26 CFR 1.401(a)(4)-5 Plan amendments and plan terminations.
(a) Plan amendments -- (1) General rule. A plan does not satisfy
section 401(a)(4) if a plan amendment or series of plan amendments
discriminates significantly in favor of highly compensated employees.
For this purpose, a plan amendment includes the establishment or
termination of a plan and any change in the benefits, rights, or
features under a plan.
(2) Facts-and-circumstances determination. Whether a plan amendment
or series of plan amendments discriminates significantly in favor of
highly compensated employees is determined based on all relevant facts
and circumstances. These include, for example, the relative numbers of
highly and nonhighly compensated employees affected by the plan
amendment, the relative accrued benefits of highly and nonhighly
compensated employees before and after the plan amendment, any
additional benefits provided to highly and nonhighly compensated
employees under other plans, the relative length of service of highly
and nonhighly compensated employees, the length of time the plan and the
benefit, right, or feature being amended have been in effect, and the
turnover of employees prior to the plan amendment. In the case of a
plan amendment that grants past service credits, the relevant facts and
circumstances also include the benefits former employees would have
received had the plan, as amended, been in effect throughout the period
for which past service credits are granted. For this purpose, past
service credits include benefits attributable to an employee's service
prior to the time a new plan is in effect, increases in existing
benefits resulting from an employee's service prior to the effective
date of a plan amendment, and benefits attributable to an employee's
service with another employer.
(3) Time at which determination is made. The requirements of this
paragraph (a) are generally applied at the time a plan amendment first
becomes effective for purposes of section 401(a). Thus, whether a plan
amendment with a delayed effective date discriminates significantly in
favor of highly compensated employees is generally determined when the
amendment actually becomes effective, and not when it is adopted. In
the case of an unpredictable contingent event benefit (within the
meaning of section 412(l)(7)), the determination as to whether the
amendment discriminates significantly in favor of highly compensated
employees is generally made at the time the contingency occurs.
(4) Treatment of certain prospective plan amendments. A plan
amendment increasing future benefits for highly compensated employees or
reducing future benefits for nonhighly compensated employees does not
necessarily discriminate significantly in favor of highly compensated
employees. For example, an amendment instituting use of the disparity
permitted under section 401(l) for the first time does not necessarily
discriminate significantly in favor of highly compensated employees.
(5) Safe harbor for certain grants of past service. A plan amendment
that credits past service is deemed not to discriminate significantly in
favor of highly compensated employees if the period for which the credit
is granted does not exceed the 5 years immediately preceding the year in
which the amendment first becomes effective, the past service credit is
granted on a reasonably uniform basis to current employees under the
plan, the amount of the credit is determined by applying the current
plan formula to the number of years being credited, and the period for
which past service credit is granted represents actual service (or
imputed service within the meaning of 1.401(a)(4)-11(d)) with the
employer or a previous employer. However, this safe harbor is not
available if a plan amendment granting past service credit for 5 years
is part of a pattern of amendments that significantly discriminates in
favor of highly compensated employees.
(6) Examples. The following examples illustrate the plan amendment
rules in this paragraph (a).
Example 1. Plan A is a defined benefit plan that covered both highly
and nonhighly compensated employees for most of its existence. The
employer decides to wind up its business. In the process of ceasing
operations, but at a time when the plan covers only highly compensated
employees, Plan A is amended to increase benefits and thereafter is
terminated. Plan A does not satisfy this paragraph (a).
Example 2. Plan B is a defined benefit plan that provides a social
security supplement that is not a QSUPP. After substantially all of the
highly compensated employees of the employer have benefited from the
supplement, but before a substantial number of nonhighly compensated
employees have become eligible for the supplement, Plan B is amended to
significantly reduce the amount of the supplement. Plan B does not
satisfy this paragraph (a).
Example 3. Plan C is a defined benefit plan that contains an
ancillary life insurance benefit available to all employees. The plan
is amended to eliminate this benefit at a time when life insurance
payments have been made only to beneficiaries of highly compensated
employees. Because all employees received the benefit of life insurance
coverage before Plan C was amended, Plan C does not fail to satisfy this
paragraph (a) merely as a result of the amendment.
Example 4. Plan D provides for a benefit of 1 percent of average
annual compensation per year of service. Ten years after Plan D is
adopted, it is amended to provide a benefit of 2 percent of average
annual compensation per year of service, including years of service
prior to the amendment. The amendment is effective only for employees
currently employed at the time of the amendment. The ratio of highly
compensated employees to highly compensated former employees is
significantly higher than the ratio of nonhighly compensated employees
to nonhighly compensated former employees. Plan D does not satisfy this
paragraph (a).
Example 5. The facts are the same as in Example 4, except that the
years of prior service are equivalent between highly and nonhighly
compensated employees who are current employees, and the group of
current employees with prior service would satisfy the nondiscriminatory
classification test of 1.410(b)-4 in the current and all prior plan
years for which past service credit is granted. Plan D does not fail to
satisfy this paragraph (a) merely as a result of the amendment.
Example 6. Employer V maintains Plan E, an accumulation plan. In
1993, Employer V amends Plan E to provide that the compensation used to
determine an employee's benefit for all preceding plan years shall not
be less than the employee's average annual compensation as of the close
of the 1993 plan year. The years of service and percentage increases in
compensation for highly compensated employees are reasonably comparable
to those of nonhighly compensated employees. In addition, the ratio of
highly compensated employees to highly compensated former employees is
proportional to the ratio of nonhighly compensated employees to
nonhighly compensated former employees. Plan E does not fail to satisfy
this paragraph (a) merely as a result of the amendment.
Example 7. Employer W currently has six nonexcludable employees, two
of whom, H1 and H2, are highly compensated employees, and the remaining
four of whom, N1 through N4, are nonhighly compensated employees. The
ratio of highly compensated employees to highly compensated former
employees is significantly higher then the ratio of nonhighly
compensated employees to nonhighly compensated former employees.
Employer W establishes Plan F, a defined benefit plan providing a
benefit of 1 percent of average annual compensation per year of service,
including years of service prior to the establishment of the plan. H1
and H2 each have 15 years of prior service, N1 has 9 years of past
service, N2 has 5 years, N3 has 3 years, and N4 has 1 year. Plan E does
not satisfy this paragraph (a).
Example 8. Assume the same facts as in Example 7, except that N1
through N4 were hired in the current year, and Employer W never employed
any nonhighly compensated employees prior to the current year. Thus, no
nonhighly compensated employees would have received additional benefits
had Plan F been in existence during the preceding 15 years. Plan F does
not fail to satisfy this paragraph (a) merely as a result of the grant
of past service.
Example 9. The facts are the same as in Example 7, except that Plan
F limits the grant of past service credit to 5 years, and the grant of
past service otherwise satisfies the safe harbor in paragraph (a)(5) of
this section. Plan F does not fail to satisfy this paragraph (a) merely
as a result of the grant of past service.
Example 10. The facts are the same as in Example 9, except that 5
years after the establishment of Plan F, Employer W amends the plan to
provide a benefit equal to 2 percent of average annual compensation per
year of service, taking into account all years of service since the
establishment of the plan. The ratio of highly compensated employees to
highly compensated former employees who terminated employment during the
5-year period since the establishment of the plan is significantly
higher than the ratio of nonhighly compensated employees to nonhighly
compensated former employees who terminated employment during the 5-year
period since the establishment of the plan. Although the amendment
described in this example might separately satisfy the safe harbor in
paragraph (a)(5) of this section, the safe harbor is not available with
respect to the amendment because, under these facts, the amendment is
part of a pattern of amendments that significantly discriminates in
favor of highly compensated employees.
Example 11. Employer Y established Plan G, a defined benefit plan,
covering all its employees in 1971. No past service credit was granted
to Employer Y's employees at the time Plan G was established. In 1990,
Employer Y acquires Division B from Employer Z. Employees of Division B
had been covered under a defined benefit plan maintained by Employer Z.
Employer Y amends Plan G to cover all employees of Division B and grants
past service credit to all employees of Division B for each year of
service with Employer Z beginning with 1971. Employer Y further amends
its plan to provide that benefits for employees of Division B under its
plan will be offset by benefits paid under the plan maintained by
Employer Z. Under these facts, Plan G does not fail to satisfy this
paragraph (a) merely as a result of these amendments.
Example 12. Plan H is an insurance contract plan within the meaning
of section 412(i). For all plan years before 1999, Plan H purchases
insurance contracts from Insurance Company J. In 1999, Plan H shifts
future purchases of insurance contracts to Insurance Company K. The
shift in insurance companies is a plan amendment subject to the
requirements of this paragraph (a).
(b) Pre-termination restrictions -- (1) Required provisions in
defined benefit plans. A defined benefit plan must incorporate
provisions restricting benefits and distributions as described in
paragraphs (b)(2) and (b)(3) of this section at the time the plan is
established or, if later, the effective date of these regulations,
unless the Commissioner determines that such provisions are not
necessary to prevent the prohibited discrimination that may occur in the
event of an early termination of the plan. For this purpose, the
restrictions apply to a plan within the meaning of section 414(l). Any
plan containing a provision described in this paragraph (b) satisfies
section 411(d)(2) and does not fail to satisfy section 411(a) or (d)(3)
merely because of the provision.
(2) Restriction of benefits. A plan must provide that, in the event
of plan termination, the benefit of any highly compensated employee (and
any highly compensated former employee) is limited to a benefit that is
nondiscriminatory under section 401(a)(4).
(3) Restrictions on distribution -- (i) Limit on annual payments. A
plan must provide that the annual payments to an employee described in
paragraph (b)(3)(ii) of this section are restricted to an amount equal
in each year to the payments that would be made on behalf of the
employee under --
(A) A straight life annuity that is the actuarial equivalent of the
accrued benefit and other benefits to which the employee is entitled
under the plan (other than a social security supplement), and
(B) The amount of the payments that the employee is entitled to
receive under a social security supplement. The restrictions in this
paragraph (b)(3) do not apply, however, if any one of the following
requirements is satisfied --
(1) After payment to an employee described in paragraph (b)(3)(ii) of
this section of all benefits payable to the employee under the plan, the
value of plan assets equals or exceeds 110 percent of the value of
current liabilities, as defined in section 412(l)(7),
(2) The value of the benefits payable to the employee under the plan
for an employee described in paragraph (b)(3)(ii) of this section is
less than 1 percent of the value of current liabilities before
distribution, or
(3) The value of the benefits payable to the employee under the plan
for an employee described in paragraph (b)(3)(ii) of this section does
not exceed the amount described in section 411(a)(11)(A) (restrictions
on certain mandatory distributions).
(ii) Employees whose benefits are restricted. The employees whose
benefits are restricted on distribution include all highly compensated
employees and highly compensated former employees. In any one year, the
total number of employees whose benefits are subject to restriction
under this section can be limited by the plan to a group of not less
than 25 highly compensated employees and highly compensated former
employees. If the group of affected employees is so limited by the
plan, the group must consist of those highly compensated employees and
highly compensated former employees with the greatest compensation in
the current or any prior year. Plan provisions defining or altering the
group of employees whose benefits are restricted under this paragraph
(b) may be amended at any time without violating section 411(d)(6).
(iii) ''Benefit'' defined. For purposes of this paragraph (b), the
term ''benefit'' includes, among other benefits, loans in excess of the
amounts set forth in section 72(p)(2)(A), any periodic income, any
withdrawal values payable to a living employee, and any death benefits
not provided for by insurance on the employee's life.
(iv) Determination of current liabilities. For purposes of this
paragraph (b), an employer required to file Form 5500 (Annual
Return/Report of Employee Benefit Plan (with more than 100
participants)) or Form 5500-C/R (Annual Return/Report of Employee
Benefit Plan (with less than 100 participants)) may use the value of
current liabilities as reported on Schedule B of the employer's most
recent, timely filed Form 5500 or Form 5500 C/R. Alternatively, an
employer is permitted to determine current liabilities as of a later
date. Employers that are not required to file Schedule B of the Form
5500 or Form 5500 C/R may apply rules similar to those applicable to
employers who do file Schedule B to determine the value of current
liabilities.
(v) Determination date for assets and liabilities. For purposes of
this paragraph (b), the value of plan assets and the value of current
liabilities must be determined as of the same date.
(4) Operational restrictions on certain money purchase pension plans.
A money purchase pension plan that has an accumulated funding
deficiency, within the meaning of section 412(a), must comply in
operation with the restrictions on benefits and distributions as
described in paragraphs (b)(2) and (b)(3) of this section. Restrictions
imposed by the requirements of this paragraph (b)(4) are treated as not
violating section 411(d)(6).
(T.D. 8360, 56 FR 47572, Sept. 19, 1991; 57 FR 4720, Feb. 7, 1992;
57 FR 10952, Mar. 31, 1992)
26 CFR 1.401(a)(4)-6 Contributory defined benefit plans.
(a) Overview -- (1) Contributions not allocated to separate accounts.
This section contains rules necessary for determining whether a
contributory DBplan satisfies the nondiscriminatory amount requirement
of 1.401(a)(4)-1(b)(2). A contributory DBplan must satisfy that
requirement separately with respect to benefits derived from employer
contributions (employer-provided benefits) and benefits derived from
employee contributions not allocated to separate accounts
(employee-provided benefits). See 1.401(a)(4)-1(c)(4). The general
rules for determining whether a defined benefit plan satisfies the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2) with
respect to the amount of employer-provided benefits are set forth in
1.401(a)(4)-3 and 1.401(a)(4)-8 (c) and (d). Paragraph (b) of this
section provides rules for determining the amount of employer-provided
benefits under a contributory DBplan for purposes of section 401(a)(4).
Paragraph (c) of this section provides the exclusive rules for
determining whether a contributory DBplan satisfies 1.401(a)(4)-1(b)(2)
with respect to the amount of employee-provided benefits.
(2) Contributions allocated to separate accounts. The portion of a
plan that consists of employee contributions allocated to separate
accounts is treated as a separate plan under the mandatory
disaggregation rules of 1.410(b)-7(c)(1). See 1.401(a)(4)-2(d)(2) for
the exclusive rules for determining whether a plan consisting of
contributions of this type satisfies the nondiscriminatory amount
requirement of 1.401(a)(4)-1(b)(2).
(b) Determination of employer-provided benefit -- (1) General rule.
An employee's employer-provided benefit under a contributory DBplan as
of a plan year for purposes of section 401(a)(4) equals the difference
between the employee's total benefit under the plan as of the plan year
and the employee's employee-provided benefit under the plan as of the
plan year. The rules of section 411(c) generally must be used to
determine an employee's employer-provided benefit for this purpose.
However, paragraphs (b)(2) through (b)(6) of this section provide
alternative methods for determining an employee's employer-provided
benefit. If one of these alternatives is applied with respect to an
employee in the plan for a plan year, it must be applied to all
employees in the plan for the plan year. Contributory DBplans that
satisfy paragraph (b)(2) or (b)(3) of this section may be eligible to
use the safe harbor described in 1.401(a)(4)-3(b)(3) (safe harbor for
unit credit plans). Contributory DBplans that satisfy paragraph (b)(4),
(b)(5) or (b)(6) of this section may be eligible to use any of the safe
harbors in 1.401(a)(4)-3 (b)(3) through (b)(7) (the safe harbors for
unit credit plans, unit credit plans using fractional accrual rule, and
flat benefit plans, the alternative safe harbor for flat benefit plans,
and the safe harbor for insurance contract plans, respectively). See
1.401(a)(4)-3(b)(8)(ix).
(2) Composition-of-workforce method -- (i) In general. A
contributory DBplan that satisfies paragraphs (b)(2)(ii) (A) and (B) of
this section may apply the requirements of 1.401(a)(4)-3 to the plan by
substituting employees' employer-provided benefit rates determined under
paragraph (b)(2)(iii) of this section for the accrual rates otherwise
applicable under that section.
(ii) Eligibility requirements -- (A) Uniform rate of employee
contributions. A contributory DBplan satisfies this paragraph
(b)(2)(ii)(A) if it requires all employees in the plan to make employee
contributions at the same rate (expressed as a percentage of plan year
compensation). A plan does not fail to satisfy this paragraph
(b)(2)(ii)(A) merely because it eliminates the requirement of employee
contributions for all employees with plan year compensation below a
stated dollar amount. Alternatively, a plan does not fail to satisfy
this paragraph (b)(2)(ii)(A) merely because it requires all employees in
the plan to make employee contributions at the same rate (expressed as a
percentage of plan year compensation) with respect to plan year
compensation up to a stated dollar amount, and at a higher rate
(expressed as a percentage of plan year compensation) that is the same
for all employees in the plan with respect to plan year compensation at
or above the stated dollar amount.
(B) Demographic requirements -- (1) In general. A contributory
DBplan satisfies this paragraph (b)(2)(ii)(B) if it satisfies one of the
demographic tests in paragraph (b)(2)(ii)(B) (2) or (3) of this section.
(2) Minimum percentage test. This test is satisfied only if more
than 40 percent of the nonhighly compensated employees in the plan have
attained ages at least equal to the plan's target age, and more than 20
percent (rounded up to the next whole number) of the nonhighly
compensated employees in the plan have attained ages at least equal to
the average attained age of the highly compensated employees in the
plan. For this purpose, a plan's target age is the lesser of age 50, or
the average attained age of the highly compensated employees in the plan
minus X years, where X equals 20 minus the number that is equal to 5
times the employee contribution rate under the plan (expressed as a
percentage of plan year compensation). In no case, however, may X years
be fewer than zero (0) years. Thus, for example, if the average
attained age of the highly compensated employees in the plan is 53 and
the employee contribution rate is 2 percent of plan year compensation,
the plan's target age is 43 years (i.e., 53 minus (20 minus (5 times
2))).
(3) Ratio test. This test is satisfied only if the percentage of all
nonhighly compensated nonexcludable employees, who are in the plan and
who have attained ages at least equal to the average attained age of the
highly compensated employees in the plan, is at least 70 percent of the
percentage of all highly compensated nonexcludable employees, who are in
the plan and who have attained ages at least equal to the average
attained age of the highly compensated employees in the plan. Attained
age must be determined as of the beginning of the plan year. In lieu of
determining the actual distribution of the attained ages of the highly
compensated employees, an employer may assume that 50 percent of all
highly compensated employees in the plan have attained ages at least
equal to the average attained age of the highly compensated employees in
the plan.
(iii) Determination of employer-provided benefit -- (A) Application
of factors to determine employee-provided benefit rate. The rate at
which employee-provided benefits are provided under a contributory
DBplan (the employee-provided benefit rate) may be determined for
purposes of this paragraph (b)(2) by multiplying the rate at which
employee contributions (expressed as a percentage of plan year
compensation) are required to be made under the plan by the factor
determined under paragraph (b)(2)(iv) of this section. In the case of a
contributory DBplan described in the second or third sentences of
paragraph (b)(2)(ii)(A) of this section (e.g., a plan requiring
different rates of employee contributions at different levels of plan
year compensation), the employee-provided benefit rate is determined for
all employees in the plan using the highest required rate of employee
contributions applicable to any level of plan year compensation for that
plan year.
(B) Employer-provided benefits under a unit credit safe harbor plan.
For purposes of applying the safe harbor in 1.401(a)(4)-3(b)(3) with
respect to employer-provided benefits under a section 401(l) plan, an
employee's gross benefit percentage, or an employee's excess benefit
percentage and base benefit percentage, are reduced by subtracting the
employees provided benefit rate determined under paragraph
(b)(2)(iii)(A) of this section from the respective percentages for the
plan year. For purposes of applying the safe harbor in
1.401(a)(4)-3(b)(3) with respect to employer-provided benefits under a
plan other than a section 401(l) plan, the employee's entire accrued
benefit is treated as employer-provided.
(C) Employer-provided benefits under the general test. For purposes
of applying the general test of 1.401(a)(4)-3(c) with respect to
employer-provided benefits, an employee's normal and most valuable
accrual rates otherwise determined under 1.401(a)(4)-3(d) are reduced
by subtracting the employee-provided benefit rate determined under
paragraph (b)(2)(iii)(A) of this section from the respective accrual
rates. This adjustment is made before applying the optional rules in
1.401(a)(4)-3(d)(6)(ii), (iv), (v), and (vi) (regarding imputation of
permitted disparity, grouping of accrual rates, floor on most valuable
accrual rates, and adjustment for certain disability benefits,
respectively). If employee contributions were not required, or were
required at a different rate (or rates), in prior plan years than in the
current plan year, a plan may not use the accrued-to-date or projected
method in 1.401(a)(4)-3(d) (3) and (4). The plan may, however, use one
of the fresh-start alternatives to these methods in 1.401(a)(4)-3(d)(6)
(vii) and (viii), provided that the plan uses a fresh-start date that is
no earlier than the last day of the last plan year in which employee
contributions were not required at the rate (or rates) applicable for
the current plan year.
(iv) Determination of plan factor. The factor for a plan is
determined under the following table based on the average entry age of
the employees in the plan and on whether or not the plan determines
benefits based on average compensation. For this purpose, average entry
age equals the average attained age of all employees in the plan, minus
the average years of participation of all employees in the plan. A plan
is treated as determining benefits based on average compensation if it
determines benefits based on compensation averaged over a specified
period not exceeding 5 consecutive years (or the employee's entire
period of employment with the employer, if shorter).
(v) Examples. The following examples illustrate the rules of this
paragraph (b)(2).
Example 1. Plan A is a contributory DBplan that is a defined benefit
excess plan providing a benefit equal to 2.0 percent of the employee's
average annual compensation at or below covered compensation, plus 2.5
percent of average annual compensation above covered compensation, times
years of service up to 35. Under the plan, average annual compensation
is determined using a 5-consecutive-year period for purposes of
1.401(a)(4)-3(e)(2). The plan requires employee contributions at a rate
of 4 percent of plan year compensation for all employees. Assume that
the plan satisfies the demographic requirements of paragraph
(b)(2)(ii)(B) of this section. Under these facts, the plan satisfies
the eligibility requirements of paragraph (b)(2)(ii) of this section.
Assume, further, that the average attained age for all employees in the
plan is 55, and that the average years of participation of all employees
in the plan is 10. The average entry age for the plan is therefore 45,
and, accordingly, the appropriate factor under the table is 0.2. Thus,
for a plan year, an employee's employee-provided benefit rate is 0.8
percent (4 percent 0.2). In applying the safe harbor requirements of
1.401(a)(4)-3(b)(3) to this plan (including the requirements of
1.401(l)-3), the employee's base benefit percentage is 1.2 percent, and
the employee's excess benefit percentage is 1.7.
Example 2. The facts are the same as in Example 1, except that the
employee contribution rate is 2 percent of plan year compensation for
the first $20,000, and 4 percent for plan year compensation at or above
that amount. In determining the employee-provided benefit rate under
the plan using the table in paragraph (b)(2)(iv) of this section, all
employees are assumed to make employee contributions at the 4 percent
rate. Thus, for a plan year, an employee's employee-provided benefit
rate is 0.8 percent (4 percent 0.2). In applying the safe harbor
requirements of 1.401(a)(4)-3(b)(3) to this plan (including the
requirements of 1.401(l)-3), the employee's base benefit percentage is
1.2 percent, and the employee's excess benefit percentage is 1.7.
Example 3. The facts are the same as in Example 1, except that the
plan is tested using the general test in 1.401(a)(4)-3(c). Assume
Employee X participates in Plan A and has a normal accrual rate for the
plan year (calculated with respect to Employee X's total accrued
benefit) of 2.2 percent of testing compensation before applying any of
the optional rules in 1.401(a)(4)-3(d)(6)(ii), (iv), (v), and (vi). In
applying the general test in 1.401(a)(4)-3(c) with respect to
employer-provided benefits, this rate is reduced by 0.8 to yield a
normal accrual rate of 1.4 percent. This rate may then be adjusted using
any of the optional rules in 1.401(a)(4)-3(d)(6)(ii), (iv), (v), and
(vi).
(3) Minimum benefit method -- (i) Application of uniform factors. A
contributory DBplan that satisfies the uniform rate requirement of
paragraph (b)(2)(ii)(A) of this section and the minimum benefit
requirement of paragraph (b)(3)(ii) of this section may apply the
adjustments provided in paragraph (b)(2)(iii) of this section as if the
average entry age of employees in the plan were between 30 and 40.
Thus, if this minimum benefit requirement is satisfied, a plan need not
satisfy the demographic requirements of paragraph (b)(2)(ii)(B) of this
section or actually determine the average entry age of the employees in
the plan.
(ii) Minimum benefit requirement. This requirement is satisfied if
the plan provides that, in plan years beginning after December 31, 1991,
each employee will accrue a benefit that equals or exceeds the sum of --
(A) The accrued benefit derived from employee contributions made for
plan years beginning after December 31, 1991, determined in accordance
with section 411(c), and
(B) Fifty percent of the total benefit accrued in plan years
beginning after December 31, 1991, as determined under the plan benefit
formula without regard to that portion of the formula designed to
satisfy the minimum benefit requirement of this paragraph (b)(3)(ii).
(iii) Example. The following example illustrates the minimum benefit
method of this paragraph (b)(3).
Example. Plan A is contributory DBplan. For the plan year beginning
in 1992, Employee X participates in Plan A and accrues a benefit under
the terms of the plan (without regard to the minimum benefit requirement
of paragraph (b)(3)(ii) of this section) of $3,000. The portion of
Employee X's benefit accrual for the plan year beginning in 1992 derived
from employee contributions is $2,000, determined by applying the rules
of section 411(c) to such contributions. The requirement of paragraph
(b)(3)(ii) of this section is not satisfied for the plan year beginning
in 1992 unless the plan provides that Employee A's benefit accrual for
the plan year beginning in 1992 is equal to $3,500 ($2,000 plus 50
percent of $3,000).
(4) Grandfather rule for plans in existence on May 14, 1990. A
contributory DBplan that satisfies the requirements of paragraph (c)(4)
of this section may determine an employee's employer-provided benefit by
subtracting from the employee's total benefit the employee-provided
benefits determined using any reasonable method set forth in the plan,
provided that it is the same method used in determining whether the plan
satisfies paragraph (c)(4)(iv) of this section.
(5) Government plan method. A contributory DBplan that is
established and maintained for its employees by the government of any
state or political subdivision or by any agency or instrumentality
thereof may treat an employee's total benefit as entirely
employer-provided.
(6) Cessation of employee contributions method. If a contributory
DBplan provides that no employee contributions may be made to the plan
for plan years beginning after December 31, 1991, the plan may treat an
employee's total benefit as entirely employer-provided.
(c) Rules applicable in determining whether employee-provided
benefits are nondiscriminatory in amount -- (1) In general. A
contributory DBplan satisfies 1.401(a)(4)-1(b)(2) with respect to the
amount of employee-provided benefits for a plan year only if the plan
satisfies the requirements of paragraph (c)(2), (c)(3), or (c)(4) of
this section for the plan year. This requirement applies regardless of
the method used to determine the amount of employer-provided benefits
under paragraph (b) of this section.
(2) Same rate of contributions. This requirement is satisfied for a
plan year if the plan requires all employees in the plan to make
employee contributions at the same rate (expressed as a percentage of
plan year compensation) for the plan year.
(3) Total benefits method. This requirement is satisfied for a plan
year if --
(i) The total benefits (i.e., the sum of employer-provided and
employee-provided benefits) under the plan would satisfy 1.401(a)(4)-3
if all benefits were treated as employer-provided benefits, and
(ii) The plan either --
(A) Requires all employees in the plan with plan year compensation at
or above a stated dollar amount to make employee contributions at the
same rate (expressed as a percentage of plan year compensation), and
does not require employees with plan year compensation below that amount
to make employee contributions, or
(B) Requires all employees in the plan to make employee contributions
at the same rate (expressed as a percentage of plan year compensation)
with respect to plan year compensation up to a stated dollar amount, and
at a higher rate (expressed as a percentage of plan year compensation)
that is the same for all employees in the plan with respect to plan year
compensation at or above the amount.
(4) Grandfather rule for plans in existence on May 14, 1990. This
requirement is satisfied for a plan year if all the following
requirements are met --
(i) On May 14, 1990, the plan required employee contributions at a
greater rate (expressed as a percentage of compensation) at higher
levels of compensation than at lower levels of compensation;
(ii) The required rate of employee contributions is not increased
after May 14, 1990, although the level of compensation at which employee
contributions are required may be increased or decreased;
(iii) For plan years beginning after December 31, 1991, all employees
in the plan are permitted to make employee contributions under the plan
at a uniform rate with respect to all compensation; and
(iv) The benefits provided on account of employee contributions at
lower levels of compensation are comparable to those provided on account
of employee contributions at higher levels of compensation.
(T.D. 8360, 56 FR 47574, Sept. 19, 1991)
26 CFR 1.401(a)(4)-7 Imputation of permitted disparity.
(a) Introduction -- (1) In general. In determining whether a plan
satisfies section 401(a)(4) with respect to the amount of contributions
or benefits, section 401(a)(5)(C) allows the disparities permitted under
section 401(l) to be taken into account. For purposes of satisfying the
safe harbors of 1.401(a)(4)-2(b)(3) and 1.401(a)(4)-3(b), permitted
disparity may be taken into account only by satisfying section 401(l) in
form in accordance with 1.401(l)-2 or 1.401(l)-3, respectively.
Alternatively, for purposes of the general tests of 1.401(a)(4)-2(c)
and 1.401(a)(4)-3(c), permitted disparity may be taken into account only
in accordance with the rules of this section. In general, this section
allows permitted disparity to be arithmetically imputed with respect to
employer-provided contributions or benefits by determining an adjusted
allocation or accrual rate that appropriately accounts for the permitted
disparity with respect to each employee. This section contains the
exclusive rules for imputing permitted disparity. See
1.401(a)(4)-8(b)(2)(i)(D) and (c)(2)(i)(E) and 1.401(a)(4)-9(b)(2)(iv)
for special rules applying the rules of this section with respect to
equivalent allocation rates and equivalent accrual rates.
(2) Overview. Paragraph (b) of this section provides rules for
imputing permitted disparity with respect to employer-provided
contributions by adjusting each employee's unadjusted allocation rate.
Paragraph (c) of this section provides rules for imputing permitted
disparity with respect to employer-provided benefits by adjusting each
employee's unadjusted accrual rate. Paragraph (d) of this section
contains rules of general application.
(b) Adjusting allocation rates -- (1) In general. This paragraph (b)
provides rules for adjusting unadjusted allocation rates to take into
account permitted disparity. These rules produce an adjusted allocation
rate for each employee by determining the excess contribution percentage
under the hypothetical formula that would yield the allocation actually
received by the employee, if the plan took into account the full
disparity permitted under section 401(l)(2) and used the taxable wage
base as the integration level. This adjusted allocation rate is used to
determine whether the amount of contributions under the plan satisfies
the general test of 1.401(a)(4)-2(c) and to apply the average benefit
percentage test on the basis of contributions under 1.410(b)-5(d)(5) or
(e)(2). Paragraph (b)(2) of this section applies to employees whose
plan year compensation does not exceed the taxable wage base, and
paragraph (b)(3) of this section applies to employees whose plan year
compensation exceeds the taxable wage base. Paragraph (b)(4) of this
section provides definitions, and paragraph (b)(5) of this section
provides an example.
(2) Employees whose plan year compensation does not exceed taxable
wage base. If an employee's plan year compensation does not exceed the
taxable wage base, the employee's adjusted allocation rate is the lesser
of the A rate and the B rate determined under the formulas below, where
the permitted disparity rate and the unadjusted allocation rate are
determined under paragraphs (b)(4) (ii) and (iv) of this section,
respectively.
A Rate = 2 unadjusted allocation rate.
B Rate = unadjusted allocation rate + permitted disparity rate.
(3) Employees whose plan year compensation exceeds taxable wage base.
If an employee's plan year compensation exceeds the taxable wage base,
the employee's adjusted allocation rate is the lesser of the C rate and
the D rate determined under the formulas below, where allocations and
the permitted disparity rate are determined under paragraphs (b)(4) (i)
and (ii), respectively.
(4) Definitions. In applying this paragraph (b), the following
definitions govern.
(i) Allocations. Allocations means the amount determined by
multiplying the employee's plan year compensation by the employee's
unadjusted allocation rate.
(ii) Permitted disparity rate -- (A) In general. Permitted disparity
rate means the rate in effect as of the beginning of the plan year under
section 401(l)(2)(A)(ii) (e.g., 5.7 percent for plan years beginning in
1990).
(B) Cumulative permitted disparity limit. Notwithstanding paragraph
(b)(4)(ii)(A) of this section, the permitted disparity rate is zero for
an employee who has benefited under a defined benefit plan taken into
account under 1.401(l)-5(a)(3) for any plan year beginning after
December 31, 1991, if imputing permitted disparity would result in a
cumulative disparity fraction for the employee, as defined in
1.401(l)-5(c)(2), that exceeds 35. An employee is not treated as
benefiting under a defined benefit plan for a plan year beginning after
December 31, 1991, if the employer can establish that for that plan year
the defined benefit plan was not a section 401(l) plan and did not
impute permitted disparity under this section. For purposes of this
paragraph (b)(4)(ii)(B), a DB/DC plan (as described in
1.401(a)(4)-9(a)) and a target benefit plan (that satisfies
1.401(a)(4)-8(b)(3)) are treated as defined benefit plans, but a cash
balance plan (that satisfies 1.401(a)(4)-8(c)(3)) is treated as a
defined contribution plan. Thus, for example, if, for any plan year
beginning after December 31, 1991, an employee benefits under a defined
contribution plan that is included in a DB/DC plan that imputes
permitted disparity under this section, the employee is treated as
benefiting under a defined benefit plan.
(iii) Taxable wage base. Taxable wage base means the taxable wage
base, as defined in 1.401(l)-1(c)(32), in effect at the beginning of
the plan year.
(iv) Unadjusted allocation rate. Unadjusted allocation rate means
the employee's allocation rate determined under 1.401(a)(4)-2(c)(2)(i)
for the plan year (expressed as a percentage of plan year compensation),
without imputing permitted disparity under this section.
(5) Example. (a) Employees M and N participate in a profit-sharing
plan maintained by Employer X. Employee M has plan year compensation of
$30,000 in the 1990 plan year and has an unadjusted allocation rate of 5
percent. Employee N has plan year compensation of $100,000 in the 1990
plan year and has an unadjusted allocation rate of 8 percent. The
taxable wage base in 1990 is $51,300.
(b) Because Employee M's plan year compensation does not exceed the
taxable wage base, Employee M's A rate is 10 percent (2 5 percent),
and Employee M's B rate is 10.7 percent (5 percent + 5.7 percent). Thus,
Employee M's adjusted allocation rate is 10 percent, the lesser of the A
rate and the B rate.
(c) Employee N's allocations are $8,000 (8 percent $100,000).
Because Employee N's plan year compensation exceeds the taxable wage
base, Employee N's C rate is 10.76 percent ($8,000 divided by ($100,000
^ ( 1/2 $51,300))), and Employee N's D rate is 10.92 percent (($8,000
+ (5.7 percent $51,300)) divided by $100,000). Thus, Employee N's
adjusted allocation rate is 10.76 percent, the lesser of the C rate and
the D rate.
(c) Adjusting accrual rates -- (1) In general. This paragraph (c)
provides rules for adjusting unadjusted accrual rates to take into
account permitted disparity. These rules produce an adjusted accrual
rate for each employee by determining the excess benefit percentage
under the hypothetical plan formula that would yield the
employer-provided accrual actually received by the employee, if the plan
took into account the full permitted disparity under section
401(l)(3)(A) in each of the first 35 years of an employee's testing
service under the plan and used the employee's covered compensation as
the integration level. This adjusted accrual rate is used to determine
whether the amount of employer-provided benefits under the plan
satisfies the alternative safe harbor for flat benefit plans under
1.401(a)(4)-3(b)(6) or the general test of 1.401(a)(4)-3(c), and to
apply the average benefit percentage test on the basis of benefits under
1.410(b)-5 (d)(6) or (e)(2). Paragraph (c)(2) of this section applies
to employees whose testing compensation does not exceed covered
compensation, and paragraph (c)(3) of this section applies to employees
whose testing compensation exceeds covered compensation. Paragraph
(c)(4) of this section provides definitions, and paragraph (c)(5) of
this section provides an example.
(2) Employees whose testing compensation does not exceed covered
compensaton. If an employee's testing compensation does not exceed the
employee's covered compensation, the employee's adjusted accrual rate is
the lesser of the A rate and the B rate determined under the formulas
below, where the permitted disparity factor and the unadjusted accrual
rate are determined under paragraphs (c)(4) (iii) and (vi) of this
section, respectively.
