[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2017 Edition]
[From the U.S. Government Publishing Office]



[[Page i]]

          

          Title 26

Internal Revenue


________________________

Part 1 (Sec. Sec.  1.410 to 1.440)

                         Revised as of April 1, 2017

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2017
                    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]]




                            Table of Contents



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

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     669
      Alphabetical List of Agencies Appearing in the CFR......     689
      Table of OMB Control Numbers............................     699
      List of CFR Sections Affected...........................     717

[[Page iv]]





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

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 26 CFR 1.410(a)-1 
                       refers to title 26, part 
                       1, section 1.410(a)-1.

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

[[Page v]]



                               EXPLANATION

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

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

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

LEGAL STATUS

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

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
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    To determine whether a Code volume has been amended since its 
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EFFECTIVE AND EXPIRATION DATES

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OMB CONTROL NUMBERS

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Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
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PAST PROVISIONS OF THE CODE

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this volume.

[[Page vii]]

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    Oliver A. Potts,
    Director,
    Office of the Federal Register.
    April 1, 2017.







[[Page ix]]



                               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, 
2017. 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 1.440)

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

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

[[Page 3]]



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




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

                  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.
1.410(a)-1 Minimum participation standards; general rules.
1.410(a)-2 Effective dates.
1.410(a)-3 Minimum age and service conditions.
1.410(a)-3T Minimum age and service conditions (temporary).
1.410(a)-4 Maximum age conditions and time of participation.
1.410(a)-5 Year of service; break in service.
1.410(a)-6 Amendment of break in service rules; transition period.
1.410(a)-7 Elapsed time.
1.410(a)-8 Five consecutive 1-year breaks in service, transitional rules 
          under the Retirement Equity Act of 1984.
1.410(a)-8T Year of service; break in service (temporary).
1.410(a)-9 Maternity and paternity absence.
1.410(a)-9T Elapsed time (temporary).
1.410(b)-0 Table of contents.
1.410(b)-1 Minimum coverage requirements (before 1994).
1.410(b)-2 Minimum coverage requirements (after 1993).
1.410(b)-3 Employees and former employees who benefit under a plan.
1.410(b)-4 Nondiscriminatory classification test.
1.410(b)-5 Average benefit percentage test.
1.410(b)-6 Excludable employees.
1.410(b)-7 Definition of plan and rules governing plan disaggregation 
          and aggregation.
1.410(b)-8 Additional rules.
1.410(b)-9 Definitions.
1.410(b)-10 Effective dates and transition rules.
1.410(d)-1 Election by church to have participation, vesting, funding, 
          etc. provisions apply.
1.411(a)-1 Minimum vesting standards; general rules.
1.411(a)-2 Effective dates.
1.411(a)-3 Vesting in employer-derived benefits.
1.411(a)-3T Vesting in employer-derived benefits (temporary).
1.411(a)-4 Forfeitures, suspensions, etc.
1.411(a)-4T Forfeitures, suspensions, etc. (temporary).
1.411(a)-5 Service included in determination of nonforfeitable 
          percentage.
1.411(a)-6 Year of service; hours of service; breaks in service.
1.411(a)-7 Definitions and special rules.
1.411(a)-8 Changes in vesting schedule.
1.411(a)-8T Changes in vesting schedule (temporary).
1.411(a)-9 Amendment of break in service rules; transitional period.
1.411(a)-11 Restriction and valuation of distributions.
1.411(a)(13)-1 Statutory hybrid plans.
1.411(b)-1 Accrued benefit requirements.
1.411(b)(5)-1 Reduction in rate of benefit accrual under a defined 
          benefit plan.
1.411(c)-1 Allocation of accrued benefits between employer and employee 
          contributions.
1.411(d)-1 Coordination of vesting and discrimination requirements. 
          [Reserved]
1.411(d)-2 Termination or partial termination; discontinuance of 
          contributions.
1.411(d)-3 Other special rules.
1.411(d)-4 Section 411(d)(6) protected benefits.
1.411(d)-5 Class year plans; plan years beginning after October 22, 
          1986.
1.412(b)-2 Amortization of experience gains in connection with certain 
          group deferred annuity contracts.
1.412(b)-5 Election of the alternative amortization method of funding.
1.412(c)(1)-1 Determinations to be made under funding method--terms 
          defined.
1.412(c)(1)-2 Shortfall method.
1.412(c)(1)-3 Applying the minimum funding requirements to restored 
          plans.
1.412(c)(1)-3T Applying the minimum funding requirements to restored 
          plans (temporary).
1.412(c)(2)-1 Valuation of plan assets; reasonable actuarial valuation 
          methods.
1.412(c)(3)-1 Reasonable funding methods.
1.412(c)(3)-2 Effective dates and transitional rules relating to 
          reasonable funding methods.
1.412(i)-1 Certain insurance contract plans.
1.412(l)(7)-1 Mortality tables used to determine current liability.
1.413-1 Special rules for collectively bargained plans.
1.413-2 Special rules for plans maintained by more than one employer.
1.414(b)-1 Controlled group of corporations.
1.414(c)-1 Commonly controlled trades or businesses.
1.414(c)-2 Two or more trades or businesses under common control.
1.414(c)-3 Exclusion of certain interests or stock in determining 
          control.
1.414(c)-4 Rules for determining ownership.
1.414(c)-5 Certain tax-exempt organizations.

[[Page 6]]

1.414(c)-6 Effective date.
1.414(e)-1 Definition of church plan.
1.414(f)-1 Definition of multiemployer plan.
1.414(g)-1 Definition of plan administrator.
1.414(l)-1 Mergers and consolidations of plans or transfers of plan 
          assets.
1.414(q)-1 Highly compensated employee.
1.414(q)-1T Highly compensated employee (temporary).
1.414(r)-0 Table of contents.
1.414(r)-1 Requirements applicable to qualified separate lines of 
          business.
1.414(r)-2 Line of business.
1.414(r)-3 Separate line of business.
1.414(r)-4 Qualified separate line of business--fifty-employee and 
          notice requirements.
1.414(r)-5 Qualified separate line of business--administrative scrutiny 
          requirement--safe harbors.
1.414(r)-6 Qualified separate line of business--administrative scrutiny 
          requirement--individual determinations.
1.414(r)-7 Determination of the employees of an employer's qualified 
          separate lines of business.
1.414(r)-8 Separate application of section 410(b).
1.414(r)-9 Separate application of section 401(a)(26).
1.414(r)-10 Separate application of section 129(d)(8). [Reserved]
1.414(r)-11 Definitions and special rules.
1.414(s)-1 Definition of compensation.
1.414(v)-1 Catch-up contributions.
1.414(w)-1 Permissible withdrawals from eligible automatic contribution 
          arrangements.
1.415(a)-1 General rules with respect to limitations on benefits and 
          contributions under qualified plans.
1.415(b)-1 Limitations for defined benefit plans.
1.415(b)-2 Multiple annuity starting dates [Reserved].
1.415(c)-1 Limitations for defined contribution plans.
1.415(c)-2 Compensation.
1.415(d)-1 Cost-of-living adjustments.
1.415(f)-1 Aggregating plans.
1.415(g)-1 Disqualification of plans and trusts.
1.415(j)-1 Limitation year.
1.416-1 Questions and answers on top-heavy plans.
1.417(a)(3)-1 Required explanation of qualified joint and survivor 
          annuity and qualified preretirement survivor annuity.
1.417(e)-1 Restrictions and valuations of distributions from plans 
          subject to sections 401(a)(11) and 417.
1.417(e)-1T Restrictions and valuations of distributions from plans 
          subject to sections 401(a)(11) and 417. (Temporary)
1.419-1T Treatment of welfare benefit funds. (Temporary)
1.419A-1T Qualified asset account limitation of additions to account. 
          (Temporary)
1.419A-2T Qualified asset account limitation for collectively bargained 
          funds. (Temporary)
1.419A(f)(6)-1 Exception for 10 or more employer plan.
1.420-1 Significant reduction in retiree health coverage during the cost 
          maintenance period.

                          Certain Stock Options

1.421-1 Effective dates and meaning and use of certain terms.
1.421-1 Meaning and use of certain terms.
1.421-2 General rules.
1.422-1 Incentive stock options; general rules.
1.422-2 Incentive stock options defined.
1.422-3 Stockholder approval of incentive stock option plans.
1.422-4 $100,000 limitation for incentive stock options.
1.423-1 Applicability of section 421(a).
1.423-2 Employee stock purchase plan defined.
1.424-1 Definitions and special rules applicable to statutory options.
1.426-1.429 [Reserved]
1.430(d)-1 Determination of target normal cost and funding target.
1.430(f)-1 Effect of prefunding balance and funding standard carryover 
          balance.
1.430(g)-1 Valuation date and valuation of plan assets.
1.430(h)(2)-1 Interest rates used to determine present value.
1.430(h)(3)-1 Mortality tables used to determine present value.
1.430(h)(3)-2 Plan-specific substitute mortality tables used to 
          determine present value.
1.430(i)-1 Special rules for plans in at-risk status.
1.431(c)(6)-1 Mortality tables used to determine current liability.
1.432 [Reserved]
1.432(e)(9)-1 Benefit suspensions for multiemployer plans in critical 
          and declining status.
1.433-1.435 [Reserved]
1.436-0 Table of contents.
1.436-1 Limits on benefits and benefit accruals under single employer 
          defined benefit plans.
1.437-1.440 [Reserved]

    Authority: 26 U.S.C. 7805, unless otherwise noted.
    Section 1.410(b)-2 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-3 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-4 also issued under 26 U.S.C. 410(b)(6).

[[Page 7]]

    Section 1.410(b)-5 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-6 also issued under 26 U.S.C. 410(b)(6) and section 
664 of the Economic Growth and Tax Relief Reconciliation Act of 2001 
(Public Law 107-16, 115 Stat. 38).
    Section 1.410(b)-7 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-8 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-9 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-10 also issued under 26 U.S.C. 410(b)(6).
    Section 1.411(a)-7 also issued under 26 U.S.C. 411(a)(7)(B)(i).
    Section 1.411(a)(13)-1 also issued under 26 U.S.C. 411(a)(13).
    Section 1.411(b)(5)-1 also issued under 26 U.S.C. 411(b)(5).
    Section 1.411(d)-3 also issued under 26 U.S.C. 411(d)(6) and section 
645(b) of the Economic Growth and Tax Relief Reconciliation Act of 2001, 
Public Law 107-16 (115 Stat. 38).
    Section 1.411(d)-4 also issued under 26 U.S.C. 411(d)(6).
    Section 1.411(d)-6 issued under Reorganization Plan No. 4 of 1978, 
29 U.S.C. 1001nt.
    Sec. Sec.  1.414(c)-1 through 1.414(c)-5 also issued under 26 U.S.C. 
414(c).
    Section 1.414(c)-5 also issued under 26 U.S.C. 414(b), (c), and (o).
    Section 1.414(q)-1T also issued under 26 U.S.C. 414(q).
    Sections 1.414(r)-0 through 1.414(r)-7 also issued under 26 U.S.C. 
414(r).
    Section 1.414(r)-8 also issued under 26 U.S.C. 410(b) and 414(r).
    Section 1.414(r)-9 also issued under 26 U.S.C. 401(a)(26) and 
414(r).
    Section 1.414(r)-10 also issued under 26 U.S.C. 129 and 414(r).
    Section 1.414(r)-1 also issued under 26 U.S.C. 414(r).
    Section 1.414(s)-1 also issued under 26 U.S.C. 414(s).
    Section 1.417(e)-1 also issued under 26 U.S.C. 417(e)(3)(A)(ii)(II).
    Section 1.417(e)-1T also issued under 26 U.S.C. 
417(e)(3)(A)(ii)(II).
    Section 1.419A(f)(6)-1 also issued under 26 U.S.C. 419A(i).
    Section 1.420-1 also issued under 26 U.S.C. 420(c)(3)(E).
    Section 1.430(j) 1 also issued under 26 U.S.C. 430(j)(4)(F).

                       DEFERRED COMPENSATION, ETC.

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



Sec.  1.410(a)-1  Minimum participation standards; general rules.

    (a) In general. A plan is not a qualified plan (and a trust forming 
a part of such plan is not a qualified trust) unless the plan 
satisfies--
    (1) The minimum age and service requirements of section 410(a)(1) 
and Sec.  1.410(a)-3,
    (2) The maximum age requirements of section 410(a)(2) and Sec.  
1.410(a)-4, and
    (3) The minimum coverage requirements of section 410(b)(1) and Sec.  
1.410(b)-1.
    (b) Organization of regulations relating to minimum participation 
standards--(1) General rules. This section prescribes general rules 
relating to the minimum participation standards provided by Section 410.
    (2) Effective dates. Section 1.410(a)-2 provides rules under section 
1017 of the Employee Retirement Income Security Act of 1974 relating to 
effective dates under section 410.
    (3) Age and service conditions. Section 1.410(a)-3 provides rules 
under section 410(a)(1) relating to minimum age and service conditions.
    (4) Maximum age and time of participation. Section 1.410(a)-4 
provides rules under section 410(a) (2) and (4) relating to maximum age 
and time of participation.
    (5) Year of service; breaks in service. For rules relating to years 
of service and breaks in service, see 29 CFR Part 2530 (Department of 
Labor regulations relating to minimum standards for employee pension 
benefit plans). See Sec.  1.410(a)-5 for rules under section 
410(a)(3)(B) relating to seasonal industries and for certain rules under 
section 410(a)(5) relating to breaks in service.
    (6) Breaks in service. Section 1.410(a)-6 provides special rules 
under section 1017(f) of the Employee Retirement Income Security Act of 
1974 relating to amendment of break in service rules.
    (7) Elapsed time. Section 1.410 (a)-7 provides rules under sections 
410 and 411 relating to the elapsed time method of crediting years of 
service.
    (8) Coverage. Section 1.410(b)-1 provides rules relating to the 
minimum coverage requirements provided by section 410(b)(1).
    (9) Church election. Section 1.410(d)-1 provides rules relating to 
the election by a church to have participation, vesting, funding, etc., 
provisions apply.

[[Page 8]]

    (c) Application of participation standards to certain plans--(1) 
General rule. Except as provided in subparagraph (2) of this paragraph, 
section 410 does not apply to--
    (i) A governmental plan (within the meaning of section 414(d) and 
the regulations thereunder),
    (ii) A church plan (within the meaning of section 414(e) and the 
regulations thereunder) which has not made the election provided by 
section 410(d) and the regulations thereunder,
    (iii) A plan which has not provided for employer contributions at 
any time after September 2, 1974, and
    (iv) A plan established and maintained by a society, order, or 
association described in section 501(c) (8) or (9), if no part of the 
contributions to or under such plan are made by employers of 
participants in such plan.
    (2) Participation requirements. A plan described in subparagraph (1) 
of this paragraph shall, for purposes of section 401(a), be treated as 
meeting the requirements of section 410 if such plan meets the coverage 
requirements resulting from the application of section 401(a)(3) as in 
effect on September 1, 1974. Such coverage requirements include the 
rules in Sec.  1.410(b)-1(d) (special rules relating to minimum coverage 
requirements), that interpret statutory provisions substantially 
identical to section 401(a)(3) as in effect on September 1, 1974. In 
applying the rules of that paragraph (d) to plans described in this 
paragraph (c) employees whose principal duties consist in supervising 
the work of other employees shall be treated as officers, shareholders, 
and highly compensated employees.
    (d) Supersession. Section 11.410(a)-1 through 11.410(d)-1 inclusive, 
of the Temporary Income Tax Regulation under the Employee Retirement 
Income Security Act of 1974 are superseded by this section and 
Sec. Sec.  1.410(a)-2 through 1.410(d)-1.

(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7508, 42 FR 47193, Sept. 20, 1977, as amended by T.D. 7703, 45 FR 
40980, June 17, 1980; T.D. 7735, 45 FR 74722, Nov. 12, 1980]



Sec.  1.410(a)-2  Effective dates.

    (a) Plans not in existence on January 1, 1974. Under section 1017(a) 
of the Employee Retirement Income Security Act of 1974, in the case of a 
plan which was not in existence on January 1, 1974, section 410 and the 
regulations thereunder apply for plan years beginning after September 2, 
1974. See paragraph (c) of this section for time plan is considered in 
existence.
    (b) Plans in existence on January 1, 1974. Under section 1017(b) of 
the Employee Retirement Income Security Act of 1974, in the case of a 
plan which was in existence on January 1, 1974, section 410 and the 
regulations thereunder apply for plan years beginning after December 31, 
1975. See paragraph (c) of this section for time plan is considered to 
be in existence.
    (c) Time of plan existence--(1) General rule. For purposes of this 
section, a plan is considered to be in existence on a particular day 
if--
    (i) The plan on or before that day was reduced to writing and 
adopted by the employer (including, in the case of a corporate employer, 
formal approval by the employer's board of directors and, if required, 
shareholder), even though no amounts had been contributed under the plan 
as of such day, and
    (ii) The plan was not terminated on or before that day.
    (2) Collectively bargained plan. Notwithstanding subparagraph (1) of 
this paragraph, a plan described in section 413(a), relating to a plan 
maintained pursuant to a collective bargaining agreement, is considered 
to be in existence on a particular day if--
    (i) On or before that day there is a legally enforceable agreement 
to establish such a plan signed by the employer, and
    (ii) The employer contributions to be made to the plan are set forth 
in the agreement.
    (3) Special rule. If a plan is considered to be in existence on 
January 1, 1974, under subparagraph (1) of this paragraph, any other 
plan with which such existing plan is merged or consolidated shall also 
be considered to be in existence on such date.
    (d) Certain existing plans may elect new provisions--(1) In general. 
The plan administrator (as defined in section 414(g)) of a plan that was 
in existence on January 1, 1974, may elect to have the provisions of the 
Code relating to participation, vesting, funding, and

[[Page 9]]

form of benefit (as in effect from time to time) apply to a plan year 
selected by the plan year selected by the plan administrator which 
begins after September 2, 1974, but before the otherwise applicable 
effective dates determined under section 1017 (b) or (c), 1021, or 1024 
of the Employee Retirement Income Security Act of 1974, and to all 
subsequent plan years. The provisions referred to are the amendments to 
the Code made by sections 1011, 1012, 1013, 1015, 1016(a) (1) through 
(11) and (13) through (27), 1021, and 1022(b) of the Employee Retirement 
Income Security Act of 1974.
    (2) Election is irrevocable. Any election made under this paragraph, 
once made shall be irrevocable.
    (3) Procedure and time for making election. An election under this 
paragraph shall be made by attaching a statement to either the annual 
return required under section 6058(a) (or an amended return) with 
respect to the plan which is filed for the first plan year for which the 
election is effective or to a written request for a determination letter 
relating to the qualification of the plan under section 401(a), 403(a), 
or 405(a) of the Code and, if trusteed, the exempt status under section 
501(a) of the Code of a trust consituting a part of the plan. If the 
election is made with a written request for a determination letter, the 
election may be conditioned upon issuance of a favorable determination 
letter and will become irrevocable upon issuance of such letter. The 
statement shall indicate that the election is made under section 1017(d) 
of the Employee Retirement Income Security Act of 1974 and the first 
plan year for which the election is effective.
    (e) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. A plan is adopted on January 2, 1974, effective as of 
Janurary 1, 1974. The plan is not considered to have been in existence 
on Janurary 1, 1974.
    Example 2. A plan was in existence on January 1, 1974, and was 
amended on November 1, 1974, to increase benefits. The fact that the 
plan was amended is not relevant and the amended plan is considered to 
be in existence on January 1, 1974.
    Example 3. (i) A subsidiary business corporation is a member of a 
controlled group of corporations within the meaning of IRC section 
1563(a). On November 1, 1974, the plan of the parent corporation is 
amended to provide coverage for employees of the subsidiary corporation. 
This amendment of the parent corporation's plan does not affect the 
effective date of section 410 with respect to the parent corporation's 
plan. No distinction is made for this purpose between employees of the 
parent corporation and employees of the subsidiary corporation.
    (ii) If the subsidiary adopted a separate plan on November 1, 1974, 
under paragraph (a) of this section, section 410 would apply to that 
plan for its first plan year beginning after September 2, 1974. However, 
the adoption of a different plan by the subsidiary would not affect the 
time section 410 applies to the plan of the parent corporation. If, 
instead of adopting its own separate plan, the subsidiary merely 
executed an adoption agreement under the terms of the parent plan 
providing that a subsidiary, upon the execution of an adoption 
agreement, will become part of the parent plan, the effective date of 
section 410 with respect to such plan will not be affected by the 
adoption of the plan by the subsidiary.

(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7508, 42 FR 47194, Sept. 20, 1977]



Sec.  1.410(a)-3  Minimum age and service conditions.

    (a) General rule. Except as provided by paragraph (b) or (c) of this 
section, a plan is not a qualified plan (and a trust forming a part of 
such plan is not a qualified trust) if the plan requires, as a condition 
of participation in the plan, that an employee complete a period of 
service with the employer or employers maintaining the plan extending 
beyond the later of--
    (1) Age 25. The date on which the employee attains the age of 25; or
    (2) One year of service. The date on which the employee completes 1 
year of service.
    (b) Special rule for plan with 3-year 100 percent vesting. A plan 
which provides that after not more than 3 years of service each 
participant's right to his accrued benefit under the plan is completely 
nonforfeitable (within the meaning of section 411 and the regulations 
thereunder) at the time such benefit accrues satisfies the requirements 
of paragraph (a) of this section if the period of service required by 
the plan as a condition of participation does not extend beyond the 
later of--
    (1) Age 25. The date on which the employee attains the age of 25; or

[[Page 10]]

    (2) Three years of service. The date on which the employee completes 
3 years of service.
    (c) Special rule for employees of certain educational institutions. 
A plan maintained exclusively for employees of an educational 
institution (as defined in section 170(b)(1)(A)(ii)) by an employer 
exempt from tax under section 501(a) which provides that after 1 year of 
service each participant's right to his accrued benefit under the plan 
is completely nonforfeitable (within the meaning of section 411 and the 
regulations thereunder) at the time such benefit accrues satisfies the 
requirements of paragraph (a) of this section if the period of service 
required by the plan as a condition of participation does not extend 
beyond the later of--
    (1) Age 30. The date on which the employee attains the age of 30; or
    (2) One year of service. The date on which the employee completes 1 
year of service.
    (d) Other conditions. Section 410(a), Sec.  1.410(a)-4, and this 
section relate solely to age and service conditions and do not preclude 
a plan from establishing conditions, other than conditions relating to 
age or service, which must be satisfied by plan participants. For 
example, such provisions would not preclude a qualified plan from 
requiring, as a condition of participation, that an employee be employed 
within a specified job classification. See section 410(b) and the 
regulations thereunder for rules with respect to coverage of employees 
under qualified plans.
    (e) Age and service requirements--(1) General rule. For purposes of 
applying the rules of this section, plan provisons may be treated as 
imposing age or service requirements even though the provisions do not 
specifically refer to age or service. Plan provisions which have the 
effect of requiring an age or service requirement with the employer or 
employers maintaing the plan will be treated as if they imposed an age 
or service requirement. In general, a plan under which an employee 
cannot participate unless he retires will impose an age and service 
requirement. However, a plan may provide benefits which supplement 
benefits provided for employees covered under a pension plan, as defined 
in section 3(2) of the Employee Retirement Income Security Act of 1974, 
satisfying the requirements of section 410(a)(1) without violating the 
age and service rules.
    (2) Examples. The rules of this paragraph are illustrated by the 
following examples:

    Example 1. Corporation A is divided into two divisions. In order to 
work in division 2 an employee must first have been employed in division 
1 for 5 years. A plan provision which required division 2 employment for 
participation will be treated as a service requirement because such a 
provision has the effect of requiring 5 years of service.
    Example 2. Plan B requires as a condition of participation that each 
employee have had a driver's license for 15 years or more. This 
provision will be treated as an age requirement because such a provision 
has the effect of requiring an employee to attain a specified age.
    Example 3. A plan which requires 1 year of service as a condition of 
participation also excludes a part-time or seasonal employee if his 
customary employment is for not more than 20 hours per week or 5 months 
in any plan year. The plan does not qualify because the provision could 
result in the exclusion by reason of a minimum service requirement of an 
employee who has completed a year of service. The plan would not qualify 
even though after excluding all such employees, the plan satisfied the 
coverage requirements of section 410(b).
    Example 4. Employer A establishes a plan which covers employees 
after they retire and does not cover current employees unless they 
retire. Any employee who works past age 60 is treated as retired. The 
plan fails to satisfy the requirements of section 410(a) because the 
plan imposes a minimum age and service requirement in excess of that 
allowed by this section.
    Example 5. Employer B establishes plan X, which provides that 
employees covered by qualified plan Y will receive benefits 
supplementing their benefits under plan Y to take into account cost of 
living increases after retirement. Plan X is not treated as imposing an 
age of service requirement.
    Example 6. Employer C establishes a qualified plan satisfying the 
minimum age and service requirements. At a later time, entry into the 
plan is frozen so that employees not covered at that time cannot 
participate in the plan. The limitation on new participants is not 
treated as imposing a minimum age and service requirement.

(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7508, 42 FR 47194, Sept. 20, 1977]

[[Page 11]]



Sec.  1.410(a)-3T  Minimum age and service conditions (temporary).

    (a) [Reserved]
    (b) Special rule for plan with 2-year 100 percent vesting. A plan 
which provides that after not more than 2 years of service each 
participant's right to his or her accrued benefit under the plan is 
completely nonforeitable (within the meaning of section 411 and the 
regulations thereunder) at the time such benefit accrues satisfies the 
requirements of paragraph (a) of this section if the period of service 
required by the plan as a condition of participation does not extend 
beyond the later of--
    (1) [Reserved]
    (2) Two years of service. The date on which the employee completes 2 
years of service. For employees not described in Sec.  1.411(a)-
3T(e)(1), which describes employees with one hour of service in any plan 
year beginning after December 31, 1988, or later in the case of certain 
collectively bargained plans, the preceding sentence shall be applied by 
substituting ``3 years of service'' for ``2 years of service''.

[T.D. 8170, 53 FR 239, Jan. 6, 1988]



Sec.  1.410(a)-4  Maximum age conditions and time of participation.

    (a) Maximum age conditions--(1) General rule. A plan is not a 
qualified plan (and a trust forming a part of such plan is not a 
qualified trust) if the plan excludes from participation (on the basis 
of age) an employee who has attained an age specified by the plan 
unless--
    (i) The plan is a defined benefit plan or a target benefit plan, and
    (ii) The employee begins employment with the employer after the 
employee has attained an age specified by the plan, which age is not 
more than 5 years before normal retirement age (within the meaning of 
section 411(a)(8) and Sec.  1.411(a)-7.

For purposes of this paragraph, a target benefit plan is a defined 
contribution plan under which the amount of employer contributions 
allocated to each participant is determined under a plan formula which 
does not allow employer discretion and on the basis of the amount 
necessary to provide a target benefit specified by the plan for such 
participant. Such target benefit must be the type of benefit which is 
provided by a defined benefit plan and the targeted benefit must not 
discriminate in favor of employees who are officers, shareholders, or 
highly compensated. For purposes of this paragraph, in the determination 
of the time an employee begins employment, any such time which is 
included in a period of service which may be disregarded under the break 
in service rules need not be taken into account.
    (2) Examples. The rules provided by this paragraph are illustrated 
by the following examples:

    Example 1. A defined benefit plan provides that an employee will 
become a participant upon completion of 3 years of service if at such 
time the employee is less than age 60. The normal retirement age under 
the plan is age 65. The plan also provides full and immediate vesting 
for each of the plan's participants. Under the plan, an employee hired 
at age 58 would be denied participation on account of service for the 
first 3 years and on account of maximum age for the remaining years even 
though the employee was hired more than 5 years prior to the normal 
retirement date. The plan therefore does not satisfy section 410(a)(2).
    Example 2. A defined benefit plan provides a normal retirement age 
of the later of age 65 or completion of 10 years of service. Because no 
employee could ever be hired within 5 years of his normal retirement 
age, the plan could not exclude employees for being over a specified 
age.
    Example 3. Prior to the effective date of section 410, a defined 
benefit plan with a normal retirement age of 65 contained a maximum age 
55 requirement for participation. Because of the maximum age 
requirement, and employee hired at age 58 was excluded from the plan. 
This employee is age 61 at the time that section 410 first applies to 
the plan. The employee cannot be excluded from participation because of 
age. The exclusion under section 410(a)(2) is not applicable in this 
instance because the employee's age at the time of hire, 58, was not 
within 5 years of the normal retirement age specified in the plan.
    Example 4. Employee A was hired at age 50 and participated in a 
defined benefit plan until separating from service at age 55 with 5 
years of service and with no vested benefit. At age 61, employee A was 
rehired within 5 years of the normal retirement age of 65 after he 
incurred 6 consecutive breaks in service. Because A's consecutive number 
of 1-year breaks (6) exceeds his years of service prior to such breaks 
(5), his service before

[[Page 12]]

the breaks may be disregarded. Consequently, A's initial employment date 
falling within such period may be disregarded and the plan could exclude 
A on account of his age because his employment commenced within 5 years 
of normal retirement age.

    (b) Time of participation--(1) General rule. A plan is not a 
qualified plan (and a trust forming a part of such plan is not a 
qualified trust) unless under the plan any employee who has satisfied 
the applicable minimum age and service requirements specified in Sec.  
1.410(a)-3, and who is otherwise entitled to participate in the plan, 
commences participation in the plan no later than the earlier of--
    (i) The first day of the first plan year beginning after the date on 
which such employee first satisfied such requirements, or
    (ii) The date 6 months after the date on which he first satisfied 
such requirements,


unless such employee was separated from service and has not returned 
before the date referred to in subdivision (i) or (ii), whichever is 
applicable. If such separated employee returns to service after either 
of such dates without incurring a 1-year break in service, the employee 
must commence participation immediately upon his return. In the case of 
a plan using the elapsed time method described in Sec.  1.410(a)-7, such 
an employee who has a period of absence commencing before the date 
referred to in subdivision (i) or (ii) (whichever is applicable) must 
commence participation as of such applicable date no later than the date 
such absence ended. However, if an employee's prior service is 
disregarded on account of the plan's break-in-service rules then, for 
purposes of this subparagraph, such service is also disregarded for 
purposes of determining the date on which such employee first satisfied 
the minimum age and service requirements.
    (2) Examples. The rules provided by this paragraph are illustrated 
by the following examples:

    Example 1. A calendar year plan provides that an employee may enter 
the plan only on the first semi-annual entry date, January 1 or July 1, 
after he has satisfied the applicable minimum age and service 
requirements specified in section 410(a)(1). The plan satisfies the 
requirements of this paragraph because an employee is eligible to 
participate no later than the earlier of (1) the first day of the first 
plan year beginning after he satisfied the applicable minimum age and 
service requirements, or (2) the date 6 months after he satisfied such 
requirements.
    Example 2. A plan provides that an employee is not eligible to 
participate until the first day of the first plan year beginning after 
he has satisfied the minimum age and service requirements of section 
410(a)(1). In this case, an employee who satisfies the ``6 month'' rule 
described in subparagraph (1) of this paragraph will not be eligible to 
participate in the plan. Therefore, the plan does not satisfy the 
requirements of this paragraph.
    Example 3. A calendar year plan provides that an employee may enter 
the plan only on the first semi-annual entry date, January 1 or July 1, 
after he has satisfied the applicable minimum age and service 
requirements specified in section 410(a)(1). Employee A after 10 years 
of service separated from service in 1976 with a vested benefit. On 
February 1, 1990, A returns to employment covered by the plan. Assuming 
A completes a year of service after his return, A must participate 
immediately on his return, February 1. A's prior service cannot be 
disregarded, because he had a vested benefit when he separated from 
service. Therefore, the plan may not postpone his participation until 
July 1.
    Example 4. Assume the same facts as in example (3). The plan has the 
break-in-service rule described in section 410(a)(5)(D) and Sec.  
1.410(a)-5(c)(4). Employee B, after he had 5 years of service but no 
vested benefit incurs 5 consecutive 1-year breaks. Because B's prior 
service can be disregarded, the plan may postpone B's participation in 
the plan under the rule described in section 410(a)(4) and this 
paragraph.

(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7508, 42 FR 47195, Sept. 20, 1977, as amended by T.D. 7703, 45 FR 
40980, June 17, 1980]



Sec.  1.410(a)-5  Year of service; break in service.

    (a) Year of service. For the rules relating to years of service 
under subparagraphs (A), (C), and (D) of section 410(a)(3), see 
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530, 
relating to minimum standards for employee pension benefit plans.
    Rules relating to a general rule for a year of service, hours of 
service, and maritime industries apply for purposes of section 410(a) 
and the regulations thereunder.

[[Page 13]]

    (b) Seasonal industries. For rules which relate to seasonal 
industries under section 410(a)(3)(B), see regulations prescribed by the 
Secretary of Labor under 29 CFR Part 2530, relating to minimum standards 
for employee pension benefits plans.
    (c) Breaks in service--(1) General rule. This paragraph provides 
rules with respect to breaks in service under section 410(a)(5). Except 
as provided in subparagraphs (2), (3), (4), and (5) of this paragraph, 
all of an employee's years of service with the employer or employers 
maintaining a plan are taken into account in computing his period of 
service under the plan for purposes of section 410(a)(1) and Sec.  
1.410(a)-3.
    (2) Employees under 3-year 100 percent vesting schedule--( i) 
General rule. In the case of an employee who incurs a 1-year break in 
service under a plan which provides that after not more than 3 years of 
service, each participant's right to his accrued benefit under the plan 
is completely nonforfeitable (within the meaning of section 411 and the 
regulations thereunder) at the time such benefit accrues, the employee's 
service before the break in service is not required to be taken into 
account after the break in service in determining the employee's years 
of service under section 410(a)(1) and Sec.  1.410(a)-3 if such employee 
has not satisfied such service requirement.
    (ii) Example. The rules of this subparagraph are illustrated by the 
following example.

    Example. A qualified plan computing service by the actual counting 
of hours provides full and immediate vesting. The plan can not require 
as a condition of participation that an employee complete 3 consecutive 
years of service with the employer because the requirement as to 
consecutive years is not permitted under section 410(a) (5). However, 
such a plan can require 3 years without a break in service, i.e., 3 
years with no intervening years in which the employee fails to complete 
more than 500 hours of service. Under a plan containing such a 
participation requirement, the following example illustrates when 
employees whould become eligible to participate.

------------------------------------------------------------------------
                                            Hours of service completed
                                        --------------------------------
                  Year                    Employee   Employee   Employee
                                             A          B          C
------------------------------------------------------------------------
1......................................      1,000      1,000      1,000
2......................................      1,000      1,000        500
3......................................      1,000        700      1,000
4......................................      1,000      1,000        700
5......................................      1,000      1,000      1,000
6......................................      1,000      1,000      1,000
------------------------------------------------------------------------
Note. Employee A will have satisfied the plan's service requirement at
  the end of year 3. Employee B at the end of year 4, and Employee C at
  the end of year 6.


    (3) One-year break in service--(i) In general. In computing the 
period of service of an employee who has incurred a 1-year break in 
service, for purposes of section 410(a)(1) and Sec.  1.410(a)-3, a plan 
may disregard the employee's service before the break until the employee 
completes a year of service after such break in service.
    (ii) Examples. The rules provided by this subparagraph are 
illustrated by the following examples.

    Example 1. Employee A completes a year of service under a plan 
computing service by the actual counting of hours for the 12-month 
period ending December 31, 1980, and incurs a 1-year break in service 
for the 12-month period ending December 31, 1981. The plan does not 
contain the provisions permitted by section 410(a)(5)(B) (relating to 3-
year 100 percent vesting) and section 410(a)(5)(D) (relating to 
nonvested participants). Thereafter, he does not complete a year of 
service. As of January 1, 1982, in computing his period of service under 
the plan his service prior to December 31, 1981, is not required to be 
taken into account for purposes of section 410(a)(1) and Sec.  1.410 
(a)-3.
    Example 2. The employee in example (1) completes a year of service 
for the 12-month period ending December 31, 1982. Prior to December 31, 
1982, in computing the employee's period of service as of any date 
occurring in 1982, the employee's service before December 31, 1981, is 
not required to be taken into account for purposes of section 410(a)(1) 
and Sec.  11.410(a)-3. Because the employee completed a year of service 
for the 12-month period ending December 31, 1982, however, his period of 
service is redetermined as of January 1, 1982. Upon completion of a year 
of service for 1982, the employee's period of service, determined as of 
any date occurring in 1982, includes service prior to December 31, 1981.

    (4) Nonvested participants--(i) General rule. In the case of a 
participant in a plan who does not have any nonforfeitable right under 
the plan to his employer-derived accrued benefit and who incurs a 1-year 
break in service, for

[[Page 14]]

purposes of section 410(a)(1) and Sec.  1.410.(a)-3 the plan may 
disregard his years of service prior to such break if the number of his 
consecutive 1-year breaks in service equals or exceeds his aggregate 
number of years of service prior to such break. In the case of a plan 
using the elapsed time method described in Department of Labor 
regulations, the plan may disregard such years of service prior to such 
break if the period of severance is at least 1 year and the period of 
severance equals or exceeds the prior period of service, whether or not 
consecutive, completed before such period of severance. The plan may in 
computing such aggregate number of years of service prior to such break 
disregard any years of service which could have been disregarded under 
this subparagraph by reason of any prior break in service.
    (ii) Examples. The rules of this subparagraph are illustrated by the 
following example:

    Example. In 1980, A, who was hired at age 35, separates from the 
service of X Corporation after completing 4 years of service. At this 
time A had no vested benefits. In 1985, after incurring 5 consecutive 
one-year breaks in service, A was reemployed. Under section 
410(a)(5)(D), A's 4 years of service may be disregarded because they are 
exceeded by the number of years of consecutive one-year breaks (5) after 
such service.

    (d) Special continuity rule for certain plans. For special rules for 
computing years of service in the case of a plan maintained by more than 
one employer, see regulations prescribed by the Secretary of Labor under 
29 CFR Part 2530, relating to minimum standards for employee pension 
benefit plans.

(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7508, 42 FR 47196, Sept. 20, 1977; T.D. 7508, 42 FR 57123, Nov. 1, 
1977, as amended by T.D. 7703, 45 FR 40980, June 17, 1980]



Sec.  1.410(a)-6  Amendment of break in service rules; Transition period.

    (a) In general. Under section 1017(f) (1) of the Employee retirement 
Income Security Act of 1974, a plan is not a qualified plan (and a trust 
forming a part of such plan is not a qualified trust) if the rules of 
the plan relating to breaks in service are amended, and--
    (1) Such amendment is effective after January 1, 1974, and before 
the date on which section 410 becomes applicable to the plan, and
    (2) Under such amendment, any employee's participation in the plan 
commences at any date later than the later of--
    (i) The date on which his participation would commence under the 
break in service rules of section 410(a)(5), or
    (ii) The earliest date on which his participation would commence 
under the plan as in effect on or after January 1, 1974.
    (b) Break in service rules. For purposes of paragraph (a), the term 
``break in service rules'' means the rules provided by a plan relating 
to circumstances under which a period of an employee's service or plan 
participation is disregarded for purposes of determining his rights to 
participate in the plan, if under such rules such service is disregarded 
by reason of the employee's failure to complete a required period of 
service within a specified period of time.

(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7508, 42 FR 47197, Sept. 20, 1977; 43 FR 2721, Jan. 19, 1978]



Sec.  1.410(a)-7  Elapsed time.

    (a) In general--(1) Introduction to elapsed time method of crediting 
service. (i) 29 CFR 2530.200b-2 sets forth the general method of 
crediting service for an employee. The general method is based upon the 
actual counting of hours of service during the applicable 12-
consecutive-month computation period. The equivalencies set forth in 29 
CFR 2530.200b-3 are also methods for crediting hours of service during 
computation periods. Under the general method and the equivalencies an 
employee receives a year's credit (in units of years of service or years 
of participation) for a computation period during which the employee is 
credited with a specified number of hours of service. In general, an 
employee's statutory entitlement with respect to eligibility to 
participate, vesting and benefit accrual is determined by totalling the 
number of years' credit to which an employee is entitled.

[[Page 15]]

    (ii) Under the alternative method set forth in this section, by 
contrast, an employee's statutory entitlement with respect to 
eligibility to participate, vesting and benefit accrual is not based 
upon the actual completion of a specified number of hours of service 
during a 12-consecutive-month period. Instead, such entitlement is 
determined generally with reference to the total period of time which 
elapses while the employee is employed (i.e., while the employment 
relationship exists) with the employer or employers maintaining the 
plan. The alternative method set forth in this section is designed to 
enable a plan to lessen the administrative burdens associated with the 
maintenance of records of an employee's hours of service by permitting 
each employee to be credited with his or her total period of service 
with the employer or employers maintaining the plan, irrespective of the 
actual hours of service completed in any 12-consecutive-month period.
    (2) Overview of the operation of the elapsed time method. (i) Under 
the elapsed time method of crediting service, a plan is generally 
required to take into account the period of time which elapses while the 
employee is employed (i.e., while the employment relationship exists) 
with the employer or employers maintaining the plan, regardless of the 
actual number of hours he or she completes during such period. Under 
this alternative method of crediting service, an employee's service is 
required to be taken into account for purposes of eligibility to 
participate and vesting as of the date he or she first performs an hour 
of service within the meaning of 29 CFR 2530.200b-2 (a) (1) for the 
employer or employers maintaining the plan. Service is required to be 
taken into account for the period of time from the date the employee 
first performs such an hour of service until the date he or she severs 
from service with the employer or employers maintaining the plan.
    (ii) The date the employee severs from service is the earlier of the 
date the employee quits, is discharged, retires or dies, or the first 
anniversary of the date the employee is absent from service for any 
other reason (e.g., disability, vacation, leave of absence, layoff, 
etc.). Thus, for example, if an employee quits, the severance from 
service date is the date the employee quits. On the other hand, if an 
employee is granted a leave of absence (and if no intervening event 
occurs), the severance from service date will occur one year after the 
date the employee was first absent on leave, and this one year of 
absence is required to be taken into account as service for the employer 
or employers maintaining the plan. Because the severance from service 
date occurs on the earlier of two possible dates (i.e., quit, discharge, 
retirement or death or the first anniversary of an absence from service 
for any other reason), a quit, discharge, retirement or death within the 
year after the beginning of an absence for any other reason results in 
an immediate severance from service. Thus, for example, if an employee 
dies at the end of a four-week absence resulting from illness, the 
severance from service date is the date of death, rather than the first 
anniversary date of the first day of absence for illness.
    (iii) In addition, for purposes of eligibility to participate and 
vesting under the elapsed time method of crediting service, an employee 
who has severed from service by reason of a quit, discharge or 
retirement may be entitled to have a period of time of 12 months or less 
taken into account by the employer or employers maintaining the plan if 
the employee returns to service within a certain period of time and 
performs an hour of service within the meaning of 29 CFR 2530.200b-2 (a) 
(1). In general, the period of time during which the employee must 
return to service begins on the date the employee severs from service as 
a result of a quit, discharge or retirement and ends on the first 
anniversary of such date. However, if the employee is absent for any 
other reason (e.g., layoff) and then quits, is discharged or retires, 
the period of time during which the employee may return and receive 
credit begins on the severance from service date and ends one year after 
the first day of absence (e.g., first day of layoff). As a result of the 
operation of these rules, a severance from service (e.g., a quit), or an 
absence (e.g., layoff) followed by a severance from service,

[[Page 16]]

never results in a period of time of more than one year being required 
to be taken into account after an employee severs from service or is 
absent from service.
    (iv) For purposes of benefit accrual under the elapsed time method 
of crediting service, an employee is entitled to have his or her service 
taken into account from the date he or she begins to participate in the 
plan until the severance from service date. Periods of severance under 
any circumstances are not required to be taken into account. For 
example, a participant who is discharged on December 14, 1980 and 
rehired on October 14, 1981 is not required to be credited with the 10 
month period of severance for benefit accrual purposes.
    (3) Overview of certain concepts relating to the elapsed time 
method--(i) In general. The rules with respect to the elapsed time 
method of crediting service are based on certain concepts which are 
defined in paragraph (b) of this section. These concepts are applied in 
the substantive rules contained in paragraphs (c), (d), (e), (f) and (g) 
of this section. The purpose of this subparagraph is to summarize these 
concepts.
    (ii) Employment commencement date. (A) A concept which is necessary 
in order to credit service accurately under any service crediting method 
is the establishment of a starting point for crediting service. The 
employment commencement date, which is the date on which an employee 
first performs an hour of service within the meaning of 29 CFR 
2530.200b-2 (a) (1) for the employer or employers maintaining the plan, 
is used to establish the date upon which an employee must begin to 
receive credit for certain purposes (e.g., eligibility to participate 
and vesting).
    (B) In order to credit accurately an employee's total service with 
an employer or employers maintaining the plan, a plan also may provide 
for an ``adjusted'' employment commencement date (i.e., a recalculation 
of the employment commencement date to reflect noncreditable periods of 
severance) or a reemployment commencement date as defined in paragraph 
(b) (3) of this section. Fundamentally, all three concepts rely upon the 
performance of an hour of service to provide a starting point for 
crediting service. One purpose of these three concepts is to enable 
plans to satisfy the requirements of this section in a variety of ways.
    (C) The fundamental rule with respect to these concepts is that any 
plan provision is permissible so long as it satisfies the minimum 
standards. Thus, for example, although the rules of this section provide 
that credit must begin on the employment commencement date, a plan is 
permitted to ``adjust'' the employment commencement date to reflect 
periods of time for which service is not required to be credited. 
Similarly, a plan may wish to credit service under the elapsed time 
method as discrete periods of service and provide for a reemployment 
commencement date. Certain plans may wish to provide for both concepts, 
although it is not a requirement of this section that plans so provide.
    (iii) Severance from service date. Another fundamental concept of 
the elapsed time method of crediting service is the severance from 
service date, which is defined as the earlier of the date on which an 
employee quits, retires, is discharged or dies, or the first anniversary 
of the first date of absence for any other reason. One purpose of the 
severance from service date is to provide the endpoint for crediting 
service under the elapsed time method. As a general proposition, service 
is credited from the employment commencement date (i.e., the starting 
point) until the severance from service date (i.e., the endpoint). A 
complementary purpose of the severance from service date is to establish 
the starting point for measuring a period of severance from service in 
order to determine a ``break in service'' (see paragraph (a)(3)(v) of 
this section). A third purpose of such date is to establish the starting 
point for measuring the period of time which may be required to be taken 
into account under the service spanning rules (see paragraph (a)(3)(vi) 
of this section).
    (iv) Period of service. A third elapsed time concept is the use of 
the ``period of service'' rather than the ``year of service'' in 
determining service to be

[[Page 17]]

taken into account for purposes of eligibility to participate, vesting 
and benefit accrual. For purposes of eligibility to participate and 
vesting, the period of service runs from the employment commencement 
date or reemployment commencement date until the severance from service 
date. For purposes of benefit accrual, a period of service runs from the 
date that a participant commences participation under the plan until the 
severance from service date. Because the endpoint of the period of 
service is marked by the severance from service date, an employee is 
credited with the period of time which runs during any absence from 
service (other than for reason of a quit, retirement, discharge or 
death) which is 12 months or less. Thus, for example, a three week 
absence for vacation is taken into account as part of a period of 
service and does not trigger a severance from service date.
    (v) Period of severance. A period of severance begins on the 
severance from service date and ends when an employee returns to service 
with the employer or employers maintaining the plan. The purpose of the 
period of severance is to apply the statutory ``break in service'' rules 
to an elapsed time method of crediting service.
    (vi) Service spanning. Under the elapsed time method of crediting 
service, a plan is required to credit periods of service and, under the 
service spanning rules, certain periods of severance of 12 months or 
less for purposes of eligibility to participate and vesting. Under the 
first service spanning rule, if an employee severs from service as a 
result of quit, discharge or retirement and then returns to service 
within 12 months, the period of severance is required to be taken into 
account. Also, a situation may arise in which an employee is absent from 
service for any reason other than quit, discharge, retirement or death 
and during the absence a quit, discharge or retirement occurs. The 
second service spanning rule provides in that set of circumstances that 
a plan is required to take into account the period of time between the 
severance from service date (i.e., the date of quit, discharge or 
retirement) and the first anniversary of the date on which the employee 
was first absent, if the employee returns to service on or before such 
first anniversary date.
    (4) Organization and applicability. (i) The substantive rules for 
crediting service under the elapsed time method with respect to 
eligibility to participate are contained in paragraph (c), the rules 
with respect to vesting are contained in subparagraph (d), and the rules 
with respect to benefit accrual are contained in paragraph (e). The 
format of the rules is designed to enable a plan to use the elapsed time 
method of crediting service either for all purposes or for any one or 
combination of purposes under sections 410 and 411. Thus, for example, a 
plan may credit service for eligibility to participate purposes by the 
use of the general method of crediting service set forth in 29 CFR 
2530.200b-2 or by the use of any of the equivalences set forth in 29 CFR 
2530.200b-3, while the plan may credit service for vesting and benefit 
accrual purposes by the use of the elapsed time method of crediting 
service.
    (ii) A plan using the elapsed time method of crediting service for 
one or more classifications of employees covered under the plan may use 
the general method of crediting service set forth in 29 CFR 2530.200b-2 
or any of the equivalencies set forth in 29 CFR 2530.200b-3 for other 
classifications of employees, provided that such classifications are 
reasonable and are consistently applied. Thus, for example, a plan may 
provide that part-time employees are credited under the general method 
of crediting service set forth in 29 CFR 2530.200b-2 and full-time 
employees are credited under the elapsed time method. A classification, 
however, will not be deemed to be reasonable or consistently applied if 
such classification is designed with an intent to preclude an employee 
or employees from attaining his or her statutory entitlement with 
respect to eligibility to participate, vesting or benefit accrual. For 
example, a classification applied so that any full-time employee 
credited with less than 1,000 hours of service during a given 12-
consecutive-month period would be considered part-time and subject to 
the general method of crediting service rather than the

[[Page 18]]

elapsed time method would not be reasonable.
    (iii) Notwithstanding paragraph (a) (4) (i) and (ii) of this 
section, the use of the elapsed time method for some purposes or the use 
of the elapsed time method for some employees may, under certain 
circumstances, result in discrimination prohibited under section 
401(a)(4), even though the use of the elapsed time method for such 
purposes, and for such employees, is permitted under this section.
    (5) More than one employer plans. For special rules for computing 
years of service in the case of a plan maintained by more than one 
employer, see 29 CFR Part 2530 (Department of Labor regulations relating 
to minimum standards for employee pension benefit plans).
    (b) Definitions--(1) Employment commencement date. For purposes of 
this section, the term ``employment commencement date'' shall mean the 
date on which the employee first performs an hour of service within the 
meaning of 29 CFR 2530.200b-2 (a)(1) for the employer or employers 
maintaining the plan.
    (2) Severance from service date. For purposes of this section, a 
``severance from service'' shall occur on the earlier of--
    (i) The date on which an employee quits, retires, is discharged or 
dies; or
    (ii) The first anniversary of the first date of a period in which an 
employee remains absent from service (with or without pay) with the 
employer or employers maintaining the plan for any reason other than 
quit, retirement, discharge or death, such as vacation, holiday, 
sickness, disability, leave of absence or layoff.
    (3) Reemployment commencement date. For purposes of this section, 
the term ``reemployment commencement date'' shall mean the first date, 
following a period of severance from service which is not required to be 
taken into account under the service spanning rules in paragraphs 
(c)(2)(iii) and (d)(1)(iii) of this section, on which the employee 
performs an hour of service within the meaning of 29 CFR 2530.200b-
2(a)(1) for the employer or employers maintaining the plan.
    (4) Participation commencement date. For purposes of this section, 
the term ``participation commencement date'' shall mean the date a 
participant first commences participation under the plan.
    (5) Period of severance. For purposes of this section, the term 
``period of severance'' shall mean the period of time commencing on the 
severance from service date and ending on the date on which the employee 
again performs an hour of service within the meaning of 29 CFR 
2530.200b-2(a)(1) for an employer or employers maintaining the plan.
    (6) Period of service--(i) General rule. For purposes of this 
section, the term ``period of service'' shall mean a period of service 
commencing on the employee's employment commencement date or 
reemployment commencement date, whichever is applicable, and ending on 
the severance from service date.
    (ii) Aggregation rule. Unless a plan provides in some manner for an 
``adjusted'' employment commencement date or similar method of 
consolidating periods of service, periods of service shall be aggregated 
unless such periods may be disregarded under section 410(a)(5) or 
411(a)(4).
    (iii) Other federal law. Nothing in this section shall be construed 
to alter, amend, modify, invalidate, impair or supersede any law of the 
United States or any rule or regulation issued under such law. Thus, for 
example, nothing in this section shall be construed as denying an 
employee credit for a ``period of service'' if credit is required by a 
separate federal law. Furthermore, the nature and extent of such credit 
shall be determined under such law.
    (c) Eligibility to participate--(1) General rule. For purposes of 
section 410(a)(1)(A), a plan generally may not require as a condition of 
participation in the plan that an employee complete a period of service 
with the employer or employers maintaining the plan extending beyond the 
later of--
    (i) The date on which the employee attains the age of 25; or
    (ii) The date on which the employee completes a one-year period of 
service. See the regulations under section 410(a) (relating to 
eligibility to participate).
    (2) Determination of one-year period of service. (i) For purposes of 
determining

[[Page 19]]

the date on which an employee satisfies the service requirement for 
initial eligibility to participate under the plan, a plan using the 
elapsed time method of crediting service shall provide that an employee 
who completes the 1-year period of service requirement on the first 
anniversary of his employment commencement date satisfies the minimum 
service requirement as of such date. In the case of an employee who 
fails to complete a one-year period of service on the first anniversary 
of his employment commencement date, a plan which does not contain a 
provision permitted by section 410(a)(5)(D) (rule of parity) shall 
provide for the aggregation of periods of service so that a one-year 
period of service shall be completed as of the date the employee 
completes 12 months of service (30 days are deemed to be a month in the 
case of the aggregation of fractional months) or 365 days of service.
    (ii) For purposes of section 410(a)(1)(B)(i), a ``3-year period of 
service'' shall be deemed to be ``3 years of service.''
    (iii) Service spanning rules. In determining a 1-year period of 
service for purposes of initial eligibility to participate and a period 
of service for purposes of retention of eligibility to participate, in 
addition to taking into account an employee's period of service, a plan 
shall take into account the following periods of severance--
    (A) If an employee severs from service by reason of a quit, 
discharge or retirement and the employee then performs an hour of 
service within the meaning of 29 CFR 2530.200b-2(a)(1) within 12 months 
of the severance from service date, the plan is required to take into 
account the period of severance; and
    (B) Notwithstanding paragraph (c)(2)(iii)(A) of this section, if an 
employee severs from service by reason of a quit, discharge or 
retirement during an absence from service of 12 months or less for any 
reason other than a quit, discharge, retirement or death, and then 
performs an hour of service within the meaning of 29 CFR 2530.200b-
2(a)(1) within 12 months of the date on which the employee was first 
absent from service, the plan is required to take into account the 
period of severance.
    (iv) For purposes of determining an employee's retention of 
eligibility to participate in the plan, a plan shall take into account 
an employee's entire period of service unless certain periods of service 
may be disregarded under section 410(a)(5) of the Code.
    (v) Example. Employee W, age 31, completed 6 months of service and 
was laid off. After 2 months of layoff, W quit. Five months later, W 
returned to service. For purposes of eligibility to participate, W was 
required to be credited with 13 months of service (8 months of service 
and 5 months of severance). If, on the other hand, W had not returned to 
service within the first 10 months of severance (i.e., within 12 months 
after the first day of layoff), W would be required to be credited with 
only 8 months of service.
    (3) Entry date requirements--(i) General rule. For purposes of 
section 410(a)(4), it is necessary for a plan to provide that any 
employee who has satisfied the minimum age and service requirements, and 
who is otherwise entitled to participate in the plan, commences 
participation in the plan no later than the earlier of--
    (A) The first day of the first plan year beginning after the date on 
which such employee satisfied such requirements, or
    (B) The date six months after the date on which he satisfied such 
requirements, unless such employee was separated from service before the 
date referred to in subdivision (i) (A) or (B), whichever is applicable. 
See the regulations under section 410(a) (relating to eligibility to 
participate).
    (ii) Separation from service--(A) Definition. For purposes of this 
section, the term ``separated from service'' includes a severance from 
service or an absence from service for any reason other than a quit, 
discharge, retirement or death, regardless of the duration of such 
absence. Accordingly, if an employee is laid off for a period of six 
weeks, the employee shall be deemed to be ``separated from service'' 
during such period for purposes of the entry date requirements.
    (B) Application. A period of severance which is taken into account 
under the

[[Page 20]]

service spanning rules in paragraph (c)(2)(iii) of this section or an 
absence of 12 months or less may result in an employee satisfying the 
plan's minimum service requirement during such period of time. In 
addition, once an employee satisfies the plan's minimum service 
requirement, either before or during such period of time, such period of 
time may contain an entry date applicable to such employee. In the case 
of an employee whose period of severance is taken into account and such 
period contains an entry date applicable to the employee, he or she 
shall be made a participant in the plan (if otherwise eligible) no later 
than the date on which he or she ended the period of severance. In the 
case of an employee whose period of absence contains an entry date 
applicable to such employee, he or she, no later than the date such 
absence ended, shall be made a participant in the plan (if otherwise 
eligible) as of the first applicable entry date which occurred during 
such absence from service.
    (iii) Examples. For purposes of the following examples, assume that 
the plan provides for a minimum age requirement of 25 and a minimum 
service requirement of one year, and provides for semi-annual entry 
dates.
    (A) Employee A, age 35, worked for 10 months in a job classification 
covered under the plan, became disabled for nine consecutive months and 
then returned to service. During the period of absence, A completed a 1-
year period of service and passed a semi-annual entry date after 
satisfying the minimum service requirement. Accordingly, the plan is 
required to make A a participant no later than his return to service 
effective as of the applicable entry date.
    (B) Employee B, after satisfying the minimum age and service 
requirements, quit work before the next semi-annual entry date, and then 
returned to service before incurring a 1-year period of severance, but 
after such semi-annual entry date. Employee B is entitled to become a 
participant immediately upon his return to service effective as of the 
date of his return.
    (4) Break in service. For purposes of applying the break in service 
rules under section 410(a)(5) (B) and (C), the term ``1-year period of 
severance'' shall be substituted for the term ``1-year break in 
service''. A 1-year period of severance shall be determined on the basis 
of a 12-consecutive-month period beginning on the severance from service 
date and ending on the first anniversary of such date, provided that the 
employee during such 12-consecutive-month period does not perform an 
hour of service within the meaning of 29 CFR 2530.200b-2(a)(1) for the 
employer or employers maintaining the plan.
    (5) One-year hold-out--(i) General rule. (A) For purposes of section 
410(a)(5)(C), in determining the period of service of an employee who 
has incurred a 1-year period of severance, a plan may disregard the 
employee's period of service before such period of severance until the 
employee completes a 1-year period of service after such period of 
severance.
    (B) Example. Assume that a plan provides for a minimum service 
requirement of 1-year and provides for semi-annual entry dates, but does 
not contain the provisions permitted by section 410(a)(5)(D) (relating 
to the rule of parity). Employee G, age 40, completed a seven-month 
period of service, quit and then returned to service 15 months later, 
thereby incurring a 1-year period of severance. After working four 
months, G was laid off for nine months and then returned to work again. 
Although the plan may hold employee G out from participation in the plan 
until the completion of a 1-year period of service after the 1-year (or 
greater) period of severance, once the 1-year hold-out is completed, the 
plan is required to provide the employee with such statutory entitlement 
as arose during the 1-year hold-out. Accordingly, employee G satisfied 
the 1-year hold-out requirement as of the eighth month of layoff, and G 
is entitled to become a participant in the plan immediately upon his 
return to service after the nine-month layoff effective as of the first 
applicable entry date occurring after the date on which he satisfied the 
1-year of service requirement (i.e., the first applicable entry date 
after the first month of layoff). See the regulations under section 410 
(a) (relating to eligibility to participate).

[[Page 21]]

    (6) Rule of parity--(i) General rule. For purposes of section 
410(a)(5)(D), in the case of a participant who does not have any 
nonforfeitable right under the plan to his accrued benefit derived from 
employer contributions and who incurs a 1-year period of severance, a 
plan, in determining an employee's period of service for purposes of 
section 410(a)(1), may disregard his period of service if his latest 
period of severance equals or exceeds his prior periods of service, 
whether or not consecutive, completed before such period of severance. 
See the regulations under section 410(a) (relating to eligibility to 
participate).
    (ii) In determining whether a completely nonvested employee's 
service may be disregarded under the rule of parity, a plan is not 
permitted to apply the rule until the employee incurs a 1-year period of 
severance. Accordingly, a plan may not disregard a period of service of 
less than one year until an employee has incurred a period of severance 
of at least one year.
    (iii) Example. Assume that a plan provides for a minimum service 
requirement of one year and provides for the rule of parity. An employee 
works for three months, quits and then is rehired 10 months later. Such 
employee is entitled to receive 13 months of credit for purposes of 
eligibility to participate and vesting (see the service spanning rules). 
Although the period of severance exceeded the period of service, the 
three months of service may not be disregarded because no 1-year period 
of severance occurred.
    (d) Vesting--(1) General rule. (i) For purposes of section 
411(a)(2), relating to vesting in accrued benefits derived from employer 
contributions, a plan which determines service to be taken in account on 
the basis of elapsed time shall provide that an employee is credited 
with a number of years of service equal to at least the number of whole 
years of the employee's period of service, whether or not such periods 
of service were completed consecutively.
    (ii) In order to determine the number of whole years of an 
employee's period of service, a plan shall provide that non-successive 
periods of service must be aggregated and that less than whole year 
periods of service (whether or not consecutive) must be aggregated on 
the basis that 12 months of service (30 days are deemed to be a month in 
the case of the aggregation of fractional months) or 365 days of service 
equal a whole year of service.
    (iii) Service spanning rules. In determining a participant's period 
of service for vesting purposes, a plan shall take into account the 
following periods of severance--
    (A) If an employee severs from service by reason of a quit, 
discharge or retirement and the employee then performs an hour of 
service within the meaning of 29 CFR 2530.200b-2(a)(1) within 12 months 
of the severance from service date, the plan is required to take into 
account the period of severance; and
    (B) Nothwithstanding paragraph (d)(1)(iii)(A) of this section, if an 
employee severs from service by reason of a quit, discharge or 
retirement during an absence from service of 12 months or less for any 
reason other than a quit, discharge, retirement or death, and then 
performs an hour of service within the meaning of 29 CFR 2530.200b-
2(a)(1) within 12 months of the date on which the employee was first 
absent from service, the plan is required to take into account the 
period of severance.
    (iv) For purposes of determining an employee's nonforfeitable 
percentage of accrued benefits derived from employer contributions, a 
plan, after calculating an employee's period of service in the manner 
prescribed in this paragraph, may disregard any remaining less than 
whole year, 12-month or 365-day period of service. Thus, for example, if 
a plan provides for the statutory five to fifteen year graded vesting, 
an employee with a period (or periods) of service which yield 5 whole 
year periods of service and an additional 321-day period of service is 
twenty-five percent vested in his or her employer-derived accrued 
benefits (based solely on the 5 whole year periods of service).
    (2) Service which may be disregarded. (i) For purposes of section 
411(a)(4), in determining the nonforfeitable percentage of an employee's 
right to his or her accrued benefits derived from employer 
contributions, all of an employee's period or periods of service with an 
employer or employers maintaining the plan shall be taken into account

[[Page 22]]

unless such service may be disregarded under paragraph (d)(2)(ii) of 
this section.
    (ii) For purposes of paragraph (d)(2)(i) of this section, the 
following periods of service may be disregarded--
    (A) The period of service completed by an employee before the date 
on which he attains age 22;
    (B) In the case of a plan which requires mandatory employee 
contributions, the period of service which falls within the period of 
time to which a particular employee contribution relates, if the 
employee had the opportunity to make a contribution for such period of 
time and failed to do so;
    (C) The period of service during any period for which the employer 
did not maintain the plan or a predecessor plan;
    (D) The period of service which is not required to be taken into 
account by reason of a period of severance which constitutes a break in 
service within the meaning of paragraph (d)(4) of this section;
    (E) The period of service completed by an employee prior to January 
1, 1971, unless the employee completes a period of service of at least 3 
years at any time after December 31, 1970; and
    (F) The period of service completed before the first plan year for 
which this section applies to the plan, if such service would have been 
disregarded under the plan rules relating to breaks in service in effect 
at that time. See the regulations under section 411(a) (relating to 
vesting).
    (3) Seasonal industry. [Reserved]
    (4) Break in service. For purposes of applying the break in service 
rules, the term ``1-year period of severance'' shall be substituted for 
the term ``1-year break in service''. A 1-year period of severance shall 
be a 12-consecutive-month period beginning on the severance from service 
date and ending on the first anniversary of such date, provided that the 
employee during such 12-consecutive-month period fails to perform an 
hour of service within the meaning of 29 CFR 2530.200b-2(a)(1) for an 
employer or employers maintaining the plan.
    (5) One-year hold-out. For purposes of section 411(a)(6)(B), in 
determining the nonforfeitable percentage of the right to accrued 
benefits derived from employer contributions of an employee who has 
incurred a 1-year period of severance, the period of service completed 
before such period of severance is not required to be taken into account 
until the employee has completed a 1-year period of service after his 
return to service. See the regulations under section 411(a) (relating to 
vesting).
    (6) Vesting in pre-break accruals. For purposes of section 
411(a)(6)(C), a ``1-year period of severance'' shall be deemed to 
constitute a ``1-year break in service.'' See the regulations under 
section 411(a) (relating to vesting).
    (7) Rule of partity--(i) General rule. For purposes of section 
411(a)(6)(D), in the case of an employee who is a nonvested participant 
in employer-derived benefits at the time he incurs a 1-year period of 
severance, the period of service completed by such participant before 
such period of severance is not required to be taken into account for 
purposes of determining the vested percentage of his or her right to 
employer-derived benefits if at such time the consecutive period of 
severance equals or exceeds his prior periods of service, whether or not 
consecutive, completed before such period of severance. See the 
regulations under section 411(a) (relating to vesting).
    (e) Benefit accrual. (1) For purposes of section 411(b), a plan may 
provide that a participant's service with an employer or employers 
maintaining the plan shall be determined on the basis of the 
participant's total period of service beginning on the participation 
commencement date and ending on the severance from service date.
    (2) Under section 411(b)(3)(A), a defined benefit pension plan may 
determine an employee's service for purposes of benefit accrual on any 
basis which is reasonable and consistent and which takes into account 
all service during the employee's participation in the plan which is 
included in a period of service required to be taken into account under 
section 410(a)(5) (relating to service which must be taken into account 
for purposes of determining an employee's eligibility to participate). A 
plan which provides for the determination of an employee's service with 
an employer or employers maintaining

[[Page 23]]

the plan on the basis permitted under paragraph (e)(1) of this section 
will be deemed to meet the requirements of section 411(b)(3)(A), 
provided that the plan meets the requirements of 29 CFR 2530.204-3, 
relating to plans which determine an employee's service for purposes of 
benefit accrual on a basis other than computation periods. Specifically, 
under 29 CFR 2530.204-3, it must be possible to prove that, despite the 
fact that benefit accrual under such a plan is not based on computation 
periods, the plan's provisions meet at least one of the three benefit 
accrual rules of section 411(b)(1) under all circumstances. Further, 29 
CFR 2530.204-3 prohibits such a plan from disregarding service under 
section 411(b)(3)(C) (which would otherwise permit a plan to disregard 
service performed by an employee during a computation period in which 
the employee is credited with less than 1,000 hours). See the 
regulations under section 411(b) (relating to benefit accrual).
    (f) Transfers between methods of crediting service--(1) Single plan. 
A plan may provide that an employee's service for purposes of 
eligibility to participate, vesting or benefit accrual shall be 
determined on the basis of computation periods under the general method 
set forth in 29 CFR 2530.200b-2 for certain classes of employees but 
under the alternative method permitted under this section for other 
classes of employees if the plan provides as follows--
    (i) In the case of an employee who transfers from a class of 
employees whose service is determined on the basis of computation 
periods to a class of employees whose service is determined on the 
alternative basis permitted under this section, the employee shall 
receive credit for a period of service consisting of--
    (A) A number of years equal to the number of years of service 
credited to the employee before the computation period during which the 
transfer occurs; and
    (B) The greater of (1) the period of service that would be credited 
to the employee under the elapsed time method for his service during the 
entire computation period in which the transfer occurs or (2) the 
service taken into account under the computation periods method as of 
the date of the transfer.
    In addition, the employee shall receive credit for service 
subsequent to the transfer commencing on the day after the last day of 
the computation period in which the transfer occurs.
    (ii) In the case of an employee who transfers from a class of 
employees whose service is determined on the alternative basis permitted 
under this section to a class of employees whose service is determined 
on the basis of computation periods--
    (A) The employee shall receive credit, as of the date of the 
transfer, for a number of years of service equal to the number of 1-year 
periods of service credited to the employee as of the date of the 
transfer, and
    (B) The employee shall receive credit, in the computation period 
which includes the date of the transfer, for a number of hours of 
service determined by applying one of the equivalencies set forth in 29 
CFR 2530.200b-3 (e) (1) to any fractional part of a year credited to the 
employee under this section as of the date of the transfer. Such 
equivalency shall be set forth in the plan and shall apply to all 
similarly situated employees.
    (2) More than one plan. In the case of an employee who transfers 
from a plan using either the general method of determining service on 
the basis of computation periods set forth in 29 CFR 2530.200b-2 or the 
method of determining service permitted under this section to a plan 
using the other method of determining service, all service required to 
be credited under the plan to which the employee transfers shall be 
determined by applying the rules of paragraph (f)(1) of this section.
    (g) Amendments to change method of crediting service. A plan may be 
amended to change the method of crediting service for any purpose or for 
any class of employees between the general method set forth in 29 CFR 
2530.200-2 and the method permitted under this section, if such 
amendment contains provisions under which each employee with respect to 
whom the method of crediting service is changed is treated in the same 
manner as an employee

[[Page 24]]

who transfers from one class of employees to another under paragraph 
(f)(1) of this section.
    (h) Transitional rule. For plans in existence on [insert the date of 
the publication of this document], the provisions of paragraph (f) of 
this section are effective for plan years beginning after December 31, 
1983.

[T.D. 7703, 45 FR 40980, June 17, 1980]



Sec.  1.410(a)-8  Five consecutive 1-year breaks in service, transitional
rules under the Retirement Equity Act of 1984.

    Sections 410(a)(5)(D) and 411(a)(6)(D), as amended by the Retirement 
Equity Act of 1984 (REA 1984), permit a plan to disregard years of 
service that were disregarded under the plan provisions satisfying those 
sections (as in effect on August 22, 1984) as of the day before the REA 
amendments apply to the plan. Under section 302(a) of REA 1984, the new 
break-in-service rules generally apply to plan years beginning after 
December 31, 1984. Thus, for example, assume a plan has a calendar plan 
year and disregarded years of service as permitted by sections 
410(a)(5)(D) and 411(a)(6)(D) as in effect on August 22, 1984. An 
employee completed two years of service in 1981 and 1982, and then 
incurred two consecutive 1-year breaks in service in 1983 and 1984. The 
plans may disregard the prior years of service even though the employee 
did not incur five consecutive 1-year breaks in service. On the other 
hand, assume the employee completed three consecutive years of service 
beginning in 1980, and incurred two 1-year breaks in service in 1983 and 
1984. Because, as of December 31, 1984, the years of service credited 
before 1983 could not be disregarded, whether the plan may subsequently 
disregard those years of service would be governed by the rules enacted 
by REA 1984.

[T.D. 8219, 53 FR 31851, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988]



Sec.  1.410(a)-8T  Year of service; break in service (temporary).

    (a)-(b) [Reserved]
    (c) Breaks in service. (1) [Reserved]
    (2) Employees under 2-year 100 percent vesting schedule--(i) General 
rule. In the case of an employee who incurs a 1-year break in service 
under a plan which provides that after not more than 2 years of service 
each participant's right to his accrued benefit under the plan is 
completely nonforfeitable (within the meaning of section 411 and the 
regulations thereunder) at the time such benefit accrues, the employee's 
service before the break in service is not required to be taken into 
account after the break in service in determining the employee's years 
of service under section 410(a)(1) and Sec.  1.410(a)-3 if such employee 
has not satisfied such service requirement.
    (ii) Example. The rules of this subparagraph are illustrated by the 
following example:

    Example. A qualified plan computing service by the actual counting 
of hours provides full and immediate vesting. The plan can not require 
as a condition of participation that an employee complete 2 consecutive 
years of service with the employer because the requirement as to 
consecutive years is not permitted under section 410(a)(5). However, 
such a plan can require 2 years without a break in service, i.e., 2 
years with no intervening years in which the employee fails to complete 
more than 500 hours of service. Under a plan containing such a 
participation requirement, the following example illustrates when 
employees would become eligible to participate.

------------------------------------------------------------------------
                                          Hours of service completed
                Year                 -----------------------------------
                                      Employee A  Employee B  Employee C
------------------------------------------------------------------------
1...................................       1,000       1,000       1,000
2...................................       1,000         700         500
3...................................       1,000       1,000       1,000
4...................................       1,000       1,000         700
5...................................       1,000       1,000       1,000
------------------------------------------------------------------------

    Note: Employee A will have satisfied the plan's service requirement 
at the end of year 2, Employee B at the end of year 3, and Employee C at 
the end of year 5.

    (3) One-year break in service--
    (i) [Reserved]
    (ii) Examples. The rules provided by this subparagraph are 
illustrated by the following examples:

    Example 1. Employee A completes a year of service under a plan 
computing service by the actual counting of hours for the 12-month 
period ending December 31, 1989, and incurs a 1-year break in service 
for the 12-month period ending December 31, 1990. The plan does not 
contain the provisions permitted by section 410(a)(5)(B) (relating to 2-

[[Page 25]]

year 100 percent vesting) and section 410(a)(5)(D) (relating to 
nonvested participants). Thereafter, he does not complete a year of 
service. As of January 1, 1991, in computing his period of service under 
the plan his service prior to December 31, 1990, is not required to be 
taken into account for purposes of section 410(a)(1) and Sec.  1.410(a)-
3.

[T.D. 8170, 53 FR 239, Jan. 6, 1988]



Sec.  1.410(a)-9  Maternity and paternity absence.

    (a) Elapsed time--(1) Rule. For purposes of applying the rules of 
Sec.  1.410(a)-7 (relating to the elapsed time method of crediting 
service) to absences described in sections 410(a)(5)(E) and 411(a)(6)(E) 
(relating to maternity or paternity absence), the severance from service 
date of an employee who is absent from service beyond the first 
anniversary of the first day of absence by reason of a maternity or 
paternity absence described in section 410(a)(5)(E)(i) or 
411(a)(6)(E)(i) is the second anniversary of the first day of such 
absence. The period between the first and second anniversaries of the 
first day of absence from work is neither a period of service nor a 
period of severance. This rule applies to maternity and paternity 
absences beginning on or after the first day of the first plan year in 
which the plan is required to credit service under sections 410(a)(5)(E) 
and 411(a)(6)(E).

    (2) Example. The rules of this section are illustrated by the 
following example:

    Assume an individual works until June 30, 1986; is first absent from 
employment on July 1, 1986, on account of maternity or paternity 
absence; and on July 1, 1989, performs an hour of service. The period of 
service must include the period from employment commencement date until 
June 30, 1987 (one year after the date of separation for any reason 
other than a quit, discharge, retirement, or death). The period from 
July 1, 1987, to June 30, 1988, is neither a period of service nor a 
period of severance. The period of severance would be from July 1, 1988, 
to June 30, 1989.

    (b) Other methods. This paragraph provides a safe harbor for plans 
that compute years of service under the hours of service methods or 
permitted equivalencies. Such a plan will be treated as satisfying the 
requirements of sections 410(a)(5)(E) and 411(a)(6)(E) if the plan 
increases the minimum period of consecutive 1-year breaks required to 
disregard any service (or deprive any employee of any right) by one. 
Thus, a plan will satisfy sections 410(a)(5)(E) and 411(a)(6)(E) without 
having to compute service for maternity or paternity and sections 
410(a)(5)(D) and 411 (a)(4)(D) and (a)(6)(C), by increasing the period 
of consecutive breaks-in-service from 5 to 6.

[T.D. 8219, 53 FR 31852, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988]



Sec.  1.410(a)-9T  Elapsed time (temporary).

    (a)-(b) [Reserved]
    (c) Eligibility to participate. (1) [Reserved]
    (2) Determination of one-year period of service.
    (i) [Reserved]
    (ii) For purposes of section 410(a)(1)(B)(i), a ``2-year period of 
service'' shall be deemed to be ``2 years of service.''
    (d) Vesting--(1) General rule.
    (i)-(iii) [Reserved]
    (iv) For purposes of determining an employee's nonforfeitable 
percentage of accrued benefits derived from employer contributions, a 
plan, after calculating an employee's period of service in the manner 
prescribed in this paragraph, may disregard any remaining less than 
whole year, 12-month or 365-day period of service. Thus, for example, if 
a plan provides for the statutory three to seven year graded vesting, an 
employee with a period (or periods) of service which yields 3 whole year 
periods of service and an additional 321-day period of service is twenty 
percent vested in his or her employer-derived accrued benefits (based 
solely on the 3 whole year periods of service).

[T.D. 8170, 53 FR 239, Jan. 6, 1988]



Sec.  1.410(b)-0  Table of contents.

    This section contains a listing of the major headings of Sec. Sec.  
1.410(b)-1 through 1.410(b)-10.

      Sec.  1.410(b)-1 Minimum coverage requirements (before 1994).

    (a) In general.
    (b) Coverage tests.
    (1) Percentage test.

[[Page 26]]

    (2) Classification test.
    (c) Exclusion of certain employees.
    (1) Bargaining unit.
    (2) Air pilots.
    (3) Nonresident aliens.
    (d) Special rules.
    (1) Highly compensated.
    (2) Discrimination.
    (3) Multiple plans.
    (4) Profit-sharing plans.
    (5) Certain classifications.
    (6) Integration with Social Security Act.
    (7) Different age and service requirements.
    (i) Application.
    (ii) General rule.
    (8) Certain controlled groups.
    (9) Transitional rule.
    (e) Example.

      Sec.  1.410(b)-2 Minimum coverage requirements (after 1993).

    (a) In general.
    (b) Requirements with respect to employees.
    (1) In general.
    (2) Ratio percentage test.
    (i) In general.
    (ii) Examples.
    (3) Average benefit test.
    (4) Certain tax credit employee stock ownership plans.
    (5) Employers with no nonhighly compensated employees.
    (6) Plans benefiting no highly compensated employees.
    (7) Plans benefiting collectively bargained employees.
    (c) Requirements with respect to former employees.
    (1) Former employees tested separately.
    (2) Testing former employees.
    (d) Nonelective contributions under section 403(b) plans.
    (e) Certain governmental and church plans.
    (f) Certain acquisitions or dispositions.
    (g) Additional rules.

  Sec.  1.410(b)-3 Employees and former employees who benefit under a 
                                  plan.

    (a) Employees benefiting under a plan.
    (1) In general.
    (2) Exceptions to allocation or accrual requirement.
    (i) Section 401(k) and 401(m) plans.
    (ii) Section 415 limits.
    (iii) Certain employees treated as benefiting.
    (iv) Section 412(i) plans.
    (3) Examples.
    (b) Former employees benefiting under a plan.
    (1) In general.
    (2) Examples.

         Sec.  1.410(b)-4 Nondiscriminatory classification test.

    (a) In general.
    (b) Reasonable classification established by the employer.
    (c) Nondiscriminatory classification.
    (1) General rule.
    (2) Safe harbor.
    (3) Facts and circumstances.
    (i) General rule.
    (ii) Factual determination.
    (4) Definitions.
    (i) Safe harbor percentage.
    (ii) Unsafe harbor percentage.
    (iii) Nonhighly compensated employee concentration percentage.
    (iv) Table.
    (5) Examples.

            Sec.  1.410(b)-5 Average benefit percentage test.

    (a) General rule.
    (b) Determination of average benefit percentage.
    (c) Determination of actual benefit percentage.
    (d) Determination of employee benefit percentages.
    (1) Overview.
    (2) Employee contributions and employee-provided benefits 
disregarded.
    (3) Plans and plan years taken into account.
    (i) Testing group.
    (ii) Testing period.
    (4) Contributions or benefits basis.
    (5) Determination of employee benefit percentage.
    (i) General rule.
    (ii) Plans with differing plan years.
    (iii) Options and consistency requirements.
    (6) Permitted disparity.
    (i) In general.
    (ii) Plans which may not use permitted disparity.
    (7) Requirements for certain plans providing early retirement 
benefits.
    (i) General rule.
    (ii) Exception.
    (e) Additional optional rules.
    (1) Overview.
    (2) Determination of employee benefit percentages as the sum of 
separately determined rates.
    (i) In general.
    (ii) Exception from consistency requirement.
    (iii) Permitted inconsistencies.
    (3) Determination of employee benefit percentages without regard to 
plans of another type.
    (i) General rule.
    (ii) Restriction on use of separate testing group determination 
method.
    (iii) Treatment of permitted disparity.
    (iv) Example.
    (4) Simplified method for determining employee benefit percentages 
for certain defined benefit plans.
    (i) In general.
    (ii) Simplified method.

[[Page 27]]

    (5) Three-year averaging period.
    (6) Alternative methods of determining compensation.
    (f) Special rule for certain collectively bargained plans.

                 Sec.  1.410(b)-6 Excludable employees.

    (a) Employees.
    (1) In general.
    (2) Rules of application.
    (b) Minimum age and service exclusions.
    (1) In general.
    (2) Multiple age and service conditions.
    (3) Plans benefiting certain otherwise excludable employees.
    (i) In general.
    (ii) Testing portion of plan benefiting otherwise excludable 
employees.
    (4) Examples.
    (c) Certain nonresident aliens.
    (1) General rule.
    (2) Special treaty rule.
    (d) Collectively bargained employees.
    (1) General rule.
    (2) Definition of collectively bargained employee.
    (1) In general.
    (ii) Special rules for certain employees in multiemployer plans.
    (iii) Covered by a collective bargaining agreement.
    (iv) Examples.
    (e) Employees of qualified separate lines of business.
    (f) Certain terminating employees.
    (1) In general.
    (2) Hours of service.
    (3) Examples.
    (g) Employees of certain governmental or tax-exempt entities.
    (1) Plans covered.
    (2) Employees of governmental entities.
    (3) Employees of tax-exempt entities.
    (h) Former employees.
    (1) In general.
    (2) Employees terminated before a specified date.
    (3) Previously excludable employees.
    (i) Former employees treated as employees.

      Sec.  1.410(b)-7 Definition of plan and rules governing plan 
                     disaggregation and aggregation.

    (a) In general.
    (b) Separate asset pools are separate plans.
    (c) Mandatory disaggregation of certain plans.
    (1) Section 401(k) and section 401(m) plans.
    (2) ESOPs and non-ESOPs.
    (3) Plans benefiting otherwise excludable employees.
    (4) Plans benefiting certain disaggregation populations of 
employees.
    (i) In general.
    (ii) Definition of disaggregation population.
    (5) Additional rules for plans benefiting employees of more than one 
qualified separate line of business.
    (d) Permissive aggregation for ratio percentage and 
nondiscriminatory classification tests.
    (1) In general.
    (2) Rules of disaggregation.
    (3) Duplicative aggregation.
    (4) Special rule for plans benefiting employees of a qualified 
separate line of business.
    (5) Same plan year requirement.
    (e) Determination of plans in testing group for average benefit 
percentage test.
    (1) In general.
    (2) Example.
    (f) Section 403(b) plans.

                   Sec.  1.410(b)-8 Additional rules.

    (a) Testing methods.
    (1) In general.
    (2) Daily testing option.
    (3) Quarterly testing option.
    (4) Annual testing option.
    (5) Example.
    (b) Family member aggregation rule.

                      Sec.  1.410(b)-9 Definitions.

    Collectively bargained employee.
    Defined benefit plan.
    Defined contribution plan.
    Employee.
    Employer.
    ESOP.
    Former employee.
    Highly compensated employee.
    Highly compensated former employee.
    Multiemployer plan.
    Noncollectively bargained employee.
    Nonhighly compensated employee.
    Nonhighly compensated former employee.
    Plan year.
    Plan year compensation.
    Professional employee.
    Ratio percentage.
    Section 401(k) plan.
    Section 401(l) plan.
    Section 401(m) plan.

         Sec.  1.410(b)-10 Effective dates and transition rules.

    (a) Statutory effective dates.
    (1) In general.
    (2) Special statutory effective date for collective bargaining 
agreements.
    (i) In general.
    (ii) Example.
    (iii) Plan maintained pursuant to a collective bargaining agreement.
    (b) Regulatory effective dates.
    (1) In general.
    (2) Plans of tax-exempt organizations.
    (c) Compliance during transition period.

[[Page 28]]

    (d) Effective date for governmental plans.

[T.D. 8363, 56 FR 47641, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992, as 
amended by T.D. 8487, 58 FR 46838, Sept. 3, 1993; T.D. 8548, 59 FR 
32914, June 27, 1994; T.D. 9275, 71 FR 41359, July 21, 2006]



Sec.  1.410(b)-1  Minimum coverage requirements (before 1994).

    (a) In general. A plan is not a qualified plan (and a trust forming 
a part of the plan is not a qualified trust) unless the plan satisfies 
section 410(b)(1). For plan years prior to the applicable effective date 
set forth in Sec.  1.410(b)-10, a plan satisfies section 410(b)(1) if it 
satisfies the requirements of paragraph (b)(1) or (b)(2) of this 
section. See also Sec.  1.410(b)-2 for plan years beginning on or after 
the applicable effective date set forth in Sec.  1.410(b)-10.
    (b) Coverage tests--(1) Percentage test. A plan satisfies the 
requirements of this subparagraph if it benefits--
    (i) Seventy percent or more of all employees, or
    (ii) Eighty percent or more of all employees who are eligible to 
benefit under the plan if 70 percent or more of all the employees are 
eligible to benefit under the plan,

excluding in each case employees who have not satisfied the minimum age 
and service requirements (if any) prescribed by the plan, as of the date 
coverage is tested, as a condition of participation and employees 
permitted to be excluded under paragraph (c) of this section. The 
percentage requirements of this subparagraph refer to a percentage of 
active employees, including employees temporarily on leave, such as 
those in the Armed Forces of the United States, if such employees are 
eligible under the plan.
    (2) Classification test. A plan satisfies the requirements of 
section 410(b)(1) and this subparagraph if it benefits such employees as 
qualify under a classification of employees set up by the employer, 
which classification is found by the Internal Revenue Service not to be 
discriminatory in favor of employees who are officers, shareholders, or 
highly compensated. For purposes of this subparagraph, except as 
provided by paragraph (c) of this section, all active employees 
(including employees who do not satisfy the minimum age or service 
requirements of the plan) are taken into account.
    (c) Exclusion of certain employees. Under section 410(b)(2), for 
purposes of section 410(b)(1) and paragraph (b) of this section, there 
shall be excluded from consideration employees described in 
subparagraphs (1), (2), and (3) of this paragraph.
    (1) Bargaining unit. Under section 410(b)(2)(A) and this paragraph, 
there may be excluded from consideration employees not included in the 
plan who are included in a unit of employees covered by an agreement 
which the Secretary of Labor finds to be a collective bargaining 
agreement between employee representatives and one or more employers, if 
the Internal Revenue Service finds that retirement benefits were the 
subject of good faith bargaining between such employee representatives 
and such employer or employers. For purposes of determining whether such 
bargaining occurred, it is not material that such employees are not 
covered by another plan or that the plan was not considered in such 
bargaining.
    (2) Air pilots. Under section 410(b)(2)(B) and this paragraph there 
may be excluded from consideration, in the case of a plan established or 
maintained pursuant to an agreement which the Secretary of Labor finds 
to be a collective bargaining agreement between air pilots represented 
in accordance with title II of the Railway Labor Act and one or more 
employers all employees not covered by such agreement. Section 
410(b)(2)(B) and this subparagraph do not apply to a plan if the plan 
provides contributions or benefits for employees whose principal duties 
are not customarily performed aboard aircraft in flight.
    (3) Nonresident aliens. Under section 410(b)(2)(C) and this 
paragraph, there may be excluded from consideration employees who are 
nonresident aliens and who receive no earned income (within the meaning 
of section 911(b) and the regulations thereunder) from the employer 
which constitutes income from sources within the United States (within 
the meaning of section 861(a)(3) and the regulations thereunder).

[[Page 29]]

    (d) Special rules--(1) Highly compensated. The classification of an 
employee as highly compensated for purposes of section 410(b)(1)(B) and 
Sec.  1.410(b)-1(b)(2) is made on the basis of the facts and 
circumstances of each case, taking into account the level of the 
employee's compensation and the level of compensation paid by the 
employer to other employees, whether or not covered by the plan. Average 
compensation levels determined on a local, regional, or national basis, 
are not relevant for this purpose. Further, the classification of an 
employee as highly compensated is not made solely on the basis of the 
number or percentage of employees whose compensation exceeds, or is 
exceeded by, the employee's.
    (2) Discrimination. The determination as to whether a plan 
discriminates in favor of employees who are officers, shareholders, or 
highly compensated is made on the basis of the facts and circumstances 
of each case, allowing a reasonable difference between the ratio of such 
employees benefited by the plan to all such employees of the employer 
and the ratio of the employees (other than officers, shareholders, or 
highly compensated) of the employer benefited by the plan to all 
employees (other than officers, shareholders, or highly compensated). A 
showing that a specified percentage of employees covered by a plan are 
not officers, shareholders, or highly compensated, is not in itself 
sufficient to establish that the plan does not discriminate in favor of 
employees who are officers, shareholders, or highly compensated.
    (3) Multiple plans--(i) An employer may designate two or more plans 
as constituting a single plan which is intended to qualify for purposes 
of section 410(b)(1) and this section, in which case all plans so 
designated shall be considered as a single plan in determining whether 
the requirements of such section are satisfied by each of the separate 
plans. A determination that the combination of plans so designated does 
not satisfy such requirements does not preclude a determination that one 
or more of such plans, considered separately, satisfies such 
requirements.
    (ii) Notwithstanding subdivision (i) of this subparagraph, a plan 
which is subject to the limitations of section 401(a)(17) of the Code or 
section 301(d)(3) of the Tax Reduction Act of 1975 cannot be considered 
with any other plan which covers any employee covered by such plan.
    (4) Profit-sharing plans. Employees under a profit-sharing plan who 
receive the amounts allocated to their accounts before the expiration of 
a period of time or the occurrence of a contingency specified in the 
plan shall not be considered covered by the plan. Thus, in case a plan 
permits employees to receive immediately the amounts allocated to their 
accounts, or to have such amounts paid to a profit-sharing plan for 
them, the employees who receive the shares immediately shall not be 
considered covered by the plan.
    (5) Certain classifications. See section 401(a)(5) and the 
regulations thereunder for rules relating to classifications of 
employees which are not considered to be discriminatory per se for 
purposes of section 410(b)(1)(B) and Sec.  1.410(b)-1(b)(2).
    (6) Integration with Social Security Act. See section 401(a)(5) and 
the regulations thereunder for rules relating to integration of plans 
with the Social Security Act.
    (7) Different age and service requirements--(i) Application. The 
rules of this subparagraph (7) apply to a plan which must satisfy the 
minimum age and service requirements of section 410(a)(1)(A) in order to 
be a qualified plan. Accordingly, the rules are inapplicable to plans 
described in section 410(c)(1) (see Sec.  1.410(a)-1(c)(1)); plans 
satisfying the alternative minimum age and service requirements of 
section 410(a)(1)(B) but not satisfying the requirements of section 
410(a)(1)(A); and plans which provide contributions or benefits for 
employees, some or all of whom are owner-employees (see section 
401(a)(10)).
    (ii) General rules. A provision for different age and service 
requirements for present and future employees either upon establishment 
or subsequent amendment is not, of itself, discriminatory under section 
410(b)(1)(B) even

[[Page 30]]

though present employees who are officers, shareholders, or highly 
compensated cannot meet the age and service requirements for future 
employees at the time the plan is established or amended and even though 
present participants who are officers, shareholders, or highly 
compensated would not have satisfied the age and service requirements 
for future employees at the time they became participants in the plan. 
Furthermore, prohibited discrimination will be deemed not to arise in 
operation, solely because of such different requirements, when future 
employees are added to the employer's work force.
    (8) Certain controlled groups. In applying the percentage test and 
classification test described in paragraph (b) (1) and (2) of this 
section for a year, all the employees of corporations or trades and 
businesses whose employees are treated as employed by a single employer 
by reason of section 414 (b) or (c) must be taken into account. The 
preceding sentence shall apply for a plan year if, on 1 day in each 
quarter of such plan year, such corporations are members of a controlled 
group of corporations (within the meaning of section 414(b)) of such 
trades or businesses are under common control (within the meaning of 
section 414(c)).
    (9) Transitional rule. In the case of a cash and deferred profit-
sharing plan, in existence on June 27, 1974, the requirements of 
paragraph (b)(2) of this section are satisfied if over one-half of the 
participants in the plan are among the lowest paid two-thirds of all 
eligible employees. This subparagraph shall not apply after December 31, 
1977.
    (e) Example. The rules provided by this section are illustrated by 
the following example:

    Example. An employer established a non-contributory defined benefit 
plan covering all employees of its ABC Division who are hired prior to 
age 60 and who are at least 25 years old. The normal retirement age 
under the plan is age 65. The employer has 100 employees including 20 
employees who are under age 25 and 10 employees who were hired over age 
60. The plan does not cover 15 employees who are over age 25 and were 
hired before age 60 because they are not in the ABC Division. Of these 
15 excluded employees, 3 have less than 1 year of service. In addition, 
12 of the 55 employees covered have less than one year of service. The 
plan can be shown not to satisfy the requirements of IRC section 
410(b)(1)(A) as follows:

(i) Number of employees........................................      100
(ii) Number of employees excluded on account of minimum age and       20
 service.......................................................
(iii) (i)-(ii).................................................       80
(iv) Number of employees who must be covered if plan is to            56
 satisfy IRC section 410(b)(1)(A), 70% of (iii)................
(v) Number of employees actually covered.......................       55
 


Because the number of employees covered is less than the number of 
employees who must be covered, the plan does not satisfy the percentage 
coverage requirements of IRC section 410(b)(1)(A).

(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7508, 42 FR 47197, Sept. 20, 1977, as amended by T.D. 7735, 45 FR 
74722, Nov. 12, 1980; T.D. 8363, 56 FR 47643, Sept. 19, 1991; T.D. 8487, 
58 FR 46839, Sept. 3, 1993]



Sec.  1.410(b)-2  Minimum coverage requirements (after 1993).

    (a) In general. A plan is a qualified plan for a plan year only if 
the plan satisfies section 410(b) for the plan year. A plan satisfies 
section 410(b) for a plan year if and only if it satisfies paragraph (b) 
of this section with respect to employees for the plan year and 
paragraph (c) of this section with respect to former employees for the 
plan year. The rules in paragraphs (a), (b), and (c) of this section 
apply to all plans as a condition of qualification, including plans 
under which no employee is able to accrue any additional benefits (for 
example, frozen plans). Paragraphs (d), (e), and (f) of this section 
provide special rules for nonelective section 403(b) plans subject to 
section 403(b)(12)(A)(i), for governmental and church plans subject to 
section 410(c), and for certain acquisitions or dispositions, 
respectively. See Sec.  1.410(b)-7 for rules for determining the 
``plan'' subject to section 410(b).
    (b) Requirements with respect to employees--(1) In general. A plan 
satisfies this paragraph (b) for a plan year if and only if it satisfies 
at least one of the tests in paragraphs (b)(2) through (b)(7) of this 
section for the plan year.
    (2) Ratio percentage test--(i) In general. A plan satisfies this 
paragraph (b)(2) for a plan year if and only if the plan's ratio 
percentage for the plan year is at least 70 percent. This test 
incorporates both the percentage test of section 410(b)(1)(A) and the 
ratio test of section

[[Page 31]]

410(b)(1)(B). See Sec.  1.410(b)-9 for the definition of ratio 
percentage.
    (ii) Examples. The following examples illustrate the ratio 
percentage test of this paragraph (b)(2).

    Example 1. For a plan year, Plan A benefits 70 percent of an 
employer's nonhighly compensated employees and 100 percent of the 
employer's highly compensated employees. The plan's ratio percentage for 
the year is 70 percent (70 percent/100 percent), and thus the plan 
satisfies the ratio percentage test.
    Example 2. For a plan year, Plan B benefits 40 percent of the 
employer's nonhighly compensated employees and 60 percent of the 
employer's highly compensated employees. Plan B fails to satisfy the 
ratio percentage test because the plan's ratio percentage is only 66.67 
percent (40 percent/60 percent).

    (3) Average benefit test. A plan satisfies this paragraph (b)(3) for 
a plan year if and only if the plan satisfies both the nondiscriminatory 
classification test of Sec.  1.410(b)-4 and the average benefit 
percentage test of Sec.  1.410(b)-5 for the plan year.
    (4) Certain tax credit employee stock ownership plans. A plan 
satisfies this paragraph (b)(4) for a plan year if and only if the 
plan--
    (i) Is a tax credit employee stock ownership plan (as defined in 
section 409(a)),
    (ii) Is the only plan of the employer that is intended to qualify 
under section 401(a), and
    (iii) Is a plan that satisfies the rule set forth in section 
410(b)(6)(D).
    This paragraph (b)(4) is available only for plan years for which the 
tax credit employee stock ownership plan receives contributions for 
which the employer is allowed a tax credit under section 41 (as in 
effect prior to its repeal by the Tax Reform Act of 1986) or section 
48(n) (as in effect prior to its amendment by the Tax Reform Act of 
1984). The requirement of this paragraph (b)(4) that the plan be the 
only plan of the employer that is intended to qualify under section 
401(a) is not satisfied if the employer has only one plan, but that plan 
is treated as two or more separate plans under the mandatory 
disaggregation rules of Sec.  1.410(b)-7(c).
    (5) Employers with no nonhighly compensated employees. A plan 
satisfies this paragraph (b)(5) for a plan year if and only if the plan 
is maintained by an employer that has no nonhighly compensated employees 
at any time during the plan year.
    (6) Plans benefiting no highly compensated employees. A plan 
satisfies this paragraph (b)(6) for a plan year if and only if the plan 
benefits no highly compensated employees for the plan year.
    (7) Plans benefiting collectively bargained employees. A plan that 
benefits solely collectively bargained employees for a plan year 
satisfies this paragraph (b)(7) for the plan year. If a plan (within the 
meaning of Sec.  1.410(b)-7(b)) benefits both collectively bargained 
employees and noncollectively bargained employees for a plan year, Sec.  
1.410(b)-7(c)(4) provides that the portion of the plan that benefits 
collectively bargained employees is treated as a separate plan from the 
portion of the plan that benefits noncollectively bargained employees. 
Thus, the mandatorily disaggregated portion of the plan that benefits 
the collectively bargained employees automatically satisfies this 
paragraph (b)(7) for the plan year and hence section 410(b). See Sec.  
1.410(b)-9 for the definitions of collectively bargained employee and 
noncollectively bargained employee.
    (c) Requirements with respect to former employees--(1) Former 
employees tested separately. Former employees are tested separately from 
employees for purposes of section 410(b). Thus, former employees are 
disregarded in applying the ratio percentage test, the nondiscriminatory 
classification test, and the average benefit percentage test with 
respect to the coverage of employees under a plan, and employees are 
disregarded in applying this section with respect to the coverage of 
former employees under a plan.
    (2) Testing former employees. A plan satisfies section 410(b) with 
respect to former employees if and only if, under all of the relevant 
facts and circumstances (including the group of nonexcludable former 
employees not benefiting under the plan), the group of former employees 
benefiting under the plan does not discriminate significantly in favor 
of highly compensated former employees.
    (d) Nonelective contributions under section 403(b) plans. For plan 
years beginning on or after January 1, 1989, a plan

[[Page 32]]

subject to section 403(b)(12)(A)(i) with respect to nonelective 
contributions (i.e., contributions not made pursuant to a salary 
reduction agreement) is treated as a plan subject to the requirements of 
this section. For this purpose, a plan described in the preceding 
sentence must satisfy the requirements of this section without regard to 
section 410(c) and paragraph (e) of this section. For plan years 
beginning before the effective date set forth in Sec.  1.410(b)-10(d), 
any plan described in section 410(c)(1)(A) (regarding governmental 
plans) satisfies the requirements of this section.
    (e) Certain governmental and church plans. The requirements of 
section 410(b) do not apply to a plan described in section 410(c)(1) 
(other than a plan subject to section 403(b)(12)(A)(i) or a plan with 
respect to which an election has been made under section 410(d)). Such a 
plan must satisfy section 401(a)(3) as in effect on September 1, 1974. 
For this purpose, a plan that satisfies section 410(b) (without regard 
to this paragraph (e)) is treated as satisfying section 401(a)(3) as in 
effect on September 1, 1974. For plan years beginning before the 
effective date set forth in Sec.  1.410(b)-10(d), any plan described in 
section 410(c)(1)(A) (regarding governmental plans) satisfies the 
requirements of this section and is thus treated as satisfying the 
requirements of section 401(a)(3) as in effect on September 1, 1974. See 
Sec.  1.410(b)-10(b)(2) for a special rule for plans of tax-exempt 
organizations.
    (f) Certain acquisitions or dispositions. Section 410(b)(6)(C) 
(relating to certain acquisitions or dispositions) provides a special 
rule whereby a plan may be treated as satisfying section 410(b) for a 
limited period of time after an acquisition or disposition if it 
satisfies section 410(b) (without regard to the special rule) 
immediately before the acquisition or disposition and there is no 
significant change in the plan or in the coverage of the plan other than 
the acquisition or disposition. For purposes of section 410(b)(6)(C) and 
this paragraph (f), the terms ``acquisition'' and ``disposition'' refer 
to an asset or stock acquisition, merger, or other similar transaction 
involving a change in employer of the employees of a trade or business.
    (g) Additional rules. The Commissioner may, in revenue rulings, 
notices, and other guidance of general applicability, provide any 
additional rules that may be necessary or appropriate in applying the 
minimum coverage requirements of section 410(b), including (without 
limitation) additional rules limiting or expanding the methods in Sec.  
1.410(b)-5(d) and (e) for determining employee benefit percentages.

[T.D. 8363, 56 FR 47643, Sept. 19, 1991; 57 FR 10817, Mar. 31, 1992, as 
amended by T.D. 8487, 58 FR 46839, Sept. 3, 1993; T.D. 8548, 59 FR 
32914, June 27, 1994]



Sec.  1.410(b)-3  Employees and former employees who benefit under a 
plan.