A Rate=2 unadjusted accrual rate
B Rate=unadjusted accrual rate + permitted disparity factor
(3) Employees whose testing compensation exceeds covered
compensation. If an employee's testing compensation exceeds the
employee's covered compensation, the employee's adjusted accrual rate is
the lesser of the C rate and D rate determined under the formulas below,
where the employer-provided accrual and the permitted disparity factor
are determined under paragraph (c)(4) (ii) and (iii) of this section
respectively.
(4) Definitions. For purposes of this paragraph (c), the following
definitions apply.
(i) Covered compensation. Covered compensation means covered
compensation as defined in 1.401(l)-1(c)(7). Notwithstanding
1.401(l)-1(c)(7)(iii), an employee's covered compensation must be
automatically adjusted each plan year for purposes of applying this
paragraph (c).
(ii) Employer-provided accrual. Employer-provided accrual means the
amount determined by multiplying the employee's testing compensation by
the employee's unadjusted accrual rate.
(iii) Permitted disparity factor -- (A) In general. Permitted
disparity factor for an employee means the employee's annual permitted
disparity factor determined under paragraph (c)(4)(iii)(B) of this
section, adjusted as provided in paragraph (c)(4)(iii) (C), (D), or (E)
of this section for the annual method, the accrued-to-date method, or
the projected method, whichever is applicable. Paragraph (c)(4)(iii)(F)
of this section contains rules for satisfying the overall permitted
disparity limits under section 401(l). The permitted disparity factor
must be determined under the same method for all employees in the plan,
unless otherwise provided (see, e.g., the special rules for terminated
employees and section 401(a)(17) employees in 1.401(a)(4)-3
(d)(3)(iii), (d)(4)(iii), (d)(4)(iv), (d)(6)(viii)(D)).
(B) Annual permitted disparity factor. An employee's annual
permitted disparity factor is 0.75 percent adjusted, pursuant to
1.401(l)-3(e), using as the age at which benefits commence the lesser of
age 65 or the employee's testing age. For example, if the employee's
testing age is 62, the annual permitted disparity factor is 0.6 percent
for an employee whose social security retirement age is 65. Generally,
if the employee's testing age is 65, the annual permitted disparity
factor is 0.75 percent for an employee whose social security retirement
age is 65, 0.70 percent for an employee whose social security retirement
age is 66, and 0.65 percent for an employee whose social security
retirement age is 67. For this purpose, a plan is permitted to treat
all employees (of whatever age) as having a social security retirement
age of 67. Thus, the plan may use an annual permitted disparity factor
of 0.65 percent for all employees in the plan whose testing age is 65.
No adjustments are made in the annual permitted disparity factor unless
an employee's testing age is different from the employee's social
security retirement age.
(C) Annual method. If unadjusted accrual rates are determined under
the annual method of 1.401(a)(4)-3(d)(2), the permitted disparity
factor for an employee is generally the annual disparity factor. In the
case of an employee with more than 35 years of testing service, the
permitted disparity factor for the current plan year is zero.
(D) Accrued-to-date method. If unadjusted accrual rates are
determined under the accrued-to-date method of 1.401(a)(4)-3(d)(3), an
employee's permitted disparity factor is determined as follows --
(1) General rule. The permitted disparity factor is equal to the
annual permitted disparity factor for the employee multiplied by the
employee's testing service (not to exceed 35), and then divided by the
employee's testing service.
(2) Fresh-start alternative. If a plan uses the fresh-start
alternative for the accrued-to-date method under
1.401(a)(4)-3(d)(6)(vii), the permitted disparity factor is equal to the
annual permitted disparity factor for the employee multiplied by the
employee's testing service since the fresh-start date (not to exceed 35
minus the employee's testing service as of the fresh-start date), and
then divided by the employee's testing service since the fresh-start
date.
(E) Projected method. If unadjusted accrual rates are determined
under the projected method of 1.401(a)(4)-3(d)(4), an employee's
permitted disparity factor is determined as follows --
(1) General rule. The permitted disparity factor is equal to the
annual permitted disparity factor for the employee multiplied by the
employee's projected testing service (not to exceed 35), and then
divided by the employee's projected testing service.
(2) Fresh-start alternative. If a plan uses the fresh-start
alternative for the projected method under 1.401(a)(4)-3(d)(6)(viii),
the permitted disparity factor is equal to the annual permitted
disparity factor for the employee multiplied by the employee's projected
testing service since the fresh-start date (not to exceed 35 minus the
employee's testing service as of the fresh-start date), and then divided
by the employee's projected testing service since the fresh-start date.
(3) Projected testing service. For purposes of this paragraph
(c)(4)(iv)(E), an employee's projected testing service is the testing
service used in determining the employee's unadjusted accrual rate.
(F) Cumulative permitted disparity limit. The 35 years used in
paragraph (c)(4)(iii) (C), (D)(1), and (E)(1) of this section must be
reduced by the employee's cumulative disparity fraction, as defined in
1.401(l)-5(c)(2), determined solely with respect to the employee's total
years of service under all other plans taken into account under
1.401(l)-5(a)(3). The 35 years used in paragraph (c)(4)(iii) (D)(2) and
(E)(2) of this section must be reduced by the employee's cumulative
disparity fraction, as defined in 1.401(l)-5(c)(2), determined solely
with respect to the employee's total years of service under all other
plans taken into account under 1.401(l)-5(a)(3) for plan years of those
other plans ending after the fresh-start date.
(iv) Social security retirement age. Social security retirement age
means social security retirement age as defined in section 415(b)(8).
(v) Testing compensation. Testing compensation means average annual
compensation as defined in 1.401(a)(4)-3(e)(2), modified (if
applicable) in accordance with 1.401(a)(4)-3(e)(3)(iii). However, if
unadjusted accrual rates are determined under the annual method of
1.401(a)(4)-3(d)(2), testing compensation may be determined using plan
year compensation.
(vi) Unadjusted accrual rate. Unadjusted accrual rate means the
normal or most valuable accrual rate, whichever is being determined for
the employee under 1.401(a)(4)-3(d), expressed as a percentage of
testing compensation, without imputing permitted disparity under this
section.
(5) Example. The following example illustrates the application of
this definition.
Example. (a) Employees M and N participate in a defined benefit plan
that uses a normal retirement age of 65. The plan is being tested for
the plan year under 1.401(a)(4)-3(c), using unadjusted accrual rates
determined under the annual method of 1.401(a)(4)-3(d)(2). Employee M
has an unadjusted normal accrual rate of 1.48 percent, testing
compensation of $21,000, and an employer-provided accrual of $311 (1.48
percent $21,000). Employee N has an unadjusted normal accrual rate of
1.7 percent, testing compensation of $106,000, and an employer-provided
accrual of $1,802 (1.7 percent $106,000). The covered compensation of
both Employees M and N is $25,000, and social security retirement age
for both employees is 65. Neither employee has testing service of more
than 35 years and neither has ever participated in another plan.
(b) Because Employee M's testing compensation does not exceed covered
compensation, Employee M's A rate is 2.96 percent (2 1.48 percent),
and Employee M's B rate is 2.23 percent (1.48 percent + 0.75 percent).
Thus, Employee M's adjusted accrual rate is 2.23 percent, the lesser of
the A rate and the B rate.
(c) Because Employee N's testing compensation exceeds covered
compensation, Employee N's C rate is 1.93 percent ($1,802/($106,000
minus (0.5 $25,000))), and Employee N's D rate is 1.88 percent
(($1,802 + (0.75 percent 25,000))/$106,000). Thus Employee N's
adjusted accrual rate is 1.88 percent, the lesser of the C rate and the
D rate.
(d) Rules of general application -- (1) Eligible plans. The rules in
this section may be used only for those plans to which the permitted
disparity rules of section 401(l) are available. Therefore, these rules
may generally not be used, for example, by an employer (determined for
purposes of the Federal Insurance Contributions Act or the Railroad
Retirement Tax Act) not subject to the tax under section 3111(a) or
3221. See 1.401(l)-1(a)(3) for other arrangements to which section
401(l) is not available.
(2) Consistency. In general, if the rules of this section are
applied to a plan, permitted disparity must be imputed for all employees
in the plan. However, permitted disparity need not be imputed for
employees, including self-employed individuals within the meaning of
section 401(c)(1), not covered by the any of the taxes under section
3111(a), section 3221, or section 1401, provided that permitted
disparity is not imputed for any of those employees. In addition,
permitted disparity may not be imputed for an employee if imputation
would violate the overall permitted disparity rules of 1.401(l)-5. See
paragraph (d)(3) of this section.
(3) Overall permitted disparity. The annual overall permitted
disparity limits of 1.401(l)-5(b) apply to the employer-provided
contributions and benefits for an employee under all plans taken into
account under 1.401(l)-5(a)(3). Thus, if an employee who benefits under
the plan for the current plan year also benefits under a section 401(l)
plan for the plan year ending with or within the current plan year,
permitted disparity may not be imputed for that employee for the plan
year. Similarly, if an employee who benefits under the plan for the
current plan year also benefits under another plan of the employer for
the plan year ending with or within the current plan year, disparity may
be imputed for that employee under only one of the plans. See
1.401(l)-5(b)(9), Example 4.
(4) Relationship to the other adjustments. Permitted disparity is
imputed under this section after taking into account the value of any
includible disability benefits under 1.401(a)(4)-3(d)(6)(vi) and before
grouping allocation or accrual rates under 1.401(a)(4)-2(c)(2)(v) or
1.401(a)(4)-3(d)(6)(iv).
(5) Compensation used for amounts testing. In applying
1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-8, 1.401(a)(4)-9, and
1.410(b)-5 to the amount of contributions or benefits under the plan, a
plan that imputes permitted disparity must use the same amount of plan
year compensation that is used in adjusting allocation rates under
paragraph (b) of this section or the same amount of testing compensation
that is used in adjusting accrual rates under paragraph (c) of this
section, as applicable. Thus, for example, if an employee's unadjusted
accrual rates are determined based on testing compensation of $26,512,
that same amount of testing compensation must be used to compute the
employees' adjusted accrual rates under paragraph (c) of this section.
(T.D. 8360, 56 FR 47577, Sept. 19, 1991; 57 FR 4720, Feb. 7, 1992;
57 FR 10952, Mar. 31, 1992)
26 CFR 1.401(a)(4)-8 Cross-testing.
(a) Introduction -- (1) Overview. In order to satisfy section
401(a)(4), either the contributions or the benefits provided under a
plan must be nondiscriminatory in amount. See 1.401(a)(4)-1(b)(2).
Whether a defined contribution plan satisfies this requirement is
generally determined on a contributions basis under 1.401(a)(4)-2. As
an alternative, however, a defined contribution plan may be tested with
respect to the equivalent amount of benefits under the rules provided in
paragraph (b) of this section. This alternative is not available to an
ESOP, a section 401(k) plan, or a section 401(m) plan. Similarly,
whether a defined benefit plan discriminates in favor of highly
compensated employees with respect to the amount of employer-provided
contributions or benefits is generally determined on a benefits basis
under 1.401(a)(4)-3. As an alternative, however, a defined benefit plan
may be tested with respect to the equivalent amount of contributions
under the rules provided in paragraph (c) of this section. Paragraphs
(b) and (c) of this section generally require the determination of
individual equivalent accrual or allocation rates. Paragraphs (b)(3),
(c)(3), and (d) of this section, however, contain additional safe harbor
testing methods for target benefit plans, cash balance plans, and
defined benefit plans that are part of floor-offset arrangements,
respectively, that generally may be satisfied on a design basis.
(2) Separate testing of employer-provided and employee-provided
benefits. This section applies solely for purposes of determining
whether a plan satisfies the nondiscriminatory amount requirement of
1.401(a)(4)-1(b)(2) with respect to the amount of employer-provided
benefits or contributions. In the case of a contributory DBplan tested
under paragraph (c)(1) of this section, the rules in
1.401(a)(4)-6(b)(1) (section 411(c) method), (b)(5) (government plan
method), or (b)(6) (cessation-of-employee-contributions method) must be
used to determine the amount of each employee's employer-provided
benefit. See 1.401(a)(4)-2(d)(2) for the exclusive rules for
determining whether a plan consisting of employee contributions
allocated to separate accounts satisfies the nondiscriminatory amount
requirement of 1.401(a)(4)-1(b)(2).
(b) Nondiscrimination in amount of benefits provided under a defined
contribution plan -- (1) General rule. A defined contribution plan
satisfies section 401(a)(4) with respect to an equivalent amount of
benefits for a plan year if each rate group under the plan satisfies
section 410(b). For purposes of this paragraph (b)(1), a rate group
exists under the plan for each highly compensated employee in the plan
and consists of the highly compensated employee and all other employees
(both highly and nonhighly compensated) in the plan who have an
equivalent accrual rate greater than or equal to the highly compensated
employee's equivalent accrual rate. Thus, an employee is in the rate
group for each highly compensated employee in the plan who has an
equivalent accrual rate less than or equal to the employee's equivalent
accrual rate. Whether a rate group satisfies section 410(b) is
determined by applying the rules in 1.401(a)(4)-3(c)(3). Allocations
under a defined contribution plan are converted into equivalent accrual
rates for this purpose using either the annual or the accrued-to-date
method in paragraph (b)(2) of this section. Paragraph (b)(3) of this
section contains an optional design-based testing method for target
benefit plans.
(2) Determination of equivalent accrual rates -- (i) Annual method.
Amounts allocated to employees' accounts under a defined contribution
plan for a plan year are converted into equivalent accrual rates under
the annual method as follows --
(A) Determine the dollar amount of the allocations under the plan
taken into account under 1.401(a)(4)-2(c)(2)(ii) for the plan year with
respect to each employee.
(B) Normalize each amount determined under paragraph (b)(2)(i)(A) of
this section. For this purpose, the amount determined in paragraph
(b)(2)(i)(A) of this section is treated as a single-sum benefit that is
immediately and unconditionally payable to the employee. The interest
rate used for this purpose must be a standard interest rate, and the
straight life annuity factor must be based on the same or a different
standard interest rate and a standard mortality table. The life annuity
factor must be based on the employee's testing age determined without
regard to paragraph (4) of the definition of testing age in
1.401(a)(4)-12 (current-age rule). All actuarial assumptions used for
this purpose must be applied on a consistent basis to all employees in
the plan.
(C) Express the annual payment under each normalized annuity
determined under paragraph (b)(2)(i)(B) of this section either as a
dollar amount or as a percentage of the employee's testing compensation
for the plan year. If testing compensation is defined as plan year
compensation, the modifications in 1.401(a)(4)-3(e)(3)(ii) do not
apply.
(D) The employer may impute permitted disparity to the extent allowed
under the rules of 1.401(a)(4)-7 using the annual method in
1.401(a)(4)-7(c)(4)(iii)(C). In determining each employee's adjusted
accrual rate for purposes of that section, the amount determined under
paragraph (b)(2)(i)(C) of this section is substituted for the employee's
unadjusted accrual rate. If permitted disparity is taken into account,
it must be taken into account for all employees in the plan.
(E) The employer may apply the grouping rules of
1.401(a)(4)-3(d)(6)(iv) to the equivalent accrual rates determined under
paragraph (b)(2)(i)(C) of this section (or, if permitted disparity is
taken into account, paragraph (b)(2)(i)(D) of this section).
(ii) Accrued-to-date method -- (A) General rule. A method analogous
to the accrued-to-date method in 1.401(a)(4)-3(d)(3) may be used
instead of the annual method in paragraph (b)(2)(i) of this section to
determine employees' equivalent accrual rates under a defined
contribution plan for a plan year. If this method is used, each
employee's equivalent accrual rate is determined by substituting the
employee's adjusted account balance (within the meaning of paragraph
(b)(2)(ii)(C) of this section) for the plan year, divided by the
employee's testing service for the plan year, for the amount determined
under paragraph (b)(2)(i)(A) of this section. In addition, in applying
the normalization requirement in paragraph (b)(2)(i)(B) of this section,
the employee's testing age is determined without regard to paragraph (4)
of the definition of testing age in 1.401(a)(4)-12 (current-age rule)
for all purposes, and not merely for purposes of determining the
straight life annuity factor that must be applied. If testing
compensation is defined as plan year compensation, the modifications in
1.401(a)(4)-3(e)(3)(ii) (A) and (B) must be made. In addition, if
permitted disparity is taken into account under paragraph (b)(2)(i)(D)
of this section, the accrued-to-date method in
1.401(a)(4)-7(c)(4)(iii)(D) must be applied.
(B) Fresh-start alternative. The accrued-to-date method provided in
this paragraph (b)(2)(ii) may be applied solely with respect to testing
service during, and adjusted account balances attributable to
allocations made for, plan years beginning after a fresh-start date.
(C) Determination of adjusted account balance. For purposes of this
paragraph (b)(2)(ii), an employee's adjusted account balance is the
employee's actual account balance attributable to allocations taken into
account under 1.401(a)(4)-2(c)(2)(ii) for all plan years taken into
account under this paragraph (b)(2)(ii), plus any additional amounts
that would have been included in that portion of the account balance but
for the fact that they were previously distributed (including an
adjustment for interest that would have been earned with respect to such
prior distributions calculated at a rate of interest that is reasonably
consistent with the investment performance of the plan). For purposes
of the foregoing, an employer may disregard distributions made to a
nonhighly compensated employee, as well as distributions made to any
employee in plan years beginning before a selected date no later than
January 1, 1986, that is the same for all employees in the plan.
(3) Safe harbor testing method for target benefit plans -- (i)
General rule. A target benefit plan is a money purchase pension plan
under which contributions to an employee's account are determined by
reference to the amounts necessary to fund the employee's stated benefit
under the plan. Whether a target benefit plan satisfies section
401(a)(4) with respect to an equivalent amount of benefits is generally
determined under paragraphs (b)(1) and (b)(2) of this section. A target
benefit plan is deemed to satisfy section 401(a)(4) with respect to an
equivalent amount of benefits, however, if each of the following
requirements is satisfied --
(A) Form of plan. The plan satisfies the uniformity requirements of
1.401(a)(4)-2(b)(2) (regarding a plan's normal retirement age,
allocation formula, and vesting and service-crediting rules), taking
into account the relevant exceptions provided in 1.401(a)(4)-2(b)(5).
(B) Stated benefit formula. Each employee's stated benefit is
determined as a straight life annuity under a unit credit fractional
rule or flat benefit formula that would satisfy the requirements of
1.401(a)(4)-3(b) (4) or (b)(5), respectively, and that would satisfy
each of the uniformity requirements in 1.401(a)(4)-3(b)(2) (taking into
account the relevant exceptions provided in 1.401(a)(4)-3(b)(8)), if
the plan were a defined benefit plan with the same benefit formula. In
determining whether these requirements are satisfied, the stated benefit
at normal retirement age is assumed to accrue ratably over each
employee's period of plan participation through normal retirement age
for which the employee was covered by the stated benefit formula in
accordance with 1.401(a)(4)-3(b)(4)(i)(B) or (b)(5)(i)(B). In
addition, the rules of 1.401(a)(4)-3(f) do not apply. An employee's
stated benefit may not take into account years in which the employee did
not participate in the plan or in which the plan did not satisfy this
paragraph (b)(3). See 1.401(a)(4)-13(e)(1) for a special rule treating
certain plans as satisfying this paragraph (b)(3) in years prior to the
effective date applicable to the plan under 1.401(a)(4)-13 (a) or (b).
(C) Employer contributions. Employer contributions with respect to
each employee are based exclusively on the employee's stated benefit
using the method provided in paragraph (b)(3)(iv) of this section, and
forfeitures and any other amounts under the plan taken into account
under 1.401(a)(4)-2(c)(2)(ii) are used exclusively to reduce employer
contributions.
(D) Employee contributions. Employee contributions (if any) are not
used to fund the stated benefit.
(E) Permitted disparity. If permitted disparity is taken into
account, the stated benefit formula satisfies 1.401(l)-3. For this
purpose, the 0.75-percent factor in the maximum excess or offset
allowance in 1.401(l)-3(b)(2)(i) or (b)(3)(i), respectively, as reduced
in accordance with 1.401(l)-3(d)(9) and (e), is further reduced by
multiplying the factor by 0.80.
(ii) Fresh-start rules -- (A) In general. A target benefit plan does
not fail to satisfy this paragraph (b)(3) merely because an employee's
stated benefit includes benefits attributable to plan years beginning
before a fresh-start date that were determined under a benefit formula
that differs from the benefit formula used to determine stated benefits
in plan years beginning after the fresh-start date, provided the stated
benefit formula satisfies 1.401(a)(4)-13(c) with respect to benefits
attributable to plan years beginning after the fresh-start date.
(B) Additional requirements for plans that did not satisfy safe
harbor in prior years. If a plan was not a target benefit plan or did
not satisfy this paragraph (b)(3) in the immediately preceeding plan
year, the stated benefit formula must satisfy 1.401(a)(4)-13(c) by
applying the formula in 1.401(a)(4)-13(c)(2) (formula without
wear-away) with respect to benefits attributable to the current and
subsequent plan years. For this purpose, each employee's frozen accrued
stated benefit under such a plan for purposes of 1.401(a)(4)-13(c)(2)
must be treated as zero. Thus, an employee's stated benefit generally
may not take into account service prior to the current plan year if the
plan did not satisfy this paragraph (b)(3) in the preceding plan year.
See 1.401(a)(4)-13(e)(1) for a special rule treating certain target
benefit plans as satisfying this paragraph (b)(3) in years prior to the
effective date applicable to the plan under 1.401(a)(4)-13 (a) or (b).
(iii) Benefits and contributions after normal retirement age. A
target benefit plan may limit increases in the stated benefit (and
contributions to fund those increases) after normal retirement age
consistent with the requirements applicable to defined benefit plans
under section 411(b)(1)(H) (without regard to section
411(b)(1)(H)(iii)), provided that the limitation applies on the same
terms to all employees in the plan. Thus, post-normal retirement
benefits required under 1.401(a)(4)-3(b)(2)(iii) must be provided under
the stated benefit formula, subject to any uniformly applicable service
cap under the formula. In addition, actuarial increases in the stated
benefit for delayed retirement may not be provided. See paragraph
(b)(3)(i)(B) of this section (prohibiting application of
1.401(a)(4)-3(f)(3)).
(iv) Method for determining required employer contributions -- (A)
General rule. An employer's required contribution to the account of an
employee for a plan year is determined based on the employee's stated
benefit and the amount of the employee's theoretical reserve as of the
date the employer's required contribution is determined for the plan
year (the ''determination date''). Paragraph (b)(3)(iv)(B) of this
section provides rules for determining an employee's theoretical
reserve. Paragraphs (b)(3)(iv) (C) and (D) of this section provides
rules for determining an employer's required contributions.
(B) Theoretical reserve -- (1) Initial theoretical reserve. An
employee's theoretical reserve as of the determination date for the
first plan year in which the employee participates in the plan, and for
the first plan year after any plan year in which the plan did not
satisfy this paragraph (b)(3), is zero. See 1.401(a)(4)-13(e)(2),
however, for transition rules used in determining an employee's initial
theoretical reserve under a plan that satisfied this paragraph (b)(3) or
other applicable nondiscrimination requirements prior to the effective
date applicable to the plan under 1.401(a)(4)-13 (a) or (b).
(2) Theoretical reserve in subsequent plan years. An employee's
theoretical reserve as of the determination date for a plan year (other
than a plan year described in paragraph (b)(3)(iv)(B)(1) of this
section) is the employee's theoretical reserve as of the determination
date for the prior plan year, plus the employer's required contribution
for the prior plan year (as limited by section 415), both increased by
interest from the determination date for the prior plan year through the
determination date for the current plan year, but not beyond the
determination date for the plan year that includes the employee's normal
retirement date. (Thus, an employee's theoretical reserve as of the
determination date for a plan year does not include the amount of the
employer's required contribution for the plan year.) The interest rate
for determining employer contributions that was in effect on the
determination date in the prior plan year must be applied to determine
the required interest adjustment for this period. For plan years
beginning after the effective date applicable to the plan under
1.401(a)(4)-13 (a) or (b), a standard interest rate must be used, and
may not be changed except on the determination date for a plan year.
(C) Required contributions for employees under normal retirement age.
The employer contributions required for purposes of paragraph
(b)(3)(i)(C) of this section with respect to an employee whose attained
age is less than the employee's normal retirement age must be determined
for each plan year as follows --
(1) Determine the employee's fractional rule benefit under the plan's
stated benefit formula in accordance with 1.401(a)(4)-3 (b)(4)(i)(B) or
(b)(5)(i)(B).
(2) Determine the actuarial present value of the fractional rule
benefit determined in paragraph (b)(3)(iv)(C)(1) of this section as of
the determination date for the current plan year, using a standard
interest rate and a standard mortality table that are set forth in the
plan and that are the same for all employees in the plan, and assuming
no mortality before the employee's normal retirement age.
(3) Determine the excess, if any, of the amount determined in
paragraph (b)(3)(iv)(C)(2) of this section over the employee's
theoretical reserve for the current plan year determined under paragraph
(b)(3)(iv)(B) of this section.
(4) Determine the required employer contribution for the current plan
year by amortizing on a level basis the result in paragraph
(b)(3)(iv)(C)(3) of this section over the period beginning with the
determination date for the current plan year and ending with the
determination date for the plan year in which the employee is projected
to reach normal retirement age.
(D) Required contributions for employees over normal retirement age.
The required employer contributions for purposes of paragraph
(b)(3)(i)(C) of this section with respect to an employee whose attained
age equals or exceeds the employee's normal retirement age is the excess
of the actuarial present value, as of the determination date for the
current plan year of the employee's stated benefit for the current plan
year (determined using a straight life annuity factor based on the
employee's normal retirement age, even though the employee's stated
benefit commences as of the employee's current age) over the employee's
theoretical reserve as of the determination date.
(v) Effect of section 415 and 416 requirements. A target benefit
plan does not fail to satisfy this paragraph (b)(3) merely because
required contributions under the plan are limited by section 415 in a
plan year or merely because additional contributions are made consistent
with the requirements of section 416(c)(2) (regardless of whether the
plan is top-heavy).
(vi) Examples. The following examples illustrate this paragraph
(b)(3).
Example 1. (a) Employer X maintains a target benefit plan with a
calendar plan year that bases contributions on a stated benefit equal to
40 percent of each employee's average annual compensation, reduced pro
rata for years of service less than 25, payable annually as a straight
life annuity commencing at normal retirement age. The UP-84 mortality
table and an interest rate of 7.5 percent are used to calculate the
contributions necessary to fund the stated benefit. Required
contributions are determined on the last day of each plan year. The
normal retirement age under the plan is 65. Employee A is 39 years old
in 1992, has participated in the plan for 6 years, and has average
annual compensation equal to $60,000 for the 1992 plan year. Assume
that Employee A's theoretical reserve as of the last day of the 1991
plan year is $13,909, determined under 1.401(a)(4)-13(e).
(b) Under these facts, Employer X's 1992 required contribution to
fund Employee A's stated benefit is $1,318, calculated as follows --
(1) Employee A's fractional rule benefit is $24,000 (40 percent of
Employee A's average annual compensation of $60,000).
(2) The actuarial present value of Employee A's fractional rule
benefit as of the last day of the 1992 plan year is $30,960 (Employee
A's fractional rule benefit of $24,000 multiplied by 1.290, the
actuarial present value factor for an annuity commencing at age 65
applicable to a 39-year-old employee, determined using the stated
interest rate of 7.5 percent and the UP-84 mortality table, and assuming
no mortality before normal retirement age).
(3) The actuarial present value of Employee A's fractional rule
benefit ($30,960) is reduced by Employee A's theoretical reserve as of
the last day of the 1992 plan year. The theoretical reserve on that day
is $14,744 -- the $13,909 theoretical reserve as of the last day of the
1991 plan year, increased by interest for one year at the rate of 6
percent. Because the required contribution for the 1991 plan year is
taken into account under 1.401(a)(4)-13(e)(2) in determining the
theoretical reserve as of the last day of the 1991 plan year, it is not
added to the theoretical reserve again in this paragraph (b)(3) of this
Example. The resulting difference is $16,216 ($30,960 minus $14,744).
(4) The $16,216 excess of the actuarial present value of Employee A's
fractional rule benefit over Employee A's theoretical reserve is
multiplied by 0.0813, the amortization factor applicable to a
39-year-old employee determined using the stated interest rate of 7.5
percent. The product of $1,318 is the amount of the required employer
contribution for Employee A for the 1992 plan year.
Example 2. (a) The facts are the same as in Example 1, except that
as of January 1, 1993, the plan's stated benefit formula is amended to
provide for a stated benefit equal to 45 percent of average annual
compensation, reduced pro rata for years of service less than 25,
payable annually as a straight life annuity commencing at normal
retirement age. The plan provides that, if the stated benefit formula
is amended, an employee's stated benefit under the plan is equal to the
greater of the employee's frozen accrued stated benefit as of the last
day of the plan year preceding the year in which such amendment first
becomes effective, or the employee's stated benefit determined under the
amended benefit formula applied for all years of service (i.e., the plan
uses the fresh-start rule in 1.401(a)(4)-13(c)(3) with respect to the
stated benefit formula). For the 1993 plan year, Employee A's average
annual compensation continues to be $60,000. The mortality table used
for the calculation of the employer's required contributions remains the
same as in the prior plan year, but the plan's stated interest rate is
changed to 8 percent effective as of December 31, 1993.
(b) Under these facts, Employer X's required contribution for
Employee A is $1,290, calculated as follows:
(1) Employee A's fractional rule benefit is $27,000 (45 percent of
$60,000).
(2) The actuarial present value of Employee A's fractional rule
benefit as of the last day of the 1993 plan year is $32,319 ($27,000
multiplied by 1.197, the actuarial present value factor for an annuity
commencing at age 65 applicable to a 40-year-old employee, determined
using the stated interest rate of 8 percent and the UP-84 mortality
table, and assuming no mortality before normal retirement age).
(3) The actuarial present value of Employee A's fractional rule
benefit ($32,319) is reduced by Employee A's theoretical reserve as of
the last day of the 1993 plan year. The theoretical reserve as of that
day is $17,267 -- the $14,744 theoretical reserve as of the last day of
the 1992 plan year plus the $1,318 required contribution for the 1992
plan year, both increased by interest for one year at the rate of 7.5
percent. The resulting difference is $15,052 ($32,319 minus $17,267).
(4) The result in paragraph (b)(3) of this Example 2 is multiplied by
0.0857, the amortization factor applicable to a 40-year-old employee
determined using the stated interest rate of 8 percent. The product,
$1,290, is the amount of the required employer contribution for Employee
A for the 1993 plan year.
(c) Nondiscrimination in amount of contributions under a defined
benefit plan -- (1) General rule. A defined benefit plan satisfies
section 401(a)(4) with respect to an equivalent amount of contributions
for a plan year if each rate group under the plan satisfies section
410(b). For purposes of this paragraph (c)(1), a rate group exists
under a plan for each highly compensated employee in the plan and
consists of the highly compensated employee and all other employees
(both highly and nonhighly compensated) in the plan who have an
equivalent normal allocation rate greater than or equal to the highly
compensated employee's equivalent normal allocation rate, and who also
have an equivalent most valuable allocation rate greater than or equal
to the highly compensated employee's equivalent most valuable allocation
rate. In the case of a defined benefit plan that satisfies the
requirements necessary to use the alternative test in
1.401(a)(4)-3(c)(2), however, a rate group consists of the highly
compensated employee and all other employees (both highly and nonhighly
compensated) in the plan who have an equivalent most valuable allocation
rate greater than or equal to the highly compensated employee's
equivalent most valuable allocation rate. Whether a rate group
satisfies section 410(b) is determined by applying the rules in
1.401(a)(4)-3(c)(3). Normal and most valuable benefits under a defined
benefit plan are converted into equivalent normal and most valuable
allocation rates using the methods in paragraph (c)(2) of this section.
Paragraph (c)(3) of this section provides a safe harbor testing method
for cash balance plans.
(2) Determination of equivalent allocation rates -- (i) Equivalent
normal allocation rate. Employees' accrued benefits under a defined
benefit plan for a plan year are converted into equivalent normal
allocation rates as follows --
(A) Determine the increase in each employee's normalized accrued
benefit under 1.401(a)(4)-3(d)(2)(i)(A) through (E) for the plan year.
(B) Determine the actuarial present value of the increase in the
employee's normalized accrued benefit determined under paragraph
(c)(2)(i)(A) of this section as of the employee's testing age, using a
standard interest rate and a standard mortality table that are applied
uniformly to all employees in the plan.
(C) Determine the present value, as of the close of the plan year, of
the amount determined under paragraph (c)(2)(i)(B) of this section using
a standard interest rate that is the same for all employees in the plan.
The interest rate used for this purpose may be different from the
interest rate used in paragraph (c)(2)(i)(B) of this section.
(D) Express the amount determined under paragraph (c)(2)(i)(C) of
this section as a dollar amount or as a percentage of the employee's
plan year compensation for the plan year.
(E) Permitted disparity may be imputed to the extent allowed under
the rules of 1.401(a)(4)-7 using the method in 1.401(a)(4)-7(b). In
determining an employee's adjusted allocation rate under that section,
the percentage amount determined under paragraph (c)(2)(i)(D) of this
section is substituted for the employee's unadjusted allocation rate.
If permitted disparity is taken into account, it must be taken into
account for all employees in the plan.
(F) The employer may apply the grouping rules of
1.401(a)(4)-2(c)(2)(v) to the equivalent normal allocation rates
determined under paragraph (c)(2)(i)(D) of this section (or, if
permitted disparity is taken into account, paragraph (c)(2)(i)(E) of
this section).
(ii) Equivalent most valuable allocation rate. An employee's
benefits under a defined benefit plan are converted into an equivalent
most valuable allocation rate using the method set forth in paragraph
(c)(2)(i) of this section, and substituting the largest normalized
annuity determined under 1.401(a)(4)-3(d)(2)(ii)(A) through (G) for
each employee for the increase in the employee's normalized accrued
benefit in paragraph (c)(2)(i)(A) of this section. An employer may use
the rule in 1.401(a)(4)-3(d)(6)(vi) to take the value of disability
benefits provided under a plan into account in determining employees'
equivalent most valuable allocation rates. If this option is used, the
largest annuity described in this paragraph (c)(2)(ii) is multiplied by
1.11 before the employee's equivalent most valuable allocation rate is
determined.
(iii) Use of optional calculation methods. Except as otherwise
provided in this section, none of the optional methods available under
1.401(a)(4)-3(d) for determining the amount of benefits used to
determine an employee's normal and most valuable accrual rates, or for
adjusting an employee's normal or most valuable accrual rates, are
available in determining the employee's equivalent normal and most
valuable allocation rates under this paragraph (c)(2). Thus, for
example, a defined benefit plan that is being tested on the basis of
equivalent contributions may take the value of disability benefits
provided under a plan into account in determining employees' equivalent
most valuable allocation rates as provided in paragraph (c)(2)(ii) of
this section, but may not disregard plan provisions described in
1.401(a)(4)-3(f)(3) that provide for increases in an employee's accrued
benefit because the employee has delayed commencement of benefits after
normal retirement age.
(3) Safe harbor testing method for cash balance plans -- (i) General
rule. A cash balance plan is a defined benefit plan that defines
benefits for each employee by reference to the employee's hypothetical
account. An employee's hypothetical account is determined by reference
to hypothetical allocations and interest adjustments that are analogous
to actual allocations of contributions and earnings to an employee's
account under a defined contribution plan. Because a cash balance plan
is a defined benefit plan, whether it satisfies section 401(a)(4) with
respect to the equivalent amount of contributions is generally
determined under paragraphs (c)(1) and (c)(2) of this section. However,
a cash balance plan that satisfies each of the requirements in
paragraphs (c)(3)(ii) through (xi) of this section is deemed to satisfy
section 401(a)(4) with respect to an equivalent amount of contributions.
(ii) Plan requirements in general. The plan must be an accumulation
plan. The benefit formula under the plan must provide for hypothetical
allocations for each employee in the plan that satisfy paragraph
(c)(3)(iii) of this section, and interest adjustments to these
hypothetical allocations that satisfy paragraph (c)(3)(iv) of this
section. The benefit formula under the plan must provide that these
hypothetical allocations and interest adjustments are accumulated as a
hypothetical account for each employee, determined in accordance with
paragraph (c)(3)(v) of this section. The plan must provide that an
employee's accrued benefit under the plan as of any date is an annuity
that is the actuarial equivalent of the employee's projected
hypothetical account as of normal retirement age, determined in
accordance with paragraph (c)(3)(vi) of this section. In addition, the
plan must satisfy paragraphs (c)(3)(vii) through (xi) of this section
(to the extent applicable) regarding optional forms of benefit, past
service credits, post-normal retirement age benefits, certain uniformity
requirements, and changes in the plan's benefit formula, respectively.
(iii) Hypothetical allocations -- (A) In general. The hypothetical
allocations provided under the plan's benefit formula must satisfy
either paragraph (c)(3)(iii)(B) or (C) of this section. Paragraph
(c)(3)(iii)(B) of this section provides a design-based safe harbor that
does not require the annual comparison of hypothetical allocations under
the plan. Paragraph (c)(3)(iii)(C) of this section requires the annual
comparison of hypothetical allocations.
(B) Uniform hypothetical allocation formula. To satisfy this
paragraph (c)(3)(iii)(B), the plan's benefit formula must provide for
hypothetical allocations for all employees in the plan for all plan
years of amounts that would satisfy 1.401(a)(4)-2(b)(3) for each such
plan year if the hypothetical allocations were the only allocations
under a defined contribution plan for the employees for those plan
years. Thus, the plan's benefit formula must provide for hypothetical
allocations for all employees in the plan for all plan years that are
the same percentage of plan year compensation or the same dollar amount.
In determining whether the hypothetical allocations satisfy
1.401(a)(4)-2(b)(3), the only provisions of 1.401(a)(4)-2(b)(5) that
apply are 1.401(a)(4)-2(b)(5)(ii) (section 401(l) permitted disparity,
(iii) (entry dates), (vi) (certain limits on allocations), and (vii)
(dollar allocation per uniform unit of service). Thus, for example, the
plan's benefit formula may take permitted disparity into account in a
manner allowed under 1.401(l)-2 for defined contribution plans.
(C) Modified general test. To satisfy this paragraph (c)(3)(iii)(C),
the plan's benefit formula must provide for hypothetical allocations for
all employees in the plan for the plan year that would satisfy the
general test in 1.401(a)(4)-2(c) for the plan year, if the hypothetical
allocations were the only allocations for the employees taken into
account under 1.401(a)(4)-2(c)(2)(ii) under a defined contribution plan
for the plan year. In determining whether the hypothetical allocations
satisfy 1.401(a)(4)-2(c), the provisions of 1.401(a)(4)-2(c)(2)(iii)
through (v) apply. Thus, for example, permitted disparity may be
imputed under 1.401(a)(4)-2(c)(2)(iv) in accordance with the rules of
1.401(a)(4)-7(b) applicable to defined contribution plans.
(iv) Interest adjustments to hypothetical allocations -- (A) General
rule. The plan benefit formula must provide that the dollar amount of
the hypothetical allocation for each employee for a plan year is
automatically adjusted using an interest rate that satisfies paragraph
(c)(3)(iv)(B) of this section, compounded no less frequently than
annually, for the period that begins with a date in the plan year and
that ends at normal retirement age. This requirement is not satisfied
if any portion of the interest adjustments to a hypothetical allocation
are contingent on the employee's satisfaction of any requirement. Thus,
for example, the interest adjustments to a hypothetical allocation must
be provided through normal retirement age, even though the employee
terminates employment or commences benefits before that age.
(B) Requirements with respect to interest rates. The interest rate
must be a single interest rate specified in the plan that is the same
for all employees in the plan for all plan years. The interest rate
must be either a standard interest rate or a variable interest rate. If
the interest rate is a variable interest rate, it must satisfy paragraph
(c)(3)(iv)(C) of this section.
(C) Variable interest rates -- (1) General rule. The plan must
specify the variable interest rate, the method for determining the
current value of the variable interest rate, and the period (not to
exceed 1 year) for which the current value of the variable interest rate
applies. Permissible variable interest rates are listed in paragraph
(c)(3)(iv)(C)(2) of this section. Permissible methods for determining
the current value of the variable interest rate are provided in
paragraph (c)(3)(iv)(C)(3) of this section.
(2) Permissible variable interest rates. The variable interest rate
specified in the plan must be one of the following --
(i) The rate on 3-month Treasury Bills,
(ii) The rate on 6-month Treasury Bills,
(iii) The rate on 1-year Treasury Bills,
(iv) The yield on 1-year Treasury Constant Maturities,
(v) The yield on 2-year Treasury Constant Maturities,
(vi) The yield on 5-year Treasury Constant Maturities,
(vii) The yield on 10-year Treasury Constant Maturities,
(viii) The yield on 30-year Treasury Constant Maturities, or
(ix) The single interest rate such that, as of a single age specified
in the plan, the actuarial present value of a deferred straight life
annuity of an amount commencing at the normal retirement age under the
plan, calculated using that interest rate and a standard mortality table
but assuming no mortality before normal retirement age, is equal to the
actuarial present value, as of the single age specified in the plan, of
the same annuity calculated using the section 417(e) rates applicable to
distributions in excess of $25,000 (determined under 1.417(e)-1(d)),
and the same mortality assumptions.
(3) Current value of variable interest rate. The current value of
the variable interest rate that applies for a period must be either the
value of the variable interest rate determined as of a specified date in
the period or the immediately preceding period, or the average of the
values of the variable interest rate as of two or more specified dates
during the current period or the immediately preceding period. The
value as of a date of the rate on a Treasury Bill is the average auction
rate for the week or month in which the date falls, as reported in the
Federal Reserve Bulletin. The value as of a date of the yield on a
Treasury Constant Maturity is the average yield for the week, month, or
year in which the date falls, as reported in the Federal Reserve
Bulletin. (The Federal Reserve Bulletin is published by the Board of
Governors of the Federal Reserve System and is available from
Publication Services, Mail Stop 138, Board of Governors of the Federal
Reserve System, Washington DC 20551.) The plan may limit the current
value of the variable interest rate to a maximum (not less than the
highest standard interest rate), or a minimum (not more than the lowest
standard interest rate), or both.
(v) Hypothetical account -- (A) Current value of hypothetical
account. As of any date, the current value of an employee's
hypothetical account must equal the sum of all hypothetical allocations
and the respective interest adjustments to each such hypothetical
allocation provided through that date for the employee under the plan's
benefit formula (without regard to any interest adjustments provided
under the plan's benefit formula for periods after that date).
(B) Value of hypothetical account as of normal retirement age. Under
paragraph (c)(3)(vi) of this section, the value of an employee's
hypothetical account must be determined as of normal retirement age in
order to determine the employee's accrued benefit as of any date at or
before normal retirement age. As of any date at or before normal
retirement age, the value of an employee's hypothetical account as of
normal retirement age must equal the sum of each hypothetical allocation
provided through that date for the employee under the plan's benefit
formula, plus the interest adjustments provided through normal
retirement age on each of those hypothetical allocations for the
employee under the plan's benefit formula (without regard to any
hypothetical allocations that might be provided after that date under
the plan's benefit formula). If the interest rate specified in the plan
is a variable interest rate, the plan must specify that the
determination in the preceding sentence is made by assuming that the
current value of the variable interest rate for all future periods is
either the current value of the variable interest rate for the current
period or the average of the current values of the variable interest
rate for the current period and one or more periods immediately
preceding the current period (not to exceed 5 years in the aggregate).
(vi) Determination of accrued benefit -- (A) Definition of accrued
benefit. The plan must provide that at any date at or before normal
retirement age the accrued benefit (within the meaning of section
411(a)(7)(A)(i)) of each employee in the plan is an annuity commencing
at normal retirement age that is the actuarial equivalent of the
employee's hypothetical account as of normal retirement age (as
determined under paragraph (c)(3)(v)(B) of this section). The separate
benefit that each employee accrues for a plan year is an annuity that is
the actuarial equivalent of the employee's hypothetical allocation for
that plan year, including the automatic adjustments for interest through
normal retirement age required under paragraph (c)(3)(iv) of this
section.
(B) Normal form of benefit. The annuity specified in paragraph
(c)(3)(vi)(A) of this section must provide an annual benefit payable in
the same form at the same uniform normal retirement age for all
employees in the plan. The annual benefit must be the normal retirement
benefit under the plan (within the meaning of section 411(a)(9)) under
the plan.
(C) Determination of actuarial equivalence. For purposes of this
paragraph (c)(3)(vi) and paragraph (c)(3)(ix) of this section, actuarial
equivalence must be determined using a standard mortality table and
either a standard interest rate or the interest rate specified in the
plan for making interest adjustments to hypothetical allocations. If
the interest rate used is the interest rate specified in the plan, and
that rate is a variable interest rate, the assumed value of the variable
interest rate for all future periods must be the same value that would
be assumed for purposes of paragraph (c)(3)(v)(B) of this section. The
same actuarial assumptions must be used for all employees in the plan.
(D) Effect of section 415 and 416 requirements. A plan does not fail
to satisfy this paragraph (c)(3)(vi) merely because the accrued benefits
under the plan are limited by section 415, or merely because the accrued
benefits under the plan are the greater of the accrued benefits
otherwise determined under the plan and the minimum benefit described in
section 416(c)(1) (regardless of whether the plan is top-heavy).
(vii) Optional forms of benefit -- (A) In general. The plan must
satisfy the uniform subsidies requirement of 1.401(a)(4)-3(b)(2)(iv)
with respect to all subsidized optional forms of benefit.
(B) Limitation on subsidies. Unless hypothetical allocations are
determined under a uniform hypothetical allocation formula that
satisfies paragraph (c)(3)(iii)(B) of this section, the actuarial
present value of any QJSA provided under the plan must not be greater
than the single sum distribution to the employee that would satisfy
paragraph (c)(3)(vii)(C) of this section assuming that it was
distributed to the employee on the date of commencement of the QJSA.
(C) Distributions subject to section 417(e). Except as otherwise
required under section 415(b), if the plan provides for a distribution
alternative that is subject to the interest rate restrictions under
section 417(e), the actuarial present value of the benefit paid to an
employee under the distribution alternative must equal the
nonforfeitable percentage (determined under the plan's vesting schedule)
of the greater of the following two amounts --
(1) The current value of the employee's hypothetical account as of
the date the distribution commences, calculated in accordance with
paragraph (c)(3)(v)(A) of this section.
(2) The actuarial present value (calculated in accordance with
1.417(e)-1(d)) of the employee's accrued benefit.
(D) Determination of actuarial present value. For purposes of this
paragraph (c)(3)(vii), actuarial present value must be determined using
a reasonable interest rate and mortality table. A standard interest
rate and a standard mortality table are considered reasonable for this
purpose.
(viii) Past service credit. The benefit formula under the plan may
not provide for hypothetical allocations in the curent plan year that
are attributable to years of service before the current plan year,
unless each of the following requirements is satisfied --
(A) The years of past service credit are granted on a uniform basis
to all current employees in the plan.
(B) Hypothetical allocations for the current plan year are determined
under a uniform hypothetical allocation formula that satisfies paragraph
(c)(3)(iii)(B) of this section.
(C) The hypothetical allocations attributable to the years of past
service would have satisfied the uniform hypothetical allocation formula
requirement of paragraph (c)(3)(iii)(B) of this section, and the
interest adjustments to those hypothetical allocations would have
satisfied paragraph (c)(3)(iv)(A) of this section, if the plan provision
granting past service had been in effect for the entire period for which
years of past service are granted to any employee. In order to satisfy
this requirement, the hypothetical allocation attributable to a year of
past service must be adjusted for interest in accordance with paragraph
(c)(3)(iv) of this section for the period (including the retroactive
period) beginning with the year of past service to which the
hypothetical allocation is attributable and ending at normal retirement
age. If the interest rate specified in the plan is a variable interest
rate, the interest adjustments for the period prior to the current plan
year either must be based on the current value of the variable interest
rate for the period in which the grant of past service first becomes
effective or must be reconstructed based on the then current value of
the variable interest rate that would have applied during each prior
period.
(ix) Employees beyond normal retirement age. In the case of an
employee who commences receipt of benefits after normal retirement age,
the plan must provide that interest adjustments continue to be made to
an employee's hypothetical account until the employee's benefit
commencement date. In the case of an employee described in the previous
sentence, the employee's accrued benefit is defined as an annuity that
is the actuarial equivalent of the employee's hypothetical account
determined in accordance with paragraph (c)(3)(v)(A) of this section as
of the date of benefit commencement.
(x) Additional uniformity requirements. In addition to any
uniformity requirements provided elsewhere in this paragraph (c)(3), the
plan must satisfy the uniformity requirements in 1.401(a)(4)-3(b)(2)(v)
(uniform vesting and service requirements) and (vi) (no employee
contributions). A plan does not fail to satisfy the uniformity
requirements of this paragraph (c)(3)(x) or any other uniformity
requirement provided in this paragraph (c)(3) merely because the plan
contains one or more of the provisions described in
1.401(a)(4)-3(b)(8)(iv) (prior vesting schedules), (v) (certain
conditions on accruals), or (xi) (multiple definitions of service).
(xi) Changes in benefit formula, allocation formula, or interest
rates. A plan does not fail to satisfy this paragraph (c)(3) merely
because the plan is amended to change the benefit formula, hypothetical
allocation formula, or the interest rate used to adjust hypothetical
allocations for plan years after a fresh-start date, provided that the
accrued benefits for plan years beginning after the fresh-start date are
determined in accordance with 1.401(a)(4)-13(c), as modified by
1.401(a)(4)-13(f).
(d) Safe harbor testing method for defined benefit plans that are
part of a floor-offset arrangement -- (1) General rule. A floor-offset
arrangement is an arrangement pursuant to which benefits under a defined
benefit plan are reduced by reference to an employee's account balance
under a defined contribution plan. Generally, a defined benefit plan
that is part of a floor-offset arrangement satisfies the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2) only if the
amount of the net benefit provided under the plan (i.e., the nominal
benefit minus the offset) can be shown to be nondiscriminatory on either
a contributions or a benefits basis. A defined benefit plan that is
part of a floor-offset arrangement is deemed to satisfy the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2), however,
if --
(i) Pursuant to the floor-offset arrangement, the vested portion of
the accrued benefit (as defined in section 411(a)(7)(A)(i)) that would
otherwise be provided to an employee under the defined benefit plan is
reduced solely by the actuarial equivalent of all or part of the vested
portion of the employee's account balance attributable to employer
contributions under a defined contribution plan maintained by the same
employer (plus the actuarial equivalent of all or part of any prior
distributions from that portion of the account balance). In determining
the actuarial equivalent of amounts provided under the defined
contribution plan, an interest rate no higher than the highest standard
interest rate must be used, and no mortality may be assumed in
determining the actuarial equivalent of any prior distributions from the
defined contribution plan or for periods prior to the benefit
commencement date under the defined benefit plan.
(ii) The defined benefit plan is not a contributory DBplan (unless it
satisfies 1.401(a)(4)-6(b)(6) (the cessation-of-employee-contributions
method)), and benefits under the defined benefit plan are not reduced by
any portion of the employee's account balance under the defined
contribution plan (or prior distributions from that account) that are
attributable to employee contributions.
(iii) The defined benefit plan and the defined contribution plan
benefit the same employees.
(iv) The offset under the defined benefit plan is applied to all
employees in the plan on the same terms. Thus, for example, uniform
interest and other actuarial assumptions must be used.
(v) All employees have available to them under the defined
contribution plan the same investment options and the same options with
respect to the timing of preretirement distributions.
(vi) The defined benefit plan satisfies the uniformity requirements
of 1.401(a)(4)-3(b)(2) and the unit credit safe harbor in
1.401(a)(4)-3(b)(3) without taking into account the offset described in
paragraph (d)(1)(i) of this section, and the defined contribution plan
satisfies any of the tests in 1.401(a)(4)-2 (b) or (c). Alternatively,
the defined benefit plan satisfies any of the tests in 1.401(a)(4)-3
(b) or (c) without taking into account the offset described in paragraph
(d)(1)(i) of this section, and the defined contribution plan satisfies
the uniform allocation safe harbor in 1.401(a)(4)-2(b)(3) (including
the uniformity requirements of 1.401(a)(4)-2(b)(2)).
(vii) The defined contribution plan is not an ESOP, a section 401(k)
plan, or a section 401(m) plan.
(2) Application of safe harbor testing method to qualified offset
arrangements. A defined benefit plan that is part of a qualified offset
arrangement as defined in section 1116(f)(5) of the Tax Reform Act of
1986, Public Law No. 99-514, is deemed to satisfy the requirements of
paragraphs (d)(1)(vi) and (d)(1)(vii) of this section, if the only
defined contribution plans included in the qualified offset arrangement
are section 401(k) plans, section 401(m) plans, or both, and the defined
benefit plan would satisfy the requirements of paragraph (d)(1)(vi) of
this section assuming the elective contributions for each employee under
the defined contribution plan were the same (either as a dollar amount
or as a percentage of compensation) for all plan years since the
establishment of the plan.
(T.D. 8360, 56 FR 47580, Sept. 19, 1991; 57 FR 4720, Feb. 7, 1992;
57 FR 10952, 10953, Mar. 31, 1992)
26 CFR 1.401(a)(4)-9 Plan aggregation and restructuring.
(a) Introduction. Two or more plans that are permissively aggregated
and treated as a single plan for purposes of the ratio percentage test
of 1.410(b)-2(b)(2) or the nondiscriminatory classification test of
1.410(b)-4 must also be treated as a single plan for purposes of section
401(a)(4). See 1.401(a)(4)-12 (definition of plan). Thus, for
example, if an employee benefits under each of two defined benefit plans
that have been aggregated and treated as a single plan for purposes of
the ratio percentage test of 1.410(b)-2(b)(2), the employee's benefits
under both plans must be taken into account in determining the
employee's normal and most valuable accrual rates for purposes of the
general test in 1.401(a)(4)-3(c)(1). In some cases, an aggregated plan
may consist of one or more defined benefit plans and one or more defined
contribution plans. Such aggregated plans are referred to in this
section as DB/DC plans. Paragraph (b) of this section provides special
rules for determining whether a DB/DC plan satisfies section 401(a)(4)
with respect to the amount of employer-provided benefits and the
availability of benefits, rights and features. Paragraph (c) of this
section provides rules allowing a plan to be treated as consisting of
separate component plans and allowing the component plans to be tested
separately under section 401(a)(4).
(b) Application of nondiscrimination requirements to DB/DC plans --
(1) General rule. Except as provided in paragraphs (b)(2) and (b)(3) of
this section, whether a DB/DC plan satisfies section 401(a)(4) is
determined using the same rules applicable to a single plan.
(2) Special rules for demonstrating nondiscrimination in amount of
contributions or benefits -- (i) Application of general tests. Because
a DB/DC plan contains both a defined benefit and a defined contribution
plan, it cannot rely on any of the design-based safe harbors or optional
testing methods provided in 1.401(a)(4)-2, 1.401(a)(4)-3, or
1.401(a)(4)-8. Furthermore, because a DB/DC plan contains a defined
benefit plan, it must be tested on the basis of employees' aggregate
normal as well as most valuable allocation or accrual rates, unless all
of the defined benefit plans in the DB/DC plan satisfy the requirements
to use the alternative test in 1.401(a)(4)-3(c)(2). Thus, a DB/DC plan
satisfies section 401(a)(4) with respect to the amount of contributions
or benefits only if it satisfies 1.401(a)(4)-8(c)(1) with respect to
the aggregate normal and most valuable allocation rates of the employees
in the plan, or if it satisfies 1.401(a)(4)-3(c)(1) (or
1.401(a)(4)-3(c)(2), if applicable) with respect to the aggregate normal
and most valuable accrual rates of the employees in the plan. Paragraph
(b)(2)(ii) of this section provides the exclusive rules for determining
employees' aggregate normal and most valuable allocation rates under a
DB/DC plan. Paragraph (b)(2)(iii) of this section provides the
exclusive rules for determining employees' aggregate normal and most
valuable accrual rates under a DB/DC plan. Paragraphs (b)(2)(iv) and
(b)(2)(v) of this section provide additional special rules applicable in
determining whether a DB/DC plan satisfies section 401(a)(4) with
respect to the amount of contributions or benefits.
(ii) Determination of aggregate allocation rates. An employee's
aggregate normal allocation rate for a plan year under a DB/DC plan is
the sum of the employee's allocation rate for the plan year under all
defined contribution plans included in the DB/DC plan, determined under
1.401(a)(4)-2(c)(2) by treating the defined contribution plans as a
single plan, and the employee's equivalent normal allocation rate for
the plan year under all defined benefit plans included in the DB/DC
plan, determined under 1.401(a)(4)-8(c)(2)(i) by treating the defined
benefit plans as a single plan. An employee's aggregate most valuable
allocation rate for the plan year under the DB/DC plan is the sum of the
employee's allocation rate for the plan year under all defined
contribution plans included in the DB/DC plan, determined under
1.401(a)(4)-2(c)(2) by treating the defined contribution plans as a
single plan, and the employee's equivalent most valuable allocation rate
for the plan year under all defined benefit plans included in the DB/DC
plan, determined under 1.401(a)(4)-8(c)(2)(ii) by treating the defined
benefit plans as a single plan.
(iii) Determination of aggregate accrual rates -- (A) Annual method.
If the annual method is used, an employee's aggregate normal accrual
rate for a plan year under a DB/DC plan is the sum of the employee's
normal accrual rate for the plan year under all defined benefit plans
included in the DB/DC plan, determined under the annual method of
1.401(a)(4)-3(d)(2)(i) by treating the defined benefit plans as a single
plan, and the employee's equivalent normal accrual rate for the plan
year under all defined contribution plans included in the DB/DC plan,
determined under the annual method of 1.401(a)(4)-8(b)(2)(i) by
treating the defined contribution plans as a single plan. An employee's
aggregate most valuable accrual rate for the plan year under the DB/DC
plan is the sum of the employee's most valuable accrual rate for the
plan year under all defined benefit plans included in the DB/DC plan,
determined under the annual method of 1.401(a)(4)-3(d)(2)(ii) by
treating the defined benefit plans as a single plan, and the employee's
equivalent most valuable accrual rate for the plan year under all
defined contribution plans included in the DB/DC plan, determined under
the annual method of 1.401(a)(4)-8(b)(2)(i) by treating the defined
contribution plans as a single plan.
(B) Accrued-to-date method. If the accrued-to-date method is used,
an employee's aggregate normal accrual rate for a plan year under a
DB/DC plan is the sum of the employee's normal accrual rate for the plan
year under all defined benefit plans included in the DB/DC plan,
determined under the accrued-to-date method of 1.401(a)(4)-3(d)(3)(i)
by treating the defined benefit plans as a single plan, and the
employee's equivalent normal accrual rate for the plan year under all
defined contribution plans included in the DB/DC plan, determined under
the accrued-to-date method of 1.401(a)(4)-8(b)(2)(ii) by treating the
defined contribution plans as a single plan. An employee's aggregate
most valuable accrual rate for the plan year under the DB/DC plan is the
sum of the employee's most valuable accrual rate for the plan year under
all defined benefit plans included in the DB/DC plan, determined under
the accrued-to-date method of 1.401(a)(4)-3(d)(3)(ii) by treating the
defined benefit plans as a single plan, and the employee's equivalent
most valuable accrual rate for the plan year under all defined
contribution plans included in the DB/DC plan, determined under the
accrued-to-date method of 1.401(a)(4)-8(b)(2)(ii) by treating the
defined contribution plans as a single plan.
(C) Projected method. Neither the projected method in
1.401(a)(4)-3(d)(4) nor the fresh-start alternative for the projected
method in 1.401(a)(4)-3(d)(6)(viii) may be used to determine aggregate
accrual or allocation rates under a DB/DC plan.
(iv) Treatment of permitted disparity. A DB/DC plan may impute
permitted disparity under the rules of 1.401(a)(4)-7 only after
calculating employees' aggregate allocation or aggregate accrual rates
under paragraphs (b)(2) (ii) or (iii) of this section. in the case of a
DB/DC plan being tested on a benefits basis, the rules of
1.401(a)(4)-7(c) must be applied. Thus, each employee's aggregate
normal and most valuable accrual rates determined in paragraph
(b)(2)(iii) of this section must be substituted respectively for the
employee's unadjusted accrual rate as defined in
1.401(a)(4)-7(c)(4)(vi). In the case of a DB/DC plan being tested on the
basis of equivalent contributions, the rules of 1.401(a)(4)-7(b) must
be applied. Thus, each employee's aggregate normal and most valuable
allocation rates determined in paragraph (b)(2)(ii) of this section must
be substituted respectively for the employee's unadjusted allocation
rate as defined in 1.401(a)(4)-7(b)(4)(iv).
(v) Consistency requirements -- (A) In general. Notwithstanding the
fact that aggregate normal and most valuable accrual and allocation
rates under a DB/DC plan must be separately determined with respect to
the defined benefit plans and defined contribution plans in the DB/DC
plan, each separately determined rate must be determined on a consistent
basis as if the DB/DC plan were a single plan. Thus, for example, the
same definition of testing compensation and the same actuarial
assumptions must be used.
(B) Use of optional calculation methods. Except as otherwise
provided in this paragraph (b), any optional methods for determining
allocation or accrual rates that would be available to a single plan may
generally be used in determining allocation or accrual rates under a
DB/DC plan, provided that the optional methods selected are applied on a
consistent basis to all employees in the DB/DC plan. Examples of
options that may be used on a consistent basis under this rule include
alternative methods of determining testing compensation under
1.401(a)(4)-3(e) or plan year compensation under 1.401(a)(4)-12, and
options to determine accrual or equivalent accrual rates based on
benefits accrued or allocations made for plan years after a fresh-start
date as provided in 1.401(a)(4)-3(d)(6)(vii) or
1.401(a)(4)-8(b)(2)(ii)(B). Options that may not be used in testing a
defined benefit plan on the basis of equivalent contributions under
1.401(a)(4)-8 may not be used in testing a DB/DC plan, however,
regardless of whether the plan is being tested on a contributions or
benefits basis. Thus, for example, a DB/DC plan may not use any
actuarial assumptions available under 1.401(a)(4)-3(d)(5)(iii)(B) other
than a standard interest rate and a standard mortality table, may not
disregard plan provisions providing for actuarial increases after normal
retirement age under 1.401(a)(4)-3(f)(3), and may not compute benefits
other than on a plan-year basis under 1.401(a)(4)-3(f)(6). Further, a
DB/DC plan must determine the amount of employer-provided benefits using
the rules in 1.401(a)(4)-6(b)(1) (section 411(c) method), (b)(5)
(government plan method), or (b)(6) (cerration-of-employee-contributions
method). In addition, if a DB/DC plan is using one of the fresh-start
options in 1.401(a)(4)-3(d)(6) (vii) or (viii), the method provided in
1.401(a)(4)-13(d) for adjusting an employee's frozen accrued benefit is
not available under the plan.
(3) Special rules for demonstrating nondiscrimination in availability
of non-core benefits, rights, and features -- (i) In general. Non-core
benefits, rights, and features provided under a DB/DC plan are permitted
to satisfy the nondiscriminatory availability requirements of
1.401(a)(4)-4 under the special rules in this paragraph (b)(3). For
this purpose, non-core benefits, rights, and features are benefits,
rights, and features other than single sum benefits, loans, ancillary
benefits, and benefit commencement dates (including the availability of
in-service withdrawals).
(ii) Current availability. A DB/DC plan satisfies
1.401(a)(4)-4(b)(1) with respect to the current availability of non-core
benefits, rights, and features if --
(A) Each of the non-core benefits, rights, and features that is
currently available to any highly compensated employee under any defined
contribution plan included in the DB/DC plan is also currently available
either to a group of employees that satisfies the ratio percentage test
of 1.410(b)-2(b)(2) or the nondiscriminatory classification test of
1.410(b)-4 (without regard to the average benefit percentage test in
1.410(b)-5), or to all nonhighly compensated employees in all defined
contribution plans included in the DB/DC plan; and
(B) Each of the non-core benefits, rights, and features that is
currently available to any highly compensated employee under any defined
benefit plan included in the DB/DC plan is also currently available
either to a group of employees that satisfies the ratio percentage test
of 1.410(b)-2(b)(2) or the nondiscriminatory classification test of
1.410(b)-4 (without regard to the average benefit percentage test in
1.410(b)-5), or to all nonhighly compensated employees in all defined
benefit plans included in the DB/DC plan.
(iii) Effective availability. The fact that a non-core benefit,
right, or feature is provided under one type of plan included in a DB/DC
plan (i.e., defined benefit or defined contribution), and therefore may
be difficult or impossible to provide under the other type of plan
included in the DB/DC plan, is one of the facts that is considered in
determining whether the plan satisfies the effective availability
requirement of 1.401(a)(4)-4(c)(1).
(c) Plan restructuring -- (1) General rule. A plan may be treated,
in accordance with this paragraph (c), as consisting of two or more
component plans for purposes of determining whether the plan satisfies
section 401(a)(4). If each of the component plans of a plan satisfies
all of the requirements of sections 401(a)(4) and 410(b) as if it were a
separate plan, then the plan is treated as satisfying section 401(a)(4).
Paragraph (c)(2) of this section describes how component plans are
identified. Paragraphs (c)(3) and (c)(4) of this section provide
special rules for determining whether a component plan satisfies
sections 401(a)(4) and 410(b), respectively. Additional rules and
examples are contained in paragraphs (c)(5) and (c)(6) of this section,
respectively.
(2) Identification of component plans. A plan may be restructured
into component plans, each consisting of all the allocations, accruals,
and other benefits, rights, and features provided to a selected group of
employees in the plan. Any criteria may be used to select the group of
employees used for this purpose, and these criteria may be changed from
plan year to plan year. Thus, for example, employees may be grouped
together based on employment at the same work site, in the same job
category, for the same division or subsidiary, or for a unit acquired in
a specific merger or acquisition, employment for the same number of
years, compensation under the same method (e.g., salaried or hourly),
coverage under the same allocation or benefit formula, or any other
attribute or method of classification, regardless of whether the
classification would be considered reasonable under the
nondiscriminatory classification test of 1.410(b)-4. Every employee in
the plan must be included in one and only one component plan under the
same plan for a plan year.
(3) Satisfaction of section 401(a)(4) by a component plan -- (i)
General rule. The rules applicable in determining whether a component
plan satisfies section 401(a)(4) are the same as those applicable to a
plan. Thus, for this purpose, any reference to a ''plan'' in section
401(a)(4) and the regulations thereunder (other than this paragraph (c))
is interpreted as a reference to a ''component plan.'' For example, any
rules relevant to the determination of allocation or accrual rates for
testing purposes, including the rules for determining an employee's
normal and most valuable accrual rates in 1.401(a)(4)-3(d), the
grouping rules in 1.401(a)(4)-2(c)(5) and 1.401(a)(4)-3(d)(6)(iv), and
the cross-testing rules in 1.401(a)(4)-8, are applied only after
restructuring. Whether a component plan satisfies the uniformity and
other requirements applicable to safe harbor plans under
1.401(a)(4)-2(b) and 1.401(a)(4)-3(b) is determined taking into account
the entire benefit formula and any other plan provisions actually or
potentially applicable to employees in a component plan, regardless of
whether all of these provisions actually apply to the employees in the
component plan for the current plan year (e.g., in the case of a
component plan covering only short-service employees under a benefit
formula providing higher accrual rates for employees with longer
service).
(ii) Certain testing rules involving averaging. The safe harbor in
1.401(a)(4)-2(b)(4) for plans with uniform points allocation formulas,
and the special nondiscrimination tests in sections 401(k)(3) and
401(m)(2) for elective, employee, and matching contributions, are not
available in testing contributions under a component plan. Thus, for
example, elective contributions under a cash or deferred arrangement may
not be tested under section 401(k)(3) if the plan of which it is a part
is restructured into component plans. Under 1.401(k)-1(a)(4)(i), a
cash or deferred arrangement that does not satisfy section 401(k)(3) is
not a qualified cash or deferred arrangement. See also
1.401(k)-1(b)(3)(iii). Further, since section 401(m)(2) provides the
exclusive means for a plan to satisfy section 401(a)(4) with respect to
the amount of employee contributions allocated to separate accounts and
matching contributions, a plan that is restructured into component plans
cannot satisfy section 401(a)(4) if such contributions are made to it.
(4) Satisfaction of section 410(b) by a component plan -- (i) General
rule. The rules applicable in determining whether a component plan
satisfies section 410(b) are the same as those applicable to a plan,
with the following modifications --
(A) The permissive aggregation rules of 1.410(b)-7(d) are not
available to a component plan. Thus, for example, two or more component
plans may not be permissively aggregated for purposes of section
401(a)(4), or for purposes of the ratio percentage test of
1.410(b)-2(b)(2) or the nondiscriminatory classification test of
1.410(b)-4, even though they may be formed from a plan that consists of
two or more plans that were permissively aggregated under
1.410(b)-7(d).
(B) A component plan satisfies the average benefit percentage test of
1.410(b)-5 if the plan of which it is a part satisfies 1.410(b)-5
(applied without regard to 1.410(b)-5(f)). In the case of a component
plan that is part of a plan that relies on 1.410(b)-5(f) to satisfy the
average benefit percentage test, the component plan satisfies the
average benefit percentage test (if applicable) only if the component
plan separately satisfies 1.410(b)-5(f)).
(ii) Relationship to satisfaction of section 410(b) by the plan.
Satisfaction of section 410(b) by a component plan is relevant solely
for purposes of determining whether the plan of which it is a part
satisfies section 401(a)(4). The plan must still independently satisfy
section 410(b) in order to be a qualified plan. Similarly, satisfaction
of section 410(b) by a plan is relevant solely for purposes of
determining whether the plan satisfies section 410(b). Thus, for
example, a component plan that does not satisfy the ratio percentage
test of 1.410(b)-2(b)(2) must still satisfy the average benefit test of
1.410(b)-2(b)(3) (including the nondiscriminatory classification test
of 1.410(b)-4 and the average benefit percentage test of 1.410(b)-5),
even though the plan of which it is a part satisfies the ratio
percentage test.
(5) Effect of restructuring under other sections. The restructuring
rules provided in this paragraph (c) apply solely for purposes of
sections 401(a)(4) and 401(l), and those portions of sections 410(b),
414(s), and any other provisions that are specifically applicable in
determining whether the requirements of section 401(a)(4) are satisfied.
Thus, for example, a component plan is not treated as a separate plan
under section 401(a)(26).
(6) Examples. The following examples illustrate the rules of this
paragraph (c).
Example 1. Employer X maintains a defined benefit plan. The plan
provides a normal retirement benefit equal to 1 percent of average
annual compensation times years of service to employees at Plant M, and
1.5 percent of average annual compensation times years of service to
employees at Plant N. Under paragraph (c)(2)(i) of this section, the
plan may be treated as consisting of two component defined benefit
plans, one providing retirement benefits equal to 1 percent of average
annual compensation times years of service to the employees at Plant M,
and another providing benefits equal to 1.5 percent of average annual
compensation times years of service to employees at Plant N. If each
component plan satisfies sections 401(a)(4) and 410(b) as if it were a
separate plan under the rules of this paragraph (c), then the entire
plan satisfies section 401(a)(4).
Example 2. The facts are the same as in Example 1, except that
Employer X also maintains another defined benefit plan providing a
normal retirement benefit equal to 2 percent of career average
compensation times years of service to employees at Plant O. If the
plan covering employees at Plants M and N were aggregated with the plan
covering employees at Plant O under section 410(b), the aggregated plan
could then be restructured into component plans. For example, the
aggregated plan could be treated as consisting of two plans, one
providing a normal retirement benefit equal to 1 percent of average
annual compensation times years of service to employees at Plant M and 2
percent of career average compensation times years of service at Plant
O, and another providing a normal retirement benefit equal to 1.5
percent of average annual compensation to employees at Plant N. If each
component plan satisfied sections 401(a)(4) and 410(b) as if it were a
separate plan under the rules of this paragraph (c), then the entire
aggregated plan would satisfy section 401(a)(4).
Example 3. Employer Y maintains Plan P, a defined benefit plan, for
its Employees A, B, C, D, E, and F. Plan P provides benefits under a
uniform formula that satisfies the requirements of 1.401(a)(4)-3(b)(2)
and (b)(3) before it is amended on February 14, 1994. The amendment
provides an early retirement window benefit that is a subsidized
optional form of benefit under 1.401(a)(4)-3(b)(2)(iv) and that is
available on the same terms to all employees who satisfy the eligibility
requirements for the window. The early retirement window benefit is
available only to employees who retire between June 1, 1994, and
December 31, 1994. Assume that Employees A, B, and C will be eligible
to receive the window benefit by the end of the window period and
Employees D, E, and F will not. Because substantially all employees in
the plan will not satisfy the eligibility requirements for the early
retirement window benefit by the close of the early retirement window
benefit period, Plan P fails to satisfy the uniform subsidies
requirement of 1.401(a)(4)-3(b)(2)(iv). See 1.401(a)(4)-3(b)(2)(vii),
Example 7. Under paragraph (c)(2)(i) of this section, Employees A, B,
C, D, E, and F may be grouped into two component plans, one consisting
of Employees A, B, and C and all their accruals and other benefits,
rights, and features under the plan (including the early retirement
window benefit), and another consisting of Employees D, E, and F, and
all their accruals and other benefits, rights, and features under the
plan. Each of the component plans identified in this manner satisfies
the uniform subsidies requirement of 1.401(a)(4)-3(b)(2)(iv), and thus
satisfies the requirements of 1.401(a)(4)-3(b). If each of these
component plans also satisfies section 410(b) (including, if applicable,
the reasonable classification requirement of 1.410(b)-4(b)) as if it
were a separate plan under the rules of this paragraph (c), then the
entire plan satisfies section 401(a)(4).