    (a) Employees benefiting under a plan--(1) In general. Except as 
provided in paragraph (a)(2) of this section, an employee is treated as 
benefiting under a plan for a plan year if and only if for that plan 
year, in the case of a defined contribution plan, the employer receives 
an allocation taken into account under Sec.  1.401(a)(4)-2(c)(2)(ii), or 
in the case of a defined benefit plan, the employee has an increase in a 
benefit accrued or treated as an accrued benefit under section 
411(d)(6).
    (2) Exceptions to allocation or accrual requirement--(i) Section 
401(k) and 401(m) plans. Notwithstanding paragraph (a)(1) of this 
section, an employee is treated as benefiting under a section 401(k) 
plan for a plan year if and only if the employee is an eligible employee 
as defined in Sec.  1.401(k)-6 under the plan. Similarly, an employee is 
treated as benefiting under a section 401(m) plan for a plan year if and 
only if the employee is an eligible employee as defined in Sec.  
1.401(m)-5 under the plan for the plan year.
    (ii) Section 415 limits--(A) General rule for defined benefit plans. 
In determining whether an employee is treated as benefiting under a 
defined benefit plan for a plan year, plan provisions that implement the 
limits of section 415 are disregarded. Any plan provision that provides 
for increases in an employee's accrued benefit under the plan due solely 
to adjustments under section 415(d)(1), additional years of 
participation or service under section 415(b)(5), or

[[Page 33]]

changes in the defined contribution fraction under section 415(e) is 
also disregarded, but only if such provision applies uniformly to all 
employees in the plan.
    (B) Defined benefit plans taking section 415 limits into account 
under section 401(a)(4) testing. Paragraph (a)(2)(ii)(A) of this section 
does not apply in the case of a defined benefit plan that uses the 
option in Sec.  1.401(a)(4)-3(d)(2)(ii)(B) to take into account plan 
provisions implementing the provisions of section 415 in determining 
accrual rates under the section 401(a)(4) general test.
    (C) Defined contribution plans. A defined contribution plan is 
permitted to apply the rule in the first sentence of paragraph 
(a)(2)(ii)(A) of this section in determining whether an employee is 
treated as benefiting under the plan, provided it applies the rule on a 
consistent basis for all employees in the plan.
    (iii) Certain employees treated as benefiting--(A) In general. An 
employee is treated as benefiting under a plan for a plan year if the 
employee satisfies all of the applicable conditions for accruing a 
benefit or receiving an allocation for the plan year but fails to have 
an increase in accrued benefit or to receive an allocation solely 
because of one or more of the conditions set forth in paragraphs 
(a)(2)(iii) (B) through (F) of this section.
    (B) Certain plan limits. The employee's benefit would otherwise 
exceed a limit that is applicable on a uniform basis to all employees in 
the plan. Thus, for example, if the formula under a defined benefit plan 
takes into account only the first 30 years of service for accrual 
purposes, an employee who has completed more than 30 years of service is 
still treated as benefiting under the plan.
    (C) Benefits previously accrued. The benefit previously accrued by 
the employee is greater than the benefit that would be determined under 
the plan if the benefit previously accrued were disregarded. This could 
happen, for example, when the plan is applying the wear-away formula of 
Sec.  1.401(a)(4)-13(c)(4)(ii) and the employee's frozen accrued benefit 
exceeds the benefit determined under the current formula.
    (D) Benefit offset arrangements. The plan offsets the employee's 
current benefit accrual under an offset arrangement described in Sec.  
1.401(a)(4)-3(f)(9) (without regard to whether the offset is 
attributable to pre-participation service or past service).
    (E) Target benefit plans. In the case of a target benefit plan that 
satisfies the nondiscriminatory amount requirement of Sec.  1.401(a)(4)-
1(b)(2) by satisfying the safe harbor in Sec.  1.401(a)(4)-8(b)(3), the 
employee's theoretical reserve is greater than or equal to the actuarial 
present value of the fractional rule benefit.
    (F) Post-normal retirement age adjustments. The employee has 
attained normal retirement age under a defined benefit plan and fails to 
accrue a benefit because of the provisions of section 411(b)(1)(H)(iii) 
regarding adjustments for delayed retirement.
    (iv) Section 412(i) plans--(A) General rule. Notwithstanding 
paragraph (a)(1) of this section, an employee is treated as benefiting 
under an insurance contract plan within the meaning of section 412(i) 
for a plan year if and only if a premium is paid on behalf of the 
employee for the plan year.
    (B) Exceptions. Notwithstanding paragraph (a)(2)(iv)(A) of this 
section, an employee is treated as benefiting under an insurance 
contract plan within the meaning of section 412(i) for a plan year if 
the sole reason that a premium is not paid on behalf of the employee is 
one of the reasons described in paragraph (a)(2)(iii) of this section. 
In addition, an employee is treated as benefiting under an insurance 
contract plan, within the meaning of section 412(i), that is a defined 
benefit plan if a premium is not paid on behalf of the employee solely 
because the insurance contracts that have previously been purchased on 
behalf of the employee guarantee to provide for the employee's projected 
normal retirement benefit without regard to future premium payments.
    (3) Examples. The following examples illustrate the determination of 
whether an employee is benefiting under a plan for purposes of section 
410(b).

    Example 1. An employer has 35 employees who are eligible under a 
defined benefit plan.

[[Page 34]]

The plan requires 1,000 hours of service to accrue a benefit. Only 30 
employees satisfy the 1,000-hour requirement and accrue a benefit. The 
five employees who do not satisfy the 1,000-hour requirement during the 
plan year are taken into account in testing the plan under section 
410(b) but are treated as not benefiting under the plan.
    Example 2. An employer maintains a section 401(k) plan. Only 
employees who are at least age 21 and who complete one year of service 
are eligible employees under the plan within the meaning of Sec.  
1.401(k)-6. Under the rule of paragraph (a)(2)(i) of this section, only 
employees who have satisfied these age and service conditions are 
treated as benefiting under the plan.
    Example 3. The facts are the same as in Example 2, except that the 
employer also maintains a section 401(m) plan that provides matching 
contributions contingent on elective contributions under the section 
401(k) plan. The matching contributions are contingent on employment on 
the last day of the plan year. Under Sec.  1.401(m)-5, because matching 
contributions are contingent on employment on the last day of the plan 
year, not all employees who are eligible employees under the section 
401(k) plan are eligible employees under the section 401(m) plan. Thus, 
employees who have satisfied the age and service conditions but who do 
not receive a matching contribution because they are not employed on the 
last day of the plan year are treated as not benefiting under the 
section 401(m) portion of the plan.

    (b) Former employees benefiting under a plan--(1) In general. A 
former employee is treated as benefiting for a plan year if and only if 
the plan provides an allocation or benefit increase described in 
paragraph (a)(1) of this section to the former employee for the plan 
year. Thus, for example, a former employee benefits under a defined 
benefit plan for a plan year if the plan is amended to provide an ad hoc 
cost-of-living adjustment in the former employee's benefits. In 
contrast, because an increase in benefits payable under a plan pursuant 
to an automatic cost-of-living provision adopted and effective before 
the beginning of the plan year is previously accrued, a former employee 
is not treated as benefiting in a subsequent plan year merely because 
the former employee receives an increase pursuant to such an automatic 
cost-of-living provision. Any accrual or allocation for an individual 
during the plan year that arises from the individual's status as an 
employee is treated as an accrual or allocation of an employee. 
Similarly, any accrual or allocation for an individual during the plan 
year that arises from the individual's status as a former employee is 
treated as an accrual or allocation of a former employee. It is possible 
for an individual to accrue a benefit both as an employee and as a 
former employee in a given plan year. During the plan year in which an 
individual ceases performing services for the employer, the individual 
is treated as an employee in applying section 410(b) with respect to 
employees and is treated as a former employee in applying section 410(b) 
with respect to former employees.
    (2) Examples. The following examples illustrate the determination of 
whether a former employee benefits under a plan for purposes of section 
410(b).

    Example 1. Employer A amends its defined benefit plan in the 1995 
plan year to provide an ad hoc cost-of-living increase of 5 percent for 
all retirees. Former employees who receive this increase are treated as 
benefiting under the plan for the 1995 plan year.
    Example 2. Employer B maintains a defined benefit plan with a 
calendar plan year. In the 1995 plan year, Employer B amends the plan to 
provide that an employee who has reached early retirement age under the 
plan and who retires before July 31 of the 1995 plan year will receive 
an unreduced benefit, even though the employee has not yet reached 
normal retirement age. This early retirement window benefit is provided 
to employees based on their status as employees. Thus, although 
individuals who take advantage of the benefit become former employees, 
the window benefit is treated as provided to employees and is not 
treated as a benefit for former employees.
    Example 3. The facts are the same as Example 2, except that on 
September 1, 1995, Employer B also amends the defined benefit plan to 
provide an ad hoc cost-of-living increase effective for all former 
employees. An individual who ceases performing services for the employer 
before July 31, 1995, under the early retirement window, and then 
receives the ad hoc cost-of-living increase, is treated as benefiting 
for the 1995 plan year both as an employee with respect to the early 
retirement window, and as a former employee with respect to the ad hoc 
COLA.

[T.D. 8363, 56 FR 47644, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992, as 
amended by T.D. 8487, 58 FR 46839, Sept. 3, 1993; T.D. 9169, 69 FR 
78153, 78154, Dec. 29, 2004]

[[Page 35]]



Sec.  1.410(b)-4  Nondiscriminatory classification test.

    (a) In general. A plan satisfies the nondiscriminatory 
classification test of this section for a plan year if and only if, for 
the plan year, the plan benefits the employees who qualify under a 
classification established by the employer in accordance with paragraph 
(b) of this section, and the classification of employees is 
nondiscriminatory under paragraph (c) of this section.
    (b) Reasonable classification established by the employer. A 
classification is established by the employer in accordance with this 
paragraph (b) if and only if, based on all the facts and circumstances, 
the classification is reasonable and is established under objective 
business criteria that identify the category of employees who benefit 
under the plan. Reasonable classifications generally include specified 
job categories, nature of compensation (i.e., salaried or hourly), 
geographic location, and similar bona fide business criteria. An 
enumeration of employees by name or other specific criteria having 
substantially the same effect as an enumeration by name is not 
considered a reasonable classification.
    (c) Nondiscriminatory classification--(1) General rule. A 
classification is nondiscriminatory under this paragraph (c) for a plan 
year if and only if the group of employees included in the 
classification benefiting under the plan satisfies the requirements of 
either paragraph (c)(2) or (c)(3) of this section for the plan year.
    (2) Safe harbor. A plan satisfies the requirement of this paragraph 
(c)(2) for a plan year if and only if the plan's ratio percentage is 
greater than or equal to the employer's safe harbor percentage, as 
defined in paragraph (c)(4)(i) of this section. See Sec.  1.410(b)-9 for 
the definition of a plan's ratio percentage.
    (3) Facts and circumstances--(i) General rule. A plan satisfies the 
requirements of this paragraph (c)(3) if and only if--
    (A) The plan's ratio percentage is greater than or equal to the 
unsafe harbor percentage, as defined in paragraph (c)(4)(ii) of this 
section, and
    (B) The classification satisfies the factual determination of 
paragraph (c)(3)(ii) of this section.
    (ii) Factual determination. A classification satisfies this 
paragraph (c)(3)(ii) if and only if, based on all the relevant facts and 
circumstances, the Commissioner finds that the classification is 
nondiscriminatory. No one particular fact is determinative. Included 
among the facts and circumstances relevant in determining whether a 
classification is nondiscriminatory are the following--
    (A) The underlying business reason for the classification. The 
greater the business reason for the classification, the more likely the 
classification is to be nondiscriminatory. Reducing the employer's cost 
of providing retirement benefits is not a relevant business reason.
    (B) The percentage of the employer's employees benefiting under the 
plan. The higher the percentage, the more likely the classification is 
to be nondiscriminatory.
    (C) Whether the number of employees benefiting under the plan in 
each salary range is representative of the number of employees in each 
salary range of the employer's workforce. In general, the more 
representative the percentages of employees benefiting under the plan in 
each salary range, the more likely the classification is to be 
nondiscriminatory.
    (D) The difference between the plan's ratio percentage and the 
employer's safe harbor percentage. The smaller the difference, the more 
likely the classification is to be nondiscriminatory.
    (E) The extent to which the plan's average benefit percentage 
(determined under Sec.  1.410(b)-5) exceeds 70 percent.
    (4) Definitions--(i) Safe harbor percentage. The safe harbor 
percentage of an employer is 50 percent, reduced by \3/4\ of a 
percentage point for each whole percentage point by which the nonhighly 
compensated employee concentration percentage exceeds 60 percent. See 
paragraph (c)(4)(iv) for a table that illustrates the safe harbor 
percentage and unsafe harbor percentage.
    (ii) Unsafe harbor percentage. The unsafe harbor percentage of an 
employer

[[Page 36]]

is 40 percent, reduced by \3/4\ of a percentage point for each whole 
percentage point by which the nonhighly compensated employee 
concentration percentage exceeds 60 percent. However, in no case is the 
unsafe harbor percentage less than 20 percent.
    (iii) Nonhighly compensated employee concentration percentage. The 
nonhighly compensated employee concentration percentage of an employer 
is the percentage of all the employees of the employer who are nonhighly 
compensated employees. Employees who are excludable employees for 
purposes of the average benefit test are not taken into account.
    (iv) Table. The following table sets forth the safe harbor and 
unsafe harbor percentages at each nonhighly compensated employee 
concentration percentage:

------------------------------------------------------------------------
  Nonhighly compensated
 employee concentration   Safe harbor percentage       Unsafe harbor
       percentage                                       percentage
------------------------------------------------------------------------
              0-60                    50.00                   40.00
                61                    49.25                   39.25
                62                    48.50                   38.50
                63                    47.75                   37.75
                64                    47.00                   37.00
                65                    46.25                   36.25
                66                    45.50                   35.50
                67                    44.75                   34.75
                68                    44.00                   34.00
                69                    43.25                   33.25
                70                    42.50                   32.50
                71                    41.75                   31.75
                72                    41.00                   31.00
                73                    40.25                   30.25
                74                    39.50                   29.50
                75                    38.75                   28.75
                76                    38.00                   28.00
                77                    37.25                   27.25
                78                    36.50                   26.50
                79                    35.75                   25.75
                80                    35.00                   25.00
                81                    34.25                   24.25
                82                    33.50                   23.50
                83                    32.75                   22.75
                84                    32.00                   22.00
                85                    31.25                   21.25
                86                    30.50                   20.50
                87                    29.75                   20.00
                88                    29.00                   20.00
                89                    28.25                   20.00
                90                    27.50                   20.00
                91                    26.75                   20.00
                92                    26.00                   20.00
                93                    25.25                   20.00
                94                    24.50                   20.00
                95                    23.75                   20.00
                96                    23.00                   20.00
                97                    22.25                   20.00
                98                    21.50                   20.00
                99                    20.75                   20.00
------------------------------------------------------------------------

    (5) Examples. The following examples illustrate the rules in this 
paragraph (c).

    Example 1. Employer A has 200 nonexcludable employees, of whom 120 
are nonhighly compensated employees and 80 are highly compensated 
employees. Employer A maintains a plan that benefits 60 nonhighly 
compensated employees and 72 highly compensated employees. Thus, the 
plan's ratio percentage is 55.56 percent ([60/120]/[72/80] = 50%/90% = 
0.5556), which is below the percentage necessary to satisfy the ratio 
percentage test of Sec.  1.410(b)-2(b)(2). The employer's nonhighly 
compensated employee concentration percentage is 60 percent (120/200); 
thus, Employer A's safe harbor percentage is 50 percent and its unsafe 
harbor percentage is 40 percent. Because the plan's ratio percentage is 
greater than the safe harbor percentage, the plan's classification 
satisfies the safe harbor of paragraph (c)(2) of this section.
    Example 2. The facts are the same as in Example 1, except that the 
plan benefits only 40 nonhighly compensated employees. The plan's ratio 
percentage is thus 37.03 percent ([40/120]/[72/80] = 33.33%/90% = 
0.3703). Under these facts, the plan's classification is below the 
unsafe harbor percentage and is thus considered discriminatory.
    Example 3. The facts are the same as in Example 1, except that the 
plan benefits 45 nonhighly compensated employees. The plan's ratio 
percentage is thus 41.67 percent ([45/120]/[72/80] = 37.50%/90% = 
0.4167), above the unsafe harbor percentage (40 percent) and below the 
safe harbor percentage (50 percent). The Commissioner may determine that 
the classification is nondiscriminatory after considering all the 
relevant facts and circumstances.
    Example 4. Employer B has 10,000 nonexcludable employees, of whom 
9,600 are nonhighly compensated employees and 400 are highly compensated 
employees. Employer B maintains a plan that benefits 600 nonhighly 
compensated employees and 100 highly compensated employees. Thus, the 
plan's ratio percentage is 25.00 percent ([600/9,600]/[100/400] = 6.25%/
25% = 0.2500), which is below the percentage necessary to satisfy the 
ratio percentage test of Sec.  1.410(b)-2(b)(2). Employer B's nonhighly 
compensated employee concentration percentage is 96 percent (9,600/
10,000); thus, Employer B's safe harbor percentage is 23 percent, and 
its unsafe harbor percentage is 20 percent. Because the plan's ratio 
percentage (25.00 percent) is greater than the safe harbor percentage 
(23.00 percent), the plan's classification satisfies the safe harbor of 
paragraph (c)(2) of this section.
    Example 5. The facts are the same as in Example 4, except that the 
plan benefits only 400 nonhighly compensated employees. The plan's ratio 
percentage is thus 16.67 percent ([400/9,600]/[100/400] = 4.17%/25% = 
0.1667). The

[[Page 37]]

plan's ratio percentage is below the unsafe harbor percentage and thus 
the classification is considered discriminatory.
    Example 6. The facts are the same as in Example 4, except that the 
plan benefits 500 nonhighly compensated employees. The plan's ratio 
percentage is thus 20.83 percent ([500/9,600]/[100/400] = 5.21%/25% = 
0.2083), above the unsafe harbor percentage (20 percent) and below the 
safe harbor percentage (23 percent). The Commissioner may determine that 
the classification is nondiscriminatory after considering all the facts 
and circumstances.

[T.D. 8363, 56 FR 47645, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992]



Sec.  1.410(b)-5  Average benefit percentage test.

    (a) General rule. A plan satisfies the average benefit percentage 
test of this section for a plan year if and only if the average benefit 
percentage of the plan for the plan year is at least 70 percent. A plan 
is deemed to satisfy this requirement if it satisfies paragraph (f) of 
this section for the plan year.
    (b) Determination of average benefit percentage. The average benefit 
percentage of a plan for a plan year is the percentage determined by 
dividing the actual benefit percentage of the nonhighly compensated 
employees in plans in the testing group for the testing period that 
includes the plan year by the actual benefit percentage of the highly 
compensated employees in plans in the testing group for that testing 
period. See paragraph (d)(3)(ii) of this section for the definition of 
testing period.
    (c) Determination of actual benefit percentage. The actual benefit 
percentage of a group of employees for a testing period is the average 
of the employee benefit percentages, calculated separately with respect 
to each of the employees in the group for the testing period. All 
nonexcludable employees of the employer are taken into account for this 
purpose, even if they are not benefiting under any plan that is taken 
into account.
    (d) Determination of employee benefit percentages--(1) Overview. 
This paragraph (d) provides rules for determining employee benefit 
percentages. See paragraph (e) of this section for alternative methods 
for determining employee benefit percentages.
    (2) Employee contributions and employee-provided benefits 
disregarded. Only employer-provided contributions and benefits are taken 
into account in determining employee benefit percentages. Therefore, 
employee contributions (including both employee contributions allocated 
to separate accounts and employee contributions not allocated to 
separate accounts), and benefits derived from such contributions, are 
not taken into account in determining employee benefit percentages.
    (3) Plans and plan years taken into account--(i) Testing group. All 
plans included in the testing group under Sec.  1.410(b)-7(e)(1), and 
only those plans, are taken into account in determining an employee's 
employee benefit percentage.
    (ii) Testing period. An employee's employee benefit percentage is 
determined on the basis of plan years ending with or within the same 
calendar year. These plan years are referred to in this section as the 
relevant plan years or, in the aggregate, as the testing period.
    (4) Contributions or benefits basis. Employee benefit percentages 
may be determined on either a contributions or a benefits basis. 
Employee benefit percentages for any testing period must be determined 
on the same basis (contributions or benefits) for all plans in the 
testing group.
    (5) Determination of employee benefit percentage--(i) General rule. 
The employee benefit percentage for an employee for a testing period is 
the rate that would be determined for that employee for purposes of 
applying the general test for nondiscrimination in Sec. Sec.  
1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8 or 1.401(a)(4)-9, if all the 
plans in the testing group were aggregated for purposes of section 
410(b). Thus, if employee benefit percentages are determined on a 
contributions basis, each employee's employee benefit percentage is the 
aggregate normal allocation rate that would be determined for the 
employee under Sec.  1.401(a)(4)-9(b)(2)(ii)(A) (if the plans in the 
testing group include both defined benefit and defined contribution 
plans), the allocation rate that would be determined for the employee 
under Sec.  1.401(a)(4)-2(c)(2) (if the plans in the testing group 
include only defined contribution plans), or the equivalent normal 
allocation

[[Page 38]]

rate that would be determined for the employee under Sec.  1.401(a)(4)-
8(c)(2) (if the plans in the testing group include only defined benefit 
plans). Similarly, if employee benefit percentages are determined on a 
benefits basis, each employee's employee benefit percentage is the 
aggregate normal accrual rate that would be determined for the employee 
under Sec.  1.401(a)(4)-9(b)(2)(ii)(B), the normal accrual rate that 
would be determined for the employee under Sec.  1.401(a)(4)-3(d), or 
the equivalent accrual rate that would be determined for the employee 
under Sec.  1.401(a)(4)-8(b)(2), depending on whether the plans in the 
testing group include both defined benefit and defined contribution 
plans, only defined benefit plans, or only defined contribution plans.
    (ii) Plans with differing plan years. If not all the plans in the 
testing group share the same plan year, Sec.  1.410(b)-7(d)(5) would 
ordinarily prohibit them from being aggregated for purposes of section 
410(b). In such a case, employee benefit percentages are determined by 
applying the rules of paragraph (d)(5)(i) of this section separately to 
each subset of plans in the testing group that share the same plan year 
(or the same accrual computation period) and aggregating the results for 
all plans in the testing group. Thus, an employee's employee benefit 
percentage is determined as the sum of these separate employee benefit 
percentages that are determined consistently for all the plans in the 
testing group (except for differences attributable solely to the 
differences in plan years).
    (iii) Options and consistency requirements. In determining employee 
benefit percentages under this paragraph (d)(5), any optional or 
alternative methods or rules available for determining rates in 
Sec. Sec.  1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, or 1.401(a)(4)-
9, whichever is applicable, may be applied. Thus, for example, employee 
benefit percentages may generally be calculated using any of the 
alternative methods of determining average annual compensation or plan 
year compensation under Sec.  1.401(a)(4)-12, and using any underlying 
definition of compensation that satisfies section 414(s). Except as 
otherwise specifically permitted, the determination of employee benefit 
percentages must be made on a consistent basis for all employees and for 
all plans in the testing group as required by Sec. Sec.  1.401(a)(4)-
2(c)(2)(vi), 1.401(a)(4)-3(d)(2)(i), 1.401(a)(4)-8(b)(2)(iv), 
1.401(a)(4)-8(c)(2)(iv) or 1.401(a)(4)-9(b)(2)(iv).
    (6) Permitted disparity--(i) In general. Permitted disparity may be 
imputed in determining employee benefit percentages as provided in 
Sec. Sec.  1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, or 1.401(a)(4)-
9, whichever is applicable. When separate employee benefit percentages 
are determined for individual plans under paragraph (e)(2) of this 
section (or for subsets of plans that have the same plan year as 
described in paragraph (d)(5)(ii) of this section), permitted disparity 
may be imputed for an employee only in one individual plan (or subset of 
plans) and may not be imputed for the same employee in another 
individual plan (or subset of plans). However, if the same average 
annual compensation or plan year compensation is used to determine 
employee benefit percentages in more than one plan, the employee's 
employee benefit percentages for those plans may be summed prior to 
imputing permitted disparity.
    (ii) Plans which may not use permitted disparity. Permitted 
disparity may be reflected in the determination of rates only to the 
extent that the plans for which rates are being determined are plans for 
which the permitted disparity of section 401(l) is available. Thus, for 
example, if a section 401(k) plan is included in the testing group and 
permitted disparity is imputed under Sec.  1.401(a)(4)-2(c)(iv), then 
employee benefit percentages are determined by first calculating an 
adjusted allocation rate (within the meaning of Sec.  1.401(a)(4)-
7(b)(1)) without regard to the amount of allocations under the section 
401(k) plan and adding to it the allocation rate for the section 401(k) 
plan. See Sec.  1.401(l)-1(a)(4) for a list of types of plans for which 
permitted disparity is not available.
    (7) Requirements for certain plans providing early retirement 
benefits--(i) General rule. If any defined benefit plan in the testing 
group provides for early retirement benefits in addition to normal

[[Page 39]]

retirement benefits to any highly compensated employee, and the average 
actuarial reduction for any one of these benefits commencing in the five 
years prior to the plan's normal retirement age is less than four 
percent per year, then the aggregate most valuable allocation rate, 
equivalent most valuable allocation rate, aggregate most valuable 
accrual rate, or most valuable accrual rate must be substituted for the 
related normal rates in paragraph (d)(5) of this section.
    (ii) Exception. Paragraph (d)(7)(i) of this section does not apply 
if early retirement benefits with average actuarial reductions described 
in that paragraph are currently available, within the meaning of Sec.  
1.401(a)(4)-4(b), under plans in the testing group to a percentage of 
nonhighly compensated employees that is at least 70 percent of the 
percentage of highly compensated employees to whom these benefits are 
currently available.
    (e) Additional optional rules--(1) Overview. This paragraph (e) 
contains various alternative methods for determining employee benefit 
percentages for a testing period.
    (2) Determination of employee benefit percentages as the sum of 
separately determined rates--(i) In general. Employee benefit 
percentages may be determined as the sum of separately determined 
employee benefit percentages for each of the plans in the testing group 
that are aggregated under paragraphs (d)(5) (i) or (ii) of this section, 
provided that these employee benefit percentages are determined on a 
consistent basis for all of these plans pursuant to paragraph 
(d)(5)(iii) of this section.
    (ii) Exception from consistency requirement. The consistency 
requirement of paragraph (e)(2)(i) of this section is not violated 
merely because employee benefit percentages are not determined in a 
consistent manner for all of the plans in the testing group and the 
inconsistencies in determination of rates among plans are described in 
paragraph (e)(2)(iii) of this section. The exception in this paragraph 
(e)(2)(ii) applies only if it is reasonable to believe that the 
inconsistencies do not result in an average benefit percentage that is 
significantly higher than the average benefit percentage that would be 
determined had employee benefit percentages been determined on a 
consistent basis pursuant to paragraph (d)(5)(iii) of this section.
    (iii) Permitted inconsistencies. The following inconsistencies 
between plans are permitted under this paragraph (e)(2)--
    (A) Use of different underlying definitions of section 414(s) 
compensation in the determination of rates;
    (B) Use of different definitions of average annual compensation;
    (C) Use of different testing ages;
    (D) Use of different fresh-start dates;
    (E) Use of different actuarial assumptions for normalization; or
    (F) Disregard of actuarial increases after normal retirement age and 
QPSA charges without regard to any requirement for uniformity in the 
actuarial increases or QPSA charges.
    (3) Determination of employee benefit percentages without regard to 
plans of another type--(i) General rule. Employee benefit percentages 
may be determined under plans of one type (i.e., defined benefit plans 
or defined contribution plans) by treating all plans of the other type 
(i.e., defined contribution plans or defined benefit plans, 
respectively) as if they were not part of the testing group, using the 
method provided in this paragraph (e)(3). If this method is used to 
determine whether a defined contribution plan satisfies the average 
benefit percentage test, employee benefit percentages under all defined 
contribution plans in the testing group must be determined on a 
contributions basis, and benefits under any defined benefit plans may 
not be included in the employee benefit percentage. Similarly, if this 
method is used to determine whether a defined benefit plan satisfies the 
average benefit percentage test, employee benefit percentages under all 
defined benefit plans in the testing group must be determined on a 
benefits basis, and allocations under any defined contribution plans may 
not be included in the employee benefit percentage.
    (ii) Restriction on use of separate testing group determination 
method. A plan does not satisfy the average benefit percentage test 
using the method provided in this paragraph (e)(3) unless each of the 
plans in the testing group

[[Page 40]]

of the other type (i.e., defined benefit plan or defined contribution 
plan) than the plan being tested satisfies the average benefit test of 
Sec.  1.410(b)-2(b)(3) using the method in this paragraph (e)(3) or 
satisfies the ratio percentage test of Sec.  1.410(b)-2(b)(2).
    (iii) Treatment of permitted disparity. Although under the general 
rule of this paragraph (e)(3) plans of another type are disregarded in 
determining employee benefit percentages, the permitted disparity used 
by those plans (including any permitted disparity that is used by those 
plans to satisfy Sec.  1.401(a)(4)-1(b)(2)) is nonetheless taken into 
account in determining the extent to which permitted disparity may be 
used in determining employee benefit percentages.
    (iv) Example. The following example illustrates the rules of this 
paragraph (e)(3):

    Example. Employer A maintains two defined benefit plans, neither of 
which covers a group of employees that satisfies the ratio percentage 
test of Sec.  1.410(b)-2(b)(2), and a profit-sharing plan and a section 
401(k) plan, each of which benefits a group of employees that satisfies 
the ratio percentage test of Sec.  1.410(b)-2(b)(2). The defined benefit 
plans will satisfy the average benefit percentage test if the actual 
benefit percentage of all nonexcludable nonhighly compensated employees, 
computed on a benefits basis without regard to contributions under the 
profit-sharing plan or the section 401(k) plan, is at least 70 percent 
of the actual benefit percentage of all nonexcludable highly compensated 
employees, computed on a benefits basis without regard to contributions 
under the profit-sharing plan or the section 401(k) plan.

    (4) Simplified method for determining employee benefit percentages 
for certain defined benefit plans--(i) In general. An employee's 
employee benefit percentage with respect to a plan may be determined 
under the simplified method of paragraph (e)(4)(ii) of this section, 
provided the following conditions are satisfied:
    (A) The only plans included in the testing group are defined benefit 
plans, and employee benefit percentages under these plans are determined 
on a benefits basis.
    (B) Employee benefit percentages under the plans in the testing 
group are not required to be determined by taking into account early 
retirement benefits under paragraph (d)(7) of this section.
    (C) The plan is a safe harbor defined benefit plan described in 
Sec.  1.401(a)(4)-3(b).
    (ii) Simplified method--(A) Section 401(l) plans. Under the 
simplified method of this paragraph (e)(4)(ii), an employee's employee 
benefit percentage with respect to a section 401(l) plan described in 
Sec.  1.401(a)(4)-3(b)(3) (i.e., a unit credit plan) may be deemed equal 
to the employee's excess benefit percentage or gross benefit percentage 
(as defined in Sec.  1.401(l)-1(c) (14) or (18), respectively), 
whichever is applicable under the plan's benefit formula in the plan 
year. In the case of a section 401(l) plan described in Sec.  
1.401(a)(4)-3(b)(4) (i.e., a fractional accrual plan), an employee's 
employee benefit percentage with respect to that plan may be deemed 
equal to the rate at which the excess or gross benefit, whichever is 
applicable, accrues for the employee in the plan year, taking into 
account the plan's benefit formula and the employee's projected service 
at normal retirement age. The use of this simplified method will be 
treated as an imputation of permitted disparity. See paragraph (d)(6) of 
this section for a restriction on multiple use of permitted disparity.
    (B) Other plans. Under the simplified method of this paragraph 
(e)(4)(ii), an employee's employee benefit percentage with respect to a 
plan described in Sec.  1.401(a)(4)-3(b)(3) that is not a section 401(l) 
plan and that is not imputing permitted disparity may be deemed equal to 
the employee's benefit rate in the plan year under the plan's benefit 
formula. In the case of a plan described in Sec.  1.401(a)(4)-3(b)(4) 
that is not a section 401(l) plan and that is not imputing permitted 
disparity, an employee's employee benefit percentage with respect to 
that plan may be deemed equal to the rate at which the benefit accrues 
for the employee in the plan year, taking into account the plan's 
benefit formula and an employee's projected service at normal retirement 
age.
    (5) Three-year averaging period. An employee's employee benefit 
percentage may be determined for a testing period as the average of the 
employee's

[[Page 41]]

employee benefit percentages determined separately for the testing 
period and for the immediately preceding one or two testing periods 
(referred to in this section as an averaging period). Employee benefit 
percentages of a particular employee that are averaged together within 
an averaging period must be determined on a consistent basis for all 
testing periods within the averaging period.
    (6) Alternative methods of determining compensation. Employee 
benefit percentages may be determined on the basis of any definition of 
compensation that satisfies Sec.  1.414(s)-1(d) (without regard to 
whether the definition satisfies Sec.  1.414(s)-1(d)(3)), provided that 
the same definition is used for all employees and it is reasonable to 
believe that the definition does not result in an average benefit 
percentage that is significantly higher than the average benefit 
percentage that would be determined had employee benefit percentages 
been determined using a definition of compensation that also satisfies 
Sec.  1.414(s)-1(d)(3).
    (f) Special rule for certain collectively bargained plans. A plan 
(as determined without regard to the mandatory disaggregation rule of 
Sec.  1.410(b)-7(c)(5)) that benefits both collectively bargained 
employees and noncollectively bargained employees is deemed to satisfy 
the average benefit percentage test of this section if--
    (1) The provisions of the plan applicable to each employee in the 
plan are identical to the provisions of the plan applicable to every 
other employee in the plan, including the plan benefit or allocation 
formula, any optional forms of benefit, any ancillary benefit, and any 
other right or feature under the plan, and
    (2) The plan would satisfy the ratio percentage test of Sec.  
1.410(b)-2(b)(2), if Sec. Sec.  1.410(b)-6(d) and 1.410(b)-7(c)(5) (the 
excludable employee and mandatory disaggregation rules for collectively 
bargained and noncollectively bargained employees) did not apply.

[T.D. 8363, 56 FR 47646, Sept. 19, 1991; 57 FR 10817, 10954, Mar. 31, 
1992, as amended by T.D. 8487, 58 FR 46840, Sept. 3, 1993]



Sec.  1.410(b)-6  Excludable employees.

    (a) Employees--(1) In general. For purposes of applying section 
410(b) with respect to employees, all employees of the employer, other 
than the excludable employees described in paragraphs (b) through (i) of 
this section, are taken into account. Excludable employees are not taken 
into account with respect to a plan even if they are benefiting under 
the plan, except as otherwise provided in paragraph (b) of this section.
    (2) Rules of application. Except as specifically provided otherwise, 
excludable employees are determined separately with respect to each plan 
for purposes of testing that plan under section 410(b). Thus, in 
determining whether a particular plan satisfies the ratio percentage 
test of Sec.  1.410(b)-2(b)(2), paragraphs (b) through (i) of this 
section are applied solely with reference to that plan. Similarly, in 
determining whether two or more plans that are permissively aggregated 
and treated as a single plan under Sec.  1.410(b)-7(d) satisfy the ratio 
percentage test of Sec.  1.410(b)-2(b)(2), paragraphs (b) through (i) of 
this section are applied solely with reference to the deemed single 
plan. In determining whether a plan satisfies the average benefit 
percentage test of Sec.  1.410(b)-5, the rules of this section are 
applied by treating all plans in the testing group as a single plan.
    (b) Minimum age and service exclusions--(1) In general. If a plan 
applies minimum age and service eligibility conditions permissible under 
section 410(a)(1) and excludes all employees who do not meet those 
conditions from benefiting under the plan, then all employees who fail 
to satisfy those conditions are excludable employees with respect to 
that plan. An employee is treated as meeting the age and service 
requirements on the date that any employee with the same age and service 
(including service permitted to be taken into account for purposes of 
nondiscrimination testing under Sec.  1.401(a)(4)-11(d)(3)) would be 
eligible to commence participation in the plan, as provided in section 
410(b)(4)(C).
    (2) Multiple age and service conditions. If a plan, including a plan 
for which an employer chooses the treatment under paragraph (b)(3) of 
this section, has two

[[Page 42]]

or more different sets of minimum age and service eligibility 
conditions, those employees who fail to satisfy all of the different 
sets of age and service conditions are excludable employees with respect 
to the plan. Except as provided in paragraph (b)(3) of this section, an 
employee who satisfies any one of the different sets of conditions is 
not an excludable employee with respect to the plan. Differences in the 
manner in which service is credited (e.g., hours of service calculated 
in accordance with 29 CFR 2530.200b-2 for hourly employees and elapsed 
time calculated in accordance with Sec.  1.410(a)-7 for salaried 
employees) for purposes of applying a service condition are not taken 
into account in determining whether multiple age and service eligibility 
conditions exist.
    (3) Plans benefiting certain otherwise excludable employees--(i) In 
general. An employer may treat a plan benefiting otherwise excludable 
employees as two separate plans, one for the otherwise excludable 
employees and one for the other employees benefiting under the plan. See 
Sec.  1.410(b)-7(c)(3) regarding permissive disaggregation of plans 
benefiting otherwise excludable employees. The effect of this rule is 
that employees who would be excludable under paragraph (b)(1) of this 
section (applied without regard to section 410(a)(1)(B)) but for the 
fact that the plan does not apply the greatest permissible minimum age 
and service conditions may be treated as excludable employees with 
respect to the plan. This treatment is available only if the plan 
satisfies section 410(b) and Sec.  1.410(b)-2 with respect to these 
otherwise excludable employees in the manner described in paragraph 
(b)(3)(ii) of this section.
    (ii) Testing portion of plan benefiting otherwise excludable 
employees. In determining whether the plan that benefits employees who 
would otherwise be excludable under paragraph (b)(1) of this section 
(applied without regard to section 410(a)(1)(B)) satisfies section 
410(b) and Sec.  1.410(b)-2, employees who have satisfied the greatest 
permissible minimum age and service conditions with respect to the plan 
are excludable employees. In addition, if the plan being tested applies 
minimum age and service conditions and those conditions are less than 
the maximum permissible minimum age and service conditions, employees 
who have not satisfied the lower minimum age and service conditions 
actually provided for in the plan are excludable employees. Thus, for 
example, if the plan requires attainment of age 18 and 3 months of 
service, employees who have not attained age 18 or 3 months of service 
with the employer are excludable employees.
    (4) Examples. The following examples illustrate the minimum age and 
service condition rules of this paragraph (b). In each example, the 
employer is not treated as operating qualified separate lines of 
business under section 414(r).

    Example 1. An employer maintains Plan A for hourly employees and 
Plan B for salaried employees. Plan A has no minimum age or service 
condition. Plan B has no minimum age condition and requires 1 year of 
service. The employer treats Plans A and B as a single plan for purposes 
of section 410(b). Because Plan A imposes no minimum age or service 
condition, all employees of the employer automatically satisfy the 
minimum age and service conditions of Plan A. Therefore, no employees 
are excludable under this paragraph (b) in testing Plans A and B for 
purposes of section 410(b).
    Example 2. An employer maintains three plans. Plan C benefits 
employees in Division C who satisfy the plan's minimum age and service 
condition of age 21 and 1 year of service. Plan D benefits employees in 
Division D who satisfy the plan's minimum age and service condition of 
age 18 and 1 year of service. Plan E benefits employees in Division E 
who satisfy the plan's minimum age and service condition of age 21 and 6 
months of service. The employer treats Plans D and E as a single plan 
for purposes of section 410(b). In testing Plan C under the ratio 
percentage test or the nondiscriminatory classification test of section 
410(b), employees who are not at least age 21 or who do not have at 
least 1 year of service are excludable employees under paragraph (b)(1) 
of this section. In testing Plans D and E, employees who do not satisfy 
the age and service requirements of either of the two plans are 
excludable employees under paragraph (b)(2) of this section. Thus, an 
employee is excludable with respect to Plans D and E only if the 
employee is not at least age 18 with at least 1 year of service or is 
not at least age 21 with at least 6 months of service. Thus, an employee 
who is 19 years old and has 11 months of service is excludable. 
Similarly, an employee who is 17 years old and has performed 2 years of 
service is also excludable.

[[Page 43]]

    Example 3. An employer maintains three plans. Plan F benefits all 
employees in Division F (the plan does not apply any minimum age or 
service condition). Plan G benefits employees in Division G who satisfy 
the plan's minimum age and service condition of age 18 and 1 year of 
service. Plan H benefits employees in Division H who satisfy the plan's 
minimum age and service condition of age 21 and 6 months of service. In 
testing the employer's plans under the average benefit percentage test 
provided in Sec.  1.410(b)-5, Plans F, G, and H are treated as a single 
plan and, as such, use the lowest minimum age and service condition 
under the rule of paragraph (b)(2) of this section. Therefore, because 
Plan F does not apply any minimum age or service condition, no employee 
is excludable under this paragraph (b).
    Example 4. An employer maintains Plan J, which does not apply any 
minimum age or service conditions. Plan J benefits all employees in 
Division 1 but does not benefit employees in Division 2. Although Plan J 
has no minimum age or service condition, the employer wants to exclude 
employees whose age and service is below the permissible minimums 
provided in section 410(b)(1)(A). The employer has 110 employees who 
either do not have 1 year of service or are not at least age 21. Of 
these 110 employees, 10 are highly compensated employees and 100 are 
nonhighly compensated employees. Five of these highly compensated 
employees, or 50 percent, work in Division 1 and thus benefit under Plan 
J. Thirty-five of these nonhighly compensated employees, or 35 percent, 
work in Division 1 and thus benefit under Plan J. Plan J satisfies the 
ratio percentage test of section 410(b) with respect to employees who do 
not satisfy the greatest permissible minimum age and service requirement 
because the ratio percentage of that group of employees is 70 percent. 
Thus, in determining whether or not Plan J satisfies section 410(b), the 
110 employees may be treated as excludable employees in accordance with 
paragraph (b)(3)(i) of this section.

    (c) Certain nonresident aliens--(1) General rule. An employee who is 
a nonresident alien (within the meaning of section 7701(b)(1)(B)) and 
who receives no earned income (within the meaning of section 911(d)(2)) 
from the employer that constitutes income from sources within the United 
States (within the meaning of section 861(a)(3)) is treated as an 
excludable employee.
    (2) Special treaty rule. In addition, an employee who is a 
nonresident alien (within the meaning of section 7701(b)(1)(B)) and who 
does receive earned income (within the meaning of section 911(d)(2)) 
from the employer that constitutes income from sources within the United 
States (within the meaning of section 861(a)(3)) is permitted to be 
excluded, if all of the employee's earned income from the employer from 
sources within the United States is exempt from United States income tax 
under an applicable income tax convention. This paragraph (c)(2) applies 
only if all employees described in the preceding sentence are so 
excluded.
    (d) Collectively bargained employees--(1) General rule. A 
collectively bargained employee is an excludable employee with respect 
to a plan that benefits solely noncollectively bargained employees. If a 
plan (within the meaning of Sec.  1.410(b)-7(b)) benefits both 
collectively bargained employees and noncollectively bargained employees 
for a plan year, Sec.  1.410(b)-7(c)(4) provides that the portion of the 
plan that benefits the collectively bargained employees is treated as a 
separate plan from the portion of the plan that benefits the 
noncollectively bargained employees. Thus, a collectively bargained 
employee is always an excludable employee with respect to the 
mandatorily disaggregated portion of any plan that benefits 
noncollectively bargained employees.
    (2) Definition of collectively bargained employee--(i) In general. A 
collectively bargained employee is an employee who is included in a unit 
of employees covered by an agreement that the Secretary of Labor finds 
to be a collective bargaining agreement between employee representatives 
and one or more employers, provided that there is evidence that 
retirement benefits were the subject of good faith bargaining between 
employee representatives and the employer or employers. An employee is a 
collectively bargained employee regardless of whether the employee 
benefits under any plan of the employer. See section 7701(a)(46) and 
Sec.  301.7701-17T of this chapter for additional requirements 
applicable to the collective bargaining agreement. An employee who 
performs hours of service during the plan year as both a collectively 
bargained employee and a noncollectively bargained employee is treated 
as a collectively bargained employee with respect to the hours of

[[Page 44]]

service performed as a collectively bargained employee and a 
noncollectively bargained employee with respect to the hours of service 
performed as a noncollectively bargained employee. See Sec.  1.410(b)-
7(c) for disaggregation rules for plans benefiting collectively 
bargained and noncollectively bargained employees.
    (ii) Special rules for certain employees in multiemployer plans--(A) 
In general. For purposes of this paragraph (d), in testing the 
disaggregated portion of a multiemployer plan benefiting noncollectively 
bargained employees, a noncollectively bargained employee who benefits 
under the plan may be treated as a collectively bargained employee with 
respect to all of the employee's hours of service under the rules of 
paragraphs (d)(2)(ii) (B) through (E) of this section, if the employee 
is or was a member of a unit of employees covered by a collective 
bargaining agreement and that agreement or a successor agreement 
provides for the employee to benefit under the plan in the current plan 
year. For this purpose, provisions of a participation agreement or 
similar document are taken into account in determining whether a 
collective bargaining agreement provides for an employee to benefit 
under a multiemployer plan.
    (B) Employees who were collectively bargained employees during a 
portion of the current plan year. An employee described in paragraph 
(d)(2)(ii)(A) of this section who performs services for one or more 
employers that are parties to the collective bargaining agreement, for 
the plan, or for the employee representative both as a collectively 
bargained employee and as a noncollectively bargained employee during a 
plan year may be treated as a collectively bargained employee for the 
plan year, provided that at least half of the employee's hours of 
service during the plan year are performed as a collectively bargained 
employee.
    (C) Employees who were collectively bargained employees during the 
collective bargaining agreement. An employee described in paragraph 
(d)(2)(ii)(A) of this section who was a collectively bargained employee 
with respect to all of the employee's hours of service during a plan 
year (including employees who are treated as collectively bargained 
employees with respect to all of their hours of service during a plan 
year under paragraph (d)(2)(ii) (B) or (E) of this section) may be 
treated as a collectively bargained employee with respect to all of the 
employee's hours of service for the duration of the collective 
bargaining agreement applicable for such plan year or, if later, until 
the end of the following plan year. For this purpose, a collective 
bargaining agreement is applicable for a plan year if it provided for 
the employee to benefit in the plan and was effective for any portion of 
that plan year. This paragraph (d)(2)(ii)(C) does not apply unless the 
terms of the plan providing for benefit accruals treat the employee in a 
manner that is generally no more favorable than similarly-situated 
employees who are collectively bargained employees.
    (D) Employees who previously were collectively bargained employees. 
An employee who was treated as a collectively bargained employee 
pursuant to paragraph (d)(2)(ii)(C) of this section may be treated as a 
collectively bargained employee with respect to all of the employee's 
hours of service after the end of the period described in paragraph 
(d)(2)(ii)(C) of this section, provided that the employee is performing 
services for one or more employers that are parties to the collective 
bargaining agreement, for the plan, or for the employee representative. 
This paragraph (d)(2)(ii)(D) does not apply unless the terms of the plan 
providing for benefit accruals treat the employee in a manner that is 
generally no more favorable than similarly-situated employees who are 
collectively bargained employees, and no more than five percent of the 
employees covered under the multiemployer plan are noncollectively 
bargained employees (determined without regard to this paragraph 
(d)(2)(ii)(D)). In determining whether more than five percent of the 
employees covered under the multiemployer plan are noncollectively 
bargained employees, those employees who are described in paragraphs 
(d)(2)(ii) (B) and (C) of this section are treated as collectively 
bargained employees.

[[Page 45]]

    (E) Transition rule. For a plan year beginning before the applicable 
effective date of these regulations as set forth in Sec.  1.410(b)-10 
(b) or (d), any employee described in paragraph (d)(2)(ii)(A) of this 
section may be treated as a collectively bargained employee with respect 
to all of the employee's hours of service for that plan year.
    (F) Consistency requirement. The rules in paragraphs (d)(2) (i) and 
(ii) of this section must be applied to all employees on a reasonable 
and consistent basis for the plan year.
    (iii) Covered by a collective bargaining agreement--(A) General 
rule. For purposes of paragraph (d)(2)(i) of this section, an employee 
is included in a unit of employees covered by a collective bargaining 
agreement if and only if the employee is represented by a bona fide 
employee representative that is a party to the collective bargaining 
agreement under which the plan is maintained. Thus, for example, an 
employee of either a plan or the employee representative that is a party 
to the collective bargaining agreement under which the plan is 
maintained is not included in a unit of employees covered by the 
collective bargaining agreement under which the plan is maintained 
merely because the employee is covered under the plan pursuant to an 
agreement entered into by the plan or employee representative on behalf 
of the employee (other than in the capacity of an employee 
representative with respect to the employee). This is the case even if 
all of such employees benefiting under the plan constitute only a de 
minimis percentage of the total employees benefiting under the plan.
    (B) Plans covering professional employees--(1) In general. An 
employee is not considered included in a unit of employees covered by a 
collective bargaining agreement for a plan year for purposes of 
paragraph (d)(2)(iii)(A) of this section if, for the plan year, more 
than 2 percent of the employees who are covered pursuant to the 
agreement are professionals. This rule applies to all employees under 
the agreement, nonprofessionals as well as professionals. Thus, no 
employees covered by such an agreement are excludable employees with 
respect to employees who are not covered by a collective bargaining 
agreement.
    (2) Multiple collective bargaining agreements. This paragraph 
(d)(2)(iii)(B) is applied separately with respect to each collective 
bargaining agreement. Thus, for example, if a plan benefits two groups 
of employees, one included in a unit of employees covered by collective 
bargaining agreement X, more than 2 percent of whom are professionals, 
and another included in a unit of employees covered by collective 
bargaining agreement Y, none of whom are professionals, the group 
covered by agreement X is not considered covered by a collective 
bargaining agreement and the group covered by agreement Y is considered 
covered by a collective bargaining agreement.
    (3) Application of minimum coverage tests. If a plan covers more 
than 2 percent professional employees, no employees in the plan are 
treated as covered by a collective bargaining agreement. A plan that 
covers more than 2 percent professional employees must satisfy section 
410(b) without regard to section 413(b) and the special rule in Sec.  
1.410(b)-2(b)(7) of this section (regarding collectively bargained 
plans). In such cases, all nonexcludable employees must be taken into 
account. For this purpose, employees included in other collective 
bargaining units are excludable employees. However, the employees who 
are not covered by a collective bargaining agreement and the employees 
who are covered by an agreement that has more than 2 percent 
professionals are not excludable employees.
    (iv) Examples. The following examples illustrate the collective 
bargaining unit rules of this section.

    Example 1. An employer has 700 collectively bargained employees 
(none of whom is a professional employee) and 300 noncollectively 
bargained employees (200 of whom are highly compensated employees). For 
purposes of applying the ratio percentage test of Sec.  1.410(b)-2(b)(2) 
to Plan X, which benefits only the 300 noncollectively bargained 
employees, the 700 collectively bargained employees are treated as 
excludable employees pursuant to paragraph (d) of this section.
    Example 2. (i) An employer has 1,500 employees in the following 
categories:

[[Page 46]]



------------------------------------------------------------------------
                                  Noncollectively  Collectively
                                     bargained       bargained    Total
                                     employees       employees
------------------------------------------------------------------------
Highly compensated employees....            100             100      200
Nonhighly compensated employees.            900             400    1,300
                                 ------------------
      Total.....................          1,000             500    1,500
------------------------------------------------------------------------

    The employer maintains Plan Y, which benefits 1,100 employees, 
including all of the noncollectively bargained employees (except for 100 
nonhighly compensated employees who are noncollectively bargained 
employees), and 200 of the collectively bargained employees (including 
the 100 highly compensated employees who are collectively bargained 
employees). There are no professional employees covered by the 
collective bargaining agreement. In accordance with Sec.  1.410(b)-
7(c)(4), the employer must apply the ratio percentage test of Sec.  
1.410(b)-2(b)(2) to Plan Y as if the plan were two separate plans, one 
benefiting the noncollectively bargained employees and the other 
benefiting the collectively bargained employees.
    (ii) In testing the portion of Plan Y that benefits the 
noncollectively bargained employees, the collectively bargained 
employees are excludable employees. That portion's ratio percentage is 
88.89 percent ([800/900] /[100/100] = 88.89%/100% = 0.8889), and thus it 
satisfies the ratio percentage test. The portion of Plan Y that benefits 
collectively bargained employees automatically satisfies section 410(b) 
under the special rule in Sec.  1.410(b)-2(b)(7).

    (e) Employees of qualified separate lines of business. If an 
employer is treated as operating qualified separate lines of business 
for purposes of section 410(b) in accordance with Sec.  1.414(r)-1 (b), 
in testing a plan that benefits employees of one qualified separate line 
of business, the employees of the other qualified separate lines of 
business of the employer are treated as excludable employees. The rule 
in this paragraph (e) does not apply for purposes of satisfying the 
nondiscriminatory classification requirement of section 410(b)(5)(B). 
See Sec. Sec.  1.414(r)-1(c)(2) and 1.414(r)-8 (separate application of 
section 410(b) to the employees of a qualified separate line of 
business). In addition, the rule in this paragraph (e) does not apply to 
a plan that is tested under the special rule for employer-wide plans in 
Sec.  1.414(r)-1(c) (2) (ii) for a plan year.
    (f) Certain terminating employees--(1) In general. An employee may 
be treated as an excludable employee for a plan year with respect to a 
particular plan if--
    (i) The employee does not benefit under the plan for the plan year,
    (ii) The employee is eligible to participate in the plan,
    (iii) The plan has a minimum period of service requirement or a 
requirement that an employee be employed on the last day of the plan 
year (last-day requirement) in order for an employee to accrue a benefit 
or receive an allocation for the plan year,
    (iv) The employee fails to accrue a benefit or receive an allocation 
under the plan solely because of the failure to satisfy the minimum 
period of service or last-day requirement,
    (v) The employee terminates employment during the plan year with no 
more than 500 hours of service, and the employee is not an employee as 
of the last day of the plan year (for purposes of this paragraph 
(f)(1)(v), a plan that uses the elapsed time method of determining years 
of service may use either 91 consecutive calendar days or 3 consecutive 
calendar months instead of 500 hours of service, provided it uses the 
same convention for all employees during a plan year), and
    (vi) If this paragraph (f) is applied with respect to any employee 
with respect to a plan for a plan year, it is applied with respect to 
all employees with respect to the plan for the plan year.
    (2) Hours of service. For purposes of this paragraph (f), the term 
``hours of service'' has the same meaning as provided for such term by 
29 CFR 2530.200b-2 under the general method of crediting service for the 
employee. If one of the equivalencies set forth in 29 CFR 2530.200b-3 is 
used for crediting service under the plan, the 500-hour requirement must 
be adjusted accordingly.
    (3) Examples. The following examples illustrate the provision of 
this paragraph (f).

    Example 1. An employer has 35 employees who are eligible to 
participate under a defined contribution plan. The plan provides that an 
employee will not receive an allocation of contributions for a plan year 
unless the employee is employed by the employer on the last day of the 
plan year. Only 30 employees are employed by the employer on the

[[Page 47]]

last day of the plan year. Two of the five employees who terminated 
employment before the last day of the plan year had 500 or fewer hours 
of service during the plan year, and the remaining three had more than 
500 hours of service during the year. Of the five employees who were no 
longer employed on the last day of the plan year, the two with 500 hours 
of service or less during the plan year are treated as excludable 
employees for purposes of section 410(b), and the remaining three who 
had over 500 hours of service during the plan year are taken into 
account in testing the plan under section 410(b) but are treated as not 
benefiting under the plan.
    Example 2. An employer has 30 employees who are eligible to 
participate under a defined contribution plan. The plan requires 1,000 
hours of service to receive an allocation of contributions or 
forfeitures. Ten employees do not receive an allocation because of their 
failure to complete 1,000 hours of service. Three of the 10 employees 
who failed to satisfy the minimum service requirement completed 500 or 
fewer hours of service and terminated their employment. Two of the 
employees completed more than 500, but fewer than 1,000 hours of service 
and terminated their employment. The remaining five employees did not 
terminate employment. Under the rule in paragraph (f) of this section, 
the three terminated employees who completed 500 or fewer hours of 
service are treated as excludable employees for the portion of the plan 
year they are employed. The other seven employees who do not receive an 
allocation are taken into account in testing the plan under section 
410(b) but are treated as not benefiting under the plan.
    Example 3. An employer maintains two plans, Plan A for salaried 
employees and Plan B for hourly employees. Of the 100 salaried 
employees, two do not receive an allocation under Plan A for the plan 
year because they terminate employment before completing 500 hours of 
service. Of the 300 hourly employees, 50 do not receive an allocation 
under Plan B for the plan year because they terminate employment before 
completing 500 hours. In applying section 410(b) to Plan A, the two 
employees who did not receive an allocation under Plan A are excludable 
employees, but the 50 who did not receive an allocation under Plan B are 
not excludable employees, because they were not eligible to participate 
under Plan A.

    (g) Employees of certain governmental or tax-exempt entities--(1) 
Plans covered. For purposes of testing either a section 401(k) plan, or 
a section 401(m) plan that is provided under the same general 
arrangement as a section 401(k) plan, an employer may treat as 
excludable those employees described in paragraphs (g)(2) and (3) of 
this section.
    (2) Employees of governmental entities. Employees of governmental 
entities who are precluded from being eligible employees under a section 
401(k) plan by reason of section 401(k)(4)(B)(ii) may be treated as 
excludable employees if more than 95 percent of the employees of the 
employer who are not precluded from being eligible employees by reason 
of section 401(k)(4)(B)(ii) benefit under the plan for the year.
    (3) Employees of tax-exempt entities. Employees of an organization 
described in section 403(b)(1)(A)(i) who are eligible to make salary 
reduction contributions under section 403(b) may be treated as 
excludable with respect to 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, if--
    (i) No employee of an organization described in section 
403(b)(1)(A)(i) is eligible to participate in such section 401(k) plan 
or section 401(m) plan; and
    (ii) At least 95 percent of the employees who are neither employees 
of an organization described in section 403(b)(1)(A)(i) nor employees of 
a governmental entity who are precluded from being eligible employees 
under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) are 
eligible to participate in such section 401(k) plan or section 401(m) 
plan.
    (h) Former employees--(1) In general. For purposes of applying 
section 410(b) with respect to former employees, all former employees of 
the employer are taken into account, except that the employer may treat 
a former employee described in paragraph (h)(2) or (h)(3) of this 
section as an excludable former employee. If either (or both) of the 
former employee exclusion rules under paragraphs (h)(2) and (h)(3) of 
this section is applied, it must be applied to all former employees for 
the plan year on a consistent basis.
    (2) Employees terminated before a specified date. The employer may 
treat a former employee as excludable if--
    (i) The former employee became a former employee either prior to 
January 1, 1984, or prior to the tenth calendar year preceding the 
calendar year in which the current plan year begins, and

[[Page 48]]

    (ii) The former employee became a former employee in a calendar year 
that precedes the earliest calendar year in which any former employee 
who benefits under the plan in the current plan year became a former 
employee.
    (3) Previously excludable employees. The employer may treat a former 
employee as excludable if the former employee was an excludable employee 
(or would have been an excludable employee if these regulations had been 
in effect) under the rules of paragraphs (b) through (g) of this section 
during the plan year in which the former employee became a former 
employee. If the employer treats a former employee as excludable 
pursuant to this paragraph (h)(3), the former employee is not taken into 
account with respect to a plan even if the former employee is benefiting 
under the plan.
    (i) Former employees treated as employees. An employer may treat as 
excludable employees all formerly nonhighly compensated employees who 
are treated as employees of the employer under Sec.  1.410(b)-9 solely 
because they have increases in accrued benefits under a defined benefit 
plan that are based on ongoing service or compensation credits 
(including imputed service or compensation) after they cease to perform 
services for the employer.

[T.D. 8363, 56 FR 47652, Sept. 19, 1991, as amended by T.D. 8376, 56 FR 
63433, Dec. 4, 1991; T.D. 8363, 57 FR 10817, Mar. 31, 1992; T.D. 8487, 
58 FR 46842, Sept. 3, 1993; T.D. 8487, 59 FR 16984, Apr. 11, 1994; T.D. 
8548, 59 FR 32914, June 27, 1994; T.D. 9275, 71 FR 41359, July 21, 2006]



Sec.  1.410(b)-7  Definition of plan and rules governing plan 
disaggregation and aggregation.

    (a) In general. This section provides a definition of ``plan.'' 
First, this section sets forth a definition of plan within the meaning 
of section 401(a) or 403(a). Then certain mandatory disaggregation and 
permissive aggregation rules are applied. The result is the definition 
of plan that applies for purposes of sections 410(b) and 401(a)(4). 
Thus, in general, the term ``plan'' as used in this section initially 
refers to a plan described in section 414(l) and to an annuity plan 
described in section 403(a), and the term ``plan'' as used in other 
sections under these regulations means the plan determined after 
application of this section. Paragraph (b) of this section provides that 
each single plan under section 414(l) is treated as a single plan for 
purposes of section 410(b). Paragraph (c) of this section describes the 
rules for certain plans that must be treated as comprising two or more 
separate plans, each of which is a single plan subject to section 
410(b). Paragraph (d) of this section provides a rule permitting an 
employer to aggregate certain separate plans to form a single plan for 
purposes of section 410(b). Paragraph (e) of this section provides rules 
for determining the testing group of plans taken into account in 
determining whether a plan satisfies the average benefit percentage test 
of Sec.  1.410(b)-5.
    (b) Separate asset pools are separate plans. Each single plan within 
the meaning of section 414(l) is a separate plan for purposes of section 
410(b). See Sec.  1.414(l)-1(b). For example, if only a portion of the 
assets under a defined benefit plan is available, on an ongoing basis, 
to provide the benefits of certain employees, and the remaining assets 
are available only in certain limited cases to provide such benefits 
(but are available in all cases for the benefit of other employees), 
there are two separate plans. Similarly, the defined contribution 
portion of a plan described in section 414(k) is a separate plan from 
the defined benefit portion of that same plan. A single plan under 
section 414(l) is a single plan for purposes of section 410(b), even 
though the plan comprises separate written documents and separate 
trusts, each of which receives a separate determination letter from the 
Internal Revenue Service. A defined contribution plan does not comprise 
separate plans merely because it includes more than one trust, or merely 
because it provides for separate accounts and permits employees to 
direct the investment of the amounts allocated to their accounts. 
Further, a plan does not comprise separate plans merely because assets 
are separately invested in individual insurance or annuity contracts for 
employees.
    (c) Mandatory disaggregation of certain plans--(1) Section 401(k) 
and 401(m)

[[Page 49]]

plans. The portion of a plan that is a section 401(k) plan and the 
portion that is not a section 401(k) plan are treated as separate plans 
for purposes of section 410(b). Similarly, the portion of a plan that is 
a section 401(m) plan and the portion that is not a section 401(m) plan 
are treated as separate plans for purposes of section 410(b). Thus, a 
plan that consists of elective contributions under a section 401(k) 
plan, employee and matching contributions under a section 401(m) plan, 
and contributions other than elective, employee, or matching 
contributions is treated as three separate plans for purposes of section 
410(b). In addition, the portion of a plan that consists of 
contributions described in Sec.  1.401(k)-2(a)(5) (i.e., contributions 
that fail to satisfy the allocation or compensation requirements 
applicable to elective contributions and are therefore required to be 
tested separately) and the portion of the plan that does not consist of 
such contributions are treated as separate plans for purposes of section 
410(b). Similarly, the portion of a plan that consists of contributions 
described in Sec.  1.410(m)-1(b)(4)(ii) (i.e., matching contributions 
that fail to satisfy the allocation and other requirements applicable to 
matching contributions and are therefore required to be tested 
separately) and the portion of the plan that does not consist of such 
contributions are treated as separate plans for purposes of section 
410(b).
    (2) ESOPs and non-ESOPs. The portion of a plan that is an ESOP and 
the portion of the plan that is not an ESOP are treated as separate 
plans for purposes of section 410(b), except as otherwise permitted 
under Sec.  54.4975-11(e) of this Chapter.
    (3) Plans benefiting otherwise excludable employees. If an employer 
applies section 410(b) separately to the portion of a plan that benefits 
only employees who satisfy age and service conditions under the plan 
that are lower than the greatest minimum age and service conditions 
permissible under section 410(a), the plan is treated as comprising 
separate plans, one benefiting the employees who have satisfied the 
lower minimum age and service conditions but not the greatest minimum 
age and service conditions permitted under section 410(a) and one 
benefiting employees who have satisfied the greatest minimum age and 
service conditions permitted under section 410(a). See Sec.  410(b)-
6(b)(3)(ii) for rules about testing otherwise excludable employees.
    (4) Plans benefiting certain disaggregation populations of 
employees--(i) In general--(A) Single plan must be treated as separate 
plans. If a plan (i.e., a single plan within the meaning of section 
414(l)) benefits employees of more than one disaggregation population, 
the plan must be disaggregated and treated as separate plans, each 
separate plan consisting of the portion of the plan benefiting the 
employees of each disaggregation population. See paragraph (c)(4)(ii) of 
this section for the definition of disaggregation population.
    (B) Benefit accruals or allocations attributable to current status. 
Except as otherwise provided in paragraph (c)(4)(i)(C) of this section, 
in applying the rule of paragraph (c)(4)(i)(A) of this section, the 
portion of the plan benefiting employees of a disaggregation population 
consists of all benefits accrued by, or all allocations made to, 
employees while they were members of the disaggregation population.
    (C) Exceptions for certain benefit accruals--(1) Attribution of 
benefits to first disaggregation population. If employees benefiting 
under a plan change from one disaggregation population to a second 
disaggregation population, benefits they accrue while members of the 
second disaggregation population that are attributable to years of 
service previously credited while the employees were members of the 
first disaggregation population may be treated as provided to them in 
their status as members of the first disaggregation population and thus 
included in the portion of the plan benefiting employees of the first 
disaggregation population. This special treatment is available only if 
it is applied on a consistent basis, if it does not result in 
significant discrimination in favor of highly compensated employees, and 
if the plan provision providing the additional benefits applies on the 
same terms to all similarly-situated employees. For example, if all 
formerly

[[Page 50]]

collectively bargained employees accrue additional benefits under a plan 
after becoming noncollectively bargained employees, then those benefit 
increases may be treated as included in the portion of the plan 
benefiting collectively bargained employees if they are attributable to 
years of service credited while the employees were collectively 
bargained (e.g., where the additional benefits result from compensation 
increases that occur while the employees are noncollectively bargained 
or from plan amendments affecting benefits earned while collectively 
bargained that are adopted while the employees are noncollectively 
bargained) and if such treatment does not result in significant 
discrimination in favor of highly compensated employees.
    (2) Attribution of benefits to current disaggregation population. If 
employees benefiting under a plan change from one disaggregation 
population to another disaggregation population, benefits they accrue 
while members of the first disaggregation population may be treated as 
provided to them in their current status and thus included in the 
portion of the plan benefiting employees of the disaggregation 
population of which they are currently members. This special treatment 
is available only if it is applied on a consistent basis and if it does 
not result in significant discrimination in favor of highly compensated 
employees.
    (D) Change in disaggregation populations--(1) Reasonable treatment. 
If, in previous years, the configuration of a plan's disaggregation 
populations differed from their configuration for the current year, for 
purposes of the benefits accrued by, or allocations made to, an employee 
for those years, the employee's status as a member of a current 
disaggregation population for those years must be determined on a 
reasonable basis. A different configuration occurs, for example, if 
disaggregation populations exist for the first time, such as when an 
employer is first treated as operating qualified separate lines of 
business, or if the existing disaggregation populations change, such as 
when an employer redesignates its qualified separate lines of business.
    (2) Example. The following example illustrates the application of 
this paragraph (c)(4)(i)(D).

    Example. (a) Employer X operates Divisions M and N, which are 
treated as qualified separate lines of business for the first time in 
1998. Thus, the disaggregation populations of employees of Division M 
and employees of Division N exist for the first time. Since 1981 
Employer X has maintained a defined benefit plan, Plan P, for employees 
of Division M. Plan P provides a normal retirement benefit of one 
percent of average annual compensation for each year of service up to 
25. Employee A has worked for Division M since 1981 and has never worked 
for Division N. Employee B has worked for Division N since 1989 and 
worked for Division M from 1981 to 1988. Employee C has worked in the 
headquarters of Employer X since 1981. For the period 1981 to 1988 
Employee C was credited with years of service under Plan P.
    (b) For purposes of the benefits accrued by Employee A under Plan P 
during years 1981 through 1997, Employee A is reasonably treated as 
having been a member of the Division M disaggregation population for 
those years. For purposes of the benefits accrued by Employee B under 
Plan P during years 1981 through 1988, Employee B is reasonably treated 
as having been a member of the Division M disaggregation population for 
1981 through 1988 and as having changed to the Division N disaggregation 
population for 1989 through 1997. For purposes of the benefits accrued 
by Employee C under Plan P during years 1981 through 1988, Employee C is 
reasonably treated as having been a member of the Division M 
disaggregation population for those years. Moreover, any benefit 
accruals for Employee B and Employee C in years after 1988, that result 
from increases in average annual compensation after 1988 and that are 
attributable to years of service credited for 1981 through 1988, may be 
treated as provided to Employee B and Employee C in their status as 
members of the Division M disaggregation population if the requirements 
of paragraph (c)(4)(i)(C)(1) of this section are otherwise met.

    (ii) Definition of disaggregation population--(A) Plan benefiting 
employees of qualified separate lines of business. If an employer is 
treated as operating qualified separate lines of business for purposes 
of section 410(b) in accordance with Sec.  1.414(r)-1(b), and a plan 
benefits employees of more than one qualified separate line of business, 
the employees of each qualified separate line of business are separate 
disaggregation populations. In this case, the portion of the plan 
benefiting the employees of

[[Page 51]]

each qualified separate line of business is treated as a separate plan 
maintained by that qualified separate line of business. However, 
employees of different qualified separate lines of business who are 
benefiting under a plan that is tested under the special rule for 
employer-wide plans in Sec.  1.414(r)-1(c)(2)(ii) for a plan year are 
not separate disaggregation populations merely because they are 
employees of different qualified separate lines of business.
    (B) Plan benefiting collectively bargained employees. If a plan 
benefits both collectively bargained employees and noncollectively 
bargained employees, the collectively bargained employees are one 
disaggregation population and the noncollectively bargained employees 
are another disaggregation population. If the population of collectively 
bargained employees includes employees covered under different 
collective bargaining agreements, the population of employees covered 
under each collective bargaining agreement is also a separate 
disaggregation population.
    (C) Plan maintained by more than one employer. If a plan benefits 
employees of more than one employer, the employees of each employer are 
separate disaggregation populations. In this case, the portion of the 
plan benefiting the employees of each employer is treated as a separate 
plan maintained by that employer, which must satisfy section 410(b) by 
reference only to that employer's employees. However, for purposes of 
this paragraph (c)(4)(ii)(C), if the plan of one employer (or, in the 
case of a plan maintained by more than one employer, the plan provisions 
applicable to the employees of one employer) treats compensation or 
service with another employer as compensation or service with the first 
employer, then the current accruals attributable to that compensation or 
service are treated as provided to an employee of the first employer 
under the plan of the first employer (or the portion of a plan 
maintained by more than one employer benefiting employees of the first 
employer), and the provisions of paragraph (c)(4)(i)(C) of this section 
do not apply to those accruals. Thus, for example, if Plan A maintained 
by Employer X imputes service or compensation for an employee of 
Employer Y, then Plan A is not treated as benefiting the employees of 
more than one employer merely because of this imputation.
    (5) Additional rule for plans benefiting employees of more than one 
qualified separate line of business. If a plan benefiting employees of 
more than one qualified separate line of business satisfies the 
reasonable classification requirement of Sec.  1.410(b)-4(b) before the 
application of paragraph (c)(4) of this section, then any portion of the 
plan that is treated as a separate plan as a result of the application 
of paragraphs (c)(4)(i)(A) and (ii)(A) of this section is deemed to 
satisfy that requirement.
    (d) Permissive aggregation for ratio percentage and 
nondiscriminatory classification tests--(1) In general. Except as 
provided in paragraphs (d)(2) and (d)(3) of this section, for purposes 
of applying the ratio percentage test of Sec.  1.410(b)-2(b)(2) or the 
nondiscriminatory classification test of Sec.  1.410(b)-4, an employer 
may designate two or more separate plans (determined after application 
of paragraph (b) of this section) as a single plan. If an employer 
treats two or more separate plans as a single plan under this paragraph, 
the plans must be treated as a single plan for all purposes under 
sections 401(a)(4) and 410(b).
    (2) Rules of disaggregation. An employer may not aggregate portions 
of a plan that are disaggregated under the rules of paragraph (c) of 
this section. Similarly, an employer may not aggregate two or more 
separate plans that would be disaggregated under the rules of paragraph 
(c) of this section if they were portions of the same plan. In addition, 
an employer may not aggregate an ESOP with another ESOP, except as 
permitted under Sec.  54.4975-11(e) of this Chapter.
    (3) Duplicative aggregation. A plan may not be combined with two or 
more plans to form more than one single plan. Thus, for example, an 
employer that maintains plans A, B, and C may not aggregate plans A and 
B and plans A and C to form two single plans. However, the employer may 
apply the permissive aggregation rules of this paragraph (d) to form any 
one (and only one) of the following combinations:

[[Page 52]]

plan ABC, plans AB and C, plans AC and B, or plans A and BC.
    (4) Special rule for plans benefiting employees of a qualified 
separate line of business. For purposes of paragraph (d)(1) of this 
section, an employer that is treated as operating qualified separate 
lines of business for purposes of section 410(b) in accordance with 
Sec.  1.414(r)-1(b) is permitted to aggregate the portions of two or 
more plans that benefit employees of the same qualified separate line of 
business (regardless of whether the employer elects to aggregate the 
portions of the same plans that benefit employees of the other qualified 
separate lines of business of the employer), provided that none of the 
plans is tested under the special rule for employer-wide plans in Sec.  
1.414(r)-1 (c)(2)(ii). Thus, the employer is permitted to apply 
paragraph (d)(1) of this section with respect to two or more separate 
plans determined after the application of paragraphs (b) and (c)(4) of 
this section, but may not aggregate a plan that is tested under the 
special rule for employer-wide plans in Sec.  1.414(r)-1(c)(2)(ii) for a 
plan year with any portion of a plan that does not rely on that special 
rule for the plan year. In all other respects, the provisions of this 
paragraph (d) regarding permissive aggregation apply, including (but not 
limited to) the disaggregation rules under paragraph (d)(2) of this 
section (including the mandatory disaggregation rule of paragraph (c)(4) 
of this section), and the prohibition on duplicative aggregation under 
paragraph (d)(3) of this section. This paragraph (d)(4) applies only in 
the case of an employer that is treated as operating qualified separate 
lines of business for purposes of section 410(b) in accordance with 
Sec.  1.414(r)-1(b). See Sec. Sec.  l.414(r)-1(c)(2) and 1.414(r)-8 
(separate application of section 410(b) to the employees of a qualified 
separate line of business).
    (5) Same plan year requirement. Two or more plans may not be 
aggregated and treated as a single plan under this paragraph (d) unless 
they have the same plan year.
    (e) Determination of plans in testing group for average benefit 
percentage test--(1) In general. For purposes of applying the average 
benefit percentage test of Sec.  1.410(b)-5 with respect to a plan, all 
plans in the testing group must be taken into account. For this purpose, 
the plans in the testing group are the plan being tested and all other 
plans of the employer that could be permissively aggregated with that 
plan under paragraph (d) of this section. Whether two or more plans 
could be permissively aggregated under paragraph (d) of this section is 
determined (i) without regard to the rule in paragraph (d)(4) of this 
section that portions of two or more plans benefiting employees of the 
same line of business may not be aggregated if any of the plans is 
tested under the special rule for employer-wide plans in Sec.  1.414(r)-
1(c)(2)(ii), (ii) without regard to paragraph (d)(5) of this section, 
and (iii) by applying paragraph (d)(2) of this section without regard to 
paragraphs (c)(1) and (c)(2) of this section.
    (2) Examples. The following example illustrates the rules of this 
paragraph (e).

    Example 1. Employer X is treated as operating two qualified separate 
lines of business for purposes of section 410(b) in accordance with 
section 414(r), QSLOB1 and QSLOB2. Employer X must apply the rules in 
Sec.  1.414(r)-8 to determine whether its plans satisfy section 410(b) 
on a qualified-separate-line-of-business basis. Employer X maintains the 
following plans:
    (a) Plan A, the portion of Employer X' s employer-wide section 
401(k) plan that benefits all noncollectively bargained employees of 
QSLOB1,
    (b) Plan B, the portion of Employer X' s employer-wide section 
401(k) plan that benefits all noncollectively bargained employees of 
QSLOB2,
    (c) Plan C, a defined benefit plan that benefits all hourly 
noncollectively bargained employees of QSLOB1,
    (d) Plan D, a defined benefit plan that benefits all collectively 
bargained employees of QSLOB1,
    (e) Plan E, an ESOP that benefits all noncollectively bargained 
employees of QSLOB1,
    (f) Plan F, a profit-sharing plan that benefits all salaried 
noncollectively bargained employees of QSLOB1.


Assume that Plan F does not satisfy the ratio percentage test of Sec.  
1.410(b)-2(b)(2) on a qualified-separate-line-of-business basis, but 
does satisfy the nondiscriminatory classification test of Sec.  
1.410(b)-4 on both an employer-wide and a qualified-separate-line-of-
business basis. Therefore, to satisfy section

[[Page 53]]

410(b), Plan F must satisfy the average benefit percentage test of Sec.  
1.410(b)-5 on a qualifiedseparatelineofbu5ine55 basis. The plans in the 
testing group used to determine whether Plan F satisfies the average 
benefit percentage test of Sec.  1.4 10(b)-5 are Plans A, C, E, and F.
    Example 2. The facts are the same as in Example 1, except that 
Employer X applies the special rule for employer-wide plans in Sec.  
1.414(r)-1(c)(2)(ii) to its employer-wide section 401(k) plan. To 
satisfy section 410(b), Plan F must satisfy the average benefit 
percentage test of Sec.  1.4 10(b)-5. Since paragraph (c)(4) of this 
section no longer applies to Plans A and B, they are treated as a single 
plan (Plan AB). The plans in the testing group used to determine whether 
Plan F satisfies the average benefit percentage test of Sec.  1.4 10(b)-
5 are therefore Plans A, B, C, E, and F. However, the employees of QSLOB 
2 continue to be excludable employees for purposes of determining 
whether Plan F satisfies the average benefit percentage test. See Sec.  
1.410(b)-6(e).

    (f) Section 403(b) plans. In determining whether a plan satisfies 
section 410(b), a plan subject to section 403(b)(12)(A)(i) is 
disregarded. However, in determining whether a plan subject to section 
403(b)(12)(A)(i) satisfied section 410(b), plans that are not subject to 
section 403(b)(12)(A)(i) may be taken into account.

[T.D. 8363, 56 FR 47655, Sept. 19, 1991, as amended by T.D. 8376, 56 FR 
63433, Dec. 4, 1991; T.D. 8363, 57 FR 10819, 10954, Mar. 31, 1992; T.D. 
8487, 58 FR 46843, Sept. 3, 1993; T.D. 8548, 59 FR 32914, June 27, 1994; 
T.D. 9169, 69 FR 78153, Dec. 29, 2004]



Sec.  1.410(b)-8  Additional rules.

    (a) Testing methods--(1) In general. A plan must satisfy section 
410(b) for a plan year using one of the testing options in paragraphs 
(a)(2) through (a)(4) of this section. Whichever testing option is used 
for the plan year must also be used for purposes of applying section 
401(a)(4) to the plan for the plan year. The annual testing option in 
paragraph (a)(4) of this section must be used in applying section 410(b) 
to a section 401(k) plan or a section 401(m) plan, and in applying the 
average benefit percentage test of Sec.  1.410(b)-5. For purposes of 
this paragraph (a), the plan provisions and other relevant facts as of 
the last day of the plan year regarding which employees benefit under 
the plan for the plan year are applied to the employees taken into 
account under the testing option used for the plan year. For this 
purpose, amendments retroactively correcting a plan in accordance with 
Sec.  1.401(a)(4)-11(g) are taken into account as plan provisions in 
effect as of the last day of the plan year.
    (2) Daily testing option. A plan satisfies section 410(b) for a plan 
year if it satisfies Sec.  1.410(b)-2 on each day of the plan year, 
taking into account only those employees (or former employees) who are 
employees (or former employees) on that day.
    (3) Quarterly testing option. A plan is deemed to satisfy section 
410(b) for a plan year if the plan satisfies Sec.  1.410(b)-2 on at 
least one day in each quarter of the plan year, taking into account for 
each of those days only those employees (or former employees) who are 
employees (or former employees) on that day. The preceding sentence does 
not apply if the plan's eligibility rules or benefit formula operate to 
cause the four quarterly testing days selected by the employer not to be 
reasonably representative of the coverage of the plan over the entire 
plan year.
    (4) Annual testing option. A plan satisfies section 410(b) for a 
plan year if it satisfies Sec.  1.410(b)-2 as of the last day of the 
plan year, taking into account all employees (or former employees) who 
were employees (or former employees) on any day during the plan year.
    (5) Example. The following example illustrates this paragraph (a).

    Example. Plan A is a defined contribution plan that is not a section 
401(k) plan or a section 401(m) plan, and that conditions allocations on 
an employee's employment on the last day of the plan year. Plan A is 
being tested for the 1995 calendar plan year using the daily testing 
option in paragraph (a)(2) of this section. In testing the plan for 
compliance with section 410(b) on March 11, 1995, Employee X is taken 
into account because he was an employee on that day and was not an 
excludable employee with respect to Plan A on that day. Employee X was a 
participant in Plan A on March 11, 1995, was employed on December 31, 
1995, and received an allocation under Plan A for the 1995 plan year. 
Under these facts, Employee X is treated as benefiting under Plan A on 
March 11, 1995, even though Employee X had not satisfied all of the 
conditions for receiving an allocation on that day, because Employee X 
satisfied all of those conditions as of the last day of the plan year.


[[Page 54]]


    (b) Family member aggregation rule. For purposes of section 410(b), 
and in accordance with section 414(q)(6), a highly compensated employee 
who is a 5-percent owner or one of the ten most highly compensated 
employees and any family member (or members) of such a highly 
compensated employee who is also an employee of the employer are to be 
treated as a single highly compensated employee. If any member of that 
group is benefiting under a plan, the deemed single employee is treated 
as benefiting under the plan. If no member of that group is benefiting 
under a plan, the deemed single employee is treated as not benefiting 
under the plan.

[T.D. 8363, 56 FR 47656, Sept. 19, 1991]



Sec.  1.410(b)-9  Definitions.

    In applying this section and Sec. Sec.  1.410(b)-2 through 1.410(b)-
10, the definitions in this section govern unless otherwise provided.
    Collectively bargained employee. Collectively bargained employee 
means a collectively bargained employee within the meaning of Sec.  
1.410(b)-6(d)(2).
    Defined benefit plan. Defined benefit plan means a defined benefit 
plan within the meaning of section 414(j). The portion of a plan 
described in section 414(k) that does not consist of separate accounts 
is treated as a defined benefit plan.
    Defined contribution plan. Defined contribution plan means a defined 
contribution plan within the meaning of section 414(i). The portion of a 
plan described in section 414(k) that consists of separate accounts is 
treated as a defined contribution plan.
    Employee. Employee means an individual who performs services for the 
employer who is either a common law employee of the employer, a self-
employed individual who is treated as an employee pursuant to section 
401(c)(1), or a leased employee (not excluded under section 414(n)(5)) 
who is treated as an employee of the employer-recipient under section 
414(n)(2) or 414(o)(2). Individuals that an employer treats as employees 
under section 414(n) pursuant to the requirements of section 414(o) are 
considered to be leased employees for purposes of this rule. In 
addition, an individual must be treated as an employee with respect to 
allocations under a defined contribution plan taken into account under 
Sec.  1.401(a)(4)-2(c)(ii) and with respect to increases in accrued 
benefits (within the meaning of 411(a)(7)) under a defined benefit plan 
that are based on ongoing service or compensation (including imputed 
service or compensation) credits.
    Employer. Employer means the employer maintaining the plan and those 
employers required to be aggregated with the employer under sections 
414(b), (c), (m), or (o). An individual who owns the entire interest of 
an unincorporated trade or business is treated as an employer. Also, a 
partnership is treated as the employer of each partner and each employee 
of the partnership.
    ESOP. ESOP or employee stock ownership plan means an employee stock 
ownership plan within the meaning of section 4975(e)(7) or a tax credit 
employee stock ownership plan within the meaning of section 409(a).
    Former employee. Former employee means an individual who was, but 
has ceased to be, an employee of the employer (i.e., the individual has 
ceased performing services as an employee for the employer). An 
individual is treated as a former employee beginning on the day after 
the day on which the individual ceases performing services as an 
employee for the employer. Thus, an individual who ceases performing 
services as an employee for an employer during a plan year is both an 
employee and a former employee for the plan year. Notwithstanding the 
foregoing, an individual is an employee (and not a former employee) to 
the extent that the individual is treated as an employee with respect to 
the plan for the plan year under the definition of employee in this 
section.
    Highly compensated employee. Highly compensated employee means an 
employee who is a highly compensated employee within the meaning of 
section 414(q) or a former employee treated as an employee under the 
definition of employee in this section who is a highly compensated 
former employee within the meaning of section 414(q).
    Highly compensated former employee. Highly compensated former 
employee means a former employee who is a

[[Page 55]]

highly compensated former employee within the meaning of section 414(q).
    Multiemployer plan. Multiemployer plan means a multiemployer plan 
within the meaning of section 414(f).
    Noncollectively bargained employee. Noncollectively bargained 
employee means an employee who is not a collectively bargained employee.
    Nonhighly compensated employee. Nonhighly compensated employee means 
an employee who is not a highly compensated employee.
    Nonhighly compensated former employee. Nonhighly compensated former 
employee means a former employee who is not a highly compensated former 
employee.
    Plan year. Plan year means the plan year of the plan as defined in 
the written plan document. In the absence of a specifically designated 
plan year, the plan year is deemed to be the calendar year.
    Plan year compensation. Plan year compensation means plan year 
compensation within the meaning of Sec.  1.401(a)(4)-12.
    Professional employee. Professional employee means any highly 
compensated employee who, on any day of the plan year, performs 
professional services for the employer as an actuary, architect, 
attorney, chiropodist, chiropractor, dentist, executive, investment 
banker, medical doctor, optometrist, osteopath, podiatrist, 
psychologist, certified or other public accountant, stockbroker, or 
veterinarian, or in any other professional capacity determined by the 
Commissioner in a notice or other document of general applicability to 
constitute the performance of services as a professional.
    Ratio percentage. With respect to a plan for a plan year, a plan's 
ratio percentage means the percentage (rounded to the nearest hundredth 
of a percentage point) determined by dividing the percentage of the 
nonhighly compensated employees who benefit under the plan by the 
percentage of the highly compensated employees who benefit under the 
plan. The percentage of the nonhighly compensated employees who benefit 
under the plan is determined by dividing the number of nonhighly 
compensated employees benefiting under the plan by the total number of 
nonhighly compensated employees of the employer. The percentage of the 
highly compensated employees who benefit under the plan is determined by 
dividing the number of highly compensated employees benefiting under the 
plan by the total number of highly compensated employees of the 
employer.
    Section 401(k) plan. Section 401(k) plan means a plan consisting of 
elective contributions described in Sec.  1.40(k)-1(g)(3) under a 
qualified cash or deferred arrangement described in Sec.  1.401(k)-
1(a)(4)(i). Thus, a section 401(k) plan does not include a plan (or 
portion of a plan) that consists of contributions under a nonqualified 
cash or deferred arrangement, or qualified nonelective or qualified 
matching contributions treated as elective contributions under Sec.  
1.401(k)-1(a)(6).
    Section 401( l) plan. Section 401( l) plan means a plan that--
    (1) Provides for a disparity in employer-provided benefits or 
contributions that satisfies section 401(l) in form, and
    (2) Relies on one of the safe harbors of Sec.  1.401(a)(4)-2(b)(2), 
1.401(a)(4)-3(b), 1.401(a)(4)-8(b)(3), or 1.401(a)(4)-8(c)(3)(iii)(B) to 
satisfy section 401(a)(4).
    Section 401(m) plan. Section 401(m) plan means a plan consisting of 
employee contributions described in Sec.  1.401(m)-1(f)(6) or matching 
contributions described in Sec.  1.40(m)-1(f)(12), or both. Thus, a 
section 401(m) plan does not include a plan (or portion of a plan) that 
consists of elective contributions or qualified nonelective 
contributions treated as matching contributions under Sec.  1.401(m)-
1(b)(5).

[T.D. 8363, 56 FR 47657, Sept. 19, 1991; 57 FR 10817, 10954, Mar. 31, 
1992, as amended by T.D. 8487, 58 FR 46843, Sept. 3, 1993; 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 Sec.  1.410(b)-9 by removing ``1.401(k)-1(g)(3) and 
1.401(m)-1(f)(12)'' and inserting ``1.401(k)-6 and 1.401(m)-1(f)(12)''. 
However, because of inaccurate language, this amendment could not be 
incorporated.

[[Page 56]]



Sec.  1.410(b)-10  Effective dates and transition rules.

    (a) Statutory effective dates--(1) In general. Except as set forth 
in paragraph (a)(2) of this section, the minimum coverage rules of 
section 410(b) as amended by section 1112 of the Tax Reform Act of 1986 
apply to plan years beginning on or after January 1, 1989.
    (2) Special statutory effective date for collective bargaining 
agreements--(i) In general. As provided for by section 1112(e)(2) of the 
Tax Reform Act of 1986, in the case of a plan maintained pursuant to one 
or more collective bargaining agreements between employee 
representatives and one or more employers ratified before March 1, 1986, 
the minimum coverage rules of section 410(b) as amended by section 1112 
of the Tax Reform Act of 1986 do not apply to employees covered by any 
such agreement in plan years beginning before the earlier of--
    (A) January 1, 1991; or
    (B) The later of January 1, 1989, or the date on which the last of 
such collective bargaining agreements terminates (determined without 
regard to any extension thereof after February 28, 1986). For purposes 
of this paragraph (a)(2), any extension or renegotiation of a collective 
bargaining agreement, which extension or renegotiation is ratified after 
February 28, 1986, is to be disregarded in determining the date on which 
the agreement terminates.
    (ii) Example. The following example illustrates this paragraph 
(a)(2).

    Example. Employer A maintains Plan 1 pursuant to a collective 
bargaining agreement. Plan 1 covers 100 of Employer A's noncollectively 
bargained employees and 900 of Employer A's collectively bargained 
employees. Employer A also maintains Plan 2, which covers Employer A's 
other 400 noncollectively bargained employees. The collective bargaining 
agreement under which Plan 1 is maintained was entered into on January 
1, 1986, and expires December 31, 1992. Because Plan 1 is a plan 
maintained pursuant to a collective bargaining agreement, section 410(b) 
applies to the first plan year beginning on or after January 1, 1991. In 
applying section 410(b) to Plan 2, the 100 noncollectively bargained 
employees in Plan 1 must be taken into account. The deferred effective 
date for plans maintained pursuant to a collective bargaining agreement 
is not applicable in determining how section 410(b) is applied to a plan 
that is not maintained pursuant to a collective bargaining agreement.

    (iii) Plan maintained pursuant to a collective bargaining agreement. 
For purposes of this paragraph (a)(2), a plan is maintained pursuant to 
one or more collective bargaining agreements between employee 
representatives and one or more employers, if one or more of the 
agreements were ratified before March 1, 1986. Only plans maintained 
pursuant to agreements that the Secretary of Labor finds to be 
collective bargaining agreements and that satisfy section 7701(a)(46) 
are eligible for the deferred effective date under this paragraph 
(a)(2). A plan will not be treated as a plan maintained pursuant to one 
or more collective bargaining agreements eligible for the deferred 
effective date under this paragraph (a)(2) unless the plan would be a 
plan maintained pursuant to one or more collective bargaining agreements 
under the principles applied under section 1017(c) of the Employee 
Retirement Income Security Act of 1974. See H.R. Rep. No. 1280, 93rd 
Cong. 2d Sess. 266 (1974).
    (b) Regulatory effective dates--(1) In general. Except as otherwise 
provided in this section, Sec. Sec.  1.410(b)-2 through 1.410(b)-9 apply 
to plan years beginning on or after January 1, 1994.
    (2) Plans of tax-exempt organizations. In the case of plans 
maintained by organizations exempt from income taxation under section 
501(a), including plans subject to section 403(b)(12)(A)(i) (nonelective 
plans), Sec. Sec.  1.410(b)-2 through 1.410(b)-9 apply to plan years 
beginning on or after January 1, 1996, to the extent such plans are 
subject to section 410(b).
    (c) Compliance during transition period. For plan years beginning 
before the effective date of these regulations, as set forth in 
paragraph (b) of this section, and on or after the statutory effective 
date as set forth in paragraph (a) of this section, a plan must be 
operated in accordance with a reasonable, good faith interpretation of 
section 410(b). Whether a plan is operated in accordance with a 
reasonable, good faith interpretation of section 410(b) will generally 
be determined based on all of the relevant facts and circumstances, 
including the extent to which an employer has resolved unclear issues in

[[Page 57]]

its favor. If a plan's classification has been determined by the 
Commissioner to be nondiscriminatory and there have been no significant 
changes in or omissions of a material fact, the classification will be 
treated as nondiscriminatory for the relevant plan year. A plan will be 
deemed to be operated in accordance with a reasonable, good faith 
interpretation of section 410(b) if it is operated in accordance with 
the terms of Sec. Sec.  1.410(b)-2 through 1.410(b)-9.
    (d) Effective date for governmental plans. In the case of 
governmental plans described in section 414(d), including plans subject 
to section 403(b)(12)(A)(i) (nonelective plans) Sec.  1.410(b)-2 through 
Sec.  1.410(b)-10 apply to plan years beginning on or after January 1, 
1996, or 90 days after the opening of the first legislative session 
beginning on or after January 1, 1996, of the governing body with 
authority to amend the plan, if that body does not meet continuously. 
Such plans are deemed to satisfy section 410(b) (and in the case of such 
plans that are not subject to section 403(b)(12)(A)(i), section 
401(a)(3) as in effect on September 1, 1974) for plan years before that 
effective date. For purposes of this section, the governing body with 
authority to amend the plan is the legislature, board, commission, 
council, or other governing body with authority to amend the plan. See 
Sec.  1.410(b)-2(d) and (e).
    (e) Effective date for provisions relating to exclusion of employees 
of certain tax-exempt entities. The provisions in Sec.  1.410(b)-6(g) 
apply to plan years beginning after December 31, 1996. For plan years to 
which Sec.  1.410(b)-6 applies that begin before January 1, 1997, Sec.  
1.410(b)-6(g) (as it appeared in the April 1, 2005 edition of 26 CFR 
part 1) applies.

[T.D. 8487, 58 FR 46844, Sept. 3, 1993, as amended by T.D. 9275, 71 FR 
41359, July 21, 2006]



Sec.  1.410(d)-1  Election by church to have participation, vesting,
funding, etc. provisions apply.

    (a) In general. If a church or convention or association of churches 
which maintains any church plan, as defined in section 414(e), makes an 
election under this section, certain provisions of the Code and title I 
of the Employee Retirement Income Security Act of 1974 (the ``Act'') 
shall apply to such church plan as if such plan were not a church plan. 
The provisions of the Code referred to are section 410 (relating to 
minimum participation standards), section 411 (relating to minimum 
vesting standards), section 412 (relating to minimum funding standards), 
section 4975 (relating to prohibited transactions), and paragraphs (11), 
(12), (13), (14), (15), and (19) of section 401(a) (relating to joint 
and survivor annuities, mergers and consolidations, assignment or 
alienation of benefits, time of benefit commencement, certain social 
security increases, and withdrawals of employee contributions, 
respectively).
    (b) Election is irrevocable. An election under this section with 
respect to any church plan shall be binding with respect to such plan 
and, once made, shall be irrevocable.
    (c) Procedure for making election--(1) Time of election. An election 
under this section may be made for plan years for which the provisions 
of section 410(d) of the Code apply to the church plan. By reason of 
section 1017(b) of the Act section 410(d) does not apply to a plan in 
existence on January 1, 1974, for plan years beginning before January 1, 
1976. Section 1017(d) of the Act permits a plan administrator to elect 
to have certain provisions of the Code (including section 410(d)) apply 
to a plan before the otherwise applicable effective dates of such 
provisions. See Sec.  1.410(a)-2(d). Therefore, for a plan in existence 
on Janurary 1, 1974, an election under section 410(d) of the Code may be 
made for a plan year beginning before January 1, 1976, only if an 
election has been made under section 1017(d) of the Act with respect to 
that plan year.
    (2) By whom election is to be made. The election provided by this 
section may be made only by the plan administrator of the church plan.
    (3) Manner of making election. The plan administrator may elect to 
have the provisions of the Code described in paragraph (a) of this 
section apply to the church plan as it is were not a church plan by 
attaching the statement described in subparagraph (5) of this paragraph 
to either (i) the annual return required under section 6058(a) (or an 
amended return) with respect to

[[Page 58]]

the plan which is filed for the first plan year for which the election 
is effective or (ii) a written request for a determination letter 
relating to the qualification of the plan under section 401(a), 403(a), 
or 405(a) of the Code and if trusteed, the exempt status under section 
501(a) of the Code of a trust constituting a part of the plan.
    (4) Conditional election. If an election is made with a written 
request for a determination letter, the election may be conditioned upon 
issuance of a favorable determination letter and will become irrevocable 
upon issuance of such letter.
    (5) Statement. The statement described in subparagraph (3) of this 
paragraph shall indicate (i) that the election is made under section 
410(d) of the Code and (ii) the first plan year for which it is 
effective.

(Sec. 410 (88 Stat. 898; 26 U.S.C. 410))

[T.D. 7508, 42 FR 47198, Sept. 20, 1977]



Sec.  1.411(a)-1  Minimum vesting standards; general rules.

    (a) In general. A plan is not a qualified plan (and a trust forming 
a part of such plan is not a qualified trust) unless--
    (1) The plan provides that an employee's right to his normal 
retirement benefit (see Sec.  1.411(a)-7(c)) is nonforfeitable (see 
Sec.  1.411(a)-4) upon and after the attainment of normal retirement age 
(see Sec.  1.411(a)-7(b)),
    (2) The plan provides that an employee's rights in his accrued 
benefit derived from his own contributions (see Sec.  1.411(c)-1) are 
nonforfeitable at all times, and
    (3) The plan satisfies the requirements of--
    (A) Section 411(a)(2) and Sec.  1.411(a)-3 (relating to vesting in 
accrued benefit derived from employer contributions), and
    (B) In the case of a defined benefit plan, section 411(b)(1) and 
Sec.  1.411(b)-1 (relating to accrued benefit).
    (b) Organization of regulations relating to minimum vesting 
standards--(1) General rules. This section prescribes general rules 
relating to the minimum vesting standards provided by section 411.
    (2) Effective dates. Section 1.411(a)-2 provides rules under section 
1017 of the Employee Retirement Income Security Act of 1974 relating to 
effective dates under section 411.
    (3) Employer contributions. Section 1.411(a)-3 provides rules under 
section 411(a)(2) relating to vesting in employer-derived accrued 
benefits.
    (4) Certain forfeitures. Section 1.411(a)-4 provides rules under 
section 411(a)(3) relating to certain permitted forfeitures, 
suspensions, etc. under qualified plans.
    (5) Nonforfeitable percentage. Section 1.411(a)-5 provides rules 
under section 411(a)(4) relating to service included in the 
determination of an employee's nonforfeitable percentage under section 
411(a)(2) and Sec.  1.411(a)-3.
    (6) Years of service; break in service. Section 1.411(a)-6 provides 
rules under section 411(a) (5) and (6) of the Internal Revenue Code of 
1954 relating to years of service and breaks in service. Rules 
prescribed by the Secretary of Labor, relating to years of service and 
breaks in service under part 2 of subtitle B of title I of the Employee 
Retirement Income Security Act of 1974 are provided under 29 CFR Part 
2530 (Department of Labor regulations relating to minimum standards for 
employee pension benefit plans).
    (7) Definitions and special rules. Section 1.411(a)-7 provides 
definitions and special rules under section 411(a) (7), (8), and (9), 
for purposes of section 411 and the regulations thereunder.
    (8) Changes in vesting schedule. Section 1.411(a)-8 provides rules 
under section 411(a)(10) relating to changes in the vesting schedule of 
a plan.
    (9) Breaks in service. Section 1.411(a)-9 provides special rules 
relating to breaks in service.
    (10) Accrued benefits. See Sec.  1.411(b)-1 for rules under section 
411(b) relating to accrued benefit requirements under defined benefit 
plans.
    (11) Allocation of accrued benefits. See Sec.  1.411(c)-1 for rules 
under section 411(c) relating to allocation of accrued benefits between 
employer and employee contributions.
    (12) Discrimination, etc. See Sec.  1.411(d)-1 for rules relating to 
the coordination of section 411 with section 401(a)(4) (relating to 
discrimination) and other rules under section 411(d).

[[Page 59]]

    (c) Application of standards to certain plans--(1) General rule. 
Except as provided in subparagraph (2) of this paragraph, section 411 
does not apply to--
    (i) A governmental plan (within the meaning of section 414(d) and 
the regulations thereunder),
    (ii) A church plan (within the meaning of section 414(e) and the 
regulations thereunder) which has not made the election provided by 
section 410(d) and the regulations thereunder,
    (iii) A plan which has not provided for employer contributions at 
any time after September 2, 1974, and
    (iv) A plan established and maintained by a society, order, or 
association described in section 501(c) (8) or (9), if no part of the 
contributions to or under such plan are made by employers of 
participants in such plan.
    (2) Vesting requirements. A plan described in subparagraph (1) of 
this paragraph shall, for purposes of section 401(a), be treated as 
meeting the requirements of section 411 if such plan meets the vesting 
requirements resulting from the application of section 401(a)(4) and 
section 401(a)(7) as in effect on September 1, 1974.
    (d) Supersession. Sections 11.411(a)-1 through 11.411(d)-3, 
inclusive, of the Temporary Income Tax Regulations under the Employee 
Retirement Income Security Act of 1974 are superseded by this section 
and Sec. Sec.  1.411(a)-2 through 1.411(d)-3.

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42324, Aug. 23, 1977]



Sec.  1.411(a)-2  Effective dates.

    (a) Plan not in existence on January 1, 1974. Under section 1017(a) 
of the Employee Retirement Income Security Act of 1974, in the case of a 
plan which was not in existence on January 1, 1974, section 411 and the 
regulations thereunder apply for plan years beginning after September 2, 
1974. See paragraph (c) of this section for time plan is considered in 
existence.
    (b) Plans in existence on January 1, 1974. Under section 1017(b) of 
the Employee Retirement Income Security Act of 1974, in the case of a 
plan which was in existence on January 1, 1974, section 411 and the 
regulations thereunder apply for plan years beginning after December 31, 
1975. See paragraph (c) of this section for time plan is considered to 
be in existence.
    (c) Time of plan existence--(1) General rule. For purposes of this 
section, a plan is considered to be in existence on a particular day 
if--
    (i) The plan on or before that day was reduced to writing and 
adopted by the employer (including, in the case of a corporate employer, 
formal approval by the employer's board of directors and, if required, 
shareholders), even though no amounts had been contributed under the 
plan as of such day, and
    (ii) The plan was not terminated on or before that day.