Example 4. Employer Z maintains Plan Q, a defined benefit plan with
a benefit formula that provides 2 percent of average annual compensation
for each year of service up to 20 to each employee in the plan. Assume
that Plan Q would satisfy the unit credit fractional rule safe harbor in
1.401(a)(4)-3(b)(4), except that some employees in the plan accrue a
portion of their normal retirement benefit in the current plan year that
is more than 1/3 larger than the portion of the same benefit accrued by
other employees in the plan for the current plan year, and the plan
therefore fails to satisfy the 1/3-larger requirement of
1.401(a)(4)-3(b)(4)(i)(C). Employer Z restructures Plan Q into two
plans, one covering employees with 30 years or less of service at normal
retirement age, and the other covering all other employees in the plan.
Each component plan would separately satisfy the 1/3-larger requirement
of 1.401(a)(4)-3(b)(4)(i)(C) if the only employees taken into account
were those employees included in the component plan in the current plan
year. Under paragraph (c)(3)(i) of this section, however, the component
plans do not satisfy the 1/3-larger requirement, and hence fail to
satisfy the unit credit fractional rule safe harbor in
1.401(a)(4)-3(b)(4), because the safe harbor determination is made
taking into account the effect of the plan benefit formula on any
potential employee, and not just those employees in the component plan
in the current plan year.
(T.D. 8360, 56 FR 47586, Sept. 19, 1991; 57 FR 4720, 4721, Feb. 7,
1992; 57 FR 10953, Mar. 31, 1992)
26 CFR 1.401(a)(4)-10 Testing of former employees.
(a) Introduction -- (1) General rule. The requirements of section
401(a)(4) with respect to the amount of contributions and benefits and
the availability of benefits, rights, and features under a plan apply
separately to employees and former employees. See 1.401(a)(4)-1(c)(3).
This section contains rules for applying those requirements to former
employees. None of the other requirements of section 401(a)(4) applies
separately to employees and former employees.
(2) Overview. Rules for determining whether a plan satisfies section
401(a)(4) with respect to the amount of contributions or benefits
provided to former employees under the plan are set forth in paragraph
(b) of this section. Rules for determining whether a plan satisfies
section 401(a)(4) with respect to the availability of benefits, rights,
and features provided to former employees under the plan are set forth
in paragraph (c) of this section. A plan may satisfy any of the tests
in paragraphs (b) or (c) of this section on a restructured basis,
pursuant to 1.401(a)(4)-9(c).
(b) Nondiscrimination in amount of contributions or benefits -- (1)
General rule. A plan must separately satisfy 1.401(a)(4)-1(b)(2) with
respect to the amount of contributions or benefits provided to former
employees. A plan under which no former employee currently benefits is
deemed to satisfy this requirement. Whether a former employee currently
benefits under a plan is determined under 1.410(b)-3(b).
(2) Defined contribution plans. Because of the application of the
limitations of section 415, a defined contribution plan generally cannot
provide an allocation to a former employee, except under section
415(c)(3)(C) (regarding permanent and total disability). Because
allocations under section 415(c)(3)(C) may not be provided to highly
compensated former employees, allocations made under that section
automatically satisfy 1.401(a)(4)-1(b)(2).
(3) Defined benefit plans -- (i) General rule. A defined benefit
plan satisfies 1.401(a)(4)-1(b)(2) with respect to the amount of
contributions or benefits provided to former employees if the plan
satisfies the unit credit safe harbor requirements of
1.401(a)(4)-3(b)(3) (including the uniformity requirements of
1.401(a)(4)-3(b)(2)), the general test of 1.401(a)(4)-3(c) (using the
annual method in 1.401(a)(4)-3(d)(2) to determine accrual rates), or
the general test of 1.401(a)(4)-8(c)(1), with respect to these
contributions or benefits. Only benefit accruals arising out of a
former employee's status as a former employee are taken into account in
determining whether these requirements are satisfied. In applying
1.401(a)(4)-3 and 1.401(a)(4)-8 for purposes of this paragraph (b), the
terms ''highly compensated former employee'' and ''nonhighly compensated
former employee'' are substituted for the terms ''highly compensated
employee'' and ''nonhighly compensated employee'' where those terms
appear in those sections. Paragraphs (b)(3) (ii) through (v) of this
section provide certain special rules for applying the safe harbor
tests, the general tests, and permitted disparity provisions to former
employees.
(ii) Special rules for applying safe harbor tests -- (A) Compensation
requirements. In order to satisfy the unit credit safe harbor in
1.401(a)(4)-3(b)(3) with respect to benefits that are determined as a
percentage of average annual compensation, the average annual
compensation of a former employee must be determined as of the date the
individual most recently became a former employee.
(B) Option to apply safe harbors on aggregate basis. Notwithstanding
the rules of 1.401(a)(4)-1(c)(3) (requiring separate testing of former
employees), a plan satisfies the requirements of 1.401(a)(4)-1(b)(2)
with respect to accruals provided to former employees in a plan year if
the accruals provided to the former employees, when added to their
previously accrued benefits (including accruals attributable to their
status as employees), satisfy the unit credit safe harbor requirements
of 1.401(a)(4)-3(b)(3) (including the uniformity requirements of
1.401(a)(4)-3(b)(2)).
(iii) Special rules for applying general tests -- (A) In general. A
former employee's accrual rate for purposes of the general tests of
1.401(a)(4)-3(c) or 1.401(a)(4)-8(c)(1) must be determined subject to
the modifications described in paragraphs (b)(3)(iii) (B) through (D) of
this section.
(B) Compensation for former employees. A former employee's testing
compensation for purposes of 1.401(a)(4)-3(d)(2), or plan year
compensation for purposes of 1.401(a)(4)-8(c)(2), is generally
determined in the same manner as it would be if the former employee were
an employee, except that it is determined as of the date the individual
most recently became a former employee. In applying the rules for
determining accrual and equivalent allocation rates in
1.401(a)(4)-3(d)(2) and 1.401(a)(4)-8(c)(2), however, the modifications
to plan year compensation provided in 1.401(a)(4)-3(e)(3)(ii) (A) and
(B) must be applied. In addition, an employer may use the former
employee's compensation as determined under the plan as of the plan year
in which the individual most recently became a former employee in lieu
of the testing compensation or plan year compensation otherwise required
under 1.401(a)(4)-3(d)(2) and 1.401(a)(4)-8(c)(2), provided that any
compensation used to determine the employee's compensation under the
plan as of that plan year is section 414(s) compensation. If the option
in the preceding sentence is used to determine any former employee's
accrual or equivalent allocation rates for a plan year, it must be
applied consistently to determine the accrual or equivalent allocation
rates of all former employees in the plan for that plan year.
(C) Testing service for former employees. A former employee's
accrual rate determined under 1.401(a)(4)-3(d)(2) and
1.401(a)(4)-8(c)(2) may be adjusted by dividing the rate by the former
employee's testing service (or the former employee's testing service
after a fresh-start date), determined as of the date the former employee
most recently became a former employee.
(iv) Special section 410(b) test for former employees. In
determining whether a rate group (within the meaning of
1.401(a)(4)-3(c) or 1.401(a)(4)-8(c)(1)) or a component plan (within
the meaning of 1.401(a)(4)-9(c)) consisting of former employees
satisfies section 410(b), the special rule in 1.410(b)-2(c)(2)(ii) may
be applied. For purposes of applying the 95-percent test of
1.410(b)-2(c)(2)(ii)(A), the term ''plan'' means a plan as defined in
1.401(a)(4)-12 and does not include a rate geoup or component plan.
(v) Permitted disparity. The provisions of section 401(l) and
1.401(a)(4)-7 generally apply to benefits provided to former employees
in the same manner as those provisions apply to employees. Thus, for
example, for purposes of determining a former employee's cumulative
permitted disparity limit, the sum of the former employee's total annual
disparity fractions (within the meaning of 1.401(l)-5) as an employee
continue to be taken into account. However, the permitted disparity
rate applicable to a former employee is determined under 1.401(l)-3(e)
as of the age the former employee commenced receipt of benefits, not as
of the date the employee receives the accrual for the current plan year.
(4) Safe harbor for ad hoc cost-of-living adjustments -- (i) General
rule. A defined benefit plan satisfies section 401(a)(4) with respect
to the amount of any ad hoc cost-of-living adjustment (an ''ad hoc
COLA'') provided to former employees if the ad hoc COLA increases the
benefits of each former employee in the plan on a consistent basis. For
purposes of this paragraph (b)(4), an ad hoc COLA may not provide for
additional increases in benefits in plan years after the plan year in
which the ad hoc COLA is provided. The percentage increase in a former
employee's benefits under the ad hoc COLA may not exceed the social
security increase. For this purpose, ''social security increase'' means
the percentage increase in social security benefits under section
215(i)(2)(A) of the Social Security Act for the period that begins with
the date the former employee commenced receipt of benefits and that ends
on the date in the current plan year on which the ad hoc COLA first
applies, less the percentage increase provided to the former employee
under any automatic COLA or any prior ad hoc COLA under the plan. An ad
hoc COLA that exceeds the social security increase for the applicable
period is tested under the general rule of paragraph (b)(1) of this
section.
(ii) Uniformity requirements. An ad hoc COLA increases benefits on a
consistent basis for purposes of this paragraph (b)(4) if it applies the
social security increase to the periodic benefit of all former employees
in the plan. An ad hoc COLA may provide a percentage increase that is
less than the social security increase, if the method of determining the
percentage increase is consistent for all former employees in the plan,
and if the ad hoc COLA provides the same percentage increase to all
former employees in the plan who commenced receipt of benefits in the
same calendar or plan year. Thus, for example, an employer may provide
an ad hoc COLA based on any of the following percentages: the annual
rate of social security increase minus a percentage point, the annual
rate of social security increase capped at a given percentage, a
specified percentage (less than 100 percent) of the social security
increase, or a fixed percentage increase for each year in the period.
Similarly, the ad hoc COLA may be limited to the social security
increase otherwise allowed under this paragraph (b)(4)(ii) for the
period since a date or an age specified in the plan.
(iii) Banding options. In determining the year in which a former
employee commenced receipt of benefits for purposes of this paragraph
(b)(4), former employees may be grouped into bands (not to exceed 5
consecutive calendar years each) based on the years in which the former
employees in the band commenced receipt of benefits. If this option is
used, all former employees in each band may be treated as if they
commenced receipt of benefits in the most recent year in the band.
Thus, for example, all former employees who commenced receipt of
benefits under the plan in calendar years 1975-1979 may be grouped into
a band, may be treated as if they had commenced receipt of benefits in
1979, and thus may be provided the same percentage increase in their
benefits. In addition, the average annual rate of social security
increase during the years within a band may be treated as the annual
social security increase for each year within the band.
(iv) Examples. The following examples illustrate the safe harbors in
this paragraph (b)(4). In each example, the plan does not contain an
automatic COLA, and it has never before granted an ad hoc COLA for
former employees.
Example 1. Plan A provides an ad hoc COLA for all former employees
in the amount of 3 percent per year since commencement of benefits. The
annual rate of social security increase since each year that a former
employee commenced receipt of benefits was at least 3 percent. Plan A
satisfies the safe harbor of this paragraph (b)(4).
Example 2. The facts are the same as in Example 1, except that the
plan bands all former employees into 3-year bands for purposes of
determining former employees' benefit commencement dates. Thus, for
example, all former employees who commenced benefits 7-9 years prior to
the amendment are treated as commencing benefits 7 years prior to the
amendment and are then entitled to a benefit increase of 21 percent.
Plan A satisfies the safe harbor of this paragraph (b)(4).
Example 3. Plan B provides an ad hoc COLA for all former employees
in the following amounts: 3 percent per year for each of the first 5
years preceding the date of the amendment granting the ad hoc COLA (the
''amendment date''); 6 percent per year for the sixth through tenth
years preceding the amendment date; and 9 percent per year for the
eleventh through fifteenth years preceding the amendment date. Thus,
for example, a former employee who commenced receipt of benefits 2 years
before the amendment date will receive an increase of 6 percent (3
percent 2 years); and a former employee who commenced receipt of
benefits 15 years before the amendment date will receive an increase of
90 percent ((3 percent 5 years) + (6 percent 5 years) + (9 percent
5 years)). Assume that the average annual rate of social security
increase during the 5 years prior to the amendment date was 3 percent,
the average annual rate of social security increase during the 6-10
years prior to the amendment date was 6 percent, and the average annual
rate of social security increase during the 11-15 years prior to the
amendment date was 9 percent. In determining the social security
increase for former employees, former employees are grouped into bands
of 5 years each, and the average annual rate of social security increase
for all years within the band is treated as the annual rate of social
security increase for each year in the band. Because the ad hoc COLA
provides for percentage increases equal to the social security increase
to all former employees, Plan B satisfies the safe harbor of this
paragraph (b)(4).
Example 4. The facts are the same as in Example 3, except that the
ad hoc COLA increases benefits for all former employees in the amount of
5 percent per year since benefit commencement. Plan B does not satisfy
the safe harbor of this paragraph (b)(4), because the ad hoc COLA
exceeds the social security increase for those former employees who
commenced receipt of benefits less than 5 years before the amendment
date.
(c) Nondiscrimination in availability of benefits, rights, or
features -- (1) General rule. A plan satisfies section 401(a)(4) with
respect to the availability of benefits, rights, and features provided
to former employees if the plan satisfies 1.401(a)(4)-4 with respect to
those benefits, rights, or features. In determining whether a group of
former employees to whom a benefit, right, or feature is currently
available satisfies section 410(b), the safe harbor testing method in
1.410(b)-2(c)(2)(ii) may be applied.
(2) No change in availability. A plan satisfies section 401(a)(4)
with respect to the availability of a benefit, right, or feature
provided to any former employee in the plan if no change in the
availability of the benefit, right, or feature has been made that is
first effective in the current plan year with respect to a former
employee.
(3) Changes in availability. A plan satisfies section 401(a)(4) with
respect to the availability of a benefit, right, or feature provided to
any former employee if any change in the availability of the benefit,
right, or feature that is first effective in the current plan year with
respect to a former employee is made in a nondiscriminatory manner.
Thus, any expansion in the availability of the benefit, right, or
feature to any highly compensated former employee in the plan must be
applied on a consistent basis to all nonhighly compensated former
employees in the plan. Similarly, any contraction in the availability
of the benefit, right, or feature that affects any nonhighly compensated
former employee in the plan must be applied on a consistent basis to all
highly compensated former employees in the plan.
(4) Plan loans. For purposes of demonstrating that a plan satisfies
section 401(a)(4) with respect to the availability of loans provided to
former employees, an employer may test as employees those former
employees who are parties in interest within the meaning of section
3(14) of the Employee Retirement Income Security Act of 1974.
(5) Employees terminated before a specified date. In applying the
rule of 1.410(b)-6(h)(2) (permitting certain former employees who
became former employees before 1984 or more than 10 years before the
current year to be excluded) for purposes of this paragraph (c), a
former employee is treated as currently benefiting under the plan only
if there has been a change in the current plan year in the availability
of any benefit, right, or feature provided to the former employee.
(T.D. 8360, 56 FR 47589, Sept. 19, 1991; 57 FR 4721, Feb. 7, 1992)
26 CFR 1.401(a)(4)-11 Additional rules.
(a) Introduction. This section contains additional rules for
determining whether a plan satisfies section 401(a)(4). Paragraph (b)
of this section contains rules for the treatment of the portion of an
employee's accrued benefit or account balance that is attributable to
rollovers and transfers between plans. Paragraph (c) of this section
contains rules relating to vesting. Paragraph (d) of this section
contains rules relating to crediting service. Paragraph (e) of this
section, regarding family aggregation, is reserved. Paragraph (f) of
this section, regarding governmental plans, is reserved. Paragraph (g)
of this section provides rules regarding the extent to which retroactive
amendments may be made for purposes of section 401(a).
(b) Rollovers and transfers -- (1) Rollovers and elective transfers.
The portion of an employee's accrued benefit or account balance that is
attributable to rollover contributions described in section 402(a)(5),
403(a)(4), or 408(d)(3), or to elective transfers described in
1.411(d)-4, Q&A-3(b), are not taken into account in determining whether
the transferee plan satisfies the nondiscriminatory amount requirement
of 1.401(a)(4)-1(b)(2).
(2) Other transfers. (Reserved)
(c) Vesting -- (1) In general. A plan does not satisfy the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2) if the
manner in which employees vest in their accrued benefits discriminates
in favor of highly compensated employees. This determination is made
after taking into account any relevant provisions of sections
401(a)(5)(E), 411(d)(1), 411(d)(2), and 411(e). For purposes of this
paragraph (c), the manner in which employees vest in their accrued
benefits also is determined taking into account any plan provision that
directly affects the nonforfeitability of employees' accrued benefits
(e.g., plan provisions regarding suspension of benefits permitted under
section 411(a)(3)(B)).
(2) Deemed equivalence of statutory vesting schedules. For purposes
of this paragraph (c), when two or more plans with different vesting
schedules are permissively aggregated under 1.410(b)-7(d), the minimum
vesting rates required under the vesting schedules in section 411(a)(2)
(A) and (B) are treated as equivalent to one another, and the minimum
vesting rates required under the vesting schedules in section 416(b)(1)
(A) and (B) are treated as equivalent to one another. Thus, for
example, Plan A, covering an employer's nonhighly compensated employees
and providing full vesting after completion of 5 years of service, and
Plan B, covering the same employer's highly compensated employees and
providing graded vesting according to the schedule in section
411(a)(2)(B), do not fail to satisfy this paragraph (c) when treated as
a single plan merely because of this difference in vesting schedules.
(d) Crediting service -- (1) In general. A plan does not satisfy the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2) if the
manner in which employees' service is credited for any purpose under the
plan discriminates in favor of highly compensated employees.
(2) Absence from service -- (i) General rule. A plan does not fail
to satisfy this paragraph (d) merely because it credits service during a
period of absence from service if the service (''imputed service'')
satisfies the requirements specified in paragraph (d)(2)(ii) of this
section.
(ii) Requirements for crediting service during absence from service
-- (A) Definition of absence from service. For the period during which
imputed service is credited to an employee, the employee must be absent
from service for a reason other than termination from employment with
the employer maintaining the plan. For this purpose, if an employee
continues to perform services for the employer during the period, the
employee is not absent from service.
(B) Uniformity. Any provision in the plan for crediting imputed
service while an employee is absent from service must be applied
uniformly to all employees in the plan.
(C) Effective availability. For purposes of applying the effective
availability requirement of 1.401(a)(4)-4(c) to the right to imputed
service credits under the plan, the manner in which the employer grants
absences from service that give rise to imputed service is taken into
account.
(D) Period of credited service. In the case of imputed service
credited for a period during which an employee is absent from service
for any reason other than military duty or jury duty, the maximum period
for which imputed service may be credited is the shorter of 6 months or
the duration of the absence. If an employee is absent from service for
military duty or jury duty, imputed service may be credited to the
employee for up to the entire period of the military duty or jury duty
even if the period exceeds 6 months.
(E) Amount of imputed service. The amount of imputed service
credited during a period of absence from service is not greater than the
service with which the employee would reasonably have been expected to
have been credited during the period if the employee had continued to
perform services.
(iii) Elapsed time. Notwithstanding paragraphs (d)(2) (i) and (ii)
of this section, if the plan is crediting service using elapsed time in
accordance with 1.410(a)-7, the amount of service credited for an
employee's absence from service must not be less than the amount of
service required to be credited under 1.410(a)-7.
(e) Family aggregation rules. (Reserved)
(f) Governmental plans. (Reserved)
(g) Retroactive correction -- (1) In general. Section
401(a)(4)-1(c)(9)(i) provides that the requirements for determining
whether a plan satisfies section 401(a)(4) are generally applied on a
plan year basis, taking into account the terms of the plan in effect and
the employer's employee demographics during the plan year.
Notwithstanding this requirement, this paragraph (g) provides rules for
retroactively amending a plan after the close of the plan year for
purposes of satisfying section 401(a) for the plan year. These rules
apply in addition to the rules of section 401(b). Paragraph (g)(2) of
this section describes the scope of the retroactive amendments that are
permitted to be made. Paragraph (g)(3) of this section specifies the
conditions under which a retroactive amendment may be made. Paragraph
(g)(4) of this section provides a rule prohibiting retroactive
amendments that benefit terminated nonvested employees from being taken
into account for certain purposes. Paragraph (g)(5) of this section
discusses the effect of the retroactive amendments permitted under this
paragraph (g) under provisions other than section 401(a).
(2) Scope of retroactive amendments -- (i) Minimum coverage and
nondiscrimination in amount of contributions or benefits. For purposes
of satisfying the minimum coverage requirements of section 410(b) or the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2), a plan may
be retroactively amended to increase accruals or allocations for
employees who benefited under the plan during the preceding plan year,
or to grant accruals or allocations to employees who did not benefit
under the plan during the preceding plan year. For purposes of this
paragraph (g), the term employee means an individual who was an employee
within the meaning of 1.410(b)-9 in the preceding plan year.
(ii) Nondiscriminatory availability of benefits, rights, and
features. A plan may not be retroactively amended to make available to
an employee a benefit, right, or feature under the plan that previously
was not available to the employee solely to meet the nondiscriminatory
availability requirements of 1.401(a)(4)-4. An employer may, however,
make available to an employee a benefit, right, or feature that is
directly related to an increase in the amount of an employee's accrual
or allocation (including a grant of accruals or allocations to an
employee who otherwise would not be treated as benefiting under the
plan).
(iii) Nondiscriminatory effect of plan amendments and terminations.
A plan may be retroactively amended to correct a discriminatory plan
amendment so that the plan satisfies the requirements of
1.401(a)(4)-5(a). A plan may not, however, be retroactively amended to
correct for a failure to incorporate the pre-termination restrictions of
1.401(a)(4)-5(b).
(iv) Special rules for section 401(k) and 401(m) plans. A plan may
not be retroactively amended under this paragraph (g) to correct for a
failure to satisfy the actual deferral percentage test of section
401(k)(3) or the actual contribution percentage test of section
401(m)(2). See 1.401(k)-1(f) and 1.401(m)-1(e) for rules on
correcting a violation of these tests. In addition, neither a section
401(k) plan nor a section 401(m) plan may be retroactively amended under
this paragraph (g) to extend eligibility under the plan to an employee
for purposes of 1.410(b)-3(a)(2)(i) or 1.401(k)-1(b)(1)(i).
(3) Conditions for retroactive correction -- (i) In general. A
retroactive amendment is not permitted under this paragraph (g) unless
it satisfies each of the requirements of paragraphs (g)(3) (ii) through
(v) of this section.
(ii) Allocations or accruals only increased. The retroactive
amendment may not result in a reduction to an employee's benefits
(including any benefit, right, or feature) determined based on the terms
of the plan in effect immediately before the amendment.
(iii) Amendment effective for all purposes. For purposes of
determining an employee's rights and benefits under the plan, the
retroactive amendment must be effective as if the amendment had been
made on the first day of the preceding plan year. Thus, increases in an
employee's allocations or accruals, along with the associated benefits,
rights, and features, must be increased to the level at which they would
have been had the amendment been in effect for the entire preceding plan
year.
(iv) Time when amendment must be adopted and put into effect -- (A)
In general. Any retroactive amendment intended to apply to the
preceding plan year must be adopted and implemented before the 15th day
of the 10th month after the close of the plan year in order to be taken
into account for the preceding plan year.
(B) Determination letter requested by employer or plan administrator.
If, on or before the end of the period set forth in paragraph
(g)(3)(iv)(A) of this section, the employer or plan administrator files
a request pursuant to 601.201(o) of this chapter (Statement of
Procedural Rules) for a determination letter on the amendment, or the
initial or continuing qualification of the plan, or the trust that is
part of the plan, the period set forth in paragraph (g)(3)(iv)(A) of
this section is extended in the same manner as provided for an extension
of the remedial amendment period under 1.401(b)-1(d)(3).
(v) Retroactive amendment must separately satisfy sections 401(a)(4)
and 410(b) -- (A) General rule. Except as provided in paragraph
(g)(3)(v)(B) of this section, the additional allocations or accruals
resulting from the retroactive amendment of a plan must separately
satisfy section 401(a)(4) for the preceding plan year and must benefit a
group of employees that separately satisfies section 410(b) for the
preceding plan year. In determining whether the additional allocations
or accruals resulting from the retroactive amendment benefit a group of
employees that separately satisfies section 410(b), the same rules apply
as in determining whether a component plan separately satisfies section
410(b) under 1.401(a)(4)-9(c)(1)(i). Thus, for example, in applying the
rules of this paragraph (g)(3)(v), an employer may not aggregate the
additional accruals or allocations resulting from the retroactive
amendment with the other accruals or allocations already provided under
the terms of the plan as in effect during the plan year without regard
to the retroactive amendment.
(B) Retroactive amendment to conform to safe harbor. The
requirements of paragraph (g)(3)(v)(A) of this section need not be met
if the retroactive amendment is for purposes of conforming the plan to
one of the safe harbors in 1.401(a)(4)-2(b) or 1.401(a)(4)-3(b)
(including for purposes of applying the requirements of those safe
harbors under the optional testing methods in 1.401(a)(4)-8 (b)(3) or
(c)(3)), or ensuring that the plan continues to meet one of those safe
harbors.
(4) Retroactive amendments affecting terminated nonvested employees.
A retroactive amendment is not taken into account in determining whether
a plan satisfies section 401(a)(4) or 410(b) to the extent the amendment
affects nonvested employees who terminated employment with the employer
as of the close of the preceding year, and therefore would not have
received any economic benefit from the amendment if it had been made in
the prior year.
(5) Effect under other statutory requirements. A retroactive
amendment under this paragraph (g) is effective only for purposes of
section 401(a). Thus, for example, the retroactive amendment is
effective not only for purposes of sections 401(a)(4) and 410(b), but
also for purposes of determining whether the plan satisfies the
requirements of sections 401(l) and 401(a)(26) for the preceding plan
year. By contrast, the amendment is not given retroactive effect for
purposes of section 404 (deductions for contributions of an employer to
an employees' trust or annuity plan) or section 412 (minimum funding
standards). Thus, the otherwise applicable rules for deductions and
funding are not modified by the rules in this paragraph (g).
(6) Examples. The following examples illustrate the retroactive
correction rules of this paragraph (g).
Example 1. Employer A maintains a calendar year defined benefit plan
that for the 1992 plan year is tested for compliance with the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2) under the
general test of 1.401(a)(4)-3(c). In 1993, Employer A is concerned that
for the 1992 plan year the plan will fail the requirement of
1.401(a)(4)-1(b)(2). Provided that any retroactive amendment meets the
requirements of paragraph (g)(2) of this section, Employer A may
retroactively amend the plan to increase accruals, and those increases
will be taken into account in determining whether the plan will satisfy
section 401(a)(4) for the 1992 plan year as to the amount of benefits.
Example 2. Employer B maintains a calendar year defined benefit plan
that in 1992, 1993, and 1994, satisfies the requirements of the
alternative safe harbor for flat benefit plans in 1.401(a)(4)-3(b)(4).
In 1996, Employer B determines that the plan will not satisfy that safe
harbor for the 1995 plan year because the average of the normal accrual
rates for all nonhighly compensated employees is less than 70 percent of
the average of the normal accrual rates for all highly compensated
employees. Provided the retroactive amendment would otherwise satisfy
the requirements of this paragraph (g), Employer B may retroactively
amend the plan to increase the number of nonhighly compensated employees
in the plan so that the amended plan satisfies the safe harbor for the
1995 plan year. The retroactive amendment need not meet the
requirements of paragraph (g)(3)(v)(A) of this section because Employer
B is retroactively amending the plan to conform to a safe harbor in
1.401(a)(4)-3(b). See paragraph (g)(3)(v)(B) of this section.
Example 3. Employer C maintains a calendar year defined contribution
plan covering all the employees in Division A and Division B. Under the
plan, only employees in Division A have the right to direct the
investments in their account. For plan years prior to 1994, the plan
met the current availability requirement of 1.401(a)(4)-4(b) because
the employees in Division A were a group of employees that satisfied the
nondiscriminatory classification test of 1.410(b)-4. Because of
attrition in the employee population in Division A in 1994, the group of
employees to whom the right to direct investments is available no longer
meets the nondiscriminatory classification test of 1.410(b)-4. Thus,
the right to direct investments under the plan fails the current
availability requirement of 1.401(a)(4)-4(b) for 1994. In 1995,
Employer C cannot retroactively amend the plan to make the right to
direct investments available to a group of employees that would meet the
current availability requirement of 1.401(a)(4)-4(b).
Example 4. The facts are the same as in Example 3. In 1995,
Employer C may amend the plan to benefit the employees in Division C as
well as Divisions A and B so that the plan will meet the minimum
coverage requirements of section 410(b). In increasing plan coverage,
the right to direct investments may also be made available to the
employees in Division C.
Example 5. Employer D maintains a defined benefit plan that covers
all employees and that offsets an employee's benefit by the employee's
projected primary insurance amount. The plan is not eligible to use the
safe harbors under 1.401(a)(4)-3(b) because the plan does not meet the
requirements of section 401(l). Under the plan, the accrual rates for
all highly compensated employees (determined under the general test of
1.401(a)(4)-3(c)) for 1994 are less than 1.5 percent of testing
compensation, and the accrual rates for all nonhighly compensated
employees (determined under the general test of 1.401(a)(4)-3(c)) for
1994 are 2 percent of testing compensation. Employer D may not
retroactively increase the contributions to the highly compensated
employees under the plan so that they equal that of the nonhighly
compensated employees, because such a retroactive amendment would not
separately satisfy sections 410(b) and 401(a)(4) if it were treated as a
separate plan. This is the case even if, after taking the amendment
into account, the plan would satisfy sections 410(b) and 401(a)(4) for
the 1994 plan year.
Example 6. Employer E maintains two plans -- Plan M and Plan N.
Plan M satisfies the ratio percentage test of 1.410(b)-2(b)(2), but
Plan N does not. Thus, in order to satisfy section 410I(b), Plan N must
satisfy the average benefits test of 1.410(b)-2(b)(3). The average
benefit percentage of Plan N is 60 percent. Employer E may increase the
accruals under either Plan M or Plan N so that the average benefit
percentage meets the 70 percent requirement of the average benefits
test.
Example 7. Employer F maintains Plan O, which does not satisfy the
requirements of section 401(a)(4) in a plan year. Under the terms of
paragraph (g)(2) of this section, Employer F amends Plan O to increase
the benefits of certain employees retroactively. In designing the
amendment, Employer F identifies those employees who have terminated
without vested benefits during the period after the end of the prior
plan year and before the adoption date of the amendment, and the
amendment provides increases in benefits primarily to those employees.
It would be inconsistent with the purpose of preventing discrimination
in favor of highly compensated employees for Plan O to treat the
amendment as retroactively effective under this paragraph (g)(2). See
1.401(a)(4)-1(c)(2).
Example 8. Employer G maintains both a section 401(k) plan and a
section 401(m) plan that provides matching contributions at a rate of 50
percent with respect to elective contributions under the section 401(k)
plan. In plan year 1995, the section 401(k) plan fails to satisfy the
actual deferral percentage test of section 401(k)(3). In order to
satisfy section 401(k)(3), Employer G makes corrective distributions to
highly compensated employees H1 through H10 of their excess
contributions as provided under 1.401(k)-1(f). The matching
contributions that H1 through H10 had received on account of their
excess contributions are not forfeited, however. Thus, the effective
rate of matching contributions provided to H1 through H10 is increased
as a result of the corrective distributions. Since no nonhighly
compensated employee in the section 401(m) plan is provided with an
equivalent rate of matching contributions, the rate of matching
contributions provided to H1 through H10 does not satisfy the
nondiscriminatory availability requirement of 1.401(a)(4)-4 in plan
year 1995. This violation may not be corrected under this paragraph
(g).
(T.D. 8360, 56 FR 47591, Sept. 19, 1991; 57 FR 4721, Feb. 7, 1992;
57 FR 10953, Mar. 31, 1992)
26 CFR 1.401(a)(4)-12 Definitions.
In applying the provisions of this section and of 1.401(a)(4)-1
through 1.401(a)(4)-13, the definitions in this section govern unless
otherwise provided.
Accrual method. Accrual method means the method used to determine
the accrued benefit (within the meaning of section 411(a)(7)(A)(i)) of
employees under a defined benefit plan as of any date.
Accumulation Plan. Accumulation plan means a defined benefit plan
under which the benefit of every employee in the plan for each plan year
is separately determined, using plan year compensation (if benefits are
determined as a percentage of compensation rather than a dollar amount)
separately calculated for the plan year, and each employee's total
accrued benefit as of the end of a plan year is the sum of the
separately determined benefits for that plan year and all prior plan
years. A plan does not fail to be an accumulation plan merely because
the benefits for years of service before a fresh-start date were not
determined in the manner described in the preceding sentence, provided
that the accrued benefit of each employee in the plan after the
fresh-start date is determined in accordance with 1.401(a)(4)-13(c)(2)
(formula without wear-away) without providing for compensation
adjustments otherwise permitted under 1.401(a)(4)-13(c)(5)(iii).
Actuarial equivalent. An amount or benefit is the actuarial
equivalent of, or is actuarially equivalent to, another amount or
benefit at a given time if the actuarial present value of the two
amounts or benefits (calculated using the same actuarial assumptions) at
that time is the same.
Actuarial present value. Actuarial present value means the value as
of a specified date of an amount or series of amounts due thereafter,
where each amount is --
(1) Multiplied by the probability that the condition or conditions on
which payment of the amount is contingent will be satisfied, and
(2) Discounted according to an assumed rate of interest to reflect
the time value of money.
Ancillary benefit. Ancillary benefit means an ancillary benefit
within the meaning of 1.401(a)(4)-4(e)(2).
Average annual compensation. Average annual compensation means
average annual compensation within the meaning of 1.401(a)(4)-3(e)(2).
Benefit formula. Benefit formula means the formula a defined benefit
plan applies to determine the accrued benefit (within the meaning of
section 411(a)(7)(A)(i)) in the form of an annual benefit commencing at
normal retirement age of an employee who continues in service until
normal retirement age. Thus, for example, the benefit formula does not
include the accrual method the plan applies (along with the benefit
formula) to determine the accrued benefit of an employee who terminates
employment before normal retirement age.
Benefits, rights, and features. Benefits, rights, and features means
optional forms of benefit, ancillary benefits, and other rights and
features within the meaning of 1.401(a)(4)-4(e). Benefit, right, or
feature means an optional form of benefit, an ancillary benefit, or an
other right or feature within the meaning of 1.401(a)(4)-4(e).
Contributory DBplan. Contributory DBplan means a defined benefit
that includes employee contributions not allocated to separate accounts.
Defined benefit excess plan. Defined benefit excess plan means
defined benefit excess plan within the meaning of 1.401(l)-1(c)(16)(i).
Defined benefit plan. Defined benefit plan means a defined benefit
plan within the meaning of 1.410(b)-9.
Defined contribution plan. Defined contribution plan means a defined
contribution plan within the meaning of 1.410(b)-9.
Employee. With respect to a plan year, employee means and employee,
within the meaning of 1.410(b)-9, who is benefiting under the plan
within the meaning of 1.410(b)-3(a) for the plan year.
Employer. Employer means the employer within the meaning the of
1.410(b)-9.
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).
Excess benefit percentage. Excess benefit percentage means excess
benefit percentage within the meaning of 1.401(l)-1(c)(14).
Former employee. Former employee means a former employee within the
meaning of 1.410(b)-9 who is not treated as excludable under
1.410(b)-6(h).
Fresh-start date. Fresh-start date means a date selected by the
employer that is the last day of a plan year and that is the same for
all employees in the plan.
Frozen. With respect to an employee's benefits under a plan frozen
means determined as if the employee terminated employment with the
employer as of a date, and without regard to any amendment to the plan
adopted after the earlier of that date and the last day of the current
plan year, other than amendments adopted after such earlier date but
recognized as effective as of or before such earlier date under section
401(b) or 1.401(a)(4)-11(g). In the case of an employee who terminates
employment before the date benefits under the plan are frozen or treated
as frozen, frozen means determined as of the date the employee actually
terminated employment, without regard to any amendment excluded from
consideration under the preceding sentence.
Gross benefit percentage. Gross benefit percentage means gross
benefit percentage within the meaning of 1.401(l)-1(c)(18).