For example, if a plan was adopted on January 2, 1974, effective as of 
January 1, 1974, the plan is not considered to have been in existence on 
January 1, 1974, because it was not both adopted and in writing on 
January 1, 1974.
    (2) Collectively-bargained plan. Notwithstanding paragraph (c) (1) 
of this section, a plan described in section 413 (a), relating to a plan 
maintained pursuant to a collective-bargaining agreement, is considered 
to be in existence on a particular day if--
    (i) On or before that day there is a legally enforceable agreement 
to establish such a plan signed by the employer, and
    (ii) The employer contributions to be made to the plan are set forth 
in the agreement.
    (3) Special rule. If a plan is considered to be in existence under 
subparagraph (1) of this paragraph, any other plan with which such 
existing plan is merged or consolidated shall also be considered to be 
in existence on such date.
    (d) Existing plans under collective-bargaining agreements. For a 
special effective date rule for certain plans maintained pursuant to a 
collective bargaining agreement, see section 1017(c)(1) of the Employee 
Retirement Income Security Act of 1974 (88 Stat. 932).
    (e) Certain existing plans may elect new provisions. The plan 
administrator may elect to have the provisions of the Code relating to 
participation, vesting, funding, and form of benefit apply to a selected 
plan year. See Sec.  1.410(a)-2(d) for rules relating to such an 
election.

[[Page 60]]

    (f) Application of rules. The requirements of section 411 do not 
apply to employees who separate from service with the employer prior to 
the first plan year to which such requirements apply and who never 
return to service with the employer in a plan year to which section 411 
applies.

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42325, Aug. 23, 1977]



Sec.  1.411(a)-3  Vesting in employer-derived benefits.

    (a) In general--(1) Alternative requirements. A plan is not a 
qualified plan (and a trust forming a part of such plan is not a 
qualified trust) unless the plan satisfies the requirements of section 
411(a)(2) and this section. A plan satisfies the requirements of this 
section if is satisfies the requirements of paragraph (b), (c), or (d) 
of this section.
    (2) Composite arrangements. A plan will not be considered to satisfy 
the requirements of paragraph (b), (c), or (d) of this section unless it 
satisfies all requirements of a particular one of such paragraphs with 
respect to all of an employee's years of service. A plan which, for 
example, satisfies the requirements of paragraph (b) (but not (c) or 
(d)) for an employee's first 9 years of service and satisfies the 
requirements of paragraph (c) (but not (b)) for all of his remaining 
years of service, does not satisfy the requirements of this section. A 
plan is not precluded from satisfying the requirement of one such 
paragraph with respect to one group of employees and another such 
paragraph with respect to another group provided that the groups are not 
so structured as to evade the requirements of this paragraph. For 
example, if plan A provides that employees who commence participation 
before age 30 are subject to the ``rule of 45'' vesting schedule and 
employees who commence participation after age 30 are subject to the 
full vesting after 10 years schedule, plan A would be so structured as 
to evade the requirements of this paragraph.
    (3) Plan amendments. A plan which satisfies the requirements of a 
particular one of such paragraphs for each of an employee's years of 
service and which is amended so that, as amended, it satisfies the 
requirements of another such paragraph for all such years of service, 
satisfies the requirements of this section even though, as amended, it 
does not satisfy the requirements of the paragraph which were satisfied 
prior to the amendment. See Sec.  1.411(a)-8 for rules relating to 
employee election where the vesting schedule is amended.
    (b) 10-year vesting. A plan satisfies the requirements of section 
411(a)(2) (A) and this paragraph if an employee who has completed 10 
years of service has a nonforfeitable right to 100 percent of his 
accrued benefit derived from employer contributions.
    (c) 5- to 15-year vesting. A plan satisfies the requirements of 
section 411(a)(2) (B) and this paragraph if an employee who has 
completed at least 5 years of service has a nonforfeitable right to a 
percentage of his accrued benefit derived from employer contribution 
which percentage is not less than the nonforfeitable percentage 
determined under the following table:

------------------------------------------------------------------------
                                                          Nonforfeitable
               Completed years of service                   percentage
------------------------------------------------------------------------
5.......................................................             25
6.......................................................             30
7.......................................................             35
8.......................................................             40
9.......................................................             45
10......................................................             50
11......................................................             60
12......................................................             70
13......................................................             80
14......................................................             90
15 or more..............................................            100
------------------------------------------------------------------------

    (d) Rule of 45. A plan satisfies the requirements of section 
411(a)(2)(C) and this paragraph if an employee is entitled to the 
greater of the two percentages determined under paragraph (d) (1) or (2) 
of this section.
    (1) Age and service test. An employee who is not separated from the 
service, who has completed at least 5 years of service, and with respect 
to whom the sum of his age and years of service equals of exceeds 45, 
has a nonforfeit- able right to a percentage of his accrued benefit 
derived from employer contributions which is not less than the 
nonforfeitable percentage corresponding to his number of completed years 
of service to the sum of his age

[[Page 61]]

and completed years of service (whichever percentage is the lesser) 
determined under the following table:

------------------------------------------------------------------------
                                       Sum of age and     Nonforfeitable
    Completed years of service             service          percentage
------------------------------------------------------------------------
5.................................  45 or 46............             50
6.................................  47 or 48............             60
7.................................  49 or 50............             70
8.................................  51 or 52............             80
9.................................  53 or 54............             90
10 or more........................  55 or more..........            100
------------------------------------------------------------------------

    (2) Service test. An employee who has completed at least 10 years of 
service has a nonforfeitable right to a percentage of his accrued 
benefit derived from employer contributions determined under the 
following table:

------------------------------------------------------------------------
                                                          Nonforfeitable
               Completed years of service                   percentage
------------------------------------------------------------------------
10......................................................             50
11......................................................             60
12......................................................             70
13......................................................             80
14......................................................             90
15......................................................            100
------------------------------------------------------------------------

    (3) Computation of age. For purposes of subparagraph (1) of this 
paragraph, the age of an employee is his age on his last birthday.
    (e) Examples. The rules provided by this section are illustrated by 
the following examples:

    Example 1. Plan B provides that each employee's rights to his 
employer-derived accrued benefit are nonforfeitable as follows:

------------------------------------------------------------------------
                                                          Nonforfeitable
               Completed years of service                   percentage
------------------------------------------------------------------------
2 or less...............................................              0
3.......................................................             30
4.......................................................             35
5.......................................................             40
6.......................................................             45
7.......................................................             50
8.......................................................             55
9.......................................................             60
10......................................................             65
11......................................................             70
12......................................................             75
13......................................................             80
14......................................................             85
15......................................................            100
------------------------------------------------------------------------


Plan B does not satisfy the requirements of paragraph (c) of this 
section (relating to 5-15-year vesting) because the nonforfeitable 
percentage provided by the plan after completion of 14 years of service 
(85 percent) is less than the percentage required by paragraph (c) of 
this section at that time (90 percent). The fact that the nonforfeitable 
percentage provided by the plan for years prior to the 13th year of 
service is greater than the percentage required under paragraph (c) of 
this section is immaterial. The plan fails to satisfy the requirements 
of paragraph (c) of this section even if it is demonstrated that the 
value of the vesting provided by the plan to the employee is at least 
equal to the value of the vesting rate required by that paragraph.
    Example 2. Plan C provides for plan participation after the 
completion of 1 year of service. The plan provides that each employee's 
rights to his employer-derived accrued benefit are 100 percent 
nonforfeitable after 10 years of plan participation rather than service. 
The plan does not satisfy the requirements of paragraph (b) of this 
section because, under the plan, an employee obtains a 100 percent 
nonforfeitable right to his employer-derived accrued benefit only after 
completion of more than 10 years of service.
    Example 3. Plan D provides that each employee's rights to his 
employer-derived accrued benefit are nonforfeitable in accordance with 
the following schedule:

------------------------------------------------------------------------
                                                          Nonforfeitable
               Completed years of service                   percentage
------------------------------------------------------------------------
0-9.....................................................              0
10......................................................             50
11......................................................             60
12......................................................             70
13......................................................             80
14......................................................             90
15......................................................            100
------------------------------------------------------------------------


The plan does not satisfy the requirements of paragraph (b) of this 
section after the 9th year of service. It does not satisfy the 
requirements of paragraph (c) of this section for years prior to the 
10th year of service. It does not satisfy the requirements of paragraph 
(d)(1) of this section for any year of service prior to the 10th year. 
The plan does not satisfy the requirements of this section because it 
does not satisfy the requirements of a particular one of the three 
paragraphs for each of an employee's years of service.
    Example 4. Plan G provides that each employee's rights to his 
employer-derived accrued benefit are 100 percent nonforfeitable upon 
completion of 5 years of service. The plan satisfies the requirements of 
paragraphs (b), (c), and (d) of this section and, because it satisfies 
the requirements of at least one of such paragraphs for all of an 
employee's years of service, it satisfies the requirements of this 
section.

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42325, Aug. 23, 1977]

[[Page 62]]



Sec.  1.411(a)-3T  Vesting in employer-derived benefits (temporary).

    (a) In general--(1) [Reserved]
    (2) Composite arrangements. A plan will not be considered to satisfy 
the requirements of paragraph (b), (c), or (d) of this section unless it 
satisfies all requirements of a particular one of such paragraphs with 
respect to all of an employee's years of service. A plan which, for 
example, satisfies the requirements of paragraph (b) (but not (c) or 
(d)) for an employee's first 4 years of service and satisfies the 
requirements of paragraph (c) (but not (b)) for all of his remaining 
years of service does not satisfy the requirements of this section. A 
plan is not precluded from satisfying the requirements of one such 
paragraph with respect to one group of employees and another such 
paragraph with respect to another group provided that the groups are not 
so structured as to evade the requirements of this paragraph.
    (b) 5-year vesting. A plan satisfies the requirements of section 
411(a)(2)(A) and this paragraph if an employee who has completed 5 years 
of service has a nonforfeitable right to 100 percent of his or her 
accrued benefits derived from employer contributions.
    (c) 3- to 7-year vesting. A plan satisfies the requirements of 
section 411(a)(2)(B) and this paragraph if an employee who has completed 
at least 3 years of service has a nonforfeitable right to a percentage 
of his accrued benefit derived from employer contributions, which 
percentage is not less than the nonforfeitable percentage determined 
under the following table:

------------------------------------------------------------------------
                                                          Nonforfeitable
               Completed years of service                   percentage
------------------------------------------------------------------------
3.......................................................             20
4.......................................................             40
5.......................................................             60
6.......................................................             80
7 or more...............................................            100
------------------------------------------------------------------------

    (d) Multiemployer plans. A plan satisfies the requirements of 
section 411(a)(2)(C) and this paragraph if--
    (1) The plan is a multiemployer plan (within the meaning of section 
414(f)), and
    (2) Under the plan--
    (i) An employee who is covered pursuant to a collective bargaining 
agreement described in section 414(f)(1)(B) has a nonforfeitable right 
to 100 percent of the employee's accrued benefit derived from employer 
contributions not later than upon completion of 10 years of service, and
    (ii) The requirements of paragraph (b) or (c) of this section are 
met with respect to employees who are not covered pursuant to a 
collective bargaining agreement described in section 414(f)(1)(B).
    (iii) For purposes of this provision, an employee is not covered 
pursuant to a collective bargaining agreement unless the employee is 
represented by a bona fide employee representative that is a party to 
the collective bargaining agreement pursuant to which the multiemployer 
plan is maintained. Thus, for example, an employee of either the 
multiemployer plan or the employee representative is not covered 
pursuant to the collective bargaining agreement under which the plan is 
maintained even if the employee is covered pursuant to an agreement 
entered into by the multiemployer plan or employee representative on 
behalf of the employee and even if all such employees covered under the 
plan constitute only a de minimis percentage of the total employees 
covered under the plan.
    (e) Effective date. (1) The provisions of this section apply to all 
employees who have one hour of service in any plan year beginning 
after--
    (i) December 31, 1988, or
    (ii) In the case of a plan maintained pursuant to one or more 
collective bargaining agreements between employee representatives and 
one or more employers ratified before March 1, 1986, for employees 
covered by any such agreement, the earlier of--
    (A) The later of--
    (1) January 1, 1989, or
    (2) The date on which the last of such collective bargaining 
agreements terminates (determined without regard to any extension 
thereof after February 28, 1986), or
    (B) January 1, 1991.
    (2) For employees not described in paragraph (e)(1), above, the 
regulations in effect prior to January 1, 1989, shall be applied to 
determine the requirements of this section.

[[Page 63]]

    (f) Examples. The rules provided by this section are illustrated by 
the following examples:

    Example 1. Plan B provides that each employee's rights to his 
employer-derived accrued benefit are nonforfeitable as follows:

------------------------------------------------------------------------
                                                          Nonforfeitable
               Completed years of service                   percentage
------------------------------------------------------------------------
1.......................................................              0
2.......................................................             10
3.......................................................             25
4.......................................................             45
5.......................................................             65
6.......................................................             75
7.......................................................            100
------------------------------------------------------------------------

    Plan B does not satisfy the requirements of paragraph (c) of this 
section (relating to 3- to 7-year vesting) because the nonforfeitable 
percentage provided by the plan after completion of 6 years of service 
(75 percent) is less than the percentage required by paragraph (c) of 
this section at that time (80 percent). The fact that the nonforfeitable 
percentage provided by the plan for years prior to the 6th year of 
service is greater than the percentage required under paragraph (c) of 
this section is immaterial. The plan fails to satisfy the requirements 
of paragraph (c) of this section even if it is demonstrated that the 
value of the vesting provided by the plan to the employees is at least 
equal to the value of the vesting rate required by this paragraph.
    Example 2. Plan C provides for plan participation after the 
completion of 1 year of service. The plan provides that each employee's 
rights to his employer-derived accrued benefits are 100 percent 
nonforfeitable after 5 years of plan participation rather than service. 
The plan does not satisfy the requirements of paragraph (b) of this 
section because, under the plan, an employee obtains a 100 percent 
nonforfeitable right to his or her employer-derived accrued benefit only 
after completion of more than 5 years of service.
    Example 3. Plan D provides that each employee's rights to his 
employer-derived accrued benefits are nonforfeitable in accordance with 
the following schedule:

------------------------------------------------------------------------
                                                          Nonforfeitable
               Completed years of service                   percentage
------------------------------------------------------------------------
0 to 4..................................................              0
5.......................................................             60
6.......................................................             80
7.......................................................            100
------------------------------------------------------------------------

    The plan does not satisfy the requirements of paragraph (b) of this 
section after the 4th year of service. It does not satisfy the 
requirements of paragraph (c) of this section for years prior to the 5th 
year of service. The plan does not satisfy the requirements of this 
section because it does not satisfy the requirements of a particular one 
of the two paragraphs for each of an employee's years of service.
    Example 4. Plan G provides that each employee's rights to his 
employer-derived accrued benefit are 100 percent nonforfeitable upon 
completion of 3 years of service. The plan satisfies the requirements of 
paragraphs (b) and (c) of this section and, because it satisfies the 
requirements of at least one of such paragraphs for all of an employee's 
years of service, it satisfies the requirements of this section.

[T.D. 8170, 53 FR 240, Jan. 6, 1988]



Sec.  1.411(a)-4  Forfeitures, suspensions, etc.

    (a) Nonforfeitability. Certain rights in an accrued benefit must be 
nonforfeitable to satisfy the requirements of section 411(a). This 
section defines the term ``nonforfeitable'' for purposes of these 
requirements. For purposes of section 411 and the regulations 
thereunder, a right to an accrued benefit is considered to be 
nonforfeitable at a particular time if, at that time and thereafter, it 
is an unconditional right. Except as provided by paragraph (b) of this 
section, a right which, at a particular time, is conditioned under the 
plan upon a subsequent event, subsequent performance, or subsequent 
forbearance which will cause the loss of such right is a forfeitable 
right at that time. Certain adjustments to plan benefits such as 
adjustments in excess of reasonable actuarial reductions, can result in 
rights being forfeitable. Rights which are conditioned upon a 
sufficiency of plan assets in the event of a termination or partial 
termination are considered to be forfeitable because of such condition. 
However, a plan does not violate the nonforfeitability requirements 
merely because in the event of a termination an employee does not have 
any recourse toward satisfaction of his nonforfeitable benefits from 
other than the plan assets or the Pension Benefit Guaranty Corporation. 
Furthermore, nonforfeitable rights are not considered to be forfeitable 
by reason of the fact that they may be reduced to take into account 
benefits which are provided under the Social Security Act or under any 
other Federal or State law and which are taken

[[Page 64]]

into account in determining plan benefits. To the extent that rights are 
not required to be nonforfeitable to satisfy the minimum vesting 
standards, or the nondiscrimination requirements of section 401(a)(4), 
they may be forfeited without regard to the limitations on 
forfeitability required by this section. The right of an employee to 
repurchase his accrued benefit for example under section 411(a)(3)(D), 
is an example of a right which is required to satisfy such standards. 
Accordingly, such a right is subject to the limitations on 
forfeitability. Rights which are required to be prospectively 
nonforfeitable under the vesting standards are nonforfeitable and may 
not be forfeited until it is determined that such rights are, in fact, 
in excess of the vesting standards. Thus, employees have a right to vest 
in the accrued benefits if they continue in employment of employers 
maintaining the plan unless a forfeitable event recognized by section 
411 occurs. For example, if a plan covered employees in Division A of 
Corporation X under a plan utilizing a 10-year 100 percent vesting 
schedule, the plan could not forfeit employees' rights on account of 
their moving to service in Division B of Corporation X prior to 
completion of 10 years of service even though employees are not vested 
at that time.
    (b) Special rules. For purposes of paragraph (a) of this section a 
right is not treated as forfeitable--
    (1) Death--(i) General rule. In the case of a participant's right to 
his employer-derived accrued benefit, merely because such accrued 
benefit is forfeitable by the participant to the extent it has not been 
paid or distributed to him prior to his death. This subparagraph shall 
not apply to a benefit which must be paid to a survivor in order to 
satisfy the requirements of section 401(a)(11).
    (ii) Employee contributions. A participant's right in his accrued 
benefit derived from his own contributions must be nonforfeitable at all 
times. Such a right is not treated as forfeitable merely because, after 
commencement of annuity or pension payments in a benefit form provided 
under the plan, the participant dies without receiving payments equal in 
amount to his nonforfeitable accrued benefit derived from his 
contributions determined at the time of commencement.
    (2) Suspension of benefits upon reemployment of retiree. In the case 
of certain suspensions of benefits under section 411(a)(3)(B), see 
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530 
(Department of Labor regulations relating to minimum standards for 
employee pension benefit plans).
    (3) Retroactive plan amendment. In the case of a participant's right 
to his employer-derived accrued benefit, merely because such benefit is 
subject to reduction to the extent provided by a plan amendment 
described in section 412(c)(8) and the regulations thereunder, which 
amendment is given retroactive effect in accordance with such section.
    (4) Other forfeiture rules--(i) Withdrawal of mandatory 
contributions. For rules allowing forfeitures on account of the 
withdrawal of mandatory contributions, see Sec.  1.411(a)-7(d) (2) and 
(3).
    (ii) Additional requirements. For additional requirements relating 
to nonforfeitability of benefits in the event of a withdrawal by the 
employee, see section 401(a)(19) and Sec.  1.401(a)-19.
    (5) Multiemployer plan. In the case of a multiemployer plan 
described in section 414(f), merely because an employee's accrued 
benefit which results from service with an employer before such employer 
was required to contribute to the plan is forfeitable on account of the 
cessation of contributions by the employer of the employee. This 
subparagraph shall not apply to an employee's accrued benefit with 
respect to an employer which accrued under a plan maintained by that 
employer prior to the adoption by that employer of the multiemployer 
plan.
    (6) Lost beneficiary; escheat. In the case of a benefit which is 
payable, merely because the benefit is forfeitable on account of the 
inability to find the participant or beneficiary to whom payment is due, 
provided that the plan provides for reinstatement of the benefit if a 
claim is made by the participant or beneficiary for the forfeited 
benefit. In addition, a benefit which is lost by reason of escheat under 
applicable state law is not treated as a forfeiture.

[[Page 65]]

    (7) Certain matching contributions. A matching contribution (within 
the meaning of section 401(m)(4)(A) and Sec.  1.401(m)-1(a)(2)) is not 
treated as forfeitable even if under the plan it may be forfeited under 
Sec.  1.401(m)-2(b)(1) because the contribution to which it relates is 
treated as an excess contribution (within the meaning of Sec. Sec.  
1.401(k)-2(b)(2)(ii) and 1.401(k)-6), excess deferral (within the 
meaning of Sec.  1.402(g)-1(e)(1)(iii)), excess aggregate contribution 
(within the meaning of Sec.  1.401(m)-5), or a default elective 
contribution (within the meaning of Sec.  1.414(w)-1(e)) that is 
withdrawn in accordance with the requirements of Sec.  1.414(w)-1(c).
    (c) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. Corporation A's plan provides that an employee is fully 
vested in his employer-derived accrued benefit after completion of 5 
years of service. The plan also provides that, if an employee works for 
a competitor he forfeits his rights in the plan. Such provision could 
result in the forfeiture of an employee's rights which are required to 
be nonforfeitable under section 411 and therefore the plan would not 
satisfy the requirements of section 411. If the plan limited the 
forfeiture to employees who completed less than 10 years of service, the 
plan would not fail to satisfy the requirements of section 411 because 
the forfeitures under this provision are limited to rights which are in 
excess of the minimum required to be nonforfeitable under section 
411(a)(2)(A).
    Example 2. Plan B provides that if an employee does not apply for 
benefits within 5 years after the attainment of normal retirement age, 
the employee loses his plan benefits. Such a plan provision could result 
in forfeiture of an employee's rights which are required to be 
nonforfeitable under section 411 and, therefore, the plan would not 
satisfy the requirements of section 411.

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42326, Aug. 23, 1977, as amended by T.D. 8357, 56 FR 
40549, Aug. 15, 1991; T.D. 9169, 69 FR 78153, Dec. 29, 2004; T.D. 9219, 
70 FR 47126, Aug. 12, 2005; T.D. 9447, 74 FR 8211, Feb. 24, 2009]

    Editorial Note: By T.D. 9169, 69 FR 78153, Dec. 29, 2004, Sec.  
1.411(a)-(b)(7) was amended by removing the reference to Sec.  1.401(k)-
1(f)(2) and (g)(7). However, the reference does not appear in the 
paragraph.



Sec.  1.411(a)-4T  Forfeitures, suspensions, etc. (temporary).

    (a) Nonforfeitability. Certain rights in an accrued benefit must be 
nonforfeitable to satisfy the requirements of section 411(a). This 
section defines the term ``nonforfeitable'' for purposes of these 
requirements. For purposes of section 411 and the regulations 
thereunder, a right to an accrued benefit is considered to be 
nonforfeitable at a particular time if, at that time and thereafter, it 
is an unconditional right. Except as provided by paragraph (b) of this 
section, a right which, at a particular time, is conditioned under the 
plan upon a subsequent event, subsequent performance, or subsequent 
forbearance which will cause the loss of such right is a forfeitable 
right at that time. Certain adjustments to plan benefits, such as 
adjustments in excess of reasonable actuarial reductions, can result in 
rights being forfeitable. Rights which are conditioned upon a 
sufficiency of plan assets in the event of a termination or partial 
termination are considered to be forfeitable because of such condition. 
However, a plan does not violate the nonforfeitability requirements 
merely because in the event of a termination an employee does not have 
any recourse toward satisfaction of his nonforfeitable benefits from 
other than the plan assets, the Pension Benefit Guaranty Corporation, or 
a trust established and maintained pursuant to sections 4041(c)(3)(B) 
(ii) or (iii) and section 4049 of ERISA with respect to the plan. 
Furthermore, nonforfeitable rights are not considered to be forfeitable 
by reason of the fact that they may be reduced as allowed under sections 
401(a)(5) and 401(l). To the extent that rights are not required to be 
nonforfeitable to satisfy the minimum vesting standards, or the 
nondiscrimination requirements of section 401(a)(4), they may be 
forfeited without regard to the limitations on forfeitability required 
by this section. The right of an employee to repurchase his accrued 
benefit for example under section 411(a)(3)(D), is an example of a right 
which is required to satisfy such standards. Accordingly, such a right 
is subject to the limitations on forfeitability. Rights which are 
required to be prospectively nonforfeitable under the

[[Page 66]]

vesting standards are nonforfeitable and may not be forfeited until it 
is determined that such rights are, in fact, in excess of the vesting 
standards. Thus, employees have a right to vest in the accrued benefits 
if they continue in employment of employers maintaining the plan unless 
a forfeitable event recognized by section 411 occurs. For example, if a 
plan covered employees in Division A of Corporation X under a plan 
utilizing a 5-year 100 percent vesting schedule, the plan could not 
forfeit employees' rights on account of their moving to service in 
Division B of Corporation X prior to completion of 5 years of service 
even though employees are not vested at that time.
    (b) [Reserved]
    (c) Examples. The rules of this section ae illustrated by the 
following examples:

    Example 1. Corporation A's plan provides that an employee is fully 
vested in his employer-derived accrued benefit after completion of 3 
years of service. The plan also provides that if the employee works for 
a competitor he forfeits his rights in the plan. Such provision could 
result in the forfeiture of an employee's rights which are required to 
be nonforfeitable under section 411 and therefore the plan would not 
satisfy the requirements of section 411. If the plan limited the 
forfeiture to employees who completed less than 5 years of service, the 
plan would not fail to satisfy the requirements of section 411 because 
the forfeitures under this provision are limited to rights which are in 
excess of the minimum required to be nonforfeitable under section 
411(a)(2)(A).

[T.D. 8170, 53 FR 241, Jan. 6, 1988]



Sec.  1.411(a)-5  Service included in determination of nonforfeitable
percentage.

    (a) In general. Under section 411(a)(4), for purposes of determining 
the nonforfeitable percentage of an employee's right to his employer-
derived accrued benefit under section 411(a)(2) and Sec.  1.411(a)-3, 
all of an employee's years of service with an employer or employers 
maintaining the plan shall be taken into account except that years of 
service described in paragraph (b) of this section may be disregarded.
    (b) Certain service. For purposes of paragraph (a) of this section, 
the following years of service may be disregarded:
    (1) Service before age 22. (i) In the case of a plan which satisfies 
the requirements of section 411(a)(2) (A) or (B) (relating to 10-year 
vesting and 5-15-year vesting, respectively), a year of service 
completed by an employee before he attains age 22.
    (ii) In the case of a plan which does not satisfy the requirements 
of section 411(a)(2) (A) or (B), a year of service completed by an 
employee before he attains age 22 if the employee is not a participant 
(for purposes of section 410) in the plan at any time during such year.
    (iii) For purposes of this subparagraph in the case of a plan 
utilizing computation periods, service during a computation period 
described in section 411(a)(5)(A) within which the employee attains age 
22 may not be disregarded. In the case of a plan utilizing the elapsed 
time method described in Sec.  1.410(a)-7, service on or after the date 
on which the employee attains age 22 may not be disregarded.
    (2) Contributory plans. In the case of a plan utilizing computation 
periods, a year of service completed by an employee under a plan which 
requires mandatory contributions (within the meaning of section 
411(c)(2)(C) and Sec.  1.411(c)-1(c)(4)) to be made by the employee for 
such year, if the employee does not participate for such year solely 
because of his failure to make all mandatory contributions to the plan 
for such year. If the employee contributes any part of the mandatory 
contributions for the year, such year may not be excluded by reason of 
this subparagraph. In the case of a plan utilizing the elapsed time 
method described in Sec.  1.410(a)-7, the service which may be 
disregarded is the period with respect to which the mandatory 
contribution is not made.
    (3) Plan not maintained--(i) In general. An employee's years of 
service with an employer during any period for which the employer did 
not maintain the plan or a predecessor plan may be disregarded for 
purposes of section 411(a)(2). Paragraph (b)(3)(ii) of this section 
provides rules regarding the period prior to the adoption of a plan. 
Paragraph (b)(3)(iii) of this section provides rules regarding the 
period after the termination of a plan. Paragraph

[[Page 67]]

(b)(3)(iv) of this section provides rules regarding employers who have 
certain relationships with other employers maintaining the plan.
    (ii) Period prior to adoption. The period for which a plan is not 
maintained by an employer includes the period before the plan was 
established. For purposes of this subdivision, a plan is established on 
the first day of the plan year in which the plan is adopted even though 
the plan is adopted after such first day. Except as provided in 
paragraph (b)(3)(iv) of this section if an employer adopts a plan which 
has previously been established by another employer or group of 
employers, the plan is not maintained by the adopting employer prior to 
the first day of the plan year in which the plan is adopted by the 
adopting employer. In the case of a transfer of assets or liabilities 
(including a merger or consolidation) involving two plans maintained by 
a single employer, the successor (or transferee) plan is treated as if 
it was established at the same time as the date of the establishment of 
the earliest component plan. In the case of a plan merger, 
consolidation, or transfer of plan assets or liabilities involving plans 
of two or more employers, the successor plan is treated as if it were 
established on each of the separate dates on which such component plan 
was established for the employees of each employer. Thus, for example, 
if employer A establishes a plan January 1, 1970, and employer B 
establishes a plan January 1, 1980, and the plans were subsequently 
merged, then the merged plan would be treated as if it were in existence 
on January 1, 1970, with respect to A's employees and as if it were in 
existence on January 1, 1980, with respect to B's employees.
    (iii) Period after termination or withdrawal. The period for which a 
plan is not maintained by an employer includes the period after the plan 
is terminated. For purposes of this section, a plan is terminated at the 
date there is a termination of the plan within the meaning of section 
411(d)(3)(A) and the regulations thereunder. Notwithstanding the 
preceding sentence, if contributions to or under a plan are made after 
termination, the plan is treated as being maintained until such 
contributions cease, whether or not accruals are made after such 
termination. If, after termination of a plan in circumstances under 
which the employer may be liable to the Pension Benefit Guaranty 
Corporation under section 4062 of the Act, employer contributions are 
made to or under the plan to fund benefits accrued at the time of 
termination, such contributions shall, for purposes of this paragraph, 
be deemed to be payments in satisfaction of employer liability to such 
Corporation rather than contributions to or under the plan. In the case 
of a plan maintained by more than one employer, the period for which the 
plan is not maintained by the withdrawing employer includes the period 
after the withdrawal from the plan.
    (iv) Certain employers. For purposes of this subparagraph--
    (A) Predecessor employers. Service with a predecessor employer who 
maintained the plan of the current employer is treated as service with 
such current employer (see section 414(a)(1) and the regulations 
thereunder), and certain service with a predecessor employer who did not 
maintain the plan of the current employer is treated as service with the 
current employer (see section 414(a)(2) and the regulations thereunder).
    (B) Related employers. Service with an employer is treated as 
service for certain related employers for the period during which the 
employers are related. These related employers include members of a 
controlled group of corporations (within the meaning of section 1563(a), 
determined without regard to subsections (a)(4) and (e)(3) (C) thereof) 
and trades or businesses (whether or not incorporated) which are under 
common control (see section 414 (b) and (c) and 29 CFR Part 2530, 
Department of Labor regulations relating to minimum standards for 
employee pension benefits plans).
    (C) Plan maintained by more than one employer. Service with an 
employer who maintains a plan is treated as service for each other 
employer who maintains that plan for the period during which the 
employers are maintaining the plan (see section 413 (b)(4) and (c)(3) 
and 29 CFR Part 2530, Department

[[Page 68]]

of Labor regulations relating to minimum standards for employee pension 
benefit plans).
    (v) Predecessor plan--(A) General rule. In the case of an employee 
who was covered by a predecessor plan, the time the successor of such 
plan is maintained for such employee includes the time the predecessor 
plan was maintained if, as of the later of the time the predecessor plan 
is terminated or the successor plan is established, the employee's years 
of service under the predecessor plan are not equalled or exceeded by 
the aggregate number of consecutive 1-year breaks in service occuring 
after such years of service. Years of service and breaks in service, 
without regard to whether the employee has nonforfeitable rights under 
the predecessor plan, are determined under section 411(a) (5) and (6) 
except that years between the termination date of the predecessor plan 
and the date of establishment of the successor plan do not count as 
years of service.
    (B) Definition of predecessor plan. For purposes of this section, 
if--
    (1) An employer establishes a retirement plan (within the meaning of 
section 7476(d)) qualified under subchapter D of chapter 1 of the Code 
within the 5-year period immediately preceding or following the date 
another such plan terminates, and
    (2) The other plan is terminated during a plan year to which this 
section applies.

The terminated plan is a predecessor plan with respect to such other 
plan.
    (C) Example. The rules provided by this subparagraph are illustrated 
by the following example:

    Example. (1) Employer X's qualified plan A terminated on January 1, 
1977, Employer X established qualified plan B on January 1, 1981. Under 
paragraph (b)(3)(v)(B) of this section, plan A is a predecessor plan 
with respect to plan B because plan B is established within the 5-year 
period immediately following the date plan A terminated.
    (2) Employee C was not covered by the A plan. Under the general rule 
in subdivision (v)(A) of this subparagraph, plan B is not maintained 
until January 1, 1981, with respect to Employee C.
    (3) Employee D was covered by the A plan. On December 31, 1976, D 
had 4 years of service. D had 4 consecutive 1-year breaks in service 
because, during the years between the termination of plan A and the 
establishment of plan B, he did not have more than 500 hours of service 
in any applicable computation period. Because D's consecutive 1-year 
breaks (4) equal his years of service prior to his breaks (4), plan B is 
not maintained until January 1, 1981, with respect to employee D.
    (4) Employee E was covered by the A plan. On December 31, 1975, E 
had 6 years of service. E had a 1-year break in service in 1976. E also 
had 4 consecutive 1-year breaks in service for the period between plan 
A's termination and plan B's establishment. Because E's years of service 
(6) are not less than his consecutive 1-year breaks (5), plan B is 
maintained for E as of the establishment date of plan A.

    (4) Break in service. A year of service which is not required to be 
taken into account by reason of a break in service (within the meaning 
of section 411(a)(6) and Sec.  1.411(a)-6)).
    (5) Service before January 1, 1971. A year of service completed by 
an employee prior to January 1, 1971, unless the employee completes at 
least 3 years of service at any time after December 31, 1970. For 
purposes of determining if an employee completes 3 years of service, 
whether or not consecutive, the exceptions of section 411(a)(4) are not 
applicable. For the meaning of the term ``year of service'', see 
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530, 
relating to minimum standards for employee pension benefit plans.
    (6) Service before effective date. A year of service completed 
before the first plan year for which this section applies to the plan, 
if such service would have been disregarded under the plan rules 
relating to breaks in service (whether or not such rules are so 
designated in the plan) as such rules were in effect from time to time 
under the plan. For this purpose, plan rules which result in the loss of 
prior vesting or benefit accruals of an employee, or which deny an 
employee eligibility to participate, by reason of separation or failure 
to complete a required period of service within a specified priod of 
time (e.g., 300 hours in one year) will be considered break in service 
rules See Sec.  1.411(a)-9 for requirements relating to certain 
amendments to the break in service rules of a plan.
    (i) [Reserved]

[[Page 69]]

    (ii) Examples. The rules of this subparagraph are illustrated by the 
following examples:

    Example 1. The A plan in 1971 provides for immediate participation 
and vesting at normal retirement age. Employees accrue a unit benefit 
based on their compensation in each year. The plan provides that if an 
employee is not employed on the last day of the calendar year, he loses 
all accrued benefits. The requirement of employment on the last day of 
the year is a break in service rule because employees can lose benefits 
by reason of their separation. Accordingly, in the case of employees who 
separate and do not return by the close of the year, service which is 
completed prior to separation may be disregarded.
    Example 2. The B plan in 1971 excludes from plan participation 
employees who work less than 1,200 hours per year. Because years of less 
than 1,200 hours are not taken into account under the B plan for 
eligibility to participate, such years are excluded under rules relating 
to breaks in service. Therefore, the years can be disregarded under this 
subparagraph.
    Example 3. The C plan in 1971 provides for immediate participation 
and provides accruals and vesting credit for 1,200 hours or more in a 
given year. The plan provides that if a participant works less than 300 
hours in a given year, he loses all prior vesting and benefit credits. 
The 300 hour rule is a break in service rule because the failure to 
complete 300 hours results in the loss of vesting and prior service 
credit. The 1,200 hour requirement is not a break in service rule 
because even though employees do not increase vesting or accrue benefits 
for service between 300 and 1,200 hours, they cannot lose prior vesting 
or benefits for such service. Accordingly, the C plan can disregard 
completed years only on account of less than 300 hours of service by an 
employee.

    (c) Special continuity rule for certain plans. For special rules for 
computing years of service in the case of a plan maintained by more than 
one employer, see 29 CFR Part 2530 (Department of Labor regulations 
relating to minimum standards for employee pension benefit plans).

(Sec. 411 (88 Stat. 901, 26 U.S.C. 411))

[T.D. 7501, 42 FR 42327, Aug. 23, 1977, as amended by T.D. 7703, 45 FR 
40985, June 17, 1980]



Sec.  1.411(a)-6  Year of service; hours of service; breaks in service.

    (a) Year of service. Under section 411 (a)(5)(A), for purposes of 
the regulations thereunder, the term ``year of service'' is defined in 
regulations prescribed by the Secretary of Labor under section 
203(b)(2)(A) of the Employee Retirement Income Security Act of 1974. For 
special rules applicable to seasonal industries and maritime industries, 
see regulations prescribed by the Secretary of Labor under subparagraphs 
(C) and (D) of section 203(b)(2) of the Employee Retirement Income 
Security Act of 1974.
    (b) Hours of service. Under section 411(a)(5)(B), for purposes of 
the regulations thereunder, the term ``hours of service'' has the 
meaning provided by section 410(a)(3)(C). See regulations prescribed by 
the Secretary of Labor under 29 CFR Part 2530, relating to minimum 
standards for employee pension benefit plans.
    (c) Breaks in service. Under section 411(a)(6), for purposes of 
Sec.  1.411(a)-5(b)(4) and of this paragraph--
    (1) In general--(i) Year of service after 1-year break in service. 
In the case of any employee who has incurred a 1-year break in service, 
years of service completed before such break are not required to be 
taken into account until the employee has completed one year of service 
after his return to service.
    (ii) Defined contribution plan. In the case of a participant in a 
defined contribution plan or in an insured defined benefit plan (which 
plan satisfies the requirements of section 411 (b)(1)(F) and Sec.  
1.411(b)-1) who has incurred a 1-year break in service, years of service 
completed after such break are not required to be taken into account for 
purposes of determining the nonforfeitable percentage of the 
participant's right to employer-derived benefits which accrued before 
such break. This subdivision does not permit years of service completed 
before a 1-year break in service to be disregarded in determining the 
nonforfeitable percentage of a participant's right to employer-derived 
benefits which accrue after such break.
    (iii) Nonvested participants. In the case of an employee who is a 
nonvested participant in employer-derived benefits at the time he incurs 
a 1-year break in service, years of service completed by such 
participant before such break are not required to be taken into

[[Page 70]]

account for purposes of determining the nonforfeitable percentage of his 
right to employer-derived benefits if at such time the number of 
consecutive 1-year breaks in service included in his most recent break 
in service equals or exceeds the aggregate number of his years of 
service, whether or not consecutive, completed before such break. In the 
case of a plan utilizing the elapsed time method described in Sec.  
1.410(a)-7, the condition in the preceding sentence shall be satisfied 
if the period of severance is at least one year and the consecutive 
period of severance equals or exceeds his prior period of service, 
whether or not consecutive, completed before such period of severance. 
In computing the aggregate number of years of service prior to such 
break, years of service which could have been disregarded under this 
subdivision by reason of any prior break in service may be disregarded.
    (2) One-year break in service defined. The term ``1-year break in 
service'' means a calendar year, plan year, or other 12-consecutive 
month period designated by a plan (and not prohibited under regulations 
prescribed by the Secretary of Labor) during which the participant has 
not completed more than 500 hours of service. In the case of a plan 
utilizing the elapsed time method, the term ``1-year break in service'' 
means a 12-consecutive month period beginning on the severance from 
service date or any anniversary thereof and ending on the next 
succeeding anniversary of such date; provided, however, that the 
employee during such 12-consecutive-month period does not complete any 
hours of service within the meaning of 29 CFR Part 2530.200b-2(a) for 
the employer or employers maintaining the plan. See regulations 
prescribed by the Secretary of Labor under 29 CFR Part 2530, relating to 
minimum standards for employee pension benefit plans.
    (d) Examples. The rules provided by this section are illustrated by 
the following examples:

    Example 1. (i) X Corporation maintains a defined contribution plan 
to which section 411 applies. The plan uses the calendar year as the 
vesting computation period. In 1980, Employee A, who was hired at age 
35, separates from the service of X Corporation after completing 4 years 
of service. At the time of his separation, Employee A had a 
nonforfeitable right to 25 percent of his employer-derived accrued 
benefit which was not distributed. In 1985, after incurring 5 
consecutive one-year breaks in service. Employee A is re-employed by X 
Corporation and becomes an active participant in the plan. The plan 
provides that, for 1985 and all subsequent years, Employee A's previous 
years of service will not be taken into account for purposes of 
computing the nonforfeitable percentage of his employer-derived accrued 
benefit, solely because of his break in service.
    (ii) The plan fails to satisfy section 411. Section 411(a)(6)(B) 
would permit the plan to disregard Employee A's prior service for 
purposes of computing his nonforfeitable percentage in 1985 only, but 
such service must be taken into account in subsequent years unless there 
is another break in service. Under section 411(a)(6)(C), the plan is not 
required to take Employee A's post-break service into account for 
purposes of computing his nonforfeitable right to his prebreak employer-
derived accrued benefits. This provision, however, would not permit the 
plan to disregard pre-break service in determining his nonforfeitable 
right to his benefit accrued after the break. The exception provided by 
section 411(a)(6)(D) does not apply in the case of a participant who has 
any nonforfeitable right to his accrued benefit derived from employer 
contributions.
    Example 2. (i) X Corporation maintains a qualified plan to which 
sections 410 and 411 (relating to minimum participation standards and 
minimum vesting standards, respectively) apply. The plan permits 
participation upon completion of a year of service and provides that 
100% of an employee's employer-derived accrued benefit vests after 10 
years of service. The plan uses the calendar year as the vesting 
computation period. The plan provides that an employee who completes at 
least 1,000 hours of service in a 12-month period is credited with a 
year of service for participation and vesting purposes. The plan also 
provides that an employee who does not complete more than 500 hours of 
service in that 12-month period incurs a one-year break in service. The 
plan includes the rule described in section 411 (a)(6)(D) for 
participation and vesting purposes. Under this rule, an employee's years 
of service prior to a break in service may be disregarded under certain 
circumstances if he has no vested right to any employer-derived benefit 
under the plan. The plan does not contain the rule described in section 
411(a)(6)(B) (relating to the requirement of one year of service after a 
one-year break in service).
    (ii) Employee A commences employment with the X Corporation on 
January 1, 1977. Employee A's employment history for 1977 through 1989 
is as follows:

[[Page 71]]



------------------------------------------------------------------------
                                                               Hours of
                  Year ending December 31                      service
                                                              completed
------------------------------------------------------------------------
1977.......................................................        1,000
1978.......................................................          800
1979.......................................................        1,000
1980.......................................................          400
1981.......................................................        1,000
1982.......................................................            0
1983.......................................................          400
1984.......................................................        1,000
1985.......................................................            0
1986.......................................................            0
1987.......................................................          500
1988.......................................................          200
1989.......................................................        1,000
------------------------------------------------------------------------


Employee A's status as a participant during this period is determined as 
follows:
    1978: Employee A was a plan participant on January 1, 1978, because 
he completed a year of service (1,000 hours) in 1977. He did not 
complete a year of service in 1978 because he completed fewer than 1,000 
hours in that year. Because he completed more than 500 hours of service 
in 1978, however, Employee A did not incur a one-year break in service 
that year.
    1979: Employee A completes a year of service in 1979. Because he did 
not incur a one-year break in service in 1978, the plan may not 
disregard his 1977 service for purposes of determining his years of 
service as of January 1, 1979.
    1980: Employee A incurs a one-year break in service in 1980.
    1981: Because Employee A had completed 2 years of service prior to 
1981 and had incurred one 1-year break in service prior to 1981, under 
section 411(a)(6)(D), the plan may not disregard his pre-1980 service in 
1981. Employee A completes a year of service in 1981.
    1982: Employee A incurs a one-year break in service in 1982.
    1983: Employee A incurs a one-year break in service in 1983. As of 
the end of 1983, he has completed 3 years of service and has incurred 2 
consecutive one-year breaks in service.
    1984: Employee A completes a year of service in 1984. Under section 
411(a)(6)(D), his pre-1982 service may not be disregarded in 1984 
because, as of the beginning of 1984, his pre-1984 years of service (3) 
exceed his consecutive one-year breaks in service (2).
    1984-1988: Employee A incurs 4 consecutive one-year breaks in 
service during the years 1985 through 1988.
    1989: Employee A's pre-1989 service is disregarded in 1989 and all 
subsequent plan years because his years of service as of January 1, 
1989, equal the number of consecutive one-year breaks he has incurred as 
of that date. Therefore, as of the beginning of 1989, Employee A is not 
a plan participant. Employee A completes a year of service in 1989. 
(Although section 411(a)(6)(D) does not prohibit the plan provision 
under which Employee A's pre-1989 service is disregarded, that section 
does not require such a provision in a qualified plan.)

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42329, Aug. 23, 1977, as amended by T.D. 7703, 45 FR 
40985, June 17, 1980]



Sec.  1.411(a)-7  Definitions and special rules.

    (a) Accrued benefit. For purposes of section 411 and the regulations 
thereunder, the term ``accrued benefit'' means--
    (1) Defined benefit plan. In the case of a defined benefit plan--
    (i) If the plan provides an accrued benefit in the form of an annual 
benefit commencing at normal retirement age, such accrued benefit, or
    (ii) If the plan does not provide an accured benefit in the form 
described in subdivision (i) of this subparagraph, an annual benefit 
commencing at normal retirement age which is the actuarial equivalent 
(determined under section 411(c)(3) and Sec.  1.411(c)-(5) of the 
accrued benefit determined under the plan. In general, the term 
``accrued benefits'' refers only to pension or retirement benefits. 
Consequently, accrued benefits do not include ancillary benefits not 
directly related to retirement benefits such as payment of medical 
expenses (or insurance premiums for such expenses), disability benefits 
not in excess of the qualified disability benefit (see section 411(a)(9) 
and paragraph (c)(3) of this section), life insurance benefits payable 
as a lump sum, incidental death benefits, current life insurance 
protection, or medical benefits described in section 401(h). For 
purposes of this paragraph a subsidized early retirement benefit which 
is provided by a plan is not taken into account, except to the extent of 
determining the normal retirement benefit under the plan (see section 
411(a)(9) and paragraph (c) of this section). The accrued benefit 
includes any optional settlement at normal retirement age under 
actuarial assumptions no less favorable than those which would be 
applied if the employee were terminating his employment at normal 
retirement age. The accrued benefit does not include any subsidized 
value in a joint and survivor annuity to the extent that

[[Page 72]]

the annual benefit of the joint and survivor annuity does not exceed the 
annual benefit of a single life annuity.
    (2) Defined contribution plan. In the case of a defined contribution 
plan, the balance of the employee's account held under the plan.
    (b) Normal retirement age--(1) General rule. For the purposes of 
section 411 and the regulations thereunder, the term ``normal retirement 
age'' means the earlier of--
    (i) The time specified by a plan at which a plan participant attains 
normal retirement age, or
    (ii) The later of--
    (A) The time the plan participant attains age 65, or
    (B) The 10th anniversary of the date the plan participant commences 
participation in the plan.

If a plan, or the employer sponsoring the plan, imposes a requirement 
that an employee retire upon reaching a certain age, the normal 
retirement age may not exceed that mandatory retirement age. The 
preceding sentence will apply if the employer consistently enforces a 
mandatory retirement age rule, whether or not set forth in the plan or 
any related document. For purposes of subdivision (i) of this 
subparagraph, if an age is not specified by a plan as the normal 
retirement age then the normal retirement age under the plan is the 
earliest age beyond which the participant's benefits under the plan are 
not greater solely on account of his age or service. For purposes of 
paragraph (b)(1)(ii)(B) of this section, participation commences on the 
first day of the first year in which the participant commenced his 
participation in the plan, except that years which may be disregarded 
under section 410(a)(5)(D) may be disregarded in determining when 
participation commenced.
    (2) Examples. The provisions of this paragraph are illustrated by 
the following examples:

    Example 1. Plan A defines normal retirement age as age 65. Under the 
plan, benefits payable to participants who retire at or after age 60 are 
not reduced on account of early retirement. For purposes of section 411 
and the vesting regulations, normal retirement age under Plan A is age 
65 (determined under subparagraph (1)(i) of this paragraph). This is 
true even if in operation all participants retire at age 60.
    Example 2. Plan B does not specify any age as the normal retirement 
age. Under the plan, participants who have attained age 55 are entitled 
to benefits commencing upon retirement but the benefits of participants 
who retire before attaining age 70 are subject to reduction on account 
of early retirement. For purposes of section 411 and the vesting 
regulations the normal retirement age under Plan B is the later of (i) 
age 65, or (ii) the 10th anniversary of the date a plan participant 
commences participation in the plan (assuming such date is prior to age 
70).
    Example 3. The facts are the same as in example (2). Employee X 
first became a participant in Plan B on January 1, 1980 at age 53. His 
participation continued until December 31, 1980, when he separated from 
the service with no vested benefits. After incurring 5 consecutive 1-
year breaks in service, Employee X again becomes an employee and a plan 
participant on January 1, 1986, at age 59. For purposes of section 411, 
Employee X's normal retirement age under Plan B is age 69, the 10th 
anniversary of the date on which his year of plan participation 
commenced. His participation in 1980 may be disregarded under the last 
sentence of paragraph (b)(1) of this section.

    (c) Normal retirement benefit--(1) In general. For purposes of 
section 411 and the regulations thereunder, the term ``normal retirement 
benefit'' means the periodic benefit under the plan commencing upon 
early retirement (if any) or at normal retirement age, whichever benefit 
is greater.
    (2) Periodic benefit. For purposes of subparagraph (1) of this 
paragraph--
    (i) In the case of a plan under which a benefit is payable as an 
annuity in the same form upon early retirement and at normal retirement 
age, the greater benefit is determined by comparing the amount of such 
annuity payments.
    (ii) In the case of a plan under which an annuity benefit payable 
upon early retirement is not in the same form as an annuity benefit 
payable at normal retirement age, the greater benefit is determined by 
converting the annuity benefit payable upon early retirement age into 
the same form of annuity benefit as is payable at normal retirement age 
and by comparing the amount of the converted early retirement benefit 
payment with the amount of the normal retirement benefit payment.

[[Page 73]]

    (iii) In the case of a plan which is integrated with the Social 
Security Act or any other Federal or State law, the periodic benefit 
payable upon and after early retirement age is adjusted for any 
increases in such benefits occurring on or after early retirement age 
which are taken into account under the plan. See however, section 
401(a)(15) and the regulations thereunder.
    (3) Benefits included. For purposes of this paragraph, the normal 
retirement benefit under a plan shall be determined without regard to 
ancillary benefits not directly related to retirement benefits such as 
medical benefits or disability benefits not in excess of the qualified 
disability benefit; see section 411(a)(7) and paragraph (a)(1) of this 
section. For this purpose, a qualified disability benefit is a 
disability benefit which is not in excess of the amount of the benefit 
which would be payable to the participant if he separated from service 
at normal retirement age.
    (4) Early retirement benefit; social security supplement. (i) For 
purposes of this paragraph, the early retirement benefit under a plan 
shall be determined without regard to any social security supplement.
    (ii) For purposes of this subparagraph, a social security supplement 
is a benefit for plan participants which--
    (A) Commences before the age and terminates before the age when 
participants are entitled to old-age insurance benefits, unreduced on 
account of age, under title II of the Social Security Act, as amended 
(see section 202 (a) and (g) of such Act), and
    (B) Does not exceed such old-age insurance benefit.
    (5) Special limitation. If a defined benefit plan bases its normal 
retirement benefits on employee compensation, the compensation must 
reflect the compensation which would have been paid for a full year of 
participation within the meaning of section 411(b)(3). If an employee 
works less than a full year of participation, the compensation used to 
determine benefits under the plan for such year of participation must be 
multiplied by the ratio of the number of hours for a complete year of 
participation to the number of hours worked in such year. A plan whose 
benefit formula is computed on a computation base which cannot decrease 
is not required to adjust employee compensation in the manner described 
in the previous sentence. Thus, for example, if a plan provided a 
benefit based on an employee's compensation for his highest five 
consecutive years or a separate benefit for each year of participation 
based on the employee's compensation for such year the plan would not 
have to so adjust compensation. However, if a plan provided a benefit 
based on an employee's compensation for the employee's last five years 
or the five highest consecutive years out of the last 10 years, the 
compensation, would have to be so adjusted. For special rules for 
applying the limitations on proration of a year of participation for 
benefit accrual, see regulations prescribed by the Secretary of Labor 
under 29 CFR Part 2530, relating to minimum standards for employee 
pension benefit plans.
    (6) Examples. The provisions of this paragraph are illustrated by 
the following examples:

    Example 1. Plan A provides for a benefit equal to 1% of high 5 years 
compensation for each year of service and a normal retirement age of 65. 
The plan also provides for a full unreduced accrued benefit without any 
actuarial reduction for any employee at age 55 with 30 years of service. 
Even though the actuarial value of the early retirement benefit could 
exceed the value of the benefit at the normal retirement age, the normal 
retirement benefit would not include the greater value of the early 
retirement benefit because actuarial subsidies are ignored.
    Example 2. Plan B provides the following benefits: (1) at normal 
retirement age 65, $300/mo. for life and (2) at early retirement age 60, 
$400/mo. for life. The normal retirement benefit is $400/mo., the 
greater of the benefit payable at normal retirement age ($300) or early 
retirement ($400).
    Example 3. Assume the same facts as example (2) except that the 
early retirement benefit of $400 is reduced to $300 upon attainment of 
age 65. If each employee's social security benefit at age 65 is not less 
than $100, the $100 would be considered to be a social security 
supplement and would therefore be ignored. Consequently, the normal 
retirement benefit would be $300.
    Example 4. Plan C provides a benefit at normal retirement age equal 
to 1% per year of service, multiplied by the participant's compensation 
averaged over the 5 years immediately prior to retirement. An early 
retirement benefit is provided upon attainment of age 60 equal to the 
benefit accrued to date of early retirement reduced by 4 percent for

[[Page 74]]

each year by which the early retirement date precedes the normal 
retirement age of 65. Employee A was hired at age 30, participated 
immediately, and retired at age 65. Employee A's annual compensation was 
$50,000 between ages 55-60 and was reduced to $33,000 after age 60. The 
following table indicates the amount of annual benefit that would have 
been provided by the plan formula if the employee retired at or after 
age 60:

------------------------------------------------------------------------
                                  Final    Percent
             Age                 average   accrued  Reduction    Annual
                               computated  benefit              benefit
------------------------------------------------------------------------
                                   (1)--     (2)--     (3)--       (4)--
------------------------------------------------------------------------
60...........................    $50,000        30      0.80    *$12,000
61...........................     46,600        31       .84      12,135
62...........................     43,200        32       .88      12,165
63...........................     39,800        33       .92      12,083
64...........................     36,400        34       .96      11,881
65...........................     33,000        35      1.00      11,550
Note. Col. (1) times col. (2) times col. (3) equals col. (4).


The normal retirement benefit is the greater of the benefit payable at 
normal retirement age or the early retirment benefit. Employee A's 
normal retirement benefit is $12,165, the greatest annual benefit 
Employee A would be entitled to.

    (d) Rules relating to certain distributions and cash-outs of accrued 
benefits--(1) In general. This paragraph sets forth vesting rules 
applicable to certain distributions from qualified plans and their 
related trusts (other than class year plans). Subparagraphs (2) and (3) 
set forth the exceptions to nonforfeitability on account of withdrawal 
of mandatory contributions provided by section 411(a)(3)(D). When a plan 
utilizes these exceptions with respect to a given participant's accrued 
benefit, such accrued benefit is not subject to the cash-out rules or 
vesting rules of subparagraphs (4) or (5), respectively. Section 411 
prescribes certain requirements with respect to accrued benefits under a 
qualified plan. These requirements would generally not be satisfied if 
the plan disregarded service in computing accrued benefits even though 
amounts were distributed on account of such service. Subparagraph (4) of 
this paragraph sets forth rules under section 411(a)(7)(B) which allow a 
plan to make distributions and compute accrued benefits without regard 
to the accrued benefit attributable to the distribution. When a defined 
contribution plan utilizes this exception with respect to an accrued 
benefit, the plan is not required to satisfy the rules of subparagraph 
(5) of this paragraph. Subparagraph (5) of this paragraph sets forth a 
vesting requirement applicable to certain distributions from defined 
contribution plans. Subparagraph (6) sets forth other rules which 
pertain to the distribution rules of this paragraph.
    (2) Withdrawal of mandatory contribution--(i) General rule. In the 
case of a participant's right to his employer-derived accrued benefit, a 
right is not treated as forfeitable merely because all or a portion of 
such benefit may be forfeited on account of the withdrawal by the 
participant of any amount attributable to his accrued benefit derived 
from his mandatory contributions (within the meaning of section 
411(c)(2)(C) and Sec.  1.411(c)-1) before he has become a 50 percent 
vested participant (within the meaning of Sec.  1.401(a)-19(b)(2)). For 
purposes of determining the vested percentage, the plan may disregard 
service after the withdrawal. For example, assume that a plan utilizes 
1000 hours for computing years of service and that for the computation 
period employee A had 1000 hours of service. If A was 40 percent vested 
at the beginning of the period but only had 800 hours at the time of the 
withdrawal, the plan could treat A as only 40 percent vested because 
service after the withdrawal can be disregarded. On the other hand, if A 
had 1000 hours at the time of the withdrawal, he must receive a year of 
service for the computation period, even though service is not taken 
into account until the end of such period.
    (ii) Plan repayment provision. (A) Subdivision (i) of this 
subparagraph shall not apply unless, at the time the amount described in 
such subdivision is withdrawn by the participant, the plan provides the 
employee with a right to restoration of his employer-derived accrued 
benefit to the extent forfeited in accordance with such subdivision upon 
repayment to the plan of the full amount of the withdrawal.
    (B) In the case of a defined benefit plan (as defined in section 
414(j)) the restoration of the employee's employer-derived accrued 
benefit may be conditioned upon repayment of interest on the full amount 
of the distribution.

[[Page 75]]

Such interest shall be computed on the amount of the distribution from 
the date of such distribution to the date of repayment, compounded 
annually from the date of distribution, at the rate determined under 
section 411(c)(2)(C) in effect on the date of repayment. A plan may 
provide for repayment of interest which is less than the amount 
determined under the preceding sentence.
    (C) In the case of both defined benefit plans and defined 
contribution plans, the plan repayment provision described in this 
subparagraph may provide that the employee must repay the full amount of 
the distribution in order to have the forfeited benefit restored. The 
plan provision may not require that such repayment be made sooner than 
the time described in paragraph (d)(2)(ii)(D) of this section.
    (D)(1) If a distribution is on account of separation from service, 
the time for repayment may not end before the earlier of--
    (i) 5 years after the first day the employee is subsequently 
employed, or
    (ii) The close of the first period of consecutive 1-year breaks in 
service commencing after the distribution.

If the distribution occurs for any other reason, the time for repayment 
may not end earlier than 5 years after the date of distribution. 
Nevertheless, a plan provision may provide for a longer period in which 
the employee may repay. For example, a plan could allow repayments to be 
made at any time before normal retirement age.
    (2) In the case of a plan utilizing the elapsed time method, 
described in Sec.  1.410(a)-7, the minimum time for repayment shall be 
determined as in paragraph (d)(2)(ii)(D)(1) of this section except as 
provided in this subdivision. The 5 consecutive 1-year break periods 
shall be determined by substituting the term ``1-year period of 
severance'' for the term ``1-year break in service''. Also, the 
repayment period both commences and closes in a manner determined by the 
Commissioner that is consistent with the rules in Sec.  1.410(a)-7 and 
the substitution in section 411(a)(6) (C) and (D) of a 5-year break-in-
service rule for the former 1-year break-in-service rule.
    (E) A defined benefit plan using the break-in-service rule described 
in section 410(a)(5)(D) or a defined contribution plan using the break-
in-service rule described in section 411(a)(6)(C) for determining 
employees' accrued benefits is not required to provide for repayment by 
an employee whose accrued benefit is disregarded by reason of a plan 
provision using these rules.
    (iii) Computation of benefit. In the case of a defined contribution 
plan, the employer-derived accrued benefit required to be restored by 
this subparagraph shall not be less than the amount in the account 
balance of the employee which was forfeited, unadjusted by any 
subsequent gains or losses.
    (iv) Delayed forfeiture. A defined contribution plan may, in lieu of 
the forfeiture and restoration described in this subparagraph, provide 
that the forfeiture does not occur until the expiration of the time for 
repayment described in subdivision (ii) of this subparagraph provided 
that the conditions of this subparagraph are satisfied.
    (3) Withdrawal of mandatory contributions; accruals before September 
2, 1974--(i) General rule. In the case of a participant's right to the 
portion of the employer-derived benefit which accrued prior to September 
2, 1974, a right is not treated as forfeitable merely because all or 
part of such portion may be forfeited on account of the withdrawal by 
the participant of an amount attributable to his benefit derived from 
mandatory contributions (within the meaning of section 411(c)(2)(C) and 
Sec.  1.411(c)-1(c)(4)) made by the participant before September 2, 
1974, if the amount so subject to forfeiture is no more than 
proportional to such amounts withdrawn. This subparagraph shall not 
apply to any plan to which any mandatory contribution (within the 
meaning of section 411(c)(2)(C) and Sec.  1.411(c)-1(c)(4)) is made 
after September 2, 1974.
    (ii) Defined contribution plan. In the case of a defined 
contribution plan, the portion of a participant's employer-derived 
benefit which accrued prior to September 2, 1974, shall be determined on 
the basis of a separate accounting between benefits accruing before and 
after such date. Gains, losses, withdrawals, forfeitures, and other 
credits

[[Page 76]]

or charges must be separately allocated to such benefits. Any allocation 
made on a reasonable and consistent basis prior to September 1, 1977, 
shall satisfy the requirements of this subdivision.
    (iii) Defined benefit plan. In the case of a defined benefit plan, 
the portion of a participant's employer-derived benefit which accrued 
prior to September 2, 1974, shall be determined in a manner consistent 
with the determination of an accrued benefit under section 411(b)(1)(D) 
(see Sec.  1.411(b)-1(c)). Any method of determining such accrued 
benefit which the Commissioner finds to be reasonable shall satisfy the 
requirements of this subdivision.
    (4) Certain cash-outs of accrued benefits--(i) Involuntary cash-
outs. For purposes of determining an employee's right to an accrued 
benefit derived from employer contributions under a plan, the plan may 
disregard service performed by the employee with respect to which--
    (A) The employee receives a distribution of the present value of his 
entire nonforfeitable benefit at the time of the distribution;
    (B) The requirements of section 411(a)(11) are satisfied at the time 
of the distribution;
    (C) The distribution is made due to the termination of the 
employee's participation in the plan; and
    (D) The plan has a repayment provision which satisfies the 
requirements of paragraph (d)(4)(iv) of this section in effect at the 
time of the distribution.
    (ii) Voluntary cash-outs. For purposes of determining an employee's 
accrued benefit derived from employer contributions under a plan, the 
plan may disregard service performed by the employee with respect to 
which--
    (A) The employee receives a distribution of the present value of his 
nonforfeitable benefit attributable to such service at the time of such 
distribution,
    (B) The employee voluntarily elects to receive such distribution,
    (C) The distribution is made on termination of the employee's 
participation in the plan, and
    (D) The plan has a repayment provision in effect at the time of the 
distribution which satisfies the requirements of subdivision (iv) of 
this subparagraph.

A distribution shall be deemed to be made on termination of 
participation in the plan if it is made not later than the close of the 
second plan year following the plan year in which such termination 
occurs. For purposes of determining the nonforfeitable benefit, the plan 
may disregard service after the distribution as illustrated in 
subparagraph (2)(i) of this subparagraph.
    (iii) Disregard of service. Service of an employee permitted to be 
disregarded under subdivision (i) or (ii) of the subparagraph is not 
required to be taken into account in computing the employee's accrued 
benefit under the plan. In the case of a voluntary distribution 
described in subdivision (ii) of this subparagraph which is less than 
the present value of the employee's total nonforfeitable benefit 
immediately prior to the distribution, the accrued benefit not required 
to be taken into account is such total accrued benefit multiplied by a 
fraction, the numerator of which is the amount of the distribution and 
the denominator of which is the present value of his total 
nonforfeitable benefit immediately prior to such distribution. For 
example, A who is 50 percent vested in an account balance of $1,000 
receives a voluntary distribution of $250. The accrued benefit which can 
be disregarded equals $1,000 times $250/$500, or $500. However, such 
service may not by reason of this paragraph be disregarded for purposes 
of determining an employee's years of service under sections 410(a)(3) 
and 411(a)(4).
    (iv) Plan repayment provision. (A) A plan repayment provision 
satisfies the requirements of this subdivision if, under the provision, 
the accrued benefit of an employee that is disregarded by a plan under 
this subparagraph is restored upon repayment to the plan by the employee 
of the full amount of the distribution. An accrued benefit is not 
restored unless all of the optional forms of benefit and subsidies 
relating to such benefit are also restored. A plan is not required to 
provide for repayment of an accrued benefit unless the employee--
    (1) Received a distribution that is in a plan year to which section 
411 applies

[[Page 77]]

(see Sec.  1.411(a)-2), which distribution is less than the amount of 
his accrued benefit determined under the same optional form of benefit 
as the distribution was made, and
    (2) Resumes employment covered under the plan.
    (B) Example. Plan A provides a single sum distribution equal to the 
present value of the normal form of the accrued benefit payable at 
normal retirement age which is a single life annuity. Plan A also 
provides a subsidized joint and survivor annuity and a subsidized early 
retirement annuity benefit. A participant who is fully vested and 
receives a single sum distribution equal to the present value of the 
single life annuity normal retirement benefit is not required to be 
provided the right under the plan to repay the distribution upon 
subsequent reemployment even though the participant received a 
distribution that did not reflect the value of the subsidy in the joint 
and survivor annuity or the value of the early retirement annuity 
subsidy. This is true whether or not the participant had satisfied at 
the time of the distribution all of the conditions necessary to receive 
the subsidies. However, if a participant does not receive his total 
accrued benefit in the optional form of benefit under which his benefit 
was distributed, the plan must provide for repayment. If the employee 
repays the distribution in accordance with section 411(a)(7), the plan 
must restore the employee's accrued benefit which would include the 
right to receive the subsidized joint and survivor annuity and the 
subsidized early retirement annuity benefit.
    (C) A plan may impose the same conditions on repayments for the 
restoration of employer-derived accrued benefits that are allowed as 
conditions for restoration of employer-derived accrued benefits upon 
repayment of mandatory contributions under paragraphs (d)(2)(ii) (B), 
(C), (D) and (E) of this section.
    (v) In the case of a defined contribution plan, the employer-derived 
accrued benefit required to be restored by this subparagraph shall not 
be less than the amount in the account balance of the employee, both the 
amount distributed and the amount forfeited, unadjusted by any 
subsequent gains or losses. Thus, for example, if an employee received a 
distribution of $250 when he was 25 percent vested in an account balance 
of $1,000, upon repayment of $250 the account balance may not be less 
than $1,000 even if, because of plan losses, the account balance, if not 
distributed, would have been reduced to $500.
    (vi) For purposes of paragraph (d)(4)(i) of this section, a 
distribution shall be deemed to be made due to the termination of an 
employee's participation in the plan if it is made no later than the 
close of the second plan year following the plan year in which such 
termination occurs, or if such distribution would have been made under 
the plan by the close of such second plan year but for the fact that the 
present value of the nonforfeitable accrued benefit then exceeded the 
cash-out limit in effect under Sec.  1.411(a)-11(c)(3)(ii). For purposes 
of determining the entire nonforfeitable benefit, the plan may disregard 
service after the distribution, as illustrated in paragraph (d)(2)(i) of 
this section.
    (vii) Effective date. Paragraphs (d)(4)(i) and (vi) of this section 
apply to distributions made on or after March 22, 1999. However, an 
employer is permitted to apply paragraphs (d)(4)(i) and (vi) of this 
section to plan years beginning on or after August 6, 1997. Otherwise, 
for distributions prior to March 22, 1999, Sec. Sec.  1.411(a)-7 and 
1.411(a)-7T, in effect prior to October 17, 2000 (as contained in 26 CFR 
part 1, revised as of April 1, 2000) apply.
    (5) Vesting requirement for defined contribution plans--(i) 
Application. The requirements of this subparagraph apply to a defined 
contribution plan which makes distributions to employees from their 
accounts attributable to employer contributions at a time when--
    (A) Employees are less than 100 percent vested in such accounts, and
    (B) Under the plan, employees can increase their percentage of 
vesting in such accounts after the distributions.
    (ii) Requirements. In order for a plan, to which this subparagraph 
applies, to satisfy the vesting requirements of section 411, account 
balances under the plan (with respect to which percentage

[[Page 78]]

vesting can increase) must be computed in a manner which satisfies 
either subdivision (iii) (A) or (B) of this subparagraph.
    (iii) Permissible methods. A plan many provide for either of the 
following methods, but not both, for computing account balances with 
respect to which percentage vesting can increase and from which 
distributions are made:
    (A)(1) A separate account is established for the employee's interest 
in the plan as of the time of the distribution, and
    (2) At any relevant time the employee's vested portion of the 
separate account is not less than an amount (``X'') determined by the 
formula: X = P(AB + (R x D))-(R x D). For purposes of applying the 
formula: P is the vested percentage at the relevant time; AB is the 
account balance at the relevant time; D is the amount of the 
distribution; R is the ratio of the account balance at the relevant time 
to the account balance after distribution; and the relevant time is the 
time at which, under the plan, the vested percentage in the account 
cannot increase.

A plan is not required to provide for separate accounts provided that 
account balances are maintained under a method that has the same effect 
as under this subdivision.
    (B) At any relevant time the employee's vested portion is not less 
than an amount (``X'') determined by the formula: X = P(AB + D)-D. For 
purposes of applying the formula, the terms have the same meaning as 
under subdivision (iii)(A)(2) of this subparagraph.
    (C) An application of the methods described in subdivisions (iii) 
(A) and (B) of this subparagraph is illustrated by the following 
examples:

    Example 1. The X defined contribution plan uses the method described 
in subdivision (iii)(A) of this subparagraph for computing account 
balances and the break in service rule described in section 411(a)(6)(C) 
(service after a 1-year break does not increase the vesting percentage 
in account balances accrued prior to the break). The plan distributes 
$250 to A when A's account balance prior to the distribution equals 
$1,000 and he is 25 percent vested. At the time of the distribution, A 
has not incurred a 1-year break so that his vesting percentage can 
increase. Six years later, when A is 60 percent vested, he incurs a 1-
year break so that his vesting percentage cannot increase. At this time 
his separate account balance equals $1,500. R = $1,500/$750 or 2. A's 
separate account must equal 60 percent ($1,500 + (2 x $250))-(2 x $250) 
or 60 percent ($1,500 + $500)-$500, or $1,200-$500 equals $700.
    Example 2. The Y defined contribution plan uses the method descirbed 
in subdivision (iii)(B) of this subparagraph for computing account 
balances and the break in service rule described in section 
411(a)(6)(C). The plan distributes $250 to B when B's account balance 
prior to the distribution equals $1,000 and he is 25 percent vested. At 
the time of the distribution, B has not incurred a 1-year break so that 
his vesting percentage can increase. Six years later, when A is 60 
percent vested, he incurs a 1-year break so that his vesting percentage 
cannot increase. At this time his account balance equals $1,500. B's 
separate account must equal 60 percent ($1,500 + $250)-$250, 60% of 
$1,750-$250 equals $800.

    (6) Other rules--(i) Distributions on separation or other event. 
None of the rules of this paragraph preclude distributions to employees 
upon separation from service or any other event recognized by the plan 
for commencing distributions. Such a distribution must, of course, 
satisfy the applicable qualification requirements pertaining to such 
distributions. For example, a profitsharing plan could pay the vested 
portion of an account balance to an employee when he separated from 
service, but in order to satisfy section 411 the plan might not be able 
to forfeit the nonvested account balance until the employee has a 1-year 
break in service. Similarly, the fact that a plan cannot disregard an 
accrued benefit attributable to service for which an employee has 
received a distribution because the plan does not satisfy the cash-out 
requirements of subparagraph (4) of this paragraph does not mean that 
the employee's accrued benefit (computed by taking into account such 
service) cannot be offset by the accrued benefit attributable to the 
distribution.
    (ii) Joint and survivor requirements. See Sec.  1.401(a)-11(a)(2) 
(relating to joint and survivor annuities) for special rules applicable 
to certain distributions described in this paragraph.

[[Page 79]]

    (iii) Plan repayments. (A) Under subparagraphs (2) and (4) of this 
paragraph, a plan may be required to restore accrued benefits in the 
event of repayment by an employee.
    (B) For purposes of applying the limitations of section 415 (c) and 
(e), in the case of a defined contribution plan, the repayment by the 
employee and the restoration by the employer shall not be treated as 
annual additions.
    (C) In the case of a defined contribution plan, the permissible 
sources for restoration of the accrued benefit are: income or gain to 
the plan, forfeitures, or employer contributions. Notwithstanding the 
provisions of Sec.  1.401-1(b)(1)(ii), contributions may be made for 
such an accrued benefit by a profit-sharing plan even though there are 
no profits. In order for such a plan to be qualified, account balances 
(accrued benefits) generally must correspond to assets in the plan. 
Accordingly, there cannot be an unfunded account balance. However, an 
account balance will not be deemed to be unfunded in the case of a 
restoration if assets for the restored benefit are provided by the end 
of the plan year following the plan year in which the repayment occurs.

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42329, Aug. 23, 1977, as amended by T.D. 8038, 50 FR 
29374, July 19, 1985; T.D. 8219, 53 FR 31852, Aug. 22, 1988; 53 FR 
48534, Dec. 1, 1988; T.D. 8794, 63 FR 70337, Dec. 21, 1998; T.D. 8891, 
65 FR 44681, July 19, 2000]



Sec.  1.411(a)-8  Changes in vesting schedule.

    (a) Requirement of prior schedule. Under section 411(a)(10)(A), for 
plan years for which section 411 applies, a plan will be treated as not 
meeting the minimum vesting standards of section 411(a)(2) if the plan 
does not satisfy the requirements of this paragraph. If the vesting 
schedule of a plan is amended, then as of the date such amendment is 
adopted, the plan satisfies the requirements of this paragraph if, under 
the plan as amended, in the case of an employee who is a participant 
on--
    (1) The date the amendment is adopted, or
    (2) The date the amendment is effective, if later.

The nonforfeitable percentage (determined as of such date) of such 
employee's right to his employer-derived accrued benefit is not less 
than his percentage computed under the plan without regard to such 
amendment.
    (b) Election of former schedule--(1) In general. Under section 411 
(a)(10)(B), for plan years for which section 411 applies, if the vesting 
schedule of a plan is amended, the plan will not be treated as meeting 
the minimum vesting standards of section 411 (a)(2) unless the plan as 
amended, provides that each participant whose nonforfeitable percentage 
of his accrued benefit derived from employer contributions is determined 
under such schedule, and who has completed at least 5 years of service 
with the employer, may elect, during the election period, to have the 
nonforfeitable percentage of his accrued benefit derived from employer 
contributions determined without regard to such amendment. 
Notwithstanding the preceding sentence, no election need be provided for 
any participant whose nonforfeitable percentage under the plan, as 
amended, at any time cannot be less than such percentage determined 
without regard to such amendment.
    (2) Election period. For purposes of subparagraph (1) of this 
paragraph, the election period under the plan must begin no later than 
the date the plan amendment is adopted and end no earlier than the 
latest of the following dates:
    (i) The date which is 60 days after the day the plan amendment is 
adopted,
    (ii) The date which is 60 days after the day the plan amendment 
becomes effective, or
    (iii) The date which is 60 days after the day the participant is 
issued written notice of the plan amendment by the employer or plan 
administrator.
    (3) Service requirement. For purposes of subparagraph (1) of this 
paragraph, a participant shall be considered to have completed 5 years 
of service if such participant has completed 5 years of service, whether 
or not consecutive, without regard to the exceptions of section 
411(a)(4) prior to the expiration of the election period described in 
subparagraph (2) of this paragraph. For

[[Page 80]]

the meaning of the term ``year of service'', see regulations prescribed 
by the Secretary of Labor under 29 CFR Part 2530, relating to minimum 
standards for employee pension benefit plans.
    (4) Election only by participant. The election described in 
subparagraph (1) of this paragraph is available only to an individual 
who is a participant in the plan at the time such election is made.
    (5) Election may be irrevocable. A plan, as amended, shall not fail 
to meet the minimum vesting standards of section 411(a)(2) by reason of 
section 411(a)(10)(B) merely because such plan provides that the 
election described in subparagraph (1) of this paragraph is irrevocable.
    (6) Relationship with section 411(a)(2). The election described in 
subparagraph (1) of this paragraph is available for a vesting schedule 
which does not satisfy the requirements of section 411(a)(2) only if 
under such schedule all participants have a 50 percent nonforfeitable 
right after 10 years of service, and a 100 percent nonforfeitable right 
after 15 years of service, in their employer-derived accrued benefit. If 
the vesting schedule provides less vesting than the percentages required 
by the preceding sentence, the plan can be amended to provide for such 
vesting.
    (c) Special rules--(1) Amendment of vesting schedule. For purposes 
of this section, an amendment of a vesting schedule is each plan 
amendment which directly or indirectly affects the computation of the 
nonforfeitable percentage of employees' rights to employer-derived 
accrued benefits. Consequently, such an amendment, for example, includes 
each change in the plan which affects either the plan's computation of 
years of service or of vesting percentages for years of service.
    (2) Aggregation of amendments. All plan amendments which are: (i) 
amendments of a vesting schedule within the meaning of subparagraph (1) 
of this paragraph and (ii) adopted and effective at the same time, shall 
be deemed to be a single amendment for purposes of applying the rules in 
paragraphs (a) and (b) of this section.
    (3) Relationship with section 411(d)(6). For additional requirements 
relating to section 411(d)(6), see Sec.  1.411(d)-3(a)(3).

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42333, Aug. 23, 1977, as amended by T.D. 9280, 71 FR 
45383, Aug. 9, 2006]



Sec.  1.411(a)-8T  Changes in vesting schedule (temporary).

    (a) [Reserved]
    (b) Election of former schedule--(1) In general. Under section 
411(a)(10)(B), for plan years for which section 411 applies, if the 
vesting schedule of a plan is amended, the plan will not be treated as 
meeting the minimum vesting standards of section 411(a)(2) unless the 
plan as amended provides that each participant whose nonforfeitable 
percentage of his accrued benefit derived from employer contributions is 
determined under such schedule, and who has completed at least 3 years 
of service with the employer, may elect, during the election period, to 
have the nonforfeitable percentage of his accrued benefit derived from 
employer contributions determined without regard to such amendment. 
Notwithstanding the preceding sentence, no election need be provided for 
any participant whose nonforfeitable percentage under the plan, as 
amended, at any time cannot be less than such percentage determined 
without regard to such amendment. For employees not described in Sec.  
1.411(a)-3T(e)(1), this section shall be applied by substituting ``5 
years of service'' for ``3 years of service'' where such language 
appears.
    (2) Election period. For purposes of subparagraph (1) of this 
paragraph, the election period under the plan must begin no later than 
the date the plan amendment is adopted and end no earlier than the 
latest of the following dates:
    (i) The date which is 60 days after the day the plan amendment is 
adopted,
    (ii) The date which is 60 days after the day the plan amendment 
becomes effective, or
    (iii) The date which is 60 days after the day the participant is 
issued written notice of the plan amendment by the employer or plan 
administrator.
    (3) Service requirement. For purposes of subparagraph (1) of this 
paragraph, a

[[Page 81]]

participant shall be considered to have completed 3 years of service if 
such participant has completed 3 years of service, whether or not 
consecutive, without regard to the exceptions of section 411(a)(4) prior 
to the expiration of the election period described in subparagraph (2) 
of this paragraph. For the meaning of the term ``year of service'', see 
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530, 
relating to minimum standards for employee pension benefit plans.

[T.D. 8170, 53 FR 241, Jan. 6, 1988]



Sec.  1.411(a)-9  Amendment of break in service rules; transitional period.

    (a) In general. Under section 1017(f)(2) of the Employee Retirement 
Income Security Act of 1974, a plan is not a qualified plan (and a trust 
forming a part of such plan is not a qualified trust) if the rules of 
the plan relating to breaks in service are amended, and--
    (1) Such amendment is effective after January 1, 1974, and before 
the effective date of section 411, and
    (2) Under such amendment, the nonforfeitable percentage of any 
employee's right to his employer-derived accrued benefit is less than 
the lesser of the nonforfeitable percentage of such employee's right to 
such benefit--
    (i) Under the break in service rules provided by section 411(a)(6) 
and Sec.  1.411(a)-6(c), or
    (ii) The greatest such percentage under the plan as in effect on or 
after January 1, 1974 (provided the break in service rules of the plan 
were not in violation of any law or rule of law on January 1, 1974).
    (b) Break in service rules. For purposes of paragraph (a), the term 
``break in service rules'' means the rules provided by a plan relating 
to circumstances under which a period of an employee's service or plan 
participation is disregarded, for purposes of determining the extent to 
which his rights to his accrued benefit under the plan are 
unconditional, if under such rules such service is disregarded by reason 
of the employee's failure to complete a required period of service 
within a specified period of time. For this purpose, plan rules which 
result in the loss of prior vesting or benefit accruals of an employee, 
or which deny an employee eligibility to participate, by reason of 
separation or failure to complete a required period of service within a 
specified period of time (e.g., 300 hours in one year) will be 
considered break in service rules. For purposes of section 411(b)(3), 
service described under the plan's break in service rules, as in effect 
before the effective date of section 411, need not be counted.

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42333, Aug. 23, 1977]



Sec.  1.411(a)-11  Restriction and valuation of distributions.

    (a) Scope--(1) In general. Section 411(a)(11) restricts the ability 
of a plan to distribute any portion of a participant's accrued benefit 
without the participant's consent. Section 411(a)(11) also restricts the 
ability of defined benefit plans to distribute any portion of a 
participant's accrued benefit in optional forms of benefit without 
complying with specified valuation rules for determining the amount of 
the distribution. If the consent requirements or the valuation rules of 
this section are not satisfied, the plan fails to satisfy the 
requirements of section 411(a).
    (2) Accrued benefit. For purposes of this section, an accrued 
benefit is valued taking into consideration the particular optional form 
in which the benefit is to be distributed. The value of an accrued 
benefit is the present value of the benefit in the distribution form 
determined under the plan. For example, a plan that provides a 
subsidized early retirement annuity benefit may specify that the 
optional single sum distribution form of benefit available at early 
retirement age is the present value of the subsidized early retirement 
annuity benefit. In this case, the subsidized early retirement annuity 
benefit must be used to apply the valuation requirements of this section 
and the resulting amount of the single sum distribution. However, if a 
plan that provides a subsidized early retirement annuity benefit 
specifies that the single sum distribution benefit available at early 
retirement age is the present value of the normal retirement annuity 
benefit, then the normal retirement annuity benefit is used to apply the 
valuation requirements of this section

[[Page 82]]

and the resulting amount of the single sum distribution available at 
early retirement age.
    (b) General consent rules. A plan must satisfy the participant 
consent requirement with respect to the distribution of a participant's 
nonforfeitable accrued benefit with a present value in excess of the 
cash-out limit in effect under paragraph (c)(3)(ii) of this section. See 
paragraphs (c) (3) and (4) for situations where no consent is required.
    (c) Consent, etc. requirements--(1) General rule. If an accrued 
benefit is immediately distributable, section 411(a)(11) permits plans 
to provide for the distribution of any portion of a participant's 
nonforfeitable accrued benefits only if the applicable consent 
requirements are satisfied.
    (2) Consent. (i) No consent is valid unless the participant has 
received a general description of the material features of the optional 
forms of benefit available under the plan. In addition, so long as a 
benefit is immediately distributable, a participant must be informed of 
the right, if any, to defer receipt of the distribution. Furthermore, 
consent is not valid if a significant detriment is imposed under the 
plan on any participant who does not consent to a distribution. Whether 
or not a significant detriment is imposed shall be determined by the 
Commissioner by examining the particular facts and circumstances.
    (ii) Consent of the participant to the distribution must not be made 
before the participant receives the notice of his or her rights 
specified in this paragraph (c)(2) and must not be made more than 90 
days before the date the distribution commences.
    (iii) A plan must provide a participant with notice of the rights 
specified in this paragraph (c)(2) at a time that satisfies either 
paragraph (c)(2)(iii)(A) or (B) of this section:
    (A) This paragraph (c)(2)(iii)(A) is satisfied if the plan provides 
a participant with notice of the rights specified in this paragraph 
(c)(2) no less than 30 days and no more than 90 days before the date the 
distribution commences. However, if the participant, after having 
received this notice, affirmatively elects a distribution, a plan will 
not fail to satisfy the consent requirement of section 411(a)(11) merely 
because the distribution commences less than 30 days after the notice 
was provided to the participant, provided the plan administrator clearly 
indicates to the participant that the participant has a right to at 
least 30 days to consider whether to consent to the distribution.
    (B) This paragraph (c)(2)(iii)(B) is satisfied if the plan--
    (1) Provides the participant with notice of the rights specified in 
this paragraph (c)(2);
    (2) Provides the participant with a summary of the notice within the 
time period described in paragraph (c)(2)(iii)(A) of this section; and
    (3) If the participant so requests after receiving the summary 
described in paragraph (c)(2)(iii)(B)(2) of this section, provides the 
notice to the participant without charge and no less than 30 days before 
the date the distribution commences, subject to the rules for the 
participant's waiver of that 30-day period. The summary described in 
paragraph (c)(2)(iii)(B)(2) of this section must advise the participant 
of the right, if any, to defer receipt of the distribution, must set 
forth a summary of the distribution options under the plan, must refer 
the participant to the most recent version of the notice (and, in the 
case of a notice provided in any document containing information in 
addition to the notice, must identify that document and must provide a 
reasonable indication of where the notice may be found in that document, 
such as by index reference or by section heading), and must advise the 
participant that, upon request, a copy of the notice will be provided 
without charge.
    (iv) For purposes of satisfying the requirements of this paragraph 
(c)(2), the plan administrator may substitute the annuity starting date, 
within the meaning of Sec.  1.401(a)-20, Q&A-10, for the date the 
distribution commences.
    (v) See Sec.  1.401(a)-20, Q&A-24 for a special rule applicable to 
consents to plan loans.
    (3) Cash-out limit. (i) Written consent of the participant is 
required before the commencement of the distribution of any portion of 
an accrued benefit if the present value of the nonforfeitable total 
accrued benefit is greater than

[[Page 83]]

the cash-out limit in effect under paragraph (c)(3)(ii) of this section 
on the date the distribution commences. The consent requirements are 
deemed satisfied if such value does not exceed the cash-out limit, and 
the plan may distribute such portion to the participant as a single sum. 
Present value for this purpose must be determined in the same manner as 
under section 417(e); see Sec.  1.417(e)-1(d).
    (ii) The cash-out limit in effect for a date is the amount described 
in section 411(a)(11)(A) for the plan year that includes that date. The 
cash-out limit in effect for dates in plan years beginning on or after 
August 6, 1997, is $5,000. The cash-out limit in effect for dates in 
plan years beginning before August 6, 1997, is $3,500.
    (iii) Effective date. Paragraphs (c)(3)(i) and (ii) of this section 
apply to distributions made on or after October 17, 2000. However, an 
employer is permitted to apply the $5,000 cash-out limit described in 
paragraph (c)(3)(ii) of this section to plan years beginning on or after 
August 6, 1997. Otherwise, for distributions prior to October 17, 2000, 
Sec. Sec.  1.411(a)-11 and 1.411(a)-11T in effect prior to October 17, 
2000 (as contained in 26 CFR Part 1 revised as of April 1, 2000) apply.
    (4) Immediately distributable. Participant consent is required for 
any distribution while it is immediately distributable, i.e., prior to 
the later of the time a participant has attained normal retirement age 
(as defined in section 411(a)(8)) or age 62. Once a distribution is no 
longer immediately distributable, a plan may distribute the benefit in 
the form of a QJSA in the case of a benefit subject to section 417 or in 
the normal form in other cases without consent.
    (5) Death of participant. The consent requirements of section 
411(a)(11) do not apply after the death of the participant.
    (6) QDROs. The consent requirements of section 411(a)(11) do not 
apply to payments to an alternate payee, defined in section 414(p)(8), 
except as provided in a qualified domestic relations order pursuant to 
section 414(p).
    (7) Section 401(a)(9), etc. The consent requirements of section 
411(a)(11) do not apply to the extent that a distribution is required to 
satisfy the requirements of section 401(a)(9) or 415. See section 
401(a)(9) and the regulations thereunder and Sec.  1.401(a)-20 Q&A 23 
for guidance on these requirements. Notwithstanding any provision to the 
contrary in section 401(a)(14) or Sec.  1.401(a)-14, a plan may not 
distribute a participant's nonforfeitable accrued benefit with a present 
value in excess of the cash-out limit in effect under paragraph 
(c)(3)(ii) of this section while the benefit is immediately 
distributable unless the participant consents to such distribution. The 
failure of a participant to consent is deemed to be an election to defer 
commencement of payment of the benefit for purposes of section 
401(a)(14) and Sec.  1.401(a)-14.
    (8) Delegation to Commissioner. The Commissioner, in revenue 
rulings, notices, and other guidance published in the Internal Revenue 
Bulletin, may modify, or provide additional guidance with respect to, 
the notice and consent requirements of this section. See Sec.  
601.601(d)(2)(ii)(b) of this chapter.
    (d) Distribution valuation requirements. In determining the present 
value of any distribution of any accrued benefit from a defined benefit 
plan, the plan must take into account specified valuation rules. For 
this purpose, the valuation rules are the same valuation rules for 
valuing distributions as set forth in section 417(e); see Sec.  
1.417(e)-1(d). This paragraph (d) applies both before and after the 
participant's death regardless of whether the accrued benefit is 
immediately distributable. This paragraph also applies whether or not 
the participant's consent is required under paragraphs (b) and (c) of 
this section.
    (e) Special rules--(1) Plan termination. The requirements of this 
section apply before, on and after a plan termination. If a defined 
contribution plan terminates and the plan does not offer an annuity 
option (purchased from a commercial provider), then the plan may 
distribute a participant's accrued benefit without the participant's 
consent. The preceding sentence does not apply if the employer, or any 
entity within the same controlled group as the employer, maintains 
another defined contribution plan, other than an employee

[[Page 84]]

stock ownership plan (as defined in section 4975(e)(7)). In such a case, 
the participant's accrued benefit may be transferred without the 
participant's consent to the other plan if the participant does not 
consent to an immediate distribution from the terminating plan. See 
section 411(d)(6) and the regulations thereunder for other rules 
applicable to transferee plans and plan terminations.
    (2) ESOP dividends. The requirements of this section do not apply to 
any distribution of dividends to which section 404(k) applies.
    (3) Other rules. See Sec.  1.401(a)-20 Q&As 14, 17 and 24 for other 
rules that apply to the section 411(a)(11) requirements.
    (f) Medium for notice and consent--(1) Notice. The notice of a 
participant's rights described in paragraph (c)(2) of this section or 
the summary of that notice described in paragraph (c)(2)(iii)(B)(2) of 
this section must be provided on a written paper document. However, 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) Consent. The consent described in paragraphs (c)(2) and (3) of 
this section must be given on a written paper document. However, see 
Sec.  1.401(a)-21 of this chapter for rules permitting the use of 
electronic media to make participant elections with respect to 
retirement plans.

[T.D. 8219, 53 FR 31853, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988, as 
amended by T.D. 8620, 60 FR 49221, Sept. 22, 1995; T.D. 8796, 63 FR 
70011, Dec. 18, 1998; T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D. 8873, 
65 FR 6006, Feb. 8, 2000; T.D. 8891, 65 FR 44681, 44682, July 19, 2000; 
T.D. 9294, 71 FR 61887, Oct. 20, 2006]



Sec.  1.411(a)(13)-1  Statutory hybrid plans.

    (a) In general. This section sets forth certain rules that apply to 
statutory hybrid plans under section 411(a)(13). Paragraph (b) of this 
section describes special rules for certain statutory hybrid plans that 
determine benefits under a lump sum-based benefit formula. Paragraph (c) 
of this section describes the vesting requirement for statutory hybrid 
plans. Paragraphs (d) and (e) of this section contain definitions and 
effective/applicability dates, respectively.
    (b) Calculation of benefit by reference to hypothetical account 
balance or accumulated percentage--(1) Payment of a current balance or 
current value under a lump sum-based benefit formula. Pursuant to 
section 411(a)(13)(A), a statutory hybrid plan that determines any 
portion of a participant's benefits under a lump sum-based benefit 
formula is not treated as failing to meet the following requirements 
solely because, with respect to benefits determined under that formula, 
the present value of those benefits is, under the terms of the plan, 
equal to the then-current balance of the hypothetical account maintained 
for the participant or to the then-current value of the accumulated 
percentage of the participant's final average compensation under that 
formula--
    (i) Section 411(a)(2); or
    (ii) With respect to the participant's accrued benefit derived from 
employer contributions, section 411(a)(11), 411(c), or 417(e).
    (2) General rules with respect to current account balance or current 
value--(i) Benefit after normal retirement age. The relief of section 
411(a)(13) does not override the requirement for a plan that, with 
respect to a participant with an annuity starting date after normal 
retirement age, the plan either provide an actuarial increase after 
normal retirement age or satisfy the requirements for suspension of 
benefits under section 411(a)(3)(B). Accordingly, with respect to such a 
participant, a plan with a lump sum based benefit formula violates the 
requirements of section 411(a) if the balance of the hypothetical 
account or the value of the accumulated percentage of the participant's 
final average compensation is not increased sufficiently to satisfy the 
requirements of section 411(a)(2) for distributions commencing after 
normal retirement age, unless the plan suspends benefits in accordance 
with section 411(a)(3)(B).
    (ii) Reductions limited. The relief of section 411(a)(13) does not 
permit the accumulated benefit under a lump sum-based benefit formula to 
be reduced in a manner that would be prohibited if that reduction were 
applied to the accrued benefit. Accordingly,

[[Page 85]]

the only reductions that can apply to the balance of the hypothetical 
account or accumulated percentage of the participant's final average 
compensation are reductions as a result of--
    (A) Benefit payments;
    (B) Qualified domestic relations orders under section 414(p);
    (C) Forfeitures that are permitted under section 411(a) (such as 
charges for providing a qualified preretirement survivor annuity);
    (D) Amendments that would reduce the accrued benefit but that are 
permitted under section 411(d)(6);
    (E) Adjustments resulting in a decrease in the balance of the 
hypothetical account due to the application of interest credits (as 
defined in Sec.  1.411(b)(5)-1(d)(1)(ii)(A)) that are negative for an 
interest crediting period;
    (F) In the case of a formula that expresses the accumulated benefit 
as an accumulated percentage of the participant's final average 
compensation, adjustments resulting in a decrease in the dollar amount 
of the accumulated percentage of the participant's final average 
compensation--
    (1) Due to a decrease in the dollar amount of the participant's 
final average compensation; or
    (2) Due to an increase in the integration level, under a formula 
that is integrated with Social Security (for example, as a result of an 
increase in the Social Security taxable wage base or in Social Security 
covered compensation); or
    (G) Other reductions to the extent provided by the Commissioner in 
revenue rulings, notices, or other guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b)).
    (3) Payment of benefits based on current account balance or current 
value--(i) Optional forms that are actuarially equivalent. With respect 
to the benefits under a lump sum-based benefit formula, the relief of 
paragraph (b)(1) of this section applies to an optional form of benefit 
that is determined as of the annuity starting date as the actuarial 
equivalent, using reasonable actuarial assumptions, of the then-current 
balance of a hypothetical account maintained for the participant or the 
then-current value of an accumulated percentage of the participant's 
final average compensation.
    (ii) Optional forms that are subsidized. With respect to the 
benefits under a lump sum-based benefit formula, if an optional form of 
benefit is payable in an amount that is greater than the actuarial 
equivalent, determined using reasonable actuarial assumptions, of the 
then-current balance of a hypothetical account maintained for the 
participant or the then-current value of an accumulated percentage of 
the participant's final average compensation, then the plan satisfies 
the requirements of sections 411(a)(2), 411(a)(11), 411(c) and 417(e) 
with respect to the amount of that optional form of benefit. However, 
see Sec.  1.411(b)(5)-1(b)(1)(iii) for rules relating to early 
retirement subsidies.
    (iii) Optional forms that are less valuable. Except as otherwise 
provided in paragraph (b)(4)(i) of this section, if an optional form of 
benefit is not at least the actuarial equivalent, using reasonable 
actuarial assumptions, of the then-current balance of a hypothetical 
account maintained for the participant or the then-current value of an 
accumulated percentage of the participant's final average compensation, 
then the relief under section 411(a)(13) (permitting a plan to treat the 
account balance or accumulated percentage as the actuarial equivalent of 
the portion of the accrued benefit determined under the lump sum-based 
benefit formula) does not apply in determining whether the optional form 
of benefit is the actuarial equivalent of the portion of the accrued 
benefit determined under the lump sum-based benefit formula. As a 
result, payment of that optional form of benefit must satisfy the rules 
applicable to payment of the accrued benefit generally under a defined 
benefit plan (without regard to the special rules of section 
411(a)(13)(A) and paragraph (b)(1) of this section), including the 
requirements of section 411(a)(2) and, for optional forms subject to the 
minimum present value requirements of section 417(e)(3), those minimum 
present value requirements.
    (4) Rules of application--(i) Relief applies on proportionate basis 
with respect

[[Page 86]]

to payment of only a portion of the benefit under a lump sum-based 
benefit formula. The relief of paragraph (b)(1) of this section applies 
on a proportionate basis to a payment of a portion of the benefit under 
a lump sum-based benefit formula, such as a payment of a specified 
dollar amount or percentage of the then-current balance of a 
hypothetical account maintained for the participant or then-current 
value of an accumulated percentage of the participant's final average 
compensation. Thus, for example, if a plan that expresses the 
participant's entire accumulated benefit as the balance of a 
hypothetical account distributes 40 percent of the participant's then-
current hypothetical account balance in a single payment, the plan is 
treated as satisfying the requirements of section 411(a) and the minimum 
present value rules of section 417(e) with respect to 40 percent of the 
participant's then-current accrued benefit.
    (ii) Relief applies only to portion of benefit determined under lump 
sum-based benefit formula. The relief of paragraph (b)(1) of this 
section generally applies only to the portion of the participant's 
benefit that is determined under a lump sum-based benefit formula and 
generally does not apply to any portion of the participant's benefit 
that is determined under a formula that is not a lump sum-based benefit 
formula. The following rules apply for purposes of satisfying section 
417(e):
    (A) ``Greater-of'' formulas. If the participant's accrued benefit 
equals the greater of the accrued benefit under a lump sum-based benefit 
formula and the accrued benefit under another formula that is not a 
lump-sum based benefit formula, a single-sum payment of the 
participant's entire benefit must be no less than the greater of the 
then-current accumulated benefit under the lump sum-based benefit 
formula and the present value, determined in accordance with section 
417(e), of the benefit under the other formula. For example, assume that 
the accrued benefit under a plan is determined as the greater of the 
accrued benefit attributable to the balance of a hypothetical account 
and the accrued benefit equal to a pro rata portion of a normal 
retirement benefit determined by projecting the hypothetical account 
balance (including future principal and interest credits) to normal 
retirement age. In such a case, a single-sum payment of the 
participant's entire benefit must be no less than the greater of the 
then-current balance of the hypothetical account and the present value, 
determined in accordance with section 417(e), of the pro rata benefit 
determined by projecting the hypothetical account balance to normal 
retirement age.
    (B) ``Sum-of'' formulas. If the participant's accrued benefit equals 
the sum of the accrued benefit under a lump sum-based benefit formula 
and the accrued benefit under another formula that is not a lump-sum 
based benefit formula, a single-sum payment of the participant's entire 
benefit must be no less than the sum of the then-current accumulated 
benefit under the lump sum-based benefit formula and the present value, 
determined in accordance with section 417(e), of the benefit under the 
other formula. For example, assume that the accrued benefit under a plan 
is determined as the sum of the accrued benefit attributable to the 
balance of a hypothetical account and the accrued benefit equal to the 
excess of the benefit under another formula over the benefit under the 
hypothetical account formula. In such a case, a single-sum payment of 
the participant's entire benefit must be no less than the sum of the 
then-current balance of the hypothetical account and the present value, 
determined in accordance with section 417(e), of the excess of the 
benefit under the other formula over the benefit under the hypothetical 
account formula.
    (C) ``Lesser-of'' formulas. If the participant's accrued benefit 
equals the lesser of the accrued benefit under a lump sum-based benefit 
formula and the accrued benefit under another formula that is not a 
lump-sum based benefit formula, a single-sum payment of the 
participant's entire benefit must be no less than the lesser of the 
then-current accumulated benefit under the lump sum-based benefit 
formula and the present value, determined in accordance with section 
417(e), of the benefit under the other formula. For

[[Page 87]]

example, assume that the accrued benefit under a plan is determined as 
the accrued benefit attributable to the balance of a hypothetical 
account, but no greater than an accrued benefit payable at normal 
retirement age in the form of a straight life annuity of $100,000 per 
year. In such a case, a single-sum payment of the participant's entire 
benefit must be no less than the lesser of the then-current balance of 
the hypothetical account and the present value, determined in accordance 
with section 417(e), of a benefit payable at normal retirement age in 
the form of a straight life annuity of $100,000 per year. If the formula 
that is not a lump sum-based benefit formula is the maximum annual 
benefit described in section 415(b), then the single-sum payment of the 
participant's entire benefit must not exceed the then-current 
accumulated benefit under the lump sum-based benefit formula.
    (c) Three-year vesting requirement--(1) In general. Pursuant to 
section 411(a)(13)(B), if any portion of the participant's accrued 
benefit under a defined benefit plan is determined under a statutory 
hybrid benefit formula, the plan is treated as failing to satisfy the 
requirements of section 411(a)(2) unless the plan provides that the 
participant has a nonforfeitable right to 100 percent of the 
participant's accrued benefit if the participant has three or more years 
of service. Thus, this 3-year vesting requirement applies with respect 
to the entire accrued benefit of a participant under a defined benefit 
plan even if only a portion of the participant's accrued benefit under 
the plan is determined under a statutory hybrid benefit formula. 
Similarly, if the participant's accrued benefit under a defined benefit 
plan is, under the plan's terms, the larger of two (or more) benefit 
amounts, where each amount is determined under a different benefit 
formula (including a benefit determined pursuant to an offset among 
formulas within the plan or a benefit determined as the greater of a 
protected benefit under section 411(d)(6) and another benefit amount) 
and at least one of those formulas is a statutory hybrid benefit 
formula, the participant's entire accrued benefit under the defined 
benefit plan is subject to the 3-year vesting rule of section 
411(a)(13)(B) and this paragraph (c). The rule described in the 
preceding sentence applies even if the larger benefit is ultimately the 
benefit determined under a formula that is not a statutory hybrid 
benefit formula.
    (2) Examples. The provisions of this paragraph (c) are illustrated 
by the following examples:

    Example 1. Employer M sponsors Plan X, a defined benefit plan under 
which each participant's accrued benefit is equal to the sum of the 
benefit provided under two benefit formulas. The first benefit formula 
is a statutory hybrid benefit formula, and the second formula is not. 
Because a portion of each participant's accrued benefit provided under 
Plan X is determined under a statutory hybrid benefit formula, the 3-
year vesting requirement described in paragraph (c)(1) of this section 
applies to each participant's entire accrued benefit provided under Plan 
X.
    Example 2. The facts are the same as in Example 1, except that the 
benefit formulas described in Example 1 only apply to participants for 
service performed in Division A of Employer M and a different benefit 
formula applies to participants for service performed in Division B of 
Employer M. Pursuant to the terms of Plan X, the accrued benefit of a 
participant attributable to service performed in Division B is based on 
a benefit formula that is not a statutory hybrid benefit formula. 
Therefore, the 3-year vesting requirement described in paragraph (c)(1) 
of this section does not apply to a participant with an accrued benefit 
under Plan X if the participant's benefit is solely attributable to 
service performed in Division B.
    Example 3. Employer N sponsors defined benefit Plan Y, an 
independent plan that provides benefits based solely on a lump sum-based 
benefit formula, and defined benefit Plan Z, which provides benefits 
based on a formula which is not a statutory hybrid benefit formula, but 
which is a floor plan that provides for the benefits payable to a 
participant under Plan Z to be reduced by the amount of the vested 
accrued benefit payable under Plan Y. The formula under Plan Y is a 
statutory hybrid benefit formula. Accordingly, Plan Y is subject to the 
3-year vesting requirement described in paragraph (c)(1) of this 
section. The formula provided under Plan Z, even taking into account the 
offset for vested accrued benefits under Plan Y, is not a statutory 
hybrid benefit formula. Therefore, Plan Z is not subject to the 3-year 
vesting requirement in paragraph (c)(1) of this section.