Highly compensated employee. Highly compensated employee means an
employee who is a highly compensated employee within the meaning of
section 414(q).
Highly compensated former employee. Highly compensated former
employee means a former employee who is highly compensated former
employee within the meaning of section 414(q)(9).
Nonexcludable employee. Nonexcludable employee means an employee
within the meaning of 1.410(b)-9, other than an excludable employee
with respect to the plan as determined under 1.410(b)-6. A
nonexcludable employee may be either a highly or nonhighly compensated
nonexcludable employee, depending on the nonexcludable employee's status
under section 414(q).
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.
Normalize. With respect to a benefit payable to an employee in a
particular form, normalize means to convert the benefit to an
actuarially equivalent straight life annuity commencing at the
employee's testing age under the normalization procedure of
1.401(a)(4)-3(d)(5)(iv).
Offset plan. Offset plan means an offset plan within the meaning of
1.401(l)-1(c)(24).
Optional form of benefit. Optional form of benefit means an optional
form of benefit within the meaning of 1.401(a)(4)-4(e)(1).
Plan. Plan means a plan within the meaning of 1.410(b)-7 (a) and
(b), after application of the mandatory disaggregation rules of
1.410(b)-7(c) and the permissive aggregation rules of 1.410(b)-7(d).
Thus, for example, two plans (within the meaning of 1.410(b)-7(b)) that
are treated as a single plan pursuant to the permissive aggregation
rules of 1.410(b)-7(d) are treated as a single plan for purposes of
section 401(a)(4).
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 -- (1) In general. Plan year compensation
means section 414(s) compensation for the plan year determined by
measuring section 414(s) compensation during one of the periods
described in paragraphs (2) through (4) of this definition. Whichever
period is selected must be applied uniformly to determine the plan year
compensation of every employee in the plan.
(2) Plan year. This period consists of the plan year.
(3) Twelve-month period ending in the plan year. This period
consists of a specified 12-month period ending with or within the plan
year, such as the calendar year or the period for determining benefit
accruals described in 1.401(a)(4)-3(f)(6).
(4) Period of plan participation during the plan year. This period
consists of the portion of the plan year during which the employee is a
participant in the plan. This period may be used to determine plan year
compensation for the plan year in which participation begins, the plan
year in which participation ends, or both. This period may be used to
determine plan year compensation for purposes of 1.401(a)(4)-3(d) only
if the plan year is also the period for determining benefit accruals
under the plan rather than another period as permitted under
1.401(a)(4)-3(f)(6). Similarly, this period may be used to measure plan
year compensation that is treated as average annual compensation under
an accumulation plan, as provided in 1.401(a)(4)-3(b)(8)(x)(B), only if
the plan year is also the period for determining benefit accruals under
the plan rather than another period as permitted under
1.401(a)(4)-3(f)(6). Further, selection of this period must be made on a
reasonably consistent basis from plan year to plan year in a manner that
does not discriminate in favor of highly compensated employees.
Discrimination might arise, for example, where this period is selected
in all plan years except a plan year in which a highly compensated
employee enters the plan at midyear.
Present value. Present value means the value as of a specified date
of an amount or series of amounts due thereafter and discounted
according to an assumed rate of interest to reflect the time value of
money, but not adjusted to reflect the probability of payment of any
amount.
QJSA. ''OJSA'' or ''qualified joint and survivor annuity'' means a
qualified joint and survivor annuity within the meaning of section
417(b).
QSUPP -- (1) In general. QSUPP or qualified social security
supplement means a social security supplement that meets each of the
requirements in paragraphs (2) through (6) of this definition.
(2) Accrual -- (i) General rule. The amount of the social security
supplement payable at any age for which the employee is eligible for the
social security supplement is equal to the lesser of --
(A) the employee's old-age insurance benefit, unreduced on account of
age, under title II of the Social Security Act, and
(B) The accrued social security supplement, determined under one of
the methods in paragraphs (2)(ii) through (2)(iv) of this definition.
(ii) Section 401 (1) plans. In the case of a section 401(1) plan
that is a defined benefit excess plan, each employee's accrued social
security supplement equals the employee's average annual compensation up
to the integration level, multiplied by the disparity provided by the
plan for the employee's years of service used in determining the
employee's accrued benefit under the plan. In the case of a section
401(1) plan that is an offset plan, each employee's accrued social
security supplement equals the dollar amount of the offset accrued for
the employee under the plan.
(iii) PIA offset plan. In the case of a PIA offset plan, each
employee's accrued social security supplement equals the dollar amount
of the offset accrued for the employee under the plan. For this
purpose, a PIA offset plan is a plan that reduces an employee's benefit
by an offset based on a stated percentage of the employee's primary
insurance amount under the Social Security Act.
(iv) Other plans. In the case of any other plan, each employee's
social security supplement accrues ratably over the period beginning
with the later of the employee's commencement of participation in the
plan or the effective date of the social security supplement and ending
with the earliest age at which the social security supplement is payable
to the employee. The effective date of the social security supplement
is the later of the effective date of the amendment adding the social
security supplement or the effective date of the amendment modifying an
existing social security supplement to comply with the requirements of
this definition. In the case of an amendment made by the end of the
last plan year beginning before January 1, 1993, to a social security
supplement in existence on September 19, 1991, the employer may treat
the accrued portion of the social security supplement, as determined
under the plan without regard to amendments made after September 19,
1991, as included in the employee's accrued social security supplement,
provided that the remainder of the social security supplement is accrued
under the otherwise applicable method.
(3) Vesting. The plan provides that an employee's right to the
accrued social security supplement becomes nonforfeitable within the
meaning of section 411 as if it were an early retirement benefit.
(4) Eligibility. The plan provides the same eligibility conditions
on receipt of the social security supplement as on receipt of the early
retirement benefit in conjunction with which the social security
supplement is payable. Furthermore, if the service required for an
employee to become eligible for the social security supplement exceeds
15 years, then the ratio percentage of the group of employees who
actually satisfy the eligibility conditions on receipt of the QSUPP in
the current plan year equals or exceeds the unsafe harbor percentage
applicable to the plan under 1.410(b)-4(c)(4)(ii).
(5) QJSA. At each age, the most valuable QSUPP commencing at that
age must be payable in conjunction with the QJSA commencing at that age.
In addition, the plan must provide that, in the case of a social
security supplement payable in conjunction with a QJSA, the social
security supplement will be paid after the employee's death on the same
terms as the QJSA, but in no event for a period longer than the period
for which the social security supplement would have been paid to the
employee had the employee not died. For example, if the QJSA is in the
form of a joint annuity with a 50-percent survivor's benefit, the social
security supplement must provide a 50-percent survivor's benefit. When
section 417(c) requires the determination of a QJSA for purposes of
determining a qualified pre-retirement survivor's annuity as defined in
section 417(c) (''QPSA''), the social security supplement payable in
conjunction with that QJSA must be paid in conjunction with the QPSA.
(6) Protection. The plan specifically provides that the social
security supplement is treated as an early retirement benefit that is
protected under section 411(d)(6) (other than for purposes of sections
401(a)(11) and 417). Thus, the accrued social security supplement
continues to be payable notwithstanding subsequent amendment of the plan
(including the plan's termination), and an employee may meet the
eligibility requirements for the social security supplement after plan
termination.
Qualified plan. Qualified plan means a plan that satisfies section
401(a). For this purpose, a qualified plan includes an annuity plan
described in 403(a).
Ratio percentage. Ratio percentage means ratio percentage within the
meaning of 1.410(b)-9.
Section 401(a)(17) employee. Section 401(a)(17) employee means a
section 401(a)(17) employee within the meaning of
1.401(a)(17)-1(e)(2)(ii).
Section 401(k) plan. Section 401(k) plan means a plan consisting of
elective contributions described in 1.401(k)-1(g)(3) under a qualified
cash or deferred arrangement described in 1.401(k)-1(a)(4)(i).
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 in 1.401(a)(4)-2(b)(3),
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 1.401(m)-1(f)(6) or matching
contributions described in 1.401(m)-1(f)(12), or both.
Section 414(s) compensation -- (1) In general. When used with
reference to compensation for a plan year, 12-month period, or other
specified period, ''section 414(s) compensation'' means compensation
measured using an underlying definition that satisfies section 414(s).
Whether an underlying definition of compensation satisfies section
414(s) is determined on a year-by-year basis, based on the provisions of
section 414(s) in effect for the applicable plan year, and if relevant,
the employer's highly and nonhighly compensated employees for that plan
year. Notwithstanding the foregoing, see paragraph (3) of this
definition for rules for determining section 414(s) compensation for
plan years or 12-month periods beginning before January 1, 1988.
(2) Determination period for section 414(s) nondiscrimination
requirement -- (i) General rule. If a definition of underlying
compensation must satisfy the nondiscrimination requirement in
1.414(s)-1(d) in order to satisfy section 414(s) for a plan year, any
one of the following determination periods may be used --
(A) The plan year,
(B) The calendar year ending in the plan year, or
(C) The 12-month period ending in the plan year that is used to
determine the underlying definition of compensation.
(ii) Exception for partial plan year compensation. Notwithstanding
the general rule in paragraph (2)(i) of this definition, if the period
for measuring underlying compensation is the portion of the plan year
during which each employee is a participant in the plan (as provided in
paragraph (4) of the definition of plan year compensation in this
section) that period must be used as the determination period.
(3) Years before 1988. Any underlying definition of compensation
used to measure the amount of employees' compensation for a plan year or
a 12-month period beginning before January 1, 1988, for purposes of this
definition is not required to satisfy section 414(s), provided that the
definition was nondiscriminatory based on the facts and circumstances in
effect for that plan year or for the plan year in which that 12-month
period ends and the definition is used consistently to determine the
compensation for the plan year or the 12-month period for all employees
in the plan.
(4) Plans using permitted disparity. In the case of a section 401(l)
plan or a plan that imputes permitted disparity in accordance with
1.401(a)(4)-7, an underlying definition of compensation is not section
414(s) compensation, if the definition results in significant
under-inclusion of compensation for employees.
Social security supplement. Social security supplement means a
social security supplement within the meaning of 1.411(a)-7(c)(4)(ii).
Standard interest rate. Standard interest rate means an interest
rate that is neither less than 7.5 percent nor greater than 8.5 percent,
compounded annually. The Commissioner may, in revenue rulings, notices,
and other guidance of general applicability, change the definition of
standard interest rate.
Standard mortality table. Standard mortality table means one of the
following tables: the UP-1984 Mortality Table (Unisex); the 1983 Group
Annuity Mortality Table (1983 GAM) (Female); the 1983 Group Annuity
Mortality Table (1983 GAM) (Male); the 1983 Individual Annuity
Mortality Table (1983 IAM) (Female); the 1983 Individual Annuity
Mortality Table (1983 IAM) (Male); the 1971 Group Annuity Mortality
Table (1971 GAM) (Female); the 1971 Group Annuity Mortality Table (1971
GAM) (Male); the 1971 Individual Annuity Mortality Table (1971 IAM)
(Female); or the 1971 Individual Annuity Mortality Table (1971 IAM)
(Male). These standard mortality tables are available from the Society
of Actuaries, 475 N. Martingale Road, Suite 800, Schaumberg, Illinois
60173. The Commissioner may, in revenue rulings, notices, and other
guidance of general applicability, change the definition of standard
mortality table.
Straight life annuity. Straight life annuity means an annuity
payable in equal installments for the life of the employee that
terminates upon the employee's death.
Straight life annuity factor. Straight life annuity factor means the
actuarial present value of an immediate straight lift annuity equal to
$1 per year. The straight life annuity factor may reflect equal
periodic payments made more frequently than annually, provided that they
total $1 per year.
Testing age. With respect to an employee, testing age means the age
determined for the employee under the following rules --
(1) If the plan provides the same uniform normal retirement age for
all employees in the plan, the employee's testing age is the employee's
normal retirement age under the plan.
(2) If a plan provides different uniform normal retirement ages for
different employees or different groups of employees in the plan, the
employee's testing age is the employee's latest normal retirement age
under any uniform normal retirement age under the plan, regardless of
whether that particular uniform normal retirement age actually applies
to the employee under the plan.
(3) If the plan does not provide a uniform normal retirement age, the
employee's testing age is 65.
(4) If an employee is beyond the testing age otherwise determined for
the employee under paragraphs (1) through (3) of this definition, the
employee's testing age is the employee's current age. The rule in the
preceding sentence does not apply in the case of a defined benefit plan
that does not satisfy the requirements of 1.401(a)(4)-3(f)(3)(i) (A)
through (C) (permitting certain increases to be disregarded in an
employee's benefits due to delayed commencement of benefits after normal
retirement age).
Testing compensation. Testing compensation means testing
compensation within the meaning of 1.401(a)(4)-3(e)(2).
Testing service -- (1) Defined contribution plans. In the case of a
defined contribution plan, testing service means the number of plan
years for which an amount taken into account under
1.401(a)(4)-2(c)(2)(ii) has been allocated or treated as allocated to
the account of the employee under the plan.
(2) Defined benefit plans -- (i) General rule. In the case of a
defined benefit plan, ''testing service'' means an employee's years of
service as defined in the plan for purposes of applying the benefit
formula under the plan, provided that the plan uses the same definition
of years of service for this purpose for all employees in the plan.
Alternatively, testing service may be determined for all employees in
the plan under the rules of paragraph (2)(ii) of this definition, even
though the plan uses the same definition of years of service for all
employees in the plan.
(ii) Plans with nonuniform service definition. In the case of a
defined benefit plan that does not use the same definition of years of
service for purposes of applying the benefit formula under the plan to
all employees in the plan, testing service means the number of plan
years the employee has benefited under the plan within the meaning of
section 410(b), plus an employee's years of service as defined in the
plan for purposes of applying the benefit formula under the plan with
respect to years of service (if any) before the employee first benefited
under the plan. For plan years beginning before the first day of the
first plan year for which the amendments made to section 410(b) by
section 1112(a) of the Tax Reform Act of 1986 apply to the plan, an
employee is treated as benefiting under the plan for a plan year if the
employee was covered under the plan for the plan year for purposes of
section 410(b) as in effect at that time.
(iii) Service caps ignored. In determining an employee's testing
service, any limitation on the number of years of service taken into
account for purposes of applying the benefit formula under the plan is
disregarded.
(3) Limitations on testing service. For purposes of determining
testing service, only service with the employer (or a predecessor
employer within the meaning of section 414(a)) may be taken into
account, plus any period of imputed service permitted under
1.401(a)(4)-11(d)(2). An employee may be credited with no more than 1
year of testing service with respect to any plan year. In the case of a
short plan year, an employee may be credited with no more than a
fraction of a year of testing service, determined by dividing the number
of months in the plan year by 12.
(4) Time of determination. An employee's testing service generally
is determined as of the close of the current plan year. However, in
applying the projected method in 1.401(a)(4)-3(d)(4) or the fresh-start
alternative to the projected method in 1.401(a)(4)-3(d)(6)(viii),
testing service is determined as of the date (other than a fresh-start
date, if applicable) that the employee's benefits under the plan are
treated as frozen. Thus, for example, in determining an employee's
normal accrual rate under 1.401(a)(4)-3(d)(4)(i), the employee's
testing service is determined as of the employee's testing age.
Similarly, in determining an employee's most valuable accrual rate under
1.401(a)(4)-3(d)(4)(ii), the employee's testing service is determined
as of the date payment of the underlying QJSA and QSUPP (if any) would
commence to the employee under the plan. If, as a result, an employee's
testing service is determined as of a date after the current plan year,
the employee's testing service is determined by assuming that the amount
of testing service credited to the employee for the current plan year
continues to be credited to the employee in each future plan year
through the date on which the employee's benefits under the plan are
treated as frozen.
Uniform normal retirement age. Uniform normal retirement age means a
single normal retirement age that does not exceed age 65 and that is the
same for all of the employees in a given group. A group of employees do
not fail to have a uniform normal retirement age merely because the plan
provides that the normal retirement age of all employees in the group is
the later of a stated age (not exceeding age 65) or a stated anniversary
no later than the 5th anniversary of the time the employee commenced
participation in the plan.
Year of service. Year of service means a year of service as defined
in the plan for a specific purpose, including the method of crediting
service for that purpose under the plan. In the absence of a specific
indication to the contrary, the term year of service generally refers to
a year of service as defined in the plan for purposes of applying the
benefit formula or accrual method under the plan. An employee may be
credited with no more than 1 year of service with respect to any
12-consecutive-month period, except for those cases in which additional
service is required to be credited under section 410 or 411, whichever
is applicable.
(T.D. 8360, 56 FR 47594, Sept. 19, 1991; 57 FR 4721, Feb. 7, 1992;
57 FR 10953, Mar. 31, 1992)
26 CFR 1.401(a)(4)-13 Effective dates and fresh-start rules.
(a) In general. Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 apply
to plan years beginning on or after January 1, 1992. For plan years
beginning before that date and on or after the first day of the first
plan year to which the amendments made to section 410(b) by section
1112(a) of the Tax Reform Act of 1986 (''TRA '86'') apply, a plan must
be operated in accordance with a reasonable, good faith interpretation
of section 401(a)(4), taking into account pre-existing guidance and the
amendments made by TRA '86 to related provisions of the Code (including,
for example, sections 401(l), 401(a)(17), and 410(b)). Whether a plan
is operated in accordance with a reasonable, good faith interpretation
of section 401(a)(4) will generally be determined on the basis of all
relevant facts and circumstances, including the extent to which an
employer has resolved unclear issues in its favor. A plan will be
deemed to be operated in accordance with a reasonable, good faith
interpretation of section 401(a)(4) if it is operated in accordance with
the terms of 1.401(a)(4)-1 through 1.401(a)(4)-13.
(b) Effective date for governmental plans. In the case of
governmental plans described in section 414(d), including section 401(a)
plans and nonelective plans subject to section 403(b)(12)(A)(i), section
401(a)(4) is considered satisfied for plan years beginning before the
later of January 1, 1993, or 90 days after the opening of the first
legislative session beginning on or after January 1, 1993, of the
governing body with authority to amend the plan, if that body does not
meet continuously. For purposes of this paragraph (b), the term
''governing body with authority to amend the plan'' means the
legislature, board, commission, council, or other governing body with
authority to amend the plan.
(c) Fresh-start rules for defined benefit plans -- (1) Introduction
-- (i) In general. In order to use the fresh-start rules under
1.401(a)(4)-3(b)(8)(viii), 1.401(a)(4)-3(d)(6) (vii) or (viii),
1.401(a)(4)-8(b)(3)(ii)(A), or 1.401(a)(4)-8(c)(3)(xi), a defined
benefit plan (or the stated benefit formula under a target benefit plan)
must, for plan years after the fresh-start date, determine each
employee's accrued benefit under the plan under one of the formulas
provided in paragraphs (c)(2) through (c)(4) of this section.
Paragraphs (c)(5) and (c)(6) of this section allow certain changes in an
employee's accrued benefit frozen as of the fresh-start date (the
employee's ''frozen accrued benefit'') for purposes of applying the
formulas after the fresh-start date. See 1.401(a)(4)-12 for the
definitions of ''fresh-start date'' and ''frozen.''
(ii) Consistency. Unless otherwise provided, the same fresh-start
formula must be applied to all employees who have accrued benefits as of
the fresh-start date and who have at least one hour of service with the
employer in a plan year beginning after that date. Thus, for example,
if two or more plans are aggregated and treated as a single plan for
purposes of sections 401(a)(4) and 410(b) in the plan year ending on the
fresh-start date or any later year, those plans are also treated as a
single plan for purposes of this paragraph (c). Thus, if a plan makes a
fresh start and for a later plan year is aggregated for purposes of
section 401(a)(4) with another plan that did not make the same fresh
start, the aggregated plan must make a new fresh start in order to use
any of the fresh-start rules referenced in paragraph (c)(1)(i) of this
section for that later plan year or any subsequent plan year.
(iii) Multiple fresh starts. If a plan makes a new fresh start after
having made an earlier fresh start, each employee's accrued benefit, as
determined under the original fresh-start formula as of the new
fresh-start date, must be frozen as of the new fresh-start date for
purposes of applying the new fresh-start formula.
(2) Formula without wear-away. An employee's accrued benefit under
the plan is equal to the sum of --
(i) The employee's frozen accrued benefit, and
(ii) The employee's accrued benefit determined under the formula
applicable to benefit accruals in the current plan year as applied to
years of service after the fresh-start date.
(3) Formula with wear-away. An employee's accrued benefit under the
plan is equal to the greater of --
(i) The employee's frozen accrued benefit, or
(ii) The employee's accrued benefit determined under the formula
applicable to benefit accruals in the current plan year as applied to
the employee's total years of service for the employer before and after
the fresh-start date.
(4) Formula with extended wear-away. An employee's accrued benefit
under the plan is equal to the greater of --
(i) The sum determined under paragraph (c)(2) of this section, or
(ii) The employee's accrued benefit determined under the formula
applicable to benefit accruals in the current plan year as applied to
the employee's total years of service for the employer before and after
the fresh-start date.
(5) Permitted adjustments. An employee's accrued benefit will not
fail to be frozen as of the fresh-start date merely because the plan
increases the employee's frozen accrued benefit in one or more of the
ways described in paragraphs (c)(5) (i) through (iv) of this section.
Any adjustment must be made uniformly for all employees with frozen
accrued benefits under the plan.
(i) Increases in section 415 limits. A plan may provide for
increases in the frozen accrued benefit of every employee in the plan
whose benefit would be greater, but for the application of section 415,
to the extent permitted under section 415(d)(1).
(ii) Former employees. A plan may increase the benefits of former
employees who were employees on the fresh-start date, if the increase
satisfies the requirements of 1.401(a)(4)-10 and applies consistently
to all former employees with frozen accrued benefits under the plan.
(iii) Adjusted accrued benefit. A plan that satisfies the
requirements of paragraph (d) of this section may make the adjustments
described in paragraphs (d)(5) and (d)(6) of this section. However, if
the plan makes a new fresh start after the effective date applicable to
the plan under paragraph (a) or (b) of this section, in accordance with
paragraph (c)(1)(iii) of this section the adjustments otherwise
permitted under paragraph (d)(6) of this section must cease as of the
new fresh-start date.
(iv) Compensation adjustments to top-heavy minimum benefits. If the
frozen accrued benefit of an employee under the plan includes top-heavy
minimum benefits, the plan may increase the employee's frozen accrued
benefit solely to the extent necessary to comply with the average
compensation requirement of section 416(c)(1)(D)(i).
(6) Benefits, rights, and features -- (i) Eligibility and vesting.
Service for the employer after the fresh-start date continues to be
taken into account for purposes of determining eligibility and vesting
for benefits, rights, and features under the plan.
(ii) Changes in optional forms. A plan may provide a new optional
form of benefit with respect to the frozen accrued benefit, provided the
following requirements are met --
(A) The optional form is provided with respect to each employee's
entire accrued benefit (i.e., accrued both before and after the
fresh-start date).
(B) The plan provided meaningful coverage as of the fresh-start date,
as described in paragraph (d)(3) of this section.
(C) The plan provides meaningful current benefit accruals, as
described in paragraph (d)(4) of this section.
(7) Examples. The following examples illustrate the provisions of
this paragraph (c).
Example 1. (a) Employer M maintains a defined benefit plan with a
calendar plan year. The plan contains several formulas covering
different groups of employees, and, for plan years before 1996, the plan
satisfies section 401(a)(4) by passing the general test of
1.401(a)(4)-3(c). Effective for the 1996 plan year, the employer amends
the plan to satisfy the unit credit safe harbor under
1.401(a)(4)-3(b)(3). The amended plan formula provides a normal
retirement benefit for all employees of 1.25 percent of average annual
compensation for each year of service up to 30. The plan otherwise
satisfies the requirements of 1.401(a)(4)-3(b)(2) and (b)(3). For plan
years after 1995, each employee's accrued benefit is determined under
the fresh-start formula in paragraph (c)(3) of this section (formula
with wear-away), using December 31, 1995, as the fresh-start date.
(b) As of December 31, 1995, Employee A has 20 years of service with
Employer M, average annual compensation of $40,000, and an accrued
benefit of $14,000. As of December 31, 1996, Employee A has 21 years of
service with Employer M and average annual compensation of $43,000.
Employee A's accrued benefit as of December 31, 1996, is $14,000, the
greater of $14,000 (Employee A's accrued benefit frozen as of December
31, 1995) and $11,288 (1.25 percent $43,000 21 years).
(c) As of December 31, 2000, Employee A has 25 years of service with
Employer M and average annual compensation of $52,000. Employee A's
accrued benefit as of December 31, 2000, is $16,250, the greater of
$14,000 (Employee A's accrued benefit frozen as of December 31, 1995)
and $16,250 (1.25 percent $52,000 25 years).
Example 2. (a) Employer Y maintains a defined benefit plan with a
calendar plan year. The plan formula provides an employee with a normal
retirement benefit at age 65 of 1 percent of average annual compensation
up to covered compensation multiplied by the employee's years of service
for Employer Y, plus 1.5 percent of average annual compensation in
excess of the covered compensation, multiplied by the employee's years
of service for Employer Y up to 40.
(b) For plan years beginning after 1992, Employer Y amends the plan
formula to provide a normal retirement benefit of 0.75 percent of
average annual compensation up to covered compensation multiplied by the
employee's total years of service for Employer Y up to 35, plus 1.4
percent of average annual compensation in excess of covered compensation
multiplied by the employee's years of service for Employer Y up to 35.
For plan years after 1992, each employee's accrued benefit is determined
under the fresh-start formula in paragraph (c)(4) of this section
(formula with extended wear-away), using December 31, 1992, as the
fresh-start date.
(c) As of December 31, 1992, Employee C has 10 years of service for
Employer Y, has average annual compensation of $38,000, and has covered
compensation of $30,000. Employee C's accrued benefit as of December
31, 1992, is therefore $4,200 ((1 percent $30,000 10 years) + (1.5
percent $8,000 10 years)). As of December 31, 1993, Employee C has
11 years of service for Employer Y, has average annual compensation of
$40,000, and has covered compensation of $32,000. Employee C's accrued
benefit as of December 31, 1993, is $4,552, the greater of --
(1) $4,552, the sum of Employee C's accrued benefit frozen as of
December 31, 1992, ($4,200) and the amended formula applied to Employee
C's years of service after 1992 ((0.75 percent $32,000 1 year) +
(1.4 percent $8,000 1 year), or $352)), or
(2) $3,872, the amended formula applied to Employee C's total years
of service ((0.75 percent $32,000 11 years) + (1.4 percent $8,000
11 years)).
(d) Plans using pre-effective-date fresh-start dates -- (1) In
general. A defined benefit plan that uses a fresh-start date before the
effective date applicable to the plan under paragraph (a) or (b) of this
section, and that satisfies the requirements of paragraphs (d)(2)
through (d)(5) of this section, may substitute an employee's adjusted
accrued benefit for the employee's frozen accrued benefit in applying
the formulas in paragraphs (c)(2) through (c)(4) of this section (or
paragraph (f)(2) of this section, if applicable).
(2) Average pay requirement. As of the fresh-start date, the plan
contained a benefit formula under which increases in an employee's
benefits accrued as of the fresh-start date would have been determined
by reference to the employee's compensation in plan years beginning
after the fresh-start date. A plan would satisfy this requirement, for
example, if it based benefits on an employee's highest average pay over
a fixed period of years or on an employee's average pay over the
employee's entire career with the employer.
(3) Meaningful coverage as of fresh-start date. The plan provided
meaningful coverage as of the fresh-start date. A plan provided
meaningful coverage as of the fresh-start date if the group of employees
with accrued benefits under the plan as of the fresh-start date
satisfied the minimum coverage requirements of section 410(b) as in
effect on that date (including the average benefit percentage test, if
applicable). In order to satisfy the requirement in the preceding
sentence, an employer may amend the plan to grant past service credit
under the formula in effect as of the fresh-start date to nonhighly
compensated employees, provided that the amount of past service granted
them is reasonably comparable, on average, to the amount of past service
highly compensated employees have under the plan. The portion of an
amendment that grants past service credit to nonhighly compensated
employees as described in the preceding sentence is not considered
adopted after the fresh-start date for purposes of paragraph (d)(2) of
this section or for purposes of the definition of ''frozen'' in
1.401(a)(4)-12. Thus, any benefit increase that results from the grant
of past service credit to a nonhighly compensated employee under this
paragraph (d)(3) is included in the employee's frozen accrued benefit.
(4) Meaningful current benefit accruals. The benefit formula and
accrual method under the plan provides benefit accruals in the current
plan year (other than increases in benefits accrued as of the
fresh-start date) that are meaningful in comparison to the rate at which
benefits accrued in plan years beginning before the fresh-start date.
(5) Minimum benefit adjustment -- (i) In general. In the case of a
section 401(l) plan or a plan that imputes disparity under
1.401(a)(4)-7, the plan makes the minimum benefit adjustment described
in paragraph (d)(5)(ii) or (iii) of this section.
(ii) Excess or offset plans. In the case of a plan that is a defined
benefit excess plan as of the fresh-start date, each employee's frozen
accrued benefit is adjusted so that the base benefit percentage is not
less than 50 percent of the excess benefit percentage. In the case of a
plan that is a PIA offset plan as of the fresh-start date, each
employee's offset as applied to determine the frozen accrued benefit is
adjusted so that it does not exceed 50 percent of the benefit determined
without applying the offset. For purposes of this paragraph (d)(5)(ii),
a PIA offset plan is a plan that applies the plan's benefit rates
uniformly regardless of an employee's compensation, but that reduces an
employee's benefit by a stated percentage of the employee's primary
insurance amount under the Social Security Act.
(iii) Other plans. In the case of a plan that is not described in
paragraph (d)(5)(ii) of this section, each employee's frozen accrued
benefit is adjusted in a manner that is economically equivalent to the
adjustment required under that paragraph, taking into account the plan's
benefit formula, accrual rate, and relevant employee factors, such as
period of service.
(6) Adjusted accrued benefit -- (i) General rule. The term adjusted
accrued benefit means an employee's frozen accrued benefit that is
adjusted as provided in paragraph (d)(5) of this section, and then
multiplied by a fraction (not less than 1) determined under one of the
following methods that is the same for every employee in the plan --
(A) Old compensation fraction. The numerator is the employee's
compensation for the current plan year determined under the compensation
definition and formula used to determine the frozen accrued benefit, and
the denominator is the employee's compensation for the plan year ending
on the fresh-start date determined under the same compensation
definition and formula used in the numerator.
(B) New compensation fraction. The numerator is the employee's
average annual compensation for the current plan year, and the
denominator is the employee's average annual compensation for the plan
year ending on the fresh-start date, determined in the same manner as
the numerator.
(C) Reconstructed compensation fraction. The numerator is the
employee's average annual compensation for the current plan year, and
the denominator is the employee's reconstructed average annual
compensation, as defined in paragraph (d)(6)(ii) of this section.
In determining the numerators and the denominators of the fractions
described in this paragraph (d)(6), the annual compensation limit under
section 401(a)(17) generally applies.
See, however, 1.401(a)(17)-1(e)(4) for special rules applicable to
section 401(a)(17) employees.
(ii) Reconstructed average annual compensation. The term
reconstructed average annual compensation means an employee's average
annual compensation for the plan year ending on the fresh-start date
determined under the following method for every employee in the plan --
(A) Select a single plan year beginning after the fresh-start date
but beginning not later than December 31, 1992.
(B) Determine the employee's average annual compensation for the
selected plan year under the same method used to determine the
employee's average annual compensation for the current plan year under
paragraph (d)(6)(i)(C) of this section.
(C) Multiply the employee's average annual compensation for the
selected plan year by a fraction, the numerator of which is the
employee's compensation for the plan year ending on the fresh-start date
determined under the same compensation definition and formula used to
determine the employee's frozen accrued benefit, and the denominator of
which is the employee's compensation for the selected plan year
determined under the compensation definition and formula used to
determine the employee's frozen accrued benefit. The product is the
employee's reconstructed average annual compensation.
(iii) Permissible compensation definitions. Any compensation or
average annual compensation definition used for purposes of this
paragraph (d)(6) must be the same for every employee with benefits
accrued under the plan as of the fresh-start date. The definition may,
but need not, be the same as the compensation or average annual
compensation definition used in the current plan year for other purposes
under section 401(a)(4).
(iv) Option to make less than the full permitted adjustment. A plan
may make less than the full increase in each employee's frozen accrued
benefit (''FAB'') as permitted under paragraph (d)(6)(i) of this section
by determining each employee's adjusted accrued benefit (''AAB'') under
the following formula, where P is a single percentage (not to exceed 100
percent) designated in the plan for this purpose, and where F is one of
the fractions described in paragraph (d)(6)(ii) of this section that is
the same for all employees in the plan:
AAB = FAB + (P FAB (F ^ 1))
In addition, a plan may impose a uniform maximum dollar amount on the
adjusted accrued benefit of every employee in the plan or, in the
alternative, of every highly compensated employee in the plan, provided
the maximum dollar amount does not reduce any employee's accrued
benefit. Furthermore, the plan may, at any time, terminate all future
adjustments permitted under this paragraph (d).
(7) Examples. The following examples illustrate this paragraph (d).
Example 1. (a) Employer X maintains a defined benefit plan with a
calendar plan year. Effective for the 1991 plan year, the plan is
amended to provide a new formula. The amended plan also provides that,
for plan years after 1990, each employee's accrued benefit is determined
under the formula in paragraph (c)(3) of this section (formula with
wear-away) and, in applying the fresh-start formula, each employee's
frozen accrued benefit under paragraph (c)(3)(i) of this section will be
adjusted under this paragraph (d), using the new compensation fraction
under paragraph (d)(6)(i)(B) of this section. The plan is not a section
401(l) plan and does not impute permitted disparity under 1.401(a)(4)-7
for years after 1990; thus, the minimum benefit adjustment under
paragraph (d)(5) of this section does not apply.
(b) As of December 31, 1990, Employee A has average annual
compensation of $24,000 and an accrued benefit of $3,000. As of
December 31, 1994, Employee A has average annual compensation
(determined in the same manner as average annual compensation as of
December 31, 1990) of $30,000. As of December 31, 1994, Employee A's
adjusted accrued benefit is $3,750 ($3,000 $30,000/$24,000). Thus,
Employee A's accrued benefit is the greater of $3,750 and the employee's
accrued benefit determined under the new formula as applied to the
employee's total years of service.
Example 2. (a) Employer Y maintains a defined benefit excess plan
with a calendar plan year. For plan years before 1989, the plan is
integrated with benefits provided under the Social Security Act,
providing each employee with a normal retirement benefit equal to 1
percent of the employee's average annual compensation in excess of the
employee's covered compensation, multiplied by the employee's years of
service for Y. The benefit formula thus provides no benefit with
respect to average annual compensation up to covered compensation.
(b) As of December 31, 1988, Employee A has 10 years of service for Y
and has covered compensation of $25,000 and average annual compensation
of $20,000. Employee A's average annual compensation has never exceeded
$20,000. Therefore, as of December 31, 1988, Employee A's accrued
benefit under the plan is zero.
(c) Effective with the 1989 plan year, the plan is amended to provide
each employee with a normal retirement benefit of 0.6 percent of average
annual compensation up to covered compensation plus 1.2 percent of
average annual compensation in excess of covered compensation,
multiplied by the employee's years of service up to 35. The plan also
provides that, for plan years after 1988, each employee's accrued
benefit is determined under the formula in paragraph (c)(2) of this
section (formula without wear-away) and, in applying the fresh-start
formula, each employee's frozen accrued benefit under paragraph
(c)(3)(i) of this section will be adjusted under this paragraph (d),
using the old compensation fraction under paragraph (d)(6)(i)(A) of this
section.
(d) The plan is a section 401(l) plan and thus must also make the
minimum benefit adjustment under paragraph (d)(5) of this section.
Because the excess benefit percentage under the plan for years before
1989 was 1 percent, the plan must provide a base benefit percentage for
those years of at least 0.5 percent. After the minimum benefit
adjustment, Employee A's accrued benefit as of December 31, 1988, is
$1,000 (0.5 percent $20,000 10 years).
(e) As of December 31, 1992, Employee A has 14 years of service and
has covered compensation of $30,000 and average annual compensation of
$35,000. Employee A's adjusted accrued benefit as of December 31, 1992,
is $1,750 ($1,000 $35,000/$20,000), and Employee A's accrued benefit
as of December 31, 1992, is $2,710 (the sum of $1,750 plus $960 ((0.6
percent $30,000 4 years) plus (1.2 percent $5,000 4 years))).
Example 3. (a) Employer Z maintains an offset plan with a calendar
plan year. For plan years before 1989, the plan is integrated with
benefits provided under the Social Security Act, providing each employee
with a normal retirement benefit of 50 percent of average annual
compensation, offset by 83 1/3 percent of the employee's projected
primary insurance amount under the Social Security Act. The plan
determines each employee's accrued benefit under the fractional accrual
rule of section 411(b)(1)(C).