[[Page 88]]


    (d) Definitions--(1) In general. The definitions in this paragraph 
(d) apply for purposes of this section.
    (2) Accumulated benefit. A participant's accumulated benefit at any 
date means the participant's benefit, as expressed under the terms of 
the plan, accrued to that date. For this purpose, if a participant's 
benefit is expressed under the terms of the plan as the current balance 
of a hypothetical account or the current value of an accumulated 
percentage of the participant's final average compensation, the 
participant's accumulated benefit is expressed in that manner regardless 
of how the plan defines the participant's accrued benefit. Thus, for 
example, the accumulated benefit of a participant may be expressed under 
the terms of the plan as either the current balance of a hypothetical 
account or the current value of an accumulated percentage of the 
participant's final average compensation, even if the plan defines the 
participant's accrued benefit as an annuity beginning at normal 
retirement age that is actuarially equivalent to that balance or value.
    (3) Lump sum-based benefit formula-- (i) In general. A lump sum-
based benefit formula means a benefit formula used to determine all or 
any part of a participant's accumulated benefit under a defined benefit 
plan under which the accumulated benefit provided under the formula is 
expressed as the current balance of a hypothetical account maintained 
for the participant or as the current value of an accumulated percentage 
of the participant's final average compensation. A benefit formula is 
expressed as the current balance of a hypothetical account maintained 
for the participant if it is expressed as a current single-sum dollar 
amount equal to that balance. A benefit formula is expressed as the 
current value of an accumulated percentage of the participant's final 
average compensation if it is expressed as a current single-sum dollar 
amount equal to a percentage of the participant's final average 
compensation or, for plan years described in paragraph (e)(2)(ii)(A) or 
(e)(2)(ii)(B) of this section, as applicable (or any earlier date as 
elected by the taxpayer), a percentage of the participant's highest 
average compensation (regardless of whether the plan applies a 
limitation on the past period for which compensation is taken into 
account in determining highest average compensation). Whether a benefit 
formula is a lump sum-based benefit formula is determined based on how 
the accumulated benefit of a participant is expressed under the terms of 
the plan, and does not depend on whether the plan provides an optional 
form of benefit in the form of a single-sum payment. However, for plan 
years described in paragraph (e)(2)(ii)(A) or (e)(2)(ii)(B) of this 
section (as applicable), a benefit formula does not constitute a lump 
sum-based benefit formula unless a distribution of the benefits under 
that formula in the form of a single-sum payment equals the accumulated 
benefit under that formula (except to the extent the single-sum payment 
is greater to satisfy the requirements of section 411(d)(6)). In 
addition, for plan years described in paragraph (e)(2)(ii)(A) or 
(e)(2)(ii)(B) of this section (as applicable), a benefit formula does 
not constitute a lump sum-based benefit formula unless the portion of 
the participant's accrued benefit that is determined under that formula 
and the then-current balance of the hypothetical account or the then-
current value of the accumulated percentage of the participant's final 
average compensation are actuarially equivalent (determined using 
reasonable actuarial assumptions) either--
    (A) Upon attainment of normal retirement age; or
    (B) At the annuity starting date for a distribution with respect to 
that portion.
    (ii) Exception for employee contributions. For purposes of the 
definition of a lump sum-based benefit formula in paragraph (d)(3)(i) of 
this section, the benefit properly attributable to after-tax employee 
contributions, rollover contributions from eligible retirement plans 
under section 402(c)(8), and other similar employee contributions (such 
as repayments of distributions pursuant to section 411(a)(7)(C) and 
employee contributions that are pickup contributions pursuant to section 
414(h)(2)) is disregarded. However, a benefit is not properly 
attributable to contributions described in this paragraph (d)(3)(ii) if

[[Page 89]]

the contributions are credited with interest at a rate that exceeds a 
reasonable rate of interest or if the conversion factors used to 
calculate such benefit are not actuarially reasonable. See section 
411(c) for an example of a calculation of a benefit that is properly 
attributable to employee contributions.
    (4) Statutory hybrid benefit formula--(i) In general. A statutory 
hybrid benefit formula means a benefit formula that is either a lump 
sum-based benefit formula or a formula that is not a lump sum-based 
benefit formula but that has an effect similar to a lump sum-based 
benefit formula.
    (ii) Effect similar to a lump sum-based benefit formula-- (A) In 
general. Except as provided in paragraphs (d)(4)(ii)(B) through (E) of 
this section, a benefit formula under a defined benefit plan that is not 
a lump sum-based benefit formula has an effect similar to a lump sum-
based benefit formula if the formula provides that a participant's 
accumulated benefit is expressed as a benefit that includes the right to 
adjustments (including a formula that provides for indexed benefits 
under Sec.  1.411(b)(5)-1(b)(2)) for a future period and the total 
dollar amount of those adjustments is reasonably expected to be smaller 
for the participant than for any similarly situated, younger individual 
(within the meaning of Sec.  1.411(b)(5)-1(b)(5)) who is or could be a 
participant in the plan. For this purpose, the right to adjustments for 
a future period means, for plan years described in paragraph 
(e)(2)(ii)(A) or (e)(2)(ii)(B) of this section (as applicable), the 
right to any changes in the dollar amount of benefits over time, 
regardless of whether those adjustments are denominated as interest 
credits. A benefit formula that does not include adjustments for any 
future period is treated as a formula with an effect similar to a lump 
sum-based benefit formula if the formula would be described in this 
paragraph (d)(4)(ii)(A) except for the fact that the adjustments are 
provided pursuant to a pattern of repeated plan amendments. See Sec.  
1.411(d)-4, A-1(c)(1).
    (B) Exception for post-retirement benefit adjustments. Post-annuity 
starting date adjustments in the amount payable to a participant (such 
as cost-of-living increases) are disregarded in determining whether a 
benefit formula under a defined benefit plan has an effect similar to a 
lump sum-based benefit formula.
    (C) Exception for certain variable annuity benefit formulas. If a 
variable annuity benefit formula adjusts benefits by reference to the 
difference between a rate of return on plan assets (or specified market 
indices) and a specified assumed interest rate of 5 percent or higher, 
then the variable annuity benefit formula is not treated as being 
reasonably expected to provide a smaller total dollar amount of future 
adjustments for the participant than for any similarly situated, younger 
individual who is or could be a participant in the plan, and thus such a 
variable annuity benefit formula does not have an effect similar to a 
lump sum-based benefit formula. For plan years described in paragraph 
(e)(2)(ii)(A) or (e)(2)(ii)(B) of this section (as applicable) (or any 
earlier date as elected by the taxpayer), the rate of return on plan 
assets (or specified market index) by reference to which the benefit 
formula adjusts must be a rate of return described in Sec.  1.411(b)(5)-
1(d)(5) (which includes, in the case of a benefit formula determined 
with reference to an annuity contract for an employee issued by an 
insurance company licensed under the laws of a State, the rate of return 
on the market index specified under that contract).
    (D) Exception for employee contributions. Benefits that are 
disregarded under paragraph (d)(3)(ii) of this section (benefits 
properly attributable to certain employee contributions) are also 
disregarded for purposes of determining whether a benefit formula has an 
effect similar to a lump sum-based benefit formula.
    (E) Exception for certain actuarial reductions for early 
commencement under traditional formula. A defined benefit formula is not 
treated as having an effect similar to a lump sum-based benefit formula 
with respect to a participant merely because the formula provides for a 
reduction in the benefit payable at early retirement due to early 
commencement (with the result that the benefit payable at normal 
retirement age is greater than the benefit

[[Page 90]]

payable at early retirement), provided that the benefit payable at 
normal retirement age to the participant cannot be less than the benefit 
payable at normal retirement age to any similarly situated, younger 
individual who is or could be a participant in the plan. Thus, for 
example, a plan that provides a benefit equal to 1 percent of final 
average pay per year of service, payable as a life annuity at normal 
retirement age, is not treated as having an effect similar to a lump 
sum-based benefit formula by reason of an actuarial reduction in the 
benefit payable under the plan for early commencement.
    (5) Statutory hybrid plan. A statutory hybrid plan means a defined 
benefit plan that contains a statutory hybrid benefit formula.
    (6) Variable annuity benefit formula. A variable annuity benefit 
formula means any benefit formula under a defined benefit plan which 
provides that the amount payable is periodically adjusted by reference 
to the difference between a rate of return and a specified assumed 
interest rate.
    (e) Effective/applicability date--(1) Statutory effective/
applicability date--(i) In general. Except as provided in paragraphs 
(e)(1)(ii) and (e)(1)(iii) of this section, section 411(a)(13) applies 
for periods beginning on or after June 29, 2005.
    (ii) Calculation of benefits. Section 411(a)(13)(A) applies to 
distributions made after August 17, 2006.
    (iii) Vesting--(A) Plans in existence on June 29, 2005--(1) General 
rule. In the case of a plan that is in existence on June 29, 2005 
(regardless of whether the plan is a statutory hybrid plan on that 
date), section 411(a)(13)(B) applies to plan years that begin on or 
after January 1, 2008.
    (2) Exception for plan sponsor election. See Sec.  1.411(b)(5)-
1(f)(1)(iii)(A)(2) for a special election for early application of 
section 411(a)(13)(B).
    (B) Plans not in existence on June 29, 2005. In the case of a plan 
not in existence on June 29, 2005, section 411(a)(13)(B) applies to plan 
years that end on or after June 29, 2005.
    (C) Collectively bargained plans. Notwithstanding paragraphs 
(e)(1)(iii)(A) and (B) of this section, in the case of a collectively 
bargained 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, the requirements of section 
411(a)(13)(B) do not apply to plan years that begin before the earlier 
of--
    (1) The later of--
    (i) The date on which the last of those collective bargaining 
agreements terminates (determined without regard to any extension 
thereof on or after August 17, 2006); or
    (ii) January 1, 2008; or
    (2) January 1, 2010.
    (D) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to 
which a collective bargaining agreement applies to some, but not all, of 
the plan participants, the plan is considered a collectively bargained 
plan for purposes of paragraph (e)(1)(iii)(C) of this section if it is 
considered a collectively bargained plan under the rules of Sec.  1.436-
1(a)(5)(ii)(B).
    (E) Hour of service required. Section 411(a)(13)(B) does not apply 
to a participant who does not have an hour of service after section 
411(a)(13)(B) would otherwise apply to the participant under the rules 
of paragraph (e)(1)(iii)(A), (B), or (C) of this section.
    (2) Effective/applicability date of regulations--(i) In general. 
Except as provided in paragraph (e)(2)(ii) of this section, this section 
applies to plan years that begin on or after January 1, 2011. For the 
periods after the statutory effective date set forth in paragraph (e)(1) 
of this section and before the regulatory effective date set forth in 
the preceding sentence, the relief of section 411(a)(13)(A) applies and 
the 3-year vesting requirement of section 411(a)(13)(B) must be 
satisfied. During these periods, a plan is permitted to rely on the 
provisions of this section for purposes of applying the relief of 
section 411(a)(13)(A) and satisfying the requirements of section 
411(a)(13)(B).
    (ii) Special effective date--(A) In general. Except as otherwise 
provided in this paragraph (e)(2)(ii), paragraphs (b)(2), (3), and (4) 
of this section apply to plan years that begin on or after January 1, 
2017.
    (B) Collectively bargained plans. In the case of a plan maintained 
pursuant to

[[Page 91]]

one or more collective bargaining agreements between employee 
representatives and one or more employers ratified on or before November 
13, 2015, that constitutes a collectively bargained plan under the rules 
of Sec.  1.436-1(a)(5)(ii)(B), paragraphs (b)(2), (3), and (4) of this 
section apply to plan years that begin on or after the later of--
    (1) January 1, 2017; and
    (2) The earlier of--
    (i) January 1, 2019; and
    (ii) The date on which the last of those collective bargaining 
agreements terminates (determined without regard to any extension 
thereof on or after November 13, 2015).
    (iii) Hour of service required. A benefit formula is not treated as 
having an effect similar to a lump sum-based benefit formula under 
paragraph (d)(4)(ii) of this section with respect to a participant who 
does not have an hour of service after the regulatory effective date set 
forth in paragraph (e)(2)(i) of this section.

[T.D. 9505, 75 FR 64135, Oct. 19, 2010, as amended by 76 FR 4244, Jan. 
25, 2011; T.D. 9693, 79 FR 56457, Sept. 19, 2014; T.D. 9743, 80 FR 
70683, 70684, Nov. 16, 2015]



Sec.  1.411(b)-1  Accrued benefit requirements.

    (a) Accrued benefit requirements--(1) In general. Under section 
411(b), for plan years beginning after the applicable effective date of 
section 411, rules are provided for the determination of the accrued 
benefit to which a participant is entitled under a plan. Under a defined 
contribution plan, a participant's accrued benefit is the balance to the 
credit of the participant's account. Under a defined benefit plan, a 
participant's accrued benefit is his accrued benefit determined under 
the plan. A defined benefit plan is not a qualified plan unless the 
method provided by the plan for determining accrued benefits satisfies 
at least one of the alternative methods (described in paragraph (b) of 
this section) for determining accrued benefits with respect to all 
active participants under the plan. A defined benefit plan may provide 
that accrued benefits for participants are determined under more than 
one plan formula. In such a case, the accrued benefits under all such 
formulas must be aggregated in order to determine whether or not the 
accrued benefits under the plan for participants satisfy one of the 
alternative methods. A plan may satisfy different methods with respect 
to different classifications of employees, or separately satisfy one 
method with respect to the accrued benefits for each such 
classification, provided that such classifications are not so structured 
as to evade the accrued benefit requirements of section 411(b) and this 
section. (For example, if a plan provides that employees who commence 
participation at or before age 40 accrue benefits in a manner which 
satisfies the 133\1/3\ percent method of determining accrued benefits 
and employees who commence participation after age 40 accrue benefits in 
a manner which satisfies the 3 percent method of determining accrued 
benefits, the plan would be so structured as to evade the requirements 
of section 411(b).) A defined benefit plan does not satisfy the 
requirements of section 411(b) and this section merely because the 
accrued benefit is defined as the ``reserve under the plan''. Special 
rules are provided for the first two years of service by a participant, 
certain insured defined benefit plans, and certain reductions in accrued 
benefits due to increasing age or service. In addition, a special rule 
is provided with respect to accruals for service before the effective 
date of section 411.
    (2) Cross references--(i) 3 percent method. For rules relating to 
the 3 percent method of determining accrued benefits, see paragraph 
(b)(1) of this section.
    (ii) 133\1/3\ percent method. For rules relating to the 133\1/3\ 
percent method of determining accrued benefits, see paragraph (b)(2) of 
this section.
    (iii) Fractional method. For rules relating to the fractional method 
of determining accrued benefits, see paragraph (b)(3) of this section.
    (iv) Accruals before effective date. For rules relating to accruals 
for service before the effective date of section 411, see paragraph (c) 
of this section.
    (v) First 2 years of service. For special rules relating to 
determination of accrued benefit for first 2 continuous years of 
service, see paragraph (d)(1) of this section.

[[Page 92]]

    (vi) Certain insured plans. For special rules relating to 
determination of accrued benefit under a defined benefit plan funded 
exclusively by insurance contracts, see paragraph (d)(2) of this 
section.
    (vii) Accruals decreased by increasing age or service. For special 
rules relating to prohibition of decrease in accrued benefit on account 
of increasing age or service, see paragraph (d)(3) of this section.
    (viii) Separate accounting. For rules relating to requirements for 
separate accounting, see paragraph (e) of this section.
    (ix) Year of participation. For definition of ``year of 
participation'', see paragraph (f) of this section.
    (b) Defined benefit plans. A defined benefit plan satisfies the 
requirements of section 411(b)(1) and this paragrah for a plan year to 
which section 411 and this section apply if it satisfies the 
requirements of subparagraph (1), (2), or (3) of this paragraph for such 
year.
    (1) 3 percent method--(i) General rule. A defined benefit plan 
satisfies the requirements of this paragraph for a plan year if, as of 
the close of the plan year, the accrued benefit to which each 
participant is entitled, computed as if the participant separated from 
the service as of the close of such plan year, is not less than 3 
percent of the 3 percent method benefit, multiplied by the number of 
years (not in excess of 33\1/3\) of his participation in the plan 
including years after his normal retirement age. For purposes of this 
subparagraph, the ``3 percent method benefit'' is the normal retirement 
benefit to which the participant would be entitled if he commenced 
participation at the earliest possible entry age for any individual who 
is or could be a participant under the plan and if he served 
continuously until the earlier of age 65 or the normal retirement age 
under the plan.
    (ii) Special rules--(A) Compensation. In the case of a plan 
providing a retirement benefit based upon compensation during any 
period, the normal retirement benefit to which a participant would be 
entitled is determined as if he continued to earn annually the average 
rate of compensation which he earned during consecutive years of 
service, not in excess of 10, for which his compensation was the 
highest. For purposes of this subdivision (A), the number of consecutive 
years of service used in computing average compensation shall be the 
number of years of service specified under the plan (not in excess of 
10) for computing normal retirement benefits.
    (B) Social security, etc. For purposes of this subparagraph, for any 
plan year, social security benefits and all relevant factors used to 
compute benefits, e.g., consumer price index, are treated as remaining 
constant as of the beginning of the current plan year for all subsequent 
plan years.
    (C) Computation in certain cases. In the case of any plan to which 
the provisions of section 411(b)(1)(D) and paragraph (c) of this section 
are applicable, for any plan year the accrued benefit of any participant 
shall not be less than the accrued benefit otherwise determined under 
this subparagraph, reduced by the excess of the accrued benefit 
determined under this subparagraph as of the first day of the first plan 
year to which section 411 applies over the accrued benefit determined 
under section 411(b)(1)(D) and paragraph (c) of this section and 
increased by the amount determined under paragraph (c)(2)(v) of this 
section.
    (iii) Examples. The application of this subparagraph is illustrated 
by the following examples.

    Example 1. The M Corporation's defined benefit benefit plan provides 
an annual retirement benefit commencing at age 65 or $4 per month for 
each year of participation. As a condition of participation, the plan 
requires that an employee have attained age 25. The normal retirement 
age specified under the plan is age 65. The plan provides for no limit 
on the number of years of credited service. A, age 40, is a participant 
in the M Corporation's plan.
    A has completed 12 years of participation in the plan of the M 
Corporation as of the close of the plan year. Under subdivision (i) of 
this subparagraph, the normal retirement benefit commencing at age 65 to 
which a participant would be entitled if he commenced participation at 
the earliest possible entry age (25) under the plan and served 
continuously until normal retirement age (65) is an annual benefit of 
$1,920 [40 x (12 x $4)]. Under paragraph (b)(1)(i) of this section, the 
plan does not satisfy the requirements of this subparagraph unless A has 
accrued an annual benefit of at least $691 [0.03 x ($1,920 x 12)] as of 
the close of the plan year. Under the M

[[Page 93]]

Corporation plan, A is entitled to an accrued benefit of $576 [(12 x 12) 
x $4] as of the close of the plan year. Thus, with respect to A, the 
accrued benefit provided under the M Corporation plan does not satisfy 
the requirements of this subparagraph.
    Example 2. Assume the same facts as in example (1) except that the M 
Corporation's plan provides that only the first 30 years of 
participation are taken into account. Under subdivision (i) of this 
subparagraph, the normal retirement benefit commencing at age 65 to 
which a participant would be entitled if he commenced participation at 
the earliest possible entry age under the plan (25) and served 
continuously until normal retirement age (65) is an annual benefit of 
$1.440 [30 x $48]. Under paragraph (b)(1)(i) of this section, the plan 
does not satisfy the requirements of this subparagraph unless A has 
accrued an annual benefit of at least $518 [0.03 x ($1,440 x 12)] as of 
the close of the plan year. Under the M Corporation plan, A is entitled 
to an accrued benefit of $576 [(12 x $48]. Thus, with respect to A, the 
accrued benefit provided under the M Corporation plan satisfies the 
requirements of this subparagraph.
    Example 3. The N Corporation's defined benefit plan provides an 
annual retirement benefit commencing at age 65 of 50 percent of average 
compensation for the highest 3 consecutive years of compensation for an 
employee with 25 years of participation. A participant who separates 
from service before age 65 is entitled to 2 percent of average 
compensation for the highest 3 consecutive years of compensation for 
each year of participation not in excess of 25. The plan has no minimum 
age or service requirement for participation. The normal retirement age 
specified under the plan is age 65. On December 31, 1990, B, age 40, is 
a participant in the N Corporation's plan. B began employment with the N 
Corporation and became a participant in the N Corporation's plan on 
January 1, 1980. Under this subparagraph, the normal retirement benefit 
to which a participant would be entitled if he commenced participation 
at the earliest possible entry age (0) under the plan and served 
continuously until normal retirement age (65) is 50 percent of average 
compensation for the highest 3 consecutive years of compensation per 
year commencing at age 65. Under this subparagraph, B must have accrued 
an annual benefit of at least 16.5 percent of his highest 3 consecutive 
years of compensation per year commencing at age 65 [0.03 x 50 percent 
of average compensation for the highest 3 consecutive years of 
compensation x 11] as of the close of the plan year. Under the N 
Corporation plan, B has accrued an annual benefit of 22 percent of 
average compensation for his highest 3 consecutive years of compensation 
per year commencing at age 65. Thus, with respect to B, the accrued 
benefit under the N Corporation plan satisfies the requirements of this 
subparagraph.
    Example 4. The P Corporation's defined benefit plan provides an 
annual retirement benefit commencing at age 65 of 50 percent of average 
compensation for the 3 consecutive years of compensation from the P 
Corporation next preceding normal retirement age. The plan has no 
minimum age or service requirement for participation. The normal 
retirement age under the plan is age 65. On December 31, 1990, C, age 
55, separates from service with the P Corporation. C began employment 
with the P Corporation and became a participant in the P Corporation's 
plan on January 1, 1980. As of December 31, 1990. C's average 
compensation for the 3 consecutive years preceding his separation from 
service is $15,000. Under this subparagraph, the normal retirement 
benefit to which a participant would be entitled if he commenced 
participation at the earliest possible entry age (0) under the plan and 
served continuously until normal retirement age (65) is an annual 
benefit of 50 percent of average compensation for the 3 consecutive 
years of compensation from the P Corporation next preceding normal 
retirement age commencing at age 65. C must have accrued an annual 
benefit of at least $2,475 commencing at age 65 [0.03 x (0.050 x 
$15,000) x 11] as of his separation from the service with the P 
Corporation in order for the P Corporation's plan to satisfy the 
requirements of this subparagraph with respect to C.
    Example 5. On December 31, 1985, the R Corporation's defined benefit 
plan provided an annual retirement benefit commencing at age 65 of $100 
for each year of participation, not to exceed 30. As a condition of 
participation, the plan requires that an employee have attained age 25. 
The normal retirement age specified under the plan is age 65. The 
appropriate computation period is the calendar year. On January 1, 1986, 
the plan is amended to provide an annual retirement benefit commencing 
at age 65 of $200 for each year of participation (before and after the 
amendment), not to exceed 30. B, age 40, is a participant in the R 
Corporation's plan. B has completed 15 years of participation in the 
plan of the R Corporation as of December 31, 1990. Under paragraph 
(b)(1)(i) of this section, the normal retirement benefit commencing at 
age 65 to which a participant would be entitled if he commenced 
participation at the earliest possible entry age (25) under the plan and 
served continuously until normal retirement age (65) is an annual 
benefit of $6,000 [30 x 200]. Under subdivision (i) of this 
subparagraph, the plan does not satisfy the requirements of this 
subparagraph unless B has accrued an annual benefit of at least $2,700 
[0.03 x $6,000 x 15] as of December 31, 1990. Under the R Corporation 
plan, B is entitled to an accrued benefit of $3,000 [$200

[[Page 94]]

x 15] as of December 31, 1990. Thus, with respect to B, the accrued 
benefit provided under the R Corporation plan satisfies the requirements 
of this subparagraph.
    Example 6. On December 31, 1995, the J Corporation's defined benefit 
plan provided an annual retirement benefit commencing at age 65 of 
$4,800 after 30 years of participation. The normal retirement age 
specified under the plan is age 65. The appropriate computation period 
is the calendar year. On January 1, 1996, the plan is amended to provide 
an annual retirement benefit commencing at age 65 of $6,000. A, age 40, 
is a participant in the J Corporation's plan since its adoption on 
January 1, 1986. Under paragraph (b)(1)(i) of this section, on December 
31, 1995, the normal retirement benefit commencing at age 5 to which a 
participant would be entitled if he commenced participation at the 
earliest possible entry age (0) under the plan and served continuously 
until normal retirement age (65) is an annual benefit of $4,800. Under 
paragraph (b)(1)(i) of this section, on January 1, 1996, the normal 
retirement benefit commencing at age 65 to which a participant would be 
entitled if he commenced participation at the earliest possible entry 
age (0) under the plan and served continuously until normal retirement 
age (65) is an annual benefit of $6,000. Under subdivision (i) of this 
subparagraph, the plan does not satisfy the requirements of this 
subparagraph unless A has an accrued benefit on December 31, 1995 of at 
least $1,440 [$4,800 x 0.02 x 10] and an accrued benefit on January 1, 
1996 of at least $1,800 [$6,000 x 0.03 x 10].
    Example 7. The X Company's defined benefit plan provides an annual 
retirement benefit commencing at age 65 of $4 per month for each year of 
participation (not to exceed 30). As a condition of participation, the 
plan requires that an employee have attained age 25. The normal 
retirement age specified under the plan is age 65. D, age 68, is a 
participant in the X Company's plan. D has completed 20 years of 
participation in the X Company plan as of the close of the plan year. 
Under paragraph (b)(1)(i) of this section, the normal retirement benefit 
commencing at age 65 to which a participant would be entitled if he 
commenced participation at the earliest possible entry age (25) under 
the plan and served continuously until normal retirement age (65) is an 
annual benefit, commencing at age 65, of $1,440 [30 x $48]. Under 
paragraph (b)(1)(i) of this section, the plan does not satisfy the 
requirements of this subparagraph unless D has accrued an annual 
benefit, commencing at age 65, of $864 [0.03 x $1,440 x 20] as of the 
close of the plan year. Under the X Company plan, D has accrued an 
annual benefit, commencing at age 65, of $960 [20 x $48]. Thus, with 
respect to D the accrued benefit provided under the X Company plan 
satisfies the requirements of this subparagraph.
    Example 8. Assume the same facts as in example (7) except that for 
purposes of determining accrued benefits under the plan the X Company's 
plan disregards all years of participation after normal retirement age. 
Under paragraph (b)(1)(i) of this section, the normal retirement benefit 
commencing at age 65 to which a participant would be entitled if he 
commenced participation at the earliest possible entry age (25) under 
the plan and served continuously until normal retirement age (65) is an 
annual benefit of $1,440 [30 x $48]. Under paragraph (b)(1)(i) of this 
section the plan does not satisfy the requirements of this subparagraph 
unless D has accrued an annual benefit, commencing at age 65, of $864 
[0.03 x $1,440 x 20] as of the close of the plan year. Under the X 
Company's plan D has accrued an annual benefit commencing at age 65, of 
$816 [17 x $48]. Thus, with respect to D, the accrued benefit provided 
under the X Company plan does not satisfy the requirements of this 
subparagraph.

    (2) 133\1/3\ percent rule--(i) General rule. A defined benefit plan 
satisfies the requirements of this subparagraph for a particular plan 
year if--
    (A) Under the plan the accrued benefit payable at the normal 
retirement age (determined under the plan) is equal to the normal 
retirement benefit (determined under the plan), and
    (B) The annual rate at which any individual who is or could be a 
participant can accrue the retirement benefits payable at normal 
retirement age under the plan for any later plan year cannot be more 
than 133\1/3\ percent of the annual rate at which he can accrue benefits 
for any plan year beginning on or after such particular plan year and 
before such later plan year.
    (ii) Special rules. For purposes of this subparagraph--
    (A) Plan amendments. Any amendment to the plan which is in effect 
for the current plan year shall be treated as if it were in effect for 
all other plan years.
    (B) Change in accrual rate. Any change in an accrual rate which 
change does not apply to any individual who is of could be a participant 
in the plan year is disregarded. Thus, for example, if for its plan year 
beginning January 1, 1980, a defined benefit plan provides an accrued 
benefit in plan year 1980 of 2 percent of a participant's average 
compensation for his highest 3 years of compensation for each year of 
service

[[Page 95]]

and provides that in plan year 1981 the accrued benefit will be 3 
percent of such average compensation, the plan will not be treated as 
failing to satisfy the requirements of this subparagraph for plan year 
1980 because in plan year 1980 the change in the accrual rate does not 
apply to any individual who is or could be a participant in plan year 
1980. However, if, for example, a defined benefit plan provided for an 
accrued benefit of 1 percent of a participant's average compensation for 
his highest 3 years of compensation for each of the first 10 years of 
service and 1.5 percent of such average compensations for each year of 
service thereafter, the plan will be treated as failing to satisfy the 
requirements of this subparagraph for the plan year even though no 
participant is actually accruing at the 1.5 percent rate because an 
individual who could be a participant and who had over 10 years of 
service would accrue at the 1.5 percent rate, which rate exceeds 133\1/
3\ percent of the 1 percent rate.
    (C) Early retirement benefits. The fact that certain benefits under 
the plan may be payable to certain participants before normal retirement 
age is disregarded. Thus, the requirements of subdivision (i) of this 
subparagraph must be satisfied without regard to any benefit payable 
prior to the normal retirement benefit (such as an early retirement 
benefit which is not the normal retirement benefit (see Sec.  1.411(a)-
7(c).
    (D) Social security, etc. For purposes of this paragraph, for any 
plan year, social security benefits and all relevant factors used to 
compute benefits, e.g., consumer price index, are treated as remaining 
constant as of the beginning of the current plan year for all subsequent 
plan years.
    (E) Postponed retirement. A plan shall not be treated as failing to 
satisfy the requirements of this subparagraph for a plan year merely 
because no benefits under the plan accrue to a participant who continues 
service with the employer after such participant has attained normal 
retirement age.
    (F) Computation of benefit. A plan shall not satisfy the 
requirements of this subparagraph if the base for the computation of 
retirement benefits changes solely by reason of an increase in the 
number of years of participation. Thus, for example, a plan will not 
satisfy the requirements of this subparagraph if it provides a benefit, 
commencing at normal retirement age, of the sum of (1) 1 percent of 
average compensation for a participant's first 3 years of participation 
multiplied by his first 10 years of participation (or, if less than 10 
his total years of participation) and (2) 1 percent of average 
compensation for a participant's 3 highest years of participation 
multiplied by each year of participation subsequent to the 10th year.
    (G) Variable interest crediting rate under a statutory hybrid 
benefit formula. For plan years that begin on or after January 1, 2012 
(or an earlier date as elected by the taxpayer), a plan that determines 
any portion of the participant's accrued benefit pursuant to a statutory 
hybrid benefit formula (as defined in Sec.  1.411(a)(13)-1(d)(4)) that 
utilizes an interest crediting rate described in Sec.  1.411(b)(5)-1(d) 
that is a variable rate that was less than zero for the prior plan year 
is not treated as failing to satisfy the requirements of paragraph 
(b)(2) of this section for the current plan year merely because the plan 
assumes for purposes of paragraph (b)(2) of this section that the 
variable rate is zero for the current plan year and all future plan 
years.
    (H) Special rule for multiple formulas. [Reserved]
    (iii) Examples. The application of this subparagraph is illustrated 
by the following examples:

    Example 1. On January 1, 1980, the R Corporation's defined benefit 
plan provides for an annual benefit (commencing at age 65) of a 
percentage of a participant's average compensation for the period of 5 
consecutive years of participation for which his compensation is the 
highest. The percentage is 2 percent for each of the first 20 years of 
participation and 1 percent per year thereafter. The appropriate 
computation period is the calendar year. The R Corporation's plan 
satisfies the requirements of this subparagraph because the 133\1/3\ 
percent rule does not restrict subsequent accrual rate decreases.
    Example 2. On January 1, 1980, the J Corporation's defined benefit 
plan provides for an annual benefit (commencing at age 65) of a 
percentage of a participant's average compensation for the period of his 
final 5 consecutive years of participation. The percentage is 1 percent 
for each of the first 5 years

[[Page 96]]

of participation; 1\1/3\ percent for each of the next 5 years of 
participation; and 1\7/9\ percent for each year thereafter. The 
appropriate computation period is the calendar year. Even though no 
single accrual rate under the J Corporation's plan exceeds 133\1/3\ 
percent of the immediately preceding accrual rate, the J Corporation's 
plan does not satisfy the requirements of this subparagraph because the 
rate of accrual for all years of participation in excess of 10 (1\7/9\ 
percent) exceeds 133\1/3\ percent of the rate of accrual for any of the 
first 5 years of participation (1 percent).
    Example 3. On January 1, 1980, the C Corporation's defined benefit 
plan provides for an annual benefit (commencing at age 65) of a 
percentage of a participant's average compensation for the period of 3 
consecutive years of participation for which his compensation is the 
highest. The percentage is 2 percent for each of the first 5 years of 
participation; 1 percent for each of the next 5 years of participation; 
and 1\1/2\ percent for each year thereafter. The appropriate computation 
period is the calendar year. Even though the average rate of accrual 
under the C Corporation's plan is not less rapidly than ratably, the C 
Corporation's plan does not satisfy the requirements of this 
subparagraph because the rate of accrual for all years of participation 
in excess of 10 (1\1/2\ percent) for any employee who is actually 
accruing benefits or who could accrue benefits exceeds 133\1/3\ percent 
of the rate of accrual for the sixth through tenth years of 
participation, respectively (1 percent).

    (3) Fractional rule--(i) In general. A defined benefit plan 
satisfies the requirements of this paragraph if the accrued benefit to 
which any participant is entitled is not less than the fractional rule 
benefit multiplied by a fraction (not exceeding 1)--
    (A) The numerator of which is his total number of years of 
participation in the plan, and
    (B) The denominator of which is the total number of years he would 
have participated in the plan if he separated from the service at the 
normal retirement age under the plan.
    (ii) Special rules. For purposes of this subparagraph--
    (A) Fractional rule benefit. The ``fractional rule benefit'' is the 
annual benefit commencing at the normal retirement age under the plan to 
which a participant would be entitled if he continued to earn annually 
until such normal retirement age the same rate of compensation upon 
which his normal retirement benefit would be computed. Such rate of 
compensation shall be computed on the basis of compensation taken into 
account under the plan (but taking into account average compensation for 
no more than the 10 years of service immediately preceding the 
determination). For purposes of this subdivision (A), the normal 
retirement benefit shall be determined as if the participant had 
attained normal retirement age on the date any such determination is 
made.
    (B) Social security, etc. For purposes of this subparagraph, for any 
plan year, social security benefits and all relevant factors used to 
compute benefits, e.g., consumer price index, are treated as remaining 
constant as of the beginning of the current plan year for all subsequent 
plan years.
    (C) Postponed retirement. A plan shall not be treated as failing to 
satisfy the requirements of this subparagraph merely because no benefits 
under the plan accrue to a participant who continues service with the 
employer after such participant has attained normal retirement age under 
the plan.
    (D) Computation in certain cases. In the case of any plan to which 
the provisions of section 411(b)(1)(D) and paragraph (c) of this section 
are applicable, for any plan year the accrued benefit of any participant 
shall not be less than the accrued benefit otherwise determined under 
this subparagraph, reduced by the excess of the accrued benefit 
determined under this subparagraph as of the first day of the first plan 
year to which section 411 applies over the accrued benefit determined 
under section 411(b)(1)(D) and paragraph (c) of this section and 
increased by the amount determined under paragraph (c)(2)(v) of this 
section.
    (iii) Examples. The application of this subparagraph is illustrated 
by the following examples:

    Example 1. The R Corporation's defined benefit plan provides an 
annual retirement benefit commencing at age 65 of 30 percent of a 
participant's average compensation for his highest 3 consecutive years 
of participation. If a participant separates from service prior to 
normal retirement age, the R Corporation's plan provides a benefit equal 
to an amount which bears the same ratio to 30 percent of such average 
compensation as the participant's actual number of years of 
participation in the plan bears to the number of

[[Page 97]]

years the participant would have participated in the plan had he 
separated from service at age 65. The plan further provides that normal 
retirement age is age 65. A, age 55, is a participant in the R 
Corporation's plan for the current year, and A has 15 years of 
participation in the R Corporation's plan. As of the current year, A's 
average compensation for his highest 3 years of compensation is $20,000. 
The R Corporation's plan satisfies the requirements of this subparagraph 
because if A separates from the service in the current year he will be 
entitled to an annual benefit of $3,600 commencing at age 65 [0.3 x 
$20,000 x 15/25].
    Example 2. The J Corporation's defined benefit plan provides a 
normal retirement benefit of 1 percent per year of a participant's 
average compensation from the employer. In the case of a participant who 
separates from service prior to normal retirement age (65), the plan 
provides that the annual benefit is an amount which is equal to 1 
percent of such compensation multiplied by the number of years of plan 
participation actually completed by the participant. The plan year of 
the J Corporation's plan is the calendar year. B, age 55, is a 
participant in the J Corporation's plan for the current year. B became a 
participant in the J Corporation's plan on January 1, 1980. As of 
December 31, 1990, B's compensation history is as follows:

------------------------------------------------------------------------
                          Year                             Compensation
------------------------------------------------------------------------
1980...................................................          $17,000
1981...................................................           18,000
1982...................................................           20,000
1983...................................................           20,000
1984...................................................           21,000
1985...................................................           22,000
1986...................................................           23,000
1987...................................................           25,000
1988...................................................           26,000
1989...................................................           29,000
1990...................................................           32,000
------------------------------------------------------------------------

    If B separates from service on December 31, 1990, he would be 
entitled to an annual benefit of $2,530 commencing at age 65. Because 
the J Corporation's plan does not limit the number of years of 
compensation to be taken into account in determining the normal 
retirement benefit, B's rate of compensation for purposes of determining 
his normal retirement benefit is $23,600 [$18,000 + $20,000 + $20,000 + 
$21,000 + $22,000 + $23,000 + $25,000 + $26,000 + $29,000 + $32,000]/10.
    Under this subparagraph, B's accrued benefit under the J 
Corporation's plan as of December 31, 1990 must be not less than $2,561 
per year commencing at age 65 [0.01 x ($17,000 + $18,000 + $20,000 + 
$20,000 + $21,000 + $22,000 + $23,000 + $25,000 + $26,000 + $29,000 + 
$32,000 + ($23,600 x 10)) x 11/21]. Thus, the J Corporation's plan would 
not satisfy the requirements of this subparagraph.

    (c) Accruals for service before effective date--(1) General rule. 
For a plan year to which section 411 applies, a defined benefit plan 
does not satisfy the requirements of section 411(b)(1) and this section 
unless, under the plan, the accrued benefit of each participant for plan 
years beginning before section 411 applies is not less than the greater 
of--
    (i) Such participant's accrued benefit (as of the day before section 
411 applies) determined under the plan as in effect from time to time 
prior to September 2, 1974 (without regard to any amendment adopted 
after such date), or
    (ii) One-half of the accrued benefit that would be determined with 
respect to the participant as of the day before section 411 applies if 
the participant's accrued benefit were computed for such prior plan 
years under a method which satisfies the requirements of section 
411(b)(1) (A), (B), or (C) and paragraph (b) (1), (2), or (3) of this 
section. See 29 CFR Part 2530, Department of Labor regulations relating 
to minimum standards for employee pension benefit plans, for time 
participation deemed to begin.
    (2) Special rules--(i) A plan shall not be deemed to fail to satisfy 
the requirements of section 411(b) and this section merely because the 
method for computing the accrued benefit of a participant for years of 
participation prior to the first plan year for which section 411 is 
effective with respect to the plan is not the same method for computing 
the accrued benefit of a participant for years of participation 
subsequent to such plan year.
    (ii) For purposes of paragraph (c)(1)(ii) of this section, section 
411(b)(1)(A) and paragraph (b)(1) of this section shall be applied as if 
the participant separated from service with the employer on the day 
before the first day of the first plan year to which section 411 
applies.
    (iii) For purposes of paragraph (c)(1)(ii) of this section, section 
411(b)(1)(B) and paragraph (b)(2) of this section shall be applied in 
the following manner:
    (A) Except as provided in (c)(2)(iii)(B) of this section, section 
411(b)(1)(B) and paragraph (b)(2) of this section shall be applied as if 
the participant separated

[[Page 98]]

from service with the employer on the day before the first day of the 
first plan year to which section 411 applies.
    (B) In the case that the plan does not satisfy the requirements of 
section 411(b)(1)(B) and paragraph (b)(2) of this section at any time 
prior to the day specified in (c)(2)(iii)(A) of this section, the plan 
shall be deemed revised to the extent necessary to satisfy the 
requirements of section 411(b)(1)(B) and paragraph (b)(2) of this 
section for all plan years beginning before the applicable effective 
date of section 411 and this section. For purposes of the preceding 
sentence, a plan shall not be deemed revised to the extent necessary to 
satisfy the requirements of section 411(b)(1)(B) and paragraph (b)(2) of 
this section for a plan year if the benefit a participant would receive 
if he were employed until normal retirement age is reduced by such 
revision or if the revised rate of accrual with respect to such accrued 
benefit does not otherwise satisfy the requirements of section 
411(b)(1)(B) and paragraph (b)(2) of this section.
    (iv) For purposes of paragraph (c)(1)(ii) of this section, section 
411(b)(1)(C) and paragraph (b)(3) of this section shall be applied as if 
the participant separated from service on the day before the first day 
of the first plan year to which section 411 applies.
    (v) The excess of the accrued benefit payable at normal retirement 
age of any participant determined under section 411(b)(1) (A), (B), or 
(C) (without regard to section 411(b)(1)(D)), and paragraph (b)(1), (2), 
or (3) of this section (without regard to this paragraph) as of the day 
before the first day of the first plan year to which section 411 and 
this section applies over the accrued benefit determined under paragraph 
(c)(1) of this section shall be accrued in accordance with the 
provisions of the plan as in effect after the applicable effective date 
of section 411, as if the plan had been initially adopted on such 
effective date.
    (d) Special rules--(1) First 2 years of service. Notwithstanding 
paragraphs (1), (2), and (3) of paragraph (b) of this section, under 
section 411(b)(1)(E) and this subparagraph, a plan shall not be treated 
as failing to satisfy the requirements of paragraph (b) of this section 
solely because the accrual of benefits under the plan does not become 
effective until the employee has completed 2 continuous years of 
service. For purposes of this subparagraph, continuous years of service 
are years of service (within the meaning of section 410(a)(3)(A)) which 
are not separated by a break in service (within the meaning of section 
410(a)(5)). For years of service beginning after such 2 years of 
service, the accrued benefit of an employee shall not be less than that 
to which the employee would be entitled if section 411(b)(1)(E) and this 
subparagraph did not apply. Thus, for example, a plan which otherwise 
satisfies the requirements of paragraph (b)(2) of this section provides 
for a rate of accrual of 1 percent of average compensation for the 
highest 3 years of compensation beginning with the third year of service 
of a participant shall not be treated as satisfying paragraph (b)(2) of 
this section because as of the time the employee completes 3 continuous 
years of service there is no accrual during the first 2 years of 
service. In addition, a plan which otherwise satisfies the requirements 
of paragraph (b)(1) of this section and which requires that an employee 
must attain age 25 and complete 1 year of service prior to becoming a 
participant will not satisfy the requirements of paragraph (b)(1) of 
this section if an employee who completes 2 years of service prior to 
attaining age 25 does not begin accruals immediately upon commencement 
of participation in the plan. For rules relating to years of service, 
see 29 CFR part 2530, Department of Labor regulations relating to 
minimum standards for employee pension benefit plans.
    (2) Certain insured defined benefit plans. Notwithstanding 
paragraphs (b) (1), (2), and (3) of this section, a defined benefit plan 
satisfies the requirements of paragraph (b) of this section if such plan 
is funded exclusively by the purchase of contracts from a life insurance 
company and such contracts satisfy the requirements of sections 412(i) 
(2) and (3) and the regulations thereunder. The preceding sentence is 
applicable only if an employee's accrued benefit as of any applicable 
date is not less than the cash surrender value such employee's insurance 
contracts would

[[Page 99]]

have on such applicable date if the requirements of section 412(i) (4), 
(5), and (6) and the regulations thereunder were satisfied.
    (3) Accrued benefit may not decrease on account of increasing age or 
service. Notwithstanding paragraphs (b) (1), (2), and (3) of this 
section and paragraphs (d) (1) and (2) of this section, a defined 
benefit plan shall be treated as not satisfying the requirements of 
paragraphs (b) and (d) of this section if the participant's accrued 
benefit is reduced on account of any increase in his age or years of 
service. The preceding sentence shall not apply to social security 
supplements described in Sec.  1.411(a)-7(c)(4).
    (e) Separate accounting. A plan satisfies the requirements of this 
paragraph if the requirements of paragraph (e) (1) or (2) of this 
paragraph are met.
    (1) Defined benefit plan. In the case of a defined benefit plan, the 
requirements of this paragraph are satisfied if the plan requires 
separate accounting for the portion of each employee's accrued benefit 
derived from any voluntary employee contributions permitted under the 
plan. For purposes of this subparagraph the term ``voluntary employee 
contributions'' means all employee contributions which are not mandatory 
contributions within the meaning of section 411(c)(2)(C) and the 
regulations thereunder. See Sec.  1.411(c)-1(b)(1) for rules requiring 
the determination of such an accrued benefit by the use of a separate 
account.
    (2) Defined contribution plan. In the case of a defined contribution 
plan, the requirements of this paragraph are not satisfied unless the 
plan requires separate accounting for each employee's accrued benefit. 
If a plan utilizes the break in service rule of section 411(a)(6)(C), an 
employee could have different percentages of vesting between pre-break 
and post-break accrued benefits. In such a case, the requirements of 
this paragraph are not satisfied unless the plan computes accrued 
benefits in a manner which takes into account different percentages. A 
plan which provides separate accounts for pre-break and post-break 
accrued benefits will be deemed to compute benefits in a reasonable 
manner.
    (f) Year of participation--(1) In general. This paragraph is 
inapplicable to a defined contribution plan. For purposes of determining 
an employee's accrued benefit, a ``year of participation'' is a period 
of service determined under regulations prescribed by the Secretary of 
Labor in 29 CFR Part 2530, relating to minimum standards for employee 
pension benefit plans.
    (2) Additional rule relating to year of participation. A trust shall 
not constitute a qualified trust if the plan of which such trust is a 
part provides for the crediting of a year of participation, or part 
thereof, and such credit results in the discrimination prohibited by 
section 401(a)(4).
    (g) Additional illustrations. The application of this section may be 
illustrated by the following example:

    Example. (i) The S Corporation established a defined benefit plan on 
January 1, 1980. The plan provides a minimum age for participation of 
age 25. The normal retirement age under the plan is age 65. The 
appropriate computation periods are the calendar year. The plan provides 
an annual benefit, commencing at age 65, equal to $96 per year of 
service for the first 25 years of service, and $48 per year of service 
for each additional year of service.
    (ii) The plan of the S Corporation does not satisfy the requirements 
of section 411(b)(1)(A) and paragraph (b)(1) of this section because the 
accrued benefit under the plan at some point will be less than the 
accrued benefit required under section 411(b)(1)(A) and paragraph (b)(1) 
of this section (i.e., 3 percent x normal retirement benefit x years of 
participation).
    (iii) The plan of the S Corporation does satisfy the requirements of 
section 411(b)(1)(B) and paragraph (b)(2) of this section because the 
rate of benefit accrual is equal in each of the first 25 years of 
service and the rate decreases thereafter.
    (iv) The plan of the S Corporation does satisfy the requirements of 
section 411(b)(1)(C) and paragraph (b)(3) of this section because the 
accrued benefit under the plan will equal or exceed the normal 
retirement benefit multiplied by the fraction described in paragraph 
(b)(3)(i) of this section.

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42334, Aug. 23, 1977, as amended by T.D. 9693, 79 FR 
56459, Sept. 19, 2014]

[[Page 100]]



Sec.  1.411(b)(5)-1  Reduction in rate of benefit accrual under a
defined benefit plan.

    (a) In general--(1) Organization of regulation. This section sets 
forth certain rules for determining whether a reduction occurs in the 
rate of benefit accrual under a defined benefit plan because of the 
attainment of any age for purposes of section 411(b)(1)(H)(i). Paragraph 
(b) of this section describes safe harbors for certain plan designs 
(including statutory hybrid plans) that are deemed to satisfy the age 
discrimination rules under section 411(b)(1)(H). Paragraph (c) of this 
section describes rules relating to statutory hybrid plan conversion 
amendments. Paragraph (d) of this section describes rules restricting 
interest credits (or equivalent amounts) under a statutory hybrid plan 
to a market rate of return. Paragraph (e) of this section contains 
additional rules related to market rates of return. Paragraph (f) of 
this section contains effective/applicability dates.
    (2) Definitions. The definitions of accumulated benefit, lump sum-
based benefit formula, statutory hybrid benefit formula, statutory 
hybrid plan, and variable annuity benefit formula in Sec.  1.411(a)(13)-
1(d) apply for purposes of this section.
    (b) Safe harbors for certain plan designs--(1) Accumulated benefit 
testing--(i) In general. Pursuant to section 411(b)(5)(A), and subject 
to paragraph (b)(1)(ii) of this section, a plan is not treated as 
failing to meet the requirements of section 411(b)(1)(H)(i) with respect 
to an individual who is or could be a participant if, as of any date, 
the accumulated benefit of the individual would not be less than the 
accumulated benefit of any similarly situated, younger individual who is 
or could be a participant. Thus, this test involves a comparison of the 
accumulated benefit of an individual who is or could be a participant in 
the plan with the accumulated benefit of each similarly situated, 
younger individual who is or could be a participant in the plan. See 
paragraph (b)(5) of this section for rules regarding whether a younger 
individual who is or could be a participant is similarly situated to a 
participant. The comparison described in this paragraph (b)(1)(i) is 
based on any one of the following benefit measures, each of which is 
referred to as a safe-harbor formula measure:
    (A) The annuity payable at normal retirement age (or current age, if 
later) if the accumulated benefit of the participant under the terms of 
the plan is an annuity payable at normal retirement age (or current age, 
if later).
    (B) The current balance of a hypothetical account maintained for the 
participant if the accumulated benefit of the participant is the current 
balance of a hypothetical account.
    (C) The current value of an accumulated percentage of the 
participant's final average compensation if the accumulated benefit of 
the participant is the current value of an accumulated percentage of the 
participant's final average compensation.
    (ii) Benefit formulas for comparison--(A) In general. Except as 
provided in paragraphs (b)(1)(ii)(B), (C), (D) and (E) of this section, 
the safe harbor provided by section 411(b)(5)(A) and paragraph (b)(1)(i) 
of this section is available only with respect to a participant if the 
participant's accumulated benefit under the plan is expressed in terms 
of only one safe-harbor formula measure and no similarly situated, 
younger individual who is or could be a participant has an accumulated 
benefit that is expressed in terms of any measure other than that same 
safe-harbor formula measure. Thus, for example, if a plan provides that 
the accumulated benefit of participants who are age 55 or older is 
expressed under the terms of the plan as a life annuity payable at 
normal retirement age (or current age if later) as described in 
paragraph (b)(1)(i)(A) of this section and the plan provides that the 
accumulated benefit of participants who are younger than age 55 is 
expressed as the current balance of a hypothetical account as described 
in paragraph (b)(1)(i)(B) of this section, then the safe harbor 
described in section 411(b)(5)(A) and paragraph (b)(1)(i) of this 
section does not apply to individuals who are or could be participants 
and who are age 55 or older.
    (B) Sum-of benefit formulas. If a plan provides that a participant's 
accumulated benefit is expressed as the sum of benefits determined in 
terms of two or more benefit formulas, each of which is

[[Page 101]]

expressed in terms of a different safe-harbor formula measure, then the 
plan is deemed to satisfy paragraph (b)(1)(i) of this section with 
respect to the participant, provided that the plan satisfies the 
comparison described in paragraph (b)(1)(i) of this section separately 
for benefits determined in terms of each safe-harbor formula measure and 
no accumulated benefit of a similarly situated, younger individual who 
is or could be a participant is expressed other than as--
    (1) The sum of benefits under two or more benefit formulas, each of 
which is expressed in terms of one of those same safe-harbor formula 
measures as is used for the participant's ``sum-of'' benefit;
    (2) The greater of benefits under two or more benefit formulas, each 
of which is expressed in terms of any one of those same safe-harbor 
formula measures;
    (3) The choice of benefits under two or more benefit formulas, each 
of which is expressed in terms of any one of those same safe-harbor 
formula measures;
    (4) A benefit that is determined in terms of only one of those same 
safe-harbor formula measures; or
    (5) The lesser of benefits under two or more benefit formulas, at 
least one of which is expressed in terms of one of those same safe-
harbor formula measures.
    (C) Greater-of benefit formulas. If a plan provides that a 
participant's accumulated benefit is expressed as the greater of 
benefits under two or more benefit formulas, each of which is determined 
in terms of a different safe-harbor formula measure, then the plan is 
deemed to satisfy paragraph (b)(1)(i) of this section with respect to 
the participant, provided that the plan satisfies the comparison 
described in paragraph (b)(1)(i) of this section separately for benefits 
determined in terms of each safe-harbor formula measure and no 
accumulated benefit of a similarly situated, younger individual who is 
or could be a participant is expressed other than as--
    (1) The greater of benefits determined under two or more benefit 
formulas, each of which is expressed in terms of one of those same safe-
harbor formula measures as is used for the participant's ``greater-of'' 
benefit;
    (2) The choice of benefits determined under two or more benefit 
formulas, each of which is expressed in terms of one of those same safe-
harbor formula measures;
    (3) A benefit that is determined in terms of only one of those same 
safe-harbor formula measures; or
    (4) The lesser of benefits under two or more benefit formulas, at 
least one of which is expressed in terms of one of those same safe-
harbor formula measures.
    (D) Choice-of benefit formulas. If a plan provides that a 
participant's accumulated benefit is determined pursuant to a choice by 
the participant between benefits determined in terms of two or more 
different safe-harbor formula measures, then the plan is deemed to 
satisfy paragraph (b)(1)(i) of this section with respect to the 
participant, provided that the plan satisfies the comparison described 
in paragraph (b)(1)(i) of this section separately for benefits 
determined in terms of each safe-harbor formula measure and no 
accumulated benefit of a similarly situated, younger individual who is 
or could be a participant is expressed other than as--
    (1) The choice of benefits determined under two or more benefit 
formulas, each of which is expressed in terms of one of those same safe-
harbor formula measures as is used for the participant's ``choice-of'' 
benefit;
    (2) A benefit that is determined in terms of only one of those same 
safe-harbor formula measures; or
    (3) The lesser of benefits under two or more benefit formulas, at 
least one of which is expressed in terms of one of those same safe-
harbor formula measures.
    (E) Lesser-of benefit formulas. If a plan provides that a 
participant's accumulated benefit is expressed as a single safe-harbor 
formula measure and no accumulated benefit of a similarly situated, 
younger individual who is or could be a participant is expressed

[[Page 102]]

other than as a benefit that is determined under the same safe-harbor 
formula measure or as the lesser of benefits under two or more benefit 
formulas, at least one of which is expressed in terms of the same safe-
harbor formula measure, then the plan is deemed to satisfy paragraph 
(b)(1)(i) of this section with respect to the participant only if the 
plan satisfies the comparison described in paragraph (b)(1)(i) of this 
section for benefits determined in terms of the same safe-harbor formula 
measure. Similarly, if a plan provides that a participant's accumulated 
benefit is expressed as the lesser of benefits under two or more benefit 
formulas, each of which is determined in terms of a different safe-
harbor formula measure, then the plan is deemed to satisfy paragraph 
(b)(1)(i) of this section with respect to the participant only if the 
plan satisfies the comparison described in paragraph (b)(1)(i) of this 
section separately for benefits determined in terms of each safe-harbor 
formula measure and no accumulated benefit of a similarly situated, 
younger individual who is or could be a participant is expressed other 
than as the lesser of benefits under two or more benefit formulas, 
expressed in terms of all of those same safe-harbor formula measures 
(and any other additional formula measures).
    (F) Limitations on plan formulas that provide for hypothetical 
accounts or accumulated percentages of final average compensation. For 
plan years described in paragraph (f)(2)(i)(B)(1) or (f)(2)(i)(B)(3) of 
this section (as applicable), a benefit measure is a safe harbor formula 
measure described in paragraph (b)(1)(i)(B) or (C) of this section only 
if the formula under which the balance of a hypothetical account or the 
accumulated percentage of final average compensation is determined is a 
lump-sum based benefit formula.
    (iii) Disregard of certain subsidized benefits. For purposes of 
paragraph (b)(1)(i) of this section, any subsidized portion of an early 
retirement benefit that is included in a participant's accumulated 
benefit is disregarded. For this purpose, an early retirement benefit 
includes a subsidized portion only if it provides a higher actuarial 
present value on account of commencement before normal retirement age. 
However, for plan years described in paragraph (f)(2)(i)(B)(1) or 
(f)(2)(i)(B)(3) of this section (as applicable), if the annual benefit 
payable before normal retirement age is greater for a participant than 
the annual benefit under the corresponding form of benefit for any 
similarly situated, older individual who is or could be a participant 
and who is currently at or before normal retirement age, then that 
excess is not part of the subsidized portion of an early retirement 
benefit and, accordingly, is not disregarded under this paragraph 
(b)(1)(iii). For purposes of determining whether the annual benefit 
payable before normal retirement age is greater for a participant than 
the annual benefit under the corresponding form of benefit for any 
similarly situated, older individual who is or could be a participant, 
social security leveling options and social security supplements are 
disregarded. In addition, a plan is not treated as providing a greater 
annual benefit to a participant than to a similarly situated, older 
individual who is or could be a participant merely because the reduction 
(based on actuarial equivalence, using reasonable actuarial assumptions) 
in the amount of an annuity to reflect a survivor benefit is smaller for 
the participant than for a similarly situated, older individual who is 
or could be a participant.
    (iv) Examples. The provisions of this paragraph (b)(1) are 
illustrated by the following examples:

    Example 1. (i) Facts relating to formulas described in paragraph 
(b)(1)(i)(A) of this section. Employer X maintains a defined benefit 
plan that provides a straight life annuity payable commencing at normal 
retirement age (which is age 65) equal to 1 percent of the participant's 
highest 3 consecutive years' compensation times years of service and 
provides for suspension of benefits as permitted under section 
411(a)(3)(B). In the case of a participant whose service continues after 
normal retirement age, the amount payable is the greater of (i) the 
benefit payable at normal retirement age, and for each year thereafter, 
actuarially increased to account for delayed commencement, and (ii) the 
retirement benefit determined under the formula at the date the 
employee's service ceases (calculated by including years of service and 
increases in compensation after normal retirement age).

[[Page 103]]

    (ii) Conclusion. Under these facts, the plan formula is a formula 
described in paragraph (b)(1)(i)(A) of this section. The formula is not 
a statutory hybrid benefit formula merely because the plan formula 
includes a benefit that is based on the participant's benefit at normal 
retirement age (and each year thereafter) that is actuarially increased 
for commencement after attainment of normal retirement age. In addition, 
the plan formula would satisfy the comparison under paragraph (b)(1)(i) 
of this section for each individual who is or could be a participant 
because, as of any date (including any date after normal retirement 
age), the accumulated benefit of the individual would not be less than 
the accumulated benefit of any similarly situated, younger individual 
who is or could be a participant.
    Example 2. (i) Facts relating to formulas described in paragraph 
(b)(1)(i)(B) of this section. Employer Y maintains a defined benefit 
plan that expresses each participant's accumulated benefit as the 
balance of a hypothetical account. Under the formula, the hypothetical 
account balance of each participant is credited monthly with interest at 
a specified rate and the hypothetical account balance of each employee 
who is a participant is also credited with a pay credit under the plan 
equal to 7 percent of the participant's compensation for the month.
    (ii) Conclusion. The plan formula is a lump sum-based benefit 
formula described in paragraph (b)(1)(i)(B) of this section and the 
formula would satisfy the comparison under paragraph (b)(1)(i) of this 
section for each individual who is or could be a participant because, as 
of any date, the hypothetical account balance of the individual would 
not be less than the hypothetical account balance of any similarly 
situated, younger individual who is or could be a participant.
    Example 3. (i) Facts where plan suspends interest credits after 
normal retirement age. The facts are the same as in Example 2 except 
that the plan provides for suspension of benefits as permitted under 
section 411(a)(3)(B). Pursuant to the plan's suspension of benefits 
provision, the plan provides for interest credits to cease during 
service after normal retirement age or for the amount of the interest 
credits during this service to be reduced to reflect principal credits 
credited.
    (ii) Conclusion. The plan does not satisfy the safe harbor in 
paragraph (b)(1)(i) of this section. Applying the rule of paragraph 
(b)(1)(i) of this section, the plan formula would fail to satisfy the 
safe harbor comparison under paragraph (b)(1)(i) of this section with 
respect to an individual whose benefits have been suspended because, as 
of any date after attainment of normal retirement age, the hypothetical 
account balance of this individual would be less than the hypothetical 
account balance of one or more similarly situated individuals who have 
not attained normal retirement age.
    Example 4. (i) Facts providing greater-of benefits as described in 
paragraph (b)(1)(ii)(C) of this section. Employer Z sponsors a defined 
benefit plan that provides an accumulated benefit expressed as a 
straight life annuity commencing at the plan's normal retirement age 
(age 65), based on a percentage of average annual compensation times the 
participant's years of service. On November 2, 2011, the plan is amended 
effective as of January 1, 2012, to provide participants who have 
attained age 55 by January 1, 2012, with a benefit that is the greater 
of the benefit under the average annual compensation formula and a 
benefit that is based on the balance of a hypothetical account, which 
provides for annual pay credits of a specified percentage of the 
participant's compensation and annual interest credits based on the 
third segment rate.
    (ii) Conclusion where plan provides greater-of benefits to older 
participants. The plan satisfies the safe harbor of paragraph (b)(1)(i) 
of this section with respect to all individuals who are or could be 
participants. Pursuant to the rules of paragraph (b)(1)(ii)(C) of this 
section, the plan satisfies the safe harbor with respect to individuals 
who have attained age 55 by January 1, 2012, because (A) with respect to 
the benefit described in paragraph (b)(1)(i)(A) of this section (the 
benefit based on average annual compensation, disregarding the benefit 
based on the balance of a hypothetical account), the accumulated benefit 
for any individual who is or could be a participant and who is at least 
age 55 on January 1, 2012, would in no event be less than the 
accumulated benefit for a similarly situated, younger individual who is 
or could be participant and who has not yet attained age 55 by January 
1, 2012, (B) with respect to the benefit described in paragraph 
(b)(1)(i)(B) of this section (the benefit based on the balance of a 
hypothetical account, disregarding the benefit based on average annual 
compensation), the accumulated benefit for any individual who is or 
could be a participant and who is at least age 55 on January 1, 2012, 
would in no event be less than the accumulated benefit for a similarly 
situated, younger individual who is or could be a participant and who 
has not yet attained age 55 by January 1, 2012, and (C) the benefit of 
any individual who is or could be a participant who has not yet attained 
age 55 by January 1, 2012, is only expressed as an annuity payable at 
normal retirement age as described in paragraph (b)(1)(i)(A) of this 
section, and this safe-harbor formula measure applies also to 
participants who have attained age 55 by January 1, 2012. Furthermore, 
the plan satisfies the safe harbor with respect to individuals who have 
not yet attained age 55 by January 1, 2012, because the benefit of these

[[Page 104]]

individuals satisfies the general rule of paragraph (b)(1)(ii)(A) of 
this section.
    (iii) Conclusion where plan provides greater-of benefits only to 
younger participants. If, instead of the facts in paragraph (i) of this 
Example 4, the plan had been amended to provide only participants who 
have not yet attained age 55 by January 1, 2012, with a benefit that is 
the greater of the benefit under the average annual compensation formula 
and a benefit that is based on the balance of a hypothetical account, 
then the safe harbor would not be satisfied with respect to individuals 
who have attained age 55 by January 1, 2012. Under paragraph 
(b)(1)(ii)(A) of this section, except as provided in paragraphs 
(b)(1)(ii)(B), (C), and (D) of this section, the safe harbor of 
paragraph (b)(1)(i) of this section is available only with respect to 
individuals over age 55, whose benefit is expressed in terms of only one 
safe-harbor formula measure, if no similarly situated, younger 
individual has an accumulated benefit that is expressed in terms of any 
measure other than that same safe-harbor formula measure. This is not 
the case under these facts. The greater-of rule of paragraph 
(b)(1)(ii)(C) of this section would not apply to individuals who have 
attained age 55 because the accumulated benefits of these individuals is 
not equal to the greater of benefits under two or more benefit formulas.
    Example 5. (i) Facts where plan provides choice-of benefits to older 
participants. The facts are the same as in paragraph (i) of Example 4, 
except that for service after December 31, 2011, the amendment permits 
participants who have attained age 55 by January 1, 2012, to choose 
between benefits under the average annual compensation benefit formula 
or benefits under the hypothetical account balance formula (but, if a 
participant chooses the hypothetical account balance formula, his or her 
benefit under the plan is in no event to be less than the benefit 
determined under the average annual compensation benefit formula for 
service before January 1, 2012), while other participants receive 
benefits solely under the hypothetical account balance formula (but 
individuals who are participants on December 31, 2011, are in no event 
to receive less than the benefit determined under the average annual 
compensation benefit formula for service before January 1, 2012).
    (ii) Conclusion where plan provides choice to older participants. 
The plan satisfies the safe harbor with respect to all individuals who 
are or could be participants. Pursuant to the rule of paragraph 
(b)(1)(ii)(D) of this section, the plan satisfies the safe harbor of 
paragraph (b)(1)(i) of this section with respect to individuals who have 
attained age 55 by January 1, 2012, and, pursuant to the rule of 
paragraph (b)(1)(ii)(A), the plan satisfies the safe harbor with respect 
to individuals who have not yet attained 55 by January 1, 2012.
    (iii) Conclusion where plan provides choice-of benefits to older 
workers and greater-of benefits to younger participants. If, in addition 
to the facts in paragraph (i) of this Example 5, the plan were also to 
provide participants who had not yet attained age 55 by January 1, 2012, 
the greater of the benefits under the average annual compensation 
benefit formula or the benefits under the hypothetical account balance 
formula, then pursuant to the rules of paragraph (b)(1)(ii)(A) and (D) 
of this section, the safe harbor would not be satisfied with respect to 
participants who have attained age 55 by January 1, 2012.

    (2) Indexed benefits-- (i) In general. Except as provided in 
paragraph (b)(2)(iii) of this section, pursuant to section 411(b)(5)(E) 
and this paragraph (b)(2)(i), a defined benefit plan is not treated as 
failing to meet the requirements of section 411(b)(1)(H) with respect to 
a participant solely because a benefit formula (other than a lump sum-
based benefit formula) under the plan provides for the periodic 
adjustment of the participant's accrued benefit under the plan by means 
of the application of a recognized index or methodology. An indexing 
rate that does not exceed a market rate of return, as defined in 
paragraph (d) of this section, is deemed to be a recognized index or 
methodology for purposes of the preceding sentence. In addition, for 
plan years described in paragraph (f)(2)(i)(B)(1) or (f)(2)(i)(B)(3) of 
this section, as applicable (or an earlier date as elected by the 
taxpayer), any subsidized portion of any early retirement benefit under 
such a plan that meets the requirements of paragraph (b)(1)(iii) is 
disregarded in determining whether the plan meets the requirements of 
section 411(b)(1)(H). However, such a plan must satisfy the 
qualification requirements otherwise applicable to statutory hybrid 
plans, including the requirements of Sec.  1.411(a)(13)-1(c) (relating 
to minimum vesting standards) and paragraph (c) of this section 
(relating to plan conversion amendments) if the plan has an effect 
similar to a lump sum-based benefit formula, pursuant to the rules of 
Sec.  1.411(a)(13)-1(d)(4)(ii).
    (ii) Similarly situated participant test. Paragraph (b)(2)(i) of 
this section does not apply unless the aggregate adjustments made to a 
participant's accrued benefit under the plan (determined as a

[[Page 105]]

percentage of the unadjusted accrued benefit) in a period would not be 
less than the aggregate adjustments for any similarly situated, younger 
participant. This test requires a comparison, for each period, of the 
aggregate adjustments for each individual who is or could be a 
participant in the plan for the period with the aggregate adjustments of 
each other similarly situated, younger individual who is or could be a 
participant in the plan for that period. See paragraph (b)(5) of this 
section for rules regarding whether each younger individual who is or 
could be a participant is similarly situated to a participant.
    (iii) Protection against loss--(A) In general. Paragraph (b)(2)(i) 
of this section does not apply unless the plan satisfies section 
411(b)(5)(E)(ii) and paragraph (d)(2) of this section (relating to 
preservation of capital).
    (B) Exception for variable annuity benefit formulas. The requirement 
to satisfy section 411(b)(5)(B)(i)(II), as set forth in paragraph (d)(2) 
of this section, as well as section 411(b)(5)(E)(ii), as set forth in 
this paragraph (b)(2)(iii), does not apply in the case of a benefit 
provided under a variable annuity benefit formula as defined in Sec.  
1.411(a)(13)-1(d)(6).
    (3) Certain offsets permitted. A plan is not treated as failing to 
meet the requirements of section 411(b)(1)(H) solely because the plan 
provides offsets against benefits under the plan to the extent the 
offsets are allowable in applying the requirements of section 401(a) and 
the applicable requirements of the Employee Retirement Income Security 
Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), and the Age 
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 
602 (1967)).
    (4) Permitted disparities in plan contributions or benefits. A plan 
is not treated as failing to meet the requirements of section 
411(b)(1)(H) solely because the plan provides a disparity in 
contributions or benefits with respect to which the requirements of 
section 401(l) are met.
    (5) Definition of similarly situated. For purposes of paragraphs 
(b)(1) and (b)(2) of this section, an individual is similarly situated 
to another individual if the individual is identical to that other 
individual in every respect that is relevant in determining a 
participant's benefit under the plan (including period of service, 
compensation, position, date of hire, work history, and any other 
respect) except for age. In determining whether an individual is 
similarly situated to another individual, any characteristic that is 
relevant for determining benefits under the plan and that is based 
directly or indirectly on age is disregarded. For example, if a 
particular benefit formula applies to a participant on account of the 
participant's age, an individual to whom the benefit formula does not 
apply and who is identical to the participant in all other respects is 
similarly situated to the participant. By contrast, an individual is not 
similarly situated to a participant if a different benefit formula 
applies to the individual and the application of the different formula 
is not based directly or indirectly on age.
    (c) Special rules for plan conversion amendments--(1) In general. 
Pursuant to section 411(b)(5)(B)(ii), (iii), and (iv), if there is a 
conversion amendment within the meaning of paragraph (c)(4) of this 
section with respect to a defined benefit plan, then the plan is treated 
as failing to meet the requirements of section 411(b)(1)(H) unless the 
plan, after the amendment, satisfies the requirements of paragraph 
(c)(2) of this section.
    (2) Separate calculation of post-conversion benefit--(i) In general. 
A statutory hybrid plan satisfies the requirements of this paragraph 
(c)(2) if the plan provides that, in the case of an individual who was a 
participant in the plan immediately before the date of adoption of the 
conversion amendment, the participant's benefit at any subsequent 
annuity starting date is not less than the sum of--
    (A) The participant's section 411(d)(6) protected benefit (as 
defined in Sec.  1.411(d)-3(g)(14)) with respect to service before the 
effective date of the conversion amendment, determined under the terms 
of the plan as in effect immediately before the effective date of the 
conversion amendment; and
    (B) The participant's section 411(d)(6) protected benefit with 
respect to service on and after the effective date of

[[Page 106]]

the conversion amendment, determined under the terms of the plan as in 
effect after the effective date of the conversion amendment.
    (ii) Rules of application. For purposes of this paragraph (c)(2), 
except as provided in paragraph (c)(3) of this section, the benefits 
under paragraphs (c)(2)(i)(A) and (c)(2)(i)(B) of this section must each 
be determined in the same manner as if they were provided under separate 
plans that are independent of each other (for example, without any 
benefit offsets), and, except to the extent permitted under Sec.  
1.411(d)-3 or Sec.  1.411(d)-4 (or other applicable law), each optional 
form of payment provided under the terms of the plan with respect to a 
participant's section 411(d)(6) protected benefit as in effect before 
the conversion amendment must be available thereafter to the extent of 
the plan's benefits for service prior to the effective date of the 
conversion amendment.
    (3) Establishment of opening hypothetical account balance or opening 
accumulated percentage--(i) Provided that the requirements of paragraph 
(c)(3)(ii) of this section are satisfied, a statutory hybrid plan under 
which an opening hypothetical account balance or opening accumulated 
percentage of the participant's final average compensation is 
established as of the effective date of the conversion amendment does 
not fail to satisfy the requirements of paragraph (c)(2) of this section 
merely because benefits attributable to that opening hypothetical 
account balance or opening accumulated percentage (that is, benefits 
that are not described in paragraph (c)(2)(i)(B) of this section) are 
substituted for benefits described in paragraph (c)(2)(i)(A) of this 
section.
    (ii) Comparison of benefits at annuity starting date--(A) Testing 
requirement. The requirements of this paragraph (c)(3)(ii) are satisfied 
with respect to an optional form of benefit payable at an annuity 
starting date only if the plan provides that the amount of the benefit 
payable in that optional form under the lump sum-based benefit formula 
that is attributable to the opening hypothetical account balance or 
opening accumulated percentage as described in paragraph (c)(3)(i) of 
this section is not less than the benefit under the comparable optional 
form of benefit under paragraph (c)(2)(i)(A) of this section. To satisfy 
this requirement, if the benefit under the optional form attributable to 
the opening hypothetical account balance or opening accumulated 
percentage is less than the benefit under the comparable optional form 
of benefit described in paragraph (c)(2)(i)(A) of this section, then the 
benefit attributable to the opening hypothetical account balance or 
opening accumulated percentage must be increased to the extent necessary 
to provide the minimum benefit described in this paragraph (c)(3)(ii). 
Thus, if a plan is using the option under this paragraph (c)(3)(ii) to 
satisfy paragraph (c)(2) of this section with respect to a participant, 
the participant must receive a benefit equal to not less than the sum 
of--
    (1) The benefit described in paragraph (c)(2)(i)(B) of this section; 
and
    (2) The greater of--
    (i) The benefit attributable to the opening hypothetical account 
balance or attributable to the opening accumulated percentage of the 
participant's final average compensation as described in this paragraph 
(c)(3)(ii); or
    (ii) The benefit described in paragraph (c)(2)(i)(A) of this 
section.
    (B) Comparable optional form of benefit. If there was an optional 
form of benefit within the same generalized optional form of benefit 
(within the meaning of Sec.  1.411(d)-3(g)(8)) that would have been 
available to the participant at that annuity starting date under the 
terms of the plan as in effect immediately before the effective date of 
the conversion amendment, then that optional form of benefit is the 
comparable optional form of benefit.
    (C) Special rule for new post-conversion optional forms of benefit. 
If an optional form of benefit is available on the annuity starting date 
with respect to the benefit attributable to the opening hypothetical 
account balance or opening accumulated percentage, but no optional form 
within the same generalized optional form of benefit (within the meaning 
of Sec.  1.411(d)-3(g)(8)) was available at that annuity starting date 
under the terms of the plan as in effect immediately prior to the 
effective date of the conversion amendment, then, for

[[Page 107]]

purposes of this paragraph (c)(3)(ii), the plan is treated as if such an 
optional form of benefit were available immediately prior to the 
effective date of the conversion amendment for purposes of this 
paragraph (c)(3)(ii). Thus, for example, if a single-sum optional form 
of payment is not available under the plan terms applicable to the 
accrued benefit described in paragraph (c)(2)(i)(A) of this section, but 
a single-sum optional form of payment is available with respect to the 
benefit attributable to the opening hypothetical account balance or 
opening accumulated percentage as of the annuity starting date, then, 
for purposes of this paragraph (c)(3)(ii), the plan is treated as if a 
single sum (which satisfies the requirements of section 417(e)(3)) were 
available under the terms of the plan as in effect immediately prior to 
the effective date of the conversion amendment.
    (4) Conversion amendment--(i) In general. An amendment is a 
conversion amendment that is subject to the requirements of this 
paragraph (c) with respect to a participant if--
    (A) The amendment reduces or eliminates the benefits that, but for 
the amendment, the participant would have accrued after the effective 
date of the amendment under a benefit formula that is not a statutory 
hybrid benefit formula (and under which the participant was accruing 
benefits prior to the amendment); and
    (B) After the effective date of the amendment, all or a portion of 
the participant's benefit accruals under the plan are determined under a 
statutory hybrid benefit formula.
    (ii) Rules of application--(A) In general. Paragraphs (c)(4)(iii), 
(iv), and (v) of this section describe special rules that treat certain 
arrangements as conversion amendments. The rules described in those 
paragraphs apply both separately and in combination. Thus, for example, 
in an acquisition described in Sec.  1.410(b)-2(f), if the buyer adopts 
an amendment under which a participant's benefits under the seller's 
plan that is not a statutory hybrid plan are coordinated with a separate 
plan of the buyer that is a statutory hybrid plan, such as through an 
offset of the participant's benefit under the buyer's plan by the 
participant's benefit under the seller's plan, the seller and buyer are 
treated as a single employer under paragraph (c)(4)(iv) of this section 
and they are treated as having adopted a conversion amendment under 
paragraph (c)(4)(iii) of this section. However, pursuant to paragraph 
(c)(4)(iii) of this section, if there is no coordination between the two 
plans, there is no conversion amendment.
    (B) Covered amendments. Only amendments that eliminate or reduce 
accrued benefits described in section 411(a)(7), or a retirement-type 
subsidy described in section 411(d)(6)(B)(i), that would otherwise 
accrue as a result of future service are treated as amendments described 
in paragraph (c)(4)(i)(A) of this section.
    (C) Operation of plan terms treated as covered amendment. If, under 
the terms of a plan, a change in the conditions of a participant's 
employment results in a reduction of the participant's benefits that 
would have accrued in the future under a benefit formula that is not a 
statutory hybrid benefit formula, the plan is treated for purposes of 
this paragraph (c)(4) as if such plan terms constitute an amendment that 
reduces the participant's benefits that would have accrued after the 
effective date of the change under a benefit formula that is not a 
statutory hybrid benefit formula. Thus, for example, if a participant 
transfers from an operating division that is covered by a non-statutory 
hybrid benefit formula to an operating division that is covered by a 
statutory hybrid benefit formula, there has been a conversion amendment 
and the effective date of the conversion amendment is the date of the 
transfer. For purposes of applying the effective date rule of paragraph 
(f)(1)(ii) of this section, the date that the relevant plan terms were 
adopted is treated as the adoption date of the amendment.
    (iii) Multiple plans. An employer is treated as having adopted a 
conversion amendment if the employer adopts an amendment under which a 
participant's benefits under a plan that is not a statutory hybrid plan 
are coordinated with a separate plan that is a statutory hybrid plan, 
such as through a reduction (offset) of the benefit under

[[Page 108]]

the plan that is not a statutory hybrid plan.
    (iv) Multiple employers. If the employer of an employee changes as a 
result of a transaction described in Sec.  1.410(b)-2(f), then the two 
employers are treated as a single employer for purposes of this 
paragraph (c)(4).
    (v) Multiple amendments--(A) In general--(1) General rule. For 
purposes of this paragraph (c)(4), a conversion amendment includes 
multiple amendments that result in a conversion amendment even if the 
amendments are not conversion amendments individually. For example, an 
employer is treated as having adopted a conversion amendment if the 
employer first adopts an amendment described in paragraph (c)(4)(i)(A) 
of this section and, at a later date, adopts an amendment that adds a 
benefit under a statutory hybrid benefit formula as described in 
paragraph (c)(4)(i)(B) of this section, if they are consolidated under 
paragraph (c)(4)(v)(A)(2) of this section.
    (2) Delay between plan amendments. In determining whether a 
conversion amendment has been adopted, an amendment to provide a benefit 
under a statutory hybrid benefit formula is consolidated with a prior 
amendment to reduce non-statutory hybrid benefit formula benefits if the 
amendment providing benefits under a statutory hybrid benefit formula is 
adopted within three years after adoption of the amendment reducing non-
statutory hybrid benefit formula benefits. Thus, the later adoption of 
the statutory hybrid benefit formula will cause the earlier amendment to 
be treated as part of a conversion amendment. In the case of an 
amendment to provide a benefit under a statutory hybrid benefit formula 
that is adopted more than three years after adoption of an amendment to 
reduce benefits under a non-statutory hybrid benefit formula, there is a 
presumption that the amendments are not consolidated unless the facts 
and circumstances indicate that adoption of the amendment to provide a 
benefit under a statutory hybrid benefit formula was intended at the 
time of reduction in the non-statutory hybrid benefit formula.
    (B) Multiple conversion amendments. If an employer adopts multiple 
amendments reducing benefits described in paragraph (c)(4)(i)(A) of this 
section, each amendment is treated as a separate conversion amendment, 
provided that paragraph (c)(4)(i)(B) of this section is applicable at 
the time of the amendment (taking into account the rules of this 
paragraph (c)(4)).
    (vi) Effective date of a conversion amendment. The effective date of 
a conversion amendment is, with respect to a participant, the date as of 
which the reduction of the participant's benefits described in paragraph 
(c)(4)(i)(A) of this section occurs. In accordance with section 
411(d)(6), the date of a reduction of those benefits cannot be earlier 
than the date of adoption of the conversion amendment.
    (5) Examples. The following examples illustrate the application of 
this paragraph (c):

    Example 1. (i) Facts where plan does not establish opening 
hypothetical account balance for participants and participant elects 
life annuity at normal retirement age. Employer N sponsors Plan E, a 
defined benefit plan that provides an accumulated benefit, payable as a 
straight life annuity commencing at age 65 (which is Plan E's normal 
retirement age), based on a percentage of highest average compensation 
times the participant's years of service. Plan E permits any participant 
who has had a severance from employment to elect payment in the 
following optional forms of benefit (with spousal consent if 
applicable), with any payment not made in a straight life annuity 
converted to an equivalent form based on reasonable actuarial 
assumptions: A straight life annuity; and a 50 percent, 75 percent, or 
100 percent joint and survivor annuity. The payment of benefits may 
commence at any time after attainment of age 55, with an actuarial 
reduction if the commencement is before normal retirement age. In 
addition, the plan offers a single-sum payment after attainment of age 
55 equal to the present value of the normal retirement benefit using the 
applicable interest rate and mortality table under section 417(e)(3) in 
effect under the terms of the plan on the annuity starting date.
    (ii) Facts relating to the conversion amendment. On January 1, 2012, 
Plan E is amended to eliminate future accruals under the highest average 
compensation benefit formula and to base future benefit accruals under a 
hypothetical account balance formula. For service on or after January 1, 
2012, each participant's hypothetical account balance is credited 
monthly with a pay credit equal to a specified percentage of the 
participant's compensation during the month and also

[[Page 109]]

with interest based on the third segment rate described in section 
430(h)(2)(C)(iii). With respect to benefits under the hypothetical 
account balance attributable to service on and after January 1, 2012, a 
participant is permitted to elect (with spousal consent if applicable) 
payment in the same generalized optional forms of benefit (even though 
different actuarial factors apply) as under the terms of the plan in 
effect before January 1, 2012, and also as a single-sum distribution. 
The plan provides for the benefit attributable to service before January 
1, 2012, to be determined under the terms of the plan as in effect 
immediately before the effective date of the amendment, and the benefit 
attributable to service on and after January 1, 2012, to be determined 
separately, under the terms of the plan as in effect after the effective 
date of the amendment, with neither benefit offsetting the other in any 
manner. Thus, each participant's benefit is equal to the sum of the 
benefit attributable to service before January 1, 2012 (to be determined 
under the terms of the plan as in effect immediately before the 
effective date of the amendment), plus the benefit attributable to the 
participant's hypothetical account balance.
    (iii) Facts relating to an affected participant. Participant A is 
age 62 on January 1, 2012. On December 31, 2011, A's benefit for years 
of service before January 1, 2012, payable as a straight life annuity 
commencing at A's normal retirement age (age 65), which is January 1, 
2015, is $1,000 per month. On January 1, 2015, when Participant A has a 
severance from employment, the then-current hypothetical account 
balance, with pay credits and interest from January 1, 2012, to January 
1, 2015, is $11,000. Using the conversion factors applicable under the 
plan on January 1, 2015, that balance is equivalent to a straight life 
annuity of $100 per month commencing on January 1, 2015. This benefit is 
in addition to the benefit attributable to service before January 1, 
2012. Participant A elects (with spousal consent) a straight life 
annuity of $1,100 per month commencing January 1, 2015.
    (iv) Conclusion. Participant A's benefit satisfies the requirements 
of paragraph (c) of this section because Participant A's benefit is not 
less than the sum of Participant A's section 411(d)(6) protected benefit 
(as defined in Sec.  1.411(d)-3(g)(14)) with respect to service before 
the effective date of the conversion amendment, determined under the 
terms of the plan as in effect immediately before the effective date of 
the amendment, and Participant A's section 411(d)(6) protected benefit 
with respect to service on and after the effective date of the 
conversion amendment, determined under the terms of the plan as in 
effect after the effective date of the amendment.
    Example 2. (i) Facts involving plan's establishment of opening 
hypothetical account balance and payment of pre-conversion accumulated 
benefit in life annuity at normal retirement age. Except as indicated in 
this Example 2, the facts are the same as the facts under paragraph (i) 
of Example 1.
    (ii) Facts relating to the conversion amendment. On January 1, 2012, 
Plan E is amended to eliminate future accruals under the highest average 
compensation benefit formula and to provide future benefit accruals 
under a hypothetical account balance formula. An opening hypothetical 
account balance is established for each participant, and, under the 
plan's terms, that balance is equal to the present value of the 
participant's accumulated benefit on December 31, 2011 (payable as a 
straight life annuity at normal retirement age or immediately, if 
later), using the applicable interest rate and applicable mortality 
table under section 417(e)(3) on January 1, 2012. Under Plan E, the 
account based on this opening hypothetical account balance is maintained 
as a separate account from the account for accruals on or after January 
1, 2012. The hypothetical account balance maintained for each 
participant for accruals on or after January 1, 2012, is credited 
monthly with a pay credit equal to a specified percentage of the 
participant's compensation during the month. A participant's 
hypothetical account balance (including both of the separate accounts) 
is credited monthly with interest based on the third segment rate 
described in section 430(h)(2)(C)(iii).
    (iii) Facts relating to optional forms of benefit. Following 
severance from employment and attainment of age 55, a participant is 
permitted to elect (with spousal consent, if applicable) payment in the 
same generalized optional forms of benefit as under the plan in effect 
prior to January 1, 2012, with the amount payable calculated based on 
the hypothetical account balance on the annuity starting date and the 
applicable interest rate and applicable mortality table on the annuity 
starting date. The single-sum distribution is equal to the hypothetical 
account balance.
    (iv) Facts relating to conversion protection. The plan provides 
that, as of a participant's annuity starting date, the plan will 
determine whether the benefit attributable to the opening hypothetical 
account balance payable in the particular optional form of benefit 
selected is equal to or greater than the benefit accrued under the plan 
through the date of conversion and payable in the same generalized 
optional form of benefit with the same annuity starting date. If the 
benefit attributable to the opening hypothetical account balance is 
equal to or greater than the pre-conversion benefit, the plan provides 
that such benefit is paid in lieu of the pre-conversion benefit, 
together with the benefit

[[Page 110]]

attributable to post-conversion pay-based principal credits. If the 
benefit attributable to the opening hypothetical account balance is less 
than the pre-conversion benefit, the plan provides that such benefit is 
increased sufficiently to provide the pre-conversion benefit, together 
with the benefit attributable to post-conversion pay-based principal 
credits.
    (v) Facts relating to an affected participant. On January 1, 2012, 
the opening hypothetical account balance established for Participant A 
is $80,000, which is the present value of Participant A's straight life 
annuity of $1,000 per month commencing at January 1, 2015, using the 
applicable interest rate and applicable mortality table under section 
417(e)(3) in effect on January 1, 2012. On January 1, 2012, the 
applicable interest rate for Participant A is equivalent to a level rate 
of 5.5 percent. Thereafter, Participant A's hypothetical account balance 
for subsequent accruals is credited monthly with a pay credit equal to a 
specified percentage of the participant's compensation during the month. 
In addition, Participant A's hypothetical account balance (including 
both of the separate accounts) is credited monthly with interest based 
on the third segment rate described in section 430(h)(2)(C)(iii).
    (vi) Facts relating to calculation of the participant's benefit. 
Participant A has a severance from employment on January 1, 2015 at age 
65, and elects (with spousal consent) a straight life annuity commencing 
January 1, 2015. On January 1, 2015, the opening hypothetical account 
balance, with interest credits from January 1, 2012, to January 1, 2015, 
has become $95,000, which, using the conversion factors under the plan 
on January 1, 2015, is equivalent to a straight life annuity of $1,005 
per month commencing on January 1, 2015 (which is greater than the 
$1,000 a month payable at age 65 under the terms of the plan in effect 
before January 1, 2012). This benefit is in addition to the benefit 
determined using the hypothetical account balance for service after 
January 1, 2012.
    (vii) Conclusion. The benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant A 
because A's benefit is not less than the sum of (A) the greater of 
Participant A's benefits attributable to the opening hypothetical 
account balance and A's section 411(d)(6) protected benefit (as defined 
in Sec.  1.411(d)-3(g)(14)) with respect to service before the effective 
date of the conversion amendment, determined under the terms of the plan 
as in effect immediately before the effective date of the amendment, and 
(B) Participant A's section 411(d)(6) protected benefit with respect to 
service on and after the effective date of the conversion amendment, 
determined under the terms of the plan as in effect after the effective 
date of the amendment.
    Example 3. (i) Facts involving a subsequent decrease in interest 
rates. The facts are the same as in Example 2, except that, because of a 
decrease in bond rates after January 1, 2012, and before January 1, 
2015, the rate of interest credited in that period averages less than 
5.5 percent, and, on January 1, 2015, the effective applicable interest 
rate under section 417(e)(3) under the plan's terms is 4.7 percent. As a 
result, Participant A's opening hypothetical account balance plus 
attributable interest credits has increased to only $87,000 on January 
1, 2015, and, using the conversion factors under the plan on January 1, 
2015, is equivalent to a straight life annuity commencing on January 1, 
2015, of $775 per month. Under the terms of Plan E, the benefit 
attributable to A's opening hypothetical account balance is increased so 
that A's straight life annuity commencing on January 1, 2015, is $1,000 
per month. This benefit is in addition to the benefit attributable to 
the hypothetical account balance for service after January 1, 2012.
    (ii) Conclusion. The benefit satisfies the requirements of paragraph 
(c)(3)(ii)(A) of this section with respect to Participant A because A's 
benefit is not less than the sum of--
    (A) The greater of A's benefits attributable to the opening 
hypothetical account balance and A's section 411(d)(6) protected benefit 
(as defined in Sec.  1.411(d)-3(g)(14)) with respect to service before 
the effective date of the conversion amendment, determined under the 
terms of the plan as in effect immediately before the effective date of 
the amendment; and
    (B) A's section 411(d)(6) protected benefit with respect to service 
on and after the effective date of the conversion amendment, determined 
under the terms of the plan as in effect after the effective date of the 
amendment.
    Example 4. (i) Facts involving payment of a subsidized early 
retirement benefit. The facts are the same as in Example 2, except that 
under the terms of Plan E on December 31, 2011, a participant who 
retires before age 65 and after age 55 with 30 years of service has only 
a 3 percent per year actuarial reduction. Participant A has a severance 
from employment on January 1, 2013, when A is age 63 and has 30 years of 
service. On January 1, 2013, A's opening hypothetical account balance, 
with interest from January 1, 2012, to January 1, 2013, has become 
$86,000, which, using the conversion factors under the plan (as amended) 
on January 1, 2013, is equivalent to a straight life annuity commencing 
on January 1, 2013, of $850 per month.
    (ii) Facts relating to calculation of the participant's benefit. 
Under the terms of Plan E on December 31, 2011, Participant A is 
entitled to a straight life annuity commencing on January 1, 2013, equal 
to at least $940 per month ($1,000 reduced by 3 percent for each

[[Page 111]]

of the 2 years that A's benefits commence before normal retirement age). 
Under the terms of Plan E, the benefit attributable to A's opening 
account balance is increased so that A is entitled to a straight life 
annuity of $940 per month commencing on January 1, 2015. This benefit is 
in addition to the benefit determined using the hypothetical account 
balance for service after January 1, 2012.
    (iii) Conclusion. The benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant A 
because A's benefit is not less than the sum of--
    (A) The greater of Participant A's benefits attributable to the 
opening hypothetical account balance (increased by attributable interest 
credits) and A's section 411(d)(6) protected benefit (as defined in 
Sec.  1.411(d)-3(g)(14)) with respect to service before the effective 
date of the conversion amendment, determined under the terms of the plan 
as in effect immediately before the effective date of the amendment; and
    (B) Participant A's section 411(d)(6) protected benefit with respect 
to service on and after the effective date of the conversion amendment, 
determined under the terms of the plan as in effect after the effective 
date of the amendment.
    Example 5. (i) Facts involving addition of a single-sum payment 
option. The facts are the same as in Example 2, except that, before 
January 1, 2012, Plan E did not offer payment in a single-sum 
distribution for amounts in excess of $5,000. Plan E, as amended on 
January 1, 2012, offers payment in any of the available annuity 
distribution forms commencing at any time following severance from 
employment as were provided under Plan E before January 1, 2012. In 
addition, Plan E, as amended on January 1, 2012, offers payment in the 
form of a single sum attributable to service before January 1, 2012, 
which is the greater of the opening hypothetical account balance 
(increased by attributable interest credits) or a single-sum 
distribution of the straight life annuity payable at age 65 using the 
same actuarial factors as are used for mandatory cashouts for amounts 
equal to $5,000 or less under the terms of the plan on December 31, 
2011. Participant B is age 40 on January 1, 2012, and B's opening 
hypothetical account balance (increased by attributable interest 
credits) is $33,000 (which is the present value, using the conversion 
factors under the plan (as amended) on January 1, 2012, of Participant 
B's straight life annuity of $1,000 per month commencing at January 1, 
2037, which is when B will be age 65). Participant B has a severance 
from employment on January 1, 2015, and elects (with spousal consent) an 
immediate single-sum distribution. Participant B's opening hypothetical 
account balance (increased by attributable interest) on January 1, 2015, 
is $45,000. The present value, on January 1, 2015, of Participant B's 
benefit of $1,000 per month, commencing immediately using the actuarial 
factors for mandatory cashouts under the terms of the plan on December 
31, 2011, would result in a single-sum payment of $44,750. Participant B 
is paid a single-sum distribution equal to the sum of $45,000 plus an 
amount equal to B's January 1, 2015, hypothetical account balance for 
benefit accruals for service after January 1, 2012.
    (ii) Conclusion. Because, under Plan E, Participant B is entitled to 
the sum of--
    (A) The greater of the $45,000 opening hypothetical account balance 
(increased by attributable interest credits) and $44,750 (present value 
of the benefit with respect to service prior to January 1, 2012, using 
the actuarial factors for mandatory cashout distributions under the 
terms of the plan on December 31, 2011); and
    (B) An amount equal to B's hypothetical account balance for benefit 
accruals for service after January 1, 2012, the benefit satisfies the 
requirements of paragraph (c)(3)(ii)(A) of this section with respect to 
Participant B. If Participant B's hypothetical account balance under 
Plan E was instead less than $44,750 on January 1, 2015, Participant B 
would be entitled to a single-sum payment equal to the sum of $44,750 
and an amount equal to B's hypothetical account balance for benefit 
accruals for service after January 1, 2012.
    Example 6. (i) Facts involving addition of new annuity optional form 
of benefit. The facts are the same as in Example 2, except that, after 
December 31, 2011, and before January 1, 2015, Plan E is amended to 
offer payment in a 5-, 10-, or 15-year term certain and life annuity, 
using the same actuarial assumptions that apply for other optional forms 
of distribution. When Participant A has a severance from employment on 
January 1, 2015, A elects (with spousal consent) a 5-year term certain 
and life annuity commencing immediately equal to $935 per month. 
Application of the same actuarial assumptions to Participant A's benefit 
of $1,000 per month (under Plan E as in effect on December 31, 2011), 
commencing immediately on January 1, 2015, would result in a 5-year term 
certain and life annuity commencing immediately equal to $955 per month. 
Under the terms of Plan E, the benefit attributable to A's opening 
account balance is increased so that, using the conversion factors under 
the plan (as amended) on January 1, 2015, A's opening hypothetical 
account balance (increased by attributable interest credits) produces a 
5-year term certain and life annuity commencing immediately equal to 
$955 per month commencing on January 1, 2015. This benefit is in 
addition to the benefit determined using the January 1, 2015, 
hypothetical account balance for service after January 1, 2012.

[[Page 112]]

    (ii) Conclusion. This benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant A.
    Example 7. (i) Facts involving addition of distribution option 
before age 55. The facts are the same as in Example 5, except that 
Participant B (age 43) elects (with spousal consent) a straight life 
annuity commencing immediately on January 1, 2015. Under Plan E, the 
straight life annuity attributable to Participant B's opening 
hypothetical account balance at age 43 is $221 per month. Application of 
the same actuarial assumptions to Participant B's benefit of $1,000 per 
month commencing at age 65 (under Plan E as in effect on December 31, 
2011) would result in a straight life annuity commencing immediately on 
January 1, 2015, equal to $219 per month.
    (ii) Conclusion. Because, under its terms, Plan E provides that 
Participant B is entitled to an amount not less than the present value 
(using the same actuarial assumptions as apply on January 1, 2015, in 
converting the $45,000 hypothetical account balance attributable to the 
opening hypothetical account balance to the $221 straight life annuity) 
of Participant B's straight life annuity of $1,000 per month commencing 
at age 65, and the $221 straight life annuity is in addition to the 
benefit accruals for service after January 1, 2012, payment of the $221 
monthly annuity would satisfy the requirements of paragraph 
(c)(3)(ii)(A) of this section with respect to Participant B.
    Example 8. (i) Facts involving establishment of opening hypothetical 
account balance. A defined benefit plan provides an accrued benefit 
expressed as a straight life annuity commencing at the plan's normal 
retirement age (age 65), based on a percentage of average annual 
compensation multiplied by the participant's years of service. On 
January 1, 2009, a conversion amendment is adopted that converts the 
plan to a statutory hybrid plan. Participant A, age 55, had an accrued 
benefit under the pre-conversion formula of $1,500 per month payable at 
normal retirement age. In conjunction with this conversion, the plan 
provides each participant with an opening hypothetical account balance 
equal to the present value, determined in accordance with section 
417(e)(3) of the participant's pre-conversion benefit. Participant A's 
opening hypothetical account balance was calculated as $121,146. The 
opening account balance (along with any subsequent amounts credited to 
the hypothetical account) is credited annually with interest credits at 
the rate of 5.0 percent up to the annuity starting date of each 
participant.
    (ii) Facts relating to changes between establishment of opening 
hypothetical account balance and age 65. Upon attainment of age 65, 
Participant A elects to receive Participant A's entire benefit under the 
plan as a single sum distribution. At the annuity starting date, 
Participant A's hypothetical account balance attributable to Participant 
A's opening account balance has increased to $197,334. However, under 
the terms of the plan and in accordance with section 417(e)(3), the 
present value at the annuity starting date of Participant A's pre-
conversion benefit of $1,500 per month is $221,383.
    (iii) Conclusion. Pursuant to paragraph (c)(3)(ii)(A) of this 
section, Participant A must receive the benefit attributable to post-
conversion service, plus the greater of the benefit attributable to the 
opening hypothetical account balance and the pre-conversion benefit 
(with the determination as to which is greater made at the annuity 
starting date). Accordingly the single-sum distribution must equal the 
benefit attributable to post-conversion service plus $221,383.

    (d) Market rate of return--(1) In general--(i) Basic test. Subject 
to the rules of paragraph (e) of this section, a statutory hybrid plan 
satisfies the requirements of section 411(b)(1)(H) and this paragraph 
(d) only if, for any plan year, the interest crediting rate with respect 
to benefits determined under a statutory hybrid benefit formula is not 
greater than a market rate of return.
    (ii) Definitions relating to market rate of return--(A) Interest 
credit. Subject to other rules in this paragraph (d), an interest credit 
for purposes of this paragraph (d) and section 411(b)(5)(B) means the 
following adjustments to a participant's accumulated benefit under a 
statutory hybrid benefit formula, to the extent not conditioned on 
current service and not made on account of imputed service (as defined 
in Sec.  1.401(a)(4)-11(d)(3)(ii)(B))--
    (1) Any increase or decrease for a period, under the terms of the 
plan at the beginning of the period, that is calculated by applying a 
rate of interest or rate of return (including a rate of increase or 
decrease under an index) to the participant's accumulated benefit (or a 
portion thereof) as of the beginning of the period; and
    (2) Any other increase for a period, under the terms of the plan at 
the beginning of the period.
    (B) Treatment of plan amendments. An increase to a participant's 
accumulated benefit is not treated as an interest credit to the extent 
the increase is made as a result of a plan amendment providing for a 
one-time adjustment to the participant's accumulated benefit. However, a 
pattern of repeated plan

[[Page 113]]

amendments each of which provides for a one-time adjustment to a 
participant's accumulated benefit will cause such adjustments to be 
treated as provided on a permanent basis under the terms of the plan. 
See Sec.  1.411(d)-4, A-1(c)(1).
    (C) Interest crediting rate. Except as otherwise provided in this 
paragraph (d), the interest crediting rate, or effective rate of return, 
for a period with respect to a participant equals the total amount of 
interest credits for the period divided by the participant's accumulated 
benefit at the beginning of the period.
    (D) Principal credit. For purposes of this paragraph (d), a 
principal credit means any increase to a participant's accumulated 
benefit under a statutory hybrid benefit formula that is not an interest 
credit. Thus, for example, a principal credit includes an increase to a 
participant's accumulated benefit to the extent the increase is 
conditioned on current service or made on account of imputed service. As 
a result, a principal credit includes an increase to the value of an 
accumulated percentage of the participant's final average compensation. 
For indexed benefits described in paragraph (b)(2) of this section, a 
principal credit includes an increase to the participant's accrued 
benefit other than an increase provided by indexing. In addition, 
pursuant to the rule in paragraph (d)(1)(ii)(B) of this section, a 
principal credit generally includes an increase to a participant's 
accumulated benefit to the extent the increase is made as a result of a 
plan amendment providing for a one-time adjustment to the participant's 
accumulated benefit. As a result, a principal credit includes an opening 
hypothetical account balance or opening accumulated percentage of the 
participant's final average compensation, as described in paragraph 
(c)(3) of this section.
    (iii) Market rate of return for single rates. Except as otherwise 
provided in this paragraph (d)(1), an interest crediting rate is not in 
excess of a market rate of return only if the plan terms provide that 
the interest credit for each plan year is determined using one of the 
following specified interest crediting rates:
    (A) The interest rate on long-term investment grade corporate bonds 
(as described in paragraph (d)(3) of this section).
    (B) An interest rate that, under paragraph (d)(4) of this section, 
is deemed to be not in excess of the interest rate described in 
paragraph (d)(3) of this section.
    (C) A rate of return that, under paragraph (d)(5) of this section, 
is not in excess of a market rate of return.
    (iv) Timing and other rules related to interest crediting rate--(A) 
In general. A plan that provides interest credits must specify how the 
plan determines interest credits and must specify how and when interest 
credits are credited. The plan must specify the method for determining 
interest credits in accordance with the requirements of paragraph 
(d)(1)(iv)(B) of this section, the frequency of interest crediting in 
accordance with the requirements of paragraph (d)(1)(iv)(C) of this 
section, and the treatment of interest credits on distributed amounts, 
as well as other debits and credits during the period, in accordance 
with the rules of paragraph (d)(1)(iv)(D) of this section. In addition, 
a plan is permitted to round the calculated interest rate or rate of 
return in accordance with paragraph (d)(1)(iv)(E) of this section. See 
paragraph (e) of this section for additional rules that apply to changes 
in the interest crediting rate.
    (B) Methods to determine interest credits. A plan that is using any 
specified interest crediting rate can determine interest credits for 
each current interest crediting period based on the effective periodic 
interest crediting rate that applies over the period. Alternatively, a 
plan that is using one of the interest crediting rates described in 
paragraph (d)(3) or (d)(4) of this section can determine interest 
credits for a stability period based on the interest crediting rate for 
a specified lookback month with respect to that stability period. For 
purposes of the preceding sentence, the stability period and lookback 
month must satisfy the rules for selecting the stability period and 
lookback month under Sec.  1.417(e)-1(d)(4), although the interest 
crediting rate can be any one of the rates in paragraph (d)(3) or (d)(4) 
of this section and

[[Page 114]]

the stability period and lookback month need not be the same as those 
used under the plan for purposes of section 417(e)(3).
    (C) Frequency of interest crediting. Interest credits under a plan 
must be provided on an annual or more frequent periodic basis and 
interest credits for each interest crediting period must be credited as 
of the end of the period. If a plan provides for the crediting of 
interest more frequently than annually (for example, daily, monthly or 
quarterly) based on one of the annual interest rates described in 
paragraph (d)(3) or (d)(4) of this section, then the plan generally 
provides an above market rate of return unless each periodic interest 
credit is determined using an interest crediting rate that is no greater 
than a pro rata portion of the applicable annual interest crediting 
rate. However, a plan that credits interest daily based on one of the 
annual interest rates described in paragraph (d)(3) or (d)(4) of this 
section is not treated as providing an above market rate of return 
merely because the plan determines each daily interest credit using a 
daily interest crediting rate that is \1/360\ of the applicable annual 
interest crediting rate. In addition, interest credits determined, under 
the terms of a plan, based on one of the annual interest rates described 
in paragraph (d)(3) or (d)(4) of this section are not treated as 
creating an effective rate of return that is in excess of a market rate 
of return merely because an otherwise permissible interest crediting 
rate for a plan year is compounded more frequently than annually. Thus, 
for example, if a plan's terms provide for interest to be credited 
monthly and for the interest crediting rate to be equal to the interest 
rate on long-term investment grade corporate bonds (as described in 
paragraph (d)(3) of this section) and the applicable annual rate on 
these bonds for the plan year is 6 percent, then the accumulated benefit 
at the beginning of each month could be increased as a result of 
interest credits by as much as 0.5 percent per month during the plan 
year without resulting in an interest crediting rate that is in excess 
of a market rate of return.
    (D) Debits and credits during the interest crediting period. A plan 
is not treated as failing to meet the requirements of this paragraph (d) 
merely because the plan does not provide for interest credits on amounts 
distributed prior to the end of the interest crediting period. 
Furthermore, a plan is not treated as failing to meet the requirements 
of this paragraph (d) merely because the plan calculates increases or 
decreases to the participant's accumulated benefit by applying a rate of 
interest or rate of return (including a rate of increase or decrease 
under an index) to the participant's adjusted accumulated benefit (or 
portion thereof) for the period. For this purpose, the participant's 
adjusted accumulated benefit equals the participant's accumulated 
benefit as of the beginning of the period, adjusted for debits and 
credits (other than interest credits) made to the accumulated benefit 
prior to the end of the interest crediting period, with appropriate 
weighting for those debits and credits based on their timing within the 
period. For plans that calculate increases or decreases to the 
participant's accumulated benefit by applying a rate of interest or rate 
of return to the participant's adjusted accumulated benefit (or portion 
thereof) for the period, interest credits include these increases and 
decreases, to the extent provided under the terms of the plan at the 
beginning of the period and to the extent not conditioned on current 
service and not made on account of imputed service (as defined in Sec.  
1.401(a)(4)-11(d)(3)(ii)(B)), and the interest crediting rate with 
respect to a participant equals the total amount of interest credits for 
the period divided by the participant's adjusted accumulated benefit for 
the period.
    (E) Rounding of interest crediting rate. A plan is not treated as 
failing to meet the requirements of this paragraph (d) merely because 
the plan determines interest credits for an interest crediting period by 
rounding the calculated interest rate or rate of return in accordance 
with this paragraph (d)(1)(iv)(E). An annual rate may be rounded to the 
nearest multiple of 25 basis points (or a smaller rounding interval). If 
a plan provides for the crediting of interest more frequently than 
annually, then the rounding interval must not exceed a pro-rata portion 
of 25 basis points.

[[Page 115]]

Notwithstanding the preceding sentence, a plan is permitted to round to 
the nearest basis point regardless of the length of the interest 
crediting period.
    (v) Lesser rates. An interest crediting rate is not in excess of a 
market rate of return if the rate can never be in excess of a particular 
rate that is described in paragraph (d)(1)(iii) of this section. Thus, 
for example, an interest crediting rate that always equals the rate 
described in paragraph (d)(3) of this section minus 200 basis points is 
not in excess of a market rate of return because it can never be in 
excess of the rate described in paragraph (d)(3) of this section. 
Similarly, an interest crediting rate that always equals the lesser of 
the yield on 30-year Treasury Constant Maturities and a fixed 7 percent 
interest rate is not in excess of a market rate of return because it can 
never be in excess of the yield on 30-year Treasury Constant Maturities.
    (vi) Greater-of rates. If a statutory hybrid plan determines an 
interest credit by applying the greater of 2 or more different rates to 
the accumulated benefit, the effective interest crediting rate is not in 
excess of a market rate of return only if each of the different rates 
would separately satisfy the requirements of this paragraph (d) and the 
requirements of paragraph (d)(6) of this section are also satisfied.
    (vii) Blended rates. A statutory hybrid plan does not provide an 
effective interest crediting rate that is in excess of a market rate of 
return merely because the plan determines an interest credit by applying 
different rates to different predetermined portions of the accumulated 
benefit, provided each rate would separately satisfy the requirements of 
this paragraph (d) if the rate applied to the entire accumulated 
benefit.
    (viii) Increases to existing rates and addition of other rates--(A) 
Increases to existing rates. The Commissioner may, in guidance published 
in the Internal Revenue Bulletin, see Sec.  601.601(d)(2)(ii)(b) of this 
chapter, increase an interest crediting rate set forth in this paragraph 
(d), so that the increased rate is treated as satisfying the requirement 
that the rate not exceed a market rate of return for purposes of this 
paragraph (d) and section 411(b)(5)(B). For this purpose, these 
increases can include increases to the maximum permitted margin that can 
be added to one or more of the safe harbor rates set forth in paragraph 
(d)(4) of this section, increases to the maximum permitted fixed rate 
set forth in paragraph (d)(4)(v) of this section, or increases to a 
maximum permitted annual floor set forth in paragraph (d)(6) of this 
section.
    (B) Additional rates. The Commissioner may, in guidance published in 
the Internal Revenue Bulletin, see Sec.  601.601(d)(2)(ii)(b) of this 
chapter, provide for additional interest crediting rates that satisfy 
the requirement that they not exceed a market rate of return for 
purposes of this paragraph (d) and section 411(b)(5)(B) (including 
providing for additional combinations of rates, such as annual minimums 
in conjunction with rates that are based on rates described in paragraph 
(d)(5) of this section but that are reduced in order to ensure that the 
effective rate of return does not exceed a market rate of return).
    (2) Preservation of capital requirement--(i) General rule. A 
statutory hybrid plan satisfies the requirements of section 411(b)(1)(H) 
only if the plan provides that the participant's benefit under the 
statutory hybrid benefit formula determined as of the participant's 
annuity starting date is no less than the benefit determined as if the 
accumulated benefit were equal to the sum of all principal credits (as 
described in paragraph (d)(1)(ii)(D) of this section) credited under the 
plan to the participant as of that date (including principal credits 
that were credited before the applicable statutory effective date of 
paragraph (f)(1) of this section). This paragraph (d)(2) applies only as 
of an annuity starting date, within the meaning of Sec.  1.401(a)-20, A-
10(b), with respect to which a distribution of the participant's entire 
vested benefit under the plan's statutory hybrid benefit formula as of 
that date commences. For a participant who has more than one annuity 
starting date, paragraph (d)(2)(ii) of this section provides rules to 
account for prior annuity starting dates when applying this paragraph 
(d)(2)(i).
    (ii) Application to multiple annuity starting dates--(A) In general. 
If the

[[Page 116]]

comparison under paragraph (d)(2)(ii)(B) of this section results in the 
sum of all principal credits credited to the participant (as of the 
current annuity starting date) exceeding the sum of the amounts 
described in paragraphs (d)(2)(ii)(B)(1) through (d)(2)(ii)(B)(3) of 
this section, then the participant's benefit to be distributed at the 
current annuity starting date must be no less than would be provided if 
that excess were included in the current accumulated benefit.
    (B) Comparison to reflect prior distributions. For a participant who 
has more than one annuity starting date, the sum of all principal 
credits credited to the participant under the plan, as of the current 
annuity starting date, is compared to the sum of--
    (1) The remaining balance of the participant's accumulated benefit 
as of the current annuity starting date;
    (2) The amount of the reduction to the participant's accumulated 
benefit under the statutory hybrid benefit formula that is attributable 
to any prior distribution of the participant's benefit under that 
formula; and
    (3) Any amount that was treated as included in the accumulated 
benefit under the rules of this paragraph (d)(2) as of any prior annuity 
starting date.
    (C) Special rule for participants with 5 or more breaks in service. 
A plan is permitted to provide that, in the case of a participant who 
receives a distribution of the entire vested benefit under the plan and 
thereafter completes 5 consecutive 1-year breaks in service, as defined 
in section 411(a)(6)(A), the rules of this paragraph (d)(2) are applied 
without regard to the prior period of service. Thus, in the case of such 
a participant, the plan is permitted to provide that the rules of this 
paragraph (d)(2) are applied disregarding the principal credits and 
distributions that occurred before the breaks in service.
    (iii) Exception for variable annuity benefit formulas. See paragraph 
(b)(2)(iii)(B) of this section for an exception to this paragraph 
(d)(2).
    (3) Long-term investment grade corporate bonds. For purposes of this 
paragraph (d), the rate of interest on long-term investment grade 
corporate bonds means the third segment rate described in section 
417(e)(3)(D) or 430(h)(2)(C)(iii) (determined with or without regard to 
section 430(h)(2)(C)(iv) and with or without regard to the transition 
rules of section 417(e)(3)(D)(ii) or 430(h)(2)(G)). However, for plan 
years beginning prior to January 1, 2008, the rate of interest on long-
term investment grade corporate bonds means the rate described in 
section 412(b)(5)(B)(ii)(II) prior to amendment by the Pension 
Protection Act of 2006, Public Law 109-280 (120 Stat. 780 (2006)) (PPA 
'06).
    (4) Safe harbor rates of interest--(i) In general. This paragraph 
(d)(4) identifies interest rates that are deemed to be not in excess of 
the interest rate described in paragraph (d)(3) of this section. The 
Commissioner may, in guidance of general applicability, specify 
additional interest crediting rates that are deemed to be not in excess 
of the rate described in paragraph (d)(3) of this section. See Sec.  
601.601(d)(2)(ii)(b).
    (ii) Rates based on government bonds with margins. An interest 
crediting rate is deemed to be not in excess of the interest rate 
described in paragraph (d)(3) of this section if the rate is equal to 
the sum of any of the following rates of interest for bonds and the 
associated margin for that interest rate:

----------------------------------------------------------------------------------------------------------------
                      Interest rate bond index                                     Associated margin
----------------------------------------------------------------------------------------------------------------
The discount rate on 3-month Treasury Bills.........................  175 basis points.
The discount rate on 12-month or shorter Treasury Bills.............  150 basis points.
The yield on 1-year Treasury Constant Maturities....................  100 basis points.
The yield on 3-year or shorter Treasury Constant Maturities.........  50 basis points.
The yield on 7-year or shorter Treasury Constant Maturities.........  25 basis points.
The yield on 30-year or shorter Treasury Constant Maturities........  0 basis points.
----------------------------------------------------------------------------------------------------------------

    (iii) Eligible cost-of-living indices. An interest crediting rate is 
deemed to be not in excess of the interest rate described in paragraph 
(d)(3) of this section if the rate is adjusted no less frequently than 
annually and is equal to the rate of increase with respect to an 
eligible cost-of-living index described

[[Page 117]]

in Sec.  1.401(a)(9)-6, A-14(b), except that, for purposes of this 
paragraph (d)(4)(iii), the eligible cost-of-living index described in 
Sec.  1.401(a)(9)-6, A-14(b)(2) is increased by 300 basis points.
    (iv) Short and mid-term investment grade corporate bonds. An 
interest crediting rate equal to the first segment rate is deemed to be 
not in excess of the interest rate described in paragraph (d)(3) of this 
section. Similarly, an interest crediting rate equal to the second 
segment rate is deemed to be not in excess of the interest rate 
described in paragraph (d)(3) of this section. For this purpose, the 
first and second segment rates mean the first and second segment rates 
described in section 417(e)(3)(D) or 430(h)(2)(C), determined with or 
without regard to section 430(h)(2)(C)(iv) and with or without regard to 
the transition rules of section 417(e)(3)(D)(ii) or 430(h)(2)(G).
    (v) Fixed rate of interest. An annual interest crediting rate equal 
to a fixed 6 percent is deemed to be not in excess of the interest rate 
described in paragraph (d)(3) of this section.
    (5) Other rates of return--(i) General rule. This paragraph (d)(5) 
sets forth additional methods for determining an interest crediting rate 
that is not in excess of a market rate of return.
    (ii) Actual rate of return on plan assets--(A) In general. An 
interest crediting rate equal to the actual rate of return on the 
aggregate assets of the plan, including both positive returns and 
negative returns, is not in excess of a market rate of return if the 
plan's assets are diversified so as to minimize the volatility of 
returns. This requirement that plan assets be diversified so as to 
minimize the volatility of returns does not require greater 
diversification than is required under section 404(a)(1)(C) of Title I 
of the Employee Retirement Income Security Act of 1974, Public Law 93-
406 (88 Stat. 829 (1974)), as amended (ERISA), with respect to defined 
benefit pension plans.
    (B) Subset of plan assets. An interest crediting rate equal to the 
actual rate of return on the assets within a specified subset of plan 
assets, including both positive and negative returns, is not in excess 
of a market rate of return if--
    (1) The subset of plan assets is diversified so as to minimize the 
volatility of returns, within the meaning of paragraph (d)(5)(ii)(A) of 
this section (thus, this requirement is satisfied if the subset of plan 
assets is diversified such that it would meet the requirements of 
paragraph (d)(5)(ii)(A) of this section if the subset were aggregate 
plan assets);
    (2) The aggregate fair market value of qualifying employer 
securities and qualifying employer real property (within the meaning of 
section 407 of ERISA) held in the subset of plan assets does not exceed 
10 percent of the fair market value of the aggregate assets in the 
subset; and
    (3) The fair market value of the assets within the subset of plan 
assets approximates the liabilities for benefits that are adjusted by 
reference to the rate of return on the assets within the subset, 
determined using reasonable actuarial assumptions.
    (C) Examples. The following examples illustrate the application of 
paragraph (d)(5)(ii)(B) of this section:

    Example 1. (i) Facts. (a) Employer A sponsors a defined benefit plan 
under which benefit accruals are determined under a formula that is not 
a statutory hybrid benefit formula. Effective January 1, 2015, the plan 
is amended to cease future accruals under the existing formula and to 
provide future benefit accruals under a statutory hybrid benefit formula 
that uses hypothetical accounts. For service on or after January 1, 
2015, the terms of the plan provide that each participant's hypothetical 
account balance is credited monthly with a pay credit equal to a 
specified percentage of the participant's compensation during the month. 
The plan also provides that hypothetical account balance is increased or 
decreased by an interest credit, which is calculated as the product of 
the account balance at the beginning of the period and the net rate of 
return on the assets within a specified subset of plan assets during 
that period. Under the terms of the plan, the net rate of return is 
equal to the actual rate of return adjusted to reflect a reduction for 
specified plan expenses. The plan does not provide for interest credits 
on amounts that are distributed prior to the end of an interest 
crediting period.
    (b) As of the effective date of the amendment, there are no assets 
in the specified subset of plan assets. Under the terms of the plan, an 
amount is added to the specified subset at the time each subsequent 
contribution for any plan year starting on or after the effective date 
of the amendment is made to the plan. The amount added (the formula

[[Page 118]]

contribution) is the amount deemed necessary to fund benefit accruals 
under the statutory hybrid benefit formula. Investment of the specified 
subset is diversified so as to minimize the volatility of returns, 
within the meaning of paragraph (d)(5)(ii)(A) of this section, and no 
qualifying employer securities or qualifying employer real property 
(within the meaning of section 407 of ERISA) are held in the subset. 
Benefits accrued under the statutory hybrid benefit formula are paid 
from the specified subset. However, if assets of the specified subset 
are insufficient to pay benefits accrued under the statutory hybrid 
benefit formula, the plan provides that assets of the residual legacy 
subset of plan assets (from which benefits accrued before January 1, 
2015 are paid) are available to pay those benefits in accordance with 
the requirement that all assets of the plan be available to pay all plan 
benefits. Except as described in this paragraph, no other amounts are 
added to or subtracted from the specified subset of plan assets.
    (c) The formula contribution for each plan year that is added to the 
specified subset of plan assets is an amount equal to the sum of the 
target normal cost of the statutory hybrid benefit formula for the plan 
year plus an additional amount intended to reflect gains or losses. This 
additional amount is equal to the annual amount necessary to amortize 
the difference between the funding target attributable to the statutory 
hybrid benefit formula portion of the plan for the plan year over the 
value of plan assets included in the specified subset of plan assets for 
the plan year in level annual installments over a 7-year period. For 
this purpose, target normal cost and funding target are determined under 
the rules of Sec.  1.430(d)-1 as if the statutory hybrid benefit formula 
portion of the plan were the entire plan and without regard to special 
rules that are applicable to a plan in at-risk status, even if the plan 
is in at-risk status for a plan year. If the formula contribution for a 
plan year exceeds the amount of the actual contribution to the plan for 
a year (such as could be the case if all or a portion of the 
contribution is offset by all or a portion of the plan's prefunding 
balance), then an amount equal to the excess of the formula contribution 
over the actual contribution is transferred from the residual legacy 
subset of plan assets to the specified subset of plan assets on the 
plan's due date for the minimum required contribution for the year.
    (ii) Conclusion. The specified subset is diversified so as to 
minimize the volatility of returns (within the meaning of paragraph 
(d)(5)(ii)(A) of this section). The aggregate fair market value of 
qualifying employer securities and qualifying employer real property 
(within the meaning of section 407 of ERISA) held in the specified 
subset do not exceed 10 percent of the fair market value of the 
aggregate assets in the subset. The fair market value of the assets 
within the specified subset of plan assets approximates the liabilities 
for benefits that are adjusted by reference to the rate of return on the 
assets within the subset, determined using reasonable actuarial 
assumptions, within the meaning of paragraph (d)(5)(ii)(B)(3) of this 
section. Therefore, the interest crediting rate under the statutory 
hybrid benefit formula portion of Employer A's defined benefit plan is 
not in excess of a market rate of return.
    Example 2. (i) Facts. (a) Pursuant to a collective bargaining 
agreement, Employer X, Employer Y and Employer Z maintain and contribute 
to a multiemployer plan (as defined in section 414(f)) that is 
established as of January 1, 2015 under which benefit accruals are 
determined under a variable annuity benefit formula. The plan provides 
that, on an annual basis, the benefit of each participant who has not 
yet retired is adjusted by reference to the difference between the 
actual return on the assets within a specified subset of plan assets and 
4 percent. A participant's benefits are fixed at retirement and 
thereafter are not adjusted.
    (b) As of the effective date of the plan, there are no assets in the 
specified subset. Under the terms of the plan, any amount contributed to 
the plan by a contributing employer is added to the specified subset at 
the time of the contribution. Investment of the specified subset is 
diversified so as to minimize the volatility of returns, within the 
meaning of paragraph (d)(5)(ii)(A) of this section, and no qualifying 
employer securities or qualifying employer real property (within the 
meaning of section 407 of ERISA) are held in the subset. The plan 
provides that, at the time of a participant's retirement, an amount 
equal to the present value of the liability for benefits payable to that 
participant is transferred to a separate subset of plan assets (the 
retiree pool). The retiree pool is invested in high-quality bonds in an 
attempt to achieve cash-flow matching of the retiree liabilities. 
Benefits are paid from the retiree pool. However, if assets of the 
retiree pool are insufficient to pay benefits, the plan provides that 
assets of the specified subset are available to pay benefits in 
accordance with the requirement that all assets of the plan be available 
to pay all plan benefits. Except as described in this paragraph, no 
other amounts are added to or subtracted from the specified subset of 
plan assets.
    (ii) Conclusion. The specified subset is diversified so as to 
minimize the volatility of returns (within the meaning of paragraph 
(d)(5)(ii)(A) of this section). The aggregate fair market value of 
qualifying employer securities and qualifying employer real property 
(within the meaning of section 407 of ERISA) held in the specified 
subset do not

[[Page 119]]

exceed 10 percent of the fair market value of the aggregate assets in 
the subset. The fair market value of the assets within the specified 
subset of plan assets approximates the liabilities for benefits that are 
adjusted by reference to the rate of return on the assets within the 
subset, determined using reasonable actuarial assumptions, within the 
meaning of paragraph (d)(5)(ii)(B)(3) of this section. Therefore, the 
methodology used to adjust participant benefits under the plan's 
variable annuity benefit formula, which is a statutory hybrid benefit 
formula under Sec.  1.411(a)(13)-1(d)(4), is not in excess of a market 
rate of return.

    (iii) Annuity contract rates. The rate of return on the annuity 
contract for the employee issued by an insurance company licensed under 
the laws of a State is not in excess of a market rate of return. 
However, this paragraph (d)(5)(iii) does not apply if the Commissioner 
determines that the annuity contract has been structured to provide an 
interest crediting rate that is in excess of a market rate of return.
    (iv) Rate of return on certain RICs. An interest crediting rate is 
not in excess of a market rate of return if it is equal to the rate of 
return on a regulated investment company (RIC), as defined in section 
851, that is reasonably expected to be not significantly more volatile 
than the broad United States equities market or a similarly broad 
international equities market. For example, a RIC that has most of its 
assets invested in securities of issuers (including other RICs) 
concentrated in an industry sector or a country other than the United 
States generally would not meet this requirement. Likewise a RIC that 
uses leverage, or that has significant investment in derivative 
financial products, for the purpose of achieving returns that amplify 
the returns of an unleveraged investment, generally would not meet this 
requirement. Thus, a RIC that has most of its investments concentrated 
in the semiconductor industry or that uses leverage in order to provide 
a rate of return that is twice the rate of return on the Standard & 
Poor's 500 index (S&P 500) would not meet this requirement. On the other 
hand, a RIC with investments that track the rate of return on the S&P 
500, a broad-based ``small-cap'' index (such as the Russell 2000 index), 
or a broad-based international equities index would meet this 
requirement.
    (6) Combinations of rates of return--(i) In general. A plan that 
determines interest credits based, in whole or in part, on the greater 
of two or more different interest crediting rates provides an effective 
interest crediting rate in excess of a market rate of return unless the 
combination of rates is described in paragraph (d)(6)(ii), (d)(6)(iii), 
(e)(3)(iii), or (e)(4) of this section. However, a plan is not treated 
as providing the greater of two or more interest crediting rates merely 
because the plan satisfies the requirements of paragraph (d)(2) of this 
section. In addition, a plan is not treated as providing the greater of 
two or more interest crediting rates merely because a rate of return 
described in paragraph (d)(5)(iii) of this section is itself based on 
the greater of two or more rates.
    (ii) Annual or more frequent floor--(A) Application to segment 
rates. An interest crediting rate under a plan does not fail to be 
described in paragraph (d)(3) or (d)(4)(iv) of this section for an 
interest crediting period merely because the plan provides that the 
interest crediting rate for that interest crediting period equals the 
greater of--
    (1) An interest crediting rate described in paragraph (d)(3) or 
(d)(4)(iv) of this section; and
    (2) An annual interest rate of 4 percent or less (or a pro rata 
portion of an annual interest rate of 4 percent or less for plans that 
provide interest credits more frequently than annually).
    (B) Application to other bond-based rates. An interest crediting 
rate under a plan does not fail to be described in paragraph (d)(4) of 
this section for an interest crediting period merely because the plan 
provides that the interest crediting rate for that interest crediting 
period equals the greater of--
    (1) An interest crediting rate described in paragraph (d)(4)(ii) or 
(d)(4)(iii) of this section; and
    (2) An annual interest rate of 5 percent or less (or a pro rata 
portion of an annual interest rate of 5 percent or less for plans that 
provide interest credits more frequently than annually).
    (iii) Cumulative floor applied to investment-based or bond-based 
rates--(A) In

[[Page 120]]

general. A plan that determines interest credits under a statutory 
hybrid benefit formula using a particular interest crediting rate 
described in paragraph (d)(3), (d)(4), or (d)(5) of this section (or an 
interest crediting rate that can never be in excess of a particular 
interest crediting rate described in paragraph (d)(3), (d)(4) or (d)(5) 
of this section) does not provide an effective interest crediting rate 
in excess of a market rate of return merely because the plan provides 
that the participant's benefit under the statutory hybrid benefit 
formula determined as of the participant's annuity starting date is 
equal to the benefit determined as if the accumulated benefit were equal 
to the greater of--
    (1) The accumulated benefit determined using the interest crediting 
rate; and
    (2) The accumulated benefit determined as if the plan had used a 
fixed annual interest crediting rate equal to 3 percent (or a lower 
rate) for all principal credits that are credited under the plan to the 
participant during the guarantee period (minimum guarantee amount).
    (B) Guarantee period defined. The guarantee period is the 
prospective period that begins on the date the cumulative floor 
described in this paragraph (d)(6)(iii) begins to apply to the 
participant's benefit and that ends on the date on which that cumulative 
floor ceases to apply to the participant's benefit.
    (C) Application to multiple annuity starting dates. The 
determination under this paragraph (d)(6)(iii) is made only as of an 
annuity starting date, within the meaning of Sec.  1.401(a)-20, A-10(b), 
with respect to which a distribution of the participant's entire vested 
benefit under the plan's statutory hybrid benefit formula as of that 
date commences. For a participant who has more than one annuity starting 
date, paragraph (d)(6)(iii)(D) of this section provides rules to account 
for prior annuity starting dates when applying paragraph (d)(6)(iii)(A) 
of this section. If the comparison under paragraph (d)(6)(iii)(D) of 
this section results in the minimum guarantee amount exceeding the sum 
of the amounts described in paragraphs (d)(6)(iii)(D)(1) through 
(d)(6)(iii)(D)(3) of this section, then the participant's benefit to be 
distributed at the current annuity starting date must be no less than 
would be provided if that excess were included in the current 
accumulated benefit.
    (D) Comparison to reflect prior distributions. For a participant who 
has more than one annuity starting date, the minimum guarantee amount 
(described in paragraph (d)(6)(iii)(A)(2) of this section), as of the 
current annuity starting date, is compared to the sum of--
    (1) The remaining balance of the participant's accumulated benefit, 
as of the current annuity starting date, to which a minimum guaranteed 
rate described in paragraph (d)(6)(iii)(A)(2) of this section applies;
    (2) The amount of the reduction to the participant's accumulated 
benefit under the statutory hybrid benefit formula that is attributable 
to any prior distribution of the participant's benefit under that 
formula and to which a minimum guaranteed rate described in paragraph 
(d)(6)(iii)(A)(2) of this section applied, together with interest at 
that minimum guaranteed rate annually from the prior annuity starting 
date to the current annuity starting date; and
    (3) Any amount that was treated as included in the accumulated 
benefit under the rules of this paragraph (d)(6)(iii) as of any prior 
annuity starting date, together with interest annually at the minimum 
guaranteed rate that applied to the prior distribution from the prior 
annuity starting date to the current annuity starting date.
    (E) Application to portion of participant's benefit. A cumulative 
floor described in this paragraph (d)(6)(iii) may be applied to a 
portion of a participant's benefit, provided the requirements of this 
paragraph (d)(6)(iii) are satisfied with respect to that portion of the 
benefit. If a cumulative floor described in this paragraph (d)(6)(iii) 
applies to a portion of a participant's benefit, only the principal 
credits that are attributable to that portion of the participant's 
benefit are taken into account in determining the amount of the 
guarantee described in paragraph (d)(6)(iii)(A)(2) of this section.
    (e) Other rules regarding market rates of return--(1) In general. 
This paragraph

[[Page 121]]

(e) sets forth additional rules regarding the application of the market 
rate of return requirement with respect to benefits determined under a 
statutory hybrid benefit formula.
    (2) Plan termination--(i) In general. This paragraph (e)(2) provides 
special rules that apply for purposes of determining certain plan 
factors under a statutory hybrid benefit formula after the plan 
termination date of a statutory hybrid plan. The terms of a statutory 
hybrid plan must reflect the requirements of this paragraph (e)(2). 
Paragraph (e)(2)(ii) of this section sets forth rules relating to the 
interest crediting rate for interest crediting periods that end after 
the plan termination date. Paragraph (e)(2)(iii) of this section sets 
forth rules for converting a participant's accumulated benefit to an 
annuity after the plan termination date. Paragraph (e)(2)(iv) of this 
section sets forth rules of application. Paragraph (e)(2)(v) of this 
section contains examples. The Commissioner may, in revenue rulings, 
notices, or other guidance published in the Internal Revenue Bulletin, 
provide for additional rules that apply for purposes of this paragraph 
(e)(2) and the plan termination provisions of section 411(b)(5)(B)(vi). 
See Sec.  601.601(d)(2)(ii)(b) of this chapter. See also regulations of 
the Pension Benefit Guaranty Corporation for additional rules that apply 
when a pension plan subject to Title IV of ERISA is terminated.
    (ii) Interest crediting rates used to determine accumulated 
benefits--(A) General rule. The interest crediting rate used under the 
plan to determine a participant's accumulated benefit for interest 
crediting periods that end after the plan termination date must be equal 
to the average of the interest rates used under the plan during the 5-
year period ending on the plan termination date. Except as otherwise 
provided in this paragraph (e)(2)(ii), the actual annual interest rate 
(taking into account minimums, maximums, and other adjustments) used to 
determine interest credits under the plan for each of the interest 
crediting periods is used for purposes of determining the average of the 
interest rates.
    (B) Special rule for variable interest crediting rates that are 
other rates of return--(1) Application to interest crediting periods. 
This paragraph (e)(2)(ii)(B) applies for an interest crediting period if 
the interest crediting rate that was used for that interest crediting 
period was a rate of return described in paragraph (d)(5) of this 
section. This paragraph (e)(2)(ii)(B) also applies for an interest 
crediting period that begins before the first plan year described in 
paragraph (f)(2)(i)(B)(1) or (f)(2)(i)(B)(3) of this section (as 
applicable), if the interest crediting rate that was used for that 
interest crediting period had the potential to be negative. For this 
purpose, a rate is not treated as having the potential to be negative if 
it is a rate described in paragraph (d)(3) or (d)(4) of this section or 
is any other rate that is based solely on current bond yields.
    (2) Use of substitution rate. For any interest crediting period to 
which this paragraph (e)(2)(ii)(B) applies, for purposes of determining 
the average of the interest rates under this paragraph (e)(2)(ii), the 
interest rate used under the plan for the interest crediting period is 
deemed to be equal to the substitution rate (as described in paragraph 
(e)(2)(ii)(C) of this section) for the period.
    (C) Definition of substitution rate. The substitution rate for any 
interest crediting period equals the second segment rate under section 
430(h)(2)(C)(ii) (determined without regard to section 430(h)(2)(C)(iv)) 
for the last calendar month ending before the beginning of the interest 
crediting period, as adjusted to account for any minimums or maximums 
that applied in the period (other than cumulative floors under paragraph 
(d)(6)(iii) of this section), but without regard to other reductions 
that applied in the period. Thus, for example, if the actual interest 
crediting rate in an interest crediting period is equal to the rate of 
return on plan assets, but not greater than 5 percent, then the 
substitution rate for that interest crediting period is equal to the 
lesser of the applicable second segment rate for the period and 5 
percent. However, if the actual interest crediting rate for an interest 
crediting period is equal to the rate of return on plan assets minus 200 
basis points, then the

[[Page 122]]

substitution rate for that interest crediting period is equal to the 
applicable second segment rate for the period.
    (D) Cumulative floors. Cumulative floors under paragraph (d)(6)(iii) 
of this section that applied during the 5-year period ending on the plan 
termination date are not taken into account for purposes of determining 
the average of the interest rates under this paragraph (e)(2)(ii). 
However, the rules of paragraph (d)(6)(iii) of this section continue to 
apply to determine benefits as of annuity starting dates on or after the 
plan termination date. Thus, if, as of an annuity starting date on or 
after the plan termination date, the benefit provided by applying an 
applicable cumulative minimum rate under paragraph (d)(6)(iii)(A)(2) of 
this section exceeds the benefit determined by applying interest credits 
to the participant's accumulated benefit (with interest credits for 
interest crediting periods that end after the plan termination date 
determined under this paragraph (e)(2)), then that cumulative minimum 
rate is used to determine benefits as of that annuity starting date.
    (iii) Annuity conversion rates and factors--(A) Conversion factors 
where a separate mortality table was used prior to plan termination--(1) 
Use of a separate mortality table. This paragraph (e)(2)(iii)(A) applies 
for purposes of converting a participant's accumulated benefit to an 
annuity after the plan termination date if, for the entire 5-year period 
ending on the plan termination date, the plan provides for a mortality 
table in conjunction with an interest rate to be used to convert a 
participant's accumulated benefit (or a portion thereof) to an annuity. 
If this paragraph (e)(2)(iii)(A) applies, then the plan is treated as 
meeting the requirements of section 411(b)(5)(B)(i) and paragraph (d)(1) 
of this section only if, for purposes of converting a participant's 
accumulated benefit (or portion thereof) to an annuity for annuity 
starting dates after the plan termination date, the mortality table used 
is the table described in paragraph (e)(2)(iii)(A)(2) of this section 
and the interest rate is the rate described in paragraph 
(e)(2)(iii)(A)(3) of this section.
    (2) Specific mortality table. The mortality table used is the 
mortality table specified under the plan for purposes of converting a 
participant's accumulated benefit to an annuity as of the termination 
date. This mortality table is used regardless of whether it was used 
during the entire 5-year period ending on the plan termination date. For 
purposes of applying this paragraph (e)(2)(iii)(A)(2), if the mortality 
table specified in the plan, as of the plan termination date, is a 
mortality table that is updated to reflect expected improvements in 
mortality experience (such as occurs with the applicable mortality table 
under section 417(e)(3)), then the table used for an annuity starting 
date after the plan termination date takes into account updates through 
the annuity starting date.
    (3) Specific interest rate. The interest rate used is the interest 
rate specified under the plan for purposes of converting a participant's 
accumulated benefit to an annuity for annuity starting dates after the 
plan termination date. However, if the interest rate used under the plan 
for purposes of converting a participant's accumulated benefit to an 
annuity has not been the same fixed rate during the 5-year period ending 
on the plan termination date, then the interest rate used for purposes 
of converting a participant's accumulated benefit to an annuity for 
annuity starting dates after the plan termination date is the average 
interest rate that applied for this purpose during the 5-year period 
ending on the plan termination date.
    (B) Tabular factors. If, as of the plan termination date, a tabular 
annuity conversion factor (i.e., a single conversion factor that 
combines the effect of interest and mortality) is used to convert a 
participant's accumulated benefit (or a portion thereof) to an annuity 
and that same fixed tabular annuity conversion factor has been used 
during the entire 5-year period ending on the plan termination date, 
then the plan satisfies the requirements of this paragraph (e)(2)(iii) 
only if that same tabular annuity conversion factor continues to apply 
after the plan termination date. However, if the tabular

[[Page 123]]

annuity conversion factor used to convert a participant's accumulated 
benefit (or a portion thereof) to an annuity is not described in the 
preceding sentence (including any case in which the tabular annuity 
conversion factor was a fixed conversion factor that changed during the 
5-year period ending on the plan termination date), then the plan 
satisfies the requirements of this paragraph (e)(2)(iii) only if the 
tabular annuity conversion factor used to convert a participant's 
accumulated benefit (or a portion thereof) to an annuity for annuity 
starting dates after the plan termination date is equal to the average 
of the tabular annuity conversion factors used under the plan for that 
purpose during the 5-year period ending on the plan termination date.
    (C) Factor applicable where a separate mortality table was not used 
for entire 5-year period prior to plan termination. If paragraph 
(e)(2)(iii)(A) of this section does not apply (including any case in 
which a separate mortality table was used in conjunction with a separate 
interest rate to convert a participant's accumulated benefit (or a 
portion thereof) to an annuity for only a portion of the 5-year period 
ending on the plan termination date), then the plan is treated as having 
used a tabular annuity conversion factor to convert a participant's 
accumulated benefit (or a portion thereof) to an annuity for the entire 
5-year period ending on the plan termination date. As a result, the 
rules of paragraph (e)(2)(iii)(B) of this section apply to determine the 
annuity conversion factor used for purposes of converting a 
participant's accumulated benefit (or portion thereof) to an annuity for 
annuity starting dates after the plan termination date. For this 
purpose, if a separate mortality table and separate interest rate 
applied for a portion of the 5-year period, that mortality table and 
interest rate are used to calculate an annuity conversion factor and 
that factor is treated as having been the tabular annuity conversion 
factor that applied for that portion of the 5-year period for purposes 
of this paragraph (e)(2)(iii).
    (D) Separate application with respect to optional forms. This 
paragraph (e)(2)(iii) applies separately with respect to each optional 
form of benefit on the date of plan termination. For this purpose, the 
term optional form of benefit has the meaning given that term in Sec.  
1.411(d)-3(g)(6)(ii), except that a change in the annuity conversion 
factor used to determine a particular benefit is disregarded in 
determining whether different optional forms exist. Thus, for example, 
if, for the entire 5-year period ending on the plan termination date, 
the plan provides for a mortality table in conjunction with an interest 
rate to be used to determine annuities other than qualified joint and 
survivor annuities, but for specified tabular factors to apply to 
determine annuities that are qualified joint and survivor annuities, 
then paragraph (e)(2)(iii)(A) of this section applies for purposes of 
annuities other than qualified joint and survivor annuities and 
paragraph (e)(2)(iii)(B) of this section applies for purposes of 
annuities that are qualified joint and survivor annuities. In addition, 
if the annuity conversion factor used to determine a particular 
qualified joint and survivor annuity has changed in the 5-year period 
ending on the plan termination date, the different factors are averaged 
for purposes of determining the annuity conversion factor that applies 
after plan termination for that particular qualified joint and survivor 
annuity.
    (iv) Rules of application--(A) Average of interest rates for 
crediting interest--(1) In general. For purposes of determining the 
average of the interest rates under paragraph (e)(2)(ii) of this 
section, an interest crediting period is taken into account if the 
interest crediting date for the interest crediting period is within the 
5-year period ending on the plan termination date. The average of the 
interest rates is determined as the arithmetic average of the annual 
interest rates used for those interest crediting periods. If the 
interest crediting periods taken into account are not all the same 
length, then each rate is weighted to reflect the length of the interest 
crediting period in which it applied. If the plan provides for the 
crediting of interest more frequently than annually, then interest 
credits after the plan termination date must be prorated in accordance 
with the rules of paragraph (d)(1)(iv)(C) of this section.

[[Page 124]]

    (2) Section 411(d)(6) protected accumulated benefit. In general, the 
interest rate that was used for each interest crediting period is the 
ongoing interest crediting rate that was specified under the plan for 
that period, without regard to any interest rate that was used prior to 
an amendment changing the interest crediting rate with respect to a 
section 411(d)(6) protected benefit. However, if, as of the end of the 
last interest crediting period that ends on or before the plan 
termination date, the participant's accumulated benefit is based on a 
section 411(d)(6) protected benefit that results from a prior amendment 
to change the rate of interest crediting applicable under the plan, then 
the pre-amendment interest rate is treated as having been used for each 
interest crediting period after the date of the interest crediting rate 
change (so that the amendment is disregarded).
    (B) Average annuity conversion rates and factors--(1) In general. 
For purposes of determining average annuity conversion interest rates 
and average tabular annuity conversion factors under paragraph 
(e)(2)(iii) of this section, an interest rate or tabular annuity 
conversion factor is taken into account if the rate or conversion factor 
applied under the terms of the plan to convert a participant's 
accumulated benefit (or a portion thereof) to a benefit payable in the 
form of an annuity during the 5-year period ending on the plan 
termination date. The average is determined as the arithmetic average of 
the interest rates or tabular factors used during that period. If the 
periods in which the rates or factors that are averaged are not all the 
same length, then each rate or factor is weighted to reflect the length 
of the period in which it applied.
    (2) Section 411(d)(6) protected annuity conversion factors. In 
general, the annuity conversion interest rate or tabular annuity 
conversion factor that was used for each period is the ongoing interest 
rate or tabular factor that was specified under the plan for that 
period, without regard to any rate or factor that was used under the 
plan prior to an amendment changing the rate or factor with respect to a 
section 411(d)(6) protected benefit. However, if, as of the plan 
termination date, the participant's annuity benefit for an annuity 
commencing at that date would be based on a section 411(d)(6) protected 
benefit that results from a prior amendment to change the rate or factor 
under the plan, then the pre-amendment rate or factor is treated as 
having been used after the date of the amendment (so that the amendment 
is disregarded).
    (C) Blended rates. If, as of the plan termination date, the plan 
determines interest credits by applying different rates to two or more 
different predetermined portions of the accumulated benefit, then the 
interest crediting rate that applies after the plan termination date is 
determined separately with respect to each portion under the rules of 
paragraph (e)(2)(ii) of this section.
    (D) Participants with less than 5 years of interest credits upon 
plan termination. If the plan provided for interest credits for any 
interest crediting period in which, pursuant to the terms of the plan, 
an individual was not eligible to receive interest credits (including 
because the individual was not a participant or beneficiary in the 
relevant interest crediting period), then, for purposes of determining 
the individual's average interest crediting rate under paragraph 
(e)(2)(ii) of this section, the individual is treated as though the 
individual received interest credits in that period using the interest 
crediting rate that applied in that period under the terms of the plan 
to a similarly situated participant or beneficiary who was eligible to 
receive interest credits.
    (E) Plan termination date--(1) Plans subject to Title IV of ERISA. 
In the case of a plan that is subject to Title IV of ERISA, the plan 
termination date for purposes of this paragraph (e)(2) means the plan's 
termination date established under section 4048(a) of ERISA.
    (2) Other plans. In the case of a plan that is not subject to Title 
IV of ERISA, the plan termination date for purposes of this paragraph 
(e)(2) means the plan's termination date established by the plan 
administrator, provided that the plan termination date may be no earlier 
than the date on which the actions necessary to effect the plan

[[Page 125]]

termination--other than the distribution of plan benefits--are taken. 
However, a plan is not treated as terminated on the plan's termination 
date if the assets are not distributed as soon as administratively 
feasible after that date. See Rev. Rul. 89-87 (1989-2 CB 2), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    (v) Examples. The following examples illustrate the rules of this 
paragraph (e)(2). In each case, it is assumed that the plan is 
terminated in a standard termination.

    Example 1. (i) Facts. (A) Plan A is a defined benefit plan with a 
calendar plan year that expresses each participant's accumulated benefit 
in the form of a hypothetical account balance to which principal credits 
are made at the end of each calendar quarter and to which interest is 
credited at the end of each calendar quarter based on the balance at the 
beginning of the quarter. Interest credits under Plan A are based on a 
rate of interest fixed at the beginning of each plan year equal to the 
third segment rate for the preceding December, except that the plan used 
the rate of interest on 30-year Treasury bonds (instead of the third 
segment rate) for plan years before 2013. The plan is terminated on 
March 3, 2017.
    (B) The third segment rate credited under Plan A from January 1, 
2013, through December 31, 2016, is assumed to be: 6 percent annually 
for each of the four quarters in 2016; 6.5 percent annually for each of 
the four quarters in 2015; 6 percent annually for each of the four 
quarters in 2014; and 5.5 percent annually for each of the four quarters 
in 2013. The rate of interest on 30-year Treasury bonds credited under 
Plan A for each of the four quarters in 2012 is assumed to be 4.4 
percent annually.
    (ii) Conclusion. Pursuant to paragraph (e)(2)(ii) of this section, 
the interest crediting rate used to determine accrued benefits under the 
plan on and after the date of plan termination is an annual rate of 5.68 
percent (which is the arithmetic average of 6 percent, 6.5 percent, 6 
percent, 5.5 percent, and 4.4 percent). In accordance with the rules of 
paragraph (d)(1)(iv)(C) of this section, the quarterly interest 
crediting rate after the plan termination date is 1.42 percent (5.68 
divided by 4).
    Example 2. (i) Facts. The facts are the same as Example 1. 
Participant S, who terminated employment before January 1, 2017, has a 
hypothetical account balance of $100,000 when the plan is terminated on 
March 3, 2017. Participant S commences distribution in the form of a 
straight life annuity commencing on January 1, 2020. For the entire 5-
year period ending on the plan termination date, the plan has provided 
that the applicable section 417(e) rates for the preceding August are 
applied on the annuity starting date in order to convert the 
hypothetical account balance to an annuity. Based on the 5-year averages 
of the first segment rates, the second segment rates, and the third 
segment rates as of the plan termination date, and the applicable 
mortality table for the year 2020, the resulting conversion rate at the 
January 1, 2020 annuity starting date is 166.67 for a monthly straight 
life annuity payable to a participant whose age is the age of 
Participant S on January 1, 2020.
    (ii) Conclusion. In accordance with the conclusion in Example 1, the 
interest crediting rate after the plan termination date is 1.42 percent 
for each of the 12 quarterly interest crediting dates in the period from 
March 3, 2017, through December 31, 2019, so that Participant S's 
account balance is $118,436 on December 31, 2019. As a result, using the 
annuity conversion rate of 166.67, the amount payable to Participant S 
commencing on January 1, 2020 is $711 per month.
    Example 3. (i) Facts. The facts are the same as Example 1. In 
addition, Participant T commenced participation in Plan A on April 17, 
2014.
    (ii) Conclusion. In accordance with the conclusion in Example 1 and 
the rule of paragraph (e)(2)(iv)(D) of this section, the quarterly 
interest crediting rate used to determine Participant T's accrued 
benefits under Plan A on and after the date of plan termination is 1.42 
percent, which is the same rate that applies to all participants and 
beneficiaries in Plan A after the termination date (and that would have 
applied to Participant T if Participant T had participated in the plan 
during the 5-year period preceding the date of plan termination).
    Example 4. (i) Facts. (A) Plan B is a defined benefit plan with a 
calendar plan year that expresses each participant's accumulated benefit 
in the form of a hypothetical account balance to which principal credits 
are made at the end of each calendar year and to which interest is 
credited at the end of each calendar year based on the balance at the 
end of the preceding year. The plan is terminated on January 27, 2018.
    (B) The plan's interest crediting rate for each calendar year during 
the entire 5-year period ending on the plan termination date is equal to 
(A) 50 percent of the greater of the rate of interest on 3-month 
Treasury Bills for the preceding December and an annual rate of 4 
percent, plus (B) 50 percent of the rate of return on plan assets. The 
rate of interest on 3-month Treasury Bills credited under Plan B is 
assumed to be: 3.4 Percent for 2017; 4 percent for 2016; 4.5 percent for 
2015; 3.5 percent for 2014; and 4.2 percent for 2013. Each of these 
rates applied under Plan B for purposes of determining the interest 
credits described in clause (A) of this paragraph (i), except that the 4 
percent minimum

[[Page 126]]

rate applied for 2017 and 2014. The second segment rate is assumed to 
be: 6 percent for December 2016; 6 percent for December 2015; 6.5 
percent for December 2014; 6 percent for December 2013; and 5.5 percent 
for December 2012.
    (ii) Conclusion. Pursuant to paragraph (e)(2)(ii) of this section, 
the interest crediting rate used to determine accrued benefits under the 
plan on and after the date of plan termination is 5.07 percent. This 
number is equal to the sum of 50 percent of 4.14 percent (which is the 
sum of 4 percent, 4 percent, 4.5 percent, 4 percent, and 4.2 percent, 
divided by 5), and 50 percent of 6 percent (which is the average second 
segment rate applicable for the 5 interest crediting periods ending 
within the 5-year period, as applied pursuant to the substitution rule 
described in paragraphs (e)(2)(ii)(B) and (C) of this section).
    Example 5. (i) Facts. The facts are the same as in Example 4, except 
that the plan had credited interest before January 1, 2016, using the 
rate of return on a specified RIC and had been amended effective January 
1, 2016, to base interest credits for all plan years after 2015 on the 
interest rate formula described in paragraph (i) of Example 4. In order 
to comply with section 411(d)(6), the plan provides that, for each 
participant or beneficiary who was a participant on December 31, 2015, 
benefits at any date are based on either the ongoing hypothetical 
account balance on that date (which is based on the December 31, 2015 
balance, with interest credited thereafter at the rate described in the 
first sentence of paragraph (i) of Example 4 and taking principal 
credits after 2015 into account) or a special hypothetical account 
balance (the pre-2016 balance) on that date, whichever balance is 
greater. For each participant, the pre-2016 balance is a hypothetical 
account balance equal to the participant's December 31, 2015 balance, 
with interest credited thereafter at the RIC rate of return, but with no 
principal credits after 2015. There are 10 participants for whom the 
pre-2016 balance exceeds the ongoing hypothetical account balance at the 
end of 2017 (which is the end of the last interest crediting period that 
ends on or before the January 27, 2018, plan termination date).
    (ii) Conclusion. Because Plan B credited interest prior to 2016 
using the rate of return on a RIC (a rate described in paragraph (d)(5) 
of this section), for purposes of determining the average interest 
crediting rate upon plan termination, the interest crediting rate used 
to determine accrued benefits under Plan B for all participants during 
those periods (for the calendar years 2013, 2014, and 2015) is equal to 
the second segment rate for December of the calendar year preceding each 
interest crediting period. In addition, because the pre-2016 balances 
exceeded the ongoing hypothetical account balance for 10 participants in 
the last interest crediting period prior to plan termination, for 
purposes of determining the average interest crediting rate upon plan 
termination, the interest crediting rate used to determine accrued 
benefits under Plan B for 2016 and 2017 for those participants is equal 
to the second segment rate for December 2015 and December 2016, 
respectively. For all other participants, for purposes of determining 
the average interest crediting rate upon plan termination, the interest 
crediting rate used to determine accrued benefits under Plan B for 2016 
and 2017 is based on the ongoing interest crediting rate (as described 
in Example 4).

    (3) Rules relating to section 411(d)(6)--(i) General rule. The right 
to future interest credits determined in the manner specified under the 
plan and not conditioned on future service is a factor that is used to 
determine the participant's accrued benefit, for purposes of section 
411(d)(6). Thus, to the extent that benefits have accrued under the 
terms of a statutory hybrid plan that entitle the participant to future 
interest credits, an amendment to the plan to change the interest 
crediting rate must satisfy section 411(d)(6) if the revised rate under 
any circumstances could result in interest credits that are smaller as 
of any date after the applicable amendment date (within the meaning of 
Sec.  1.411(d)-3(g)(4)) than the interest credits that would be provided 
without regard to the amendment. For additional rules, see Sec.  
1.411(d)-3(b). Paragraphs (e)(3)(ii) through (e)(3)(vi) of this section 
set forth special rules that apply regarding the interaction of section 
411(d)(6) and changes to a plan's interest crediting rate. The 
Commissioner may, in guidance of general applicability, prescribe 
additional rules regarding the interaction of section 411(d)(6) and 
section 411(b)(5), including changes to a plan's interest crediting 
rate. See Sec.  601.601(d)(2)(ii)(b).
    (ii) Adoption of long-term investment grade corporate bond rate. For 
purposes of applying section 411(d)(6) and this paragraph (e) to an 
amendment to change to the interest crediting rate described in 
paragraph (d)(3) of this section, a plan is not treated as providing 
interest credits that are smaller as of any date after the applicable 
amendment date than the interest credits that would be provided using an 
interest crediting rate described in paragraph (d)(4) of this section 
merely

[[Page 127]]

because the plan credits interest after the applicable amendment date 
using the interest crediting rate described in paragraph (d)(3) of this 
section, provided--
    (A) The amendment only applies to interest credits to be credited 
after the effective date of the amendment;
    (B) The effective date of the amendment is at least 30 days after 
adoption of the amendment;
    (C) On the effective date of the amendment, the new interest 
crediting rate is not lower than the interest crediting rate that would 
have applied in the absence of the amendment; and
    (D) For plan years described in paragraph (f)(2)(i)(B)(1) or 
(f)(2)(i)(B)(3) of this section (as applicable), if prior to the 
amendment the plan used a fixed annual floor in connection with a rate 
described in paragraph (d)(4)(ii), (iii) or (iv) of this section (as 
permitted under paragraph (d)(6)(ii) of this section), the floor is 
retained after the amendment to the maximum extent permissible under 
paragraph (d)(6)(ii)(A) of this section.
    (iii) Coordination of section 411(d)(6) and market rate of return 
limitation--(A) In general. An amendment to a statutory hybrid plan that 
preserves a section 411(d)(6) protected benefit is subject to the rules 
under paragraph (d) of this section relating to market rate of return. 
However, in the case of an amendment to change a plan's interest 
crediting rate for periods after the applicable amendment date from one 
interest crediting rate (the old rate) that satisfies the requirements 
of paragraph (d) of this section to another interest crediting rate (the 
new rate) that satisfies the requirements of paragraph (d) of this 
section, the plan's effective interest crediting rate is not in excess 
of a market rate of return for purposes of paragraph (d) of this section 
merely because the plan provides for the benefit of any participant who 
is benefiting under the plan (within the meaning of Sec.  1.410(b)-3(a)) 
on the applicable amendment date to never be less than what it would be 
if the old rate had continued but without taking into account any 
principal credits (as defined in paragraph (d)(1)(ii)(D) of this 
section) after the applicable amendment date.
    (B) Multiple amendments. A pattern of repeated plan amendments each 
of which provides for a prospective change in the plan's interest 
crediting rate with respect to the benefit as of the applicable 
amendment date will be treated as resulting in the ongoing plan terms 
providing for an effective interest crediting rate that is in excess of 
a market rate of return. See Sec.  1.411(d)-4, A-1(c)(1).
    (iv) Change in lookback month or stability period used to determine 
interest credits--(A) Section 411(d)(6) anti-cutback relief. With 
respect to a plan using an interest crediting rate described in 
paragraph (d)(3) or (d)(4) of this section, notwithstanding the general 
rule of paragraph (e)(3)(i) of this section, if a plan amendment changes 
the lookback month or stability period used to determine interest 
credits, the amendment is not treated as reducing accrued benefits in 
violation of section 411(d)(6) merely on account of this change if the 
conditions of this paragraph (e)(3)(iv)(A) are satisfied. If the plan 
amendment is effective on or after the adoption date, any interest 
credits credited for the one-year period commencing on the date the 
amendment is effective must be determined using the lookback month and 
stability period provided under the plan before the amendment or the 
lookback month and stability period after the amendment, whichever 
results in the larger interest credits. If the plan amendment is adopted 
retroactively (that is, the amendment is effective prior to the adoption 
date), the plan must use the lookback month and stability period 
resulting in the larger interest credits for the period beginning with 
the effective date and ending one year after the adoption date.
    (B) Section 411(b)(5)(B)(i)(I) market rate of return relief. The 
plan's effective interest crediting rate is not in excess of a market 
rate of return for purposes of paragraph (d) of this section merely 
because a plan amendment complies with the requirements of paragraph 
(e)(3)(iv)(A) of this section. However, a pattern of repeated plan 
amendments each of which provides for a change in the lookback month or 
stability period used to determine interest credits will be treated as 
resulting in the ongoing

[[Page 128]]

plan terms providing for an effective interest crediting rate that is in 
excess of a market rate of return. See Sec.  1.411(d)-4, A-1(c)(1).
    (v) RIC ceasing to exist. This paragraph (e)(3)(v) applies in the 
case of a statutory hybrid plan that credits interest using an interest 
crediting rate equal to the rate of return on a RIC (pursuant to 
paragraph (d)(5)(iv) of this section) that ceases to exist, whether as a 
result of a name change, liquidation, or otherwise. In such a case, the 
plan is not treated as violating section 411(d)(6) provided that the 
rate of return on the successor RIC is substituted for the rate of 
return on the RIC that no longer exists, for purposes of crediting 
interest for periods after the date the RIC ceased to exist. In the case 
of a name change or merger of RICs, the successor RIC means the RIC that 
results from the name change or merger involving the RIC that no longer 
exists. In all other cases, the successor RIC is a RIC selected by the 
plan sponsor that has reasonably similar characteristics, including 
characteristics related to risk and rate of return, as the RIC that no 
longer exists.
    (vi) Transitional amendments needed to satisfy the market rate of 
return rules--(A) In general. Notwithstanding the requirements of 
section 411(d)(6), if the requirements set forth in this paragraph 
(e)(3)(vi) are satisfied, a plan may be amended to change its interest 
crediting rate with respect to benefits that have already accrued in 
order to comply with the requirements of section 411(b)(5)(B)(i) and 
paragraph (d) of this section. A plan amendment is eligible for the 
treatment provided under this paragraph (e)(3)(vi)(A) to the extent that 
the amendment modifies an interest crediting rate that does not satisfy 
the requirements of section 411(b)(5)(B)(i) and paragraph (d) of this 
section in the manner specified in paragraph (e)(3)(vi)(C) of this 
section.
    (B) Rules of application--(1) Multiple noncompliant features. If a 
plan's interest crediting rate has more than one noncompliant feature as 
described in paragraph (e)(3)(vi)(C) of this section, then each 
noncompliant feature must be addressed separately in the manner 
specified in paragraph (e)(3)(vi)(C) of this section.
    (2) Definition of investment-based rate. The application of the 
rules of paragraph (e)(3)(vi)(C) of this section to an interest 
crediting rate depends on whether the interest crediting rate is an 
investment-based rate. For purposes of this paragraph (e)(3)(vi), an 
investment-based rate is a rate based on either a rate of return 
provided by actual investments (taking into account the return 
attributable to any change in the value of the underlying investments) 
or a rate of return for an index that measures the change in the value 
of investments. A rate is an investment-based rate even if it is based 
only in part on a rate described in the preceding sentence.
    (3) Timing rules for permitted amendments. The rules under this 
paragraph (e)(3)(vi) apply only to a plan amendment that is adopted 
prior to and effective no later than the first day of the first plan 
year described in paragraph (f)(2)(i)(B)(1) or (f)(2)(i)(B)(3) of this 
section, as applicable. In addition, the rules under this paragraph 
(e)(3)(vi) apply to a plan amendment only with respect to interest 
credits that are credited for interest crediting periods that begin on 
or after the applicable amendment date (within the meaning of Sec.  
1.411(d)-3(g)(4)).
    (4) Amendments that provide for greater interest crediting rates. If 
a plan is amended in accordance with paragraphs (e)(3)(vi)(C)(1) through 
(10) of this section to switch from a noncompliant rate to a compliant 
rate and is subsequently amended to switch to a second compliant rate 
that can never be less than the first compliant rate, then the second 
amendment does not violate section 411(d)(6). If, instead, the plan is 
amended to switch from the noncompliant rate to the second compliant 
rate in a single amendment, that amendment also does not violate section 
411(d)(6). For example, if it is permitted under paragraph (e)(3)(vi)(C) 
of this section to first amend the plan to credit interest using the 
lesser of the current rate and a rate described in paragraph (d)(3) of 
this section, it is then permissible to amend the plan to credit 
interest using that rate described in paragraph (d)(3) of this section. 
In such a case, it is also permissible to amend the plan to switch from

[[Page 129]]

the current rate to a rate described in paragraph (d)(3) of this section 
in a single amendment.
    (5) Cumulative floors, including floors resulting from a prior 
change in rates with section 411(d)(6) protection. This paragraph 
(e)(3)(vi)(B)(5) applies to a plan that takes into account a minimum 
rate of return that applies less frequently than annually. This 
paragraph (e)(3)(vi)(B)(5) also applies to a plan that determines the 
participant's benefit as of the annuity starting date as the benefit 
provided by the greatest of two or more account balances (for example, 
in order to comply with section 411(d)(6) in connection with a prior 
amendment to change the plan's interest crediting rate). In either case, 
this paragraph (e)(3)(vi)(B)(5) applies with respect to a participant 
only if the requirements of paragraph (d)(6) of this section are not 
satisfied with respect to that participant. If this paragraph 
(e)(3)(vi)(B)(5) applies with respect to a participant, the plan must be 
amended to provide that the benefit for the participant is based solely 
on the benefit (and the associated interest crediting rate with respect 
to that benefit) that is greatest for that participant as of the 
applicable amendment date for the amendment made pursuant to this 
paragraph (e)(3)(vi). In addition, the plan must be further amended 
pursuant to the other rules in this paragraph (e)(3)(vi) if the 
remaining interest crediting rate does not satisfy the requirements of 
paragraph (d) of this section.
    (6) Plans that permit participant direction of interest crediting 
rates. This paragraph (e)(3)(vi)(B)(6) applies in the case in which a 
plan permits a participant to choose an interest crediting rate from 
among a menu of hypothetical investment options and at least one of 
those hypothetical investment options provides for an interest crediting 
rate that is not permitted under paragraph (d) of this section (so that 
the plan fails to satisfy the requirements of paragraph (d) of this 
section). In such a case, the rules of this paragraph (e)(3)(vi) may be 
applied separately to correct each impermissible investment option. 
Alternatively, with respect to such a plan that permitted a participant 
to choose an interest crediting rate from among a menu of hypothetical 
investment options on September 18, 2014, pursuant to plan provisions 
that were adopted on or before September 18, 2014, the entire menu of 
investment options may be treated as an impermissible investment-based 
rate for which there is no permitted investment-based rate with similar 
risk and return characteristics (so that the rule of paragraph 
(e)(3)(vi)(C)(7) of this section does not apply). As a result, plans 
described in the preceding sentence may be amended to eliminate a 
participant's ability to choose an interest crediting rate from among a 
menu of hypothetical investment options in accordance with paragraph 
(e)(3)(vi)(C)(9) of this section.
    (C) Noncompliant feature and amendment to bring plan into 
compliance--(1) Timing or other rules related to determining interest 
credits not satisfied. If a plan has an underlying interest rate that 
generally satisfies the rules of paragraph (d) of this section but that 
does not satisfy the rules relating to how interest credits are 
determined and credited as set forth in paragraph (d)(1)(iv) of this 
section, then the plan must be amended either--
    (i) To correct the aspect of the plan's interest crediting rate that 
fails to comply with the rules of paragraph (d)(1)(iv) of this section 
with respect to its underlying interest crediting rate; or
    (ii) If the plan's interest crediting rate is a variable rate that 
is not an investment-based rate of return, to provide that the plan's 
interest crediting rate is the lesser of that variable rate and a rate 
described in paragraph (d)(3) of this section that satisfies the rules 
of paragraph (d)(1)(iv) of this section.
    (2) Fixed rate in excess of 6 percent. If a plan's interest 
crediting rate is a fixed rate in excess of the rate described in 
paragraph (d)(4)(v) of this section, then the plan must be amended to 
reduce the interest crediting rate to an annual interest crediting rate 
of 6 percent.
    (3) Bond-based rate with margin exceeding maximum permitted margin. 
If a plan's interest crediting rate is a noncompliant rate that consists 
of an underlying rate described in paragraph (d)(3) or (d)(4) of this 
section except

[[Page 130]]

that the plan applies a margin that exceeds the maximum permitted margin 
under paragraph (d)(3) or (d)(4) of this section to the underlying rate, 
then the plan must be amended either--
    (i) To reduce the margin to the maximum permitted margin for the 
underlying rate used by the plan; or
    (ii) To provide that the plan's interest crediting rate is the 
lesser of the plan's noncompliant rate and a rate described in paragraph 
(d)(3) of this section (together with any fixed minimum rate that was 
part of the noncompliant rate, reduced to the extent necessary to comply 
with paragraph (d)(6)(ii) of this section).
    (4) Bond-based rate with fixed minimum rate applied on an annual or 
more frequent basis in excess of the highest permitted fixed minimum 
rate. If a plan's interest crediting rate is a composite rate that 
consists of a variable rate described in paragraph (d)(3) or (d)(4) of 
this section in combination with a fixed minimum rate in excess of the 
highest permitted fixed minimum rate under paragraph (d)(6)(ii)(A)(2) or 
(B)(2) of this section (as applicable), then the plan must be amended in 
one of the following manners:
    (i) To reduce the fixed minimum rate to the highest permitted fixed 
minimum rate that may be used in combination with the plan's variable 
rate;
    (ii) To credit interest using an annual interest crediting rate of 6 
percent; or
    (iii) To provide that the plan's interest crediting rate is the 
lesser of the plan's noncompliant composite rate and a rate described in 
paragraph (d)(3) of this section (together with a fixed minimum rate of 
4 percent).
    (5) Greatest of two or more variable bond-based rates. If a plan's 
interest crediting rate is a composite rate that is the greatest of two 
or more variable rates described in paragraph (d)(3) or (d)(4) of this 
section, then the plan must be amended to provide for an interest 
crediting rate that is the lesser of the composite rate and a rate 
described in paragraph (d)(3) of this section.
    (6) Other impermissible bond-based rates. If, after application of 
the rules of paragraphs (e)(3)(vi)(C)(1) through (5) of this section, a 
plan's interest crediting rate is a variable rate that is not an 
investment-based rate of return and is not described in paragraph (d)(3) 
or (d)(4) of this section, then the plan must be amended either--
    (i) To provide for an interest crediting rate based on a variable 
rate described in paragraph (d)(3) or (d)(4) of this section that has 
similar duration and quality characteristics as the plan's variable 
rate, if such a rate can be selected; or
    (ii) To provide for an interest crediting rate that is the lesser of 
the plan's variable rate and a rate described in paragraph (d)(3) of 
this section.
    (7) Impermissible investment-based rate that can be replaced with a 
permissible rate that has similar risk and return characteristics. If a 
plan's interest crediting rate is an investment-based rate of return 
that is not described in paragraph (d)(5) of this section and a 
permitted investment-based rate described in paragraph (d)(5)(ii)(A), 
(d)(5)(ii)(B), or (d)(5)(iv) of this section that has similar risk and 
return characteristics as the plan's impermissible investment-based rate 
can be selected, then the plan must be amended to provide for an 
interest crediting rate based on such a permitted investment-based rate.
    (8) Investment-based rate with an annual or more frequent minimum 
rate that is either a fixed rate or a non-investment based variable 
rate. If a plan's interest crediting rate is an investment-based rate of 
return that would be described in paragraph (d)(5) of this section 
except that the plan uses an annual or more frequent minimum rate that 
is either a fixed rate or a non-investment based variable rate in 
conjunction with the investment-based rate, then the plan must be 
amended either--
    (i) To credit interest using that investment-based rate of return 
described in paragraph (d)(5) of this section without the minimum rate 
and eliminating any reduction (or other adjustment) to the investment-
based rate; or
    (ii) To provide that the plan's interest crediting rate is a rate 
described in paragraph (d)(3) of this section (together with any fixed 
minimum rate, reduced to the extent necessary to comply with paragraph 
(d)(6)(ii) of this section).

[[Page 131]]

    (9) Other impermissible investment-based rates. If, after 
application of the rules of paragraphs (e)(3)(vi)(C)(1), (7), and (8) of 
this section, a plan's interest crediting rate is an investment-based 
rate that is not described in paragraph (d)(5) of this section, then the 
plan must be amended either--
    (i) To provide for an interest crediting rate that is an investment-
based rate that is described in paragraph (d)(5) of this section and 
that is otherwise similar to the plan's impermissible investment-based 
rate but without the risk and return characteristics of the 
impermissible investment-based rate that caused it to be impermissible 
(generally requiring the use of a rate that is less volatile than the 
plan's impermissible investment-based rate but is otherwise similar to 
that rate); or
    (ii) To provide that the plan's interest crediting rate is a rate 
described in paragraph (d)(3) of this section with a fixed minimum rate 
of 4 percent.
    (D) Examples. The following examples illustrate the application of 
the rules of this paragraph (e)(3)(vi). Each plan has a plan year that 
is the calendar year, and all amendments are adopted on October 1, 2016, 
and become effective for interest crediting periods beginning on or 
after January 1, 2017. Except as otherwise provided, the interest 
crediting rate under the plan satisfies the timing and other rules 
related to crediting interest under paragraph (d)(1)(iv) of this 
section.

    Example 1. (i) Facts. A plan determines interest credits for a plan 
year using the average yield on 30-year Treasury Constant Maturities for 
the last week of the preceding plan year (which is an impermissible 
lookback period for this purpose pursuant to paragraph (d)(1)(iv)(B) of 
this section because it is not a month).
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(1) of this 
section, the plan must be amended in one of two manners. It may be 
amended to determine interest credits for a plan year using the average 
yield on 30-year Treasury Constant Maturities for a lookback month that 
complies with the requirements of paragraph (d)(1)(iv)(B) of this 
section. Alternatively, the plan may be amended to cap the existing rate 
so that it cannot exceed a third segment rate described in paragraph 
(d)(3) of this section for a period that complies with the requirements 
of paragraph (d)(1)(iv)(B) of this section.
    Example 2. (i) Facts. A plan determines interest credits for a plan 
year using the average yield on 30-year Treasury Constant Maturities for 
the last week of the preceding plan year, plus 50 basis points.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(B)(1) of this 
section, the plan must be amended to correct both the impermissible 
lookback period and the excess margin. Accordingly, pursuant to 
paragraph (e)(3)(vi)(C)(1) and (3) of this section, the plan may be 
amended to determine interest credits for a plan year using the average 
yield on 30-year Treasury Constant Maturities (with no margin) for a 
period that complies with the requirements of paragraph (d)(1)(iv)(B) of 
this section. Alternatively, the plan may be amended to cap the existing 
rate so that it cannot exceed a third segment rate described in 
paragraph (d)(3) of this section for a period that complies with the 
requirements of paragraph (d)(1)(iv)(B) of this section.
    Example 3. (i) Facts. A plan credits interest for a plan year using 
the rate of return on plan assets for the preceding plan year.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(1) of this 
section, the plan must be amended to determine interest credits for each 
plan year using the rate of return on plan assets for that plan year.
    Example 4. (i) Facts. A plan credits interest using the average 
yield on 30-year Treasury Constant Maturities for December of the 
preceding plan year with a minimum rate of 5.5 percent per year.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(4) of this 
section, the plan must be amended to change the plan's interest 
crediting rate. The new interest crediting rate under the plan may be 
the average yield on 30-year Treasury Constant Maturities for December 
of the preceding plan year with a minimum rate of 5 percent per year. 
Alternatively, the new interest crediting rate under the plan may be an 
annual interest crediting rate of 6 percent. As another alternative, the 
existing noncompliant composite rate may be capped so that it cannot 
exceed a third segment rate described in paragraph (d)(3) of this 
section, with a minimum rate of 4 percent as a floor on the entire 
resulting rate.
    Example 5. (i) Facts. A plan credits interest using the greater of 
the unadjusted yield on 30-year Treasury Constant Maturities and the 
yield on 1-year Treasury Constant Maturities plus 100 basis points.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(5) of this 
section, the plan must be amended to cap the existing composite 
``greater-of'' rate so that the composite rate cannot exceed a third 
segment rate described in paragraph (d)(3) of this section.
    Example 6. (i) Facts. A plan credits interest using a broad-based 
index that measures the

[[Page 132]]

yield to maturity on a group of intermediate-term investment grade 
corporate bonds.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(6) of this 
section, the plan must be amended in one of two manners. The plan may be 
amended to credit interest using a second segment rate described in 
paragraph (d)(4)(iv) of this section. Alternatively, the plan may be 
amended to cap the existing rate so that it cannot exceed a third 
segment rate described in paragraph (d)(3) of this section.
    Example 7. (i) Facts. A plan credits interest using the rate of 
return for a broad-based index that measures the yield to maturity on a 
group of short-term non-investment grade corporate bonds.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(6)(ii) of this 
section, the plan must be amended to cap the existing rate so that it 
cannot exceed a third segment rate described in paragraph (d)(3) of this 
section.
    Example 8. (i) Facts. A plan credits interest using the rate of 
return for the S&P 500 index. To bring the plan into compliance with the 
market rate of return rules, the plan sponsor amends the plan to credit 
interest based on the rate of return on a RIC that is designed to track 
the rate of return on the S&P 500 index.
    (ii) Conclusion. The amendment satisfies the rule of paragraph 
(e)(3)(vi)(C)(7) of this section.
    Example 9. (i) Facts. A plan credits interest based on the rate of 
return on a collective trust that holds a portfolio of equity 
investments, which provides a rate of return that is reasonably expected 
to be not significantly more volatile than the broad U.S. equities 
market or a similarly broad international equities market. To bring the 
plan into compliance with the market rate of return rules, the plan 
sponsor amends the plan to credit interest based on the actual rate of 
return on the assets within a specified subset of the plan's assets that 
is invested in the collective trust and that satisfies the requirements 
of paragraph (d)(5)(ii)(B) of this section.
    (ii) Conclusion. The amendment satisfies the rule of paragraph 
(e)(3)(vi)(C)(7) of this section.
    Example 10. (i) Facts. A plan credits interest for a plan year using 
the rate of return on a RIC that has most of its investments 
concentrated in the semiconductor industry.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(9) of this 
section, the plan must be amended in one of two manners. The plan may be 
amended to provide for an interest crediting rate that is an investment-
based rate that is described in paragraph (d)(5) of this section and 
that is similar to the plan's impermissible investment-based rate except 
to the extent that the risk and return characteristics of the 
impermissible investment-based rate caused it to be impermissible. Thus, 
the plan may be amended to provide for an interest crediting rate based 
on the rate of return on a RIC that is invested in a broader sector of 
the market than the semiconductor industry (such as the overall 
technology sector of the market), provided that the sector in which the 
RIC is invested is broad enough that the volatility requirements of 
paragraph (d)(5)(iv) of this section are satisfied. Alternatively, the 
plan may be amended to provide that the plan's interest crediting rate 
is a third segment rate described in paragraph (d)(3) of this section 
with a fixed minimum rate of 4 percent.
    Example 11. (i) Facts. A plan was amended in 2014 to change its 
interest crediting rate for all interest crediting periods after the 
applicable amendment date of the amendment. The amendment changed the 
rate from the yield on 30-year Treasury Constant Maturities to the rate 
of return on aggregate plan assets under paragraph (d)(5)(ii)(A) of this 
section. The amendment also provided for section 411(d)(6) protection 
with respect to the account balance as of the applicable amendment date 
(by providing that the account balance after the applicable amendment 
date will never be smaller than the account balance as of the applicable 
amendment date credited with interest using the yield on 30-year 
Treasury Constant Maturities).
    (ii) Conclusions. (A) Participants benefiting under the plan. With 
respect to those participants who were benefiting under the plan as of 
the applicable amendment date of the amendment described in paragraph 
(i) of this Example 11, the requirements of paragraph (e)(3)(iii) of 
this section (which provides a special market rate of return rule to 
permit certain changes in rates for participants benefiting under the 
plan) are satisfied. Accordingly, no amendment is required under this 
paragraph (e)(3)(vi) with respect to those participants.
    (B) Participants not benefiting under the plan. With respect to 
those participants who were not benefiting under the plan as of the 
applicable amendment date of the amendment described in paragraph (i) of 
this Example 11, the requirements of paragraph (e)(3)(iii) of this 
section are not satisfied and, accordingly, the ``greater-of'' rate 
resulting from the section 411(d)(6) protection does not satisfy the 
requirements of paragraph (d)(6) of this section. As a result, pursuant 
to paragraph (e)(3)(vi)(B)(5) of this section, it must be determined on 
a participant-by-participant basis which account balance provides the 
benefit that is greater as of the applicable amendment date for the 
amendment made pursuant to this paragraph (e)(3)(iv) (the transitional 
amendment). If, as of the applicable amendment date for the transitional 
amendment, the account balance credited with interest after the change 
in rates

[[Page 133]]

using the yield on 30-year Treasury Constant Maturities is greater, then 
the plan must be amended to provide that the participant's benefit is 
based solely on that account balance credited with interest using the 
yield on 30-year Treasury Constant Maturities. On the other hand, if, as 
of the applicable amendment date for the transitional amendment, the 
account balance using the rate of return on aggregate plan assets is 
greater, then the plan must be amended to provide that the participant's 
benefit is based solely on that account balance credited with interest 
at the rate of return on aggregate plan assets.

    (vii) Plan termination amendments. A plan amendment with an 
applicable amendment date on or before the first day of the first plan 
year described in paragraph (f)(2)(i)(B)(1) or (3) of this section (as 
applicable) is not treated as reducing accrued benefits in violation of 
section 411(d)(6) merely because the amendment changes the rules that 
apply upon plan termination in order to satisfy the requirements of 
paragraph (e)(2) of this section.
    (4) Actuarial increases after normal retirement age. A statutory 
hybrid plan is not treated as providing an effective interest crediting 
rate that is in excess of a market rate of return for purposes of 
paragraph (d) of this section merely because the plan provides that the 
participant's benefit, as of each annuity starting date after normal 
retirement age, is equal to the greater of--
    (i) The benefit based on the accumulated benefit determined using an 
interest crediting rate that is not in excess of a market rate of return 
under paragraph (d) of this section; and
    (ii) The benefit that satisfies the requirements of section 
411(a)(2).
    (5) Plans that permit participant direction of interest crediting 
rates. [Reserved]
    (f) Effective/applicability date--(1) Statutory effective/
applicability dates--(i) In general. Except as provided in paragraph 
(f)(1)(iii) of this section, section 411(b)(5) applies for periods 
beginning on or after June 29, 2005.
    (ii) Conversion amendments. The requirements of section 
411(b)(5)(B)(ii), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) apply to a 
conversion amendment (as defined in paragraph (c)(4) of this section) 
that both is adopted on or after June 29, 2005, and takes effect on or 
after June 29, 2005.
    (iii) Market rate of return--(A) Plans in existence on June 29, 
2005--(1) In general. In the case of a plan that was in existence on 
June 29, 2005 (regardless of whether the plan was a statutory hybrid 
plan on that date), section 411(b)(5)(B)(i) applies to plan years that 
begin on or after January 1, 2008.
    (2) Exception for plan sponsor election. Notwithstanding paragraph 
(f)(1)(iii)(A)(1) of this section, a plan sponsor of a plan that was in 
existence on June 29, 2005 (regardless of whether the plan was a 
statutory hybrid plan on that date) may elect to have the requirements 
of section 411(a)(13)(B) and section 411(b)(5)(B)(i) apply for any 
period on or after June 29, 2005, and before the first plan year 
beginning after December 31, 2007. In accordance with section 1107 of 
the PPA '06, an employer is permitted to adopt an amendment to make this 
election as late as the last day of the first plan year that begins on 
or after January 1, 2009 (January 1, 2011, in the case of a governmental 
plan as defined in section 414(d)) if the plan operates in accordance 
with the election.
    (B) Plans not in existence on June 29, 2005. In the case of a plan 
not in existence on June 29, 2005, section 411(b)(5)(B)(i) applies to 
the plan on and after the later of June 29, 2005, and the date the plan 
becomes a statutory hybrid plan.
    (iv) Collectively bargained plans--(A) In general. Notwithstanding 
paragraph (f)(1)(iii) of this section, in the case of a collectively 
bargained 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, the requirements of section 
411(b)(5)(B)(i) do not apply to plan years that begin before the earlier 
of--
    (1) The later of--
    (i) The date on which the last of those collective bargaining 
agreements terminates (determined without regard to any extension 
thereof on or after August 17, 2006); or
    (ii) January 1, 2008; or
    (2) January 1, 2010.
    (B) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan

[[Page 134]]

with respect to which a collective bargaining agreement applies to some, 
but not all, of the plan participants, the plan is considered a 
collectively bargained plan for purposes of this paragraph (f)(1)(iv) if 
it is considered a collectively bargained plan under the rules of Sec.  
1.436-1(a)(5)(ii)(B).
    (2) Effective/applicability date of regulations--(i) In general--(A) 
General effective date. Except as provided in paragraph (f)(2)(i)(B) of 
this section, this section applies to plan years that begin on or after 
January 1, 2011.
    (B) Special effective date--(1) In general. Except as otherwise 
provided in this paragraph (f)(2)(i)(B), paragraphs (d)(1)(iii), 
(d)(1)(iv)(D) and (E), (d)(1)(vi), (d)(2)(ii) and (v), (d)(5)(ii)(B), 
(d)(5)(iv), (d)(6), (e)(2), (e)(3)(iii), (iv) and (v), and (e)(4) of 
this section apply to plan years that begin on or after January 1, 2017 
(or an earlier date as elected by the taxpayer).
    (2) Transitional amendments. Paragraphs (e)(3)(vi) and (vii) of this 
section apply to plan amendments made on or after September 18, 2014 (or 
an earlier date as elected by the taxpayer).
    (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 ratified on or before 
November 13, 2015, that constitutes a collectively bargained plan under 
the rules of Sec.  1.436-1(a)(5)(ii)(B), the paragraphs referenced in 
paragraph (f)(2)(i)(B)(1) of this section apply to plan years that begin 
on or after the later of--
    (i) January 1, 2017; and
    (ii) The earlier of January 1, 2019; and the date on which the last 
of those collective bargaining agreements terminates (determined without 
regard to any extension thereof on or after November 13, 2015).
    (ii) Conversion amendments. With respect to a conversion amendment 
(within the meaning of paragraph (c)(4) of this section), where the 
effective date of the conversion amendment (as defined in paragraph 
(c)(4)(vi) of this section) is on or after the statutory effective date 
set forth in paragraph (f)(1)(ii) of this section, the requirements of 
paragraph (c)(2) of this section apply only to a participant who has an 
hour of service on or after the regulatory effective date set forth in 
paragraph (f)(2)(i) of this section.
    (iii) Reliance before regulatory effective date. For the periods 
after the statutory effective date set forth in paragraph (f)(1) of this 
section and before the regulatory effective date set forth in paragraph 
(f)(2)(i) of this section, the safe harbor and other relief of section 
411(b)(5) apply and the market rate of return and other requirements of 
section 411(b)(5) must be satisfied. During these periods, a plan is 
permitted to rely on the provisions of this section for purposes of 
applying the relief and satisfying the requirements of section 
411(b)(5).

[T.D. 9505, 75 FR 64137, Oct. 19, 2010, as amended by T.D. 9505, Dec. 
28, 2010; T.D. 9693, 79 FR 56460, Sept. 19, 2014; T.D. 9743, 80 FR 
70684, Nov. 16, 2015]



Sec.  1.411(c)-1  Allocation of accrued benefits between 
employer and employee contributions.

    (a) Accrued benefit derived from employer contributions. For 
purposes of section 411 and the regulations thereunder, under section 
411(c)(1), an employee's accrued benefit derived from employer 
contributions under a plan as of any applicable date is the excess, if 
any, of--
    (1) The total accrued benefit under the plan provided for the 
employee as of such date, over
    (2) The accrued benefit provided for the employee, derived from 
contributions made by the employee under the plan as of such date.
    For computation of accrued benefit derived from employee 
contributions to a defined contribution plan or from voluntary employee 
contributions to a defined benefit plan, see paragraph (b) of this 
section. For computation of accrued benefit derived from mandatory 
employee contributions to a defined benefit plan, see paragraph (c) of 
this section.
    (b) Accrued benefit derived from employee contribution to defined 
contribution plan, etc. For purposes of section 411 and the regulations 
thereunder, under section 411(c)(2)(A) the accrued benefit derived from 
employee contributions to a defined contribution plan is determined 
under paragraph (b)

[[Page 135]]

(1) or (2) of this section, whichever applies. Under section 411(d)(5), 
the accrued benefit derived from voluntary employee contributions to a 
defined benefit plan is determined under paragraph (b)(1) of this 
section.
    (1) Separate accounts maintained. If a separate account is 
maintained with respect to an employee's contributions and all income, 
expenses, gains, and losses attributable thereto, the accrued benefit 
determined under this subparagraph as of any applicable date is the 
balance of such account as of such date.
    (2) Separate accounts not maintained. If a separate account is not 
maintained with respect to an employee's contributions and the income, 
expenses, gains, and losses attributable thereto, the accrued benefit 
determined under this subparagraph is the employee's total accrued 
benefit determined under the plan multiplied by a fraction--
    (i) The numerator of which is the total amount of the employee's 
contributions under the plan less withdrawals, and
    (ii) The denominator of which is the sum of (A) the amount described 
in paragraph (b)(2)(i) of this section, and (B) the total contributions 
made under the plan by the employer on behalf of the employee less 
withdrawals.

For purposes of this subparagraph, contributions include all amounts 
which are contributed to the plan even if such amounts are used to 
provide ancillary benefits, such as incidental life insurance, health 
insurance, or death benefits, and withdrawals include only amounts 
distributed to the employee and do not reflect the cost of any death 
benefits under the plan.
    (c) Accrued benefit derived from mandatory employee contributions to 
a defined benefit plan--(1) General rule. In the case of a defined 
benefit plan (as defined in section 414(j)) the accrued benefit derived 
from contributions made by an employee under the plan as of any 
applicable date is an annual benefit, in the form of a single life 
annuity (without ancillary benefits) commencing at normal retirement 
age, equal to the amount of the employee's accumulated contributions 
(determined under paragraph (c)(3) of this section) multiplied by the 
appropriate conversion factor (determined under paragraph (c)(2) of this 
section). Paragraph (e) of this section provides rules for actuarial 
adjustments where the benefit is to be determined in a form other than 
the form described in this paragraph.
    (2) Appropriate conversion factor. For purposes of this paragraph, 
the term ``appropriate conversion factor'' means the factor necessary to 
convert an amount equal to the accumulated contributions to a single 
life annuity (without ancillary benefits) commencing at normal 
retirement age and shall be 10 percent for a normal retirement age of 65 
years. For other normal retirement ages the appropriate conversion 
factor shall be the factor as determined by the Commissioner.
    (3) Accumulated contributions. For purposes of section 411(c) and 
this section, the term ``accumulated contributions'' means the total 
of--
    (i) All mandatory contributions made by the employee (determined 
under paragraph (c)(4) of this section),
    (ii) Interest (if any) on such contributions, computed at the rate 
provided by the plan to the end of the last plan year to which section 
411(a)(2) does not apply (by reason of the applicable effective date), 
and
    (iii) Interest on the sum of the amounts determined under paragraphs 
(c)(3)(i) and (ii) of this section compounded annually at the rate of 5 
percent per annum from the beginning of the first plan year to which 
section 411(a)(2) applies (by reason of the applicable effective date) 
to the date on which the employee would attain normal retirement age.

For example, if under section 1017 of the Employee Retirement Income 
Security Act of 1974, section 411(a)(2) of the Code applies for plan 
years beginning after December 31, 1975, and for plan years beginning 
before 1975, the plan provided for 3 percent interest on employee 
contributions, an employee's accumulated contributions would be computed 
by crediting interest at the rate provided by the plan (3 percent) for 
plan years beginning before 1976 and by crediting interest at the rate 
of 5 percent (or another rate prescribed under section 411(c)(2)(D)) 
thereafter.

[[Page 136]]

Section 1017 of the Employee Retirement Income Security Act of 1974 and 
Sec.  1.411(a)-2 provide the effective dates for the application of 
section 411(a)(2).
    (4) Mandatory contributions. For purposes of section 411(c) and this 
section the term ``mandatory contributions'' means amounts contributed 
to the plan by the employee which are required as a condition of his 
employment, as a condition of his participation in the plan, or as a 
condition of obtaining benefits (or additional benefits) under the plan 
attributable to employer contributions. For example, if the benefit 
derived from employer contributions depends upon a specified level of 
employee contributions, employee contributions up to that level would be 
treated as mandatory contributions. Mandatory contributions, otherwise 
satisfying the requirements of this subparagraph, include amounts 
contributed to the plan which are used to provide ancillary benefits 
such as incidental life insurance, health insurance, or death benefits.
    (d) Limitation on accrued benefit. The accrued benefit derived from 
mandatory employee contributions under a defined benefit plan 
(determined under paragraph (c) of this section) shall not exceed the 
greater of--
    (1) The accrued benefit of the employee under the plan, or
    (2) The accrued benefit derived from employee contributions 
determined without regard to any interest under section 411(c)(2)(C) 
(ii) and (iii) and under paragraphs (c)(3) (ii) and (iii) of this 
section.
    (e) Actuarial adjustments for defined benefit plans--(1) Accrued 
benefit. In the case of a defined benefit plan (as defined in section 
414(j)) if an employee's accrued benefit is to be determined as an 
amount other than an annual benefit commencing at normal retirement age, 
such benefit (determined under section 411(c)(1) and paragraph (a) of 
this section) shall be the actuarial equivalent of such benefit, as 
determined by the Commissioner.
    (2) Accrued benefit derived from employee contributions. In the case 
of a defined benefit plan (as defined in section 414(j) if the accrued 
benefit derived from mandatory contributions made by an employee is to 
be determined with respect to a benefit other than an annual benefit in 
the form of a single life annuity (without ancillary benefits) 
commencing at normal retirement age, such benefit shall be the actuarial 
equivalent of such benefit (determined under section 411(c)(2)(B) and 
paragraph (c) of this section) as determined by the Commissioner.
    (f) Suspension of benefits, etc.--(1) Suspensions. No adjustment to 
an accrued benefit is required on account of any suspension of benefits 
if such suspension is permitted under section 203(a)(3)(B) of the 
Employee Retirement Income Security Act of 1974 (88 Stat. 855) (Code 
section 411(a)(3)(B)).
    (2) Employment after retirement. No actuarial adjustment to an 
accrued benefit is required on account of employment after normal 
retirement age. For example, if a plan with a normal retirement age of 
65 provides a benefit of $400 a month payable at age 65 the same $400 
benefit (with no upward adjustment) could be paid to an employee who 
retires at age 68.

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42338, Aug. 23, 1977]



Sec.  1.411(d)-1  Coordination of vesting and discrimination 
requirements. [Reserved]



Sec.  1.411(d)-2  Termination or partial termination; 
discontinuance of contributions.

    (a) General rule--(1) Required nonforfeitability. A plan is not a 
qualified plan (and a trust forming a part of such plan is not a 
qualified trust) unless the plan provides that--
    (i) Upon the termination or partial termination of the plan, or
    (ii) In addition, in the case of a plan to which section 412 
(relating to minimum funding standards) does not apply, upon the 
complete discontinuance of contributions under the plan,

the rights of each affected employee to benefits accrued to the date of 
such termination or partial termination (or, in the case of a plan to 
which section 412 does not apply, discontinuance), to the extent funded, 
or the rights of each employee to the amounts credited to his account at 
such time, are nonforfeitable (within the meaning of Sec.  1.411(a)-4.

[[Page 137]]

    (2) Required allocation. (i) A plan is not a qualified plan (and a 
trust forming a part of such plan is not a qualified trust) unless the 
plan provides for the allocation of any previously unallocated funds to 
the employes covered by the plan upon the termination or partial 
termination of the plan (or, in the case of a plan to which section 412 
does not apply, upon the complete discontinuance of contributions under 
the plan). Such provision may be incorporated in the plan at its 
inception or by an amendment made prior to the termination or partial 
termination of the plan for the discontinuance of contributions 
thereunder. In the case of a defined contribution plan under which 
unallocated forfeitures are held in a suspense account in order to 
satisfy the requirements of section 415, this subdivision shall not 
require such plan to provide for allocations from the suspense account 
to the extent that such allocations would result in annual additions to 
participants' accounts in excess of amounts permitted under section 415 
for the year for which such allocations would be made.
    (ii) Any provision for the allocation of unallocated funds which is 
found by the Secretary of Labor or the Pension Benefit Guaranty 
Corporation (whichever is appropriate) to satisfy the requirements of 
section 4044 or section 403(d)(1) of the Employee Retirement Income 
Security Act of 1974 is acceptable if it specifies the method to be used 
and does not conflict with the provisions of section 401(a)(4) of the 
Internal Revenue Code of 1954 and the regulations thereunder. Any 
allocation of funds required by paragraph (1), (2), (3), or (4)(A) of 
section 4044(a) of such Act shall be deemed not to result in 
discrimination prohibited by section 401(a)(4) of the Code (see, 
however, paragraph (e) of this section). Notwithstanding the preceding 
sentence, in the case of a plan which establishes subclasses or 
categories pursuant to section 4044(b)(6) of such Act, the allocation of 
funds by the use of such subclasses or categories shall not be deemed 
not to result in discrimination prohibited by the Code. The allocation 
of unallocated funds may be in cash or in the form of other benefits 
provided under the plan. However, the allocation of the funds 
contributed by the employer among the employees need not necessarily 
benefit all the employees covered by the plan.
    (iii) Paragraphs (a)(2) (i) and (ii) of this section do not require 
the allocation of amounts to the account of any employee if such amounts 
are not required to be used to satisfy the liabilities with respect to 
employees and their beneficiaries under the plan (see section 
401(a)(2)).
    (b) Partial termination--(1) General rule. Whether or not a partial 
termination of a qualified plan occurs (and the time of such event) 
shall be determined by the Commissioner with regard to all the facts and 
circumstances in a particular case. Such facts and circumstances 
include: the exclusion, by reason of a plan amendment or severance by 
the employer, of a group of employees who have previously been covered 
by the plan; and plan amendments which adversely affect the rights of 
employees to vest in benefits under the plan.
    (2) Special rule. If a defined benefit plan ceases or decreases 
future benefit accruals under the plan, a partial termination shall be 
deemed to occur if, as a result of such cessation or decrease, a 
potential reversion to the employer, or employers, maintaining the plan 
(determined as of the date such cessation or decrease is adopted) is 
created or increased. If no such reversion is created or increased, a 
partial termination shall be deemed not to occur by reason of such 
cessation or decrease. However, the Commissioner may determine that a 
partial termination of such a plan occurs pursuant to subparagraph (1) 
of this paragraph for reasons other than such cessation or decrease.
    (3) Effect of partial termination. If a termination of a qualified 
plan occurs, the provisions of section 411(d)(3) apply only to the part 
of the plan that is terminated.
    (c) Termination--(1) Application. This paragraph applies to a plan 
other than a plan described in section 411(e)(1) (relating to 
governmental, certain church plans, etc.).
    (2) Plans subject to termination insurance. For purposes of this 
section, a plan to which title IV of the Employee Retirement Income 
Security Act of

[[Page 138]]

1974 applies is considered terminated on a particular date if, as of 
that date--
    (i) The plan is voluntarily terminated by the plan administrator 
under section 4041 of the Employee Retirement Income Security Act of 
1974, or
    (ii) The Pension Benefit Guaranty Corporation terminates the plan 
under section 4042 of the Employee Retirement Income Security Act of 
1974.

For purposes of this subparagraph, the particular date of termination 
shall be the date of termination determined under section 4048 of such 
Act.
    (3) Other plans. In the case of a plan not described in paragraph 
(c)(2) of this section, a plan is considered terminated on a particular 
date if, as of that date, the plan is voluntarily terminated by the 
employer, or employers, maintaining the plan.
    (d) Complete discontinuance--(1) General rule. For purposes of this 
section, a complete discontiuance of contributions under the plan is 
contrasted with a suspension of contributions under the plan which is 
merely a temporary cessation of contributions by the employer. A 
complete discontinuance of contributions may occur although some amounts 
are contributed by the employer under the plan if such amounts are not 
substantial enough to reflect the intent on the part of the employer to 
continue to maintain the plan. The determination of whether a complete 
discontinuance of contributions under the plan has occurred will be made 
with regard to all the facts and circumstances in the particular case, 
and without regard to the amount of any contributions made under the 
plan by employees. Among the factors to be considered in determining 
whether a suspension constitutes a discontinuance are:
    (i) Whether the employer may merely be calling an actual 
discontinuance of contributions a suspension of such contributions in 
order to avoid the requirement of full vesting as in the case of a 
discontinuance, or for any other reason;
    (ii) Whether contributions are recurring and substantial; and
    (iii) Whether there is any reasonable probability that the lack of 
contributions will continue indefinitely.
    (2) Time of discontinuance. In any case in which a suspension of a 
profit-sharing plan maintained by a single employer is considered a 
discontinuance, the discontinuance becomes effective not later than the 
last day of the taxable year of the employer following the last taxable 
year of such employer for which a substantial contribution was made 
under the profit-sharing plan. In the case of a profit-sharing plan 
maintained by more than one employer, the discontinuance becomes 
effective not later than the last day of the plan year following the 
plan year within which any employer made a substantial contribution 
under the plan.
    (e) Contributions or benefits which remain forfeitable. Under 
section 411 (d) (2) and (3), section 411(a) and this section do not 
apply to plan benefits which may not be provided for designated 
employees in the event of early termination of the plan under provisions 
of the plan adopted pursuant to regulations prescribed by the Secretary 
or his delegate to preclude the discrimination prohibited by section 
401(a)(4). Accordingly, in such a case, plan benefits may be required to 
be reallocated without regard to this section. See Sec.  1.401-4(c).

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42339, Aug. 23, 1977]



Sec.  1.411(d)-3  Section 411(d)(6) protected benefits.