(b) As of December 31, 1988, Employee A, who was hired at age 40, has
10 years of service for Z and has projected service at normal retirement
age of 25 years. Employee A also has a projected annual primary
insurance amount of $10,000, covered compensation of $25,000, and
average annual compensation of $30,000. Therefore, as of December 31,
1988, Employee A's accrued benefit under the plan is $2,667 (((50
percent x $30,000) minus (83 1/3 percent $10,000)) 10/25)
(c) Effective with the 1989 plan year, the plan is amended to provide
each employee with a normal retirement benefit of 2 percent of average
annual compensation reduced by 0.65 percent of final average
compensation up to covered compensation per year of service. The plan
also provides that, for plan years after 1988, each employee's accrued
benefit is determined under the formula in paragraph (c)(2) of this
section (formula without wear-away) and, in applying the fresh-start
formula, each employee's frozen accrued benefit under paragraph
(c)(3)(i) of this section will be adjusted under this paragraph (d),
using the old compensation fraction under paragraph (d)(6)(i)(A) of this
section.
(d) The plan is a section 401(l) plan and thus must also make the
minimum benefit adjustment under paragraph (d)(5) of this section.
Because the offset applied to determine Employee A's frozen accrued
benefit as of December 31, 1988 ($3,333), exceeded 50 percent of the
benefit determined without regard to the offset ($6,000), the offset
must be reduced to no more than 50 percent. After the minimum benefit
adjustment, Employee A's accrued benefit as of December 31, 1988, is
$3,000 ($6,000 minus the reduced offset of $3,000).
(e) As of December 31, 1992, Employee A has 14 years of service and
has covered compensation of $30,000 and average annual compensation and
final average compensation of $40,000. Employee A's adjusted accrued
benefit as of December 31, 1992, is $4,000 ($3,000 $40,000/$30,000),
and Employee A's accrued benefit as of December 31, 1992, is $6,420 (the
sum of $4,000 plus $2,420 ((2 percent $40,000 4 years) minus (0.65
percent $30,000 4 years))).
(e) Special fresh-start rules for target benefit plans -- (1) Plans
qualified under prior law. A target benefit plan that was adopted and
in effect on September 19, 1991, and that satisfied the applicable
nondiscrimination requirements for target benefit plans on that date and
in all prior periods, may be treated as satisfying the requirements of
1.401(a)(4)-8(b)(3) in plan years beginning before the effective date
applicable to the plan under paragraph (a) or (b) of this section that
were taken into account in determining employees' stated benefits. In
determining whether a plan satisfied the applicable nondiscrimination
requirements for target benefit plans for any period prior to the
applicable effective date, no amendments after September 19, 1991 other
than amendments necessary to satisfy section 401(l), are taken into
account
(2) Determination of initial theoretical reserve. In the case of a
target benefit plan described in paragraph (e)(1) of this section, the
theoretical reserve, as of the determination date (within the meaning of
1.401(a)(4)-8(b)(3)(iv)(A)) for the last plan year beginning before the
earlier of the first day of the first plan year in which the plan
actually satisfied 1.401(a)(4)-8(b)(3) (i.e., without regard to
paragraph (e)(1) of this section) or the effective date applicable to
the plan under paragraph (a) or (b) of this section, of an employee who
was a participant in the plan on such earlier date is determined as
follows --
(i) Determine the actuarial present value, as of the determination
date, of the stated benefit that the employee is projected to have at
the employee's normal retirement age, using the actuarial assumptions,
the provisions of the plan, and the employee's compensation as of the
determination date. For an employee beyond normal retirement age,
determine the actuarial present value of the employee's stated benefit
at current age, but using a straight life annuity factor as of normal
retirement age.
(ii) Calculate the present value of future required employer
contributions as of the determination date (i.e., the present value of
the level contributions due for each plan year through the end of the
plan year in which the employee attains normal retirement age). This
calculation is made using the actuarial assumptions as of the
determination date and the required contribution for the plan year
including the determination date.
(iii) Determine the excess, if any, of the amount determined in
paragraph (e)(2)(i) of this section over the amount determined in
paragraph (e)(2)(ii) of this section. This is the employee's
theoretical reserve on the determination date.
(3) Example. The following example illustrates the determination of
an employee's theoretical reserve.
Example. (a) A target benefit plan that in 1991 satisfies the
requirements of Rev. Rul. 76-464, 1976-2 C.B. 115, provides a stated
benefit equal to 40 percent of compensation, payable annually as a
straight life annuity beginning at normal retirement age. Normal
retirement age under the plan is 65. The stated interest rate under the
plan is 6 percent. The determination date for required contributions
under the plan is the last day of the plan year. Employee A is 38 years
old on the determination date for the 1991 plan year, has participated
in the plan for 5 years, and has compensation equal to $60,000 in 1991.
The amount of employer contribution to Employee A's account for 1991 was
$2,468.
(b) Under these facts, Employee A's theoretical reserve is equal to
$13,909, calculated as follows:
(1) The actuarial present value of Employee A's stated benefit is
calculated using the actuarial assumptions, provisions of the plan and
Employee A's compensation as of the determination date for the 1991 plan
year. This amount is equal to $46,512, Employee A's stated benefit of
$24,000 ($60,000 multiplied by 40 percent), multiplied by 1.938, the
actuarial present value factor applicable to a participant who is 38
years old using a stated interest rate of 6 percent.
(2) The actuarial present value of future employer contributions is
calculated using the actuarial assumptions, provisions of the plan and
Employee A's compensation as of the determination date for the 1991 plan
year. This amount is equal to $32,603, which is equal to the amount of
level employer contribution ($2,468) multiplied by a factor of 13.2105,
the temporary annuity factor for a period of 27 years, assuming a stated
interest rate of 6 percent.
(3) Employee A's theoretical reserve is $13,909, the excess of the
amount determined in paragraph (b)(2) of this Example over the amount
determined in paragraph (b)(3) of this Example.
(f) Special fresh-start rules for cash balance plans -- (1) In
general. In order to satisfy the optional testing method of
1.401(a)(4)-8(c)(3) after a fresh-start date, a cash balance plan must
apply the rules of paragraph (c) of this section as modified under this
paragraph (f). Paragraph (f)(2) of this section provides an alternative
formula that may be used in addition to the formulas in paragraphs
(c)(2) through (c)(4) of this section. Paragraph (f)(3) of this section
sets forth certain limitations on use of the formulas in paragraph (c)
or (f)(2) of this section.
(2) Alternative formula -- (i) In general. An employee's accrued
benefit under the plan is equal to the greater of --
(A) The employee's frozen accrued benefit, or
(B) The employee's accrued benefit determined under the plan's
benefit formula applicable to benefit accruals in the current plan year
as applied to years of service after the fresh-start date, modified in
accordance with paragraph (f)(2)(ii) of this section.
(ii) Addition of opening hypothetical account. As of the first day
after the fresh-start date, the plan must credit each employee's
hypothetical account with an amount equal to the employee's opening
hypothetical account (determined under paragraph (f)(2)(iii) of this
section), adjusted for interest for the period that begins on the first
day after the fresh-start date and that ends at normal retirement age.
The interest adjustment in the preceding sentence must be made using the
same interest rate applied to the hypothetical allocation for the first
plan year beginning after the fresh-start date.
(iii) Determination of opening hypothetical account -- (A) General
rule. An employee's opening hypothetical account equals the actuarial
present value of the employee's frozen accrued benefit as of the
fresh-start date. For this purpose, if the plan provides for a single
sum distribution as of the fresh-start date, the actuarial present value
of the employee's frozen accrued benefit as of the fresh-start date
equals the amount of a single sum distribution payable under the plan on
that date, assuming that the employee terminated employment on the
fresh-start date, the employee's accrued benefit was 100-percent vested,
and the employee satisfied all eligibility requirements under the plan
for the single sum distribution. If the plan does not offer a single
sum distribution as of the fresh-start date, the actuarial present value
of the employee's frozen accrued benefit as of the fresh-start date must
be determined using a standard mortality table and the applicable
section 417(e) rates, as defined in 1.417(e)-1(d).
(B) Alternative opening hypothetical account. Alternatively, the
employee's opening hypothetical account is the greater of the opening
hypothetical account determined under paragraph (f)(2)(ii)(A) of this
section and the employee's hypothetical account as of the fresh-start
date determined in accordance with 1.401(a)(4)-8(c)(3)(v)(A) calculated
under the plan's benefit formula applicable to benefit accruals in the
current plan year as applied to the employee's total years of service
through the fresh-start date in a manner that satisfies the past service
credit rules of 1.401(a)(4)-8(c)(3)(viii).
(3) Limitations on formulas -- (i) Past service restriction. If the
plan does not satisfy the uniform hypothetical allocation formula
requirement of 1.401(a)(4)-8(c)(3)(iii)(B) as of the fresh-start date,
under 1.401(a)(4)-8(c)(3)(viii) the plan may not provide for past
service credits, and thus may not use the formula in paragraph (c)(3) of
this section (formula with wear-away), the formula in paragraph (c)(4)
of this section (formula with extended wear-away), or the alternative
determination of the opening hypothetical account in paragraph
(f)(2)(iii)(B) of this section.
(ii) Change in interest rate. If the interest rate used to adjust
employees' hypothetical allocations under 1.401(a)(4)-8(c)(3)(iv) for
the plan year is different from the interest rate used for this purpose
in the immediately preceding plan year, the plan must use the formula in
paragraph (c)(2) of this section (formula without wear-away).
(iii) Meaningful benefit requirement. A plan is permitted to use the
formula provided in paragraph (f)(2) of this section only if the plan
satisfies paragraphs (d)(3) through (d)(5) of this section (regarding
coverage as of fresh-start date, current benefit accruals, and minimum
benefit adjustment, respectively).
(T.D. 8360, 56 FR 47598, Sept. 19, 1991; 57 FR 4721, Feb. 7, 1992;
57 FR 10953, Mar. 31, 1992)
26 CFR 1.401(a)(5)-1 Special rules relating to nondiscrimination
requirements.
(a) In general. Section 401(a)(5) sets out certain provisions that
will not of themselves be discriminatory within the meaning of section
410(b)(2)(A)(i) or section 401(a)(4). The exceptions specified in
section 401(a)(5) are not an exclusive enumeration, but are merely a
recital of provisions frequently encountered that will not of themselves
constitute prohibited discrimination in contributions or benefits. See
section 401(a)(4) and the regulations thereunder for the basic
nondiscrimination rules. See 1.410(b)-4 for the rule of section
410(b)(2)(A)(i) (relating to the nondiscriminatory classification test
that is part of the minimum coverage requirements) referred to in
section 401(a)(5)(A). See paragraphs (b) through (f) of this section
for special rules used in applying the section 401(a)(4)
nondiscrimination requirements under the remaining provisions of section
401(a)(5).
(b) Salaried or clerical employees. A plan does not fail to satisfy
the nondiscrimination requirements of section 401(a)(4) merely because
contributions or benefits provided under the plan are limited to
salaried or clerical employees.
(c) Uniform relationship to compensation. A plan does not fail to
satisfy the nondiscrimination requirements of section 401(a)(4) merely
because the contributions or benefits of, or on behalf of, the employees
under the plan bear a uniform relationship to the compensation (within
the meaning of section 414(s)) of those employees.
(d) Certain disparity permitted. Under section 401(a)(5)(C), a plan
does not discriminate in favor of highly compensated employees (as
defined in section 414(q)), within the meaning of section 401(a)(4), in
the amount of employer-provided contributions or benefits solely because
--
(1) In the case of a defined contribution plan, employer
contributions allocated to the accounts of employees favor highly
compensated employees in a manner permitted by section 401(l) (relating
to permitted disparity in plan contributions and benefits), and
(2) In the case of a defined benefit plan, employer-provided benefits
favor highly compensated employees in a manner permitted by section
401(l) (relating to permitted disparity in plan contributions and
benefits).
See 1.401(l)-1 through 1.401(l)-6 for rules under which a plan may
satisfy section 401(l) for purposes of the safe harbors of
1.401(a)(4)-2(b)(3) and 1.401(a)(4)-3(b).
(e) Defined benefit plans integrated with social security -- (1) In
general. Under section 401(a)(5)(D), a defined benefit plan does not
discriminate in favor of highly compensated employees (as defined in
section 414(q)) with respect to the amount of employer-provided
contributions or benefits solely because the plan provides that, with
respect to each employee, the employer-provided accrued retirement
benefit under the plan is limited to the excess (if any) of --
(i) The employee's final pay from the employer, over
(ii) The employer-provided retirement benefit created under the
Social Security Act and attributable to service by the employee for the
employer.
(2) Final pay. For purposes of paragraph (e)(1)(i) of this section,
an employee's final pay from the employer as of a plan year is the
employee's compensation (as defined in section 414(q)(7)) for the year
(ending with or within the 5-plan-year period ending with the plan year
in which the employee terminates from employment with the employer) in
which the employee receives the highest compensation from the employer.
Notwithstanding the preceding sentence, final pay for each employee
under the plan may be determined with reference to the 5-plan-year
period ending with the plan year before the plan year in which the
employee terminates from employment with the employer. In determining
an employee's final pay, the plan may specify any 12-month period
(ending with or within the applicable 5-plan-year period) as a year
provided the specified 12-month period is uniformly and consistently
applied with respect to all employees. In determining an employee's
final pay, compensation for any year in excess of the applicable limit
under section 401(a)(17) for the year may not be taken into account.
(3) Rules for determining amount of employer-provided social security
retirement benefit. For purposes of paragraph (e)(1)(ii) of this
section, the following rules apply.
(i) The employer-provided retirement benefit on which any reduction
or offset in the employee's accrued retirement benefit is based is
limited solely to the employer-provided primary insurance amount payable
under section 215 of the Social Security Act attributable to service by
the employee for the employer.
(ii) The employer-provided primary insurance amount attributable to
service by the employee for the employer is determined by multiplying
the employer-provided portion of the employee's projected primary
insurance amount by a fraction (not exceeding 1), the numerator of which
is the employee's number of complete years of covered service for the
employer under the Social Security Act, and the denominator of which is
35.
(4) Projected primary insurance amount. (i) As of a plan year, an
employee's projected primary insurance amount is the primary insurance
amount, determined as of the close of the plan year (the ''determination
date''), payable to the employee upon attainment of the employee's
social security retirement age (as determined under section 415(b)(8)),
assuming the employee's annual compensation from the employer that is
treated as wages for purposes of the Social Security Act remains the
same from the plan year until the employee's attainment of social
security retirement age. With respect to service by the employee for
the employer before the determination date, the actual compensation paid
to the employee by the employer during all periods of service of the
employee for the employer covered by the Social Security Act must be
used in determining an employee's projected primary insurance amount.
With respect to years before the employee's commencement of service for
the employer, in determining the employee's projected primary insurance
amount, it may be assumed that the employee received compensation in an
amount computed by using a six-percent salary scale projected backwards
from the determination date to the employee's 21st birthday. However,
if the employee provides the employer with satisfactory evidence of the
employee's actual past compensation for the prior years treated as wages
under the Social Security Act at the time the compensation was earned
and the actual past compensation results in a smaller projected primary
insurance amount, the plan must use the actual past compensation. The
plan administrator must give clear written notice to each employee of
the employee's right to supply actual compensation history and of the
financial consequences of failing to supply the history. The notice
must be given each time the summary plan description is provided to the
employee and must also be given upon the employee's separation from
service. The notice must also state that the employee can obtain the
actual compensation history from the Social Security Administration. In
determining the employee's projected primary insurance amount, the
employer may not take into account any compensation from any other
employer while the employee is employed by the employer.
(ii) As of a plan year, the employer-provided portion of the
employee's projected primary insurance amount under the Social Security
Act is 50 percent of the employee's projected primary insurance amount
(as determined under paragraph (e)(4)(i) of this section).
(5) Employer-provided accrued retirement benefit. For purposes of
this section, the employee's employer-provided accrued retirement
benefit as of a plan year is the employee's accrued retirement benefit
under the plan (determined on an actual basis and not on a projected
basis) attributable to employer contributions under the plan. With
respect to plans that provide for employee contributions, see section
411(c) for rules relating to the allocation of accrued benefits between
employer contributions and employee contributions.
(6) Additional rules. (i) As of a plan year, paragraph (e)(1) of
this section does not apply to the extent that its application would
result in a decrease in an employee's accrued benefit. See sections
411(b)(1)(G) and 411(d)(6).
(ii) Section 401(a)(5)(D) and this paragraph (e) do not apply to a
plan maintained by an employer, determined for purposes of the Federal
Insurance Contributions Act or the Railroad Retirement Tax Act, as
applicable, that does not pay any wages within the meaning of section
3121(a) or compensation within the meaning of section 3231(e). For this
purpose, a plan maintained for a self-employed individual within the
meaning of section 401(c)(1), who is also subject to the tax under
section 1401, is deemed to be a plan maintained by an employer that pays
wages within the meaning of section 3121(a).
(iii) If a plan provides for the payment of an employee's accrued
retirement benefit (whether or not subsidized) commencing before an
employee's social security retirement age, the projected
employer-provided primary insurance amount attributable to service by
the employee for the employer (as determined under paragraphs (e)(3) and
(e)(4) of this section) that may be applied as an offset to limit the
employee's accrued retirement benefit must be reduced in accordance with
1.401(l)-3(e)(1). The reduction is made by multiplying the employee's
projected employer-provided primary insurance amount by a fraction, the
numerator of which is the appropriate factor under 1.401(l)-3(e)(1),
and the denominator of which is 0.75 percent.
(iv) The Commissioner may, in revenue rulings, notices or other
documents of general applicability, prescribe additional rules that may
be necessary or appropriate to carry out the purposes of this section,
including rules relating to the determination of an employee's projected
primary insurance amount attributable to the employee's service for
former employers and rules applying section 401(a)(5)(D) with respect to
an employer that pays wages within the meaning of section 3121(a) or
compensation within the meaning of section 3231(e) for some years and
not for other years.
(7) Effective date. This paragraph (e) is effective for plan years
beginning after December 31, 1988.
(8) Examples. The following examples illustrate this paragraph (e).
Example 1. Employer Z maintains a noncontributory defined benefit
plan that uses the calendar year as its plan year. The plan provides a
normal retirement benefit, commencing at age 65, equal to $500 a year,
multiplied by the employee's years of service for Z, limited to the
excess of the amount of the employee's final pay from Z (as determined
in accordance with paragraph (e)(2) of this section) over the employee's
employer-provided primary insurance amount attributable to the
employee's service for Z. If an employee's social security retirement
age is greater than 65, the plan provides for reduction of the
employee's employer-provided primary insurance amount in accordance with
paragraph (e)(6)(iii) of this section. The plan provides no limitation
on the number of years of service taken into account in determining
benefits under the plan. Employee A retires on July 6, 1995, at A's
social security retirement age of 65 with 35 years of service for Z.
The plan uses the plan year as the 12- month period for determining an
employee's year of final highest pay from the employer. A's
compensation for A's final 5 plan years is as follows:
A's annual primary insurance amount under social security, determined
as of A's social security retirement age, is $9,000, of which $4,500 is
the employer-provided portion attributable to A's service for Z ($9,000
50 percent 35/35). Under the plan's benefit formula (disregarding
the final pay limitation), A would be entitled to receive a normal
retirement benefit of $17,500 ($500 35 years). However, under the
plan, A's otherwise determined normal retirement benefit of $17,500 is
limited to the excess of the amount of A's final pay from Z over A's
employer-provided primary insurance amount under social security
attributable to A's service for Z. Accordingly, A's normal retirement
benefit is determined to be $15,500 ($20,000 (A's final pay from Z) less
$4,500 (A's employer-provided primary insurance amount attributable to
A's service for Z)) rather than $17,500. The final pay limitation in
Z's plan satisfies section 401(a)(5)(D) and this paragraph (e).
Accordingly, the plan maintained by Z does not discriminate in favor of
highly compensated employees within the meaning of section 401(a)(4)
merely because of the final pay limitation contained in the plan.
Example 2. Assume the same facts as in Example 1, except that A has
32 years of service for Z when A retires at A's social security
retirement age. Under the plan's benefit formula (disregarding the
final pay limitation), A would be entitled to receive an annual normal
retirement benefit of $16,000 ($500 32 years). However, the plan
provides that A's normal retirement benefit of $16,000 will be limited
to $15,500 ($20,000 (the amount of A's final pay from Z) less $4,500 (
1/2 of A's primary insurance amount under the Social Security Act)).
The final pay limitation does not satisfy this paragraph (e). The
portion of A's employer-provided primary insurance amount under the
Social Security Act attributable to A's service for Z is 32/35 $4,500,
or $4,114. Therefore, to satisfy this paragraph (e), the final pay
provision in Z's plan may not limit A's otherwise determined normal
retirement benefit of $16,000 to less than $15,886 ($20,000 (the amount
of X's final pay) minus ^$4,114 (the portion of A's employer-provided
primary insurance amount attributable to A's service for Z)).
Example 3. (a) Employer X maintains a noncontributory defined
benefit plan that uses the calendar year as its plan year. The formula
for determining benefits under the plan provides a normal retirement
benefit at age 65 equal to 90 percent of an employee's final average
compensation, with the benefit reduced by 1/30th for each year of the
employee's service less than 30 and limited to the employee's final pay
(as determined in accordance with paragraph (e)(2) of this section) less
the employee's employer-provided primary insurance amount under social
security attributable to the employee's service for X. The plan
determines an employee's employer-provided projected primary insurance
amount under social security attributable to the employee's service for
X in accordance with paragraph (e)(3) of this section and applies the
reductions applicable under paragraph (e)(6)(iii) of this section if
benefits commence before social security retirement age. The plan
determines an employee's accrued benefit under the fractional accrual
method of section 411(b)(1)(C).
(b) Employee A commences participation in the plan on January 1,
1990, when A is 35 years of age. A's social security retirement age is
67. As of the close of the 2014 plan year, A's final average
compensation from X is $15,000; A's final pay from X is $15,400, and
A's projected employer-provided annual primary insurance amount under
social security attributable to A's service for X is $4,000 (after the
reduction applicable under paragraph (e)(6)(iii) of this section).
Under the plan formula, A's accrued benefit as of the close of the 2014
plan year is $11,250 (90 percent $15,000 25/30). As of the close of
the 2014 plan year, the plan's final pay limitation does not affect A's
benefit because A's benefit under the plan as of the close of the plan
year and before application of the final pay limitation ($11,250) does
not exceed A's final pay of $15,400 from X, determined as of the close
of the plan year, less A's employer-provided projected primary insurance
amount under social security attributable to A's service for X ($4,000).
(c) Assume that, as of the close of the 2015 plan year, A's final
average compensation from X is $14,500 and A's final pay from X is
$15,400. Assume also that as of the close of the 2015 plan year, A's
employer-provided primary insurance amount attributable to A's service
for X is $4,200 (after the reduction applicable under paragraph
(e)(6)(iii) of this section). Accordingly, A's benefit as of the close
of the 2015 plan year and before application of the final pay limitation
is $11,310 (90 percent $14,500 26/30). Under the plan's final pay
limitation, A's benefit of $11,310 would be limited to $11,200, the
amount of A's final pay from X ($15,400), less A's employer-provided
projected primary insurance amount under social security attributable to
A's service for X ($4,200). However, the plan's final pay limitation
may not be applied to limit A's accrued benefit for the 2015 plan year
to an amount below $11,250, which was A's accrued benefit under the plan
at the close of the prior plan year. The foregoing is further
illustrated in the following table for the plan years presented above
and for additional years of service performed by A for X.
(f) Certain benefits not taken into account. In determining whether
a plan satisfies section 401(a)(4) and this section, other benefits
created under state or federal law (e.g., worker's compensation benefits
or black lung benefits) may not be taken into account.
(g) More than one plan treated as single plan. (Reserved)
(T.D. 8359, 56 FR 47614, Sept. 19, 1991; 57 FR 10817, 10818, 10951,
Mar. 31, 1992)
26 CFR 1.401(a)(17)-1 Limitation on annual compensation.
(a) Compensation limit requirement -- (1) In general. In order to be
a qualified plan, a plan must satisfy section 401(a)(17). Section
401(a)(17) provides an annual compensation limit for each employee under
a qualified plan. This limit applies to a qualified plan in two ways.
First, a plan may not base allocations, in the case of a defined
contribution plan, or benefit accruals, in the case of a defined benefit
plan, on compensation in excess of the annual compensation limit.
Second, the amount of an employee's annual compensation that may be
taken into account in applying certain specified nondiscrimination rules
under the Internal Revenue Code is subject to the annual compensation
limit. These two limitations are set forth in paragraphs (b) and (c) of
this section, respectively.
(2) Annual compensation limit. For purposes of this section,
''annual compensation limit'' means $200,000, adjusted annually by the
Commissioner. The amount of the annual compensation limit is adjusted
at the same time and in the same manner as under section 415(d). The
base period for the annual adjustment is 1989; the first adjustment is
effective on January 1, 1990; and the dollar increase in effect on
January 1 is effective for any plan year beginning in the calendar year.
For example, if a plan has a plan year beginning July 1, 1989, and
ending June 30, 1990, the annual compensation limit in effect on January
1, 1989 ($200,000), applies to the plan for the entire plan year. In
addition, if compensation for any plan year beginning prior to the
effective date that section 401(a)(17) first applies to a plan is used
for determining allocations or benefit accruals, or when applying any
nondiscrimination rule, in any year subject to section 401(a)(17), then
the annual compensation limit for that prior year is the annual
compensation limit for 1989 ($200,000).
(b) Plan limit on compensation -- (1) General rule. A plan does not
satisfy section 401(a)(17) unless it provides that the compensation
taken into account for any employee in determining plan allocations or
benefit accruals for any plan year is limited to the annual compensation
limit. For purposes of this rule, allocations and benefit accruals
under a plan include all benefits provided under the plan, including
ancillary benefits.
(2) Plan-year-by-plan-year requirement. For purposes of this
paragraph (b), the annual compensation limit in effect for the current
plan year applies only to the compensation for that year that is taken
into account in determining plan allocations or benefit accruals for the
year. The compensation for any prior plan year taken into account in
determining an employee's allocations or benefit accruals for the
current plan year is subject to the applicable annual compensation limit
in effect for that prior year. Thus, increases in the annual
compensation limit apply only to compensation taken into account for the
plan year in which the increase is effective. For example, if an
employer has a defined benefit plan that bases benefits on the average
of an employee's compensation for the three plan years during which the
average of the employee's compensation is the highest, compensation for
each of the plan years used in the average must be limited to the annual
compensation limit in effect for the respective years.
(3) Application of limit to a plan year -- (i) In general. For
purposes of applying this paragraph (b), the annual compensation limit
is applied to the compensation for the plan year on which allocations or
benefit accruals for that plan year are based.
(ii) Compensation for the plan year. A plan may determine
compensation used in determining allocations or benefit accruals for a
plan year based on compensation for the plan year. In this case, the
annual compensation limit that applies to the compensation for the plan
year is the limit in effect for the calendar year in which the plan year
begins. Alternatively, a plan may determine compensation used in
determining allocations or benefit accruals for the plan year for all
employees on the basis of a 12-consecutive-month period, or periods,
ending no later than the last day of the plan year. If compensation is
based on these alternative 12-month periods, the annual compensation
limit applies to compensation for each of those periods based on the
annual compensation limit in effect for the respective calendar year in
which each 12-month period begins.
(iii) Compensation for a period of less than 12 months -- (A)
Proration required. If compensation for a period of less than 12 months
is used for a plan year, then the otherwise applicable annual
compensation limit is reduced in the same proportion as the reduction in
the 12-month period. For example, if a defined benefit plan provides
that the accrual for each month in a plan year is separately determined
based on the compensation for that month and the plan year accrual is
the sum of the accruals for all months, then the annual compensation
limit for each month is 1/12th of the annual compensation limit for the
plan year. In addition, if the period for determining compensation used
in calculating an employee's allocation or accrual for a plan year is a
short plan year (i.e., shorter than 12 months), the annual compensation
limit is an amount equal to the otherwise applicable annual compensation
limit multiplied by the fraction, the numerator of which is the number
of months in the short plan year, and the demonimator of which is 12.
(B) No proration required for participation for less than a full plan
year. Notwithstanding paragraph (b)(3)(iii)(A) of this section, a plan
is not treated as limiting the compensation used in determining an
employee's allocations or benefit accruals to a specified portion of the
employee's annual compensation merely because the plan formula provides
that the allocation or accrual for each employee is based on
compensation for the portion of the plan year during which the employee
is a participant in the plan. In addition, no proration is required
merely because an employee is covered under a plan for less than a full
plan year, provided that allocations or benefit accruals are otherwise
determined using compensation for a period of at least 12 months.
(4) Limits on multiple employer and multiemployer plans. For
purposes of this paragraph (b), in the case of a plan described in
section 413(c) or 414(f) (a plan maintained by more than one employer),
the annual compensation limit applies separately with respect to the
compensation of an employee from each employer maintaining the plan
rather than the total compensation from all employers maintaining the
plan.
(5) Family aggregation. (Reserved)
(6) Examples. The following examples illustrate the rules in this
paragraph (b).
Example 1. Plan X is a defined benefit plan and bases benefits on
the average of an employee's high 3 consecutive years' compensation.
Section 401(a)(17) applies to Plan X in 1989. Employee B's high 3
consecutive years' compensation prior to the application of the annual
compensation limits is $215,000 (1989), $200,000 (1988), and $185,000
(1987). To satisfy this paragraph (b), Plan X cannot base plan benefits
for Employee B in 1989 on compensation in excess of $195,000 (the
average of $200,000 (B's 1989 compensation capped by the annual
compensation limit), $200,000 (B's 1988 compensation), and $185,000 (B's
1987 compensation)). For purposes of determining the 1989 accrual, each
year (1989, 1988, and 1987), not the average of the 3 years, is subject
to the 1989 annual compensation limit of $200,000.
Example 2. Assume the same facts as in Example 1. Also assume that
Employee B's compensation in 1990 is $230,000, and that the 1990 annual
compensation limit is $209,200. Plan X cannot base plan benefits for
Employee B in 1990 on compensation in excess of $203,067 (the average of
$209,200 (B's 1990 compensation capped by the 1990 annual compensation
limit), $200,000 (B's 1989 compensation capped by the 1989 annual
compensation limit), and $200,000 (B's 1988 compensation)). In
calculating plan benefits in 1990, the 1990 annual compensation limit
applies to the 1990 year only. The 1989 year is capped by the 1989
annual compensation limit. Each year used in the average, including the
1988 plan year, is subject to the applicable annual compensation limit
for that year.
Example 3. Assume the same facts as Example 1, except that Employee
B's high 3 consecutive years' compensation prior to the application of
the annual compensation limits is $230,000 (1989), $220,000 (1988), and
$210,000 (1987). To satisfy this paragraph (b), Plan X cannot base plan
benefits for Employee B in 1989 on compensation in excess of $200,000
(the average of $200,000 (B's 1989 compensation capped by the 1989
annual compensation limit), $200,000 (B's 1988 compensation capped by
the $200,000 annual compensation limit applicable to all years before
1989), and $200,000 (B's 1987 compensation capped by the $200,000 annual
compensation limit applicable to all years before 1989).
Example 4. Plan Z is a defined benefit plan that bases benefits on
an employee's high consecutive 36 months of compensation ending within
the plan year. Employee C's high 36 months are the period September
1989 to August 1992, in which Employee C earned $50,000 in each month.
The annual compensation limit is $200,000, $209,200, and $222,220 in
1989, 1990, and 1991, respectively. To satisfy this paragraph (b), Plan
Z cannot base plan benefits for Employee C on compensation in excess of
$210,473 for the 1992 plan year. This amount is determined by applying
the applicable annual compensation limit to compensation for each of the
three 12-consecutive-month periods. The September 1989 to August 1990
period is capped by the annual compensation limit of $200,000 for 1989,
the September 1990 to August 1991 period is capped by the annual
compensation limit of $209,200 for 1990, and the September 1991 to
August 1992 period is capped by the annual compensation limit of
$222,220 for 1991. The average of these capped amounts is the annual
compensation limit for determining benefits for the 1992 year.
Example 5. (a) Employer X is a partnership. Employer X maintains
Plan M, a profit-sharing plan that provides for an annual allocation of
employer contributions of 15 percent of plan year compensation for
employees other than self-employed individuals, and 13.0435 percent of
plan year compensation for self-employed individuals. In order to
satisfy section 401(a)(17), the plan provides that the plan year
compensation used in determining the allocation of employer
contributions for each employee may not exceed the annual compensation
limit in effect for the plan year. The plan year of Plan M is the
calendar year. Plan M defines compensation for self-employed
individuals (employees within the meaning of section 401(c)(1)) as the
self-employed individual's net profit from self-employment attributable
to Employer X minus the amount of the self-employed individual's
deduction under section 164(f) for one-half of self-employment taxes.
Plan M defines compensation for all other employees as wages within the
meaning of section 3401(a). Employee A and Employee B are partners of
Employer X and thus are self-employed individuals. Neither Employee A
nor Employee B owns an interest in any other business. For the 1991
calendar year, Employee A has net profit from self-employment of
$150,000, and Employee B has net profit from self-employment of
$230,000. The deduction for each employee under section 164(f) for
one-half of self-employment taxes is $5,123.
(b) The plan year compensation under the plan formula for Employee A
is $144,877 ($150,000 minus $5,123). The allocation of employer
contributions under the plan allocation formula for 1991 for Employee A
is $18,897 ($144,877 (Employee B's plan year compensation for 1991)
multiplied by 13.0435%). The plan year compensation under the plan
formula before application of the annual compensation limit under
section 401(a)(17) for Employee B is $224,877 ($230,000 minus $5,123).
After application of the annual compensation limit, the plan year
compensation for the 1991 plan year for Employee A is $222,220 (the
annual compensation limit for 1991). Therefore, the allocation of
employer contributions under the plan allocation formula for 1991 for
Employee B is $28,985 ($222,220 (Employee B's plan year compensation
after application of the annual compensation limit for 1991) multiplied
by 13.0435%).
Example 6. The facts are the same as in Example 5, except that Plan
M provides that plan year compensation for self-employed individuals is
defined as earned income within the meaning of section 401(c)(2)
attributable to Employer X. In addition, Plan M provides for an annual
allocation of employer contributions of 15 percent of plan year
compensation for all employees in the plan. The net profit from
self-employment for Employee A and the net profit from self-employment
for Employee B are the same as provided in Example 5. However, the
earned income of Employee A determined in accordance with section
401(c)(2) is $125,980 ($150,000 minus $5,123 minus $18,897). The earned
income of Employee B determined in accordance with section 401(c)(2) is
$195,545 ($230,000 minus $5,123 minus $29,332). Therefore, the
allocation of employer contributions under the plan allocation formula
for 1991 for Employee A is $18,897 ($125,980 (Employee A's plan year
compensation for 1991) multiplied by 15%). Employee B's earned income
for 1991 does not exceed the 1991 annual compensation limit of $222,220.
Therefore, the allocation of employer contributions under the plan
allocation formula for 1991 for Employee B is $29,332 ($195,545
(Employee B's plan year compensation for 1991) multiplied by 15%).
(c) Limit on compensation for nondiscrimination rules -- (1) General
rule. The annual compensation limit applies for purposes of applying
the nondiscrimination rules under sections 401(a)(4), 401(a)(5), 401(l),
401(k)(3), 401(m)(2), 403(b)(12), and 410(b)(2). The annual
compensation limit also applies in determining whether an alternative
method of determining compensation impermissibly discriminates under
section 414(s)(3). This paragraph (c) provides rules for applying the
annual compensation limit for these purposes. For purposes of this
paragraph (c), compensation means the compensation used in applying the
applicable nondiscrimination rule.
(2) Plan-year-by-plan-year requirement. For purposes of this
paragraph (c), when applying an applicable nondiscrimination rule for a
plan year, the compensation for each plan year taken into account is
limited to the applicable annual compensation limit in effect for that
year, and an employee's compensation for that plan year in excess of the
limit is disregarded. Thus, if the nondiscrimination provision is
applied on the basis of compensation determined over a period of more
than one year (for example, high average compensation) the annual
compensation limit in effect for each of the plan years used in the
average applies to the respective plan year's compensation taken into
account in determining the average.
(3) Plan-by-plan limit. For purposes of this paragraph (c), the
annual compensation limit applies separately to each plan (or group of
plans treated as a single plan) of an employer for purposes of the
applicable nondiscrimination requirement. For this purpose, the plans
included in the testing group taken into account in determining whether
the average benefit percentage test of 1.410(b)-5 is satisfied are
generally treated as a single plan.