    (a) Protection of accrued benefits--(1) General rule. Under section 
411(d)(6)(A), a plan is not a qualified plan (and a trust forming a part 
of such plan is not a qualified trust) if a plan amendment decreases the 
accrued benefit of any plan participant, except as provided in section 
412(d)(2) (section 412(c)(8) for plan years beginning before January 1, 
2008), section 4281 of the Employee Retirement Income Security Act of 
1974 as amended (ERISA), or other applicable law (see, for example, 
sections 418D and 418E of the Internal Revenue Code, and section 1107 of 
the Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780, 
1063)). For purposes of this section, a plan amendment includes

[[Page 139]]

any changes to the terms of a plan, including changes resulting from a 
merger, consolidation, or transfer (as defined in section 414(l)) or a 
plan termination. The protection of section 411(d)(6) applies to a 
participant's entire accrued benefit under the plan as of the applicable 
amendment date, without regard to whether the entire accrued benefit was 
accrued before a participant's severance from employment or whether any 
portion was the result of an increase in the accrued benefit of the 
participant pursuant to a plan amendment adopted after the participant's 
severance from employment.
    (2) Plan provisions taken into account--(i) Direct or indirect 
reduction in accrued benefit. For purposes of determining whether a 
participant's accrued benefit is decreased, all of the amendments to the 
provisions of a plan affecting, directly or indirectly, the computation 
of accrued benefits are taken into account. Plan provisions indirectly 
affecting the computation of accrued benefits include, for example, 
provisions relating to years of service and compensation.
    (ii) Amendments effective with the same applicable amendment date. 
In determining whether a reduction in a participant's accrued benefit 
has occurred, all plan amendments with the same applicable amendment 
date are treated as one amendment. Thus, if two amendments have the same 
applicable amendment date and one amendment, standing alone, increases 
participants' accrued benefits and the other amendment, standing alone, 
decreases participants' accrued benefits, the amendments are treated as 
one amendment and will only violate section 411(d)(6) if, for any 
participant, the net effect is to decrease participants' accrued benefit 
as of that applicable amendment date.
    (iii) Multiple amendments--(A) General rule. A plan amendment 
violates the requirements of section 411(d)(6) if it is one of a series 
of plan amendments that, when taken together, have the effect of 
reducing or eliminating a section 411(d)(6) protected benefit in a 
manner that would be prohibited by section 411(d)(6) if accomplished 
through a single amendment.
    (B) Determination of the time period for combining plan amendments. 
For purposes of applying the rule in paragraph (a)(2)(iii)(A) of this 
section, generally only plan amendments adopted within a 3-year period 
are taken into account.
    (3) Application of section 411(a) nonforfeitability provisions with 
respect to section 411(d)(6) protected benefits--(i) In general. The 
rules of this paragraph (a) apply to a plan amendment that decreases a 
participant's accrued benefits, or otherwise places greater restrictions 
or conditions on a participant's rights to section 411(d)(6) protected 
benefits, even if the amendment merely adds a restriction or condition 
that is permitted under the vesting rules in section 411(a)(3) through 
(11). However, such an amendment does not violate section 411(d)(6) to 
the extent it applies with respect to benefits that accrue after the 
applicable amendment date. See section 411(a)(10) and Sec.  1.411(a)-8 
for additional rules relating to changes in a plan's vesting schedule.
    (ii) Exception for changes in a plan's vesting computation period. 
Notwithstanding paragraph (a)(3)(i) of this section, a plan amendment 
that satisfies the applicable requirements under 29 CFR 2530.203-2(c) 
(rules relating to vesting computation periods) does not fail to satisfy 
the requirements of section 411(d)(6) merely because the plan amendment 
changes the plan's vesting computation period.
    (4) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example 1. (i) Facts. Plan A provides an annual benefit of 2% of 
career average pay times years of service commencing at normal 
retirement age (age 65). Plan A is amended on November 1, 2006, 
effective as of January 1, 2007, to provide for an annual benefit of 
1.3% of final pay times years of service, with final pay computed as the 
average of a participant's highest 3 consecutive years of compensation. 
As of January 1, 2007, Participant M has 16 years of service, M's career 
average pay is $37,500, and the average of M's highest 3 consecutive 
years of compensation is $67,308. Thus, Participant M's accrued benefit 
as of the applicable amendment date is increased from $12,000 per year 
at normal retirement age (2% times $37,500 times 16 years of service) to 
$14,000 per year at normal retirement age (1.3% times $67,308 times 16 
years of service). As of January 1, 2007, Participant N has 6 years of 
service, N's career

[[Page 140]]

average pay is $50,000, and the average of N's highest 3 consecutive 
years of compensation is $51,282. Participant N's accrued benefit as of 
the applicable amendment date is decreased from $6,000 per year at 
normal retirement age (2% times $50,000 times 6 years of service) to 
$4,000 per year at normal retirement age (1.3% times $51,282 times 6 
years of service).
    (ii) Conclusion. While the plan amendment increases the accrued 
benefit of Participant M, the plan amendment fails to satisfy the 
requirements of section 411(d)(6)(A) because the amendment decreases the 
accrued benefit of Participant N below the level of the accrued benefit 
of Participant N immediately before the applicable amendment date.
    Example 2. (i) Facts. The facts are the same as Example 1, except 
that Plan A includes a provision under which Participant N's accrued 
benefit cannot be less than what it was immediately before the 
applicable amendment date (so that Participant N's accrued benefit could 
not be less than $6,000 per year at normal retirement age).
    (ii) Conclusion. The amendment does not violate the requirements of 
section 411(d)(6)(A) with respect to Participant M (whose accrued 
benefit has been increased) or with respect to Participant N (although 
Participant N would not accrue any benefits until the point in time at 
which the new formula amount would exceed the amount payable under the 
minimum provision, approximately 3 years after the amendment becomes 
effective).
    Example 3. (i) Facts. Employer N maintains Plan C, a qualified 
defined benefit plan under which an employee becomes a participant upon 
completion of 1 year of service and is vested in 100% of the employer-
derived accrued benefit upon completion of 5 years of service. Plan C 
provides that a former employee's years of service prior to a break in 
service will be reinstated upon completion of 1 year of service after 
being rehired. Plan C has participants who have fewer than 5 years of 
service and who are accordingly 0% vested in their employer-derived 
accrued benefits. On December 31, 2007, effective January 1, 2008, Plan 
C is amended, in accordance with section 411(a)(6)(D), to provide that 
any nonvested participant who has at least 5 consecutive 1-year breaks 
in service and whose number of consecutive 1-year breaks in service 
exceeds his or her number of years of service before the breaks will 
have his or her pre-break service disregarded in determining vesting 
under the plan.
    (ii) Conclusion. Under paragraph (a)(3) of this section, the plan 
amendment does not satisfy the requirements of this paragraph (a), and 
thus violates section 411(d)(6), because the amendment places greater 
restrictions or conditions on the rights to section 411(d)(6) protected 
benefits, as of January 1, 2008, for participants who have fewer than 5 
years of service, by restricting the ability of those participants to 
receive further vesting protections on benefits accrued as of that date.
    Example 4. (i) Facts. (A) Employer O sponsors Plan D, a qualified 
profit sharing plan under which each employee has a nonforfeitable right 
to a percentage of his or her employer-derived accrued benefit based on 
the following table:

------------------------------------------------------------------------
        Completed years of service            Nonforfeitable percentage
------------------------------------------------------------------------
Fewer than 3..............................  0
3.........................................  20
4.........................................  40
5.........................................  60
6.........................................  80
7.........................................  100
------------------------------------------------------------------------

    (B) In January 2006, Employer O acquires Company X, which maintains 
Plan E, a qualified profit sharing plan under which each employee who 
has completed 5 years of service has a nonforfeitable right to 100% of 
the employer-derived accrued benefit. In 2007, Plan E is merged into 
Plan D. On the effective date for the merger, Plan D is amended to 
provide that the vesting schedule for participants of Plan E is the 7-
year graded vesting schedule of Plan D. In accordance with section 
411(a)(10)(A), the plan amendment provides that any participant of Plan 
E who had completed 5 years of service prior to the amendment is fully 
vested. In addition, as required under section 411(a)(10)(B), the 
amendment provides that any participant in Plan E who has at least 3 
years of service prior to the amendment is permitted to make an 
irrevocable election to have the vesting of his or her nonforfeitable 
right to the employer-derived accrued benefit determined under either 
the 5-year cliff vesting schedule or the 7-year graded vesting schedule. 
Participant G, who has an account balance of $10,000 on the applicable 
amendment date, is a participant in Plan E with 2 years of service as of 
the applicable amendment date. As of the date of the merger, Participant 
G's nonforfeitable right to G's employer-derived accrued benefit is 0% 
under both the 7-year graded vesting schedule of Plan D and the 5-year 
cliff vesting schedule of Plan E.
    (ii) Conclusion. Under paragraph (a)(3) of this section, the plan 
amendment does not satisfy the requirements of this paragraph (a) and 
violates section 411(d)(6), because the amendment places greater 
restrictions or conditions on the rights to section 411(d)(6) protected 
benefits with respect to G and any participant who has fewer than 5 
years of service and who elected (or was made subject to) the new 
vesting schedule. A method of avoiding a section 411 (d)(6) violation 
with respect to account balances attributable to

[[Page 141]]

benefits accrued as of the applicable amendment date and earnings 
thereon would be for Plan D to provide for the vested percentage of G 
and each other participant in Plan E to be no less than the greater of 
the vesting percentages under the two vesting schedules (for example, 
for G and each other participant in Plan E to be 20% vested upon 
completion of 3 years of service, 40% vested upon completion of 4 years 
of service, and fully vested upon completion of 5 years of service) for 
those account balances and earnings.

    (b) Protection of section 411(d)(6)(B) protected benefits--(1) 
General rule--(i) Prohibition against plan amendments eliminating or 
reducing section 411(d)(6)(B) protected benefits. Except as provided in 
this section, a plan is treated as decreasing an accrued benefit if it 
is amended to eliminate or reduce a section 411(d)(6)(B) protected 
benefit as defined in paragraph (g)(15) of this section. This paragraph 
(b)(1) applies to participants who satisfy (either before or after the 
plan amendment) the preamendment conditions for a section 411(d)(6)(B) 
protected benefit.
    (ii) Contingent benefits. The rules of paragraph (b)(1)(i) of this 
section apply to participants who satisfy (either before or after the 
plan amendment) the preamendment conditions for the section 411(d)(6)(B) 
protected benefit even if the condition on which the eligibility for the 
section 411(d)(6)(B) protected benefit depends is an unpredictable 
contingent event (e.g., a plant shutdown).
    (iii) Application of general rules in paragraph (a) of this section 
to section 411(d)(6)(B) protected benefits. For purposes of determining 
whether a participant's section 411(d)(6)(B) protected benefit is 
eliminated or reduced, the rules of paragraph (a) of this section apply 
to section 411(d)(6)(B) protected benefits in the same manner as they 
apply to accrued benefits described in section 411(d)(6)(A). As an 
example of the application of paragraph (a)(2)(ii) of this section to 
section 411(d)(6)(B) protected benefits, if there are two amendments 
with the same applicable amendment date and one amendment increases 
accrued benefits and the other amendment decreases the early retirement 
factors that are used to determine the early retirement annuity, the 
amendments are treated as one amendment and only violate section 
411(d)(6) if, after the two amendments, the net dollar amount of any 
early retirement annuity with respect to the accrued benefit of any 
participant as of the applicable amendment date is lower than it would 
have been without the two amendments. As an example of the application 
of paragraph (a)(2)(iii) of this section to section 411(d)(6)(B) 
protected benefits, a series of amendments made within a 3-year period 
that, when taken together, have the effect of reducing or eliminating 
early retirement benefits or retirement-type subsidies in a manner that 
adversely affects the rights of any participant in a more than de 
minimis manner violates section 411(d)(6)(B) even if each amendment 
would be permissible pursuant to paragraphs (c), (d), or (f) of this 
section.
    (2) Permissible elimination of section 411(d)(6)(B) protected 
benefits--(i) In general. A plan is permitted to be amended to eliminate 
a section 411(d)(6)(B) protected benefit if the elimination is in 
accordance with this section or Sec.  1.411(d)-4.
    (ii) Increases in payment amounts do not eliminate an optional form 
of benefit. An amendment is not treated as eliminating an optional form 
of benefit or eliminating or reducing an early retirement benefit or 
retirement-type subsidy under the plan, if, effective after the plan 
amendment, there is another optional form of benefit available to the 
participant under the plan that is of inherently equal or greater value 
(within the meaning of Sec.  1.401(a)(4)-4(d)(4)(i)(A)). Thus, for 
example, a change in the method of calculating a joint and survivor 
annuity from using a 90% adjustment factor on account of the 
survivorship payment at particular ages for a participant and a spouse 
to using a 91% adjustment factor at the same ages is not treated as an 
elimination of an optional form of benefit. Similarly, a plan that 
offers a subsidized qualified joint and survivor annuity option for 
married participants under which the amount payable during the 
participant's lifetime is not less than the amount payable under the 
plan's straight life annuity is permitted to be amended to eliminate the 
straight life annuity option for married participants.

[[Page 142]]

    (3) Permissible elimination of benefits that are not section 
411(d)(6) protected benefits--(i) In general. Section 411(d)(6) does not 
provide protection for benefits that are ancillary benefits, other 
rights and features, or any other benefits that are not described in 
section 411(d)(6). See Sec.  1.411(d)-4, Q&A-1(d). However, a plan may 
not be amended to recharacterize a retirement-type benefit as an 
ancillary benefit. Thus, for example, a plan amendment to recharacterize 
any portion of an early retirement subsidy as a social security 
supplement that is an ancillary benefit violates section 411(d)(6).
    (ii) No protection for future benefit accruals. Section 411(d)(6) 
only protects benefits that accrue before the applicable amendment date. 
Thus, a plan is permitted to be amended to eliminate or reduce an early 
retirement benefit, a retirement-type subsidy, or an optional form of 
benefit with respect to benefits that accrue after the applicable 
amendment date without violating section 411(d)(6). However, section 
4980F(e) of the Internal Revenue Code and section 204(h) of ERISA 
require notice of an amendment to an applicable pension plan that either 
provides for a significant reduction in the rate of future benefit 
accrual or that eliminates or significantly reduces an early retirement 
benefit or a retirement-type subsidy. See Sec.  54.4980F-1 of this 
chapter generally, and see Sec.  54.4980F-1, Q&A-7(b) and Q&A-8(c) of 
this chapter, with respect to the circumstances under which such notice 
is required for a reduction in an early retirement benefit or 
retirement-type subsidy.
    (4) Examples. The following examples illustrate the application of 
this paragraph (b):

    Example 1. (i) Facts involving amendments to an early retirement 
subsidy. Plan A provides an annual benefit of 2% of career average pay 
times years of service commencing at normal retirement age (age 65). 
Plan A is amended on November 1, 2006, effective as of January 1, 2007, 
to provide for an annual benefit of 1.3% of final pay times years of 
service, with final pay computed as the average of a participant's 
highest 3 consecutive years of compensation. Participant M is age 50, M 
has 16 years of service, M's career average pay is $37,500, and the 
average of M's highest 3 consecutive years of compensation is $67,308. 
Thus, M's accrued benefit as of the effective date of the amendment is 
increased from $12,000 per year at normal retirement age (2% times 
$37,500 times 16 years of service) to $14,000 per year at normal 
retirement age (1.3% times $67,308 times 16 years of service). (These 
facts are similar to the facts in Example 1 in paragraph (a)(4) of this 
section.) Before the amendment, Plan A permitted a former employee to 
commence distribution of benefits as early as age 55 and, for a 
participant with at least 15 years of service, actuarially reduced the 
amount payable in the form of a straight life annuity commencing before 
normal retirement age by 3% per year from age 60 to age 65 and by 7% per 
year from age 55 through age 59. Thus, before the amendment, the amount 
of M's early retirement benefit that would be payable for commencement 
at age 55 was $6,000 per year ($12,000 per year minus 3% for 5 years and 
minus 7% for 5 more years). The amendment also alters the actuarial 
reduction factor so that, for a participant with at least 15 years of 
service, the amount payable in a straight life annuity commencing before 
normal retirement age is reduced by 6% per year. As a result, the amount 
of M's early retirement benefit at age 55 becomes $5,600 per year after 
the amendment ($14,000 minus 6% for 10 years).
    (ii) Conclusion. The straight life annuity payable under Plan A at 
age 55 is an optional form of benefit that includes an early retirement 
subsidy. The plan amendment fails to satisfy the requirements of section 
411(d)(6)(B) because the amendment decreases the optional form of 
benefit payable to Participant M below the level that Participant M was 
entitled to receive immediately before the effective date of the 
amendment. If instead Plan A had included a provision under which M's 
straight life annuity payable at any age could be not be less than what 
it was immediately before the amendment (so that M's straight life 
annuity payable at age 55 could not be less than $6,000 per year), then 
the amendment would not fail to satisfy the requirements of section 
411(d)(6)(B) with respect to M's straight life annuity payable at age 55 
(although the straight life annuity payable to M at age 55 would not 
increase until the point in time at which the new formula amount with 
the new actuarial reduction factors exceeds the amount payable under the 
minimum provision, approximately 14 months after the amendment becomes 
effective).
    Example 2. (i) Facts involving plant shutdown benefits. Plan B 
permits participants who have a severance from employment before normal 
retirement age (age 65) to commence distributions at any time after age 
55 with the amount payable to be actuarially reduced using reasonable 
actuarial assumptions regarding interest and mortality specified in the 
plan, but provides that the annual reduction for any participant who has 
at

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least 20 years of service and who has a severance from employment after 
age 55 is only 3% per year (which is a smaller reduction than would 
apply under reasonable actuarial reductions). Plan B also provides 2 
plant shutdown benefits to participants who have a severance of 
employment as a result of a plant shutdown. First, the favorable 3% per 
year actuarial reduction applies for commencement of benefits after age 
55 and before age 65 for any participant who has at least 10 years of 
service and who has a severance from employment as a result of a plant 
shutdown. Second, all participants who have at least 20 years of service 
and who have a severance from employment after age 55 (and before normal 
retirement age at age 65) as a result of a plant shutdown will receive 
supplemental payments. Under the supplemental payments, an additional 
amount equal to the participant's estimated old-age insurance benefit 
under the Social Security Act is payable until age 65. The supplemental 
payments are not a QSUPP, as defined in Sec.  1.401(a)(4)-12, because 
the plan's terms do not state that the supplement is treated as an early 
retirement benefit that is protected under section 411(d)(6).
    (ii) Conclusion with respect to plant shutdown benefits. The 
benefits payable with the 3% annual reduction are retirement-type 
benefits. The excess of the actuarial present value of the early 
retirement benefit using the 3% annual reduction over the actuarial 
present value of the normal retirement benefit is a retirement-type 
subsidy and the right to receive payments of the benefit at age 55 is an 
early retirement benefit. These conclusions apply not only with respect 
to the rights that apply to participants who have at least 20 years of 
service, but also to participants with at least 10 years of service who 
have a severance from employment as a result of a plant shutdown. Thus, 
the right to receive benefits based on a 3% annual reduction for 
participants with at least 10 years of service at the time of a plant 
shutdown is an early retirement benefit that provides a retirement-type 
subsidy and is a section 411(d)(6)(B) protected benefit (even though no 
plant shutdown has occurred). Therefore, a plan amendment cannot 
eliminate this benefit with respect to benefits accrued before the 
applicable amendment date, even before the occurrence of the plant 
shutdown. Because the plan provides that the supplemental payments 
cannot exceed the OASDI benefit under the Social Security Act, the 
supplemental payments constitute a social security supplement (but not a 
QSUPP as defined in Sec.  1.401(a)(4)-12), which is an ancillary benefit 
that is not a section 411(d)(6)(B) protected benefit and accordingly is 
not taken into account in determining whether a prohibited reduction has 
occurred.
    Example 3. (i) Facts. Plan C, a multiemployer defined benefit plan 
in which participation is limited to electricians in the construction 
industry, provides that a participant may elect to commence 
distributions only if the participant is not currently employed by a 
participating employer and provides that, if the participant has a 
specified number of years of service and attains a specified age, the 
distribution is without any actuarial reduction for commencement before 
normal retirement age. Since the plan's inception, Plan C has provided 
for suspension of pension benefits during periods of disqualifying 
employment (ERISA section 203(a)(3)(B) service). Before 2007, the plan 
defined disqualifying employment to include any job as an electrician in 
the particular industry and geographic location to which Plan C applies. 
This definition of disqualifying employment did not cover a job as an 
electrician supervisor. In 2005, Participant E, having rendered the 
specified number of years of service and attained the specified age to 
retire with a fully subsidized early retirement benefit, retires from 
E's job as an electrician with Employer Y and starts a position with 
Employer Z as an electrician supervisor. Employer Z is not a 
participating employer in Plan C but is an employer in the same industry 
and geographic location as Employer Y. When E left service with Employer 
Y, E's position as an electrician supervisor was not disqualifying 
employment for purposes of Plan C's suspension of pension benefit 
provision, and E elected to commence benefit payments in 2005. In 2006, 
effective January 1, 2007, Plan C is amended to expand the definition of 
disqualifying employment to include any job (including supervisory 
positions) as an electrician in the same industry and geographic 
location to which Plan C applies. The plan's definition of disqualifying 
employment satisfies the requirements of section 411(a)(3)(B). On 
January 1, 2007, E's pension benefits are suspended because of E's 
disqualifying employment as an electrician supervisor.
    (ii) Conclusion. Under paragraphs (a)(3) and (b)(1) of this section, 
the 2007 plan amendment violates section 411(d)(6), because the 
amendment places greater restrictions or conditions on a participant's 
rights to section 411(d)(6) protected benefits to the extent it applies 
with respect to benefits that accrued before January 1, 2007. The result 
would be the same even if the amendment did not apply to former 
employees and instead applied only to participants who were actively 
employed at the time of the applicable amendment.

    (c) Permissible elimination of optional forms of benefit that are 
redundant--(1) General rule. Except as otherwise provided in paragraph 
(c)(5) of this section, a plan is permitted to be amended

[[Page 144]]

to eliminate an optional form of benefit for a participant with respect 
to benefits accrued before the applicable amendment date if--
    (i) The optional form of benefit is redundant with respect to a 
retained optional form of benefit, within the meaning of paragraph 
(c)(2) of this section;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity commencement date that is 
earlier than the number of days in the maximum QJSA explanation period 
(as defined in paragraph (g)(9) of this section) after the date the 
amendment is adopted; and
    (iii) The requirements of paragraph (e) of this section are 
satisfied in any case in which either:
    (A) The retained optional form of benefit for the participant does 
not commence on the same annuity commencement date as the optional form 
of benefit that is being eliminated; or
    (B) As of the date the amendment is adopted, the actuarial present 
value of the retained optional form of benefit for the participant is 
less than the actuarial present value of the optional form of benefit 
that is being eliminated.
    (2) Similar types of optional forms of benefit are redundant--(i) 
General rule. An optional form of benefit is redundant with respect to a 
retained optional form of benefit if, after the amendment becomes 
applicable--
    (A) There is a retained optional form of benefit available to the 
participant that is in the same family of optional forms of benefit, 
within the meaning of paragraphs (c)(3) and (4) of this section, as the 
optional form of benefit being eliminated; and
    (B) The participant's rights with respect to the retained optional 
form of benefit are not subject to materially greater restrictions (such 
as conditions relating to eligibility, restrictions on a participant's 
ability to designate the person who is entitled to benefits following 
the participant's death, or restrictions on a participant's right to 
receive an in-kind distribution) than applied to the optional form of 
benefit being eliminated.
    (ii) Special rule for core options. An optional form of benefit that 
is a core option as defined in paragraph (g)(5) of this section may not 
be eliminated as a redundant benefit under the rules of this paragraph 
(c) unless the retained optional form of benefit and the eliminated core 
option are identical except for differences described in paragraph 
(c)(3)(ii) of this section. Thus, for example, a particular 10-year term 
certain and life annuity may not be eliminated by plan amendment unless 
the retained optional form of benefit is another 10-year term certain 
and life annuity.
    (3) Family of optional forms of benefit--(i) In general. Paragraph 
(c)(4) of this section describes certain families of optional forms of 
benefits. Not every optional form of benefit that is offered under a 
plan necessarily fits within a family of optional forms of benefit as 
described in paragraph (c)(4) of this section. Each optional form of 
benefit that is not included in any particular family of optional forms 
of benefit listed in paragraph (c)(4) of this section is in a separate 
family of optional forms of benefit with other optional forms of benefit 
that would be identical to that optional form of benefit but for 
differences that are disregarded under paragraph (c)(3)(ii) of this 
section.
    (ii) Certain differences among optional forms of benefit--(A) 
Differences in actuarial factors and annuity starting dates. The 
determination of whether two optional forms of benefit are within a 
family of optional forms of benefit is made without regard to actuarial 
factors or annuity starting dates. Thus, any optional forms of benefit 
that are part of the same generalized optional form (within the meaning 
of paragraph (g)(8) of this section) are in the same family of optional 
forms of benefit. For example, if a plan has a single-sum distribution 
option for some participants that is calculated using a 5% interest rate 
and a specific mortality table (but no less than the minimum present 
value as determined under section 417(e)) and another single-sum 
distribution option for other participants that is calculated using the 
applicable interest rate as defined in section 417(e)(3)(A)(ii)(II) and 
the applicable mortality table as defined in section 
417(e)(3)(A)(ii)(I), both single-sum distribution options are part of 
the same

[[Page 145]]

generalized optional form and thus in the same family of optional forms 
of benefit under the rules of paragraph (c)(3)(i) of this section. 
However, differences in actuarial factors and annuity starting dates are 
taken into account for purposes of the requirements in paragraph (e)(3) 
of this section.
    (B) Differences in pop-up provisions and cash refund features for 
joint and contingent options. The determination of whether two optional 
forms of benefit are within a family of optional forms of benefit 
relating to joint and contingent families (as described in paragraph 
(c)(4)(i) and (ii) of this section) is made without regard to the 
following features--
    (1) Pop-up provisions (under which payments increase upon the death 
of the beneficiary or another event that causes the beneficiary not to 
be entitled to a survivor annuity);
    (2) 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); or
    (3) Term-certain provisions for optional forms of benefit within a 
joint and contingent family.
    (C) Differences in social security leveling features, refund of 
employee contributions features, and retroactive annuity starting date 
features. The determination of whether 2 optional forms of benefit are 
within a family of optional forms of benefit is made without regard to 
social security leveling features, refund of employee contributions 
features, or retroactive annuity starting date features. But see 
paragraph (c)(5) of this section for special rules relating to social 
security leveling, refund of employee contributions, and retroactive 
annuity starting date features in optional forms of benefit.
    (4) List of families. The following are families of optional forms 
of benefit for purposes of this paragraph (c):
    (i) Joint and contingent options with continuation percentages of 
50% to 100%. An optional form of benefit is within the 50% or more joint 
and contingent family if it provides a life annuity to the participant 
and a survivor annuity to an individual that is at least 50% and no more 
than 100% of the annuity payable during the joint lives of the 
participant and the participant's survivor.
    (ii) Joint and contingent options with continuation percentages less 
than 50%. An optional form of benefit is within the less than 50% joint 
and contingent family if it provides a life annuity to the participant 
and a survivor annuity to an individual that is less than 50% of the 
annuity payable during the joint lives of the participant and the 
participant's survivor.
    (iii) Term certain and life annuity options with a term of 10 years 
or less. An optional form of benefit is within the 10 years or less term 
certain and life family if it is a life annuity with a guarantee that 
payments will continue to the participant's beneficiary for the 
remainder of a fixed period that is 10 years or less if the participant 
dies before the end of the fixed period.
    (iv) Term certain and life annuity options with a term longer than 
10 years. An optional form of benefit is within the longer than 10 years 
term certain and life family if it is a life annuity with a guarantee 
that payments will continue to the participant's beneficiary for the 
remainder of a fixed period that is in excess of 10 years if the 
participant dies before the end of the fixed period.
    (v) Level installment payment options over a period of 10 years or 
less. An optional form of benefit is within the 10 years or less 
installment family if it provides for substantially level payments to 
the participant for a fixed period of at least 2 years and not in excess 
of 10 years with a guarantee that payments will continue to the 
participant's beneficiary for the remainder of the fixed period if the 
participant dies before the end of the fixed period.
    (vi) Level installment payment options over a period of more than 10 
years. An optional form of benefit is within the more than 10 years 
installment family if it provides for substantially level payments to 
the participant for a fixed period that is in excess of 10 years with a 
guarantee that payments will continue to the participant's beneficiary 
for the remainder of the fixed period if the participant dies before the 
end of the fixed period.

[[Page 146]]

    (5) Special rules for certain features included in optional forms of 
benefit. For purposes of applying this paragraph (c), to the extent an 
optional form of benefit that is being eliminated includes either a 
social security leveling feature or a refund of employee contributions 
feature, the retained optional form of benefit must also include that 
feature, and, to the extent that the optional form of benefit that is 
being eliminated does not include a social security leveling feature or 
a refund of employee contributions feature, the retained optional form 
of benefit must not include that feature. For purposes of applying this 
paragraph (c), to the extent an optional form of benefit that is being 
eliminated does not include a retroactive annuity starting date feature, 
the retained optional form of benefit must not include the feature.
    (6) Separate application of redundancy rules for bifurcated 
benefits. If a plan permits the participant to make different 
distribution elections with respect to two or more separate portions of 
the participant's benefit, the rules of this paragraph (c) are permitted 
to be applied separately to each such portion of the participant's 
benefit as if that portion were the participant's entire benefit. Thus, 
for example, if one set of distribution elections applies to a portion 
of the participant's accrued benefit and another set of distribution 
elections applies to the other portion of the participant's accrued 
benefit, then with respect to one portion of the participant's benefit, 
the determination of whether any optional form of benefit is within a 
family of optional forms of benefit is permitted to be made disregarding 
elections that apply to the other portion of the participant's benefit. 
Similarly, if a participant can elect to receive any portion of the 
accrued benefit in a single sum and the remainder pursuant to a set of 
distribution elections, the rules of this paragraph (c) are permitted to 
be applied separately to the set of distribution elections that apply to 
the portion of the participant's accrued benefit that is not payable in 
a single sum (for example, for the portion of a participant's benefit 
that is not paid in a single sum, the determination of whether any 
optional form of benefit is within a family of optional forms of benefit 
is permitted to be made disregarding the fact that the other portion of 
the participant's benefit is paid in a single sum).
    (d) Permissible elimination of noncore optional forms of benefit 
where core options are offered--(1) General rule. Except as otherwise 
provided in paragraph (d)(2) of this section, a plan is permitted to be 
amended to eliminate an optional form of benefit for a participant with 
respect to benefits accrued before the applicable amendment date if--
    (i) After the amendment becomes applicable, each of the core options 
described in paragraph (g)(5) of this section is available to the 
participant with respect to benefits accrued before and after the 
amendment;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity commencement date that is 
earlier than 4 years after the date the amendment is adopted; and
    (iii) The requirements of paragraph (e) of this section are 
satisfied in any case in which either:
    (A) One or more of the core options are not available commencing on 
the same annuity commencement date as the optional form of benefit that 
is being eliminated; or
    (B) As of the date the amendment is adopted, the actuarial present 
value of the benefit payable under any core option with the same annuity 
commencement date is less than the actuarial present value of benefits 
payable under the optional form of benefit that is being eliminated.
    (2) Special rules--(i) Treatment of certain features included in 
optional forms of benefit. For purposes of applying this paragraph (d), 
to the extent an optional form of benefit that is being eliminated 
includes either a social security leveling feature or a refund of 
employee contributions feature, at least one of the core options must 
also be available with that feature, and, to the extent that the 
optional form of benefit that is being eliminated does not include a 
social security leveling feature or a refund of employee contributions 
feature, each of the core options must be available without that

[[Page 147]]

feature. For purposes of applying this paragraph (d), to the extent an 
optional form of benefit that is being eliminated does not include a 
retroactive annuity starting date feature, each of the core options must 
be available without that feature.
    (ii) Eliminating the most valuable option for a participant with a 
short life expectancy. For purposes of applying this paragraph (d), if 
the most valuable option for a participant with a short life expectancy 
(as defined in paragraph (g)(5)(iii) of this section) is eliminated, 
then, after the plan amendment, an optional form of benefit that is 
identical, except for differences described in paragraph (c)(3)(ii) of 
this section, must be available to the participant. However, such a plan 
amendment cannot eliminate a refund of employee contributions feature 
from the most valuable option for a participant with a short life 
expectancy.
    (iii) Single-sum distributions. A plan amendment is not treated as 
satisfying this paragraph (d) if it eliminates an optional form of 
benefit that includes a single-sum distribution that applies with 
respect to at least 25% of the participant's accrued benefit as of the 
date the optional form of benefit is eliminated. But see Sec.  1.411(d)-
4, Q&A-2(b)(2)(v), relating to involuntary single-sum distributions for 
benefits with a present value not in excess of the maximum dollar amount 
in section 411(a)(11).
    (iv) Application of multiple amendment rule to core option rule. 
Notwithstanding paragraph (a)(2)(iii)(B) of this section, if a plan is 
amended to eliminate an optional form of benefit using the core options 
rule in this paragraph (d), then the employer must wait 3 years after 
the first annuity commencement date for which the optional form of 
benefit is no longer available before making any changes to the core 
options offered under the plan (other than a change that is not treated 
as an elimination under paragraph (b)(2)(ii) of this section). Thus, for 
example, if a plan amendment eliminates an optional form of benefit for 
a participant using the core options rule under this paragraph (d), with 
an adoption date of January 1, 2006 and an effective date of January 1, 
2010, the plan would not be permitted to be amended to make changes to 
the core options offered under the plan (and the core options would 
continue to apply with respect to the participant's accrued benefit) 
until January 1, 2013.
    (v) Special rule for joint and contingent annuity core option. If a 
plan offers joint and contingent annuities under which a participant is 
entitled to a life annuity with a survivor annuity for the individual 
designated by the participant (including a non-spousal contingent 
annuitant) with continuation percentage options of both 50% and 100% 
(after adjustments permitted under paragraph (g)(5)(ii) of this section 
to comply with applicable law), the plan is permitted to treat both of 
these options as core options for purposes of this paragraph (d), in 
lieu of a 75% joint and contingent annuity. Thus, such a plan is 
permitted to use the rules of this paragraph (d) if the plan satisfies 
all of the requirements of this paragraph (d) (taking into account the 
modification rule in paragraph (g)(5)(ii) of this section) other than 
the requirement of offering a 75% joint and contingent annuity as 
described in paragraph (g)(5)(i)(B) of this section.
    (e) Permissible plan amendments under paragraphs (c) and (d) 
eliminating or reducing section 411(d)(6)(B) protected benefits that are 
burdensome and of de minimis value--(1) In general. A plan amendment 
that, pursuant to paragraph (c)(1)(iii) or (d)(1)(iii) of this section, 
is required to satisfy this paragraph (e) satisfies this paragraph (e) 
if--
    (i) The amendment eliminates section 411(d)(6)(B) protected benefits 
that create significant burdens or complexities for the plan and its 
participants as described in paragraph (e)(2) of this section; and
    (ii) The amendment does not adversely affect the rights of any 
participant in a more than de minimis manner as described in paragraph 
(e)(3) of this section.
    (2) Plan amendments eliminating section 411(d)(6)(B) protected 
benefits that create significant burdens and complexities--(i) Facts and 
circumstances analysis--(A) In general. The determination of whether a 
plan amendment eliminates section 411(d)(6)(B) protected benefits that 
create significant burdens

[[Page 148]]

or complexities for the plan and its participants is based on facts and 
circumstances.
    (B) Early retirement benefits. In the case of an amendment that 
eliminates an early retirement benefit, relevant factors include whether 
the annuity starting dates under the plan considered in the aggregate 
are burdensome or complex (e.g., the number of categories of early 
retirement benefits, whether the terms and conditions applicable to the 
plan's early retirement benefits are difficult to summarize in a manner 
that is concise and readily understandable to the average plan 
participant, and whether those different early retirement benefits were 
added to the plan as a result of a plan merger, transfer, or 
consolidation), and whether the effect of the plan amendment is to 
reduce the number of categories of early retirement benefits.
    (C) Retirement-type subsidies and actuarial factors. In the case of 
a plan amendment eliminating a retirement-type subsidy or changing the 
actuarial factors used to determine optional forms of benefit, relevant 
factors include whether the actuarial factors used for determining 
optional forms of benefit available under the plan considered in the 
aggregate are burdensome or complex (e.g., the number of different 
retirement-type subsidies and other actuarial factors available under 
the plan, whether the terms and conditions applicable to the plan's 
retirement-type subsidies are difficult to summarize in a manner that is 
concise and readily understandable to the average plan participant, 
whether the plan is eliminating one or more generalized optional forms, 
whether the plan is replacing a complex optional form of benefit that 
contains a retirement-type subsidy with a simpler form, and whether the 
different retirement-type subsidies and other actuarial factors were 
added to the plan as a result of a plan merger, transfer, or 
consolidation), and whether the effect of the plan amendment is to 
reduce the number of categories of retirement-type subsidies or other 
actuarial factors.
    (D) Example. The following example illustrates the application of 
this paragraph (e)(2)(i):

    Example. (i) Facts. Plan A is a defined benefit plan under which 
employees may select a distribution in the form of a straight life 
annuity, a straight life annuity with cost-of-living increases, a 50% 
qualified joint and survivor annuity with a pop-up provision, or a 10-
year term certain and life annuity. On January 15, 2007, Plan A is 
amended, effective June 1, 2007, to eliminate the 50% qualified joint 
and survivor annuity with a pop-up provision as described in paragraph 
(c)(3)(ii)(B)(1) of this section and replace it with a 50% qualified 
joint and survivor annuity without the pop-up provision (and using the 
same actuarial factor).
    (ii) Conclusion. Plan A satisfies the requirements of paragraph 
(e)(2)(i)(B) of this section because, based on the relevant facts and 
circumstances (e.g., the amendment replaces a complex optional form of 
benefit with a simpler form), the amendment eliminates section 
411(d)(6)(B) protected benefits that create significant burdens and 
complexities. Accordingly, the plan amendment is permitted to eliminate 
the pop-up provision, provided that the plan amendment satisfies all the 
other applicable requirements in paragraph (c) or (d) of this section. 
For example, the plan amendment must not eliminate the most valuable 
option for a participant with a short life expectancy (as defined in 
paragraph (g)(5)(iii) of this section) and the plan amendment must not 
adversely affect the rights of any participant in a more than de minimis 
manner, taking into account the actuarial factors for the joint and 
survivor annuity with the pop-up provision and the joint and survivor 
annuity without the pop-up provision, as described in paragraph (e)(3) 
of this section.

    (ii) Presumptions for certain amendments--(A) Presumption for 
amendments eliminating certain annuity starting dates. If the annuity 
starting dates under the plan considered in the aggregate are burdensome 
or complex, then elimination of any one of the annuity starting dates is 
presumed to eliminate section 411(d)(6)(B) protected benefits that 
create significant burdens or complexities for the plan and its 
participants. However, if the effect of a plan amendment with respect to 
a set of optional forms of benefit is merely to substitute one set of 
annuity starting dates for another set of annuity starting dates, 
without any reduction in the number of different annuity starting dates, 
then the plan amendment does not satisfy the requirements of this 
paragraph (e)(2).

[[Page 149]]

    (B) Presumption for amendments changing certain actuarial factors. 
If the actuarial factors used for determining benefit distributions 
available under a generalized optional form considered in the aggregate 
are burdensome or complex, then replacing some of the actuarial factors 
for the generalized optional form is presumed to eliminate section 
411(d)(6)(B) protected benefits that create significant burdens or 
complexities for the plan and its participants. However, if the effect 
is merely to substitute one set of actuarial factors for another set of 
actuarial factors, without any reduction in the number of different 
actuarial factors or the complexity of those factors, then the plan 
amendment does not satisfy the requirements of this paragraph (e)(2) 
unless the change of actuarial factors is merely to replace one or more 
of the plan's actuarial factors for determining optional forms of 
benefit with new actuarial factors that are more accurate (e.g., 
reflecting more recent mortality experience or more recent market rates 
of interest).
    (iii) Restrictions against creating burdens or complexities. See 
paragraphs (a)(2)(iii) and (b)(1)(iii) of this section for general rules 
applicable to multiple amendments. In accordance with these rules, a 
plan amendment does not eliminate a section 411(d)(6)(B) protected 
benefit that creates burdens and complexities for a plan and its 
participants if, less than 3 years earlier, a plan was previously 
amended to add another retirement-type subsidy in order to facilitate 
the elimination of the original retirement-type subsidy, even if the 
elimination of the other subsidy would not adversely affect the rights 
of any plan participant in a more than de minimis manner as provided in 
paragraph (e)(3) of this section.
    (3) Elimination of early retirement benefits or retirement-type 
subsidies that are de minimis--(i) Rules for retained optional forms of 
benefit under paragraph (c) of this section. For purposes of paragraph 
(c) of this section, the elimination of an optional form of benefit does 
not adversely affect the rights of any participant in a more than de 
minimis manner if--
    (A) The retained optional form of benefit described in paragraph (c) 
of this section has substantially the same annuity commencement date as 
the optional form of benefit that is being eliminated, as described in 
paragraph (e)(4) of this section; and
    (B) Either the actuarial present value of the benefit payable in the 
optional form of benefit that is being eliminated does not exceed the 
actuarial present value of the benefit payable in the retained optional 
form of benefit by more than a de minimis amount, as described in 
paragraph (e)(5) of this section, or the amendment satisfies the 
requirements of paragraph (e)(6) of this section relating to a delayed 
effective date.
    (ii) Rules for core options under paragraph (d) of this section. For 
purposes of paragraph (d) of this section, the elimination of an 
optional form of benefit does not adversely affect the rights of any 
participant in a more than de minimis manner if, with respect to each of 
the core options--
    (A) The core option is available after the amendment with 
substantially the same annuity commencement date as the optional form of 
benefit that is being eliminated, as described in paragraph (e)(4) of 
this section; and
    (B) Either the actuarial present value of the benefit payable in the 
optional form of benefit that is being eliminated does not exceed the 
actuarial present value of the benefit payable under the core option by 
more than a de minimis amount, as described in paragraph (e)(5) of this 
section, or the amendment satisfies the requirements of paragraph (e)(6) 
of this section.
    (4) Definition of substantially the same annuity starting dates. For 
purposes of applying paragraphs (e)(3)(i)(A) and (ii)(A) of this 
section, annuity starting dates are considered substantially the same if 
they are within 6 months of each other.
    (5) Definition of de minimis difference in actuarial present value. 
For purposes of applying paragraph (e)(3)(i)(B) and (ii)(B) of this 
section, a difference in actuarial present value between the optional 
form of benefit being eliminated and the retained optional form of 
benefit or core option is not more than a de minimis amount if, as of 
the date the

[[Page 150]]

amendment is adopted, the difference between the actuarial present value 
of the eliminated optional form of benefit and the actuarial present 
value of the retained optional form of benefit or core option is not 
more than the greater of--
    (i) 2% of the present value of the retirement-type subsidy (if any) 
under the eliminated optional form of benefit prior to the amendment; or
    (ii) 1% of the greater of the participant's compensation (as defined 
in section 415(c)(3)) for the prior plan year or the participant's 
average compensation for his or her high 3 years (within the meaning of 
section 415(b)(1)(B) and (b)(3)).
    (6) Delayed effective date--(i) General rule. For purposes of 
applying paragraph (e)(3)(i)(B) and (ii)(B) of this section, an 
amendment that eliminates an optional form of benefit satisfies the 
requirements of this paragraph (e)(6) if the elimination of the optional 
form of benefit is not applicable to any annuity commencement date 
before the end of the expected transition period for that optional form 
of benefit.
    (ii) Determination of expected transition period--(A) General rule. 
The expected transition period for a plan amendment eliminating an 
optional form of benefit is the period that begins when the amendment is 
adopted and ends when it is reasonable to expect, with respect to a 
section 411(d)(6)(B) protected benefit (i.e., not taking into account 
benefits that accrue in the future), that the form being eliminated 
would be subsumed by another optional form of benefit after taking into 
account expected future benefit accruals.
    (B) Determination of expected transition period using conservative 
actuarial assumptions. The expected transition period for a plan 
amendment eliminating an optional form of benefit must be determined in 
accordance with actuarial assumptions that are reasonable at the time of 
the amendment and that are conservative (i.e., reasonable actuarial 
assumptions that are likely to result in the longest period of time 
until the eliminated optional form of benefit would be subsumed). For 
this purpose, actuarial assumptions are not treated as conservative 
unless they include assumptions that a participant's compensation will 
not increase and that future benefit accruals will not exceed accruals 
in recent periods.
    (C) Effect of subsequent amendments reducing future benefit accruals 
on the expected transition period. If, during the expected transition 
period for a plan amendment eliminating an optional form of benefit, the 
plan is subsequently amended to reduce the rate of future benefit 
accrual (or otherwise to lengthen the expected transition period), thus 
that subsequent plan amendment must provide that the elimination of the 
optional form of benefit is void or must provide for the effective date 
for elimination of the optional form of benefit to be further extended 
to a new expected transition period that satisfies this paragraph (e)(6) 
taking into account the subsequent amendment.
    (iii) Applicability of the delayed effective date rule limited to 
employees who continue to accrue benefits through the end of expected 
transition period. An amendment eliminating an optional form of benefit 
under this paragraph (e)(6) must be limited to participants who continue 
to accrue benefits under the plan through the end of the expected 
transition period. Thus, for example, the plan amendment may not apply 
to any participant who has a severance from employment during the 
expected transition period.
    (iv) Special rule for section 204(h) notice. See Sec.  54.4980F-
1(b), Q&A-8(c) of this chapter for a special rule relating to this 
paragraph (e)(6).
    (f) Utilization test--(1) General rule. A plan is permitted to be 
amended to eliminate all of the optional forms of benefit that comprise 
a generalized optional form (as defined in paragraph (g)(8) of this 
section) for a participant with respect to benefits accrued before the 
applicable amendment date if--
    (i) None of the optional forms of benefit being eliminated is a core 
option, within the meaning of paragraph (g)(5) of this section;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity commencement date that is 
earlier than the number of days in the maximum Qualified Joint and 
Survivor Annuity explanation period (as defined in paragraph

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(g)(9) of this section) after the date the amendment is adopted;
    (iii) During the look-back period--
    (A) The generalized optional form has been available to at least the 
applicable number of participants who are taken into account under 
paragraph (f)(3) and (4) of this section; and
    (B) No participant has elected any optional form of benefit that is 
part of the generalized optional form with an annuity commencement date 
that is within the look-back period.
    (2) Look-back period--(i) In general. For purposes of this paragraph 
(f), the look-back period is the period that includes--
    (A) The portion of the plan year in which such plan amendment is 
adopted that precedes the date of adoption (the pre-adoption period); 
and
    (B) The 2 plan years immediately preceding the pre-adoption period.
    (ii) Special look-back period rules--(A) 12-month plan year. In the 
look-back period, at least 1 of the plan years must be a 12-month plan 
year.
    (B) Permitted 3-month exclusion in the pre-adoption period. A plan 
is permitted to exclude from the look-back period the calendar month in 
which the amendment is adopted and the preceding 1 or 2 calendar months 
to the extent those preceding months are contained within the pre-
adoption period.
    (C) Permission to extend the look-back period. In order to have a 
look-back period that satisfies the minimum applicable number of 
participants requirement in paragraph (f)(1)(iii)(A) of this section, 
the look-back period described in paragraph (f)(2)(i)(B) of this section 
is permitted to be expanded, so as to include the 3, 4, or 5 plan years 
immediately preceding the plan year in which the amendment is adopted. 
Thus, in determining the look-back period, a plan is permitted to 
substitute the 3, 4, or 5 plan years immediately preceding the pre-
adoption period for the 2 plan years described in paragraph (f)(2)(i)(B) 
of this section. However, if a plan does not satisfy the minimum 
applicable number of participants requirement of paragraph 
(f)(1)(iii)(A) of this section using the pre-adoption period and the 
immediately preceding 5 plan years, the plan is not permitted to be 
amended in accordance with the utilization test in this paragraph (f).
    (3) Participants taken into account. A participant is taken into 
account for purposes of this paragraph (f) only if the participant was 
eligible to elect to commence payment of an optional form of benefit 
that is part of the generalized optional form being eliminated with an 
annuity commencement date that is within the look-back period. However, 
a participant is not taken into account if the participant--
    (i) Did not elect any optional form of benefit with an annuity 
commencement date that was within the look-back period;
    (ii) Elected an optional form of benefit that included a single-sum 
distribution that applied with respect to at least 25% of the 
participant's accrued benefit;
    (iii) Elected an optional form of benefit that was only available 
during a limited period of time and that contained a retirement-type 
subsidy where the subsidy that is part of the generalized optional form 
being eliminated was not extended to any optional form of benefit with 
the same annuity commencement date; or
    (iv) Elected an optional form of benefit with an annuity 
commencement date that was more than 10 years before normal retirement 
age.
    (4) Determining the applicable number of participants. For purposes 
of applying the rules in this paragraph (f), the applicable number of 
participants is 50 participants. However, notwithstanding paragraph 
(f)(3)(ii) of this section, a plan is permitted to take into account any 
participant who elected an optional form of benefit that included a 
single-sum distribution that applied with respect to at least 25% of the 
participant's accrued benefit, but only if the applicable number of 
participants is increased to 1,000 participants.
    (5) Default elections. For purposes of this paragraph (f), an 
election includes the payment of an optional form of benefit that 
applies in the absence of an affirmative election.
    (g) Definitions and use of terms. The definitions in this paragraph 
(g) apply for purposes of this section.
    (1) Actuarial present value. The term actuarial present value means 
actuarial

[[Page 152]]

present value (within the meaning of Sec.  1.401(a)(4)-12) determined 
using reasonable actuarial assumptions.
    (2) Ancillary benefit. The term ancillary benefit means--
    (i) A social security supplement under a defined benefit plan (other 
than a QSUPP as defined in Sec.  1.401(a)(4)-12);
    (ii) A benefit payable under a defined benefit plan in the event of 
disability (to the extent that the benefit exceeds the benefit otherwise 
payable), but only if the total benefit payable in the event of 
disability does not exceed the maximum qualified disability benefit, as 
defined in section 411(a)(9);
    (iii) A life insurance benefit;
    (iv) A medical benefit described in section 401(h);
    (v) A death benefit under a defined benefit plan other than a death 
benefit which is a part of an optional form of benefit; or
    (vi) A plant shutdown benefit or other similar benefit in a defined 
benefit plan that does not continue past retirement age and does not 
affect the payment of the accrued benefit, but only to the extent that 
such plant shutdown benefit, or other similar benefit (if any), is 
permitted in a qualified pension plan (see Sec.  1.401-1(b)(1)(i)).
    (3) Annuity commencement date. The term annuity commencement date 
generally means the annuity starting date, except that, in the case of a 
retroactive annuity starting date under section 417(a)(7), annuity 
commencement date means the date of the first payment of benefits 
pursuant to a participant election of a retroactive annuity starting 
date, as defined in Sec.  1.417(e)-1(b)(3)(iv).
    (4) Applicable amendment date. The term applicable amendment date, 
with respect to a plan amendment, means the later of the effective date 
of the amendment or the date the amendment is adopted.
    (5) Core options--(i) General rule. With respect to a plan, the term 
core options means--
    (A) A straight life annuity generalized optional form under which 
the participant is entitled to a level life annuity with no benefit 
payable after the participant's death;
    (B) A 75% joint and contingent annuity generalized optional form 
under which the participant is entitled to a life annuity with a 
survivor annuity for any individual designated by the participant 
(including a non-spousal contingent annuitant) that is 75% of the amount 
payable during the participant's life (but see paragraph (d)(2)(v) of 
this section for a special rule relating to the joint and contingent 
annuity core option);
    (C) A 10-year term certain and life annuity generalized optional 
form under which the participant is entitled to a life annuity with a 
guarantee that payments will continue to any person designated by the 
participant for the remainder of a fixed period of 10 years if the 
participant dies before the end of the 10-year period; and
    (D) The most valuable option for a participant with a short life 
expectancy (as defined in paragraph (g)(5)(iii) of this section).
    (ii) Modification of core options to satisfy other requirements. An 
annuity does not fail to be a core option (e.g., a joint and contingent 
annuity described in paragraph (g)(5)(i)(B) of this section or a 10-year 
term certain and life annuity described in paragraph (g)(5)(i)(C) of 
this section) as a result of differences to comply with applicable law, 
such as limitations on death benefits to comply with the incidental 
benefit requirement of Sec.  1.401-1(b)(1)(i) or on account of the 
spousal consent rules of section 417.
    (iii) Most valuable option for a participant with a short life 
expectancy--(A) General definition. Except as provided in paragraph 
(g)(5)(iii)(B) of this section, most valuable option for a participant 
with a short life expectancy means, for an annuity starting date, the 
optional form of benefit that is reasonably expected to result in 
payments that have the largest actuarial present value in the case of a 
participant who dies shortly after the annuity starting date, taking 
into account both payments due to the participant prior to the 
participant's death and any payments due after the participant's death. 
For this purpose, a plan is permitted to assume that the spouse of the 
participant is the same age as the participant. In addition, a plan is 
permitted to assume that the optional form of benefit that

[[Page 153]]

is the most valuable option for a participant with a short life 
expectancy when the participant is age 70\1/2\ also is the most valuable 
option for a participant with a short life expectancy at all older ages, 
and that the most valuable option for a participant with a short life 
expectancy at age 55 is the most valuable option for a participant with 
a short life expectancy at all younger ages.
    (B) Safe harbor hierarchy--(1) A plan is permitted to treat a 
single-sum distribution option with an actuarial present value that is 
not less than the actuarial present value of any optional form of 
benefit eliminated by the plan amendment as the most valuable option for 
a participant with a short life expectancy for all of a participant's 
annuity starting dates if such single-sum distribution option is 
available at all such dates, without regard to whether the option was 
available before the plan amendment.
    (2) If the plan before the amendment does not offer a single-sum 
distribution option as described in paragraph (g)(5)(iii)(B)(1) of this 
section, a plan is permitted to treat a joint and contingent annuity 
with a continuation percentage that is at least 75% and that is at least 
as great as the highest continuation percentage available before the 
amendment as the most valuable option for a participant with a short 
life expectancy for all of a participant's annuity starting dates if 
such joint and contingent annuity is available at all such dates, 
without regard to whether the option was available before the plan 
amendment.
    (3) If the plan before the amendment offers neither a single-sum 
distribution option as described in paragraph (g)(5)(iii)(B)(1) of this 
section nor a joint and contingent annuity with a continuation 
percentage as described in paragraph (g)(5)(iii)(B)(2) of this section, 
a plan is permitted to treat a term certain and life annuity with a term 
certain period no less than 15 years as the most valuable option for a 
participant with a short life expectancy for each annuity starting date 
if such 15-year term certain and life annuity is available at all 
annuity starting dates, without regard to whether the option was 
available before the plan amendment.
    (6) Definitions of types of section 411(d)(6)(B) protected 
benefits--(i) Early retirement benefit. The term early retirement 
benefit means the right, under the terms of a plan, to commence 
distribution of a retirement-type benefit at a particular date after 
severance from employment with the employer and before normal retirement 
age. Different early retirement benefits result from differences in 
terms relating to timing.
    (ii) Optional form of benefit--(A) In general. The term optional 
form of benefit means a distribution alternative (including the normal 
form of benefit) that is available under the plan with respect to an 
accrued benefit or a distribution alternative with respect to a 
retirement-type benefit. 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 factors or assumptions used to 
determine the amount distributed. Thus, for example, different optional 
forms of benefit may result from differences in terms relating to the 
payment schedule, timing, commencement, medium of distribution (e.g., in 
cash or in kind), election rights, differences in eligibility 
requirements, or the portion of the benefit to which the distribution 
alternative applies. Likewise, 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) Death benefits. If a death benefit is payable after the annuity 
starting date for a specific optional form of benefit and the same death 
benefit would not be provided if another optional form of benefit were 
elected by a participant, then that death benefit is part of the 
specific optional form of benefit and is thus protected under section 
411(d)(6). A death benefit is not treated as part of a specific optional 
form of benefit merely because the

[[Page 154]]

same benefit is not provided to a participant who has received his or 
her entire accrued benefit prior to death. For example, a $5,000 death 
benefit that is payable to all participants except any participant who 
has received his or her accrued benefit in a single-sum distribution is 
not part of a specific optional form of benefit.
    (iii) Retirement-type benefit. The term retirement-type benefit 
means--
    (A) The payment of a distribution alternative with respect to an 
accrued benefit; or
    (B) The payment of any other benefit under a defined benefit plan 
(including a QSUPP as defined in Sec.  1.401(a)(4)-12) that is permitted 
to be in a qualified pension plan, continues after retirement, and is 
not an ancillary benefit.
    (iv) Retirement-type subsidy. The term retirement-type subsidy means 
the excess, if any, of the actuarial present value of a retirement-type 
benefit over the actuarial present value of the accrued benefit 
commencing at normal retirement age or at actual commencement date, if 
later, with both such actuarial present values determined as of the date 
the retirement-type benefit commences. Examples of retirement-type 
subsidies include a subsidized early retirement benefit and a subsidized 
qualified joint and survivor annuity.
    (v) Subsidized early retirement benefit or early retirement subsidy. 
The terms subsidized early retirement benefit or early retirement 
subsidy mean the right, under the terms of a plan, to commence 
distribution of a retirement-type benefit at a particular date after 
severance from employment with the employer and before normal retirement 
age where the actuarial present value of the optional forms of benefit 
available to the participant under the plan at that annuity starting 
date exceeds the actuarial present value of the accrued benefit 
commencing at normal retirement age (with such actuarial present values 
determined as of the annuity starting date). Thus, an early retirement 
subsidy is an early retirement benefit that provides a retirement-type 
subsidy.
    (7) Eliminate; elimination; reduce; reduction. The terms eliminate 
or elimination when used in connection with a section 411(d)(6)(B) 
protected benefit mean to eliminate or the elimination of an optional 
form of benefit or an early retirement benefit and to reduce or a 
reduction in a retirement-type subsidy. The terms reduce or reduction 
when used in connection with a retirement-type subsidy mean to reduce or 
a reduction in the amount of the subsidy. For purposes of this section, 
an elimination includes a reduction and a reduction includes an 
elimination.
    (8) Generalized optional form. The term generalized optional form 
means a group of optional forms of benefit that are identical except for 
differences due to the actuarial factors that are used to determine the 
amount of the distributions under those optional forms of benefit and 
the annuity starting dates.
    (9) Maximum QJSA explanation period. The term maximum QJSA 
explanation period means the maximum number of days before an annuity 
starting date for a qualified joint and survivor annuity for which a 
written explanation relating to the qualified joint and survivor annuity 
would satisfy the timing requirements of section 417(a)(3) and Sec.  
1.417(e)-1(b)(3)(ii).
    (10) Other right and feature. The term other right or feature has 
the meaning set forth at Sec.  1.401(a)(4)-4(e)(3)(ii).
    (11) Refund of employee contributions feature. The term refund of 
employee contributions features means a feature with respect to an 
optional form of benefit that provides for employee contributions and 
interest thereon to be paid in a single sum at the annuity starting date 
with the remainder to be paid in another form beginning on that date.
    (12) Retirement; retirement age. For purposes of this section, the 
date of retirement means the annuity starting date. Thus, retirement age 
means a participant's age at the annuity starting date.
    (13) Retroactive annuity starting date feature. The term retroactive 
annuity starting date feature means a feature with respect to an 
optional form of benefit under which the annuity starting date for the 
distribution occurs on or before the date the written explanation 
required by section 417(a)(3) is provided to the participant.

[[Page 155]]

    (14) Section 411(d)(6) protected benefit. The term section 411(d)(6) 
protected benefit means the accrued benefit of a participant as of the 
applicable amendment date described in section 411(d)(6)(A) and any 
section 411(d)(6)(B) protected benefit.
    (15) Section 411(d)(6)(B) protected benefit. The term section 
411(d)(6)(B) protected benefit means the portion of an early retirement 
benefit, a retirement-type subsidy, or an optional form of benefit 
attributable to benefits accrued before the applicable amendment date.
    (16) Social security leveling feature. The term social security 
leveling feature means a feature with respect to an optional form of 
benefit commencing prior to a participant's expected commencement of 
social security benefits that provides for a temporary period of higher 
payments which is designed to result in an approximately level amount of 
income when the participant's estimated old age benefits from Social 
Security are taken into account.
    (h) Examples. The following examples illustrate the application of 
paragraphs (c) through (g) of this section:

    Example 1. (i) Facts involving elimination of optional forms of 
benefit as redundant. Plan C is a defined benefit plan under which 
employees may elect to commence distributions at any time after the 
later of termination of employment or attainment of age 55. At each 
potential annuity commencement date, Plan C permits employees to select, 
with spousal consent where required, a straight life annuity or any of a 
number of actuarially equivalent alternative forms of payment, including 
a straight life annuity with cost-of-living increases and a joint and 
contingent annuity with the participant having the right to select any 
beneficiary and any continuation percentage from 1% to 100%, subject to 
modification to the extent necessary to satisfy the requirements of the 
incidental benefit requirement of Sec.  1.401-1(b)(1)(i). The amount of 
any alternative payment is determined as the actuarial equivalent of the 
straight life annuity payable at the same age using reasonable actuarial 
assumptions. On June 2, 2006, Plan C is amended to delete all 
continuation percentages for joint and contingent options other than 
25%, 50%, 75%, or 100%, effective with respect to annuity commencement 
dates that are on or after January 1, 2007.
    (ii) Conclusion--(A) Categorization of family members under the 
redundancy rule. The optional forms of benefit described in paragraph 
(i) of this Example 1 are members of 4 families: a straight life 
annuity; a straight life annuity with cost-of-living increases; joint 
and contingent options with continuation percentages of less than 50%; 
and joint and contingent options with continuation percentages of 50% or 
more. The amendment does not affect either of the first 2 families, but 
affects the 2 families relating to joint and contingent options.
    (B) Conclusion for elimination of optional forms of benefit as 
redundant. The amendment satisfies the requirements of paragraph (c) of 
this section. First, the eliminated optional forms of benefit are 
redundant with respect to the retained optional forms of benefit because 
each eliminated joint and contingent annuity option with a continuation 
percentage of less than 50% is redundant with respect to the 25% 
continuation option and each eliminated joint and contingent annuity 
option with a continuation percentage of 50% or higher is redundant with 
respect to any one of the retained 50%, 75%, or 100% continuation 
options. In addition, to the extent that the optional form of benefit 
that is being eliminated does not include a social security leveling 
feature, return of employee contribution feature, or retroactive annuity 
starting date feature, the retained optional form of benefit does not 
include that feature. Second, the amendment is not effective with 
respect to annuity commencement dates before September 1, 2006, as 
required under paragraph (c)(1)(ii) of this section. Third, the plan 
amendment does not eliminate any available core option, including the 
most valuable option for a participant with a short life expectancy, 
treating a joint and contingent annuity with a 100% continuation 
percentage as this optional form of benefit pursuant to paragraph 
(g)(5)(iii)(B)(2) of this section. Finally, the amendment need not 
satisfy the requirements of paragraph (e) of this section because the 
retained optional forms of benefit are available on the same annuity 
commencement dates and have the same actuarial present value as the 
optional forms of benefit that are being eliminated.
    Example 2. (i) Facts involving elimination of optional forms of 
benefit as redundant if additional restrictions are imposed. The facts 
are the same as Example 1, except that the plan amendment also restricts 
the class of beneficiaries that may be elected under the 4 retained 
joint and contingent annuities to the employee's spouse.
    (ii) Conclusion. The amendment fails to satisfy the requirements of 
paragraph (c)(2)(i)(B) of this section because the retained joint and 
contingent annuities have materially greater restrictions on the 
beneficiary designation than did the eliminated joint and contingent 
annuities. Thus, the joint and contingent annuities being eliminated are 
not redundant with respect to the retained joint and contingent 
annuities. In addition, the amendment fails to satisfy the

[[Page 156]]

requirements of the core option rules in paragraph (d) of this section 
because the amendment fails to be limited to annuity commencement dates 
that are at least 4 years after the date the amendment is adopted, the 
amendment fails to include the core option in paragraph (g)(5)(i)(B) of 
this section because the participant does not have the right to 
designate any beneficiary, and the amendment fails to include the core 
option described in paragraph (g)(5)(i)(C) of this section because the 
plan does not provide a 10-year term certain and life annuity.
    Example 3. (i) Facts involving elimination of a social security 
leveling feature and a period certain annuity as redundant. Plan D is a 
defined benefit plan under which participants may elect to commence 
distributions in the following actuarially equivalent forms, with 
spousal consent if applicable: a straight life annuity; a 50%, 75%, or 
100% joint and contingent annuity; a 5-year, 10-year, or a 15-year term 
certain and life annuity; and an installment refund annuity (i.e., an 
optional form of benefit that provides a period certain, the duration of 
which is based on the participant's age), with the participant having 
the right to select any beneficiary. In addition, each annuity offered 
under the plan, if payable to a participant who is less than age 65, is 
available both with and without a social security leveling feature. The 
social security leveling feature provides for an assumed commencement of 
social security benefits at any age selected by the participant between 
age 62 and 65. Plan D is amended on June 2, 2006, effective as of 
January 1, 2007, to eliminate the installment refund form of benefit and 
to restrict the social security leveling feature to an assumed social 
security commencement age of 65.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (c) of this section. First, the installment refund annuity 
option is redundant with respect to the 15-year certain and life annuity 
(except for advanced ages where, because of shorter life expectancies, 
the installment refund annuity option is redundant with respect to the 
5-year certain and life annuity and also redundant with respect to the 
10-year certain and life annuity). Second, with respect to restricting 
the social security leveling feature to an assumed social security 
commencement age of 65, under paragraph (c)(3)(ii)(C) of this section, 
straight life annuities with social security leveling features that have 
different social security commencement ages are treated as members of 
the same family as straight life annuities without social security 
leveling features. To the extent an optional form of benefit that is 
being eliminated includes a social security leveling feature, the 
retained optional form of benefit must also include that feature, but it 
is permitted to have a different assumed age for commencement of social 
security benefits. Third, to the extent that the optional form of 
benefit that is being eliminated does not include a social security 
leveling feature, a return of employee contribution feature, or 
retroactive annuity starting date feature, the retained optional form of 
benefit must not include that feature. Fourth, the plan amendment does 
not eliminate any available core option, including the most valuable 
option for a participant with a short life expectancy, treating a joint 
and contingent annuity with a 100% continuation percentage as this 
optional form of benefit pursuant to paragraph (g)(5)(iii)(B)(2) of this 
section. Fifth, the amendment is not effective with respect to annuity 
commencement dates before September 1, 2006, as required under paragraph 
(c)(1)(ii) of this section. The amendment need not satisfy the 
requirements of paragraph (e) of this section because the retained 
optional forms of benefit are available on the same annuity commencement 
dates and have the same actuarial present value as the optional forms of 
benefit that are being eliminated.
    Example 4. (i) Facts involving elimination of noncore options. 
Employer N sponsors Plan E, a defined benefit plan that permits every 
participant to elect payment in the following actuarially equivalent 
optional forms of benefit (Plan E's uniformly available options), with 
spousal consent if applicable: a straight life annuity; a 50%, 75%, or 
100% joint and contingent annuity with no restrictions on designation of 
beneficiaries; and a 5-, 10-, or 15-year term certain and life annuity. 
In addition, each can be elected in conjunction with a social security 
leveling feature, with the participant permitted to select a social 
security commencement age from age 62 to age 67. None of Plan E's 
uniformly available options include a single-sum distribution. The plan 
has been in existence for over 30 years, during which time Employer N 
has acquired a large number of other businesses, including merging over 
20 defined benefit plans of acquired entities into Plan E. Many of the 
merged plans offered optional forms of benefit that were not among Plan 
E's uniformly available options, including some plans funded through 
insurance products, often offering all of the insurance annuities that 
the insurance carrier offers, and with some of the merged plans offering 
single-sum distributions. In particular, under the XYZ acquisition that 
occurred in 1990, the XYZ acquired plan offered a single-sum 
distribution option that was frozen at the time of the acquisition. On 
April 1, 2006, each single-sum distribution option applies to less than 
25% of the XYZ participants' accrued benefits. Employer N has generally, 
but not uniformly, followed the practice of limiting the optional forms 
of benefit for an acquired unit to an employee's service before the date 
of the merger, and

[[Page 157]]

has uniformly followed this practice with respect to each of the early 
retirement subsidies in the acquired unit's plan. As a result, as of 
April 1, 2007, Plan E includes a large number of generalized optional 
forms which are not members of families of optional forms of benefit 
identified in paragraph (c)(4) of this section, but there are no 
participants who are entitled to any early retirement subsidies because 
any subsidies have been subsumed by the actuarially reduced accrued 
benefit. Plan E is amended in April of 2007 to eliminate all of the 
optional forms of benefit that Plan E offers other than Plan E's 
uniformly available options, except that the amendment does not 
eliminate any single-sum distribution option except with respect to XYZ 
participants and permits any commencement date that was permitted under 
Plan E before the amendment. Plan E also eliminates the single-sum 
distribution option for XYZ participants. Further, each of Plan E's 
uniformly available options has an actuarial present value that is not 
less than the actuarial present value of any optional form of benefit 
offered before the amendment. The amendment is effective with respect to 
annuity commencement dates that are on or after May 1, 2011.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (d) of this section. First, Plan E, as amended, does not 
eliminate any single-sum distribution option as provided in paragraph 
(d)(2)(iii) of this section except for single-sum distribution options 
that apply to less than 25% of a plan participant's accrued benefit as 
of the date the option is eliminated (May 1, 2011). Second, Plan E, as 
amended, includes each of the core options as defined in paragraph 
(g)(5) of this section, including offering the most valuable option for 
a participant with a short life expectancy (treating the 100% joint and 
contingent annuity as this benefit, under paragraph (g)(5)(iii)(B)(2) of 
this section). The 100% joint and contingent annuity option (and not the 
grandfathered single-sum distribution option) is the most valuable 
option for a participant with a short life expectancy because the 
grandfathered single-sum distribution option is not available with 
respect to a participant's entire accrued benefit. In addition, as 
required under paragraph (d)(2) of this section, to the extent an 
optional form of benefit that is being eliminated includes either a 
social security leveling feature or a refund of employee contributions 
feature, at least one of the core options is available with that feature 
and, to the extent that the optional form of benefit that is being 
eliminated does not include a social security leveling feature or a 
refund of employee contributions feature, each of the core options is 
available without that feature. Third, the amendment is not effective 
with respect to annuity commencement dates that are less than 4 years 
after the date the amendment is adopted. Finally, the amendment need not 
satisfy the requirements of paragraph (e) of this section because the 
retained optional forms of benefit are available on the same annuity 
commencement date and have the same actuarial present value as the 
optional forms of benefit that are being eliminated. The conclusion that 
the amendment satisfies the requirements of paragraph (d) of this 
section assumes that no amendments are made to change the core options 
before May 1, 2014.
    Example 5. (i) Facts involving reductions in actuarial present 
value. (A) Plan F is a defined benefit plan providing an accrued benefit 
of 1% of the average of a participant's highest 3 consecutive years' pay 
times years of service, payable as a straight life annuity beginning at 
the normal retirement age at age 65. Plan F permits employees to elect 
to commence actuarially reduced distributions at any time after the 
later of termination of employment or attainment of age 55. At each 
potential annuity commencement date, Plan F permits employees to select, 
with spousal consent, either a straight life annuity, a joint and 
contingent annuity with the participant having the right to select any 
beneficiary and a continuation percentage of 50%, 66 2/3%, 75%, or 100%, 
or a 10-year certain and life annuity with the participant having the 
right to select any beneficiary, subject to modification to the extent 
necessary to satisfy the requirements of the incidental benefit 
requirement of Sec.  1.401-1(b)(1)(i). The amount of any joint and 
contingent annuity and the 10-year certain and life annuity is 
determined as the actuarial equivalent of the straight life annuity 
payable at the same age using reasonable actuarial assumptions. The plan 
covers employees at 4 divisions, one of which, Division X, was acquired 
on January 1, 1999. The plan provides for distributions before normal 
retirement age to be actuarially reduced, but, if a participant retires 
after attainment of age 55 and completion of 10 years of service, the 
applicable early retirement reduction factor is 3% per year for the 
years between age 65 and 62 and 6% per year for the ages from 62 to 55 
for all employees at any division, except for employees who were in 
Division X on January 1, 1999, for whom the early retirement reduction 
factor for retirement after age 55 and 10 years of service is 5% for 
each year before age 65. On June 2, 2006, effective January 1, 2007, 
Plan F is amended to change the early retirement reduction factors for 
all employees of Division X to be the same as for other employees, 
effective with respect to annuity commencement dates that are on or 
after January 1, 2008, but only with respect to participants who are 
employees on or after January 1, 2008 and only if Plan F continues 
accruals at the current rate through January 1, 2008 (or the effective 
date of the change in reduction factors is delayed to reflect the

[[Page 158]]

change in the accrual rate). For purposes of this Example 5, it is 
assumed that an actuarially equivalent early retirement factor would 
have a reduction shown in column 4 of the following table, which 
compares the reduction factors for Division X before and after the 
amendment:

----------------------------------------------------------------------------------------------------------------
                                                                              Actuarially
            Age (1)                 Old division X      New factor (as a   equivalent factor    Column 3 minus
                                  factor (as a %) (2)        %) (3)          (as a %) (4)        column 2 (5)
----------------------------------------------------------------------------------------------------------------
65.............................                    NA                 NA                  NA                  NA
64.............................                    95                 97                91.1                 + 2
63.............................                    90                 94                83.2                 + 4
62.............................                    85                 91                76.1                 + 5
61.............................                    80                 85                69.8                 + 5
60.............................                    75                 79                64.1                 + 4
59.............................                    70                 73                59.0                 + 3
58.............................                    65                 67                54.3                 + 2
57.............................                    60                 61                50.1                 + 1
56.............................                    55                 55                46.3                   0
55.............................                    50                 49                42.8                  -1
----------------------------------------------------------------------------------------------------------------

    (B) On January 1, 2007, the employee with the largest number of 
years of service is Employee E, who is age 54 and has 20 years of 
service. For 2006, Employee E's compensation is $80,000 and E's highest 
3 consecutive years of pay on January 1, 2007 is $75,000. Employee E's 
accrued benefit as of the January 1, 2007 effective date of the 
amendment is a life annuity of $15,000 per year at normal retirement age 
(1% times $75,000 times 20 years of service) and E's early retirement 
benefit commencing at age 55 has a present value of $91,397 as of 
January 1, 2007. It is assumed for purposes of this example that the 
longest expected transition period for any active employee does not 
exceed 5 months (20 years and 5 months, times 1% times 49% exceeds 20 
years times 1% times 50%). Finally, it is assumed for purposes of this 
example that the amendment reduces optional forms of benefit which are 
burdensome or complex.
    (ii) Conclusion concerning application of section 411(d)(6)(B). The 
amendment reducing the early retirement factors has the effect of 
eliminating the existing optional forms of benefit (where the amount of 
the benefit is based on preamendment early retirement factors in any 
case where the new factors result in a smaller amount payable) and 
adding new optional forms of benefit (where the amount of benefit is 
based on the different early retirement factors). Accordingly, the 
elimination must satisfy the requirements of paragraph (c) or (d) of 
this section if the amount payable at any date is less than would have 
been payable under the plan before the amendment.
    (iii) Conclusion concerning application of redundancy rules. The 
amendment satisfies the requirements of paragraph (c)(1)(i) and (ii) of 
this section (see paragraphs (iv) through (vi) of this Example 5 below 
for the requirements of paragraph (c)(1)(iii) of this section). First, 
with respect to each eliminated optional form of benefit (i.e., with 
respect to each optional form of benefit with the Old Division X 
Factor), after the amendment there is a retained optional form of 
benefit that is in the same family of optional forms of benefit (i.e., 
the optional form of benefit with the New Factor). Second, the amendment 
is not effective with respect to annuity commencement dates that are 
less than the time period required under paragraph (c)(1)(ii) of this 
section. Third, to the extent that the plan amendment eliminates the 
most valuable option for a participant with a short life expectancy, the 
retained optional form of benefit is identical except for differences in 
actuarial factors.
    (iv) Conclusion concerning application of the requirements under 
paragraph (e) of this section. The plan amendment must satisfy the 
requirements of paragraph (e) of this section because, as of the 
December 2, 2006 adoption date, the actuarial present value of the early 
retirement subsidy is less than the actuarial present value of the early 
retirement subsidy being eliminated. The plan amendment satisfies the 
requirements under paragraph (e)(1)(i) and (2) of this section because 
the amendment eliminates optional forms of benefit that create 
significant burdens or complexities for the plan and its participants. 
See below for the de minimis requirement under paragraph (e)(1)(ii) and 
(3) of this section.
    (v) Conclusion concerning application of de minimis rules under 
paragraph (e)(5) of this section. In order to satisfy the requirements 
under paragraph (e)(1)(ii) and (3) of this section, the amendment must 
satisfy the requirements of either paragraph (e)(5) or paragraph (e)(6) 
of this section. The amendment does not satisfy the requirements of 
paragraph (e)(5) of this section because the reduction in the actuarial 
present value is more than a de minimis amount under paragraph

[[Page 159]]

(e)(5) of this section. For example, for Employee E, the amount of the 
joint and contingent annuity payable at age 55 is reduced from $7,500 
(50% of $15,000) to $7,350 (49% of $15,000) and the reduction in present 
value as a result of the amendment is $1,828 ($91,397--$89,569). In this 
case, the retirement-type subsidy at age 55 is the excess of the present 
value of the 50% early retirement benefit over the present value of the 
deferred payment of the accrued benefit, or $13,921 ($97,269--$83,348) 
and the present value at age 54 of the retirement-type subsidy is 
$13,081. The reduction in present value is more than the greater of 2% 
of the present value of the retirement-type subsidy and 1% of E's 
compensation because the reduction in present value exceeds $800 (the 
greater of $262, which is 2% of the present value of the retirement-type 
subsidy for the benefit being eliminated, and $800, which is 1% of E's 
compensation of $80,000).
    (vi) Conclusion involving application of de minimis rules under 
paragraph (e)(6) of this section relating to expected transition period. 
The amendment satisfies the requirements of paragraph (e)(6) of this 
section and, thus, satisfies the requirements of paragraph (c) of this 
section, including the requirement in paragraph (c)(1)(iii) of this 
section that paragraph (e) of this section be satisfied. First, as 
assumed under the facts above, the amendment reduces optional forms of 
benefit that are burdensome or complex. Second, the plan amendment is 
not effective for annuity commencement dates before January 1, 2008, and 
that date is not earlier than the longest expected transition period for 
any participant in Plan F on the date of the amendment. Third, the 
amendment does not apply to any participant who has a severance from 
employment during the transition period. If, however, a later plan 
amendment reduces accruals under Plan F, the initial plan amendment will 
no longer satisfy the requirements of paragraph (e)(6) of this section 
(and must be voided) unless, as part of the later amendment, the 
expected transition period is extended to reflect the reduction in 
accruals under Plan F.
    Example 6. (i) Facts involving elimination of noncore options using 
utilization test--(A) In general. Plan G is a calendar year defined 
benefit plan under which participants may elect to commence 
distributions after termination of employment in the following 
actuarially equivalent forms, with spousal consent, if applicable: a 
straight life annuity; a 50%, 75%, or 100% joint and contingent annuity; 
or a 5-year, 10-year, or a 15-year term certain and life annuity. A 
participant is permitted to elect a single-sum distribution if the 
present value of the participant's nonforfeitable accrued benefit is not 
greater than $5,000. The annuities offered under the plan are generally 
available both with and without a social security leveling feature. The 
social security leveling feature provides for an assumed commencement of 
social security benefits at any age selected by the participant between 
the ages of 62 and 67. Under Plan G, the normal retirement age is 
defined as age 65.
    (B) Utilization test. In 2007, the plan sponsor of Plan G, after 
reviewing participants' benefit elections, determines that, during the 
period from January 1, 2005, through June 30, 2007, no participant has 
elected a 5-year term certain and life annuity with a social security 
leveling option. During that period, Plan G has made the 5-year term 
certain and life annuity with a social security leveling option 
available to 142 participants who were at least age 55 and who elected 
optional forms of benefit with an annuity commencement dates during that 
period. In addition, during that period, 20 of the 142 participants 
elected a single-sum distribution and there was no retirement-type 
subsidy available for a limited period of time. Plan G, in accordance 
with paragraph (f)(1) of this section, is amended on September 15, 2007, 
effective as of January 1, 2008, to eliminate all 5-year term certain 
and life annuities with a social security leveling option for all 
annuity commencement dates on or after January 1, 2008.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (f) of this section. First, the 5-year term certain and life 
annuity with a social security leveling option is not a core option as 
defined in paragraph (g)(5) of this section. Second, the plan amendment 
is not applicable with respect to an optional form of benefit with an 
annuity commencement date that is earlier than the number of days in the 
maximum QJSA explanation period after the date the amendment is adopted. 
Third, the 5-year term certain and life annuity with a social security 
leveling option has been available to at least 50 participants who are 
taken into account for purposes of paragraph (f) of this section during 
the look-back period. Fourth, during the look-back period, no 
participant elected any optional form that is part of the generalized 
optional form being eliminated (for example, the 5-year term and life 
annuity with a social security leveling option).

    (i) [Reserved]
    (j) Effective dates--(1) General effective date. Except as otherwise 
provided in this paragraph (j), the rules of this section apply to 
amendments adopted on or after August 12, 2005.
    (2) Effective date for rules relating to contingent event benefits. 
Paragraph (b)(1)(ii) of this section applies to amendments adopted after 
December 31, 2005.
    (3) Effective dates for rules relating to section 411(a) 
nonforfeitability provisions--(i) Application of suspension of

[[Page 160]]

benefit rules to section 411(d)(6) protected benefits. With respect to a 
plan amendment that places greater restrictions or conditions on a 
participant's rights to section 411(d)(6) protected benefits by adding 
or modifying a plan provision relating to suspension of benefit payments 
during a period of employment or reemployment, the rules provided in 
paragraph (a)(3) of this section apply to periods beginning on or after 
June 7, 2004.
    (ii) Application of section 411(a) nonforfeitability provisions to 
section 411(d)(6) protected benefits. With respect to a plan amendment 
that places greater restrictions or conditions on a participant's rights 
to section 411(d)(6) protected benefits other than a plan amendment 
described in paragraph (j)(3)(i) of this section, the rules provided in 
paragraph (a)(3) of this section apply to plan amendments adopted after 
August 9, 2006.
    (4) Effective date for change to redundancy rule regarding 
bifurcation of benefits. The rules provided in paragraph (c)(6) of this 
section are applicable for amendments adopted after August 9, 2006.
    (5) Effective date for rules relating to utilization test. The rules 
provided in paragraph (f) of this section are applicable for amendments 
adopted after December 31, 2006.

[T.D. 9219, 70 FR 47116, Aug. 12, 2005, as amended by T.D. 9280, 71 FR 
45383, Aug. 9, 2006; 71 FR 55108, Sept. 21, 2006; T.D. 9472, 74 FR 
61276, Nov. 24, 2009]



Sec.  1.411(d)-4  Section 411(d)(6) protected benefits.

    Q-1: What are ``section 411(d)(6) protected benefits''?
    A-1: (a) In general. The term ``section 411(d)(6) protected 
benefit'' includes any benefit that is described in one or more of the 
following categories--
    (1) Benefits described in section 411(d)(6)(A),
    (2) Early retirement benefits (as defined in Sec.  1.411(d)-
3(g)(6)(i)) and retirement-type subsidies (as defined in Sec.  1.411(d)-
3(g)(6)(iv)), and
    (3) Optional forms of benefit described in section 411(d)(6)(B)(ii).

Such benefits, to the extent they have accrued, are subject to the 
protection of section 411(d)(6) and, where applicable, the definitely 
determinable requirement of section 401(a) (including section 
401(a)(25)) and cannot, therefore, be reduced, eliminated, or made 
subject to employer discretion except to the extent permitted by 
regulations.
    (b) Optional forms of benefit--(1) In general. The term optional 
form of benefit has the same meaning as in Sec.  1.411(d)-3(g)(6)(ii). 
Under this definition, different optional forms of benefit exist if a 
distribution alternative is not payable on substantially the same terms 
as another distribution alternative. Thus, for example, different 
optional forms of benefit may result from differences in terms relating 
to the payment schedule, timing, commencement, medium of distribution 
(e.g., in cash or in kind), election rights, differences in eligibility 
requirements, or the portion of the benefit to which the distribution 
alternative applies.
    (2) Examples. The following examples illustrate the meaning of the 
term ``optional form of benefit.'' Other issues, such as the requirement 
that the optional forms satisfy section 401(a)(4), are not addressed in 
these examples and no inferences are intended with respect to such 
requirements. Assume that the distribution forms, including those not 
described in these examples, provided under the plan in each of the 
following examples are identical in all respects not described.

    Example 1. A plan permits each participant to receive his benefit 
under the plan as a single sum distribution; a level monthly 
distribution schedule over 15 years; a single life annuity; a joint and 
50 percent survivor annuity; a joint and 75 percent survivor annuity; a 
joint and 50 percent survivor annuity with a benefit increase for the 
participant if the beneficiary dies before a specified date; and joint 
and 50 percent survivor annuity with a 10 year certain feature. Each of 
these benefit distribution options is an optional form of benefit 
(without regard to whether the values of these options are actuarially 
equivalent).
    Example 2. A plan permits each participant who is employed by 
division A to receive his benefit in a single sum distribution payable 
upon termination from employment and each participant who is employed by 
division B in a single sum distribution payable upon termination from 
employment on or after the attainment of age 50. This plan provides two 
single sum optional forms of benefit.
    Example 3. A plan permits each participant to receive his benefit in 
a single life annuity

[[Page 161]]

that commences in the month after the participant's termination from 
employment or in a single life annuity that commences upon the 
completion of five consecutive one year breaks in service. These are two 
optional forms of benefit.
    Example 4. A profit-sharing plan permits each participant who is 
employed by division A to receive an in-service distribution upon the 
satisfaction of objective criteria set forth in the plan designed to 
determine whether the participant has a heavy and immediate financial 
need, and each participant who is employed by division B to receive an 
in-service distribution upon the satisfaction of objective criteria set 
forth in the plan designed to determine whether the participant has a 
heavy and immediate financial need attributable to extraordinary medical 
expenses. These in-service distribution options are two optional forms 
of benefits.
    Example 5. A profit-sharing plan permits each participant who is 
employed by division A to receive an in-service distribution up to 
$5,000 and each participant who is employed by division B to receive an 
in-service distribution of up to his total benefit. These in-service 
distribution options differ as to the portion of the accrued benefit 
that may be distributed in a particular form and are, therefore, two 
optional forms of benefit.
    Example 6. A profit-sharing plan provides for a single sum 
distribution on termination of employment. The plan is amended in 1991 
to eliminate the single sum optional form of benefit with respect to 
benefits accrued after the date of amendment. This single sum optional 
form of benefit continues to be a single optional form of benefit 
although, over time, the percentage of various employees' accrued 
benefits that are potentially payable under this single sum may vary 
because the form is only available with respect to benefits accrued up 
to and including the date of the amendment.
    Example 7. A profit-sharing plan permits each participant to receive 
a single sum distribution of his benefit in cash or in the form of a 
specified class of employer stock. This plan provides two single sum 
distribution optinal forms of benefit.
    Example 8. A stock bonus plan permits each participant to receive a 
single sum distribution of his benefit in cash or in the form of the 
property in which such participant's benefit was invested prior to the 
distribution. This plan's single sum distribution option provides two 
optional forms of benefit.
    Example 9. A defined benefit plan provides for an early retirement 
benefit payable upon termination of employment after attainment of age 
55 and either after ten years of service or, if earlier, upon plan 
termination to employees of Division A and provides for an identical 
early retirement benefit payable on the same terms with the exception of 
payment on plan termination to employees of Division B. The plan 
provides for two optional forms of benefit.
    Example 10. A profit-sharing plan provides for loans secured by an 
employee's account balance. In the event of default on such a loan, 
there is an execution on such account balances. Such execution is a 
distribution of the employee's accrued benefits under the plan. A 
distribution of an accrued benefit contingent on default under a plan 
loan secured by such accrued benefits is an optional form of benefit 
under the plan.

    (c) Plan terms--(1) General rule. Generally, benefits described in 
section 411(d)(6)(A), early retirement benefits, retirement-type 
subsidies, and optional forms of benefit are section 411(d)(6) protected 
benefits only if they are provided under the terms of a plan. However, 
if an employer establishes a pattern of repeated plan amendments 
providing for similar benefits in similar situations for substantially 
consecutive, limited periods of time, such benefits will be treated as 
provided under the terms of the plan, without regard to the limited 
periods of time, to the extent necessary to carry out the purposes of 
section 411(d)(6) and, where applicable, the definitely determinable 
requirement of section 401(a), including section 401(a)(25). A pattern 
of repeated plan amendments providing that a particular optional form of 
benefit is available to certain named employees for a limited period of 
time is within the scope of this rule and may result in such optional 
form of benefit being treated as provided under the terms of the plan to 
all employees covered under the plan without regard to the limited 
period of time and the limited group of named employees.
    (2) Effective date. The provisions of paragraph (c)(1)of this Q&A-1 
are effective as of July 11, 1988. Thus, patterns or repeated plan 
amendments adopted and effective before July 11, 1988 will be 
disregarded in determining whether such amendments have created an 
ongoing optional form of benefit under the plan.
    (d) Benefits that are not section 411(d)(6) protected benefits. The 
following benefits are examples of items that are not section 411(d)(6) 
protected benefits:
    (1) Ancillary life insurance protection;

[[Page 162]]

    (2) Accident or health insurance benefits;
    (3) Social security supplements described in section 411(a)(9), 
except qualified social security supplements as defined in Sec.  
1.401(a)(4)-12;
    (4) The availability of loans (other than the distribution of an 
employee's accrued benefit upon default under a loan);
    (5) The right to make after-tax employee contributions or elective 
deferrals described in section 402(g)(3);
    (6) The right to direct investments;
    (7) The right to a particular form of investment (e.g., investment 
in employer stock or securities or investment in certain types of 
securities, commercial paper, or other investment media);
    (8) The allocation dates for contributions, forfeitures, and 
earnings, the time for making contributions (but not the conditions for 
receiving an allocation of contributions or forfeitures for a plan year 
after such conditions have been satisfied), and the valuation dates for 
account balances;
    (9) Administrative procedures for distributing benefits, such as 
provisions relating to the particular dates on which notices are given 
and by which elections must be made; and
    (10) Rights that derive from administrative and operational 
provisions, such as mechanical procedures for allocating investment 
experience among accounts in defined contribution plans.
    Q-2: To what extent may section 411(d)(6) protected benefits under a 
plan be reduced or eliminated?
    A-2:
    (a) Reduction or elimination of section 411(d)(6) protected 
benefits--(1) In general. A plan is not permitted to be amended to 
eliminate or reduce a section 411(d)(6) protected benefit that has 
already accrued, except as provided in Sec.  1.411(d)-3 or this section. 
This is generally the case even if such elimination or reduction is 
contingent upon the employee's consent. However, a plan may be amended 
to eliminate or reduce section 411(d)(6) protected benefits with respect 
to benefits not yet accrued as of the later of the amendment's adoption 
date or effective date without violating section 411(d)(6).
    (2) Selection of optional forms of benefit--(i) General rule. A plan 
may treat a participant as receiving his entire nonforfeitable accrued 
benefit under the plan if the participant receives his benefit in an 
optional form of benefit in an amount determined under the plan that is 
at least the actuarial equivalent of the employee's nonforfeitable 
accrued benefit payable at normal retirement age under the plan. This is 
true even though the participant could have elected to receive an 
optional form of benefit with a greater actuarial value than the value 
of the optional form received, such as an optional form including 
retirement-type subsidies, and without regard to whether such other, 
more valuable optional form could have commenced immediately or could 
have become available only upon the employee's future satisfaction of 
specified eligibility conditions.
    (ii) Election of an optional form. Except as provided in paragraph 
(a)(2)(iii) of this Q&A-2, a plan does not violate section 411(d)(6) 
merely because an employee's election to receive a portion of his 
nonforfeitable accrued benefit in one optional form of benefit precludes 
the employee from receiving that portion of his benefit in another 
optional form of benefit. Such employee retains all 411(d)(6) protected 
rights with respect to the entire portion of such employee's 
nonforfeitable accrued benefit for which no distribution election was 
made. For purposes of this rule, an elective transfer of an otherwise 
distributable benefit is treated as the selection of an optional form of 
benefit. See Q&A-3 of this section.
    (iii) Buy-back rule. Notwithstanding paragraph (a)(2)(ii) of this 
Q&A-2, an employee who received a distribution of his nonforfeitable 
benefit from a plan that is required to provide a repayment opportunity 
to such employee if he returns to service within the applicable period 
pursuant to the requirements of section 411(a)(7) and who, upon 
subsequent reemployment, repays the full amount of such distribution in 
accordance with section 411(a)(7)(C) must be reinstated in the full 
array of section 411(d)(6) protected benefits that existed with respect 
to such benefit prior to distribution.

[[Page 163]]

    (iv) Examples. The rules in this paragraph (a)(2) can be illustrated 
by the following examples:

    Example 1. Defined benefit plan X provides, among its optional forms 
of benefit, for a subsidized early retirement benefit payable in the 
form of an annuity and available to employees who terminate from 
employment on or after their 55th birthdays. In addition plan X provides 
for a single sum distribution available on termination from employment 
or termination of the plan. The single sum distribution is determined on 
the basis of the present value of the accrued normal retirement benefit 
and does not take the early retirement subsidy into account. Plan X is 
terminated December 31, 1991. Employees U, age 47, V, age 55, and W, age 
47, all continue in the service of the employer. Employees X, age 47, Y, 
age 55 and Z, age 47, terminate from employment with the employer during 
1991. Employees U and V elect to take the single sum optional form of 
distribution at the time of plan termination. Employees X and Y elect to 
take the single sum distribution on termination from employment with the 
employer. The elimination of the subsidized early retirement benefit 
with respect to employees U, V, X and Y does not result in a violation 
of section 411(d)(6). This is the result even though employees U and X 
had not yet satisfied the conditions for the subsidized early retirement 
benefit. Because employees W and Z have not selected an optional form of 
benefit, they continue to have a 411(d)(6) protected right to the full 
array of section 411(d)(6) protected benefits provided under the plan, 
including the single sum distribution form and the subsidized early 
retirement benefit.
    Example 2. A partially vested employee receives a single sum 
distribution of the present value of his entire nonforfeitable benefit 
on account of separation from service under a defined benefit plan 
providing for a repayment provision. Upon reemployment with the employer 
such employee makes repayment in the required amount in accordance with 
section 411(a)(7). Such employee may, upon subsequent termination of 
employment, elect to take such repaid benefits in any optional form 
provided under the plan as of the time of the employee's initial 
separation from service. If the plan was amended prior to such 
repayment, to eliminate the single sum optional form of benefit with 
respect to benefits accrued after the date of the amendment, such 
participant has a 411(d)(6) protected right to take distribution of the 
repaid benefit in the form of a single sum distribution.

    (3) Certain transactions--(i) Plan mergers and benefit transfers. 
The prohibition against the reduction or elimination of section 
411(d)(6) protected benefits already accrued applies to plan mergers, 
spinoffs, transfers, and transactions amending or having the effect of 
amending a plan or plans to transfer plan benefits. Thus, for example, 
if plan A, a profit-sharing plan that provides for distribution of plan 
benefits in annual installments over ten or twenty years, is merged with 
plan B, a profit-sharing plan that provides for distribution of plan 
benefits in annual installments over life expectancy at time of 
retirement, the merged plan must retain the ten or twenty year 
installment option for participants with respect to benefits already 
accrued under plan A as of the merger and the installments over life 
expectancy for participants with benefits already accrued under plan B. 
Similarly, for example, if an employee's benefit under a defined 
contribution plan is transferred to another defined contribution plan 
(whether or not of the same employer), the optional forms of benefit 
available with respect to the employee's benefit accrued under the 
transferor plan may not be eliminated or reduced except as otherwise 
permitted under this regulation. See Q&A-3 of this section with respect 
to the transfer of benefits between and among defined benefit and 
defined contribution plans.
    (ii) Annuity contracts--(A) General rule. The right of a participant 
to receive a benefit in the form of cash payments from the plan and the 
right of a participant to receive that benefit in the form of the 
distribution of an annuity contract that provides for cash payments that 
are identical in all respects to the cash payments from the plan except 
with respect to the source of the payments are not separate optional 
forms of benefit. Therefore, for example, if a plan includes an optional 
form of benefit under which benefits are distributed in the medium of an 
annuity contract that provides for cash payments, that optional form of 
benefit may be modified by a plan amendment that substitutes cash 
payments from the plan for the annuity contract, where those cash 
payments from the plan are identical to the cash payments payable from 
the annuity contract in all respects except with respect to the source 
of the payments. The protection provided by section 411(d)(6) may not

[[Page 164]]

be avoided by the use of annuity contracts. Thus, section 411(d)(6) 
protected benefits already accrued may not be eliminated or reduced 
merely because a plan uses annuity contracts to provide such benefits, 
without regard to whether the plan, a participant, or a beneficiary of a 
participant holds the contract or whether such annuity contracts are 
purchased as a result of the termination of the plan. However, to the 
extent that an annuity contract constitutes payment of benefits in a 
particular optional form elected by the participant, the plan does not 
violate section 411(d)(6) merely because it provides that other optional 
forms are no longer available with respect to such participant. See 
paragraph (a)(2) of this Q&A-2.
    (B) Examples. The provisions of this paragraph (a)(3)(ii) can be 
illustrated by the following examples:

    Example 1. A profit-sharing plan that is being terminated satisfies 
section 411(d)(6) only if the plan makes available to participants 
annuity contracts that provide for all section 411(d)(6) protected 
benefits under the plan that may not otherwise be reduced or eliminated 
pursuant to this Q&A-2. Thus, if such a plan provided for a single sum 
distribution upon attainment of early retirement age, and a provision 
for payment in the form of 10 equal annual installments, the plan would 
satisfy section 411(d)(6) only if the participants had the opportunity 
to elect to have their benefits provided under an annuity contract that 
provided for the same single sum distribution upon the attainment of the 
participant's early retirement age and the same 10 year installment 
optional form of benefit.
    Example 2. A defined benefit plan permits each participant who 
separates from service on or after age 62 to receive a qualified joint 
and survivor annuity or a single life annuity commencing 45 days after 
termination from employment. For a participant who separates from 
service before age 62, payments under these optional forms of benefit 
commence 45 days after the participant's 62nd birthday. Under the plan, 
a participant is to elect among these optional forms of benefit during 
the 90-day period preceding the annuity starting date. However, during 
such period, a participant may defer both benefit commencement and the 
election of a particular benefit form to any later date, subject to 
section 401(a)(9). In January 1990, the employer decides to terminate 
the plan as of July 1, 1990. The plan will fail to satisfy section 
411(d)(6) unless the optional forms of benefit provided under the plan 
are preserved under the annuity contract purchased on plan termination. 
Thus, such annuity contract must provide a participant the same optional 
benefit commencement rights that the plan provided. In addition, such 
contract must provide the same election rights with respect to such 
benefit options. This is the case even if, for example, in conjunction 
with the termination, the employer amended the plan to permit 
participants to elect a qualified joint and survivor annuity, single 
life annuity, or single sum distribution commencing on July 1, 1990.

    (4) Benefits payable to a spouse or beneficiary. Section 411(d)(6) 
protected benefits may not be eliminated merely because they are payable 
with respect to a spouse or other beneficiary.
    (b) Section 411(d)(6) protected benefits that may be eliminated or 
reduced only as permitted by the Commissioner--(1) In general. The 
Commissioner may, consistent with the provisions of this section, 
provide for the elimination or reduction of section 411(d)(6) protected 
benefits that have already accrued only to the extent that such 
elimination or reduction does not result in the loss to plan 
participants of either a valuable right or an employer-subsidized 
optional form of benefit where a similar optional form of benefit with a 
comparable subsidy is not provided or to the extent such elimination or 
reduction is necessary to permit compliance with other requirements of 
section 401(a) (e.g., sections 401(a)(4), 401(a)(9) and 415). The 
Commissioner may exercise this authority only through the publication of 
revenue rulings, notices, and other documents of general applicability.
    (2) Section 411(d)(6) protected benefits that may be eliminated or 
reduced. The elimination or reduction of certain section 411(d)(6) 
protected benefits that have already accrued in the following situations 
does not violate section 411(d)(6). The rules with respect to 
permissible eliminations and reductions provided in this paragraph 
(b)(2) generally are effective January 30, 1986; however, the rules of 
paragraphs (b)(2)(iii) (A) and (B) and (b)(2)(viii) of this Q&A-2 are 
effective for plan amendments that are adopted and effective on or after 
September 6, 2000. These exceptions create no inference with respect to 
whether any other applicable requirements are satisfied (for

[[Page 165]]

example, requirements imposed by section 401(a)(9) and section 
401(a)(14)).
    (i) Change in statutory requirement. A plan may be amended to 
eliminate or reduce a section 411(d)(6) protected benefit if the 
following three requirements are met: the amendment constitutes timely 
compliance with a change in law affecting plan qualification; there is 
an exercise of section 7805(b) relief by the Commissioner; and the 
elimination or reduction is made only to the extent necessary to enable 
the plan to continue to satisfy the requirements for qualified plans. In 
general, the elimination or reduction of a section 411(d)(6) protected 
benefit will not be treated as necessary if it is possible through other 
modifications to the plan (e.g., by expanding the availability of an 
optional form of benefit to additional employees) to satisfy the 
applicable qualification requirement.
    (ii) Joint and survivor annuity. A plan that provides a range of 
three or more actuarially equivalent joint and survivor annuity options 
may be amended to eliminate any of such options, other than the options 
with the largest and smallest optional survivor payment percentages, 
even if the effect of such amendment is to change which of the options 
is the qualified joint and survivor annuity under section 417. Thus, for 
example, if a money purchase pension plan provides three joint and 
survivor annuity options with survivor payments of 50%, 75% and 100%, 
respectively, that are uniform with respect to age and are actuarially 
equivalent, then the employer may eliminate the option with the 75% 
survivor payment, even if this option had been the qualified joint and 
survivor annuity under the plan.
    (iii) In-kind distributions--(A) In-kind distributions payable under 
defined contribution plans in the form of marketable securities other 
than employer securities. If a defined contribution plan includes an 
optional form of benefit under which benefits are distributed in the 
form of marketable securities, other than securities of the employer, 
that optional form of benefit may be modified by a plan amendment that 
substitutes cash for the marketable securities as the medium of 
distribution. For purposes of this paragraph (b)(2)(iii)(A) and 
paragraph (b)(2)(iii)(B) of this Q&A-2, the term marketable securities 
means marketable securities as defined in section 731(c)(2), and the 
term securities of the employer means securities of the employer as 
defined in section 402(e)(4)(E)(ii).
    (B) Amendments to defined contribution plans to specify medium of 
distribution. If a defined contribution plan includes an optional form 
of benefit under which benefits are distributable to a participant in a 
medium other than cash, the plan may be amended to limit the types of 
property in which distributions may be made to the participant to the 
types of property specified in the amendment. For this purpose, the 
types of property specified in the amendment must include all types of 
property (other than marketable securities that are not securities of 
the employer) that are allocated to the participant's account on the 
effective date of the amendment and in which the participant would be 
able to receive a distribution immediately before the effective date of 
the amendment if a distributable event occurred. In addition, a plan 
amendment may provide that the participant's right to receive a 
distribution in the form of specified types of property is limited to 
the property allocated to the participant's account at the time of 
distribution that consists of property of those specified types.
    (C) In-kind distributions after plan termination. If a plan includes 
an optional form of benefit under which benefits are distributed in 
specified property, that optional form of benefit may be modified for 
distributions after plan termination by substituting cash for the 
specified property as the medium of distribution to the extent that, on 
plan termination, an employee has the opportunity to receive the 
optional form of benefit in the form of the specified property. This 
exception is not available, however, if the employer that maintains the 
terminating plan also maintains another plan that provides an optional 
form of benefit under which benefits are distributed in the specified 
property.
    (D) Examples. The following examples illustrate the application of 
this paragraph (b)(2)(iii):


[[Page 166]]


    Example 1. (i) An employer maintains a profit-sharing plan under 
which participants may direct the investment of their accounts. One 
investment option available to participants is a fund invested in common 
stock of the employer. The plan provides that the participant has the 
right to a distribution in the form of cash upon termination of 
employment. In addition, the plan provides that, to the extent a 
participant's account is invested in the employer stock fund, the 
participant may receive an in-kind distribution of employer stock upon 
termination of employment. On October 18, 2000, the plan is amended, 
effective on January 1, 2001, to remove the fund invested in employer 
common stock as an investment option under the plan and to provide for 
the stock held in the fund to be sold. The amendment permits 
participants to elect how the sale proceeds are to be reallocated among 
the remaining investment options, and provides for amounts not so 
reallocated as of January 1, 2001, to be allocated to a specified 
investment option.
    (ii) The plan does not fail to satisfy section 411(d)(6) solely on 
account of the plan amendment relating to the elimination of the 
employer stock investment option, which is not a section 411(d)(6) 
protected benefit. See paragraph (d)(7) of Q&A-1 of this section. 
Moreover, because the plan did not provide for distributions of employer 
securities except to the extent participants' accounts were invested in 
the employer stock fund, the plan is not required operationally to offer 
distributions of employer securities following the amendment. In 
addition, the plan would not fail to satisfy section 411(d)(6) on 
account of a further plan amendment, effective after the plan has ceased 
to provide for an employer stock fund investment option (and 
participants' accounts have ceased to be invested in employer 
securities), to eliminate the right to a distribution in the form of 
employer stock. See paragraph (b)(2)(iii)(B) of this Q&A-2.
    Example 2. (i) An employer maintains a profit-sharing plan under 
which a participant, upon termination of employment, may elect to 
receive benefits in a single-sum distribution either in cash or in kind. 
The plan's investments are limited to a fund invested in employer stock, 
a fund invested in XYZ mutual funds (which are marketable securities), 
and a fund invested in shares of PQR limited partnership (which are not 
marketable securities).
    (ii) The following alternative plan amendments would not cause the 
plan to fail to satisfy section 411(d)(6):
    (A) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of employer 
stock and shares of PQR limited partnership. See paragraph 
(b)(2)(iii)(A) of this Q&A-2.
    (B) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of employer 
stock and shares of PQR limited partnership, and that also provides that 
only participants with employer stock allocated to their accounts as of 
the effective date of the amendment have the right to distributions in 
the form of employer stock, and that only participants with shares of 
PQR limited partnership allocated to their accounts as of the effective 
date of the amendment have the right to distributions in the form of 
shares of PQR limited partnership. To comply with the plan amendment, 
the plan administrator retains a list of participants with employer 
stock allocated to their accounts as of the effective date of the 
amendment, and a list of participants with shares of PQR limited 
partnership allocated to their accounts as of the effective date of the 
amendment. See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
    (C) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of employer 
stock and shares of PQR limited partnership to the extent that those 
assets are allocated to the participant's account at the time of the 
distribution. See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
    (D) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of employer 
stock and shares of PQR limited partnership, and that provides that only 
participants with employer stock allocated to their accounts as of the 
effective date of the amendment have the right to distributions in the 
form of employer stock, and that only participants with shares of PQR 
limited partnership allocated to their accounts as of the effective date 
of the amendment have the right to distributions in the form of shares 
of PQR limited partnership, and that further provides that the 
distribution of that stock or those shares is available only to the 
extent that those assets are allocated to those participants' accounts 
at the time of the distribution. To comply with the plan amendment, the 
plan administrator retains a list of participants with employer stock 
allocated to their accounts as of the effective date of the amendment, 
and a list of participants with shares of PQR limited partnership 
allocated to their accounts as of the effective date of the amendment. 
See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
    Example 3. (i) An employer maintains a stock bonus plan under which 
a participant, upon termination of employment, may elect to receive 
benefits in a single-sum distribution in employer stock. This is the 
only plan maintained by the employer under which distributions in 
employer stock are available.

[[Page 167]]

The employer decides to terminate the stock bonus plan.
    (ii) If the plan makes available a single-sum distribution in 
employer stock on plan termination, the plan will not fail to satisfy 
section 411(d)(6) solely because the optional form of benefit providing 
a single-sum distribution in employer stock on termination of employment 
is modified to provide that such distribution is available only in cash. 
See paragraph (b)(2)(iii)(C) of this Q&A-2.

    (iv) Coordination with diversification requirement. A tax credit 
employee stock ownership plan (as defined in section 409(a)) or an 
employee stock ownership plan (as defined in section 4975(e)(7)) may be 
amended to provide that a distribution is not available in employer 
securities to the extent that an employee elects to diversify benefits 
pursuant to section 401(a)(28).
    (v) Involuntary distributions. A plan may be amended to provide for 
the involuntary distribution of an employee's benefit to the extent such 
involuntary distribution is permitted under sections 411(a)(11) and 
417(e). Thus, for example, an involuntary distribution provision may be 
amended to require that an employee who terminates from employment with 
the employer receive a single sum distribution in the event that the 
present value of the employee's benefit is not more than $3,500, by 
substituting the cash-out limit in effect under Sec.  1.411(a)-
11(c)(3)(ii) for $3,500, without violating section 411(d)(6). In 
addition, for example, the employer may amend the plan to reduce the 
involuntary distribution threshold from the cash-out limit in effect 
under Sec.  1.411(a)-11(c)(3)(ii) to any lower amount and to eliminate 
the involuntary single sum option for employees with benefits between 
the cash-out limit in effect under Sec.  1.411(a)-11(c)(3)(ii) and such 
lower amount without violating section 411(d)(6). This rule does not 
permit a plan provision permitting employer discretion with respect to 
optional forms of benefit for employees the present value of whose 
benefit is less than the cash-out limit in effect under Sec.  1.411(a)-
11(c)(3)(ii).
    (vi) Distribution exception for certain profit-sharing plans--(A) In 
general. If a defined contribution plan that is not subject to section 
412 and does not provide for an annuity option is terminated, the plan 
may be amended to provide for the distribution of a participant's 
accrued benefit upon termination in a single sum optional form without 
the participant's consent. The preceding sentence does not apply if the 
employer maintains any other defined contribution plan (other than an 
employee stock ownership plan as defined in section 4975(e)(7)).
    (B) Examples. The provisions of this paragraph (b)(2)(vi) can be 
illustrated by the following examples:

    Example 1. Employer X maintains a defined contribution plan that is 
not subject to section 412. The plan provides for distribution in the 
form of equal installments over five years or equal installments over 
twenty years. X maintains no other defined contribution plans. X 
terminates its defined contribution plan after amending the plan to 
provide for the distribution of all participants' accrued benefits in 
the form of single sum distributions, without obtaining participant 
consent. Pursuant to the rule in this paragraph (b)(2)(iv), this 
amendment does not violate the requirements of section 411(d)(6).
    Example 2. Corporations X and Y are members of controlled group 
employer XY. Both X and Y maintain defined contribution plans. X's plan, 
which is not subject to section 412, covers only employees working for 
X. Y's plan, which is subject to section 412, covers only employees 
working for Y. X terminates its defined contribution plan. Because 
employer XY maintains another defined contribution plan, plan X may not 
provide for the distribution of participants' accrued benefits upon 
termination without a participants' consent.

    (vii) Distribution of benefits on default of loans. Notwithstanding 
that the distribution of benefits arising from an execution on an 
account balance used to secure a loan on which there has been a default 
is an optional form of benefit, a plan may be amended to eliminate or 
change a provision for loans, even if such loans would be secured by an 
employee's account balance.
    (viii) Provisions for transfer of benefits between and among defined 
contribution plans and defined benefit plans. A plan may be amended to 
eliminate provisions permitting the transfer of benefits between and 
among defined contribution plans and defined benefit plans.
    (ix) De minimis change in the timing of an optional form of benefit. 
A plan may

[[Page 168]]

be amended to modify an optional form of benefit by changing the timing 
of the availability of such optional form if, after the change, the 
optional form is available at a time that is within two months of the 
time such optional form was available before the amendment. To the 
extent the optional form of benefit is available prior to termination of 
employment, six months may be substituted for two months in the prior 
sentence. Thus, for example, a plan that makes in-service distributions 
available to employees once every month may be amended to make such in-
service distributions available only once every six months. This 
exception to section 411(d)(6) relates only to the timing of the 
availability of the optional form of benefit. Other aspects of an 
optional form of benefit may not be modified and the value of such 
optional form may not be reduced merely because of an amendment 
permitted by this exception.
    (x) Amendment of hardship distribution standards. A qualified cash 
or deferred arrangement that permits hardship distributions under Sec.  
1.401(k)-1(d)(3) may be amended to specify or modify nondiscriminatory 
and objective standards for determining the existence of an immediate 
and heavy financial need, the amount necessary to meet the need, or 
other conditions relating to eligibility to receive a hardship 
distribution. For example, a plan will not be treated as violating 
section 411(d)(6) merely because it is amended to specify or modify the 
resources an employee must exhaust to qualify for a hardship 
distribution or to require employees to provide additional statements or 
representations to establish the existence of a hardship. A qualified 
cash or deferred arrangement may also be amended to eliminate hardship 
distributions. The provisions of this paragraph also apply to profit-
sharing or stock bonus plans that permit hardship distributions, whether 
or not the hardship distributions are limited to those described in 
Sec.  1.401(k)-1(d)(3).
    (xi) Section 415 benefit limitations. Accrued benefits under a plan 
as of the first day of the first limitation year beginning after 
December 31, 1986, that exceed the benefit limitations under section 415 
(b) or (e), effective on the first day of the plan's first limitation 
year beginning after December 31, 1986, because of a change in the terms 
and conditions of the plan made after May 5, 1986, or the establishment 
of a plan after that date, may be reduced to the level permitted under 
section 415 (b) or (e).
    (xii) Prohibited payment option under single-employer defined 
benefit plan of plan sponsor in bankruptcy. A single-employer plan that 
is covered under section 4021 of the Employee Retirement Income Security 
Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), as amended 
(ERISA), may be amended, effective for a plan amendment that is both 
adopted and effective after November 8, 2012, to eliminate an optional 
form of benefit that includes a prohibited payment described in section 
436(d)(5), provided that the following conditions are satisfied on the 
applicable amendment date (as defined in Sec.  1.411(d)-3(g)(4)):
    (A) The enrolled actuary of the plan has certified that the plan's 
adjusted funding target attainment percentage (as defined in section 
436(j)(2)) for the plan year that contains the applicable amendment date 
is less than 100 percent.
    (B) The plan is not permitted to pay any prohibited payment, due to 
application of the requirements of section 436(d)(2) of the Internal 
Revenue Code and section 206(g)(3)(B) of ERISA, because the plan sponsor 
is a debtor in a bankruptcy case (that is, a case under title 11, United 
States Code, or under similar Federal or State law).
    (C) The court overseeing the bankruptcy case has issued an order, 
after notice to the affected parties (as defined in section 4001(a)(21) 
of ERISA) and a hearing, within the meaning of 11 U.S.C. 102(1), finding 
that the adoption of the amendment eliminating that optional form of 
benefit is necessary to avoid a distress termination of the plan 
pursuant to section 4041(c) of ERISA or an involuntary termination of 
the plan pursuant to section 4042 of ERISA before the plan sponsor 
emerges from bankruptcy (or before the bankruptcy case is otherwise 
completed).
    (D) The Pension Benefit Guaranty Corporation has issued a 
determination that--

[[Page 169]]

    (1) The adoption of the amendment eliminating that optional form of 
benefit is necessary to avoid a distress or involuntary termination of 
the plan before the plan sponsor emerges from bankruptcy (or before the 
bankruptcy case is otherwise completed); and
    (2) The plan is not sufficient for guaranteed benefits within the 
meaning of section 4041(d)(2) of ERISA.
    (c) Multiple amendments--(1) General rule. A plan amendment violates 
the requirements of section 411(d)(6) if it is one of a series of plan 
amendments that, when taken together, have the effect of reducing or 
eliminating a section 411(d)(6) protected benefit in a manner that would 
be prohibited by section 411(d)(6) if accomplished through a single 
amendment.
    (2) Determination of time period for combining plan amendments. For 
purposes of paragraph (c)(1) of this Q&A-2, generally only plan 
amendments adopted within a 3-year period are taken into account. But 
see Q&A-1(c)(1) of this section for rules relating to repeated plan 
amendments.
    (d) ESOP and stock bonus plan exception--(1) In general. Subject to 
the limitations in paragraph (d)(2) of this Q&A-2, a tax credit employee 
stock ownership plan (as defined in section 409(a)) or an employee stock 
ownership plan (as defined in section 4975(e)(7)) will not be treated as 
violating the requirements of section 411(d)(6) merely because of any of 
the circumstances described in paragraphs (d)(1)(i) through (d)(1)(iv) 
of this Q&A-2. In addition, a stock bonus plan that is not an employee 
stock ownership plan will not be treated as violating the requirements 
of section 411(d)(6) merely because of any of the circumstances 
described in paragraphs (d)(1)(ii) and (d)(1)(iv) of this Q&A-2.
    (i) Single sum or installment optional forms of benefit. The 
employer eliminates, or retains the discretion to eliminate, with 
respect to all participants, a single sum optional form or installment 
optional form with respect to benefits that are subject to section 
409(h)(1)(B), provided such elimination or retention of discretion is 
consistent with the distribution and payment requirements otherwise 
applicable to such plans (e.g., those required by section 409).
    (ii) Employer becomes substantially employee-owned or is an S 
corporation. The employer eliminates, or retains the discretion to 
eliminate, with respect to all participants, optional forms of benefit 
by substituting cash distributions for distributions in the form of 
employer stock with respect to benefits subject to section 409(h) in the 
circumstances described in paragraph (d)(1)(ii)(A) or (B) of this Q&A-2, 
but only if the employer otherwise meets the requirements of section 
409(h)(2)--
    (A) The employer becomes substantially employee-owned; or
    (B) For taxable years of the employer beginning after December 31, 
1997, the employer is an S corporation as defined in section 1361.
    (iii) Employer securities become readily tradable. The employer 
eliminates, or retains the discretion to eliminate, with respect to all 
participants, in cases in which the employer securities become readily 
tradable, optional forms of benefit by substituting distributions in the 
form of employer securities for distributions in cash with respect to 
benefits that are subject to section 409(h).
    (iv) Employer securities cease to be readily tradable or certain 
sales. The employer eliminates, or retains the discretion to eliminate, 
with respect to all participants, optional forms of benefit by 
substituting cash distributions for distributions in the form of 
employer stock with respect to benefits that are subject to section 
409(h) in the following circumstances:
    (A) The employer stock ceases to be readily tradable;
    (B) The employer stock continues to be readily tradable but there is 
a sale of substantially all of the stock of the employer or a sale of 
substantially all of the assets of a trade or business of the employer 
and, in either situation, the purchasing employer continues to maintain 
the plan.

In the situation described in paragraph (d)(1)(iv)(B) of this Q&A-2, the 
employer may also substitute distributions in the purchasing employer's 
stock for distributions in the form of employer stock of the predecessor 
employer.

[[Page 170]]

    (2) Limitations on ESOP and stock bonus plan exceptions--(i) 
Nondiscrimination requirement. Plan amendments and the retention and 
exercise of discretion permitted under the exceptions in paragraph 
(d)(1) must meet the nondiscrimination requirements of section 
401(a)(4).
    (ii) ESOP investment requirement. Except as provided in paragraph 
(d)(2)(iii) of this Q&A-2, benefits provided by employee stock ownership 
plans will not be eligible for the exceptions in paragraph (d)(1) of 
this Q&A-2 unless the benefits have been held in a tax credit employee 
stock ownership plan (as defined in section 409 (a)) or an employee 
stock ownership plan (as defined in section 4975 (e)(7)) subject to 
section 409 (h) for the five-year period prior to the exercise of 
employer discretion or any amendment affecting such benefits and 
permitted under paragraph (d)(1) of this Q&A-2. For purposes of the 
preceding sentence, if benefits held under an employee stock ownership 
plan are transferred to a plan that is an employee stock ownership plan 
at the time of transfer, then the consecutive periods under the 
transferor and transferee employee stock ownership plans may be 
aggregated for purposes of meeting the five-year requirement. If the 
benefits are held in an employee stock ownership plan throughout the 
entire period of their existence, and such total period of existence is 
less than five years, then such lesser period may be substituted for the 
five year requirement.
    (3) Effective date. The provisions of this paragraph (d) are 
effective beginning with the first day of the first plan year commencing 
on or after January 1, 1989. Prior to this effective date the reduction 
or elimination of a section 411(d)(6) protected benefit by a tax credit 
employee stock ownership plan (as defined in section 409(a)) or an 
employee stock ownership plan (as defined in section 4975(e)(7)) will 
not be treated as violating the requirements of section 411(d)(6) if 
such reduction or elimination reflects a reasonable interpretation of 
the statutory language of section 411(d)(6)(C).
    (4) Additional exceptions and requirements. The Commissioner may, in 
revenue rulings, notices or other documents of general applicability, 
prescribe such additional rules and exceptions, consistent with the 
purposes of this section, as may be necessary or appropriate.
    (e) Permitted plan amendments affecting alternative forms of payment 
under defined contribution plans--(1) General rule. A defined 
contribution plan does not violate the requirements of section 411(d)(6) 
merely because the plan is amended to eliminate or restrict the ability 
of a participant to receive payment of accrued benefits under a 
particular optional form of benefit for distributions with annuity 
starting dates after the date the amendment is adopted if, after the 
plan amendment is effective with respect to the participant, the 
alternative forms of payment available to the participant include 
payment in a single-sum distribution form that is otherwise identical to 
the optional form of benefit that is being eliminated or restricted.
    (2) Otherwise identical single-sum distribution. For purposes of 
this paragraph (e), a single-sum distribution form is otherwise 
identical to an optional form of benefit that is eliminated or 
restricted pursuant to paragraph (e)(1) of this Q&A-2 only if the 
single-sum distribution form is identical in all respects to the 
eliminated or restricted optional form of benefit (or would be identical 
except that it provides greater rights to the participant) except with 
respect to the timing of payments after commencement. For example, a 
single-sum distribution form is not otherwise identical to a specified 
installment form of benefit if the single-sum distribution form is not 
available for distribution on the date on which the installment form 
would have been available for commencement, is not available in the same 
medium of distribution as the installment form, or imposes any condition 
of eligibility that did not apply to the installment form. However, an 
otherwise identical distribution form need not retain rights or features 
of the optional form of benefit that is eliminated or restricted to the 
extent that those rights or features would not be protected from 
elimination or restriction under section 411(d)(6) or this section.

[[Page 171]]

    (3) Example. The following example illustrates the application of 
this paragraph (e):

    Example. (i) P is a participant in Plan M, a qualified profit-
sharing plan with a calendar plan year that is invested in mutual funds. 
The distribution forms available to P under Plan M include a 
distribution of P's vested account balance under Plan M in the form of 
distribution of various annuity contract forms (including a single life 
annuity and a joint and survivor annuity). The annuity payments under 
the annuity contract forms begin as of the first day of the month 
following P's severance from employment (or as of the first day of any 
subsequent month, subject to the requirements of section 401(a)(9)). P 
has not previously elected payment of benefits in the form of a life 
annuity, and Plan M is not a direct or indirect transferee of any plan 
that is a defined benefit plan or a defined contribution plan that is 
subject to section 412. Distributions on the death of a participant are 
made in accordance with plan provisions that comply with section 
401(a)(11)(B)(iii)(I). On September 2, 2005, Plan M is amended so that, 
effective for payments that begin on or after November 1, 2005, P is no 
longer entitled to any distribution in the form of the distribution of 
an annuity contract. However, after the amendment is effective, P is 
entitled to receive a single-sum cash distribution of P's vested account 
balance under Plan M payable as of the first day of the month following 
P's severance from employment (or as of the first day of any subsequent 
month, subject to the requirements of section 401(a)(9)).
    (ii) Plan M does not violate the requirements of section 411(d)(6) 
(or section 401(a)(11)) merely because, as of November 1, 2005, the plan 
amendment has eliminated P's option to receive a distribution in any of 
the various annuity contract forms previously available.

    (4) Effective date. This paragraph (e) is applicable on January 25, 
2005.
    Q-3 Does the transfer of benefits between and among defined benefit 
plans and defined contribution plans (or similar transactions) violate 
the requirements of section 411(d)(6)?
    A-3 (a) Transfers and similar transactions--(1) General rule. 
Section 411(d)(6) protected benefits may not be eliminated by reason of 
transfer or any transaction amending or having the effect of amending a 
plan or plans to transfer benefits. Thus, for example, except as 
otherwise provided in this section, an employer who maintains a money 
purchase pension plan that provides for a single sum optional form of 
benefit may not establish another plan that does not provide for this 
optional form of benefit and transfer participants' account balances to 
such new plan.
    (2) Defined benefit feature and separate account feature. The 
defined benefit feature of an employee's benefit under a defined benefit 
plan and the separate account feature of an employee's benefit under a 
defined contribution plan are section 411(d)(6) protected benefits. 
Thus, for example, the elimination of the defined benefit feature of an 
employee's benefit under a defined benefit plan, through transfer of 
benefits from a defined benefit plan to a defined contribution plan or 
plans, will violate section 411(d)(6).
    (3) Waiver prohibition. In general, except as provided in paragraph 
(b) of this Q&A-3, a participant may not elect to waive section 
411(d)(6) protected benefits. Thus, for example, the elimination of the 
defined benefit feature of a participant's benefit under a defined 
benefit plan by reason of a transfer of such benefits to a defined 
contribution plan pursuant to a participant election, at a time when the 
benefit is not distributable to the participant, violates section 
411(d)(6).
    (4) Direct rollovers. A direct rollover described in Q&A-3 of Sec.  
1.401(a)(31)-1 that is paid to a qualified plan is not a transfer of 
assets and liabilities that must satisfy the requirements of section 
414(l), and is not a transfer of benefits for purposes of applying the 
requirements under section 411(d)(6) and paragraph (a)(1) of this Q&A-3. 
Therefore, for example, if such a direct rollover is made to another 
qualified plan, the receiving plan is not required to provide, with 
respect to amounts paid to it in a direct rollover, the same optional 
forms of benefit that were provided under the plan that made the direct 
rollover. See Sec.  1.401(a)(31)-1, Q&A-14.
    (b) Elective transfers of benefits between defined contribution 
plans--(1) General rule. A transfer of a participant's entire benefit 
between qualified defined contribution plans (other than any direct 
rollover described in Q&A-3 of Sec.  1.401(a)(31)-1) that results in the 
elimination or reduction of section 411(d)(6) protected benefits does 
not

[[Page 172]]

violate section 411(d)(6) if the following requirements are met--
    (i) Voluntary election. The plan from which the benefits are 
transferred must provide that the transfer is conditioned upon a 
voluntary, fully-informed election by the participant to transfer the 
participant's entire benefit to the other qualified defined contribution 
plan. As an alternative to the transfer, the participant must be offered 
the opportunity to retain the participant's section 411(d)(6) protected 
benefits under the plan (or, if the plan is terminating, to receive any 
optional form of benefit for which the participant is eligible under the 
plan as required by section 411(d)(6)).
    (ii) Types of plans to which transfers may be made. To the extent 
the benefits are transferred from a money purchase pension plan, the 
transferee plan must be a money purchase pension plan. To the extent the 
benefits being transferred are part of a qualified cash or deferred 
arrangement under section 401(k), the benefits must be transferred to a 
qualified cash or deferred arrangement under section 401(k). To the 
extent the benefits being transferred are part of an employee stock 
ownership plan as defined in section 4975(e)(7), the benefits must be 
transferred to another employee stock ownership plan. Benefits 
transferred from a profit-sharing plan other than from a qualified cash 
or deferred arrangement, or from a stock bonus plan other than an 
employee stock ownership plan, may be transferred to any type of defined 
contribution plan.
    (iii) Circumstances under which transfers may be made. The transfer 
must be made either in connection with an asset or stock acquisition, 
merger, or other similar transaction involving a change in employer of 
the employees of a trade or business (i.e., an acquisition or 
disposition within the meaning of Sec.  1.410(b)-2(f)) or in connection 
with the participant's change in employment status to an employment 
status with respect to which the participant is not entitled to 
additional allocations under the transferor plan.
    (2) Applicable qualification requirements. A transfer described in 
this paragraph (b) is a transfer of assets or liabilities within the 
meaning of section 414(l)(1) and, thus, must satisfy the requirements of 
section 414(l). In addition, this paragraph (b) only provides relief 
under section 411(d)(6); a transfer described in this paragraph must 
satisfy all other applicable qualification requirements. Thus, for 
example, if the survivor annuity requirements of sections 401(a)(11) and 
417 apply to the plan from which the benefits are transferred, as 
described in this paragraph (b), but do not otherwise apply to the 
receiving plan, the requirements of sections 401(a)(11) and 417 must be 
met with respect to the transferred benefits under the receiving plan. 
In addition, the vesting provisions under the receiving plan must 
satisfy the requirements of section 411(a)(10) with respect to the 
amounts transferred.
    (3) Status of elective transfer as other right or feature. A right 
to a transfer of benefits from a plan pursuant to the elective transfer 
rules of this paragraph (b) is an other right or feature within the 
meaning of Sec.  1.401(a)(4)-4(e)(3), the availability of which is 
subject to the nondiscrimination requirements of section 401(a)(4) and 
Sec.  1.401(a)(4)-4. However, for purposes of applying the rules of 
Sec.  1.401(a)(4)-4, the following conditions are to be disregarded in 
determining the employees to whom the other right or feature is 
available--
    (i) A condition restricting the availability of the transfer to 
benefits of participants who are transferred to a different employer in 
connection with a specified asset or stock disposition, merger, or other 
similar transaction involving a change in employer of the employees of a 
trade or business (i.e., a disposition within the meaning of Sec.  
1.410(b)-2(f)), or in connection with any such disposition, merger, or 
other similar transaction.
    (ii) A condition restricting the availability of the transfer to 
benefits of participants who have a change in employment status to an 
employment status with respect to which the participant is not entitled 
to additional allocations under the transferor plan.
    (c) Elective transfers of certain distributable benefits between 
qualified plans--(1) In general. A transfer of a participant's benefits 
between qualified plans

[[Page 173]]

that results in the elimination or reduction of section 411(d)(6) 
protected benefits does not violate section 411(d)(6) if--
    (i) The transfer occurs at a time at which the participant's 
benefits are distributable (within the meaning of paragraph (c)(3) of 
this Q&A-3);
    (ii) For a transfer that occurs on or after January 1, 2002, the 
transfer occurs at a time at which the participant is not eligible to 
receive an immediate distribution of the participant's entire 
nonforfeitable accrued benefit in a single-sum distribution that would 
consist entirely of an eligible rollover distribution within the meaning 
of section 401(a)(31)(C);
    (iii) The voluntary election requirements of paragraph (b)(1)(i) of 
this Q&A-3 are met;
    (iv) The participant is fully vested in the transferred benefit in 
the transferee plan;
    (v) In the case of a transfer from a defined contribution plan to a 
defined benefit plan, the defined benefit plan provides a minimum 
benefit, for each participant whose benefits are transferred, equal to 
the benefit, expressed as an annuity payable at normal retirement age, 
that is derived solely on the basis of the amount transferred with 
respect to such participant; and
    (vi) The amount of the benefit transferred, together with the amount 
of any contemporaneous section 401(a)(31) direct rollover to the 
transferee plan, equals the entire nonforfeitable accrued benefit under 
the transferor plan of the participant whose benefit is being 
transferred, calculated to be at least the greater of the single-sum 
distribution provided for under the plan for which the participant is 
eligible (if any) or the present value of the participant's accrued 
benefit payable at normal retirement age (calculated by using interest 
and mortality assumptions that satisfy the requirements of section 
417(e) and subject to the limitations imposed by section 415).
    (2) Treatment of transfer--(i) In general. A transfer of benefits 
pursuant to this paragraph (c) generally is treated as a distribution 
for purposes of section 401(a). For example, the transfer is subject to 
the cash-out rules of section 411(a)(7), the early termination 
requirements of section 411(d)(2), and the survivor annuity requirements 
of sections 401(a)(11) and 417. A transfer pursuant to the elective 
transfer rules of this paragraph (c) is not treated as a distribution 
for purposes of the minimum distribution requirements of section 
401(a)(9).
    (ii) Status of elective transfer as optional form of benefit. A 
right to a transfer of benefits from a plan pursuant to the elective 
transfer rules of this paragraph (c) is an optional form of benefit 
under section 411(d)(6), the availability of which is subject to the 
nondiscrimination requirements of section 401(a)(4) and Sec.  
1.401(a)(4)-4.
    (3) Distributable benefits. For purposes of paragraph (c)(1)(i) of 
this Q&A-3, a participant's benefits are distributable on a particular 
date if, on that date, the participant is eligible, under the terms of 
the plan from which the benefits are transferred, to receive an 
immediate distribution of these benefits (e.g., in the form of an 
immediately commencing annuity) from that plan under provisions of the 
plan not inconsistent with section 401(a).
    (d) Effective date. This Q&A-3 is applicable for transfers made on 
or after September 6, 2000.
    Q-4: May a plan provide that the employer may, through the exercise 
of discretion, deny a participant a section 411(d)(6) protected benefit 
for which the participant is otherwise eligible?
    A-4: (a) In general. Except as provided in paragraph (d) of Q&A-2 of 
this section with respect to certain employee stock ownership plans, a 
plan that permits the employer, either directly or indirectly, through 
the exercise of discretion, to deny a participant a section 411(d)(6) 
protected benefit provided under the plan for which the participant is 
otherwise eligible (but for the employer's exercise of discretion) 
violates the requirements of section 411(d)(6). A plan provision that 
makes a section 411(d)(6) protected benefit available only to those 
employees as the employer may designate is within the scope of this 
prohibition. Thus, for example, a plan provision under which only 
employees who are designated by the employer are eligible to receive a 
subsidized early retirement benefit constitutes an impermissible 
provision

[[Page 174]]

under section 411(d)(6). In addition, a pension plan that permits 
employer discretion to deny the availability of a section 411(d)(6) 
protected benefit violates the definitely determinable requirement of 
section 401(a), including section 401(a)(25). See Sec.  1.401-
1(b)(1)(i). This is the result even if the plan specifically limits the 
employer's discretion to choosing among section 411(d)(6) protected 
benefits, including optional forms of benefit, that are actuarially 
equivalent. In addition, the provisions of sections 411(a)(11) and 
417(e) that allow a plan to make involuntary distributions of certain 
amounts are not excepted from this limitation on employer discretion. 
Thus, for example, a plan may not permit employer discretion with 
respect to whether benefits will be distributed involuntarily in the 
event that the present value of the employee's benefit is not more than 
the cash-out limit in effect under Sec.  1.411(a)-11(c)(3)(ii) within 
the meaning of sections 411(a)(11) and 417(e). (An exception is provided 
for such provisions with respect to the nondiscrimination requirements 
of section 401(a)(4). See Sec.  1.401(a)(4)-4(b)(2)(ii)(C).)
    (b) Exception for administrative discretion. A plan may permit 
limited discretion with respect to the ministerial or mechanical 
administration of the plan, including the application of objective plan 
criteria specifically set forth in the plan. Such plan provisions do not 
violate the requirements of section 411(d)(6) or the definitely 
determinable requirement of section 401(a), including section 
401(a)(25). For example, these requirements are not violated by the 
following provisions that permit limited administrative discretion:
    (1) Commencement of benefit payments as soon as administratively 
feasible after a stated date or event;
    (2) Employer authority to determine whether objective criteria 
specified in the plan (e.g., objective criteria designed to identify 
those employees with a heavy and immediate financial need or objective 
criteria designed to determine whether an employee has a permanent and 
total disability) have been satisfied; and
    (3) Employer authority to determine, pursuant to specific guidelines 
set forth in the plan, whether the participant or spouse is dead or 
cannot be located.
    Q-5: When will the exercise of discretion by some person or persons, 
other than the employer, be treated as employer discretion?
    A-5: For purposes of applying the rules of this section and Sec.  
1.401(a)-4, the term ``employer'' includes plan administrator, 
fiduciary, trustee, actuary, independent third party, and other persons. 
Thus, if a plan permits any person, other than the participant (and 
other than the participant's spouse), the discretion to deny or limit 
the availability of a section 411(d)(6) protected benefit for which the 
employee is otherwise eligible under the plan (but for the exercise of 
such discretion), such plan violates the requirements of sections 
401(a), including section 411(d)(6) and, where applicable, the 
definitely determinable requirement of section 401(a), including section 
401(a)(25).
    Q-6: May a plan condition the availability of a section 411(d)(6) 
protected benefit on the satisfaction of objective conditions that are 
specifically set forth in the plan?
    A-6: (a) Certain objective conditions permissible--(1) In general. 
The availability of a section 411(d)(6) protected benefit may be limited 
to employees who satisfy certain objective conditions provided the 
conditions are ascertainable, clearly set forth in the plan and not 
subject to the employer's discretion except to the extent reasonably 
necessary to determine whether the objective conditions have been met. 
Also, the availability of the section 411(d)(6) protected benefit must 
meet the nondiscrimination requirements of section 401(a)(4). See Sec.  
1.401(a)-4.
    (2) Examples of permissible conditions. The following examples 
illustrate of permissible objective conditions: a plan may deny a single 
sum distribution form to employees for whom life insurance is not 
available at standard rates as defined under the terms of the plan at 
the time the single sum distribution would otherwise be payable; a plan 
may provide that a single sum distribution is available only if the 
employee is in extreme financial need as defined under the terms of the 
plan at the time

[[Page 175]]

the single sum distribution would otherwise be payable; a plan my 
condition the availability of a single sum distribution on the execution 
of a covenant not to compete, provided that objective conditions with 
respect to the terms of such covenant and the employees and 
circumstances requiring execution of such covenant are set forth in the 
plan.
    (b) Conditions based on factors within employer's discretion 
generally impermissible. A plan may not limit the availability of 
section 411(d)(6) protected benefits permitted under the plan on 
objective conditions that are within the employer's discretion. For 
example, the availability of section 411(d)(6) protected benefits in a 
plan may not be conditioned on a determination with respect to the level 
of the plan's funded status, because the amount of plan funding is 
within the employer's discretion. However, for example, although 
conditions based on the plan's funded status are impermissible, a plan 
may limit the availability of a section 411(d)(6) protected benefit 
(e.g., a single sum distribution) in an objective manner, such as the 
following:
    (1) Single sum distributions of $25,000 and less are available 
without limit; and
    (2) Single sum distributions in excess of $25,000 are available for 
a year only to the extent that the total amount of such single sum 
distributions for the year is not greater than $5,000,000; and
    (3) An objective and nondiscriminatory method for determining which 
particular single sum distributions will not be available during a year 
in order for the $5,000,000 limit to be satisfied is set forth in the 
plan.
    Q-7: May a plan be amended to add employer discretion or conditions 
restricting the availability of a section 411(d)(6) protected benefit?
    A-7: No. The addition of employer discretion or objective conditions 
with respect to a section 411(d)(6) protected benefit that has already 
accrued violates section 411(d)(6). Also, the addition of conditions 
(whether or not objective) or any change to existing conditions with 
respect to section 411(d)(6) protected benefits that results in any 
further restriction violates section 411(d)(6). However, the addition of 
objective conditions to a section 411(d)(6) protected benefit may be 
made with respect to benefits accrued after the later of the adoption or 
effective date of the amendment. In addition, objective conditions may 
be imposed on section 411(d)(6) protected benefits accrued as of the 
date of an amendment where permitted under the transitional rules of 
Sec.  1.401(a)-4 Q&A-5 and Q&A-8 of this section. Finally, objective 
conditions may be imposed on section 411(d)(6) protected benefits to the 
extent permitted by the permissible benefit cutback provisions of Q&A-2 
of this section.
    Q-8: If a plan contains an impermissible employer discretion 
provision with respect to a section 411(d)(6) protected benefit, what 
acceptable alternative exist for amending the plan without violating the 
requirements of section 411(d)(6)?
    A-8: (a) In general. The following rules apply for purposes of 
making necessary amendments to existing plans (as defined in Q&A-9 of 
this section) that contain discretion provisions with respect to the 
availability of section 411(d)(6) protected benefits that violate the 
requirements of section 401(a), including sections 401(a)(25) and 
411(d)(6), and this section. These transitional rules are provided under 
the authority of section 411(d)(6) and section 7805(b).
    (b) Transitional alternatives. If the availability of an optional 
forms of benefit, early or late retirement benefit, or retirement-type 
subsidy under an existing plan is conditioned on the exercise of 
employer discretion, the plan must be amended either to eliminate the 
optional form of benefit, early or late retirement benefit, or 
retirement-type subsidy to make such benefit available to all 
participants without limitation, or to apply objective and 
nondiscriminatory conditions to the availability of the optional form of 
benefit, early or later retirement benefit, or retirement-type subsidy. 
See paragraph (d) of this Q&A-8 for rules limiting the period during 
which section 411(d)(6) protected benefits may be eliminated or reduced 
under this paragraph.
    (c) Compliance and amendment date provisions--(1) Operational 
compliance requirement. On or before the applicable

[[Page 176]]

effective date for the plan (as determined under Q&A-9 of this section), 
the plan sponsor must select one of the alternatives permitted under 
paragraph (b) of the Q&A-8 with respect to each affected section 
411(d)(6) protected benefit and the plan must be operated in accordance 
with this selection. This is an operational requirement and does not 
require a plan amendment prior to the period set forth in paragraph 
(c)(2) of this Q&A-8. There are no special reporting requirements under 
the Code or this section with respect to this selection.
    (2) Deferred amendment date. If paragraph (c)(1) of this Q&A-8 is 
satisfied, a plan amendment conforming the plan to the particular 
alternative selected under paragraph (b) of this Q&A-8 must be adopted 
within the time period permitted for amending plans in order to meet the 
requirements of section 410(b) as amended by TRA '86. The plan amendment 
to conform the plan to these regulations may be made at an earlier date. 
Such conforming amendment must be consistent with the sponsor's 
selection as reflected by plan practice during the period from the 
effective date to the date the amendment is adopted. Thus, for example, 
if any existing calendar year noncollectively bargained defined benefit 
plan has a single sum distribution option that is subject to employer 
discretion as of August 1, 1986, and such employer makes one or more 
single sum distributions available on or after January 1, 1989 and 
before the effective date by which plan amendment is required pursuant 
to this section, then such employer may not adopt a plan amendment 
eliminating the single sum distribution, but rather must adopt an 
amendment eliminating the discretion provision. Any objective conditions 
that are adopted as part of such amendment must not be inconsistent with 
the plan practice for the applicable period prior to the amendment. A 
conforming amendment under this paragraph (c)(2) must be made with 
respect to each section 411(d)(6) protected benefit for which such 
amendment is required and must be retroactive to the applicable 
effective date.
    (d) Limitation on transitional alternatives. The transitional 
alternatives permitting the elimination or reduction of section 
411(d)(6) protected benefits are only permissible until the applicable 
effective date for the plan (see Q&A-9 of this section). After the 
applicable effective date, any amendment (other than one permitted under 
paragraph (c)(2) of this Q&A-8) that eliminates or reduces a section 
411(d)(6) protected benefit or imposes new objective conditions on the 
availability of such benefit will fail to qualify for the exception to 
section 411(d)(6) provided in this Q&A-8. This is the case without 
regard to whether the section 411(d)(6) protected benefit is subject to 
employer discretion.
    Q-9: What are the applicable effective date rules for purposes of 
this section?
    A-9: (a) General effective date. Except as otherwise provided in 
this section, the provisions of this section are effective January 30, 
1986.
    (b) New plans--(1) In general. Unless otherwise provided in 
paragraph (b)(2) of this Q&A-9, plans that are either adopted or made 
effective on or after August 1, 1986, are ``new plans''. With respect to 
such new plans, this section is effective August 1, 1986. This effective 
date is applicable to such plans whether or not they are collectively 
bargained.
    (2) Exception with respect to certain new plans. Plans that are new 
plans as defined in paragraph (b)(1) of this Q&A-9; under which the 
availability of a section 411(d)(6) protected benefit is subject to 
employer discretion; and that receive a favorable determination letter 
that covered such plan provisions with respect to an application 
submitted prior to July 11, 1988, will be treated as existing plans with 
respect to such section 411(d)(6) protected benefit for purposes of the 
transitional rules of this section. Thus, such plans are eligible for 
the compliance and amendment alternatives set forth in the transitional 
rule in Q&A-8 of this section.
    (c) Existing plans--(1) In general. Plans, including plans that are 
adoptions of master or prototype plans, that are both adopted and in 
effect prior to August 1, 1986, are ``existing plans'' for purposes of 
this section. In addition, a plan that is established after July 31, 
1986, but before January

[[Page 177]]

1, 1989, as an initial adoption of a master or prototype plan for which 
a favorable opinion letter was issued by the Service after July 18, 1985 
and before January 1, 1989, will be deemed to be an existing plan for 
purposes of this section. See sections 4.01 and 4.02 of Rev. Proc. 84-
23, 1984-1 C.B. 457, 459, for the definitions of master prototype plans. 
However, if such plan ceases to be covered under an opinion letter of 
the type described above, as a result of amendment of the plan or 
adoption of a new plan, prior to the first day of the first plan year 
beginning on or after January 1, 1989, then the effective date for such 
plan will be determined as though the plan were a new plan initially 
adopted as of the date of such amendment or adoption of a new plan. 
Finally, new plans described in paragraph (b)(2) of this Q&A-9 are 
treated as existing plans with respect to certain section 411(d)(6) 
protected benefits. Subject to the limitations in paragraph (c) of this 
Q&A-9, the effective dates set forth in paragraphs (c)(2), (c)(3), and 
(c)(4) of this Q&A-9 apply to these existing plans for purposes of this 
section:
    (2) Existing noncollectively bargained plans. With respect to 
existing plans other than collectively bargained plans this section is 
effective for the first day of the first plan year commencing on or 
after January 1, 1989.
    (3) Existing collectively bargained plans. With respect to existing 
collectively bargained plans this section is effective for the later of 
the first day of the first plan year commencing on or after January 1, 
1989, or the first day of the first plan year that the requirements of 
section 410(b) as amended by TRA '86 apply to such plan.
    (4) Existing master and prototype plans. With respect to existing 
plans that are adoptions of master or prototype plans the effective date 
will be the first day of the first plan year commencing on or after 
January 1, 1989.
    (d) Delayed effective date not applicable to new alternatives or 
conditions--(1) In general. The delayed effective dates in paragraphs 
(c)(2) and (c)(3) of this Q&A-9 for existing plans are only applicable 
with respect to a section 411(d)(6) protected benefit if both the 
section 411(d)(6) protected benefit and the condition providing employer 
discretion as to the availability of such benefit are both adopted and 
in effect prior to August 1, 1986. If the preceding sentence is not 
satisfied with respect to a particular section 411(d)(6) protected 
benefit, this section is effective with respect to such section 
411(d)(6) protected benefit as if the plan were a new plan.
    (2) Addition of discretion on or after January 30, 1986. The delayed 
effective dates in paragraphs (c)(2) and (c)(3) of this Q&A-9 are not 
available with respect to any section 411(d)(6) protected benefit if the 
section 411(d)(6) protected benefit was provided for in the plan prior 
to January 30, 1986, and the availability of such benefit was made 
subject to the exercise of employer discretion on or after January 30, 
1986. If the conditions set forth in this paragraph are not satisfied 
with respect to a particular section 411(d)(6) protected benefit, this 
section is effective with respect to such section 411(d)(6) protected 
benefit as if the plan were a new plan. A limited exception is provided 
with respect to existing plans that provided a particular section 
411(d)(6) protected benefit prior to January 30, 1986, and then amended 
the plan after January 30, 1986, and before August 1, 1986, to add a 
provision for employer discretion with respect to the availability of 
such benefit. Such plans are required to have been amended retroactively 
by December 31, 1987, to remove such provision for employer discretion, 
and, if the benefit made subject to such discretion was subsequently 
eliminated, the plan is required to have been further amended, by the 
same date, to retroactively reinstate the benefit.
    (3) Exception for certain amendments covered by a favorable 
determination letter. If an amendment adding a section 411(d)(6) 
protected benefit subject to employer discretion was adopted or made 
effective after August 1, 1986, and the plan receives a favorable 
determination letter covering such provision with respect to an 
application for such letter made prior to July 11, 1988, then the 
effective date for purposes of amending such provision under the 
transitional rules is the applicable effective date determined under the 
rules with respect to existing plans.

[[Page 178]]

    (e) Transitional rule effective date. The transitional rule provided 
in Q&A-8 of this section is effective January 30, 1986.
    Q-10: If a plan provides for an age 70\1/2\ distribution option that 
commences prior to retirement from employment with the employer 
maintaining the plan, to what extent may the plan be amended to 
eliminate this distribution option?
    A-10: (a) In general. The right to commence benefit distributions in 
a particular form and at a particular time prior to retirement from 
employment with the employer maintaining the plan is a separate optional 
form of benefit within the meaning of section 411(d)(6)(B) and Q&A-1 of 
this section, even if the plan provision creating this right was 
included in the plan solely to comply with section 401(a)(9), as in 
effect for years before January 1, 1997. Therefore, except as otherwise 
provided in paragraph (b) of this Q&A-10 or any other Q&A in this 
section, a plan amendment violates section 411(d)(6) if it eliminates an 
age 70\1/2\ distribution option (within the meaning of paragraph (c) of 
this Q&A-10) to the extent that it applies to benefits accrued as of the 
later of the adoption date or effective date of the amendment.
    (b) Permitted elimination of age 70\1/2\ distribution option. An 
amendment of a plan will not violate the requirements of section 
411(d)(6) merely because the amendment eliminates an age 70\1/2\ 
distribution option to the extent that the option provides for 
distribution to an employee prior to retirement from employment with the 
employer maintaining the plan, provided that--
    (1) The amendment eliminating this optional form of benefit applies 
only to benefits with respect to employees who attain age 70\1/2\ in or 
after a calendar year, specified in the amendment, that begins after the 
later of--
    (i) December 31, 1998; or
    (ii) The adoption date of the amendment;
    (2) The plan does not, except to the extent required by section 
401(a)(9), preclude an employee who retires after the calendar year in 
which the employee attains age 70\1/2\ from receiving benefits in any of 
the same optional forms of benefit (except for the difference in the 
timing of the commencement of payments) that would have been available 
had the employee retired in the calendar year in which the employee 
attained age 70\1/2\; and
    (3) The amendment is adopted no later than--
    (i) The last day of the remedial amendment period that applies to 
the plan for changes under the Small Business Job Protection Act of 1996 
(110 Stat. 1755); or
    (ii) Solely in the case of a plan maintained pursuant to one or more 
collective bargaining agreements between employee representatives and 
one or more employers ratified before September 3, 1998, the last day of 
the twelfth month beginning after the date on which the last of such 
collective bargaining agreements terminates (determined without regard 
to any extension thereof on or after September 3, 1998), if later than 
the date described in paragraph (b)(3)(i) of this Q&A-10. For purposes 
of this paragraph (b)(3)(ii), the rules of Sec.  1.410(b)-10(a)(2) apply 
for purposes of determining whether a plan is maintained pursuant to one 
or more collective bargaining agreements, except that September 3, 1998 
is substituted for March 1, 1986, as the date before which the 
collective bargaining agreements must be ratified.
    (c) Age 70\1/2\ distribution option. For purposes of this Q&A-10, an 
age 70\1/2\ distribution option is an optional form of benefit under 
which benefits payable in a particular distribution form (including any 
modifications that may be elected after benefit commencement) commence 
at a time during the period that begins on or after January 1 of the 
calendar year in which an employee attains age 70\1/2\ and ends April 1 
of the immediately following calendar year.
    (d) Examples. The provisions of this Q&A-10 are illustrated by the 
following examples:

    Example 1. Plan A, a defined benefit plan, provides each participant 
with a qualified joint and survivor annuity (QJSA) that is available at 
any time after the later of age 65 or retirement. However, in accordance 
with section 401(a)(9) as in effect prior to January 1, 1997, Plan A 
provides that if an employee does not retire by the end of the calendar 
year in which the employee attains age 70\1/2\, then the QJSA commences 
on the following

[[Page 179]]

April 1. On October 1, 1998, Plan A is amended to provide that, for an 
employee who is not a 5-percent owner and who attains age 70\1/2\ after 
1998, benefits may not commence before the employee retires but must 
commence no later than the April 1 following the later of the calendar 
year in which the employee retires or the calendar year in which the 
employee attains age 70\1/2\. This amendment satisfies this Q&A-10 and 
does not violate section 411(d)(6).
    Example 2. Plan B, a money purchase pension plan, provides each 
participant with a choice of a QJSA or a single sum distribution 
commencing at any time after the later of age 65 or retirement. In 
addition, in accordance with section 401(a)(9) as in effect prior to 
January 1, 1997, Plan B provides that benefits will commence in the form 
of a QJSA on April 1 following the calendar year in which the employee 
attains age 70\1/2\, except that, with spousal consent, a participant 
may elect to receive annual installment payments equal to the minimum 
amount necessary to satisfy section 401(a)(9) (calculated in accordance 
with a method specified in the plan) until retirement, at which time a 
participant may choose between a QJSA and a single sum distribution 
(with spousal consent). On June 30, 1998, Plan B is amended to provide 
that, for an employee who is not a 5-percent owner and who attains age 
70\1/2\ after 1998, benefits may not commence prior to retirement but 
benefits must commence no later than April 1 after the later of the 
calendar year in which the employee retires or the calendar year in 
which the employee attains age 70\1/2\. The amendment further provides 
that the option described above to receive annual installment payments 
prior to retirement will not be available under the plan to an employee 
who is not a 5-percent owner and who attains age 70\1/2\ after 1998. 
This amendment satisfies this Q&A-10 and does not violate section 
411(d)(6).
    Example 3. Plan C, a profit-sharing plan, contains two distribution 
provisions. Under the first provision, in any year after an employee 
attains age 59\1/2\, the employee may elect a distribution of any 
specified amount not exceeding the balance of the employee's account. In 
addition, the plan provides a section 401(a)(9) override provision under 
which, if, during any year following the year that the employee attains 
age 70\1/2\, the employee does not elect an amount at least equal to the 
minimum amount necessary to satisfy section 401(a)(9) (calculated in 
accordance with a method specified in the plan), Plan C will distribute 
the difference by December 31 of that year (or for the year the employee 
attains age 70\1/2\, by April 1 of the following year). On December 31, 
1996, Plan C is amended to provide that, for an employee other than an 
employee who is a 5-percent owner in the year the employee attains age 
70\1/2\, in applying the section 401(a)(9) override provision, the later 
of the year of retirement or year of attainment of age 70\1/2\, is 
substituted for the year of attainment of age 70\1/2\. After the 
amendment, Plan C still permits each employee to elect to receive the 
same amount as was available before the amendment. Because this 
amendment does not eliminate an optional form of benefit, the amendment 
does not violate section 411(d)(6). Accordingly, the amendment is not 
required to satisfy the conditions of paragraph (b) of this Q&A-10.

    (e) Effective date. This Q&A-10 applies to amendments adopted and 
effective after June 5, 1998.
    Q-11: To what extent may a plan amendment that is made pursuant to 
the Taxpayer Relief Act of 1997 (TRA '97) (Public Law 105-34, 111 Stat. 
788), reduce or eliminate section 411(d)(6) protected benefits?
    A-11: A plan amendment does not violate the requirements of section 
411(d)(6) merely because the plan amendment reduces or eliminates 
section 411(d)(6) protected benefits as of the effective date of the 
plan amendment, provided that--
    (a) The plan amendment is made pursuant to an amendment made by 
title XV, or subtitle H of title X, of TRA '97; and
    (b) The plan amendment is adopted no later than the last day of any 
remedial amendment period that applies to the plan pursuant to 
Sec. Sec.  1.401(b)-1 and 1.401(b)-1T for changes under TRA '97.
    Q-12. Is there a transition period during which a plan is permitted 
to eliminate a right to in-service distributions in connection with an 
amendment to ensure that the plan's normal retirement age satisfies the 
requirements of Sec.  1.401(a)-1(b)(2)?
    A-12. (a) In general. A plan amendment that changes the normal 
retirement age under the plan to a later normal retirement age pursuant 
to Sec.  1.401(a)-1(b)(2) does not violate section 411(d)(6) merely 
because it eliminates a right to an in-service distribution prior to the 
amended normal retirement age. However, this paragraph does not provide 
relief from any other applicable requirements; for example, this relief 
does not permit the amendment to violate section 411(a)(9) (requiring 
that the normal retirement benefit not be less than the greater of any 
early retirement benefit payable under the

[[Page 180]]

plan or the benefit under the plan commencing at normal retirement age), 
section 411(a)(10) (if the amendment changes the plan's vesting rules), 
section 411(d)(6) (other than elimination of the right to an in-service 
distribution prior to the amended normal retirement age), or section 
4980F (relating to an amendment that reduces the rate of future benefit 
accrual). This paragraph only applies to a plan amendment that is 
adopted after May 22, 2007 and on or before the last day of the 
applicable remedial amendment period under Sec.  1.401(b)-1 with respect 
to the requirements of Sec.  1.401(a)-1(b)(2) and (3).
    (b) Example. The following example illustrates the application of 
this section:

    (i) Facts. (A) Plan A is a defined benefit plan intended to be 
qualified under section 401(a). Plan A is maintained by a calendar year 
taxpayer and has a normal retirement age that is age 45. For employees 
who cease employment before normal retirement age with a vested benefit, 
Plan A permits benefits to commence at any date after the attainment of 
normal retirement age through attainment of age 70\1/2\ and provides for 
benefits to be actuarially increased to the extent they commence after 
normal retirement age. For employees who continue employment after 
attainment of normal retirement age, Plan A provides for benefits to 
continue to accrue and permits benefits to commence at any time, with an 
actuarial increase in benefits to apply to the extent benefits do not 
commence after normal retirement age. Age 45 is an age that is earlier 
than the earliest age that is reasonably representative of the typical 
retirement age for the industry in which the covered workforce is 
employed.
    (B) On February 18, 2008, Plan A is amended, effective May 22, 2007, 
to change its normal retirement age to the later of age 65 or the fifth 
anniversary of participation in the plan. The amendment provides full 
vesting for any participating employee who is employed on May 21, 2007, 
and who terminates employment on or after attaining age 45. The 
amendment provides employees who cease employment before the revised 
normal retirement age and who are entitled to a vested benefit with the 
right to be able to commence benefits at any date from age 45 to age 
70\1/2\. The plan amendment also revises the plan's benefit accrual 
formula so that the benefit for prior service (payable commencing at the 
revised normal retirement age or any other age after age 45) is not less 
than would have applied under the plan's formula before the amendment 
(also payable commencing at the corresponding dates), based on the 
benefit accrued on May 21, 2007, and provides for service thereafter to 
have the same rate of future benefit accrual. Thus, for any participant 
employed on May 21, 2007, with respect to benefits accrued for service 
after May 21, 2007, the amount payable under the plan (as amended) at 
any benefit commencement date after age 45 is the same amount that would 
have been payable at that benefit commencement date under the plan prior 
to amendment. The plan amendment also eliminates the right to an in-
service distribution between age 45 and the revised normal retirement 
age. Plan A has been operated since May 22, 2007, in conformity with the 
amendment adopted on February 18, 2008.
    (ii) Conclusion. The plan amendment does not violate section 
411(d)(6). Although the amendment eliminates the right to commence 
benefits in-service between age 45 and the revised normal retirement 
age, the amendment is made before the last day of the remedial amendment 
period applicable to the plan under Sec.  1.401(b)-1 with respect to the 
requirements of Sec.  1.401(a)-1(b)(2) and (3), and therefore the 
amendment is permitted under paragraph (a) of this A-12. Further, the 
amendment does not result in a reduction in any benefit for service 
after May 22, 2007.
    Thus, the amendment does not result in a reduction in any benefit 
for future service, and advance notice of a significant reduction in the 
rate of future benefit accrual is not required under section 4980F.

[53 FR 26058, July 11, 1988]

    Editorial Note: For Federal Register citations affecting Sec.  
1.411(d)-4, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.



Sec.  1.411(d)-5  Class year plans; plan years beginning after October 22, 1986.

    (a) Plan years beginning prior to 1989. (1) The requirements of 
section 411(a)(2) shall be treated as satisfied in the case of a class-
year plan if such plan provides that 100 percent of each employee's 
right to or derived from the contributions of the employer on the 
employee's behalf with respect to any plan year is nonforfeitable not 
later than when such participant was performing services for the 
employer as of the close of each of 5 plan years (whether or not 
consecutive) after the plan year for which the contributions were made.
    (2) For purposes of paragraph (a)(1) of this section if--

[[Page 181]]

    (i) Any contributions are made on behalf of a participant with 
respect to any plan year, and
    (ii) Before such participant meets the requirements of paragraph 
(a)(1) of this section, such participant was not performing services for 
the employer as of the close of each of any 5 consecutive plan years 
after such plan year, then the plan may provide that the participant 
forfeits any right to or derived from the contributions made with 
respect to such plan year.
    (3) This paragraph (a) applies to contributions made for plan years 
beginning after October 22, 1986.
    (b) Plan years beginning after 1988. (1) The special class year 
vesting rule in section 411(d)(4) was repealed by section 1113(b) of the 
Tax Reform Act of 1986 (1986 Act). The repeal is generally effective for 
plan years beginning after December 31, 1988. See section 1111(e) of the 
1986 Act for a special effective date rule applicable to certain plans 
maintained pursuant to collective bargaining agreements.
    (2)(i) This subparagraph (2) provides a special rule for class year 
plans that were in compliance with section 411(d)(4) immediately before 
the first plan year beginning after section 411(d)(4) is repealed. These 
plans are not required to retroactively compute years of service under 
the general section 411(a)(2) rules. Instead, a participant must receive 
a year of service for each such prior plan year if the employee was 
performing services on the last day of such year. Similarly, if the 
participant was not performing services on the last day of such years, 
the participant will be treated as if a one-year break-in-service 
occurred for such plan year. This subdivision (i) applies to plan years 
to which this section applies.
    (ii) In the case of a plan year to which Sec.  1.411(d)-3 applied, a 
class year plan must compute years of service and breaks in service in a 
manner consistent with the rules in this paragraph (b)(2)(i), giving 
appropriate regard to the statutory changes made to section 411(d)(4).

[T.D. 8219, 53 FR 31854, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988]



Sec.  1.412(b)-2  Amortization of experience gains in connection 
with certain group deferred annuity contracts.

    (a) Experience gain treatment. Dividends, rate credits, and credits 
for forfeitures arising in a plan described in paragraph (b) of this 
section are experience gains described in section 412(b)(3)(B)(ii) 
(relating to the amortization of experience gains).
    (b) Plan. A plan is described in this paragraph (b) if--
    (1) The plan is funded solely through a group deferred annuity 
contract,
    (2) The annual single premium required under the contract for the 
purchase of the benefits accruing during the plan year is treated as the 
normal cost of the plan for that year, and
    (3) The amount necessary to pay in equal annual installments, over 
the appropriate amortization period, an amount equal to the single 
premium necessary to provide all past service benefits not initially 
funded, together with interest thereon, is treated as the annual 
amortization amount determined under section 412(b)(2)(B) (i), (ii) or 
(iii).
    (c) Effective date. This section applies for the first plan year to 
which section 412 applies that begins after May 22, 1981.

[T.D. 7764, 46 FR 6923, Jan. 22, 1981]



Sec.  1.412(b)-5  Election of the alternative amortization method
of funding.

    (a) Alternative amortization method in general. Section 1013(d) of 
the Employee Retirement Income Security Act of 1974 provides an 
alternative method which may be used by certain multiemployer plans (as 
defined in section 414(f)) which were in existence on January 1, 1974, 
for funding certain unfunded past service liability. The multiemployer 
plans which may elect to use this alternative method are those plans (1) 
under which, on January 1, 1974, contributions were based on a 
percentage of pay, (2) which use actuarial assumptions with respect to 
pay that are reasonably related to past and projected experience, and 
(3) which use rates of interest that are determined on the basis of 
reasonable acturial assumptions. The unfunded past service liability to 
which this method applies is that amount existing as of the date

[[Page 182]]

12 months after the date on which section 412 first applies to the plan. 
The alternative method allows the plan to fund this liability over a 
period of 40 plan years by charging the funding standard account with an 
equal annual percentage of the aggregate pay of all participants in the 
plan instead of the level dollar charges required under section 
412(b)(2)(B). Paragraphs (b), (c), (d) and (e) of this section contain 
procedural rules for electing this alternative method.
    (b) Election procedure. To elect the alternative amortization 
method, a multiemployer plan must attach a statement to the annual 
report required under section 6058(a) for the plan year for which the 
election is made, stating that the alternative method for funding 
unfunded past service liability is being adopted. Advance approval from 
the Internal Revenue Service is not required. The alternative method 
must be adopted on or before the last day prescribed for filing the 
annual report corresponding to the last plan year beginning before 
January 1, 1982.
    (c) Charges to which the alternative amortization method is 
applicable. Once elected, the alternative amortization method is 
applicable to the unfunded past service liability existing as of the 
date 12 months after the date on which section 412 first applies to the 
plan. This results in charges to the funding standard account which are 
in lieu of--
    (1) Charges required under clause (i) of section 412(b)(2)(B), and
    (2) Charges required under clause (iii) of section 412(b)(2)(B) if 
the plan amendments referred to in such clause result in a net increase 
in the unfunded past service liability existing as of the date 12 months 
after the date on which section 412 first applies to the plan. Such 
charges generally will arise only with respect to plan amendments 
adopted in the first plan year to which section 412 applies.


If the election is made on an annual report corresponding to a plan year 
after the first plan year to which section 412 applies, recomputation of 
the contributions due in the prior years (to which section 412 applied) 
will be necessary.
    (d) Limitation. The sum of the charges described in this paragraph 
may not be less than the interest on the unfunded past service 
liabilities described in section 412(b)(2)(B) (i) and (iii), determined 
as of the date 12 months after the date on which section 412 first 
applies to the plan.
    (e) Reporting requirements. Each annual report required by section 
6058(a) and periodic report of the actuary required by section 6059 must 
include all additional information relevant to the use of the 
alternative amortization method as may be required by the applicable 
forms and the instructions for such forms.

[T.D. 7702, 45 FR 40113, June 13, 1980]



Sec.  1.412(c)(1)-1  Determinations to be made under funding 
method--terms defined.

    (a) Actuarial cost method and funding method. Section 3 (31) of the 
Employee Retirement Income Security Act of 1974 (``ERISA'') provides 
certain acceptable (and unacceptable) actuarial cost methods which may 
(or may not) be used by employee plans. The term ``funding method'' when 
used in section 412 has the same meaning as the term ``actuarial cost 
method'' in section 3 (31) of ERISA. For shortfall method for certain 
collectively bargained plans, see Sec.  1.412(c)(1)-2; for principles 
applicable to funding methods in general, see regulations under section 
412(c)(3).
    (b) Computations included in funding method. The funding method of a 
plan includes not only the overall funding method used by the plan but 
also each specific method of computation used in applying the overall 
method. However, the choice of which actuarial assumptions are 
appropriate to the overall method or to the specific method of 
computation is not a part of the funding method. For example, the 
decision to use or not to use a mortality factor in the funding method 
of a plan is not a part of such funding method. Similarly, the specific 
mortality rate determined to be applicable to a particular plan year is 
not part of the funding method. See section 412(c)(5) for the 
requirement of approval to change the funding method used by a plan.

[T.D. 7733, 45 FR 75202, Nov. 14, 1980]

[[Page 183]]



Sec.  1.412(c)(1)-2  Shortfall method.

    (a) In general--(1) Shortfall method. The shortfall method is a 
funding method that adapts a plan's underlying funding method for 
purposes of section 412. As such, the use of the shortfall method is 
subject to section 412(c)(3). A plan described in paragraph (a)(2) of 
this section may elect to determine the charges to the funding standard 
account required by section 412(b) under the shortfall method. These 
charges are computed on the basis of an estimated number of units of 
service or production (for which a certain amount per unit is to be 
charged). The difference between the net amount charged under this 
method and the net amount that otherwise would have been charged under 
section 412 for the same period is a shortfall loss (gain) and is to be 
amortized over certain subsequent plan years.
    (2) Eligibility for use of shortfall. No plan may use the shortfall 
method unless--
    (i) The plan is a collectively bargained plan described in section 
413(a), and
    (ii) Contributions to the plan are made at a rate specified under 
the terms of a legally binding agreement applicable to the plan.

For purposes of this section, a plan maintained by a labor organization 
which is exempt from tax under section 501(c)(5) is treated as a 
collectively bargained plan and the governing rules of the organization 
(such as its constitution, bylaws, or other document that can be altered 
only through action of a convention of the organization) are treated as 
a collectively bargained agreement.
    (b) Computation and effect of net shortfall charge--(1) In general. 
The ``net shortfall charge'' to the funding standard account under the 
shortfall method is the product of (i) the estimated unit charge 
described in paragraph (c) of this section that applies for a particular 
plan year, multiplied by (ii) the actual number of base units (for 
example, units of service or production) which occurred during that plan 
year. When the shortfall method is used, the net shortfall charge is a 
substitute for the specific charges and credits to the funding standard 
account described in section 412 (b)(2) and (3)(B).
    (2) Example. Paragraph (b)(1) of this section may be illustrated by 
the following example:

    Example. A pension plan uses the calendar year as the plan year and 
the shortfall method. Its estimated unit charge applicable to 1980 is 80 
cents per hour of covered employment. During 1980, there were 125,000 
hours of covered employment. The net shortfall charge for the plan year 
is $100,000 (i.e., 125,000 x $.80), regardless of the amount which would 
be charged and credited to the funding standard account under section 
412 (b)(2) and (3)(B) had the shortfall method not applied. The funding 
standard account for 1980 will be separately credited for the amount 
considered contributed for the plan year under section 412 (b)(3)(A). 
The other items which may be credited, if applicable, are a waived 
funding deficiency and the alternative minimum funding standard credit 
adjustment under section 412(b)(3)(C) and (D) because these items are 
not credits under section 412(b)(3)(B).

    (3) Plans with more than one contract, contribution rate, employer, 
or benefit level--(i) General rule. A single plan with more than one 
contract, contribution rate, employer, or benefit level may compute a 
separate net shortfall charge for each contract, contribution rate, each 
employer, or each benefit level. The sum of these charges is the plan's 
total net shortfall charge. under Sec.  1.412(c)(1)-1(b), the use of 
separate computations would be a specific method of computation used in 
applying the overall funding method. See also paragraph (f)(5) of this 
section.
    (ii) Single valuation. Only one actuarial valuation shall be made 
for the single plan on each actuarial valuation date.
    (iii) Reasonableness test. The specific method of computation of the 
net shortfall charge must be reasonable, determined in the light of the 
facts and circumstances.
    (c) Estimated unit charge. The estimated unit charge is the annual 
computation charge described in paragraph (d) of this section divided by 
the estimated base units of service or production described in paragraph 
(e) of this section.
    (d) Annual computation charge. The annual computation charge for a 
plan year is the sum of the following amounts:

[[Page 184]]

    (1) The net charges and credits which, but for using the shortfall 
method, would be made under section 412 (b)(2) and (b)(3)(B).
    (2) The amount described in paragraph (g)(3) of this section, if 
applicable, for amortization of shortfall gain or loss.
    (e) Estimated base units--(1) In general. The estimated base units 
are the expected units of service or production for a plan year (hours, 
days, tons, dollars of compensation, etc.), determined as of the base 
unit estimation date for that plan year under paragraph (f) of this 
section. This estimate must be based on the past experience of the plan 
and the reasonable expectations of the plan for the plan year. The 
specific type of unit used must be described in the statement of funding 
method for the plan year. (See paragraph (i)(3) of this section for 
reporting requirements.)
    (2) Reasonable expectations. The reasonableness of expectations used 
under paragraph (e)(1) of this section is determined under the facts and 
circumstances of the plan for each plan year as of the relevant base 
unit estimation date. Expectations will be considered unreasonable if, 
for example, they do not reflect a consistent and substantial decline or 
growth in actual base units that has occurred over the course of recent 
years and that is likely to continue beyond the base unit estimation 
date. This determination of reasonableness is independent of 
determinations made under section 412(c)(3) of the reasonableness of 
actuarial assumptions.
    (f) Base unit estimation date--(1) In general. The base unit 
estimation date for the current plan year is determined under this 
paragraph (f). This date shall be an actuarial valuation date no earlier 
than the last actuarial valuation date occurring at least one year 
before the earliest date any current collectively bargained agreement in 
existence during the plan year came into effect.
    (2) Four-month rule. For purposes of this paragraph (f), a current 
collectively bargained agreement is one in effect during at least four 
months of the current plan year.
    (3) Effective date of agreement. For purposes of this paragraph (f), 
a collectively bargained agreement shall be deemed to have come into 
effect on the effective date of the agreement containing the currently 
effective provision for contributions to the plan or the benefits 
provided under the plan.
    (4) Long-term contract rule. The effective date of a collectively 
bargained agreement shall be deemed not to occur prior to the first day 
of the third plan year preceding the current year.
    (5) Special rule for plans computing separate net shortfall charge. 
A plan that computes a separate net shortfall charge for each contract, 
contribution rate, employer, or benefit level under paragraph (b)(3) of 
this section shall determine the base unit estimation date for each 
separate charge without regard to any collectively bargained agreement 
that does not relate to that contract, contribution rate, employer, or 
benefit level. If a collective bargaining agreement requiring 
contributions by a certain employer, or prescribing a certain benefit 
level, is in effect on December 31, 1980, the preceding sentence shall 
not apply to the computation of a separate net shortfall charge for that 
employer or benefit level until the earlier of--
    (i) The first plan year beginning after the date on which expires 
the collective bargaining agreement requiring contributions by that 
employer (or the last collective bargaining agreement relating to that 
benefit level), or
    (ii) The first plan year beginning after December 31, 1983.
    (6) Example. The rules contained in paragraph (f) of this section 
are illustrated by the following table. In the table, ``V'' signifies 
actuarial valuation date (January 1 in each case shown); ``B'' signifies 
beginning of a contract; and ``E'' signifies end of a contract. The 
table shows the resulting earliest base unit estimation date with 
respect to the following assumed items:

[[Page 185]]



                                Computation of Earliest Base Unit Estimation Date
----------------------------------------------------------------------------------------------------------------
                                                        Plan year (calendar year basis)
           Example           -----------------------------------------------------------------------------------
                               1973   1974   1975   1976   1977   1978   1979   1980   1981   1982   1983   1984
----------------------------------------------------------------------------------------------------------------
Plan A......................      V  .....  .....      V  .....  .....      V  .....  .....      V
  Contract 1................  .....  .....    E/B  .....  .....    E/B  .....    E/B  .....  .....  .....    E/B
  Base unit estimation date   .....  .....  .....   1973   1973   1973   1976   1976   1979   1979   1979   1979
   \1\......................
----------------------------------------------------------------------------------------------------------------
Plan B......................      V  .....  .....      V  .....  .....      V  .....  .....      V
  Contract 2................    \2\    \2\    \2\     B*  .....    E/B  .....  .....  .....   E/B*
  Contract 3................    E/B  .....  .....    E/B  .....  .....    E/B  .....  .....    E/B
  Base unit estimation date   .....  .....  .....   1973   1973   1973   1976   1976   1976   1976   1979   1979
   \1\......................
----------------------------------------------------------------------------------------------------------------
Plan C......................      V      V      V      V      V      V      V      V      V      V      V      V
  Contract 4................  .....  .....    E/B  .....  .....   E/B*  .....  .....  .....   E/B*
  Contract 5................  .....  .....    E/B  .....  .....   E/B*  .....  .....  .....  .....   E/B*
  Base unit estimation date   .....  .....  .....   1974   1974   1977   1977   1977   1977   1978   1979   1981
   \1\......................
----------------------------------------------------------------------------------------------------------------
\1\ The base unit estimation date may be on or any time after the actuarial valuation date in the year indicated
  on this line.
\2\ No contract.
* Denotes that a prior contract ends and a new contract begins prior to the fifth month of a plan year.

    (g) Amortization of shortfall gain or loss--(1) Definition. The 
shortfall gain for a plan is the excess for the plan year of--
    (i) The net shortfall charge computed under paragraph (b) of this 
section over
    (ii) The annual computation charge described in paragraph (d) of 
this section.

The shortfall loss for a plan is the excess for the plan year of the 
annual computation charge over the net shortfall charge.
    (2) Shortfall amortization period--(i) First year. The plan year in 
which the amortization of a shortfall gain or loss must begin is the 
earlier of two years: the fifth plan year following the plan year in 
which the shortfall gain or loss arose, or the first plan year beginning 
after the latest scheduled expiration date of a collectively bargained 
agreement in effect with respect to the plan during the plan year in 
which the shortfall gain or loss arose. For purposes of this 
subparagraph, a contract expiring on the last day of a plan year shall 
be deemed to be renewed on such last day for the same period of years as 
the contract that succeeds the expiring contract.
    (ii) Last year. The plan year in which the amortization of a 
shortfall gain or loss must end is the 15th plan year following the plan 
year in which the shortfall gain or loss arose. For a multiemployer plan 
described in section 414(f), the amortization must end with the 20th 
plan year instead of the 15th.
    (3) Annual amortization amount. The shortfall gain or loss must be 
amortized in equal annual installments. The total amount to be amortized 
must be adjusted for interest at the rate used for determining the 
plan's normal cost.
    (4) Shortfall gain or loss under spread gain type of funding 
method--(i) In general. A spread gain type of funding method spreads 
experience gains and losses over future periods as part of a plan's 
normal cost. (Examples of spread gain types of funding methods are the 
aggregate cost method, the frozen initial liability method, and the 
attained age normal method.) However, a shortfall gain or loss is not an 
experience gain or loss. Therefore, a plan using a spread gain type of 
funding method together with the shortfall method must amortize 
shortfall gains and losses and otherwise meet the requirements of 
paragraph (g) of this section.
    (ii) Asset adjustment for aggregate method. A plan using the 
shortfall method with the aggregate cost method of funding must adjust 
its plan assets for a shortfall gain or loss in calculating normal cost. 
The unamortized portion of any shortfall gain is subtracted from plan 
assets. The unamortized portion of any shortfall loss is added to plan 
assets.
    (5) Reconciliation of shortfall gain or loss with funding standard 
account. At the beginning of each year, the actual unfunded liability 
under the method used by the plan must equal the outstanding balance of 
all amortization bases, including bases for shortfall

[[Page 186]]

gains and losses, less the credit balance under the funding standard 
account at the end of the prior year.
    (6) Example. This paragraph is illustrated by the following 
examples:

    Example 1. A multiemployer plan described in section 414 (f) is 
maintained with the calendar year as the plan year and uses the 
shortfall method. The plan uses the frozen initial liability funding 
method. A five percent interest assumption is used by the plan, with 
payments computed as of the first day of each plan year for all items. 
The expiration dates of contracts in effect during plan years 1976, 
1977, and 1978 are such that the amortization of gains or losses for 
each year must begin in the fifth following plan year. The assumed plan 
costs and estimated base units for selected years, and the computations 
under this section which follow from such assumptions are shown in the 
following table. In the table, ``*'' denotes an assumed item. The 
remaining figures have been calculated on the basis of these 
assumptions.

   (A) Computation of Net Shortfall Charge and Shortfall Gain or Loss
------------------------------------------------------------------------
            Plan year                  1976         1977         1978
------------------------------------------------------------------------
1. Normal cost*..................     $100,000     $100,000     $100,000
2. Amortization of unfunded             50,000       50,000       50,000
 liability*......................
                                  --------------------------------------
3. Total annual computation           $150,000     $150,000     $150,000
 charges.........................
4. Estimated base units*.........      100,000      100,000      100,000
5. Estimated unit charge (line 3 /       $1.50        $1.50        $1.50
  line 4)........................
6. Actual units during year*.....       80,000       90,000      110,000
7. Net shortfall charge for year       120,000      135,000      165,000
 (line 5 x line 6)...............
8. Shortfall (gain) or loss (line       30,000       15,000    ($15,000)
 3-line 7).......................
------------------------------------------------------------------------


                     (B) Annual Amortization Amount
9. Year of shortfall gain or loss         1976         1977         1978
10. First year of amortization...         1981         1982         1983
11. Last year of amortization....         1996         1997         1998
12. (Gain) or loss adjusted for        $38,288      $19,144    ($19,144)
 interest to year amortization
 begins (1-1-76 to 1-1-81, etc.).
13. Annual amortization (16             $3,364       $1,682     ($1,682)
 years)..........................
 


 (C) Computation of Net Shortfall Charges for Selected Years (Including
                         Shortfall Amortization)
------------------------------------------------------------------------
            Plan year                  1981         1982         1983
------------------------------------------------------------------------
14. Normal cost*.................     $120,000     $125,000     $130,000
15. Amortization of unfunded            50,000       50,000       50,000
 liability*......................
16. Shortfall amortization (see
 line 13) from:
    1976.........................        3,364        3,364        3,364
    1977.........................  ...........        1,682        1,682
    1978.........................  ...........  ...........      (1,682)
                                  --------------------------------------
17. Total annual computation           173,364      180,046      183,364
 charges.........................
18. Estimated base units*........      110,000      110,000      110,000
19. Estimated unit charge (line          1.576        1.637        1.667
 17 / line 18)...................
20. Actual units during year*....      105,000      110,000      105,000
21. Net shortfall charge for year      165,480      180,070      175,035
 (line 19 x line 20).............
22. Shortfall (gain) loss (line          7,884         (24)        8,329
 17-line 21).....................
------------------------------------------------------------------------

    The amounts in line 22 will be amortized beginning 1986, 1987, and 
1988, respectively. The $24 gain in 1982 results from rounding the 
estimated unit charge.
    Example 2. Assume the facts in Example 1. Also assume that the plan 
uses the frozen initial liability funding method, that the unfunded 
liability as of January 1, 1976 (corresponding to a 40-year charge of 
$50,000 due at the beginning of the year) is $900,850, and that actual 
contributions at the rate of $1.75 per unit are paid at mid-year in 
1976.

    (A) Computation of the Unfunded Liability as of December 31, 1976
1. Unfunded liability as of 1/1/76.........................     $900,850
2. Normal cost (that used in the calculation of the total        100,000
 annual computation charges)...............................
3. Interest at 5% due on items 1 and 2.....................       50,043
4. Contribution with interest: $1.75 x 80,000 x 1.025            143,500
 (actual contribution rate times acutal base units times
 interest adjustment from mid-year)........................
                                                            ------------
5. Unfunded liability as of 12/31/76: item 1 + item 2 +          907,393
 item 3 -item 4............................................
 


 (B) Computation of the Outstanding Balance of the Bases as of December
                                31, 1976
1. Original base: ($900,850-$50,000) x 1.05................     $893,393
2. Shortfall loss $30,000 x 1.05...........................       31,500
                                                            ------------
3. Total...................................................      924,893
 


[[Page 187]]


      (C) Computation of the Credit Balance as of December 31, 1976
1. Net shortfall charge (Sec.   1.412 (c) (1)-2 (b))            $126,000
 adjusted for interest: $120,000 x 1.05....................
2. Actual contributions with interest......................      143,500
                                                            ------------
3. Credit balance as of 12/31/76: item 2-item 1............       17,500
 

                   (D) Reconciliation of computations

    As of January 1, 1977, the unfunded liability ($907,393) equals the 
outstanding balance of the bases minus the credit balance ($924,893-
$17,500 = $907,393).

    (h) Amortization of experience gain or loss--(1) General rule. In 
the case of a plan using an immediate gain type of funding method, an 
experience gain or loss shall be amortized pursuant to section 412 
(b)(2)(B)(iv) or (b)(3)(B)(ii). (Examples of the immediate gain type of 
funding method are the unit credit method, the entry age normal cost 
method, and the individual level premium cost method.) For purposes of 
this section, a shortfall gain or loss is not an experience gain or 
loss. The amount of the experience gain or loss must be adjusted for 
interest at the rate used for determining the plan's normal cost.
    (2) Experience amortization period under shortfall method--(i) First 
year. The plan year in which the amortization of an experience gain or 
loss must begin in the case of a plan using the shortfall method is the 
earlier of two years: the fifth plan year following the plan year in 
which the experience gain or loss arose, or the first plan year 
beginning after the last scheduled expiration date of a contract in 
effect during the plan year in which the experience gain or loss arose. 
For purposes of this subparagraph a contract expiring on the last day of 
the plan year shall be deemed to be renewed on such last day for the 
same period of years as the contract that succeeds the expiring 
contract.
    (ii) Last year. The plan year in which the amortization of an 
experience gain or loss must end in the case of a plan using the 
shortfall method is the 15th plan year following the plan year in which 
the experience gain or loss arose. For a multi-employer plan described 
in section 414 (f), the amortization must end with the 20th plan year 
instead of the 15th.
    (3) Use of annual computation charge in determining experience gain 
or loss. In the case of a plan using an immediate gain type of funding 
method, an experience gain or loss is the difference between the 
expected unfunded liability and the actual unfunded liability under the 
plan. The expected unfunded liability as of the end of a plan year 
equals the actual unfunded liability as of the beginning of the year 
plus normal cost, minus contributions, all adjusted for interest. If the 
plan adopts the shortfall method, the expected unfunded liability is 
computed by using the normal cost applicable for the plan year in 
determining the annual computation charge under paragraph (d) of this 
section. The same normal cost is used in computing the unfunded 
liability under the frozen initial liability funding method.
    (4) Example. This paragraph is illustrated by the following example:

    Example. Assume the facts in Example 2 from paragraph (g) (6) of 
this section, except that the entry age normal funding method is used. 
Also assume that as of December 31, 1976, the actual unfunded liability 
is $900,000.

             (A) Computation of Expected Unfunded Liability
1. Actual unfunded liability as of 1-1-76..................     $900,850
2. Normal cost portion of annual computation charge as of 1-     100,000
 1-76......................................................
3. Interest at 5% due on items 1 and 2.....................       50,043
4. Contribution received with interest: $1.75 x 80,000 x         143,500
 1.025 (actual contribution rate times actual base units
 times interest adjustment at mid-year)....................
                                                            ------------
5. Expected unfunded liability as of 12-31-76 (item 1 +          907,393
 item 2 + item 3 - item 4).................................
 


                     (B) Computation of Gain or Loss
1. Expected unfunded liability as of 12-31-76..............     $907,393
2. Actual unfunded liability as of 12-31-76................      900,000
                                                            ------------
3. Gain (or loss) (item 1 - item 2)........................        7,393
 


    (i) Election procedure--(1) In general. To elect the shortfall 
method, a collectively bargained plan must attach a statement to the 
annual report required under section 6058 (a) for the first plan year to 
which it is applied. The statement shall state that the shortfall method 
is adopted, beginning with the plan year covered by such report. Advance 
approval from the Internal Revenue Service is not required if the 
shortfall method is first adopted on or before the later of--

[[Page 188]]

    (i) The first plan year to which section 412 applies or
    (ii) The last plan year commencing before December 31, 1981.

However, approval must be received pursuant to section 412(c)(5) prior 
to the adoption of the shortfall method at a later time, or the 
discontinuance of such method, once adopted.
    (2) Use of specific computation method. A specific method of 
computation under the shortfall method is described in paragraph (b)(3) 
of this section, regarding the treatment of more than one contract, 
employer, or benefit level under the plan. This specific method may be 
adopted with respect to any plan year to which the shortfall method 
applies. Approval from the Commissioner must be received under section 
412(c)(5) prior to the adoption of this specific computation method for 
a plan year subsequent to the first plan year to which the shortfall 
method applies, or prior to the discontinuance of a specific computation 
method, once adopted.
    (3) Reporting requirements. Each annual report required by section 
6058(a) and periodic report of the actuary required by section 6059 must 
include all additional information relevant to the use of the shortfall 
method as may be required by the applicable forms and the instructions 
for such forms.
    (j) Transitional rule. In lieu of paragraphs (g)(2) and (h)(2) of 
this section relating to the amortization period for shortfall and 
experience gains and losses, for gains and losses arising in plan years 
beginning before January 1, 1981, a plan may rely on the prior published 
position of the Internal Revenue Service with respect to the 
amortization period for shortfall and experience gains and losses.
    (k) Supersession. This section and Sec.  1.412 (c) (1)-1 supersede 
Sec. Sec.  11.412 (c) (1)-1 and (c) (1)-2 of the Temporary Income Tax 
Regulations Under the Employee Retirement Income Security Act of 1974.

(Secs. 412, 7805, Internal Revenue Code of 1954 (88 Stat. 914 and 68A 
Stat. 917; (26 U.S.C. 412 and 7805)), and sec. 3 (31) of the Employee 
Retirement Income Security Act of 1974 (88 Stat. 837; (29 U.S.C. 1002)))

[T.D. 7733, 45 FR 75202, Nov. 14, 1980]



Sec.  1.412(c)(1)-3  Applying the minimum funding requirements
to restored plans.

    (a) In general--(1) Restoration method. The restoration method is a 
funding method that adapts the underlying funding method of section 412 
in the case of certain plans that are or have been terminated and are 
later restored by the Pension Benefit Guaranty Corporation (PBGC). The 
normal operation of the funding standard account, and all other 
provisions of section 412 and the regulations thereunder, are unchanged 
except as provided in this Sec.  1.412(c)(1)-3. Under the restoration 
method, the PBGC shall determine a restoration payment schedule, 
extending over no more than 30 years, that replaces all charges and 
credits to the funding standard account attributable to pre-restoration 
amortization bases. The restoration payment schedule is determined on 
the basis of an actuarial valuation of the accrued liability of the plan 
on the initial post-restoration valuation date less the actuarial value 
of the plan assets on that date. The initial post-restoration valuation 
date is the date of the valuation that falls in the first plan year 
beginning on or after the date of the restoration order.
    (2) Applicability of restoration method. A plan must use the 
restoration method if, and only if--
    (i) The plan is being or has been terminated pursuant to section 
4041(c) or section 4042 of the Employee Retirement Income Security Act 
of 1974 (ERISA); and
    (ii) The plan has been restored by the PBGC pursuant to its 
authority under section 4047 of ERISA.
    (b) Computation and effect of the initial restoration amortization 
base--(1) In general. The initial restoration amortization base is 
determined under the underlying funding method used by the plan. When 
the plan uses a spread gain funding method that does not maintain an 
unfunded liability, the plan must change either to an immediate gain 
method that directly calculates an accrued liability or to a spread gain 
method that maintains an unfunded liability. A plan may adopt any cost 
method that satisfies this requirement and that is acceptable under 
section 412

[[Page 189]]

and the regulations thereunder, provided that the plan administrator 
follows the procedures established by the Commissioner for changes in 
funding methods. The initial restoration amortization base is determined 
using the valuation for the plan year in which the initial post-
restoration valuation date falls. The initial restoration amortization 
base equals the accrued liability with respect to plan benefit 
liabilities returned by the PBGC less the value of the plan assets 
returned by the PBGC. The initial restoration amortization base replaces 
all prior amortization bases including those under section 412(b)(2) 
(B), (C), and (D) and under section 412(b)(3)(B). Any base resulting 
from a change in funding method, including a change required under this 
paragraph, is treated as a prior amortization base within the meaning of 
this paragraph (b). Any accumulated funding deficiency or credit balance 
in the funding standard account is set equal to zero when the initial 
restoration amortization base is established.
    (2) Example. The following example illustrates the provisions of 
this paragraph (b):

    Example. A pension plan uses the calendar year as its plan year, 
makes its annual periodic valuation as of January 1, and uses the unit 
credit actuarial cost method for funding purposes. The plan is in the 
process of being terminated. By order of the PBGC the plan is restored 
as of July 1, 1991. The initial post-restoration valuation date is 
January 1, 1992, and a restoration payment schedule order is issued on 
October 31, 1992. If, as of January 1, 1992, the accrued liability of 
the plan is $1,000,000 and the value of the plan assets is $200,000, the 
initial restoration amortization base is $800,000.

    (c) Establishment of a restoration payment schedule--(1) 
Certification requirement. When the PBGC establishes a restoration 
payment schedule, the Executive Director of the PBGC must certify to the 
PBGC's Board of Directors, and to the Internal Revenue Service, that the 
PBGC has reviewed the funding of the plan, the financial condition of 
the plan sponsor and its controlled group members, the payments required 
under the restoration payment schedule (taking into account the 
availability of deferrals authorized under paragraph (c)(4) of this 
section), and any other factor that the PBGC deems relevant, and, based 
on that review, determines that it is in the best interests of 
participants and beneficiaries of the plan and the pension insurance 
program that the restored plan not be reterminated.
    (2) Requirements for restoration payment schedule--(i) Amortization 
of base over period of no more than 30 years. The restoration payment 
schedule must be prescribed in an order requiring the employer to make 
stated contributions to the plan sufficient to amortize the initial 
restoration amortization base over a period extending not more than 30 
years after the initial post-restoration valuation date (the restoration 
payment period). Payments included in the restoration payment schedule 
order are charged to the funding standard account of the plan at the end 
of each plan year in accordance with paragraph (d) of this section. The 
restoration payment schedule must provide for total charges that are 
sufficient to amortize the entire amount of the initial restoration 
amortization base by the end of the restoration payment period. The 
scheduled charges need not be in level amounts, but the present value of 
the prescribed charges on the initial post-restoration valuation date, 
computed with interest at the valuation rate, must equal the initial 
restoration amortization base.
    (ii) Minimum annual charge. The restoration payment schedule must 
prescribe annual charges that are sufficient to prevent the outstanding 
balance of the initial restoration amortization base from exceeding 
whichever of the following amounts is applicable--
    (A) During the first 10 plan years on the restoration payment 
schedule, the amount of the initial restoration amortization base on the 
date the base was established; or
    (B) During plan years 11 through 20 on the restoration payment 
schedule, the maximum permitted outstanding balance of the initial 
restoration amortization base at the end of the tenth plan year, as 
calculated under paragraph (c)(2)(iii) of this section; or

[[Page 190]]

    (C) During plan years 21 through the end of the restoration payment 
schedule, the maximum permitted outstanding balance of the initial 
restoration amortization base at the end of the twentieth plan year, as 
calculated under paragraph (c)(2)(iii) of this section.
    (iii) Interim amortization requirements. The restoration payment 
schedule must provide for sufficient periodic charges so that the 
outstanding balance of the initial restoration amortization base at the 
end of the tenth plan year and at the end of the twentieth plan year of 
the restoration payment period will not be larger than the outstanding 
balance that would have remained at the end of the tenth plan year and 
at the end of the twentieth plan year, respectively, if the initial 
restoration amortization base had been amortized in level annual amounts 
over the restoration payment period at the valuation rate.
    (3) Amendments to the restoration payment schedule. The order 
establishing the restoration payment schedule may be amended by the PBGC 
from time to time with respect to any remaining payments, provided that 
no amendment may extend the restoration payment period beyond 30 years 
from the initial post-restoration valuation date, and provided further 
that the restoration payment schedule, as amended, satisfies the 
requirements of paragraph (c)(2) of this section.
    (4) Deferral of minimum scheduled annual payment amounts--(i) 
Authority to grant deferral. Not later than 2\1/2\ months following the 
end of the plan year, the PBGC may grant a deferral of the charges 
required in the restoration payment schedule for that plan year if the 
requirements in paragraph (c)(4)(ii) of this section are satisfied. The 
PBGC may require the plan sponsor and its controlled group members to 
provide security to the plan as a condition to granting a deferral.
    (ii) Determination of business hardship. Before granting a deferral 
under this paragraph (c)(4), the PBGC must make a determination that the 
granting of the deferral is in the best interests of plan participants 
and the plan termination insurance system, and that the plan sponsor and 
its controlled group members are unable to make the scheduled 
restoration payments without experiencing temporary substantial business 
hardship. In making these determinations, the factors the PBGC shall 
consider, include, but are not limited to, the following--
    (A) Whether the plan sponsor and its controlled group members are 
operating at an economic loss;
    (B) Whether there is substantial unemployment or underemployment in 
the trades or businesses of the plan sponsor and its controlled group 
members;
    (C) Whether the sales and profits of the industry or industries are 
depressed or declining; and
    (D) Whether it is reasonable to expect that the plan termination 
insurance system will suffer a greater loss if the plan is terminated 
than if it is continued as a restored plan.
    (iii) Amount of deferral. The amount of the deferral for any 
particular plan year may not exceed the lesser of the amount that would 
have been required to be contributed under the restoration payment 
schedule for that year or interest at the valuation rate on the 
outstanding balance of the initial restoration amortization base for 
that year. An amortization payment for a deferral granted for a prior 
plan year may not be deferred. No deferral may extend the overall 
restoration payment period beyond 30 years.
    (iv) Modification of payment schedule. The restoration payment 
schedule must be adjusted to reflect any deferral granted for a plan 
year in the manner prescribed in this paragraph (c). The charge 
otherwise specified in the schedule is reduced by the amount of any 
deferral. The charges under the restoration payment schedule for the 
subsequent plan years are increased by the amounts in paragraph 
(c)(4)(v) of this section.
    (v) Amortization of deferred amount. The amount of any deferral 
granted by the PBGC for any plan year must be amortized in level amounts 
over five years or such shorter period as may be prescribed by the PBGC, 
at the valuation rate, beginning with the plan year following the year 
of the deferral.
    (vi) Number of deferrals permitted. The PBGC may not grant more than 
five

[[Page 191]]

deferrals of the minimum scheduled payments as required by this section 
during the restoration payment period and no more than three of these 
deferrals may be granted during the first ten years of that period.
    (vii) Deferrals override minimum annual charges and interim 
amortization requirements. In determining the minimum annual charge 
under paragraph (c)(2)(ii) of this section and in applying the interim 
amortization requirements of paragraph (c)(2)(iii) of this section, the 
unamortized balances of any deferrals granted by the PBGC under this 
paragraph shall be added to the outstanding balance of the initial 
restoration amortization base otherwise allowable.
    (d) Charging the scheduled restoration payments to the funding 
standard account. In addition to any other charges and credits 
prescribed in the normal operation of the funding standard account under 
section 412, the amount of each payment specified in the restoration 
payment schedule shall be charged against the funding standard account 
of the plan for the plan year to which that payment is attributed in the 
restoration payment schedule. To the extent that the restoration payment 
schedule provides for payments before the end of the plan year, the 
annual charge to the funding standard account attributable to the 
restoration payment schedule is equal to the sum of the periodic 
payments for the plan year accumulated with interest at the valuation 
rate to the last day of the plan year.
    (e) Changes in actuarial assumptions or methods. The plan 
administrator must notify the PBGC of any changes in the actuarial 
assumptions or methods used by the plan. Upon notification of any such 
change, the PBGC may make any changes to the restoration payment 
schedule that it deems appropriate.
    (f) Change to restoration method. A plan that has been restored must 
use the restoration method until the initial restoration amortization 
base has been fully amortized. The use of this method does not require 
prior approval from the Commissioner. A plan using the restoration 
method must compute the charges to the funding standard account to 
amortize the initial restoration amortization base in accordance with 
the order of the PBGC and in accordance with this section.
    (g) Deficit reduction contribution--(1) Calculation of deficit 
reduction contribution. For any plan using the restoration method, the 
deficit reduction contribution under section 412(l)(2) is equal to the 
sum of--
    (i) The unfunded section 412(l) restoration liability amount; plus
    (ii) The unfunded new liability amount.
    (2) Unfunded section 412(l) restoration liability amount. The 
unfunded section 412(l) restoration liability amount is the amount 
necessary to amortize fully the unfunded section 412(l) restoration 
liability in installments, as prescribed by the PBGC, over not more than 
30 years. The annual amount need not be level, but at all times the 
present value of the future amortization charges prescribed under the 
restoration payment schedule, at the current liability interest rate, 
must equal the outstanding balance of the unfunded section 412(l) 
restoration liability and the schedule must provide that at the end of 
no more than 30 years the entire amount of the unfunded section 412(l) 
restoration liability base will have been fully amortized. The schedule 
prescribed for amortization of the unfunded section 412(l) restoration 
liability must comply with the requirements imposed in paragraph (c) of 
this section on the restoration payment schedule, except as provided in 
paragraph (g)(7) of this section and except that the maximum permitted 
outstanding balance of the unfunded section 412(l) restoration liability 
at the end of the tenth plan year must not be greater than the 
outstanding balance of the section 412(l) restoration liability that 
would have remained at the end of the tenth plan year if the unfunded 
section 412(l) restoration liability had been amortized in level amounts 
over the restoration payment period at the actual current liability 
interest rate for each year, increased by the current liability interest 
rate differential as defined under paragraph (g)(7) of this section. The 
unfunded section 412(l) restoration liability amount for the tenth plan 
year otherwise prescribed under the restoration payment schedule is 
increased by any

[[Page 192]]

outstanding current liability interest rate differential. By issuing an 
appropriate order, the PBGC may permit the outstanding current liability 
interest rate differential to be amortized over the tenth through the 
fourteenth plan years. If the PBGC permits the amortization of the 
outstanding current liability interest rate differential, then the 
unfunded section 412(l) restoration liability amount for each year to 
which an amortization payment is attributed under the order shall be 
increased by such payment. The outstanding balance otherwise required by 
paragraph (g)(2) of this section is increased by the outstanding 
balance, if any, of the base resulting from the amortization of the 
current liability interest rate differential. The PBGC may amend the 
amortization schedule for the unfunded section 412(l) restoration 
liability subject to the limits on amendments to the amortization 
schedule prescribed for the initial restoration amortization base.
    (3) Establishment of unfunded section 412(l) restoration liability. 
In the plan year in which the initial post-restoration valuation date 
falls, the unfunded section 412(l) restoration liability is equal to the 
unfunded current liability of the plan.
    (4) Unfunded new liability amount. In the case of a plan using the 
restoration method, the unfunded new liability amount is the applicable 
percentage, as defined in section 412(l)(4)(C), of the unfunded new 
liability determined under paragraph (g)(5) of this section.
    (5) Unfunded new liability. The unfunded new liability of a plan 
using the restoration method is the excess, if any, of the unfunded 
current liability of the plan, within the meaning of section 
412(l)(8)(A) for the plan year (determined without taking into account 
any unpredictable contingent event benefits, even if the event has 
occurred) over the outstanding balance of the unfunded section 412(l) 
restoration liability determined under paragraph (g)(3) of this section.
    (6) Offset of amortization charges. The amounts charged to the 
funding standard account pursuant to the restoration payment schedule in 
order to amortize the initial restoration base, as described in 
paragraph (d) of this section, must be offset against the deficit 
reduction contribution in paragraph (g)(1) of this section along with 
any other applicable amounts provided in section 412(l)(1)(A)(ii).
    (7) Interest rate differential. During the first 10 plan years after 
the initial post-restoration valuation date, the restoration payment 
schedule must prescribe an unfunded section 412(l) restoration liability 
amount for each plan year that is sufficient to prevent the outstanding 
balance of the unfunded section 412(l) restoration liability from 
exceeding the initial amount of the unfunded section 412(l) restoration 
liability increased by the current liability interest rate differential. 
The current liability interest rate differential at any point during the 
first ten years of the restoration payment period is the excess, if any, 
of the outstanding balance of the unfunded section 412(l) restoration 
liability determined using the actual current liability interest rate 
for each year, taking into account the charges described in paragraph 
(d) of this section, over the outstanding balance of the unfunded 
section 412(l) restoration liability determined using the lowest, for 
each year, of the initial current liability interest rate, the current 
liability interest rate for the computation year, and the valuation 
interest rate, taking into account the charges described in paragraph 
(d) of this section.
    (h) Election of the alternative minimum funding standard. A plan 
using the restoration method may not elect the alternative minimum 
funding standard under section 412(g).
    (i) Funding review by the PBGC. The PBGC must review the funding of 
any plan using the restoration method at least once in each plan year. 
As a result of a funding review, the PBGC may amend the restoration 
payment schedule as provided in paragraph (c)(3) of this section. As 
part of the funding review, the Executive Director of the PBGC must 
certify to the PBGC's Board of Directors, and to the Internal Revenue 
Service, that the PBGC has reviewed the funding of the plan, the 
financial condition of the plan sponsor and its controlled group 
members, the

[[Page 193]]

payments required under the restoration payment schedule (taking into 
account the availability of deferrals authorized under paragraph (c)(4) 
of this section), and any other factor that the PBGC deems relevant, 
and, based on that review, determines that it is in the best interests 
of participants and beneficiaries of the plan and the pension insurance 
program that the restored plan not be reterminated.

[T.D. 8494, 58 FR 54491, Oct. 22, 1993]



Sec.  1.412(c)(1)-3T  Applying the minimum funding requirements
to restored plans (temporary).

    (a) In general--(1) Restoration method. The restoration method is a 
funding method that adapts the underlying funding method of section 412 
in the case of certain plans that are or have been terminated and are 
later restored by the Pension Benefit Guaranty Corporation. The normal 
operation of the funding standard account, and all other provisions of 
section 412 and the regulations thereunder, are unchanged except as 
provided in this Sec.  1.412(c)(1)-3T. Under the restoration method, the 
Pension Benefit Guaranty Corporation shall determine a restoration 
payment schedule, extending over no more than 30 years, that replaces 
all charges and credits to the funding standard account attributable to 
pre-restoration amortization bases. The restoration payment schedule is 
determined on the basis of an actuarial valuation of the accrued 
liability of the plan on the initial post-restoration valuation date 
less the actuarial value of the plan assets on that date. The initial 
post-restoration valuation date is the date of the first valuation that 
falls in the first plan year beginning on or after the later of October 
23, 1990, or the date of the restoration order.
    (2) Applicability of restoration method. A plan must use the 
restoration method if, and only if:
    (i) The plan is being or has been terminated pursuant to section 
4041(c) or section 4042 of the Employee Retirement Income Security Act 
of 1974 (ERISA), and
    (ii) The plan has been restored by the Pension Benefit Guaranty 
Corporation pursuant to its authority under section 4047 of ERISA.
    (b) Computation and effect of the initial restoration amortization 
base--(1) In general. The initial restoration amortization base is 
determined under the underlying funding method used by the plan. When 
the plan uses a spread gain funding method that does not maintain an 
unfunded liability, the plan must change either to an immediate gain 
method that directly calculates an accrued liability or to a spread gain 
method that maintains an unfunded liability. A plan may adopt any cost 
method that satisfies this requirement and that is acceptable under 
section 412 and the regulations thereunder, provided that the plan 
follows the procedures established by the Commissioner for changes in 
funding methods. The initial restoration amortization base is determined 
using the valuation for the plan year in which the initial post-
restoration valuation date falls. The initial restoration amortization 
base equals the accrued liability with respect to plan benefit 
liabilities returned by the Pension Benefit Guaranty Corporation less 
the value of the plan assets returned by the Pension Benefit Guaranty 
Corporation. The initial restoration amortization base replaces all 
prior amortization bases including those under subparagraphs (B), (C), 
and (D) of section 412(b)(2) and under subparagraph (B) of section 
412(b)(3). Any base resulting from a change in funding method is treated 
as a prior amortization base within the meaning of this paragraph (b). 
Any accumulated funding deficiency or credit balance in the funding 
standard account is set equal to zero when the initial restoration 
amortization base is established.
    (2) Example. A pension plan uses the calendar year as its plan year, 
makes its annual periodic valuation as of January 1, and uses the unit 
credit actuarial cost method for funding purposes. The plan is in the 
process of being terminated. By order of the Pension Benefit Guaranty 
Corporation the plan is restored as of July 1, 1991, and a restoration 
payment schedule order issued on October 31, 1992. The initial post-
restoration valuation date is January l, 1993. If, as of that date, the 
accrued liability of the plan is $1,000,000 and the value of the plan 
assets is $200,000, the

[[Page 194]]

initial restoration amortization base is $800,000.
    (c) Establishment of a restoration payment schedule--(1) 
Certification requirement. When the PBGC establishes a restoration 
payment schedule, the Executive Director of the PBGC must certify to the 
Corporation's Board of Directors, and to the Internal Revenue Service, 
that the Corporation has reviewed the funding of the plan, the financial 
condition of the plan sponsor and its controlled group members, the 
payments required under the restoration payment schedule (taking into 
account the availability of deferrals authorized under paragraph (c)(4) 
of this section), and any other factor that the Corporation deems 
relevant, and, based on that review, determines that it is in the best 
interests of participants and beneficiaries of the plan and the pension 
insurance program that the restored plan not be reterminated.
    (2) Requirements for restoration payment schedule--(i) Amortization 
of base over period of no more than 30 years. The restoration payment 
schedule must be prescribed in an order requiring the employer to make 
stated contributions to the plan sufficient to amortize the initial 
restoration amortization base over a period extending not more than 30 
years after the initial post-restoration valuation date (the restoration 
payment period). The restoration payment schedule must be sufficient to 
amortize the entire amount of the initial restoration amortization base 
by the end of the restoration payment period. The scheduled charges need 
not be in level amounts, but the present value of the prescribed charges 
on the initial post-restoration valuation date, computed with interest 
at the valuation rate, must equal the initial restoration amortization 
base.
    (ii) Minimum annual charge. The restoration payment schedule must 
require annual charges that are sufficient to prevent the outstanding 
balance of the initial restoration amortization base from exceeding 
whichever of the following amounts is applicable:
    (A) During the first 10 plan years on the restoration payment 
schedule, the amount of the initial restoration amortization base on the 
date the base was established, or
    (B) During plan years 11 through 20 on the restoration payment 
schedule, the maximum permitted outstanding balance of the initial 
restoration amortization base at the end of the tenth plan year, as 
calculated under paragraph (c)(2)(iii) below, or
    (C) During plan years 21 through the end of the restoration payment 
schedule, the maximum permitted outstanding balance of the initial 
restoration amortization base at the end of the twentieth plan year, as 
calculated under paragraph (c)(2)(iii) below.
    (iii) Interim amortization requirements. The restoration payment 
schedule must provide for sufficient periodic charges so that the 
outstanding balance of the initial restoration amortization base at the 
end of the tenth plan year and at the end of the twentieth plan year of 
the restoration payment period will not be larger than the outstanding 
balance that would have remained at the end of the tenth plan year and 
at the end of the twentieth plan year, respectively, if the initial 
restoration amortization base had been amortized in level amounts over 
the restoration payment period at the valuation rate.
    (3) Amendments to the restoration payment schedule. The order 
establishing the restoration payment schedule may be amended by the 
Pension Benefit Guaranty Corporation from time to time with respect to 
any remaining payments, provided that no amendment may extend the 
restoration payment period beyond 30 years from the initial post-
restoration valuation date, and provided further that the restoration 
payment schedule, as amended, satisfies the requirements of paragraph 
(c)(2) of this section.
    (4) Deferral of minimum scheduled annual payment amounts--(i) 
Authority to grant deferral. Not later than 2\1/2\ months following the 
end of the plan year, the Pension Benefit Guaranty Corporation may grant 
a deferral of the charges required in the restoration payment schedule 
for that plan year if the requirements in paragraph (c)(4)(ii) of this 
section are satisfied. The Pension Benefit Guaranty Corporation may 
require the plan sponsor and its controlled group members to provide

[[Page 195]]

security to the plan as a condition to granting a deferral.
    (ii) Determination of business hardship. Before granting a deferral 
under this paragraph (c)(4), the Pension Benefit Guaranty Corporation 
must make a determination that the granting of the deferral is in the 
best interests of plan participants and the plan termination insurance 
system, and that the plan sponsor and its controlled group members are 
unable to make the scheduled restoration payments without experiencing 
temporary substantial business hardship. In making these determinations, 
the factors the Pension Benefit Guaranty Corporation shall consider, 
include, but are not limited to, the following:
    (A) Whether the plan sponsor and its controlled group members are 
operating at an economic loss,
    (B) Whether there is substantial unemployment or underemployment in 
the trades or businesses of the plan sponsor and its controlled group 
members,
    (C) Whether the sales and profits of the industry or industries are 
depressed or declining, and
    (D) Whether it is reasonable to expect that the plan termination 
insurance system will suffer a greater loss if the plan is terminated 
than if it is continued as a restored plan.
    (iii) Amount of deferral. The amount of the deferral for any 
particular plan year may not exceed the lesser of the amount that would 
have been required to be contributed under the restoration payment 
schedule for that year or interest on the outstanding balance of the 
initial restoration amortization base for that year. An amortization 
payment for a deferral granted for a prior plan year may not be 
deferred. No deferral may extend the overall restoration payment period 
beyond 30 years.
    (iv) Modification of payment schedule. The restoration payment 
schedule must be adjusted to reflect any deferral granted for a plan 
year in the manner prescribed in this paragraph (c). The charge 
otherwise specified in the schedule is reduced by the amount of any 
deferral. The charges under the restoration payment schedule for the 
subsequent plan years are increased by the amounts in paragraph 
(c)(4)(v) of this section.
    (v) Amortization of deferred amount. The amount of any deferral 
granted by the Pension Benefit Guaranty Corporation for any plan year 
must be amortized in level amounts over five years or such shorter 
period as may be prescribed by the Pension Benefit Guaranty Corporation, 
at the valuation rate, beginning with the plan year following the year 
of the deferral.
    (vi) Number of deferrals permitted. The Pension Benefit Guaranty 
Corporation may not grant more than five deferrals of the minimum 
scheduled payments as required by this section during the restoration 
payment period and no more than three of these deferrals may be granted 
during the first ten years of that period.
    (d) Charging the scheduled restoration charges to the funding 
standard account. In addition to any other charges and credits 
prescribed in the normal operation of the funding standard account under 
section 412, the amount of each charge specified in the restoration 
payment schedule shall be charged against the funding standard account 
of the plan for the plan year to which that payment is attributed in the 
restoration payment schedule.
    (e) Changes in actuarial assumptions. If changes in actuarial 
assumptions increase or decrease the charges that would be required to 
amortize the outstanding balance of the initial restoration amortization 
base over the remaining years of the restoration payment schedule, the 
plan must notify the Pension Benefit Guaranty Corporation of the changes 
so that it may make appropriate changes to the restoration payment 
schedule.
    (f) Change to restoration method. A plan that has been restored must 
use the restoration method until the initial restoration amortization 
base has been fully amortized. The use of this method does not require 
prior approval from the Commissioner. A plan using the restoration 
method must compute the charges and credits to the initial restoration 
amortization base in accordance with the order of the Pension Benefit 
Guaranty Corporation and in accordance with this section.