(4) Application of limit to a plan year. The rules provided in
paragraph (b)(3) of this section regarding the application of the annual
compensation limit to a plan year apply for purposes of this paragraph
(c).
(5) Limits on multiple employer and multiemployer plans. The rule
provided in paragraph (b)(4) of this section regarding the application
of the annual compensation limit to multiple employer and multiemployer
plans applies for purposes of this paragraph (c).
(d) Effective date -- (1) Statutory effective date -- (i) General
rule. Except as otherwise provided in this paragraph (d)(1), section
401(a)(17) applies to allocations and benefit accruals for plan years
beginning on or after January 1, 1989.
(ii) Exception for collectively bargained plans. In the case of a
plan maintained pursuant to 1 or more collective bargaining agreements
between employee representatives and 1 or more employers ratified before
March 1, 1986, section 401(a)(17) applies to allocations and benefit
accruals for plan years beginning on or after the earlier of --
(A) January 1, 1991, or
(B) The later of January 1, 1989, or the date on which the last of
the collective bargaining agreements terminates (determined without
regard to any extension or renegotiation of any agreement occurring on
or after March 1, 1986). For purposes of this paragraph (d)(1)(ii), any
extension or renegotiation of a collective bargaining agreement, which
extension or renegotiation is ratified after February 28, 1986, is
disregarded in determining the date on which the agreement terminates.
(iii) Exception for governmental plans. Section 401(a)(17) is
considered satisfied for plan years beginning before January 1, 1993, in
the case of governmental plans described in section 414(d).
(2) Regulatory effective date. This 1.401(a)(17)-1 applies to plan
years beginning on or after January 1, 1991. For plan years beginning
before that date, and on or after the first day of the first plan year
to which section 401(a)(17) applies, a plan must be operated in
accordance with a reasonable, good faith interpretation of section
401(a)(17). Whether a plan is operated in accordance with a reasonable,
good faith interpretation of section 401(a)(17) is generally determined
based on all the relevant facts and circumstances, including the extent
to which an employer has resolved unclear issues in its favor. A plan
is deemed to be operated in accordance with a reasonable, good faith
interpretation of section 401(a)(17) if it is operated in accordance
with the terms of this section.
(3) Pre-effective date benefits -- (i) In general. For purposes of
this paragraph (d), allocations or benefits accrued under a plan for
plan years beginning before the statutory effective date applicable to
the plan under paragraph (d)(1) of this section are not subject to the
annual compensation limits.
(ii) Allocations for years before the effective date. Allocations
for plan years beginning before the statutory effective date applicable
to the plan under paragraph (d)(1) of this section include all amounts
allocated or treated as allocated to the account of an employee for
those plan years, including employer contributions, forfeitures,
elective contributions, employee contributions, and matching
contributions, plus earnings, expenses, gains, and losses attributable
to those amounts. In the case of a defined contribution plan subject to
section 412, the amount of employer contributions treated as allocated
for the plan year is the amount of employer contributions required to be
allocated under the plan to the employee's account for the plan year,
even if all or part of any required contribution is not actually made.
(iii) Benefits accrued for years before the effective date. The
benefits accrued for plan years beginning before the statutory effective
date applicable to the plan under paragraph (d)(1) of this section by
any employee are the employee's benefits accrued under the plan,
determined as if those benefits had been frozen (as defined in
1.401(a)(4)-12) as of the last day of the last plan year beginning
before the statutory effective date, disregarding any amendments adopted
after the date that the employee's benefits under the plan are treated
as frozen. Thus, benefits accrued for those plan years do not include
any benefits accrued under an amendment granting past service that is
adopted after the date that the employee's benefits under the plan must
be treated as frozen. Nonetheless, service for the employer after that
date continues to be taken into account for purposes of determining an
employee's nonforfeitable percentage and eligibility for benefits,
rights, and features under the plan with respect to the benefits treated
as frozen under this paragraph (d)(3)(iii).
(e) Determination of post-effective-date accrued benefits -- (1) In
general. The plan formula that is used to determine the amount of
allocations or benefit accruals for plan years beginning on or after the
statutory effective date must comply with section 401(a)(17). However,
in determining whether an allocation or benefit accrual under the plan
formula for plan years beginning on or after the statutory effective
date satisfies section 401(a)(17), a plan is not required to take into
account any allocations or benefit accruals described in paragraph
(d)(3) of this section. This paragraph (e) provides rules for applying
section 401(a)(17) in the case of section 401(a)(17) employees who
accrue additional benefits in a plan year beginning on or after the
statutory effective date. Paragraph (e)(2) of this section contains
definitions used in applying this paragraph (e). Paragraphs (e)(3) and
(e)(4) of this section explain the application of the fresh-start rules
in 1.401(a)(4)-13 to the determination of the accrued benefits of
section 401(a)(17) employees.
(2) Definitions. For purposes of this paragraph (e), the following
definitions apply:
(i) Statutory effective date means the first day of the first plan
year beginning on or after the statutory effective date applicable to
the plan under paragraph (d)(1) of this section.
(ii) Section 401(a)(17) employee means an employee with accrued
benefits in plan years beginning before the statutory effective date
that were determined taking into account compensation that exceeded the
annual compensation limit for any year.
(iii) Section 401(a)(17) fresh-start date means a fresh-start date as
defined in 1.401(a)(4)-12 not earlier than the last day of the last
plan year beginning before the statutory effective date and not later
than the last day of the last plan year beginning before January 1, 1992
(or January 1, 1993, in the case of governmental plans described in
section 414(d)).
(iv) Section 401(a)(17) frozen accrued benefit means the accrued
benefit for any section 401(a)(17) employee frozen (as defined in
1.401(a)(4)-12) as of the last day of the last plan year beginning
before the statutory effective date, determined in the same manner as
provided in paragraph (d)(3)(iii) of this section.
(3) Application of fresh-start rules -- (i) General rule. In order
to satisfy section 401(a)(17), the plan must determine the accrued
benefit of each section 401(a)(17) employee by applying the fresh-start
rules in 1.401(a)(4)-13(c). The fresh-start rules must be applied using
a section 401(a)(17) fresh-start date and using the plan benefit formula
after amendment to comply with section 401(a)(17) and this section as
the formula applicable to benefit accruals in the current plan year.
(ii) Fresh start for section 401(a)(17) employees only. The
fresh-start rules in 1.401(a)(4)-13(c) may be applied in accordance
with paragraph (e)(3)(i) of this section to determine the accrued
benefits of all section 401(a)(17) employees in the plan but not the
accrued benefit of other employees in the plan in lieu of applying the
rules to determine the benefits of all employees in the plan as
otherwise required under the consistency rule in 1.401(a)(4)-13(c)(ii).
(iii) Consistency rules in 1.401(a)(4)-13 (c) and (d) -- (A) General
rule. In applying the fresh-start rules of 1.401(a)(4)-13 (c) and (d)
to section 401(a)(17) employees, the consistency rules of those sections
govern, unless otherwise provided. Thus, for example, if the plan is
using a fresh-start date applicable to all employees and not adjusting
frozen accrued benefits under 1.401(a)(4)-13(d) for employees other
than section 401(a)(17) employees, frozen accrued benefits may not be
adjusted for section 401(a)(17) employees after the fresh-start date
under 1.401(a)(4)-13(d) or this paragraph (e) either. Notwithstanding
the foregoing, if the fresh-start rules provided in paragraph (e)(3)(i)
of this section are applied to determine benefits of section 401(a)(17)
employees only, the consistency rules in 1.401(a)(4)-13 (c) and (d) are
applied as if the section 401(a)(17) employees were the only employees
in the plan. For example, if the fresh-start rules are applied using
the section 401(a)(17) fresh-start date to determine benefits of section
401(a)(17) employees only, the same formula in 1.401(a)(4)-(13) (c)(2),
(c)(3), or (c)(4) must be applied to determine the accrued benefits of
all section 401(a)(17) employees in the plan after the section
401(a)(17) fresh-start date.
(B) Determination of adjusted accrued benefit. If the fresh-start
rules of 1.401(a)(4)-13 (c) and (d) are applied to determine the
benefits of all employees after a fresh-start date, the plan will not
fail to satisfy the uniformity requirement of 1.401(a)(4)-13(c)(5)
merely because the plan makes the adjustment described in
1.401(a)(4)-13 (d)(5) and (d)(6) to the frozen accrued benefits of
employees who are not section 401(a)(17) employees, but does not make
the adjustment to the frozen accrued benefits of section 401(a)(17)
employees. In addition, the plan does not fail the uniformity
requirement of 1.401(a)(4)-13(c)(5) merely because the plan makes the
adjustment described in 1.401(a)(4)-13(d)(6) for section 401(a)(17)
employees on the basis of the old compensation fraction (as required by
paragraph (e)(4)(iii) of this section), but for employees who are not
section 401(a)(17) employees on the basis of the new compensation
fraction or the reconstructed compensation fraction.
(4) Permitted adjustments to frozen accrued benefit of section
401(a)(17) employees -- (i) General rule. Except as otherwise provided
in paragraphs (e)(4) (ii) and (iii) of this section, the rules in
1.401(a)(4)-13(c)(5) permitting certain adjustments to frozen accrued
benefits apply to section 401(a)(17) frozen accrued benefits.
(ii) Optional forms of benefit. After the section 401(a)(17)
fresh-start date, a plan may be amended to provide a new optional form
of benefit or to make an optional form available with respect to the
section 401(a)(17) frozen accrued benefit provided that the optional
form of benefit is not subsidized. An optional form is not subsidized
only if it is the actuarial equivalent of the employee's accrued benefit
using a reasonable interest rate and reasonable mortality assumptions.
A standard interest rate and a standard mortality table (as defined in
1.401(a)(4)-12) are deemed to be reasonable for this purpose.
(iii) Determining adjusted section 401(a)(17) accrued benefit -- (A)
Fresh start as of statutory effective date. For purposes of
1.401(a)(4)-13(d), if the plan uses a section 401(a)(17) fresh-start
date that is the last day of the last plan year beginning before the
statutory effective date, the section 401(a)(17) frozen accrued benefit
of each section 401(a)(17) employee may be adjusted in accordance with
1.401(a)(4)-13(d)(6), if applicable, with the following modifications --
(1) The adjustment must be made using the old compensation fraction
described in 1.401(a)(4)-13(d)(6)(i)(A).
(2) The numerator of the old compensation fraction in
1.401(a)(4)-13(d)(6)(i)(A) must be determined after applying the section
401(a)(17) annual compensation limit for the current plan year, and the
denominator of the fraction must be determined as of the last day of the
last year before the statutory effective date without regard to the
section 401(a)(17) annual compensation limit.
(B) Fresh starts after statutory effective date. For purposes of
1.401(a)(4)-13(d), if the plan uses a section 401(a)(17) fresh-start
date or any other fresh-start date that is later than the last day of
the last plan year beginning before the statutory effective date, the
adjusted accrued benefit (within the meaning of 1.401(a)(4)-13(d)) for
each section 401(a)(17) employee must be determined after the
fresh-start date under the following bifurcated method --
(1) Determine the section 401(a)(17) employee's frozen accrued
benefit in accordance with 1.401(a)(4)-13(c)(1)(i) as of the
fresh-start date.
(2) Determine the employee's section 401(a)(17) frozen accrued
benefit adjusted in accordance with paragraph (e)(4)(iii)(A) of this
section, if applicable, through the fresh-start date.
(3) Subtract from the frozen accrued benefit determined in paragraph
(e)(4)(iii)(B)(1) of this section the employee's adjusted section
401(a)(17) frozen accrued benefit determined in paragraph
(e)(4)(iii)(B)(2) of this section. This is the employee's
post-effective date frozen accrued benefit.
(4) Adjust the employee's post-effective date frozen accrued benefit
in accordance with 1.401(a)(4)-13(d)(6) under the normal rules
applicable to employees who are not section 401(a)(17) employees. Thus,
in determining the numerator and the denominator of the fraction used to
adjust the post-effective date frozen accrued benefit, the annual
compensation limit under section 401(a)(17) applies.
(5) Adjust the section 401(a)(17) frozen accrued benefit in paragraph
(e)(4)(iii)(B)(2) of this section in accordance with
1.401(a)(4)-13(d)(6), as modified by paragraph (e)(4)(iii)(A) of this
section.
(6) The adjusted accrued benefit of the section 401(a)(17) employee
after the fresh-start date is the sum of the amounts in paragraphs
(e)(4)(iii)(B)(4) and (5) of this section.
(5) Examples. The following examples illustrate the rules in this
paragraph (e). In each example, it is assumed that, under the
definition of compensation provided in Plan Y, Employee A's compensation
for each calendar year of employment exceeds the annual compensation
limit for that calendar year.
Example 1. (a) Plan Y is a calendar year defined benefit plan
providing an annual benefit for each year of service equal to 2 percent
of compensation averaged over an employee's high 3 consecutive years'
compensation. Plan Y is not a collectively bargained plan or a
governmental plan. As of the close of the last plan year beginning
before January 1, 1989 (i.e., the 1988 plan year), Employee A, with 5
years of service, had accrued a benefit of $25,000 which equals 10
percent (2 percent multiplied by 5 years of service) of average
compensation of $250,000. Effective for plan years after December 31,
1988, Plan Y is amended to provide that in determining an employee's
benefit, compensation taken into account is subject to the annual
compensation limit under section 401(a)(17), and that, for section
401(a)(17) employees, the employee's accrued benefit is the greater of
the employee's benefit under the plan formula after the plan formula is
amended to comply with section 401(a)(17) as applied to the employee's
total years of service, and the employee's accrued benefit as of
December 31, 1988, determined as though the employee terminated
employment on the date without regard to any plan amendments after that
date. Employer X decides not to amend Plan Y to provide for the
adjustments permitted under 1.401(a)(4)-13(d)(6) to the accrued benefit
of section 401(a)(17) employees as of December 31, 1988.
(b) Under Plan Y's formula, Employee A's accrued benefit at the end
of 1989 is $25,000, which is the greater of Employee A's accrued benefit
as of the last day of the 1988 plan year ($25,000), and $24,000, which
is Employee A's benefit based on the plan's formula applied to Employee
A's total years of service ($200,000 multiplied by (2 percent multiplied
by 6 years of service)). The formula of Plan Y applicable to section
401(a)(17) employees for calculating their accrued benefits for years
after the section 401(a)(17) fresh-start date is the formula in
1.401(a)(4)-13(c)(3) (formula with wear-away). The fresh-start formula
is applied using a benefit formula that satisfies section 401(a)(17) and
this section and is applied using December 31, 1988, as the section
401(a)(17) fresh-start date. Thus, Plan Y, as amended, satisfies
paragraph (e)(3)(i) of this section.
Example 2. Assume the same facts as in Example 1, except that the
plan formula provides that effective January 1, 1989, for section
401(a)(17) employees, the employee's benefit will equal the sum of an
employee's accrued benefit as of December 31, 1988 (determined as though
he terminated employment on that date and without regard to any
amendments after that date), and 2 percent of compensation averaged over
an employee's high 3 consecutive years' compensation times years of
service taking into account only years of service after December 31,
1988. Thus, under Plan Y's formula, Employee A's accrued benefit at the
end of 1989 is $29,000, which is equal to the sum of $25,000 (Employee
A's accrued benefit at the end of 1988) plus $4,000 ($200,000 multiplied
by (2 percent multiplied by 1 year of service)). The formula of Plan Y
applicable to section 401(a)(17) employees for calculating their accrued
benefits for years after the section 401(a)(17) fresh-start date is the
formula in 1.401(a)(4)-13(c)(2) (formula without wear-away). The
fresh-start formula is applied using a benefit formula for the 1989 plan
year that satisfies section 401(a)(17) and this section and is applied
using December 31, 1988, as the section 401(a)(17) fresh-start date.
Thus, Plan Y, as amended, satisfies paragraph (e)(1) of this section.
Example 3. Assume the same facts as in Example 1, except that the
plan formula provides that effective January 1, 1989, an employee's
benefit equals the greater of the plan formulas in Example 1 and Example
2. Thus, under Plan Y's formula, Employee A's accrued benefit at the
end of 1989 is $29,000, which is equal to the greater of $25,000 and
$29,000. The formula of Plan Y applicable to section 401(a)(17)
employees for calculating their accrued benefits for years after the
section 401(a)(17) fresh-start date is the formula in
1.401(a)(4)-13(c)(4) (formula with extended wear-away). The fresh-start
formula is applied using a benefit formula for the 1989 plan year that
satisfies section 401(a)(17) and this section and is applied using
December 31, 1988, as the section 401(a)(17) fresh-start date. Thus,
Plan Y, as amended, satisfies paragraph (e)(1) of this section.
Example 4. Assume the same facts as in Example 3. As of December
31, 1995, Employee A's average annual compensation under the plan
compensation formula, disregarding the amendment to comply with section
401(a)(17) is equal to $300,000. Assume that the annual compensation
limit is adjusted to $260,000, $270,000, and $280,000 for plan years
beginning on or after January 1, 1993, 1994, and 1995, respectively.
The compensation that may be taken into account for the 1995 plan year
cannot exceed $270,000 (the average of $260,000, $270,000, and
$280,000). Therefore, at the end of December 31, 1995, the amount using
formula with wear-away would be $64,800 ($270,000 multiplied by (2
percent multiplied by 12 years of service)). The amount using formula
without wear-away would be $62,800 which is equal to $25,000 (Employee
A's section 401(a)(17) frozen accrued benefit) plus $37,800 ($270,000
multiplied by (2 percent multiplied by 7 years of service)). Thus,
because Employee A's accrued benefit is being determined using formula
with extended wear-away, the accrued benefit is equal to the greater of
the two amounts. Employee A's accrued benefit at the end of 1995 is
$64,800.
Example 5. (a) Assume the same facts as in Example 4, except that
Plan Y satisfies 1.401(a)(4)-13 (d)(2) through (d)(5) and that the
amendment to Plan Y effective for plan years beginning after December
31, 1988, also provided for adjustments in accordance with
1.401(a)(4)-13(d)(6) to the frozen accrued benefit of section 401(a)(17)
employees. No other fresh-start date applies to the calculation of
benefits under Plan Y.
(b) The numerator of Employee A's old compensation fraction is
$270,000 (the average of Employee A's annual compensation for 1993,
1994, and 1995, as limited by the respective annual compensation limit
for each of those years). The denominator of Employee A's old
compensation fraction determined in accordance with the modification in
paragraph (e)(4)(iii)(A)(2) of this section is $250,000 (the average of
Employee A's high 3 consecutive years' annual compensation as of
December 31, 1988, determined without regard to section 401(a)(17)).
Therefore, Employee A's old compensation fraction is $270,000/$250,000.
Employee A's adjusted section 401(a)(17) frozen accrued benefit adjusted
through December 31, 1995, is $27,000 (($270,000 divided by $250,000)
multiplied by $25,000). Therefore, the accrued benefit using the
formula without wear-away would also be $64,800 ($27,000 (Employee A's
adjusted section 401(a)(17) accrued benefit) plus $37,800 ($270,000
multiplied by (2 percent multiplied by 7 years of service))).
Example 6. (a) Assume the same facts as in Example 2 (example
illustrating formula without wear-away), except that as of December 31,
1991, Employer X amends Plan Y to increase benefits to 3 percent of each
employee's average annual compensation using the average of the 5
consecutive calendar years out of the last 10 consecutive calendar years
during which the average of the employee's compensation is the highest.
(After amendment, Plan Y satisfies the requirements of
1.401(a)(4)-3(b)(3).) Employer X applies the fresh-start rules in
1.401(a)(4)-13(c) using the formula in 1.401(a)(4)-13(c)(2) (formula
without wear-away) to all employees. Plan Y satisfies the requirements
of 1.401(a)(4)-13(d) (2) through (5) and the amendment increasing
benefits also provides for the frozen accrued benefit of each employee
to be adjusted in accordance with 1.401(a)(4)-13(d)(6) using the new
compensation fraction in 1.401(a)(4)-13(d)(6)(i)(B). In applying the
new compensation formula, Plan Y provides that average annual
compensation will be determined using the plan's compensation formula.
However, Plan Y provides that the adjusted accrued benefits of section
401(a)(17) employees are to be determined using the bifurcated method in
paragraph (e)(4)(iii)(B) of this section. Employee A's calendar year
compensation exceeds the section 401(a)(17) annual compensation limit
for every year through 1992. Assume that the annual compensation limit
for 1992 is $245,000.
(b) Employee A's frozen accrued benefit as of December 31, 1991,
determined under the fresh-start rules of 1.401(a)(4)-13(c)(2) (formula
without wear-away) is $37,628 ($25,000 plus $12,628 (($210,473 (the
average of $200,000, $209,200, and $222,220) multiplied by 2 percent)
multiplied by 3 years)). Employee A's frozen accrued benefit adjusted
through December 31, 1992, determined in accordance with paragraph
(e)(4)(iii)(B) of this section is calculated as follows:
(1) Employee A's post-effective date frozen accrued benefit is
$12,628 ((Employee A's frozen accrued benefit as of December 31, 1991)
($37,628) minus (Employee A's section 401(a)(17) frozen accrued benefit
($25,000))).
(2) The numerator of Employee A's new compensation fraction is
$215,284 (the average of $200,000, $200,000, $209,200, $222,220, and
$245,000). The denominator of Employee A's new compensation fraction is
$206,284 (the average $200,000, $200,000, $200,000, $209,200, and
$222,220).
(3) Employee A's post-effective date frozen accrued benefit adjusted
through December 31, 1992, is $13,179 (($215,284 divided by $206,284)
multiplied by $12,628).
(4) Employee A's section 401(a)(17) frozen accrued benefit adjusted
through December 31, 1992, remains $25,000. The old compensation
fraction determined in accordance with the modification in paragraph
(e)(4)(iii)(A) of this section is less than one ($225,473 (the average
of $209,200, $222,220, and $245,000) divided by $250,000).
(5) Employee A's adjusted accrued benefit as of December 31, 1992,
equals $38,179 (the sum of the amounts from paragraphs (b)(3) and (b)(4)
of this Example).
(f) 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 concerning the
annual limits on compensation under section 401(a)(17).
(T.D. 8362, 56 FR 47605, Sept. 19, 1991; 57 FR 10815, 10816, 10953,
Mar. 31, 1992)
26 CFR 1.401(a)(26)-0 Table of contents.
This section contains a listing of the headings of 1.401 (a)(26)-1
through 1.401(a)(26)-9.
(a) General rule.
(b) Exceptions to section 401(a)(26).
(1) Plans that do not benefit any highly compensated employees.
(2) Multiemployer plans.
(i) In general.
(ii) Multiemployer plans covering noncollectively bargained
employees.
(A) In general.
(B) Special testing rule.
(3) Certain underfunded defined benefit plans.
(i) In general.
(ii) Eligible plans.
(iii) Actuarial certification.
(iv) Cessation of all benefit accruals.
(4) Section 401(k) plan maintained by employers that include certain
governmental or tax-exempt entities.
(5) Certain acquisitions or dispositions.
(i) General rule.
(ii) Special rule for transactions that occur in the plan year prior
to the first plan year to which section 401(a)(26) applies.
(iii) Definition of ''acquisition'' or ''disposition''.
(c) Additional rules.
(a) General rule.
(b) Frozen plans.
(c) Plan.
(d) Disaggregation of certain plans.
(1) Mandatory disaggregation.
(i) ESOPs and non-ESOPs.
(ii) Plans maintained by more than one employer.
(A) Multiple employer plans.
(B) Multiemployer plans.
(iii) Defined benefit plans with other arrangements.
(A) In general.
(B) Examples.
(iv) Plans benefiting employees of qualified separate lines of
business.
(2) Permissive disaggregation.
(i) Plans benefiting collectively bargained employees.
(ii) Plans benefiting otherwise excludable employees.
(a) General rule.
(b) Prior benefit structure.
(c) Testing a prior benefit structure.
(1) General rule.
(2) Meaningful benefits.
(d) Multiemployer plan rule.
(a) Scope.
(b) Minimum participation rule for former employees.
(c) Special rule.
(d) Excludable former employees.
(1) General rule.
(2) Exception.
(a) Employees benefiting under a plan.
(1) In general.
(2) Sequential or concurrent benefit offset arrangements.
(i) In general.
(ii) Offset by sequential or grandfathered benefits.
(iii) Concurrent benefit offset arrangements.
(A) General rule.
(B) Special rules for certain section 414(n) employer-recipients.
(b) Former employees benefiting under a plan.
(a) In general.
(b) Excludable employees.
(1) Minimum age and service exclusions.
(i) In general.
(ii) Plans benefiting otherwise excludable employees.
(iii) Examples.
(2) Certain air pilots.
(3) Certain nonresident aliens.
(i) In general.
(ii) Special treaty rule.
(4) Employees covered pursuant to a collective bargaining agreement.
(5) Employees not covered pursuant to a collective bargaining
agreement.
(6) Examples.
(7) Certain terminating employees.
(i) In general.
(ii) Hours of service.
(8) Employees of qualified separate lines of business.
(c) Former employees.
(1) In general.
(2) Employees terminated before a specified date.
(3) Previously excludable employees.
(4) Vested accrued benefits eligible for mandatory distribution.
(d) Certain police or firefighters.
(a) Testing on each day of the plan year.
(b) Simplified testing method.
(c) Retroactive correction.
Collective bargaining agreement.
Collectively bargained employee.
Covered by a collective bargaining agreement.
Defined benefit plan.
Defined contribution plan.
Employee.
Employer.
ESOP.
Former employee.
Highly compensated employee.
Highly compensated former employee.
Multiemployer plan.
Noncollectively bargained employee.
Nonhighly compensated employee.
Nonhighly compensated former employee.
Plan.
Plan year.
Professional employee.
Section 401(k) plan.
Section 401(m) plan.
(a) In general.
(b) Transition rules.
(1) Governmental plans and certain section 403(b) annuities.
(2) Early retirement ''window-period'' benefits.
(3) Employees who do not benefit because of a
minimum-period-of-service requirement or a last-day requirement.
(4) Certain plan terminations.
(i) In general.
(ii) Exception.
(5) ESOPs and non-ESOPs.
(c) Waiver of excise tax on reversions.
(1) In general.
(2) Termination date.
(3) Failure to satisfy section 401(a)(26).
(d) Special rule for collective bargaining agreements.
(T.D. 8375, 56 FR 63413, Dec. 4, 1991)
26 CFR 1.401(a)(26)-1 Minimum participation requirements.
(a) General rule. A plan is a qualified plan for a plan year only if
the plan satisfies section 401(a)(26) for the plan year. A plan that
satisfies any of the exceptions described in paragraph (b) of this
section passes section 401(a)(26) automatically for the plan year. A
plan that does not satisfy one of the exceptions in paragraph (b) of
this section must satisfy 1.401(a)(26)-2(a). In addition, a defined
benefit plan must satisfy 1.401(a)(26)-3 with respect to its prior
benefit structure. Finally, a defined benefit plan that benefits former
employees (for example, a defined benefit plan that is amended to
provide an ad hoc cost-of-living adjustment to former employees) must
separately satisfy 1.401(a)(26)-4 with respect to its former employees.
(b) Exceptions to section 401(a)(26) -- (1) Plans that do not benefit
any highly compensated employees. A plan, other than a frozen defined
benefit plan as defined in 1.401(a)(26)-2(b), satisfies section
401(a)(26) for a plan year if the plan is not a top-heavy plan under
section 416 and the plan meets the following requirements:
(i) The plan benefits no highly compensated employee or highly
compensated former employee of the employer; and
(ii) The plan is not aggregated with any other plan of the employer
to enable the other plan to satisfy section 401(a)(4) or 410(b). The
plan may, however, be aggregated with the employer's other plans for
purposes of the average benefit percentage test in section
410(b)(2)(A)(ii).
(2) Multiemployer plans -- (i) In genera1. The portion of a
multiemployer plan that benefits only employees included in a unit of
employees covered by a collective bargaining agreement may be treated as
a separate plan that satisfies section 401(a)(26) for a plan year.
(ii) Multiemployer plans covering noncollectively bargained employees
-- (A) In general. The rule provided in paragraph (b)(2)(i) does not
apply to the portion of a multiemployer plan that benefits employees who
are not included in any collective bargaining unit covered by a
collective bargaining agreement. Thus, the portion of the plan
benefiting these employees must separately satisfy section 401(a)(26).
(B) Special testing rule. A multiemployer plan that benefits
employees who are not included in any collective bargaining unit covered
by a collective bargaining agreement satisfies section 401(a)(26) if the
plan benefits 50 employees. For purposes of this special testing rule,
employees who are included in a unit of employees covered by a
collective bargaining agreement may be included in determining whether
the plan benefits 50 employees.
(3) Certain underfunded defined benefit plans -- (i) In general. A
defined benefit plan is deemed to satisfy section 401(a)(26) for a plan
year if all of the conditions of paragraphs (b)(3)(ii) through
(b)(3)(iv) of this section are satisfied with respect to the plan for
the plan year.
(ii) Eligible plans. This condition is satisfied for a plan year
only if the plan is subject to Title IV of the Employee Retirement
Income Security Act of 1974 (ERISA) for the plan year or, if the plan is
not a Title IV plan under ERISA, it is not a top-heavy plan within the
meaning of section 416. This condition does not apply for plan years
beginning before January 1, 1992.
(iii) Actuarial certification. This condition is satisfied for a
plan year only if the employer's timely filed actuarial report, as
required by section 6059, evidences that the plan does not have
sufficient assets to satisfy all liabilities under the plan (determined
in accordance with section 401(a)(2)).
(iv) Cessation of all benefit accruals. This condition is satisfied
for a plan year only if, for the plan year, no employee or former
employee is benefiting within the meaning of 1.401(a)(26)-5(a) or (b).
For this purpose, an employee is not treated as benefiting solely by
reason of being a non-key employee receiving minimum benefit accruals
required by section 416.
(4) Section 401(k) plan maintained by employers that include certain
governmental or tax-exempt entities. Section 401(k)(4)(B) prevents
certain State and local governments and tax-exempt organizations from
maintaining a section 401(k) plan. A section 401(k) plan or a section
401(m) plan that consists solely of employer matching contributions or
employee after-tax contributions that are tied to elective contributions
under a section 401(k) plan may be treated as a separate plan that
satisfies section 401(a)(26) for a plan year if the following
requirements are satisfied:
(i) The section 401(k) plan is maintained by an employer who has
employees precluded from being eligible employees under the arrangement
by reason of section 401(k)(4)(B), and
(ii) More than 95 percent of the employees of the employer who are
not precluded from being eligible employees under a section 401(k) plan
by reason of section 401(k)(4)(B) benefit under the section 401(k) plan.
(5) Certain acquisitions or dispositions -- (i) General rule. Rules
similar to the rules prescribed under section 410(b)(6)(C) apply under
section 401(a)(26). Pursuant to these rules, the requirements of
section 401(a)(26) are treated as satisfied for certain plans of an
employer involved in an acquisition or disposition (transaction) for the
transition period. The transition period begins on the date of the
transaction and ends on the last day of the first plan year beginning
after the date of the transaction.
(ii) Special rule for transactions that occur in the plan year prior
to the first plan year to which section 401(a)(26) applies. Where there
has been a transaction described in section 410(b)(6)(C) in the plan
year prior to the first plan year in which section 401(a)(26) applies to
a plan, the plan satisfies section 401(a)(26) for the transition period
if the plan benefited 50 employees or 40 percent of the employees of the
employer immediately prior to the transaction.
(iii) Definition of ''acquisition'' and ''disposition.'' For purposes
of this paragraph (b)(5), the terms ''acquisition'' and ''disposition''
refer to an asset or stock acquisition, merger, or other similar
transaction involving a change in employer of the employees of a trade
or business.
(c) Additional rules. The Commissioner may, in revenue rulings,
notices, and other guidance of general applicability, provide any
additional rules that may be necessary or appropriate in applying the
minimum participation requirements of section 401(a)(26).
(T.D. 8375, 56 FR 63413, Dec. 4, 1991)
26 CFR 1.401(a)(26)-2 Minimum participation rule.
(a) General rule. A plan satisfies this paragraph (a) for a plan
year only if the plan benefits at least the lesser of --
(1) 50 employees of the employer, or
(2) 40 percent of the employees of the employer.
(b) Frozen plans. A plan under which no employee or former employee
benefits (within the meaning of 1.401(a)(26)-5 (a) or (b)), is a frozen
plan for purposes of this section and satisfies paragraph (a) of this
section automatically. Thus, a frozen defined contribution plan
satisfies section 401(a)(26) automatically and a frozen defined benefit
plan satisfies section 401(a)(26) for a plan year by satisfying the
prior benefit structure requirements in 1.401(a)(26)-3. For purposes of
the rule in this paragraph (b), a defined benefit plan that provides
only the minimum benefits for non-key employees required by section 416
is a frozen defined benefit plan.
(c) Plan. ''Plan'' means a plan within the meaning of 1.401(b)-7
(a) and (b), after the application of the mandatory disaggregation rules
of paragraph (d)(1) of this section and, if applicable, the permissive
disaggregation rules of paragraph (d)(2) of this section.
(d) Disaggregation of certain plans -- (1) Mandatory disaggregation
-- (i) ESOPs and non-ESOPs. The portion of a plan that is an ESOP and
the portion of the plan that is not an ESOP are treated as separate
plans for purposes of section 401(a)(26), except as otherwise permitted
under 54.4975-11(e) of this Chapter.
(ii) Plans maintained by more than one employer -- (A) Multiple
employer plans. If a plan benefits employees of more than one employer
and those employees are not included in a unit of employees covered by
one or more collective bargaining agreements, the plan is a multiple
employer plan. A multiple employer plan is treated as separate plans,
each of which is maintained by a separate employer and must separately
satisfy section 401(a)(26) by reference only to that employer's
employees.
(B) Multiemployer plans. The portion of a multiemployer plan that
benefits employees who are included in one or more units of employees
covered by one or more collective bargaining agreements and the portion
of that plan that benefits employees who are not included in a unit of
employees covered pursuant to any collective bargaining agreement are
treated as separate plans. The portion of a multiemployer plan that
benefits employees who are not included in a unit of employees covered
by a collective bargaining agreement is a multiple employer plan as
described in paragraph (d)(1)(ii)(A) of this section. This paragraph
(d)(1)(ii)(B) does not apply to the extent that the special testing rule
in 1.401(a)(26)-1(b)(2)(ii) applies. Also, this paragraph (d)(1)(B)(2)
does not apply for purposes of prior benefit structure testing under
1.401 (a)(26)-3.
(iii) Defined benefit plans with other arrangements -- (A) In
general. A defined benefit plan is treated as comprising separate plans
if, under the facts and circumstances, there is an arrangement (either
under or outside the plan) that has the effect of providing any employee
with a greater interest in a portion of the assets of a plan in a way
that has the effect of creating separate accounts. Separate plans are
not created, however, merely because a partnership agreement provides
for allocation among partners, in proportion to their partnership
interests, of either the cost of funding the plan or surplus assets upon
plan termination.
(B) Examples. The following examples illustrate certain situations
in which other arrangements relating to a defined benefit plan are or
are not treated as creating separate plans:
Example 1. Employer A maintains a defined benefit plan under which
each highly compensated employee can direct the investment of the
portion of the plan's assets that represents the accumulated
contributions with respect to that employee's plan benefits. In
addition, by agreement outside the plan, if the product of the
employee's investment direction exceeds the value needed to fund that
employee's benefits, Employer A agrees to make a special payment to the
participant. In this case, each separate portion of the pool of assets
over which an employee has investment authority is a separate plan for
the employee.
Example 2. Employer B is a partnership that maintains a defined
benefit plan. The partnership agreement provides that, upon termination
of the plan, a special allocation of any excess plan assets after
reversion is made to the partnership on the basis of partnership share.
This arrangement does not create separate plans with respect to the
partners.
(iv) Plans benefiting employees of qualified separate lines of
business. If an employer is treated as operating qualified separate
lines of business for purposes of section 401(a)(26) in accordance with
1.414(r)-1(b), the portion of a plan that benefits employees of one
qualified separate line of business is treated as a separate plan from
the portions of the same plan that benefit employees of the other
qualified separate lines of business of the employer. See
1.414(r)-1(c)(3) and 1.414(r)-9 (separate application of section
401(a)(26) to the employees of a qualified separate line of business).
The rule in this paragraph (d)(6) does not apply to a plan that is
tested under the special rule for employer-wide plans in
1.414(r)-1(c)(3)(ii) for a plan year.
(2) Permissive disaggregation -- (i) Plans benefiting collectively
bargained employees. For purposes of section 401(a)(26), an employer
may treat the portion of a plan that benefits employees who are included
in a unit of employees covered by a collective bargaining agreement as a
plan separate from the portion of a plan that benefits employees who are
not included in such a collective bargaining unit. This paragraph
(d)(2)(i) applies separately to each collective bargaining agreement.