[[Page 196]]

    (g) Deficit reduction contribution--(1) Calculation of deficit 
reduction contribution. For any plan using the restoration method, the 
deficit reduction contribution under section 412(l)(2) is equal to the 
sum of--
    (i) The unfunded section 412(l) restoration liability amount, plus
    (ii) The unfunded new liability amount.
    (2) Unfunded section 412(l) restoration liability amount. The 
unfunded section 412(l) restoration liability amount is the amount 
necessary to amortize fully the unfunded section 412(l) restoration 
liability in installments, as prescribed by the Pension Benefit Guaranty 
Corporation, over not more than 30 years. The annual amount need not be 
level, but at all times the present value of the future amortization 
charges under the restoration payment schedule, at the current liability 
interest rate, must equal the outstanding balance of the unfunded 
section 412(l) restoration liability and the schedule must provide that 
at the end of no more than 30 years the entire amount of the unfunded 
section 412(l) restoration liability base will have been fully 
amortized. The schedule prescribed for amortization of the unfunded 
section 412(l) restoration liability must comply with the requirements 
imposed in paragraph (c) of this section on the restoration payment 
schedule, except as provided in paragraph (g)(7) of this section and 
except that the maximum permitted outstanding balance of the unfunded 
section 412(l) restoration liability at the end of the tenth plan year 
must not be greater than the outstanding balance of the section 412(l) 
restoration liability that would have remained at the end of the tenth 
plan year if the unfunded section 412(l) restoration liability had been 
amortized in level amounts over the restoration payment period at the 
current liability interest rate, increased by the current liability 
interest rate differential as defined under paragraph (g)(7) of this 
section. The Pension Benefit Guaranty Corporation may amend the 
amortization schedule for the unfunded section 412(l) restoration 
liability subject to the limits on amendments to the amortization 
schedule prescribed for the initial restoration amortization base.
    (3) Establishment of unfunded section 412(l) restoration liability. 
In the plan year in which the initial post-restoration valuation date 
falls, the unfunded section 412(l) restoration liability is equal to the 
unfunded current liability of the plan.
    (4) Unfunded new liability amount. In the case of a plan using the 
restoration method, the unfunded new liability amount is the applicable 
percentage, as defined in section 412(l)(4)(C), of the unfunded new 
liability determined under paragraph (g)(5) of this section.
    (5) Unfunded new liability. The unfunded new liability of a plan 
using the restoration method is the unfunded current liability of the 
plan for the plan year less the outstanding balance of the unfunded 
section 412(l) restoration liability determined under paragraph (g)(3) 
of this section and less any unpredictable contingent event benefit 
liabilities (without regard to whether or not the event has occurred).
    (6) Offset of amortization charges. The charges specified in the 
restoration payment schedule to amortize the initial restoration 
amortization base, must be offset against the deficit reduction 
contribution in paragraph (g)(1) of this section along with any other 
applicab1e amounts provided in section 412 (l)(1)(A)(ii).
    (7) Interest rate differential. During the first 10 plan years after 
the initial post-restoration valuation date, the unfunded section 412(l) 
restoration liability amount for the plan as determined for purposes of 
this section must be sufficient to prevent the outstanding balance of 
the unfunded section 412(l) restoration liability from exceeding the 
initial amount of the unfunded section 412(l) restoration liability 
increased by the current liability interest rate differential. The 
current liability interest rate differential at any point during the 
first ten years of the restoration payment period is the excess if any 
of the accumulated interest on the unfunded section 412(l) restoration 
liability computed at the current liability interest rate over the 
accumulated interest on the unfunded section 412(l) restoration 
liability computed at the least of the valuation rate, the current 
liability interest rate and current liability interest rate for

[[Page 197]]

the plan year in which the initial post restoration valuation date 
falls. The current liability interest rate differential is charged to 
the funding standard account at the end of the tenth plan year, but the 
Pension Benefit Guaranty Corporation may, as part of the restoration 
payment schedule order, or a modification to that order, direct that the 
charging of this amount must be spread over not more than 5 years, 
beginning with the eleventh plan year.
    (h) Election of the alternative minimum funding standard. A plan 
using the restoration method may not elect the alternative minimum 
funding standard under section 412(g).
    (i) Funding review by the Pension Benefit Guaranty Corporation. The 
Pension Benefit Guaranty Corporation must review the funding of any plan 
using the restoration method at least once in each plan year. As a 
result of a funding review, the Pension Benefit Guaranty Corporation may 
amend the restoration payment schedule as provided in paragraph (c)(3) 
of this section. As part of the funding review, the Executive Director 
of the PBGC must certify to the Corporation's Board of Directors, and to 
the Internal Revenue Service, that the Corporation has reviewed the 
funding of the plan, the financial condition of the plan sponsor and its 
controlled group members, the payments required under the restoration 
payment schedule (taking into account the availability of deferrals 
authorized under paragraph (c)(4) of this section), and any other factor 
that the Corporation deems relevant, and, based on that review, 
determines that it is in the best interests of participants and 
beneficiaries of the plan and the pension insurance program that the 
restored plan not be reterminated.

[T.D. 8317, 55 FR 42707, Oct. 23, 1990; 56 FR 19038, Apr. 25, 1991]



Sec.  1.412(c)(2)-1  Valuation of plan assets; reasonable
actuarial valuation methods.

    (a) Introduction--(1) In general. This section prescribes rules for 
valuing plan assets under an actuarial valuation method which satisfies 
the requirements of section 412(c)(2)(A). An actuarial valuation method 
is a funding method within the meaning of section 412(c)(3) and the 
regulations thereunder. Therefore, certain changes affecting the 
actuarial valuation method are identified in this section as changes in 
a plan's funding method.
    (2) Exception for certain bonds, etc. The rules of this section do 
not apply to bonds or other evidences of indebtedness for which the 
election described in section 412(c)(2)(B) has been made, nor are such 
assets counted in applying paragraphs (b) or (c) of this section. Also, 
an election under section 412(c)(2)(B) is not a change in funding method 
within the meaning of section 412(c)(5).
    (3) Money purchase pension plan. A money purchase pension plan must 
value assets for the purpose of satisfying the requirements of section 
412(c)(2)(A) solely on the basis of their fair market value (under 
paragraph (c) of this section).
    (4) Defined benefit plans. (i) To satisfy the requirements of 
section 412(c)(2)(A), an actuarial method valuing assets of a defined 
benefit plan must meet the requirements of paragraph (b) of this 
section.
    (ii) In general, the purpose of paragraph (b) of this section is to 
permit use of reasonble actuarial valuation methods designed to mitigate 
short-run changes in the fair market value of plan assets. The funding 
of plan benefits and the charges and credits to the funding standard 
account required by section 412 are generally based upon the assumption 
that the defined benefit plan will be continued by the employer. Thus, 
short-run changes in the value of plan assets presumably will offset one 
another in the long term. Accordingly, in the determination of the 
amount required to be contributed under section 412 it is generally not 
necessary to recognize fully each change in fair market value of the 
assets in the period in which it occurs.
    (iii) The asset valuation rules contained in paragraph (b) produce a 
``smoothing'' effect. Thus, investment performance, including 
appreciation or depreciation in the market value of the assets occurring 
in each plan year, may be recognized gradually over several plan years. 
This ``smoothing'' is in addition to the ``smoothing'' effect which 
results, for example, from amortizing

[[Page 198]]

experience losses and gains over 15 or 20 years under section 412(b)(2 
(B)(iv) and (3)(B)(ii).
    (b) Asset valuation method requirements--(1) Consistent basis. (i) 
The actuarial asset valuation method must be applied on a consistent 
basis. Any change in meeting the requirements of this paragraph (b) is a 
change in funding method subject to section 412(c)(5).
    (ii) A method may satisfy the consistency requirement even though 
computations are based only on the period elapsed since the adoption of 
the method or on asset values occurring during that period.
    (2) Statement of plan's method. The method of determining the 
actuarial value (but not fair market value) of the assets must be 
specified in the plan's actuarial report (required under section 6059). 
The method must be described in sufficient detail so that another 
actuary employing the method described would arrive at a reasonably 
similar result. Whether a deviation from the stated actuarial valuation 
method is a change in funding method is to be determined in accordance 
with section 412(c)(5) and the regulations thereunder. A deviation to 
include a type of asset not previously held by the plan would not be a 
change in funding method.
    (3) Consistent valuation dates. The same day or days (such as the 
first or the last day of a plan year) must be used for all purposes to 
value the plan's assets for each plan year, or portion of plan year, for 
which a valuation is made. For purposes of this section, each such day 
is a valuation date. A change in the day or days used is a change in 
funding method.
    (4) Reflect fair market value. The valuation method must take into 
account fair market value by making use of the--
    (i) Fair market value (determined under paragraph (c) of this 
section), or
    (ii) Average value (determined under paragraph (b)(7) of this 
section) of the plan's assets as of the applicable asset valuation date. 
This is done either directly in the computation of their actuarial value 
or indirectly in the computation of upper or lower limits placed on that 
value.
    (5) Results above and below fair market or average value. A method 
will not satisfy the requirements of this paragraph (b) if it is 
designed to produce a result which will be consistently above or below 
the values described in paragraph (b)(4) (i) and (ii). However, a method 
designed to produce a result which consistently falls between fair 
market value and average value will satisfy this requirement. See 
Example 5 in paragraph (b)(9) of this section for an illustration of a 
method described in the preceding sentence.
    (6) Corridor limits. (i) Regardless of how the method reflects fair 
market value under paragraph (b)(4), the method must result in an 
actuarial value of the plan's assets which is not less than a minimum 
amount and not more than a maximum amount. The minimum amount is the 
lesser of 80 percent of the current fair market value of plan assets as 
of the applicable asset valuation date or 85 percent of the average 
value (as described in subparagraph (7)) of plan assets as of that date. 
The maximum amount is the greater of 120 percent of the current fair 
market value of plan assets as of the applicable asset valuation date or 
115 percent of the average value of plan assets as of that date.
    (ii) Under a plan's method, a preliminary computation of the 
expected actuarial value may fall outside the prescribed corridor. A 
method meets the requirements of paragraph (b)(6)(i) of this section is 
such a case only by adjusting the expected actuarial value to the 
nearest corridor limit applicable under the method. A plan may use an 
actuarial valuation method with a narrower corridor than the general 
corridor required under paragraph (b)(6)(i). The adjustment to the 
nearest corridor limit of such a method for purposes of this subdivision 
(ii) would be determined by the narrower corridor stated in the 
description of the plan's method.
    (7) Average value. the average value of plan assets is computed by--
    (i) Determining the fair market value of plan assets at least 
annually,
    (ii) Adding the current fair market value of the assets (as of the 
applicable valuation date) and their adjusted values (as described in 
paragraph (b)(8) of this section) for a stated period not to

[[Page 199]]

exceed the five most recent plan years (including the current year), and
    (iii) Dividing this sum by the number of values (including the 
current fair market value) considered in computing the sum described in 
subdivision (ii).
    (8) Adjusted value. (i) the adjusted value of plan assets for a 
prior valuation date is their fair market value on that date with 
certain positive and negative adjustments. These adjustments reflect 
changes that occur between the prior asset valuation date and the 
current valuation date. However, no adjustment is made for increases or 
decreases in the total value of plan assets that result from the 
purchase, sale, or exchange of plan assets or from the receipt of 
payment on a debt obligation held by the plan.
    (ii) In determining the adjusted value of plan assets for a prior 
valuation date, there is added to the fair market value of the plan 
assets of that date the sum of all additions to the plan assets since 
that date, excluding appreciation in the fair market value of the 
assets. The additions would include, for example, any contribution to 
the plan; any interest or dividend paid to the plan; and any asset not 
taken into account in a prior valuation of assets, but taken into 
account for the current year, in computing the fair market value of plan 
assets under paragraph (c) of this section.
    (iii) In determining the adjusted value of plan assets for a prior 
valuation date, there is subtracted from the fair market value of the 
plan assets on that date the sum of all reductions in plan assets since 
that date, excluding depreciation in the fair market value of the 
assets. The reductions would include, for example, any benefit paid from 
plan assets; any expense paid from plan assets; and any asset taken into 
account in a prior valuation of assets but not taken into account for 
the current year, in computing the fair market value of plan assets 
under paragraph (c) of this section.
    (9) Examples. This paragraph (b) may be illustrated by the following 
examples. In each example, assume that the pension plan uses a 
consistent actuarial method of valuing its assets within the meaning of 
paragraph (b)(1), (2), and (3) of this section.

    Example 1. Plan A considers the value of its assets to be initial 
cost, increased by an assumed rate of growth of X percent annually. 
Under the circumstances, the X-percent factor used by the plan is a 
reasonable assumption. Thus, this method is not designed to produce 
results consistently above or below fair market value as prohibited by 
paragraph (b)(5) of this section. Also, the method requires that the 
actuarial value be adjusted as required to fall within the corridor 
under paragraph (b) (6) and (7) of this section. Therefore, the method 
reflects fair market value as required by paragraph (b)(4) of this 
section.
    Example 2. Plan B computes the actuarial value of its assets as 
follows: It determines the fair market value of the plan assets. Then 
the fair market value is adjusted to the extent necessary to make the 
actuarial value fall within a ``5 percent'' corridor. This corridor is 
plus or minus 5 percent of the following amount: the fair market value 
of the assets at the beginning of the valuation period plus an assumed 
annual growth of 4 percent with adjustments for contributions and 
benefit payments during the period. This method reflects fair market 
value in a manner prescribed by paragraph (b)(4) of this section. If the 
4 percent factor used by the plan is a reasonable assumption, this 
method is not designed to produce results consistently above or below 
fair market value, and thus it satisfies paragraph (b)(5). However, this 
method is unacceptable because in some instances it may result in an 
actuarial value outside the corridor described in paragraph (b)(6) of 
this section. This method would be permitted if a second corridor were 
imposed which would adjust the value of the total plan assets to the 
corridor limits as required by paragraph (b)(6).
    Example 3. Plan C values its assets by multiplying their fair market 
value by an index number. The use of the index results in the 
hypothetical average value that plan assets present on the valuation 
date would have had if they had been held during the current and four 
preceding years, and had appreciated or depreciated at the actual yield 
rates including appreciation and depreciation experienced by the plan 
during that period. However, the method requires an adjustment to the 
extent necessary to bring the resulting actuarial value of the assets 
inside the corridor described in the statement of the plan's actuarial 
valuation method. In this case, the stated corridor is 90 to 110 percent 
of fair market value, a corridor narrower than that described in 
paragraph (b)(7) of this section. This method is permitted.
    Example 4. Plan D values its assets by multiplying their fair market 
value by 95 percent. Although the method reflects fair market value and 
the results of this method will always be within the required corridor, 
it is

[[Page 200]]

not acceptable because it will consistently result in a value less than 
fair market value.
    Example 5. Plan E values its assets by using a five-year average 
method with appropriate adjustments for the period. Under the particular 
method used by Plan E, assets are not valued below 80 percent of fair 
market value or above 100 percent of fair market value. If the average 
produces a value that exceeds 100 percent of fair market value, the 
excess between 100 and 120 percent is recorded in a ``value reserve 
account.'' In years after one in which the average exceeds 100 percent 
of fair market value, amounts are subtracted from this account and 
added, to the extent necessary, to raise the value produced by the 
average for that year to 100 percent of fair market value. This method 
is permitted because it reflects fair market value under paragraph 
(b)(4) of this section by appropriately computing an average value, it 
satisfies paragraph (b)(5) by producing a result that falls consistently 
between fair market value and average value, and it properly reflects 
the corridor described in paragraph (b)(7).
    Example 6. All assets of Plan F are invested in a trust fund and the 
plan year is the calendar year. The actuarial value is determined by 
averaging fair market value over 4 years. An actuarial valuation is 
performed as of December 31, 1988.
    (i) The average value as of December 31, 1988, is computed as 
follows:

----------------------------------------------------------------------------------------------------------------
                                             1986        1986        1987        1987        1988        1988
----------------------------------------------------------------------------------------------------------------
Fair market value: Jan. 1...............  ..........    $150,000  ..........    $196,500  ..........    $238,000
  Contributions.........................     $65,000  ..........     $62,000  ..........     $66,000
  Benefit payments......................    (22,000)  ..........    (24,000)  ..........    (25,000)
  Expenses..............................     (6,500)  ..........     (7,000)  ..........     (7,500)
  Interest and dividends................       8,000      44,500       7,500      38,500       7,000     240,500
Net realized gains (losses).............  ..........     (2,000)  ..........       6,000  ..........     (8,000)
Balancing item \1\......................  ..........       4,000  ..........     (3,000)  ..........    (42,000)
                                         -----------------------------------------------------------------------
Fair market value: Dec. 31..............  ..........     196,500  ..........     238,000  ..........    228,000
----------------------------------------------------------------------------------------------------------------
\1\ This equals the increase (decrease) in unrealized appreciation.


----------------------------------------------------------------------------------------------------------------
                 Adjusted values                       1985            1986            1987            1988
----------------------------------------------------------------------------------------------------------------
Fair market value: Dec. 31......................        $150,000        $196,500        $238,000        $228,000
Net adjustments:
  1988..........................................          40,500          40,500          40,500
  1987..........................................          38,500          38,500
  1986..........................................          44,500
                                                 ---------------------------------------------------------------
   Total........................................         273,500         275,500         278,500         228,000
                                                 ===============================================================
Average value: 1988 = $273,500 + $275,500 + $278,500 + $228,000 / 4 = $263,875
----------------------------------------------------------------------------------------------------------------

    (ii) Plan F properly determines an average value under paragraph 
(b)(7) of this section for use as an actuarial value. Therefore, the 
valuation method meets the requirements of this section.
    Example 7. Plan G computes the actuarial value of the plan assets as 
follows: The current fair market value of the plan assets is averaged 
with the most recent prior adjusted actuarial value. This average value 
is adjusted up or down toward the current fair market value by 20 
percent of the difference between it and the current fair market value 
of the assets. This value is further adjusted to the extent necessary to 
fall within the corridor described in the statement of the plan's 
actuarial valuation method. The lower end of the corridor is the lesser 
of 80 percent of the fair market value of the plan assets or 85 percent 
of the average value of the plan assets. The higher end of the corridor 
is the greater of 120 percent of the fair market value of plan assets or 
115 percent of the average value of plan assets. Average value for 
purposes of the corridor is determined under paragraph (b)(7) of this 
section. Assuming the numerical data of Example 6, the application of 
the corridor is as follows. The actuarial asset value as of December 31, 
1988, must not be less than $182,400 (80 percent of current fair market 
value, $228,000) nor greater than $303,456 (115 percent of average 
value, 263,875). This method is permitted because it reflects fair 
market value in a manner permitted by paragraph (b)(4) of this section, 
it produces an actuarial value which is neither consistently above nor 
consistently below fair market or average value to satisfy paragraph 
(b)(5), and it is appropriately limited by the corridor described in 
paragraph (b)(6).

    (c) Fair market value of assets--(1) General rules. Except as 
otherwise provided in this paragraph (c), the fair market value of a 
plan's assets for purposes of this section is the price at which the 
property would change hands between

[[Page 201]]

a willing buyer and a willing seller, neither being under any compulsion 
to buy or sell and both having reasonable knowledge of relevant facts.
    (d) Methods for taking into account the fair market value of certain 
agreements. [Reserved]
    (e) Effective date and transition rules--(1) Effective date. This 
section applies to plan years to which section 412, or section 302 of 
the Employee Retirement Income Security Act of 1974, applies.
    (2) Special rule for certain plan years. For plan years beginning 
prior to November 12, 1980, the amounts required to be determined under 
section 412 may be computed on the basis of any reasonable actuarial 
method of asset valuation which takes into account the fair market value 
of the plan's assets, even if the method does not meet all of the 
requirements of paragraphs (a) through (c) of this section.
    (3) Plan years beginning on or after November 12, 1980. Paragraphs 
(a) through (c) of this section apply beginning with the first valuation 
of plan assets made for a plan year to which section 412 applies that 
begins on or after November 12, 1980. The statement of the plan's 
actuarial asset valuation method required by paragraph (b)(2) of this 
section must be included with the plan's actuarial report for that year, 
in addition to any subsequent reports.
    (4) Effect of change of asset valuation method. A plan which is 
required to change its asset valuation method to comply with paragraphs 
(a) through (c) of this section must make the change no later than the 
time when the plan is first required to comply with this section under 
paragraph (e)(3). A method of adjustment must be used to take account of 
any difference in the actuarial value of the plan's assets based on the 
old and new valuation methods. The plan may use either--
    (i) A method of adjustment described in paragraph (e)(5) or (e)(6) 
of this section without prior approval by the Commissioner, or
    (ii) Any other method of adjustment if the Commissioner gives prior 
approval under section 412(c)(5).
    (5) Retroactive recomputation method. (i) Under this method of 
adjustment, the plan recomputes the balance of the funding standard 
account as of the beginning of the first plan year for which it uses its 
new asset valuation method to comply with paragraphs (a) through (c) of 
this section. This new balance is recomputed by retroactively applying 
the plan's new method as of the first day of the first plan year to 
which section 412 applies.
    (ii) Beginning with the first plan year for which it uses its new 
method, the plan computes the normal cost and amortization charges and 
credits to the funding standard account based on the retroactive 
application of its new method as of the first day of the first plan year 
to which section 412 applies.
    (iii) If the recomputed aggregate charges exceed the recomputed 
aggregate credits to the funding standard account as of the end of the 
first plan year for which the plan uses its new method, an additional 
contribution to the plan may be necessary to avoid an accumulated 
funding deficiency in that year. The use of the retroactive 
recomputation method may also result in an accumulated funding 
deficiency for years prior to that first year. In such cases, the rules 
of section 412(c)(10), relating to the time when certain contributions 
are deemed to have been made, apply.
    (6) Prospective gain or loss adjustment method. (i) Under this 
method of adjustment the plan values its assets under its new method no 
later than the valuation date for the first plan year beginning after 
[the publication date of this section]
    (ii) Regardless of the type of funding method used by a plan, the 
difference in the value of the assets under the old and the new asset 
valuation methods may be treated as arising from an experience loss or 
gain; or alternatively it may be treated as arising from a change in 
actuarial assumptions.
    (iii) The treatment of this difference as an experience gain or loss 
or as a change in actuarial assumptions must be consistent with the 
treatment of such gains, losses, or changes under the funding method 
used by the plan. Thus, if a plan uses a spread gain type funding method 
other than the aggregate cost method, the difference in the value of 
assets under the old and the new asset valuation methods may be either 
amortized or spread over future

[[Page 202]]

periods as a part of normal cost. Examples of this type of funding 
method are the frozen initial liability cost method and the attained age 
normal cost method. With an aggregate method, the difference in the 
value of assets under the old and the new asset valuation methods must 
be spread over future periods as a part of normal cost.

(Secs. 412(c)(2) and 7805 of the Internal Revenue Code of 1954 (88 Stat. 
916 and 68A Stat. 917; 26 U.S.C. 412(c)(2) and 7805))

[T.D. 7734, 45 FR 74718, Nov. 12, 1980]



Sec.  1.412(c)(3)-1  Reasonable funding methods.

    (a) Introduction--(1) In general. This section prescribes rules for 
determining whether or not, in the case of an ongoing plan, a funding 
method is reasonable for purposes of section 412(c)(3). A method is 
unreasonable only if it is found to be inconsistent with a rule 
prescribed in this section. The term ``reasonable funding method'' under 
this section has the same meaning as the term ``acceptable actuarial 
cost method'' under section 3(31) of the Employee Retirement Income 
Security Act of 1974 (ERISA).
    (2) Computations included in method. See Sec.  1.412(c)(1)-1(b) for 
a discussion of matters that are, and are not, included in the funding 
method of a plan.
    (3) Plans using shortfall. The shortfall method is a method of 
determining charges to the funding standard account by adapting the 
underlying funding method of certain collectively bargained plans in the 
manner described in Sec.  1.412(c)(1)-2. As such, the shortfall method 
is a funding method. The underlying method of a plan that uses the 
shortfall method must be a reasonable funding method under this section. 
The rules contained in this section, relating to cost under a reasonable 
funding method, apply in the shortfall method to the annual computation 
charge under Sec.  1.412(c)(1)-2(d).
    (4) Scope of funding method. Except for the shortfall method, a 
reasonable funding method is applied to the computation of--
    (i) The normal cost of a plan for a plan year; and, if applicable,
    (ii) The bases established under section 412(b)(2)(B), (C), and (D), 
and (3) (B) (``amortizable bases'').
    (b) General rules for reasonable funding methods--(1) Basic funding 
formula. At any time, except as provided by the Commissioner, the 
present value of future benefits under a reasonable funding method must 
equal the sum of the following amounts:
    (i) The present value of normal costs (taking into account future 
mandatory employee contributions, within the meaning of section 
411(c)(2)(C), in the case of a contributory plan) over the future 
working lifetime of participants;
    (ii) The sum of the unamortized portions of amortizable bases, if 
any, treating credit bases under section 412(b)(3)(B) as negative 
numbers; and
    (iii) The plan assets, decreased by a credit balance (and increased 
by a debit balance) in the funding standard account under section 
412(b).
    (2) Normal cost. Normal cost under a reasonable funding method must 
be expressed as--
    (i) A level dollar amount, or a level percentage of pay, that is 
computed from year to year on either an individual basis or an aggregate 
basis; or
    (ii) An amount equal to the present value of benefits accruing under 
the method for a particular plan year.
    (3) Application to shortfall. Paragraph (b)(2) will not fail to be 
satisfied merely because an amount described in (i) or (ii) is expressed 
as permitted under the shortfall method.
    (c) Additional requirements--(1) Inclusion of all liabilities. Under 
a reasonable funding method, all liabilities of the plan for benefits, 
whether vested or not, must be taken into account.
    (2) Production of experience gains and losses. If each actuarial 
assumption is exactly realized under a reasonable funding method, no 
experience gains or losses are produced.
    (3) Plan population--(i) In general. Under a reasonable funding 
method, the plan population must include three classes of individuals: 
participants currently employed in the service of the employer; former 
participants who either terminated service with the employer, or 
retired, under the plan; and all other individuals currently entitled to 
benefits under the plan. See Sec.  1.412(c)(3)-1(d)(2) for rules 
concerning anticipated future participants.

[[Page 203]]

    (ii) Limited exclusion for certain recent participants. Under a 
reasonable funding method, certain individuals may be excluded from the 
first class of individuals described in paragraph (c)(3)(i) of this 
section unless otherwise provided by the Commissioner. The excludable 
individuals are participants who would be excluded from participation by 
the minimum age or service requirement of section 410 but who, under the 
terms of the plan, participate immediately upon entering the service of 
the employer.
    (iii) Special exclusion for ``rule of parity'' cases. Under a 
reasonable funding method, certain individuals may be excluded from the 
second class of individuals described in paragraph (c)(3)(i) of this 
section. The excludable individuals are those former participants who 
have terminated service with the employer without vested benefits and 
whose service might be taken into account in future years because the 
``rule of parity'' of section 411(a)(6)(D) does not permit that service 
to be disregarded. However if the plan's experience as to separated 
employees' returning to service has been such that the exclusion 
described in this subparagraph would be unreasonable, the exclusion 
would no longer apply.
    (4) Use of salary scale--(i) General acceptability. The use of a 
salary scale assumption is not inappropriate merely because of the 
funding method with which it is used. Therefore, in determining whether 
actuarial assumptions are reasonable, a salary scale will not be 
considered to be prohibited merely because a particular funding method 
is being used.
    (ii) Projection to appropriate salary. Under a reasonable funding 
method, salary scales reflected in projected benefits must be the 
expected salary on which benefits would be based under the plan at the 
age when the receipt of benefits is expected to begin.
    (5) Treatment of allocable items. Under a reasonable funding method 
that allocates assets to individual participants to determine costs, the 
allocation of assets among participants must be reasonable. An initial 
allocation of assets among participants will be considered reasonable 
only if it is in proportion to related liabilities. However, the 
Commissioner may determine, based on the facts and circumstances, that 
it is unreasonable to continue to allocate assets on this basis beyond 
the initial year. Under a reasonable funding method that allocates 
liabilities among different elements of past and future service, the 
allocation of liabilities must be reasonable.
    (d) Prohibited considerations under a reasonable funding method--(1) 
Anticipated benefit changes--(i) In general. Except as otherwise 
provided by the Commissioner, a reasonable funding method does not 
anticipate changes in plan benefits that become effective, whether or 
not retroactively, in a future plan year or that become effective after 
the first day of, but during, a current plan year.
    (ii) Exception for collectively bargained plans. A collectively 
bargained plan described in section 413(a) may on a consistent basis 
anticipate benefit increases scheduled to take effect during the term of 
the collective-bargaining agreement applicable to the plan. A plan's 
treatment of benefit increases scheduled in a collective bargaining 
agreement is part of its funding method. Accordingly, a change in a 
plan's treatment of such benefit increases (for example, ignoring 
anticipated increases after taking them into account) is a change of 
funding method.
    (2) Anticipated future participants. A reasonable funding method 
must not anticipate the affiliation with the plan of future participants 
not employed in the service of the employer on the plan valuation date. 
However, a reasonable funding method may anticipate the affiliation with 
the plan of current employees who have not satisfied the participation 
requirements of the plan.
    (e) Special rules for certain funding methods--(1) Applicability of 
special rules. Paragraph (e) of this section applies to a funding method 
that determines normal cost under paragraph (b)(2)(ii) of this section.
    (2) Use of salary scale. For rules relating to use of a salary scale 
assumption, see paragraph (c)(4) of this section.
    (3) Allocation of liabilities. In determining a plan's normal cost 
and accrued liability for a particular plan year, the projected benefits 
of the plan must be allocated between past years and future years. 
Except in the case of

[[Page 204]]

a career average pay plan, this allocation must be in proportion to the 
applicable rates of benefit accrual under the plan. Thus, the allocation 
to past years is effected by multiplying the projected benefit by a 
fraction. The numerator of the fraction is the participant's credited 
years of service. The denominator is the participant's total credited 
years of service at the anticipated benefit commencement date. 
Adjustments are made to account for changes in the rate of benefit 
accrual. An allocation based on compensation is not permitted. In the 
case of a career average pay plan, an allocation between past and future 
service benefits must be reasonable.
    (f) Treatment of ancillary benefit costs--(1) General rule. Under a 
reasonable funding method, except as otherwise provided by this 
paragraph (f), ancillary benefit costs must be computed by using the 
same method used to compute retirement benefit costs under a plan.
    (2) Ancillary benefit defined. For purposes of this paragraph an 
ancillary benefit is a benefit that is paid as a result of a specified 
event which--
    (i) Occurs not later than a participant's separation from service, 
and
    (ii) Was detrimental to the participant's health.


Thus, for example, benefits payable if a participant dies or becomes 
disabled prior to separation from service are ancillary benefits because 
the events giving rise to the benefits are detrimental to the 
participant's health. However, an early retirement benefit, a social 
security supplement (as defined in Sec.  1.411(a)-7(c)(4)(ii)), and the 
vesting of plan benefits (even if more rapid than is required by section 
411) are not ancillary benefits because those benefits do not result 
from an event which is detrimental to the participant's health.
    (3) Exception for certain insurance contracts. Under a reasonable 
funding method, regardless of the method used to compute retirement 
benefit costs, the cost of an ancillary benefit may equal the premium 
paid for that benefit under an insurance contract if--
    (i) The ancillary benefit is provided under the contract, and
    (ii) The benefit is guaranteed under the contract.
    (4) Exception for 1-year term funding and other approved methods. 
[Reserved]
    (5) Section 401(h) benefits. Section 412 does not apply to benefits 
that are described in section 401(h) and for which a separate account is 
maintained.
    (g) Examples. The principles of this section are illustrated by the 
following examples:

    Example 1. Assume that a plan, using funding method A, is in its 
first year. No contributions have been made to the plan, other than a 
nominal contribution to establish a corpus for the plan's trust. There 
is no past service liability, and the normal cost is a constant 
percentage of an annually determined amount. The constant percentage is 
99 percent, and the annually determined amount is the excess of the 
present value of future benefits over plan assets. The present value of 
future benefits is $10,000. Under paragraph (b)(1) of this section, the 
present value of future benefits must equal the present value of future 
normal costs plus plan assets. (No amortizable bases exist, nor are 
there credit or debit balances.) Under method A, the present value of 
future normal costs would equal the sum of a series of annually 
decreasing amounts. Because of the constant percentage factor, the 
present value of future normal costs over the years can never equal 
$10,000, the present value of future benefits. In effect, then, assets 
under method A can never equal the present value of future benefits if 
all assumptions are exactly realized. Therefore, method A is not a 
reasonable funding method.
    Example 2. Assume that a plan, using funding method B, determines 
normal cost by computing the present value of benefits expected to be 
accrued under the plan by the end of 10 years after the valuation date 
and adding to this the present value of benefits expected to be paid 
within these 10 years. Plan assets are subtracted from the sum of the 
two present value amounts. The difference then is divided by the present 
value of salaries projected over the 10 years. Under paragraph (c)(1) of 
this section, all liabilities of a plan must be taken into account. 
Because method B takes into account only benefits paid or accrued by the 
end of 10 years, it is not a reasonable funding method.
    Example 3. Assume that a plan, using funding method C, determines 
normal cost as a constant percentage of compensation. (This percentage 
is determined as follows: The excess of projected benefits over accrued 
benefits is computed. Then the present value of this excess is divided 
by the present value of future salaries.) However, the accrued liability 
is computed each year as the present value of accrued benefits. (This 
computation

[[Page 205]]

does not reflect normal cost as a constant percentage of compensation. 
Thus, normal cost under the plan does not link accrued liabilities under 
the plan for consecutive years as would be the case, for example, under 
a unit credit cost method.) In determining gains and losses, method C 
compares the actual unfunded liability (the accrued liability less 
assets) with the expected unfunded liability (the sum of the actual 
unfunded liability in the previous year and the normal cost for the 
previous year less the contribution made for the previous year, all 
adjusted for interest). Under paragraph (c)(2) of this section, if 
actuarial assumptions are exactly realized, experience gains and losses 
must not be produced. Under method C, the use of a constant percentage 
in computing normal cost (and the expected unfunded liability) coupled 
with the manner of computing the accrued liability (and the actual 
unfunded liability) generally produces gains in the earlier years and 
losses in the later years if each actuarial assumption is exactly 
realized. Therefore, method C is not a reasonable funding method.
    Example 4. Assume that a plan, using funding method D, bases 
benefits on final average pay. Under method D, the past service 
liability on any date equals the present value of the accrued benefit on 
that date based on compensation as of that date. The normal cost for any 
year equals the present value of a certain amount. That amount is the 
excess of the projected accrued benefit as of the end of the year over 
the actual accrued benefit at the beginning of the year. Accrued 
benefits, projected as of the end of a year, reflect a 1-year salary 
projection. Under paragraph (c)(4) of this section, salary scales 
reflected in projected benefits must project salaries to the salary on 
which benefits would be based under the plan at the age when the receipt 
of benefits under the plan is expected to begin. Because the plan is not 
a career average pay plan and compensation is projected only 1 year, 
method D is not a reasonable funding method. (Under paragraph (c)(4) of 
this section, the use of a salary scale assumption could be required 
with a unit credit method if, without the use of a salary scale, 
assumptions in the aggregate are unreasonable.)
    Example 5. Assume that a plan, using method E, a unit credit funding 
method, calculates a participant's accrued benefit according to the 
following formula: 2 percent of final salary for the first 10 years of 
service and 1 percent of final salary for the years of service in excess 
of 10. Under the plan, no employee may be credited with more than 25 
years of service. The actuarial assumptions for the valuation include a 
salary scale of 5 percent per year. For a participant at age 40 with 15 
years of service, a current salary of $20,000 and a normal retirement 
age of 65, the accrued liability for the retirement benefit is the 
present value of an annuity of $16,932 per year, commencing at age 65. 
The $16,932 is calculated as follows:
[GRAPHIC] [TIFF OMITTED] TC14NO91.161


(3.3864 is 1.05 raised to the 25th power; the 25th power reflects the 
difference between normal retirement age and attained age (65-40).)
    Salary under this method is projected to the age when the receipt of 
benefits is expected to begin. Therefore, method E meets the requirement 
of paragraph (c)(4) of this section. Also, the allocation of benefits 
under method E between past and future years of service meets the 
requirements of paragraph (e)(3) of this section.
    Example 6. Assume that a plan that has two participants and that 
previously used the unit credit cost method wishes to change the funding 
method at the beginning of the plan year to funding method F, a 
modification of the aggregate cost method. The modification involves 
determining normal cost for each of the two participants under the plan. 
Therefore, it requires an allocation of assets to each participant for 
valuation purposes. The actuary proposes to allocate the assets on hand 
at the beginning of the plan year of the change in funding method in 
proportion to the accrued liabilities calculated under the unit credit 
cost method. The relevant results of the calculations are shown below:

------------------------------------------------------------------------
                                                    Employees
                                                ----------------  Totals
                                                    M       N
------------------------------------------------------------------------
Accrued Liabilities (unit credit method):
  Dollar amount................................   15,670    906   16,576
  Per cent of total............................    94.53   5.47   100.00
Assets:
  Dollar amount................................    7,835    453    8,288
  per cent of total............................    94.53   5.47   100.00
------------------------------------------------------------------------

    The proposed allocation in proportion to the accrued liabilities 
under the unit credit cost method satisfies the requirements of 
paragraph (c)(5) of this section at the beginning of the first plan year 
for which the new method is used.
    Example 7. The facts are the same as in Example 6. However, the 
actuary proposes to

[[Page 206]]

allocate all the assets to employee M, the older employee. Method F, 
under these facts, is not an acceptable funding method because the 
allocation is not in proportion to related liabilities as required under 
paragraph (c)(5) of this section.

[T.D. 7746, 45 FR 86430, Dec. 31, 1980]



Sec.  1.412(c)(3)-2  Effective dates and transitional rules
relating to reasonable funding methods.

    (a) Introduction. This section prescribes effective dates for rules 
relating to reasonable funding methods, under section 412(c)(3) and 
Sec.  1.412(c)(3)-1. Also, this section sets forth rules concerning 
adjustments to a plan's funding standard account that are necessitated 
by a change in funding method, and a provision setting forth procedural 
requirements for use of an optional phase-in of required changes.
    (b) Effective date--(1) General rule. Except as otherwise provided 
by subparagraph (2) of this paragraph, Sec.  1.412(c)(3)-1 applies to 
any valuation of a plan's liabilities (within the meaning of section 
412(c)(9)) as of a date after April 30, 1981.
    (2) Exception. If a collective bargaining agreement which determines 
contributions to a plan is in effect on April 30, 1981, then Sec.  
1.412(c)(3)-1 applies to any valuation of that plan's liabilities as of 
a date after the earlier of the date on which the last such collective 
bargaining agreement expires or April 30, 1984.
    (3) Transitional rule. The reasonableness of a funding method used 
in making a valuation of a plan's liability as of a date before the 
effective date determined under subparagraph (1) or (2) of this 
paragraph is determined on the basis of such published guidance as was 
available on the date as of which the valuation was made.
    (c) Change of funding method without approval--(1) In general. A 
plan that is required to change its funding method to comply with Sec.  
1.412(c)(3)-1 is not required to submit the change of funding method for 
approval as otherwise required by section 412(c)(5). However, this 
change must be described on Form 5500, Schedule B for the plan year with 
respect to which the change is first effective.
    (2) Amortization base. An amortization base must be established in 
the plan year of the change in method equal to the change in the 
unfunded liability due to the change (where both unfunded liabilities 
are based on the same actuarial assumptions). Such a base must be 
amortized over 30 years in determining the charges or credits to the 
funding standard account, unless the Commissioner upon application 
permits amortization over a shorter period.
    (d) Phase-in of additional funding required by new method--(1) In 
general. A plan that is required to change its funding method to comply 
with Sec.  1.412(c)(3)-1 may elect to charge and credit the funding 
standard account as provided in this paragraph. An election under this 
paragraph shall be irrevocable.
    (2) Credit in year of change. In the plan year of the change in 
method the funding standard account may be credited with an amount not 
in excess of 0.8 multiplied by the excess (if any) of--
    (i) The normal cost under the new method plus the amortization 
charge (or minus the amortization credit) computed as described in Sec.  
1.412(c)(3)-2(c)(2), over
    (ii) The normal cost under the prior method, for the plan year of 
the change in method.
    (3) Credits in the next three years. In the three years following 
the year of the change the funding standard account may be credited with 
an amount not in excess of 0.6, 0.4, and 0.2 respectively in the first, 
second, and third years, multiplied by either of the following amounts, 
computed as of the last day of the year of credit--
    (i) The excess described in Sec.  1.412(c)(3)-2(d)(2) multiplied by 
a fraction (not greater than 1), the numerator of which is the number of 
participants in the year of the credit and the denominator of which is 
the number of participants in the year of the change, or, at the option 
of the plan,
    (ii) The excess (if any) in the year of credit of--
    (A) The net charge to the funding standard account based on the new 
method, over
    (B) The net charge to the funding standing account based on the 
prior method.

[[Page 207]]

    (4) Computational rules. For purposes of the calculation described 
in Sec.  1.412(c)(3)-2(d)(3)(ii), the net charge is the excess of 
charges under section 412(b)(2) (A) and (B) over the credits under 
section 412(b)(3)(B) (including the charge or credit described in Sec.  
1.412(c)(3)-2(c)) which would be required using the actuarial 
assumptions and plan benefit structure in effect on the last day of the 
plan year of change.
    (5) Fifteen-year amortization of credits. The funding standard 
account shall be charged with 15-year amortization of each credit 
described in Sec.  1.412(c)(3)-2(d) (2) and (3) beginning in the year 
following each such credit.
    (6) Manner of election. An election under this paragraph shall be 
made by the claiming of the credits described in Sec.  1.412(c)(3)-2(d) 
(2) and (3) on Schedule B to Form 5500 and by filing such other 
information as may be required by the Commissioner.
    (e) Effect on shortfall method. The charges and credits described in 
this section apply in the shortfall method to the annual computation 
charge described in Sec.  1.412(c)(1)-2(d). The amounts described in 
Sec.  1.412(c)(3)-2(d) shall be determined before the application of the 
shortfall method.

(Sec. 3(31) of the Employee Retirement Income Security Act of 1974 (88 
Stat. 837; 29 U.S.C. 1002) and sec. 7805 of the Internal Revenue Code of 
1954 (68A Stat. 917; 26 U.S.C. 7805))

[T.D. 7746, 45 FR 86432, Dec. 31, 1980]



Sec.  1.412(i)-1  Certain insurance contract plans.

    (a) In general. Under section 412(h)(2) of the Internal Revenue Code 
of 1954, as added by section 1013(a) of the Employee Retirement Income 
Security Act of 1974 (88 Stat. 914) (hereinafter referred to as ``the 
Act''), an insurance contract plan described in section 412(i) for a 
plan year is not subject to the minimum funding requirements of section 
412 for that plan year. Consequently, if an individual or group 
insurance contract plan satisfies all of the requirements of paragraph 
(b)(2) or (c)(2) of this section, whichever are applicable, for the plan 
year, the plan is not subject to the requirements of section 412 for 
that plan year. The effective date for section 412 of the Code is 
determined under section 1017 of the Act. In general, in the case of a 
plan which was not in existence on January 1, 1974, this section applies 
for plan years beginning after September 2, 1974, and in the case of a 
plan in existence on January 1, 1974, to plan years beginning after 
December 31, 1975.
    (b) Individual insurance contract plans. (1) An individual insurance 
contract plan is described in section 412(i) during a plan year if the 
plan satisfies the requirements of paragraph (b)(2) of this section for 
the plan year.
    (2) The requirements of this paragraph are:
    (i) The plan must be funded exclusively by the purchase from an 
insurance company or companies (licensed under the law of a State or the 
District of Columbia to do business with the plan) of individual annuity 
or individual insurance contracts, or a combination thereof. The 
purchase may be made either directly by the employer or through the use 
of a custodial account or trust. A plan shall not be considered to be 
funded otherwise than exclusively by the purchase of individual annuity 
or individual insurance contracts merely because the employer makes a 
payment necessary to comply with the provisions of section 411(c)(2) 
(relating to accrued benefit from employee contributions).
    (ii) The individual annuity or individual insurance contracts issued 
under the plan must provide for level annual, or more frequent, premium 
payments to be paid under the plan for the period commencing with the 
date each individual participating in the plan became a participant and 
ending not later than the normal retirement age for that individual or, 
if earlier, the date the individual ceases his participation in the 
plan. Premium payments may be considered to be level even though items 
such as experience gains and dividends are applied against premiums. In 
the case of an increase in benefits, the contracts must provide for 
level annual payments with respect to such increase to be paid for the 
period commencing at the time the increase becomes effective. If payment 
commences on the first payment date under the contract occurring after 
the

[[Page 208]]

date an individual becomes a participant or after the effective date of 
an increase in benefits, the requirements of this subdivision will be 
satisfied even though payment does not commence on the date on which the 
individual's participation commenced or on the effective date of the 
benefit increase, whichever is applicable. If an individual accrues 
benefits after his normal retirement age, the requirements of this 
subdivision are satisfied if payment is made at the time such benefits 
accrue. If the provisions required by this subdivision are set forth in 
a separate agreement with the issuer of the individual contracts, they 
need not be included in the individual contracts.
    (iii) The benefits provided by the plan for each individual 
participant must be equal to the benefits provided under his individual 
contracts at his normal retirement age under the plan provisions.
    (iv) The benefits provided by the plan for each individual 
participant must be guaranteed by the life insurance company, described 
in paragraph (b)(2)(i) of this section, issuing the individual contracts 
to the extent premiums have been paid.
    (v) Except as provided in the following sentence, all premiums 
payable for the plan year, and for all prior plan years, under the 
insurance or annuity contracts must have been paid before lapse. If the 
lapse has occurred during the plan year, the requirements of this 
subdivision will be considered to have been met if reinstatement of the 
insurance policy, under which the individual insurance contracts are 
issued, occurs during the year of the lapse and before distribution is 
made or benefits commence to any participant whose benefits are reduced 
because of the lapse.
    (vi) No rights under the individual contracts may have been subject 
to a security interest at any time during the plan year. This 
subdivision shall not apply to contracts which have been distributed to 
participants if the security interest is created after the date of 
distribution.
    (vii) No policy loans, including loans to individual participants, 
on any of the individual contracts may be outstanding at any time during 
the plan year. This subdivision shall not apply to contracts which have 
been distributed to participants if the loan is made after the date of 
distribution. An application of funds by the issuer to pay premiums due 
under the contracts shall be deemed not to be a policy loan if the 
amount of the funds so applied, and interest thereon, is repaid during 
the plan year in which the funds are applied and before distribution is 
made or benefits commence to any participant whose benefits are reduced 
because of such application.
    (c) Group insurance contract plans. (1) A group insurance contract 
plan is described in section 412(i) during a plan year if the plan 
satisfies the requirements of subparagraph (2) for the plan year.
    (2) The requirements of this subparagraph are:
    (i) The plan must be funded exclusively by the purchase from an 
insurance company or companies, described in paragraph (b)(2)(i) of this 
section, of group annuity or group insurance contracts, or a combination 
thereof. The purchase may be made either directly by the employer or 
through the use of a custodial account or trust. A plan shall not be 
considered to be funded otherwise than exclusively by the purchase of 
group annuity or group insurance contracts merely because the employer 
makes a payment necessary to comply with the provisions of section 411 
(c)(2) (relating to accrued benefit derived from employee 
contributions).
    (ii) In the case of a plan funded by a group insurance contract or a 
group annuity contract the requirements of paragraph (b)(2)(ii) of this 
section must be satisfied by the group contract issued under the plan. 
Thus, for example, each individual participant's benefits under the 
group contract must be provided for by level annual, or more frequent, 
payments equivalent to the payments required to satisfy such paragraph. 
The requirements of this subdivision will not be satisfied if benefits 
for any individual are not provided for by level payments made on his 
behalf under the group contract.
    (iii) The group annuity or group insurance contract must satisfy the 
requirements of clauses (iii), (iv), (v), (vi), and (vii) of paragraph 
(b)(2). Thus,

[[Page 209]]

for example, each participant's benefits provided by the plan must be 
equal to his benefits provided under the group contract at his normal 
retirement age.
    (iv)(A) If the plan is funded by a group annuity contract, the value 
of the benefits guaranteed by the insurance company issuing the contract 
under the plan with respect to each participant under the contract must 
not be less than the value of such benefits which the cash surrender 
value would provide for that participant under any individual annuity 
contract plan satisfying the requirements of paragraph (b) and approved 
for sale in the State where the principal office of the plan is located.
    (B) If the plan is funded by a group insurance contract, the value 
of the benefits guaranteed by the insurance company issuing the contract 
under the plan with respect to each participate under the contract must 
not be less than the value of such benefits which the cash surrender 
value would provide for that participant under any individual insurance 
contract plan satisfying the requirements of paragraph (b) and approved 
for sale in the State where the principal office of the plan is located.
    (v) Under the group annuity or group insurance contract, premiums or 
other consideration received by the insurance company (and, if a 
custodial account or trust is used, the custodian or trustee thereof) 
must be allocated to purchase individual benefits for participants under 
the plan. A plan which maintains unallocated funds in an auxiliary trust 
fund or which provides that an insurance company will maintain 
unallocated funds in a separate account, such as a group deposit 
administration contract, does not satisfy the requirements of this 
subdivision.
    (d) Combination of plans. A plan which is funded by a combination of 
individual contracts and a group contract shall be treated as a plan 
described in section 412 (i) for the plan year if the combination, in 
the aggregate, satisfies the requirements of this section for the plan 
year.

[T.D. 7746, 45 FR 47676, July 16, 1980; 45 FR 50563, July 30, 1980]



Sec.  1.412(l)(7)-1  Mortality tables used to determine current
liability.

    (a) In general. The mortality tables set forth in paragraph (d) of 
this section are to be used in determining current liability under 
section 412(l)(7) for participants and beneficiaries (other than 
disabled participants) for plan years beginning in 2007. For plan years 
beginning on or after January 1, 2008, the mortality tables described in 
section 430(h)(3)(A) are to be used in determining current liability 
under section 412(l)(7) for participants and beneficiaries (other than 
disabled participants).
    (b) Separate tables for annuitants and nonannuitants. The separate 
tables for annuitants and nonannuitants are used unless the plan applies 
the optional combined table pursuant to paragraph (c) of this section. 
If these separate tables are used, the nonannuitant mortality table is 
applied to determine the probability of survival for a nonannuitant for 
the period before the nonannuitant is projected to commence receiving 
benefits. The annuitant mortality table is applied to determine the 
present value of benefits for each annuitant, and for each nonannuitant 
for the period after which the nonannuitant is projected to commence 
receiving benefits. For purposes of this section, an annuitant means a 
plan participant who has commenced receiving benefits and a nonannuitant 
means a plan participant who has not yet commenced receiving benefits 
(e.g., an active employee or a terminated vested participant). Thus, for 
example, with respect to a 45-year-old active participant who is 
projected to commence receiving an annuity at age 55, current liability 
would be determined using the nonannuitant mortality table for the 
period before the participant attains age 55 (i.e., so that the 
probability of an active male participant living from age 45 to the age 
of 55 for the table that applies in plan years beginning in 2007 is 
98.59%) and the annuitant mortality table for the period ages 55 and 
above. Similarly, if a 45-year-old terminated vested participant is 
projected to commence an annuity at age 65, current liability would be 
determined using the nonannuitant mortality table for the period before 
the participant attains

[[Page 210]]

age 65 and the annuitant mortality table for ages 65 and above. For 
purposes of this section, a participant whose benefit has partially 
commenced is treated as an annuitant with respect to the portion of the 
benefit which has commenced and a nonannuitant with respect to the 
balance of the benefit.
    (c) Optional combined tables. As an alternative to the separate 
tables specified for annuitants and nonannuitants as described in 
paragraph (b) of this section, the optional combined table, which 
applies the same mortality rates to both annuitants and nonannuitants, 
can be used.
    (d) Mortality tables for 2007. As set forth in paragraph (a) of this 
section, the following tables are to be used for determining current 
liability for plan years beginning during 2007 in accordance with the 
rules of this section.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Male                                           Female
                                                         -----------------------------------------------------------------------------------------------
                           Age                             Nonannuitant      Annuitant       Optional      Nonannuitant      Annuitant       Optional
                                                               table           table      combined table       table           table      combined table
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................        0.000408        0.000408        0.000408        0.000366        0.000366        0.000366
2.......................................................        0.000276        0.000276        0.000276        0.000239        0.000239        0.000239
3.......................................................        0.000229        0.000229        0.000229        0.000178        0.000178        0.000178
4.......................................................        0.000178        0.000178        0.000178        0.000133        0.000133        0.000133
5.......................................................        0.000163        0.000163        0.000163        0.000121        0.000121        0.000121
6.......................................................        0.000156        0.000156        0.000156        0.000113        0.000113        0.000113
7.......................................................        0.000150        0.000150        0.000150        0.000106        0.000106        0.000106
8.......................................................        0.000138        0.000138        0.000138        0.000094        0.000094        0.000094
9.......................................................        0.000134        0.000134        0.000134        0.000090        0.000090        0.000090
10......................................................        0.000136        0.000136        0.000136        0.000090        0.000090        0.000090
11......................................................        0.000140        0.000140        0.000140        0.000092        0.000092        0.000092
12......................................................        0.000146        0.000146        0.000146        0.000095        0.000095        0.000095
13......................................................        0.000154        0.000154        0.000154        0.000099        0.000099        0.000099
14......................................................        0.000167        0.000167        0.000167        0.000109        0.000109        0.000109
15......................................................        0.000176        0.000176        0.000176        0.000119        0.000119        0.000119
16......................................................        0.000186        0.000186        0.000186        0.000127        0.000127        0.000127
17......................................................        0.000197        0.000197        0.000197        0.000135        0.000135        0.000135
18......................................................        0.000207        0.000207        0.000207        0.000138        0.000138        0.000138
19......................................................        0.000217        0.000217        0.000217        0.000136        0.000136        0.000136
20......................................................        0.000226        0.000226        0.000226        0.000134        0.000134        0.000134
21......................................................        0.000239        0.000239        0.000239        0.000132        0.000132        0.000132
22......................................................        0.000251        0.000251        0.000251        0.000133        0.000133        0.000133
23......................................................        0.000267        0.000267        0.000267        0.000138        0.000138        0.000138
24......................................................        0.000282        0.000282        0.000282        0.000144        0.000144        0.000144
25......................................................        0.000301        0.000301        0.000301        0.000152        0.000152        0.000152
26......................................................        0.000331        0.000331        0.000331        0.000164        0.000164        0.000164
27......................................................        0.000342        0.000342        0.000342        0.000171        0.000171        0.000171
28......................................................        0.000352        0.000352        0.000352        0.000180        0.000180        0.000180
29......................................................        0.000369        0.000369        0.000369        0.000190        0.000190        0.000190
30......................................................        0.000398        0.000398        0.000398        0.000212        0.000212        0.000212
31......................................................        0.000447        0.000447        0.000447        0.000257        0.000257        0.000257
32......................................................        0.000503        0.000503        0.000503        0.000293        0.000293        0.000293
33......................................................        0.000565        0.000565        0.000565        0.000323        0.000323        0.000323
34......................................................        0.000629        0.000629        0.000629        0.000349        0.000349        0.000349
35......................................................        0.000692        0.000692        0.000692        0.000372        0.000372        0.000372
36......................................................        0.000753        0.000753        0.000753        0.000394        0.000394        0.000394
37......................................................        0.000810        0.000810        0.000810        0.000415        0.000415        0.000415
38......................................................        0.000844        0.000844        0.000844        0.000439        0.000439        0.000439
39......................................................        0.000875        0.000875        0.000875        0.000465        0.000465        0.000465
40......................................................        0.000904        0.000904        0.000904        0.000506        0.000506        0.000506
41......................................................        0.000936        0.000963        0.000936        0.000555        0.000555        0.000555
42......................................................        0.000974        0.001081        0.000975        0.000611        0.000611        0.000611
43......................................................        0.001018        0.001258        0.001021        0.000672        0.000672        0.000672
44......................................................        0.001071        0.001493        0.001079        0.000738        0.000738        0.000738
45......................................................        0.001131        0.001788        0.001146        0.000788        0.000791        0.000788
46......................................................        0.001185        0.002142        0.001211        0.000839        0.000896        0.000840
47......................................................        0.001244        0.002554        0.001286        0.000889        0.001054        0.000893
48......................................................        0.001304        0.003026        0.001366        0.000962        0.001265        0.000972
49......................................................        0.001368        0.003557        0.001457        0.001039        0.001528        0.001059
50......................................................        0.001434        0.004146        0.001557        0.001149        0.001844        0.001184
51......................................................        0.001500        0.004226        0.001636        0.001272        0.001962        0.001312
52......................................................        0.001570        0.004254        0.001754        0.001442        0.002173        0.001496
53......................................................        0.001681        0.004312        0.001932        0.001637        0.002445        0.001714
54......................................................        0.001803        0.004369        0.002134        0.001861        0.002771        0.001969
55......................................................        0.001986        0.004514        0.002508        0.002117        0.003155        0.002314
56......................................................        0.002217        0.004749        0.003020        0.002414        0.003608        0.002755
57......................................................        0.002488        0.005069        0.003464        0.002696        0.004088        0.003170

[[Page 211]]

 
58......................................................        0.002803        0.005501        0.003990        0.002947        0.004588        0.003583
59......................................................        0.003095        0.005972        0.004529        0.003223        0.005156        0.004066
60......................................................        0.003421        0.006539        0.005177        0.003521        0.005780        0.004640
61......................................................        0.003860        0.007284        0.006030        0.003838        0.006450        0.005354
62......................................................        0.004244        0.008024        0.006929        0.004170        0.007168        0.006148
63......................................................        0.004746        0.008989        0.008099        0.004513        0.007932        0.007084
64......................................................        0.005154        0.009947        0.009159        0.004862        0.008758        0.007996
65......................................................        0.005553        0.011015        0.010377        0.005213        0.009662        0.009018
66......................................................        0.006073        0.012379        0.011951        0.005559        0.010640        0.010192
67......................................................        0.006447        0.013705        0.013349        0.005896        0.011690        0.011323
68......................................................        0.006650        0.014940        0.014641        0.006220        0.012838        0.012522
69......................................................        0.006974        0.016504        0.016231        0.006528        0.014126        0.013843
70......................................................        0.007115        0.017971        0.017689        0.006818        0.015607        0.015309
71......................................................        0.008002        0.019884        0.019606        0.007450        0.017078        0.016784
72......................................................        0.009777        0.022078        0.021822        0.008714        0.018995        0.018716
73......................................................        0.012439        0.024592        0.024371        0.010610        0.020819        0.020577
74......................................................        0.015988        0.027435        0.027256        0.013139        0.023074        0.022872
75......................................................        0.020425        0.031057        0.030919        0.016299        0.025117        0.024967
76......................................................        0.025749        0.034615        0.034523        0.020092        0.027673        0.027570
77......................................................        0.031961        0.039054        0.038999        0.024516        0.030911        0.030846
78......................................................        0.039059        0.044018        0.043992        0.029573        0.034074        0.034043
79......................................................        0.047046        0.049617        0.049610        0.035261        0.037618        0.037610
80......................................................        0.055919        0.055919        0.055919        0.041582        0.041582        0.041582
81......................................................        0.063476        0.063476        0.063476        0.046024        0.046024        0.046024
82......................................................        0.071926        0.071926        0.071926        0.051021        0.051021        0.051021
83......................................................        0.080176        0.080176        0.080176        0.056651        0.056651        0.056651
84......................................................        0.090433        0.090433        0.090433        0.063006        0.063006        0.063006
85......................................................        0.100383        0.100383        0.100383        0.071188        0.071188        0.071188
86......................................................        0.111295        0.111295        0.111295        0.080522        0.080522        0.080522
87......................................................        0.125051        0.125051        0.125051        0.091080        0.091080        0.091080
88......................................................        0.140385        0.140385        0.140385        0.101448        0.101448        0.101448
89......................................................        0.155142        0.155142        0.155142        0.114246        0.114246        0.114246
90......................................................        0.173400        0.173400        0.173400        0.126258        0.126258        0.126258
91......................................................        0.188868        0.188868        0.188868        0.138648        0.138648        0.138648
92......................................................        0.207683        0.207683        0.207683        0.151126        0.151126        0.151126
93......................................................        0.224037        0.224037        0.224037        0.165722        0.165722        0.165722
94......................................................        0.240367        0.240367        0.240367        0.177747        0.177747        0.177747
95......................................................        0.260098        0.260098        0.260098        0.189133        0.189133        0.189133
96......................................................        0.276058        0.276058        0.276058        0.199703        0.199703        0.199703
97......................................................        0.291564        0.291564        0.291564        0.212246        0.212246        0.212246
98......................................................        0.310910        0.310910        0.310910        0.220832        0.220832        0.220832
99......................................................        0.325614        0.325614        0.325614        0.228169        0.228169        0.228169
100.....................................................        0.339763        0.339763        0.339763        0.234164        0.234164        0.234164
101.....................................................        0.358628        0.358628        0.358628        0.244834        0.244834        0.244834
102.....................................................        0.371685        0.371685        0.371685        0.254498        0.254498        0.254498
103.....................................................        0.383040        0.383040        0.383040        0.266044        0.266044        0.266044
104.....................................................        0.392003        0.392003        0.392003        0.279055        0.279055        0.279055
105.....................................................        0.397886        0.397886        0.397886        0.293116        0.293116        0.293116
106.....................................................        0.400000        0.400000        0.400000        0.307811        0.307811        0.307811
107.....................................................        0.400000        0.400000        0.400000        0.322725        0.322725        0.322725
108.....................................................        0.400000        0.400000        0.400000        0.337441        0.337441        0.337441
109.....................................................        0.400000        0.400000        0.400000        0.351544        0.351544        0.351544
110.....................................................        0.400000        0.400000        0.400000        0.364617        0.364617        0.364617
111.....................................................        0.400000        0.400000        0.400000        0.376246        0.376246        0.376246
112.....................................................        0.400000        0.400000        0.400000        0.386015        0.386015        0.386015
113.....................................................        0.400000        0.400000        0.400000        0.393507        0.393507        0.393507
114.....................................................        0.400000        0.400000        0.400000        0.398308        0.398308        0.398308
115.....................................................        0.400000        0.400000        0.400000        0.400000        0.400000        0.400000
116.....................................................        0.400000        0.400000        0.400000        0.400000        0.400000        0.400000
117.....................................................        0.400000        0.400000        0.400000        0.400000        0.400000        0.400000
118.....................................................        0.400000        0.400000        0.400000        0.400000        0.400000        0.400000
119.....................................................        0.400000        0.400000        0.400000        0.400000        0.400000        0.400000
120.....................................................        1.000000        1.000000        1.000000        1.000000        1.000000        1.000000
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 212]]

    (e) Effective date. This section applies for plan years beginning on 
or after January 1, 2007.

[T.D. 9310, 72 FR 4958, Feb. 2, 2007]



Sec.  1.413-1  Special rules for collectively bargained plans.

    (a) Application of section 413(b) to certain collectively bargained 
plans--(1) In general. Section 413(b) sets forth special rules 
applicable to certain pension, profit-sharing, and stock bonus plans 
(and each trust which is a part of such a plan), hereinafter referred to 
as ``section 413(b) plans'', described in paragraph (a)(2) of this 
section. Notwithstanding any other provision of the Code, a section 
413(b) plan is subject to the special rules of section 413(b) (1) 
through (8) and paragraphs (b) through (i) of this section.
    (2) Requirements. Section 413(b) applies to a plan (and each trust 
which is a part of such plan) if the plan is a single plan which is 
maintained pursuant to one or more agreements which the Secretary of 
Labor finds to be a collective bargaining agreement between employee 
representatives and one or more employers. A plan which provides 
benefits for employees of more than one employer is considered a single 
plan subject to the requirements of section 413(b) and this section if 
the plan is considered a single plan for purposes of applying section 
414(l) (see Sec.  1.414(l)-1(b)(1)). For purposes of determining whether 
one or more plans (or agreements) are a single plan, under sections 
413(a) and 414(l), it is irrelevant that there are in form two or more 
separate plans (or agreements). For example, a single plan will be 
considered to exist where agreements are entered into separately by a 
national labor organization (or one or more local units of such 
organization), on one hand, and individual employers, on the other hand, 
if the plan is considered a single plan for purposes of applying section 
414(l).
    (3) Additional rules and effective dates. (i) If a plan is a section 
413(b) plan at a relevant time, the rules of section 413(b) and this 
section apply, and the rules of section 413(c) and Sec.  1.413-2 do not 
apply to the plan.
    (ii) The qualification of a section 413(b) plan, at any relevant 
time, under section 401(a), 403(a), or 405(a), as modified by sections 
413(b) and this section, is determined with respect to all employers 
maintaining the plan. Consequently, the failure by one employer 
maintaining the plan (or by the plan itself) to satisfy an applicable 
qualification requirement will result in the disqualification of the 
plan for all employers maintaining the plan.
    (iii) Except as otherwise provided, section 413 (a) and (b) and this 
section apply to a plan for plan years beginning after December 31, 
1953.
    (b) Participation. Section 410 and the regulations thereunder shall 
be applied as if all employees of each of the employers who are parties 
to the collective-bargaining agreement and all such employees who are 
subject to the same benefit computation formula under the plan were 
employed by a single employer.
    (c) Discrimination, etc.--(1) General rule. Section 401(a)(4) 
(relating to prohibited discrimination) and section 411(d)(3) (relating 
to vesting required on termination, partial termination, or 
discontinuance of contributions) shall be applied as if all the 
participants in the plan, who are subject to the same benefit 
computation formula and who are employed by employers who are parties to 
the collective bargaining agreement, are employed by a single employer.
    (2) Application of discrimination rules. Under section 401(a)(4) and 
the regulations thereunder a plan is not qualified unless the 
contributions or benefits provided under the plan do not discriminate in 
favor of officers, shareholders or highly compensated employees 
(hereinafter referred to collectively as ``the prohibited group''). The 
presence or absence of such discrimination under a plan to which this 
section applies at any time shall not be determined on an employer-by-
employer basis, but rather by testing separately each group of employees 
who are subject to the same benefit computation formula to determine if 
there is discrimination within such group. Consequently, discrimination 
in contributions or benefits among two or more different groups or among 
employees in different groups covered by the plan may be present without 
causing the plan to be disqualified. However, the

[[Page 213]]

presence of prohibited discrimination within one such group will result 
in the disqualification of the plan for all groups. Section 401(a)(4) 
and the regulations thereunder provide rules relating to the 
determination of which employees are members of the prohibited group and 
to the determination of discrimination in contributions or benefits 
which are applicable to a plan to which this section applies. The 
determination of whether or not an individual employee is a highly 
compensated employee shall be based on the relationship of the 
compensation of the employee to the compensation of all the other 
employees of all employers who are maintaining the plan and have 
employees covered under the same benefit computation formula, whether or 
not such other employees are covered by the plan or are covered under 
the same benefit computation formula, rather than to the compensation of 
all the other employees of the employer of such individual employee.
    (3) Application of termination, etc. rules. Section 411(d)(3) and 
the regulations thereunder (relating to vesting required in the case of 
a termination, partial termination, or complete discontinuance of 
contributions) apply to a plan subject to the provisions of this 
section. The requirements of section 411(d)(3) shall be applied as if 
all participants in the plan who are subject to the same benefit 
computation formula and who are employed by employers who are parties to 
the collective bargaining agreement are employed by a single employer. 
The determination of whether or not there is a termination, partial 
termination, or complete discontinuance of contributions shall be made 
separately for each such group of participants who are treated as 
employed by a single employer. Consequently, if there are two or more 
groups of participants, a termination, partial termination, or complete 
discontinuance can take place under a plan with respect to one group of 
participants but not with respect to another such group of participants 
or for the entire plan. See Sec.  1.411(d)-2 for rules prescribed under 
section 411(d)(3).
    (4) Effective dates and transitional rules. (i) Section 413(b)(2) 
and this paragraph apply to a plan for plan years beginning after 
December 31, 1953.
    (ii) In applying the rules of this paragraph to a plan for plan 
years to which section 411 does not apply, section 401(a)(7) (as in 
effect on September 1, 1974) shall be substituted for section 411(d)(3). 
See Sec.  1.401-6 for rules prescribed under section 401(a)(7) as in 
effect on September 1, 1974. See Sec.  1.411(a)-2 for the effective 
dates of section 411.
    (5) Examples. The provisions of this paragraph are illustrated by 
the following examples:

    Example 1. Plan A is a defined benefit plan subject to the 
provisions of this section and covers two groups of participants, local 
unions 1 and 2. Each local union has negotiated its own bargaining 
agreement with employers X, Y, and Z to provide its own benefit 
computation formula. The following table indicates the composition of 
the plan A participants:

------------------------------------------------------------------------
                                 Employer   Employer   Employer
                                    X          Y          Z       Total
------------------------------------------------------------------------
Local union 1.................         20         10         70      100
Local union 2.................         30         70        100      200
------------------------------------------------------------------------


Under the rules of subparagraph (2) of this paragraph, the determination 
of whether contributions or benefits provided under the plan 
discriminate in favor of the prohibited group is made by applying the 
rules of section 401(a)(4) separately to participants who are members of 
local union 1 and local union 2. Thus, plan A will satisfy the 
qualification requirements of section 401(a)(4) if, within local union 1 
and local union 2, respectively, plan benefits do not discriminate in 
favor of participants who are prohibited group employees within local 
union 1 and local union 2. Under the rules of subparagraph (2) of this 
paragraph, the determination under section 401(a)(4) of whether or not 
any individual employee, included within the 300 participants in plan A, 
is a highly compensated employee is based on the relationship of the 
compensation of such individual employee to the compensation of all the 
employees of Employers X, Y, and Z, whether or not such employees are 
participants in plan A. Thus, if there are 20 participants who are 
prohibited group employees within the 100 participants of local union 1, 
discrimination is determined by comparing the benefits of the 20 
prohibited group participants to the benefits of the other 80 
participants within local union 1. The same comparison would have to be 
made for the local union 2 participants between the prohibited group 
participants and the other participants in local union 2. Discrimination 
in benefits, if any, between the participants in local union 1 and local 
union 2,

[[Page 214]]

or among the employees of X, Y, or Z, would not affect the qualification 
of plan A under section 401(a)(4).
    Example 2. Assume the same facts as in example (1). Employer X 
withdraws from the plan. Under subparagraph (3) of this paragraph, 
whether or not as a result of the withdrawal there is a partial 
termination under section 411(d)(3) is to be determined by applying the 
requirements of such section separately to the local union 1 and local 
union 2 participants. See Sec.  1.411(d)-2 for the requirements relating 
to partial terminations. The application of such requirements raises the 
following possibilities with respect to the plan: (1) A partial 
termination as to local union 1, (2) a partial termination as to local 
union 2, (3) a partial termination as to both local unions 1 and 2, or 
(4) no partial termination for either local union.
    Example 3. Assume the same facts as in example (1). Plan A is 
amended to cease future benefit accruals under the plan for local union 
1 participants. Under subparagraph (3) of the paragraph, whether or not 
as a result of the cessation there is a partial termination under 
section 411(d)(3) is to be determined by applying the requirements of 
such section separately to the local union 1 and local union 2 
participants.
    Example 4. Plan A is a defined benefit plan that provides for two 
normal retirement benefits, X and 2X. A participant receives benefit X 
if the collective bargaining agreement covering his employment provides 
for a contribution rate, M. If such agreement provides for a 
contribution rate of N, the participant receives benefit 2X. Benefit X 
and benefit 2X constitute separate benefit computation formulas.
    Example 5. Plan B is a defined benefit plan that provides for a 
normal retirement benefit, X. Benefit X is provided for all plan 
participants even though there are two collective bargaining agreements 
providing for different contribution rates, M and N. Plan B has a single 
benefit computation formula, even though there are two contribution 
rates.

    (d) Exclusive benefit. Under section 401(a), a plan is not qualified 
unless the plan is for the exclusive benefit of the employees (and their 
beneficiaries) of the employer establishing and maintaining the plan. 
Other qualification requirements under section 401(a) require the 
application of the exclusive benefit rule (for example, section 
401(a)(2), which precludes diversion of plan assets). For purposes of 
applying the requirements of section 401(a) in determining whether a 
plan subject to this section is, with respect to each employer 
establishing and maintaining the plan, for the exclusive benefit of its 
employees (and their beneficiaries), all of the employees participating 
in the plan shall be treated as employees of each such employer. Thus, 
for example, contributions by employer A to a plan subject to this 
section could be allocated to employees of other employers maintaining 
the plan without violating the requirements of section 401(a)(2), 
because all the employees participating in the plan are deemed to be 
employees of A.
    (e) Vesting. Section 411 (other than section 411(d)(3) relating to 
termination or partial termination; discontinuance of contributions) and 
the regulations thereunder shall be applied as if all employers who have 
been parties to the collective-bargaining agreement constituted a single 
employer. The application of any rules with respect to breaks in service 
under section 411 shall be made under regulations prescribed by the 
Secretary of Labor. Thus, for example, all the hours which an employee 
worked for each employer in a collectively-bargained plan would be 
aggregated in computing the employee's hours of service under the plan. 
See also 29 CFR Part 2530 (Department of Labor regulations relating to 
minimum standards for employee pension benefit plans.)
    (f)-(h) [Reserved]
    (i) Employees of labor unions--(1) General rule. For purposes of 
section 413(b) and this section, employees of employee representatives 
shall be treated as employees of an employer establishing and 
maintaining a plan to which section 413(b) and this section apply if, 
with respect to the employees of such representatives, the plan 
satisfies the nondiscrimination requirements of section 401(a)(4) 
(determined without regard to section 413(b)(2)) and the minimum 
participation and coverage requirements of section 410 (determined 
without regard to section 413(b)(1)). For purposes of the preceding 
sentence, the plan and any affiliated employee health or welfare plan 
shall be deemed to be an employee representative. If employees of 
employee representatives, the plan, or an affiliated employee health or 
welfare plan are covered by the plan and are not treated as employees of 
an employer

[[Page 215]]

establishing and maintaining the plan under the provisions of this 
paragraph, the plan fails to satisfy the qualification requirements of 
section 401(a). In addition, in order for such a plan to be qualified, 
the plan must satisfy the requirements of section 413(b) (1) and (2), 
relating to participation and discrimination, respectively; see 
paragraphs (b) and (c) of this section. For purposes of this paragraph, 
an affiliated health or welfare plan is a health or welfare plan that is 
maintained under the same collective bargaining agreement or agreements, 
and that covers the same membership.
    (2) Effective dates and transitional rules. (i) Section 413(b)(8) 
and this paragraph apply to a plan for plan years beginning after 
December 31, 1953.
    (ii) In applying the rules of this paragraph to a plan for plan 
years to which section 410 does not apply, section 401(a)(3) (as in 
effect on September 1, 1974) shall be substituted for section 410. See 
Sec.  1.401-3 for rules prescribed under section 401(a)(3) as in effect 
on September 1, 1974. See Sec.  1.410(a)-2 for the effective dates of 
section 410.
    (3) Examples. The provisions of this paragraph are illustrated by 
the following examples:

    Example 1. Plan A is a defined benefit plan, maintained pursuant to 
a collective bargaining agreement between employers, X, Y, and Z and 
labor union, L, which covers members of L employed by X, Y, and Z. In 
1978, plan A is amended to cover, under the same benefit formula, all 
five employees of L who have satisfied the minimum age and service 
requirements of the plans (age 25 and 1 year of service). Assume that 
plan A is subject to section 413(b) and satisfies the requirements of 
section 413(b) (1) and (2). Assume further that with respect to 
employees of L, plan A (i) satisfies the nondiscrimination requirements 
of section 401(a)(4), (ii) meets the minimum participation requirements 
of section 410(a), and (iii) meets the minimum coverage requirements of 
section 410(b)(1)(A). Under the rules of subparagraph (1) of this 
paragraph, because such requirements are all satisfied, the employees of 
L are treated as employees of an employer establishing and maintaining 
plan A.
    Example 2. Assume the same facts as example (1), except that plan A 
is amended to cover only one of the five employees of L, none of whom is 
covered by any other plan. Assume further that, under plan A, L does not 
satisfy the minimum percentage coverage requirement of section 
410(b)(1)(A) with respect to employees of L. Assume further that the 
compensation of the one L employee who is covered by the plan is such 
that he is highly compensated relative to the four employees of L not 
covered by the plan. Consequently, L does not satisfy the minimum 
coverage requirements of section 410(b)(1)(B), with respect to employees 
of L. Under the rules of subparagraph (1) of this paragraph, the 
employees of L cannot be treated as employees of an employer 
establishing and maintaining the A plan because such coverage 
requirements are not satisfied by L. Consequently, the A plan fails to 
satisfy the qualification requirements of section 401(a).

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42340, Aug. 23, 1977, as amended by 42 FR 47198, Sept. 
20, 1977; T.D. 7654, 44 FR 65063, Nov. 9, 1979]



Sec.  1.413-2  Special rules for plans maintained by more 
than one employer.

    (a) Application of section 413(c)--(1) In general. Section 413(c) 
describes certain plans (and each trust which is a part of any such 
plan) hereinafter referred to as ``section 413(c) plans.'' A plan (and 
each trust which is a part of such plan) is deemed to be a section 
413(c) plan if it is described in subparagraph (2) of this paragraph. 
Notwithstanding any other provision of the code (not specifically in 
conflict with the special rules hereinafter mentioned), a section 413(c) 
plan is subject to the special rules of section 413(c) (1) through (6) 
and paragraphs (b) through (g) of this section.
    (2) Section 413(c) plan. A plan (and each trust which is a part of 
such plan) is a section 413(c) plan if--
    (i) The plan is a single plan, within the meaning of section 413(a) 
and Sec.  1.413-1(a)(2), and
    (ii) The plan is maintained by more than one employer.

For purposes of subdivision (ii) of this subparagraph, the number of 
employers maintaining the plan is determined by treating any employers 
described in section 414(b) (relating to a controlled group of 
corporations) or any employers described in section 414(c) (relating to 
trades or businesses under common control), whichever is applicable, as 
if such employers are a single employer. See Sec.  1.411(a)-5(b)(3) for 
rules relating to the time when an employer maintains a plan. A master 
or prototype plan is not a section 413(c) plan unless

[[Page 216]]

such a plan is described in this subparagraph. Similarly, the mere fact 
that a plan, or plans, utilizes a common trust fund or otherwise pools 
plan assets for investment purposes does not, by itself, result in a 
particular plan being treated as a section 413(c) plan.
    (3) Additional rules. (i) If a plan is a collectively bargained plan 
described in Sec.  1.413-1(a), the rules of section 413(c) and this 
section do not apply, and the rules of section 413(b) and Sec.  1.413-1 
do apply to the plan.
    (ii) The special rules of section 413(b)(1) and Sec.  1.413-1(b) 
relating to the application of section 410, other than the rules of 
section 410(a), do not apply to a section 413(c) plan. Thus, for 
example, the minimum coverage requirements of section 410(b) are 
generally applied to a section 413(c) plan on an employer-by-employer 
basis, taking into account the generally applicable rules such as 
section 401(a)(5) and section 414 (b) and (c).
    (iii) The special rules of section 413(b)(2) and Sec.  1.413-1(c) 
(relating to (A) section 401(a)(4) and prohibited discrimination, and 
(B) 411(d)(3) and vesting required on termination, partial termination, 
or discontinuance of contributions) do not apply to a section 413(c) 
plan. Thus, for example, the determination of whether or not there is a 
termination, within the meaning of section 411(d)(3), of a section 
413(c) plan is made solely by reference to the rules of sections 
411(d)(3) and 413(c)(3).
    (iv) The qualification of a section 413(c) plan, at any relevant 
time, under section 401(a), 403(a) or 405(a), as modified by section 
413(c) and this section, is determined with respect to all employers 
maintaining the section 413(c) plan. Consequently, the failure by one 
employer maintaining the plan (or by the plan itself) to satisfy an 
applicable qualification requirement will result in the disqualification 
of the section 413(c) plan for all employers maintaining the plan.
    (4) Effective dates. Except as otherwise provided, section 413(c) 
and this section apply to a plan for plan years beginning after December 
31, 1953.
    (b) Participation. Section 410(a) and the regulations thereunder 
shall be applied as if all employees of each of the employers who 
maintain the plan were employed by a single employer.
    (c) Exclusive benefit. In the case of a plan subject to this 
section, the exclusive benefit requirements of section 401(a) shall be 
applied to the plan in the same manner as under section 413(b)(3) and 
Sec.  1.413-1(d).
    (d) Vesting. Section 411 and the regulations thereunder shall be 
applied as if all employers who maintain the plan constituted a single 
employer. The application of any rules with respect to breaks in service 
under section 411 shall be made under regulations prescribed by the 
Secretary of Labor. Thus, for example, all the hours which an employee 
worked for each employer maintaining the plan would be aggregated in 
computing the employee's hours of service under the plan. See also 29 
CFR Part 2530 (Department of Labor regulations relating to minimum 
standards for employee pension benefit plans).

(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))

[T.D. 7501, 42 FR 42340, Aug. 23, 1977, as amended by 42 FR 47198, Sept. 
20, 1977; T.D. 7654, 44 FR 65065, Nov. 9, 1979]



Sec.  1.414(b)-1  Controlled group of corporations.

    (a) Defintion of controlled group of corporations. For purposes of 
this section, the term ``controlled group of corporations'' has the same 
meaning as is assigned to the term in section 1563(a) and the 
regulations thereunder, except that (1) the term ``controlled group of 
corporations'' shall not include an ``insurance group'' described in 
section 1563(a)(4), and (2) section 1563(e)(3)(C) (relating to stock 
owned by certain employees' trusts) shall not apply. For purposes of 
this section, the term ``members of a controlled group'' means two or 
more corporations connected through stock ownership described in section 
1563(a) (1), (2), or (3), whether or not such corporations are 
``component members of a controlled group'' within the meaning of 
section 1563(b). Two or more corporations are members of a controlled 
group at any time such corporations meet the requirements of section 
1563(a) (as modified by this paragraph). For purposes of this section, 
if a corporation is a member of more than one controlled group

[[Page 217]]

of corporations, such corporation shall be treated as a member of each 
controlled group.
    (b) Single plan adopted by two or more members. If two or more 
members of a controlled group of corporations adopt a single plan for a 
plan year, then the minimum funding standard provided in section 412, 
the tax imposed by section 4971, and the applicable limitations provided 
by section 404(a) shall be determined as if such members were a single 
employer. In such a case, the amount of such items and the allocable 
portion attributable to each member shall be determined in the manner 
provided in regulations under sections 412, 4971, and 404(a).
    (c) Cross reference. For rules relating to the application of 
sections 401, 408(k), 410, 411, 415, and 416 with respect to two or more 
trades or businesses which are under common control, see section 414(c) 
and the regulations thereunder.

[T.D. 8179, 53 FR 6605, Mar. 2, 1988]



Sec.  1.414(c)-1  Commonly controlled trades or businesses.

    For purposes of applying the provisions of sections 401 (relating to 
qualified pension, profit-sharing, and stock bonus plans), 408(k) 
(relating to simplified employee pensions), 410 (relating to minimum 
participation standards), 411 (relating to minimum vesting standards), 
415 (relating to limitations on benefits and contributions under 
qualified plans), and 416 (relating to top-heavy plans), all employees 
of two or more trades or businesses under common control within the 
meaning of Sec.  1.414(c)-2 for any period shall be treated as employed 
by a single employer. See sections 401, 408(k), 410, 411, 415, and 416 
and the regulations thereunder for rules relating to employees of trades 
or businesses which are under common control. See Sec.  1.414(c)-5 for 
effective date.

[T.D. 8179, 53 FR 6606, Mar. 2, 1988]



Sec.  1.414(c)-2  Two or more trades or businesses under common
control.

    (a) In general. For purposes of this section, the term ``two or more 
trades or businesses under common control'' means any group of trades or 
businesses which is either a ``parent-subsidiary group of trades or 
businesses under common control'' as defined in paragraph (b) of this 
section, a ``brother-sister group of trades or businesses under common 
control'' as defined in paragraph (c) of this section, or a ``combined 
group of trades or businesses under common control'' as defined in 
paragraph (d) of this section. For purposes of this section and 
Sec. Sec.  1.414(c)-3 and 1.414(c)-4, the term ``organization'' means a 
sole proprietorship, a partnership (as defined in section 7701(a)(2)), a 
trust, an estate, or a corporation.
    (b) Parent-subsidiary group of trades or businesses under common 
control--(1) In general. The term ``parent-subsidiary group of trades or 
businesses under common control'' means one or more chains of 
organizations conducting trades or businesses connected through 
ownership of a controlling interest with a common parent organization 
if--
    (i) A controlling interest in each of the organizations, except the 
common parent organization, is owned (directly and with the application 
of Sec.  1.414(c)-4(b)(1), relating to options) by one or more of the 
other organizations; and
    (ii) The common parent organization owns (directly and with the 
application of Sec.  1.414(c)-4(b)(1), relating to options) a 
controlling interest in at least one of the other organizations, 
excluding, in computing such controlling interest, any direct ownership 
interest by such other organizations.
    (2) Controlling interest defined--(i) Controlling interest. For 
purposes of paragraphs (b) and (c) of this section, the phrase 
``controlling interest'' means:
    (A) In the case of an organization which is a corporation, ownership 
of stock possessing at least 80 percent of total combined voting power 
of all classes of stock entitled to vote of such corporation or at least 
80 percent of the total value of shares of all classes of stock of such 
corporation;
    (B) In the case of an organization which is a trust or estate, 
ownership of an actuarial interest of at least 80 percent of such trust 
or estate;
    (C) In the case of an organization which is a partnership, ownership 
of at

[[Page 218]]

least 80 percent of the profits interest or capital interest of such 
partnership; and
    (D) In the case of an organization which is a sole proprietorship, 
ownership of such sole proprietorship.
    (ii) Actuarial interest. For purposes of this section, the actuarial 
interest of each beneficiary of trust or estate shall be determined by 
assuming the maximum exercise of discretion by the fiduciary in favor of 
such beneficiary. The factors and methods prescribed in Sec.  20.2031-7 
or, for certain prior periods, Sec.  20.2031-7A (Estate Tax Regulations) 
for use in ascertaining the value of an interest in property for estate 
tax purposes shall be used for purposes of this subdivision in 
determining a beneficiary's actuarial interest.
    (c) Brother-sister group of trades or businesses under common 
control--(1) In general. The term ``brother-sister group of trades or 
businesses under common control'' means two or more organizations 
conducting trades or businesses if (i) the same five or fewer persons 
who are individuals, estates, or trusts own (directly and with the 
application of Sec.  1.414(c)-4) a controlling interest in each 
organization, and (ii) taking into account the ownership of each such 
person only to the extent such ownership is identical with respect to 
each such organization, such persons are in effective control of each 
organization. The five or fewer persons whose ownership is considered 
for purposes of the controlling interest requirement for each 
organization must be the same persons whose ownership is considered for 
purposes of the effective control requirement.
    (2) Effective control defined. For purposes of this paragraph, 
persons are in ``effective control'' of an organization if--
    (i) In the case of an organization which is a corporation, such 
persons own stock possessing more than 50 percent of the total combined 
voting power of all classes of stock entitled to vote or more than 50 
percent of the total value of shares of all classes of stock of such 
corporation;
    (ii) In the case of an organization which is a trust or estate, such 
persons own an aggregate actuarial interest of more than 50 percent of 
such trust or estate;
    (iii) In the case of an organization which is a partnership, such 
persons own an aggregate of more than 50 percent of the profits interest 
or capital interest of such partnership; and
    (iv) In the case of an organization which is a sole proprietorship, 
one of such persons owns such sole proprietorship.
    (d) Combined group of trades or businesses under common control. The 
term ``combined group of trades or businesses under common control'' 
means any group of three or more organizations, if (1) each such 
organization is a member of either a parent-subsidiary group of trades 
or businesses under common control or a brother-sister group of trades 
or businesses under common control, and (2) at least one such 
organization is the common parent organization of a parent-subsidiary 
group of trades or businesses under common control and is also a member 
of a brother-sister group of trades or businesses under common control.
    (e) Examples. The definitions of parent-subsidiary group of trades 
or businesses under common control, brother-sister group of trades or 
businesses under common control, and combined group of trades or 
businesses under common control may be illustrated by the following 
examples.

    Example 1. (a) The ABC partnership owns stock possessing 80 percent 
of the total combined voting power of all classes of stock entitled to 
voting of S corporation. ABC partnership is the common parent of a 
parent-subsidiary group of trades or businesses under common control 
consisting of the ABC partnership and S Corporation.
    (b) Assume the same facts as in (a) and assume further that S owns 
80 percent of the profits interest in the DEF Partnership. The ABC 
Partnership is the common parent of a parent-subsidiary group of trades 
or businesses under common control consisting of the ABC Partnership, S 
Corporation, and the DEF Partnership. The result would be the same if 
the ABC Partnership, rather than S, owned 80 percent of the profits 
interest in the DEF Partnership.
    Example 2. L Corporation owns 80 percent of the only class of stock 
of T Corporation, and T, in turn, owns 40 percent of the capital 
interest in the GHI Partnership. L also owns 80 percent of the only 
class of stock of N Corporation and N, in turn, owns 40 percent of the 
capital interest in the GHI Partnership.

[[Page 219]]

L is the common parent of a parent-subsidiary group of trades or 
businesses under common control consisting of L Corporation, T 
Corporation, N Corporation, and the GHI Partnership.
    Example 3. ABC Partnership owns 75 percent of the only class of 
stock of X and Y Corporations; X owns all the remaining stock of Y, and 
Y owns all the remaining stock of X. Since interorganization ownership 
is excluded (that is, treated as not outstanding) for purposes of 
determining whether ABC owns a controlling interest of at least one of 
the other organizations, ABC is treated as the owner of stock possessing 
100 percent of the voting power and value of all classes of stock of X 
and of Y for purposes of paragraph (b)(1)(ii) of this section. 
Therefore, ABC is the common parent of a parent-subsidiary group of 
trades or businesses under common control consisting of the ABC 
Partnership, X Corporation, and Y Corporation.
    Example 4. Unrelated individuals A, B, C, D, E, and F own an 
interest in sole proprietorship A, a capital interest in the GHI 
Partnership, and stock of corporations M, W, X, Y, and Z (each of which 
has only one class of stock outstanding) in the following proportions:

                                                                      Organizations
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Individuals                             A            GHI            M             W             X             Y             Z
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.....................................................     100%           50%          100%           60%           40%           20%           60%
B.....................................................       --           40%            --           15%           40%           50%           30%
C.....................................................       --            --            --            --           10%           10%           10%
D.....................................................       --            --            --           25%            --           20%            --
E.....................................................       --           10%            --            --           10%            --            --
                                                       -------------------------------------------------------------------------------------------------
                                                           100%          100%          100%          100%          100%          100%          100%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Under these facts the following four brother-sister groups of trades 
or businesses under common control exist: GHI, X and Z; X, Y and Z; W 
and Y; A and M. In the case of GHI, X, and Z, for example, A and B 
together have effective control of each organization because their 
combined identical ownership of GHI, X and Z is greater than 50%. (A's 
identical ownership of GHI, X and Z is 40% because A owns at least a 40% 
interest in each organization. B's identical ownership of GHI, X and Z 
is 30% because B owns at least a 30% interest in each organization.) A 
and B (the persons whose ownership is considered for purposes of the 
effective control requirement) together own a controlling interest in 
each organization because they own at least 80% of the capital interest 
of partnership GHI and at least 80% of the total combined voting power 
of corporations X and Z. Therefore, GHI, X and Z comprise a brother-
sister group of trades or businesses under common control. Y is not a 
member of this group because neither the effective control requirement 
nor the 80% controlling interest requirement are met. (The effective 
control requirement is not met because A's and B's combined identical 
ownership in GHI, X, Y and Z (20% for A and 30% for B) does not exceed 
50%. The 80% controlling interest test is not met because A and B 
together only own 70% of the total combined voting power of the stock of 
Y.) A and M are not members of this group because B owns no interest in 
either organization and A's ownership of GHI, X and Z, considered alone, 
is less than 80%.
    Example 5. The outstanding stock of corporations U and V, which have 
only one class of stock outstanding, is owned by the following unrelated 
individuals:

                              Corporations
------------------------------------------------------------------------
                                                  U              V
                Individuals                -----------------------------
                                              (percent)      (percent)
------------------------------------------------------------------------
A.........................................       12             12
B.........................................       12             12
C.........................................       12             12
D.........................................       12             12
E.........................................       13             13
F.........................................       13             13
G.........................................       13             13
H.........................................       13             13
                                           -----------------------------
                                                100            100
------------------------------------------------------------------------


Any group of five of the shareholders will own more than 50 percent of 
the stock in each corporation, in identical holdings. However, U and V 
are not members of a brother-sister group of trades or businesses under 
common control because at least 80 percent of the stock of each 
corporation is not owned by the same five or fewer persons.
    Example 6. A, an individual, owns a controlling interest in ABC 
Partnership and DEF Partnership. ABC, in turn, owns a controlling 
interest in X Corporation. Since ABC, DEF, and X are each members of 
either a parent-subsidiary group or a brother-sister group of trades or 
businesses under common control, and ABC is the common parent of a 
parent-subsidiary group of trades or businesses under common control 
consisting of

[[Page 220]]

ABC and X, and also a member of a brother-sister group of trades or 
businesses under common control consisting of ABC and DEF, ABC 
Partnership, DEF Partnership, and X Corporation are members of the same 
combined group of trades or businesses under common control.

[T.D. 8179, 53 FR 6606, Mar. 2, 1988, as amended by T.D. 8540, 59 FR 
30102, June 10, 1994]



Sec.  1.414(c)-3  Exclusion of certain interests or stock in
determining control.

    (a) In general. For purposes of Sec.  1.414(c)-2 (b)(2)(i) and 
(c)(2), the term ``interest'' and the term ``stock'' do not include an 
interest which is treated as not outstanding under paragraph (b) of this 
section in the case of a parent-subsidiary group of trades or businesses 
under common control or under paragraph (c) of this section in the case 
of a brother-sister group of trades or businesses under common control. 
In addition, the term ``stock'' does not include treasury stock or 
nonvoting stock which is limited and preferred as to dividends. For 
definitions of certain terms used in this section, see paragraph (d) of 
this section.
    (b) Parent-subsidiary group of trades or businesses under common 
control--(1) In general. If an organization (hereinafter in this section 
referred to as ``parent organization'') owns (within the meaning of 
paragraph (b)(2) of this section)--
    (i) In the case of a corporation, 50 percent or more of the total 
combined voting power of all classes of stock entitled to vote or 50 
percent or more of the total value of shares of all classes of stock of 
such corporation.
    (ii) In the case of a trust or an estate, an actuarial interest 
(within the meaning of Sec.  1.414(c)-2(b)(2)(ii)) of 50 percent or more 
of such trust or estate, and
    (iii) In the case of a partnership, 50 percent or more of the 
profits or capital interest of such partnership, then for purposes of 
determining whether the parent organization or such other organization 
(hereinafter in this section referred to as ``subsidiary organization'') 
is a member of a parent-subsidiary group of trades or businesses under 
common control, an interest in such subsidiary organization excluded 
under paragraph (b) (3), (4), (5), or (6) of this section shall be 
treated as not outstanding.
    (2) Ownership. For purposes of paragraph (b)(1) of this section, a 
parent organization shall be considered to own an interest in or stock 
of another organization which it owns directly or indirectly with the 
application of Sec.  1.414(c)-4(b)(1) and--
    (i) In the case of a parent organization which is a partnership, a 
trust, or an estate, with the application of paragraphs (b) (2), (3), 
and (4) of Sec.  1.414(c)-4, and
    (ii) In the case of a parent organization which is a corporation, 
with the application of Sec.  1.414(c)-4(b)(4).
    (3) Plan of deferred compensation. An interest which is an interest 
in or stock of the subsidiary organization held by a trust which is part 
of a plan of deferred compensation (within the meaning of section 
406(a)(3) and the regulations thereunder) for the benefit of the 
employees of the parent organization or the subsidiary organization 
shall be excluded.
    (4) Principal owners, officers, etc. An interest which is an 
interest in or stock of the subsidiary organization owned (directly and 
with the application of Sec.  1.414(c)-4) by an individual who is a 
principal owner, officer, partner, or fiduciary of the parent 
organization shall be excluded.
    (5) Employees. An interest which is an interest in or stock of the 
subsidiary organization owned (directly and with the application of 
Sec.  1.414(c)-4) by an employee of the subsidiary organization shall be 
excluded if such interest or such stock is subject to conditions which 
substantially restrict or limit the employee's right (or if the employee 
constructively owns such interest or such stock, the direct or record 
owner's right) to dispose of such interest or such stock and which run 
in favor of the parent or subsidiary organization.
    (6) Controlled exempt organization. An interest which is an interest 
in or stock of the subsidiary organization shall be excluded if owned 
(directly and with the application of Sec.  1.414(c)-4) by an 
organization (other than the parent organization):
    (i) To which section 501 (relating to certain educational and 
charitable organizations which are exempt from tax) applies, and

[[Page 221]]

    (ii) Which is controlled directly or indirectly (within the meaning 
of paragraph (d)(7) of this section) by the parent organization or 
subsidiary organization, by an individual, estate, or trust that is a 
principal owner of the parent organization, by an officer, partner, or 
fiduciary of the parent organization, or by any combination thereof.
    (c) Brother-sister group of trades or businesses under common 
control--(1) In general. If five or fewer persons (hereinafter in this 
section referred to as ``common owners'') who are individuals, estates, 
or trusts own (directly and with the application of Sec.  1.414(c)-4)--
    (i) In the case of a corporation, 50 percent or more of the total 
combined voting power of all classes of stock entitled to vote or 50 
percent or more of the total value of shares of all classes of stock or 
such corporation,
    (ii) In the case of a trust or an estate, an actuarial interest 
(within the meaning of Sec.  1.414(c)-2(b)(2)(ii)) of 50 percent or more 
of such trust or estate, and
    (iii) In the case of a partnership, 50 percent or more of the 
profits or capital interest of such partnership, then for purposes of 
determining whether such organization is a member of a brother-sister 
group of trades or businesses under common control, an interest in such 
organization excluded under paragraph (c) (2), (3), or (4) of this 
section shall be treated as not outstanding.
    (2) Exempt employees' trust. An interest which is an interest in or 
stock of such organization held by an employees' trust described in 
section 401(a) which is exempt from tax under section 501(a) shall be 
excluded if such trust is for the benefit of the employees of such 
organization.
    (3) Employees. An interest which is an interest in or stock of such 
organization owned (directly and with the application of Sec.  1.414(c)-
4) by an employee of such organization shall be excluded if such 
interest or stock is subject to conditions which run in favor of a 
common owner of such organization or in favor of such organization and 
which substantially restrict or limit the employee's right (or if the 
employee constructively owns such interest or stock, the direct or 
record owner's right) to dispose of such interest or stock.
    (4) Controlled exempt organization. An interest which is an interest 
in or stock of such organization shall be excluded