Thus, for example, the portion of a plan that benefits employees
included in a unit of employees covered by one collective bargaining
agreement may be treated as a plan that is separate from the portion of
the plan that benefits employees included in a unit of employees covered
by another collective bargaining agreement.
(ii) Plans benefiting otherwise excludable employees. If an employer
applies section 401(a)(26) separately to the portion of a plan that
benefits only employees who satisfy age and service conditions under the
plan that are lower than the greatest minimum age and service conditions
permissible under section 410(a), the plan is treated as comprising
separate plans, one benefiting the employees who have not satisfied the
lower minimum age and service but not the greatest minimum age and
service conditions permitted under section 410(a) and one benefiting
employees who have satisfied the greatest minimum age and service
conditions permitted under section 410(a). See
1.401(a)(26)-6(b)(1)(ii) for rules concerning testing of otherwise
excludable employees.
(T.D. 8375, 56 FR 63414, Dec. 4, 1991)
26 CFR 1.401(a)(26)-3 Rules applicable to a defined benefit plan's
prior benefit structure.
(a) General rule. A defined benefit plan that does not meet one of
the exceptions in 1.401(a)(26)-1(b) must satisfy paragraph (c) of this
section with respect to its prior benefit structure. Defined
contribution plans are not subject to this section.
(b) Prior benefit structure. Each defined benefit plan has only one
prior benefit structure, and all accrued benefits under the plan as of
the beginning of a plan year (including benefits rolled over or
transferred to the plan) are included in the prior benefit structure for
the year.
(c) Testing a prior benefit structure -- (1) General rule. A plan's
prior benefit structure satisfies this paragraph if the plan provides
meaningful benefits to a group of employees that includes the lesser of
50 employees or 40 percent of the employer's employees. Thus, a plan
satisfies the requirements of this paragraph (c) if at least 50
employees or 40 percent of the employer's employees currently accrue
meaningful benefits under the plan. Alternatively, a plan satisfies
this paragraph if at least 50 employees and former employees or 40
percent of the employer's employees and former employees have meaningful
accrued benefits under the plan.
(2) Meaningful benefits. Whether a plan is providing meaningful
benefits, or whether individuals have meaningful accrued benefits under
a plan, is determined on the basis of all the facts and circumstances.
The relevant factors in making this determination include, but are not
limited to, the following: the level of current benefit accruals; the
comparative rate of accruals under the current benefit formula compared
to prior rates of accrual under the plan; the projected accrued
benefits under the current benefit formula compared to accrued benefits
as of the close of the immediately preceding plan year; the length of
time the current benefit formula has been in effect; the number of
employees with accrued benefits under the plan; and the length of time
the plan has been in effect. A rule for determining whether an offset
plan provides meaningful benefits is provided in 1.401(a)(26)-5(a)(2).
A plan does not satisfy this paragraph (c) if it exists primarily to
preserve accrued benefits for a small group of employees and thereby
functions more as an individual plan for the small group of employees or
for the employer.
(d) Multiemployer plan rule. A multiemployer plan is deemed to
satisfy the prior benefit structure rule in paragraph (c)(1) of this
section for a plan year if the multiemployer plan provides meaningful
benefits to at least 50 employees for a plan year, or 50 employees have
meaningful accrued benefits under the plan. For purposes of this
paragraph, all employees benefiting under the multiemployer plan may be
considered, whether or not these employees are included in a unit of
employees covered pursuant to any collective bargaining agreement.
(T.D. 8375, 56 FR 63415, Dec. 4, 1991)
26 CFR 1.401(a)(26)-4 Testing former employees.
(a) Scope. This section applies to any defined benefit plan that
benefits former employees in a plan year within the meaning of
1.401(a)(26)-5(b) and does not meet one of the exceptions in
1.401(a)(26)-1(b).
(b) Minimum participation rule for former employees. Except as set
forth in paragraph (c) of this section, a plan that is subject to this
section must benefit at least the lesser of:
(1) 50 former employees of the employer, or
(2) 40 percent of the former employees of the employer.
(c) Special rule. A plan satisfies the minimum participation rule in
paragraph (b) of this section if the plan benefits at least five former
employees, and if either:
(1) More than 95 percent of all former employees with vested accrued
benefits under the plan benefit under the plan for the plan year, or
(2) At least 60 percent of the former employees who benefit under the
plan for the plan year are nonhighly compensated former employees.
(d) Excludable former employees -- (1) General rule. Whether a
former employee is an excludable former employee for purposes of this
section is determined under 1.401(a)(26)-6(c).
(2) Exception. Solely for purposes of paragraph (c) of this section,
the rule in 1.401(a)(26)-6(c)(4) (regarding vested accrued benefits
eligible for mandatory distribution) does not apply to any former
employee having a vested accrued benefit. Thus, a former employee who
has a vested accrued benefit is not an excludable former employee merely
because that vested accrued benefit does not exceed $3,500.
(T.D. 8375, 56 FR 63416, Dec. 4, 1991)
26 CFR 1.401(a)(26)-5 Employees who benefit under a plan.
(a) Employees benefiting under a plan -- (1) In general. Except as
provided in paragraph (a)(2) of this section, an employee is treated as
benefiting under a plan for a plan year if and only if, for that plan
year, the employee would be treated as benefiting under the provisions
of 1.410(b)-3(a), without regard to 1.410(b)-3(a)(iv).
(2) Sequential or concurrent benefit offset arrangements -- (i) In
general. An employee is treated as accruing a benefit under a plan that
includes an offset or reduction of benefits that satisfies either
paragraph (a)(2)(ii) or (a)(2)(iii) of this section if either the
employee accrues a benefit under the plan for the year, or the employee
would have accrued a benefit if the offset or reduction portion of the
benefit formula were disregarded. In addition, an employee is treated
as accruing a meaningful benefit for purposes of prior benefit structure
testing under 1.401(a)(26)-3 if the employee would have accrued a
meaningful benefit if the offset or reduction portion of the benefit
formula were disregarded.
(ii) Offset by sequential or grandfathered benefits. An offset or
reduction of benefits under a defined benefit plan satisfies this
paragraph (a)(2) if the benefit formula provides that an employee will
not accrue additional benefits under the current portion of the benefit
formula until the employee has accrued, under such portion, a benefit in
excess of such employee's benefit under one or more formulas in effect
for prior years that are based wholly on prior years of service. The
prior benefit may have accrued under the same or a separate plan, may be
provided under the same or a separate plan and may relate to service
with the same or previous employers. Benefits will not fail to be
treated as based wholly on prior years if they are based, directly or
indirectly, on compensation earned after such prior years (including
compensation earned in the current year), if they are adjusted to
reflect increases in the section 415 limitations, or if they are
increased to provide an ad hoc cost of living adjustment designed to
adjust, in whole or in part, for inflation. Furthermore, benefits do
not fail to be treated as based wholly on prior years merely because the
benefits (e.g., early retirement benefits) are subject to an age or
years-of-service condition and, in applying the condition or conditions,
the current and prior years are taken into account.
(iii) Concurrent benefit offset arrangements -- (A) General rule. An
offset or reduction of benefits under a defined benefit plan satisfies
the requirements of this paragraph (a)(2)(iii) if the benefit formula
provides a benefit that is offset or reduced by contributions or
benefits under another plan that is maintained by the same employer and
the following additional requirements are met:
(1) The contributions or benefits under a plan that are used to
offset or reduce the benefits under the positive portion of the fomu1a
being tested accrued under such other plan;
(2) The employees who benefit under the formula being tested also
benefit under the other plan on a reasonable and uniform basis; and
(3) The contributions or benefits under the plan that are used to
offset or reduce the benefits under the formula being tested are not
used to offset or reduce that employee's benefits under any other plan
or any other formula.
(B) Special rules for certain section 414(n) employer-recipients.
The same employer requirement in the concurrent benefit offset rule in
paragraph (a)(2)(iii)(A) of this section is waived for certain section
414(n) employer-recipients. Under this exception, an employer-recipient
(within the meaning of sections 414 (n) and (o)) may treat contributions
or benefits under a plan maintained by a leasing organization as
contributions or benefits accrued under the recipient organization plan
provided the following requirements are met: the employer-recipient
maintains a plan covering leased employees (which employees are treated
as employees of the employer-recipient within the meaning of sections
414(n)(2) and 414(o)(2)); the leased employees are also covered under a
plan maintained by the leasing organization; and contributions or
benefits under the plan maintained by the employer-recipient are offset
or reduced by the contributions or benefits under the leasing
organization plan that are attributable to service with the recipient
organization. Also, for purposes of the benefiting condition
requirement in paragraph (a)(2)(iii)(A)(2) of this section, the
employees of the employer-recipient who are not leased from the leasing
organization are not required to benefit under the plan of the leasing
organization.
(b) Former employees benefiting under a plan. A former employee is
treated as benefiting for a plan year if and only if the former employee
would be treated as benetiting under the rules in 1.410(b)-3(b).
(T.D. 8375, 56 FR 63416, Dec. 4, 1991)
26 CFR 1.401(a)(26)-6 Excludable employees.
(a) In general. For purposes of applying section 401(a)(26) with
respect to either employees, former employees, or both employees and
former employees, as applicable, all employees other than excludable
employees described in paragraph (b) of this section, all former
employees other than excludable former employees described in paragraph
(c) of this section, or both, as the case may be, must be taken into
account. Except as specifically provided otherwise in this section, the
rules of this section are applied by reference only to the particular
plan and must be applied on a uniform and consistent basis.
(b) Excludable employees. An employee is an excludable employee if
the employee is covered by one or more of the following exclusions:
(1) Minimum age and service exclusions -- (i) In general. If a plan
applies minimum age and service eligibility conditions permissible under
section 410(a)(1) and excludes all employees who do not meet those
conditions from benefiting under the plan, tbn all employees who fail to
satisfy those conditions may be treated as excludable employees with
respect to that plan. An employee is treated as meeting the age and
service requirements on the date any employee with the same age and
service would be eligible to commence participation in the plan, as
provided in section 410(b)(4)(C).
(ii) Plans benefiting otherwise excludable employees. An employer
may treat a plan benefiting otherwise excludable employees as two
separate plans, one for the otherwise excludable employees and one for
the other employees benefiting under the plan. The effect of this rule
is that employees who would be excludable under paragraph (b)(1) of this
section (applied without regard to section 410(a)(1)(B)), but for the
fact that the plan does not apply the greatest permissible minimum age
and service conditions, may be treated as excludable employees with
respect to the plan. This treatment is only available if each of the
following conditions is satisfied:
(A) The plan under which the otherwise excludable employees benefit
also benefits employees who are not otherwise excludable.
(B) The plan under which the otherwise excludable employees benefit
satisfies section 401(a)(26), both by reference only to otherwise
excludable employees and by reference only to employees who are not
otherwise excludable.
(C) The contributions or benefits provided to the otherwise
excludable employees (expressed as percentages of compensation) are not
greater than the contributions or benefits provided to the employees who
are not otherwise excludable under the plan.
(D) No highly compensated employee is included in the group of
otherwise excludable employees for more than one plan year.
(iii) Examples. The following examples illustrate some of the
minimum-age-and-service exclusion requirements:
Example 1. Employer X maintains a defined contribution plan, Plan X,
under which employees who have not completed 1 year of service are not
eligible to participate. Employer X has six employees. Two of the
employees participate in Plan X. The other four employees have not
completed 1 year of service and are therefore not eligible to
participate in Plan X. The four employees who have not completed 1 year
of service are excludable employees and may be disregarded for purposes
of applying the minimum participation test. Therefore, Plan X satisfies
section 401(a)(26) because both of the two employees who must be
considered are participants in Plan X.
Example 2. Employer Y has 100 employees and maintains two plans,
Plan 1 and Plan 2. Plan 1 provides that employees who have not
completed 1 year of service are not eligible to participate. Plan 2 has
no minimum age or service requirement. Twenty of Y's employees do not
meet the minimum service requirement under Plan 1. Each plan satisfies
the ratio test under section 410(b)(1)(B). In testing Plan 1 to
determine whether it satisfies section 401(a)(26), the 20 employees not
meeting the minimum age and service requirement under Plan 1 are treated
as excludable employees. In testing Plan 2 to determine whether it
satisfies section 401(a)(26), no employees are treated as excludable
employees because Plan 2 does not have a minimum age or service
requirement.
(2) Certain air pilots. An employee who is excluded from
consideration under section 410(b)(3)(B) (relating to certain air
pilots) may be treated as an excludable employee.
(3) Certain nonresident aliens -- (i) In general. An employee who is
excluded from consideration under section 410(b)(3)(C) (relating to
certain nonresident aliens) may be treated as an excludable employee.
(ii) Special treaty rule. In addition, an employee who is a
nonresident alien (within the meaning of section 7701(b)(1)(B)) and who
does receive earned income (within the meaning of section 911(d)(2))
from the employer that constitutes income from sources within the United
States (within the meaning of section 861(a)(3)) is permitted to be
excluded, if all of the employee's earned income from the employer from
sources within the United States is exempt from United States income tax
under an applicable income tax convention. This paragraph (b)(3)(ii)
applies only if all employees described in the preceding sentence are so
excluded.
(4) Employees covered pursuant to a collective bargaining agreement.
When testing a plan benefiting only noncollectively bargained employees,
an employee who is excluded from consideration under section
410(b)(3)(A) (exclusion for employees included in a unit of employees
covered by a collective bargaining agreement) may be treated as an
excludable employee. This rule may be applied separately to each
collective bargaining agreement. See 1.401(a)(26)-8 for the
definitions of the terms ''collective bargaining agreement'',
''collectively bargained employee,'' and ''covered pursuant to a
collective bargaining agreement''.
(5) Employees not covered pursuant to a collective bargaining
agreement. When testing a plan that benefits only employees who are
included in a group of employees who are covered pursuant to a
collective bargaining agreement, an employee who is not included in the
group of employees who are covered by the collective bargaining
agreement may be treated as an excludable employee.
(6) Examples. The following examples illustrate the excludable
employee rules that relate to employees covered pursuant to collective
bargaining agreements. For purposes of these examples assume that no
other exclusion rules are applicable.
Example 1. Employer W has 70 collectively bargained employees and 30
non-collectively bargained employees. Employer W maintains Plan W,
which benefits only the 30 non-collectively bargained employees. The 70
collectively bargained employees may be treated as excludable employees
and thus may be disregarded in applying section 401(a)(26) to Plan W.
Example 2. Assume the same facts as Example I, except that the
Commissioner has determined that the employee representative is not a
bona fide employee representative under section 7701(a)(46) and thus
there are no ''collectively bargained employees.'' In this case, all
employees of W must be considered in determining whether section
401(a)(26) is met.
Example 3. Employer X has collectively bargained employees and 70
noncollectively bargained employees. Employer X maintains Plan X, which
benefits only the 30 collectively bargained employees. Employer X may
treat the non-collectively bargained employees as excludable employees
and disregard them in applying section 401(a)(26) to the collectively
bargained plan.
Example 4. Assume the same facts as Example 3, except that the
Commissioner has determined that the employee representative is not a
bona fide employee representative under section 7701(a)(46) and thus
there is no recognized collective bargaining agreement. In this case,
Employer X may not treat the non-collectively bargained employees of X
as excludable employees.
Example 5. Assume the same facts as Example 3, except that 3 percent
of the 30 collectively bargained employees are professionals. In this
case, Employer X may not treat the non-collectively bargained employees
of X as excludable employees.
Example 6. Employer Y has 100 collectively bargained employees.
Thirty of Y's employees are represented by Collective Bargaining Unit 1
and covered under Plan 1. Seventy of Y's employees are represented by
Collective Bargaining Unit 2 and covered under Plan 2. For purposes of
testing Plan 1, the employees of Collective Bargaining Unit 2 may be
treated as excludable employees. Similarly, for purposes of testing
Plan 2, the employees of Collective Bargaining Unit 1 may be treated as
excludable employees.
(7) Certain terminating employees -- (i) In general. An employee may
be treated as an excludable employee for a plan year with respect to a
particular plan if --
(A) The employee does not benefit under the plan for the plan year,
(B) The employee is eligible to participate in the plan,
(C) The plan has a minimum period of service requirement or a
requirement that an employee be employed on the last day of the plan
year (last-day requirement) in order for an employee to accrue a benefit
or receive an allocation for the plan year,
(D) The employee fails to accrue a benefit or receive an allocation
under the plan solely because of the failure to satisfy the minimum
period of service or last-day requirement,
(E) The employee terminates employment during the plan year with no
more than 500 hours of service, and the employee is not an employee as
of the last day of the plan year (for purposes of this paragraph
(b)(7)(i)(E), a plan that uses the elapsed time method of determining
years of service may use either 91 consecutive calendar days or 3
consecutive calendar months instead of 500 hours of service, provided it
uses the same convention for all employees during a plan year), and
(F) If this paragraph (b)(7) is applied with respect to any employee
with respect to a plan for a plan year, it is applied with respect to
all employees with respect to the plan for the plan year.
(ii) Hours of service. For purposes of this paragraph (b)(7), the
term ''hour of service'' has the same meaning as set forth in 29 CFR
2530.200b-2 under the general method of crediting service for the
employee. If one of the equivalencies set forth in 29 CFR 2530.200b-3
is used for crediting service under the plan, the 500-hour requirement
must be adjusted accordingly.
(8) Employees of qualified separate lines of business. If an
employer is treated as operating qualified separate lines of business
for purposes of section 401(a)(26) in accordance with 1.414(r)-1(b), in
testing a plan that benefits employees of one qualified separate line of
business, the employees of the other qualified separate lines of
business of the employer are treated as excludable employees. See
1.414(r)-1(c)(3) and 1.414(r)-9 (separate application of section
401(a)(26) to the employees of a qualified separate line of business).
The rule in this paragraph (b)(8) does not apply to a plan that is
tested under the special rule for employer-wide plans in
1.414(r)-l(c)(3)(ii) for a plan year.
(c) Former employees -- (1) In general. For purposes of applying
section 401(a)(26) with respect to former employees, all former
employees of the employer are taken into account, except that the
employer may treat a former employee described in paragraph (c)(2)
through (c)(4) of this section as an excludable former employee. If any
of the former employee exclusion rules under paragraphs (c)(2) through
(c)(4) of this section is applied, it must be applied to all former
employees for the plan year on a consistent basis.
(2) Employees terminated before a specified date. The employer may
treat a former employee as excludable if --
(i) The former employee became a former employee either prior to
January 1, 1984, or prior to the tenth calendar year preceding the
calendar year in which the current plan year begins, and
(ii) The former employee became a former employee in a calendar year
that precedes the earliest calendar year in which any former employee
who benefits under the plan in the current plan year became a former
employee.
(3) Previously excludable employees. The employer may treat a former
employee as excludable if the former employee was an excludable employee
(or would have been an excludable employee if these regulations had been
in effect) under the rules of paragraphs (a) and (b) of this section
during the plan year in which the former employee became a former
employee. If the employer treats a former employee as excludable
pursuant to this paragraph (c)(3), the former employee is not taken into
account with respect to a plan even if the former employee is benefiting
under the plan.
(4) Vested accrued benefits eligible for mandatory distribution. A
former employee may be treated as an excludable former employee if the
present value of the former employee's vested accrued benefit does not
exceed $3,500. This determination is made in accordance with the rules
of sections 411(a)(11) and 417(e).
(d) Certain police or firefighters. An employer may apply section
401(a)(26) separately with respect to any classification of qualified
public safety employees for whom a separate plan is maintained. Thus,
for purposes of testing a separate plan covering a class of qualified
public safety employees, all employees who are not in that
classification are treated as excludable employees. Also, such
employees need not be taken into account in determining whether or not
any other plan satisfies section 401(a)(26). For purposes of this
paragraph (d), ''qualified public safety employee'' means any employee
of any police department or fire department organized and operated by a
State or political subdivision if the employee provides police
protection, firefighting services, or emergency medical services for any
area within the jurisdiction of a State or political subdivision.
(T.D. 8375, 56 FR 63416, Dec. 4, 1991)
26 CFR 1.401(a)(26)-7 Testing methods.
(a) Testing on each day of the plan year. A plan satisfies section
401(a)(26) for a plan year only if the plan satisfies section 401(a)(26)
on each day of the plan year. An employee benefits on a day if the
employee is a participant for such day and the employee benefits under
the plan for the year under the rules in 1.401(a)(26)-5.
(b) Simplified testing method. A plan is treated as satisfying the
requirements of paragraph (a) of this section if it satisfies section
401(a)(26) on any single plan day during the plan year, but only if that
day is reasonably representative of the employer's workforce and the
plan's coverage. A plan does not have to be tested on the same day each
plan year.
(c) Retroactive correction. If a plan fails to satisfy section
401(a)(26) for a plan year, the plan may be retroactively amended during
the same period and under the same conditions as provided for in
1.401(a)(4)-11(g)(3) through (g)(5) to satisfy section 401(a)(26). A
plan merger that occurs by the end of the period provided in
l.401(a)(4)-11(g)(3)(iv) is treated solely for purposes of section
401(a)(26) as if it were effective as of the first day of the plan year.
The rule of this paragraph (c) may be illustrated by the following
example.
Example. Assume that an employer with 500 employees maintains two
defined contribution plans. Plan A benefits 45 employees. Plan B
benefits 50 employees. Immediately before the end of the period
provided for in 1.401(a)(4)-11(g)(3)(iv), the employer expands coverage
under Plan A to benefit 20 more employees retroactively for the plan
year. Thus, Plan A satisfies paragraph (a) of this section for the plan
year. Alternatively, before the end of the period provided for in
1.401(a)(4)-11(g)(3)(iv), or later if a later period is applicable under
section 401(b), the employer could merge Plan A with Plan B to satisfy
section 401(a)(26).
(T.D. 8375, 56 FR 63418, Dec. 4, 1991)
26 CFR 1.401(a)(26)-8 Definitions.
In applying this section and 1.401(a)(26)-1 through 1.401(a)(26)-9
the definitions in this section govern unless otherwise provided.
Collective bargaining agreement. Collective bargaining agreement
means an agreement that the Secretary of Labor finds to be a collective
bargaining agreement between employee representatives and the employer
that satisfies 301.7701-17T. Employees described in section 413(b)(8)
who are employees of the union or the plan and are treated as employees
of an employer are not employees covered pursuant to a collective
bargaining agreement for purposes of section 401(a)(26) unless the
employees are actually covered pursuant to such an agreement.
Collectively bargained employee. Collectively bargained employee
means a collectively bargained employee within the meaning of
1.410(b)-6(d)(2).
Covered by a collective bargaining agreement. Covered by a
collective bargaining agreement means covered by a collective bargaining
agreement within the meaning of 1.410(b)-6(d)(2)(iii).
Defined benefit plan. Defined benefit plan means a defined benefit
plan within the meaning of 1.410(b)-9.
Defined contribution plan. Defined contribution plan means a defined
contribution plan within the meaning of 1.410(b)-9.
Employee. Employee means an employee, within the meaning of
1.410(b)-9.
Employer. Employer means the employer within the meaning of
1.410(b)-9.
ESOP. ESOP means an employee stock ownership plan within the meaning
of section 4975(e)(7) or a tax credit employee stock ownership plan
within the meaning of section 409(a).
Former employee. Former employee means a former employee within the
meaning of 1.410(b)-9.
Highly compensated employee. Highly compensated employee means an
employee who is highly compensated within the meaning of section 414(q).
Highly compensated former employee. Highly compensated former
employee means a former employee who is highly compensated within the
meaning of section 414(q)(9).
Multiemployer plan. Multiemployer plan means a multiemployer plan
within the meaning of section 414(f).
Noncollectively bargained employee. Noncollectively bargained
employee means an employee who is not a collectively bargained employee.
Nonhighly compensated employee. Nonhighly compensated employee'
means an employee who is not a highly compensated employee.
Nonhighly compensated former employee. Nonhighly compensated former
employee means a former employee who is not a highly compensated former
employee.
Plan. Plan means plan as defined in 1.401(a)(26)-2(c).
Plan year. Plan year means the plan year of the plan as defined in
the written plan document. In the absence of a specifically designated
plan year, the plan year is deemed to be the calendar year.
Professional employee. Professional employee means a professional
employee as defined in 1.410(b)-9.
Section 401(k) plan. Section 401(k) plan means a plan consisting of
elective contributions described in 1.401(k)-1 (g)(3) under a qualified
cash or deferred arrangement described in 1.401(k)-1(a)(4)(i).
Section 401(m) plan. Section 401(m) plan means a plan consisting of
employee contributions described in 1.401(m)-1(f)(6) or matching
contributions described in 1.401(m)-1(f)(12), or both.
(T.D. 8375, 56 FR 63418, Dec. 4, 1991)
26 CFR 1.401(a)(26)-9 Effective dates and transition rules.
(a) In general. Except as provided in paragraphs (b), (c), and (d)
of this section, section 401(a)(26) and the regulations thereunder apply
to plan years beginning on or after January 1, 1989.
(b) Transition rules -- (1) Governmental plans and certain section
403(b) annuities. Section 401(a)(26) is treated as satisfied for plan
years beginning before January 1, 1993, in the case of a plan maintained
by the government of any State or political subdivision thereof, or by
any agency or instrumentality of either of the foregoing. Also, a
section 403(b) plan for employees who perform services for an
educational organization described in section 170(b)(1)(A)(ii),
maintained by an employer which is a State, a political subdivision of a
State, or an agency or instrumentality of any one or more of the
foregoing is deemed to satisfy section 401(a)(26) for plan years
beginning before January 1, 1993.
(2) Early retirement ''window-period'' benefits. Early retirement
benefits available under a plan only to employees who retire within a
limited period of time, not to exceed one year, are treated as
satisfying section 401(a)(26) if such benefits are provided under plan
terms that were adopted and in effect on or before March 14, 1989.
(3) Employees who do not benefit because of a
minimum-period-of-service requirement or a last-day requirement. For
the first plan year beginning after December 31, 1988, and before
January 1, 1990, employees who are eligible to participate under the
plan and who fail to accrue a benefit solely because of the failure to
satisfy either a minimum-period-of-service requirement of 1000 hours of
service or less or a last-day requirement may be treated as benefiting
under the plan.
(4) Certain plan terminations -- (i) In general. Except as provided
in paragraph (b)(4)(ii) of this section, if a plan terminates after
section 401(a)(26) becomes effective with respect to the plan (as
determined under paragraph (a) of this section), the plan is not treated
as a qualified plan upon termination unless it complies with section
401(a)(26) and the regulations thereunder (to the extent they are
applicable) for all periods for which section 401(a)(26) is effective
with respect to the plan.
(ii) Exception. Notwithstanding paragraphs (a) and (b)(4)(i) of this
section, a plan does not fail to be treated as a qualified plan upon
termination merely because the plan fails to satisfy the requirements of
section 401(a)(26) and the regulations thereunder if the plan is
terminated with a termination date on or before December 31, 1989, and
either of the following conditions is satisfied:
(A) In the case of a defined benefit plan, no highly compensated
employee has an accrued benefit under the plan exceeding the lesser of
either the benefit the employee had accrued as of the close of the last
plan year beginning before January 1, 1989, or the benefit the employee
would have accrued as of the close of the last plan year under the terms
of the plan in effect and applicable with respect to the employee on
December 13, 1988.
(B) In the case of a defined contribution plan, no highly compensated
employee receives a contribution allocation for any plan year beginning
after December 31, 1988. For this purpose, a contribution allocation
with respect to an employee for a plan year beginning before January 1,
1989, may be treated as a contribution allocation for a plan year
beginning after December 31, 1988, if the allocation for the prior year
exceeds the allocation that the employee would have received for such
year under the terms of the plan in effect and applicable with respect
to the employee on December 13, 1988. An allocation of forfeitures to
highly compensated employees with respect to contributions made for plan
years beginning before January 1, 1988, does not cause a defined
contribution plan to fail to satisfy the conditions of this paragraph
(b)(4)(ii)(B).
(5) ESOPs and non-ESOPs. Notwithstanding paragraph (a) of this
section and 54.4975-11(a)(5) of this Chapter, an employer may treat the
rule in 1.401(a)(26)-2(d)(1)(i), regarding mandatory disaggregation of
ESOPs and non-ESOPs as not effective for plan years beginning before
January 1, 1990.
(c) Waiver of excise tax on reversions -- (1) In general. Pursuant
to section 1112(e)(3) of the Tax Reform Act of 1986 (TRA '86), if
certain conditions are satisfied, a waiver of the excise tax under
section 4980 applies with respect to any employer reversion that occurs
by reason of the termination or merger of a plan before the first year
to which section 401(a)(26) applies to the plan. In general, the
applicable conditions are that the plan must have been in existence on
August 16, 1986; that if section 401(a)(26) was in effect for the plan
year including August 16, 1986, the plan would have failed to satisfy
the requirements of section 401(a)(26) and would have continued to fail
the requirements at all times thereafter; that the plan satisfies the
applicable conditions in paragraph (b)(4)(ii)(A) or (B) of this section;
and that certain requirements regarding asset or liability transfers
and mergers and spinoffs involving the plan after August 16, 1986, are
satisfied.
(2) Termination date. An employer reversion with respect to a plan
is eligible for the section 4980 excise tax waiver only if the employer
reversion occurs by reason of the termination of the plan with a
termination date prior to the first plan year for which section
401(a)(26) applies to the plan. Solely for purposes of this waiver, the
employer reversion is treated as satisfying this paragraph (c)(2) even
though the plan's termination date is during the first plan year for
which section 401(a)(26) applies to the plan if the plan's termination
date is on or before May 31, 1989. If the termination date occurs in
the first plan year for which section 401(a)(26) applied to the plan and
the employer receives a reversion that is eligible for the waiver of the
section 4980 tax, the plan is subject to the interest rate restriction
set forth in section 11 12(e)(3)(B) of TRA '86 as amended.
(3) Failure to satisfy section 401(a)(26). An employer reversion
with respect to a plan is eligible for the excise tax waiver only if the
plan was in existence on August 16, 1986, and, if section 401(a)(26) had
applied to the plan for the plan year including such date, the plan
would have failed to satisfy section 401(a)(26) for the plan year and
continuously thereafter until the plan's termination or merger. For
purposes of this paragraph (c)(3), a plan is treated as though it would
have failed to satisfy section 401(a)(26) before such section actually
applied to the plan only if the plan (as defined under section 414(1))
failed to benefit at least the lesser of 50 employees or 40 percent of
the employer's employees. In general, this determination is to be made
on the basis of only the applicable statutory provisions, without regard
to the regulations under section 401(a)(26). Thus, for example, the
prior benefit structure rules in 1.401(a)(26)-3 do not apply in
determining whether a plan would have failed to satisfy section
401(a)(26) for plan years beginning prior to the effective date of
section 401(a)(26) with respect to the plan.
(d) Special rule for collective bargaining agreements. In the case
of a plan maintained pursuant to one or more collective bargaining
agreements (as defined in 1.401(a)(26)-8(a)) that were ratified before
March 1, 1986, section 401(a)(26) and the regulations thereunder shall
not apply to plan years beginning before the earlier of --
(1) January 1, 1991, or
(2) The later of --
(i) January 1, 1989, or
(ii) The date on which the last of such collective bargaining
agreements terminates. For purposes of this paragraph (d), any
extension or renegotiation of any collective bargaining agreement that
is ratified after February 28, 1986, is disregarded in determining the
date on which such collective bargaining agreement terminates.
(T.D. 8375, 56 FR 63419, Dec. 4, 1991)
26 CFR 1.401(b)-1 Certain retroactive changes in plan.
(a) General rule. Under section 401(b) a stock bonus, pension,
profit-sharing, annuity, or bond purchase plan which does not satisfy
the requirements of section 401(a) on any day solely as a result of a
disqualifying provision (as defined in paragraph (b) of this section)
shall be considered to have satisfied such requirements on such date if,
on or before the last day of the remedial amendment period (as
determined under paragraphs (c), (d) and (e) of this section) with
respect to such disqualifying provision, all provisions of the plan
which are necessary to satisfy all requirements of sections 401(a),
403(a), or 405(a) are in effect and have been made effective for all
purposes for the whole of such period. Under some facts and
circumstances, it may not be possible to amend a plan retroactively so
that all provisions of the plan which are necessary to satisfy the
requirements of section 401(a) are in fact made effective for the whole
remedial amendment period. If it is not possible, the requirements of
this section will not be satisfied even if the employer adopts a
retroactive plan amendment which, in form, appears to satisfy such
requirements. Section 401(b) does not permit a plan to be made
retroactively effective, for qualification purposes, for a taxable year
prior to the taxable year of the employer in which the plan was adopted
by such employer.
(b) Disqualifying provisions. For purposes of this section, with
respect to a plan described in paragraph (a) of this section, the term
''disqualifying provision'' means:
(1) A provision of a new plan, the absence of a provision from a new
plan, or an amendment to an existing plan, which causes such plan to
fail to satisfy the requirements of the Code applicable to qualification
of such plan as of the date such plan or amendment is first made
effective or
(2) A plan provision which results in the failure of the plan to
satisfy the qualification requirements of the Code by reason of a change
in such requirements --
(i) Effected by the Employee Retirement Income Security Act of 1974
(Pub. L. 93-406, 88 Stat. 829), hereafter referred to as ''ERISA,'' or
the Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248, 96
Stat. 324), hereafter referred to as ''TEFRA,'' or
(ii) Effective before the first day of the first plan year beginning
after December 31, 1989 and that is effected by the Tax Reform Act of
1986 (Pub. L. 99-514, 100 Stat. 2085, 2489), hereafter referred to as
''TRA '86,'' the Omnibus Budget Reconciliation Act of 1986, (Pub. L.
99-509, 100 Stat. 1874), hereafter referred to as ''OBRA '86,'' or the
Omnibus Budget Reconciliation Act of 1987 (Pub. L. 100-203, 101 Stat.
1330), hereafter referred to as ''OBRA '87.'' For purposes of this
paragraph (b)(2)(ii), a disqualifying provision includes any plan
provision that is integral to a qualification requirement changed by TRA
'86, OBRA '86, or OBRA '87 or any requirement treated by the
Commissioner, directly or indirectly, as if section 1140 of TRA '86
applied to it, but only to the extent such provision is effective before
the first day of the first plan year beginning after December 31, 1989.
With respect to disqualifying provisions described in this paragraph
(b)(2)(ii) effective before the first day of the first plan year which
begins after December 31, 1988, there must be compliance with the
conditions of section 1140 of TRA '86 (other than the requirement that
the plan amendment be made on or before the last day of the first plan
year beginning after December 31, 1988), including operation in
accordance with the plan provision as of its effective date with respect
to the plan.
(iii) Effected by amendments to the Code that are designated by the
Commissioner, at his discretion, as disqualifying provisions described
in this paragraph (b)(2). For purposes of this paragraph (b)(2), a
disqualifying provision includes the absence from a plan of a provision
required by such change if the plan was in effect on the date such
change became effective with respect to such plan.
(c) Remedial amendment period. (1) The remedial amendment period
with respect to a disqualifying provision begins:
(i) In the case of a provision of, or absence of a provision from, a
new plan, described in paragraph (b)(1) of this section, the date the
plan is put into effect,
(ii) In the case of an amendment to an existing plan, described in
paragraph (b)(1) of this section, the date the plan amendment is adopted
or put into effect (whichever is earlier), or
(iii) In the case of a disqualifying provision described in paragraph
(b)(2) of this section, the date on which the change effected by ERISA,
TEFRA, TRA '86, OBRA '86, OBRA '87, or a qualification requirement that
is treated, directly or indirectly, as subject to the conditions of
section 1140 of TRA '86 described in paragraph (b)(2) of this section,
became effective with respect to such plan or, in the case of a
provision, described in paragraph (b)(2)(ii) of this section, that is
integral to such qualification requirement, the first day on which the
plan was operated in accordance with such provision.
(2) Unless further extended as provided by paragraph (d) of this
section, the remedial amendment period ends with the latest of:
(i) In the case of a plan maintained by one employer, the time
prescribed by law, including extensions, for filing the income tax
return (or partnership return of income) of the employer for the
employer's taxable year in which falls the latest of:
(A) The date on which the remedial amendment period begins.
(B) The date on which a plan amendment described in paragraph (b)(1)
of this section is adopted, or
(C) The date on which a plan amendment described in paragraph (b)(1)
of this section is made effective,
(ii) In the case of a plan maintained by one employer, the last day
of the plan year within which falls the latest of:
(A) The date on which the remedial amendment period begins,
(B) The date on which a plan amendment described in paragraph (b)(1)
of this section is adopted, or
(C) The date on which a plan amendment described in paragraph (b)(1)
of this section is made effective,
(iii) In the case of a plan maintained by more than one employer, the
last day of the tenth month following the last day of the plan year in
which falls the latest of:
(A) The date on which the remedial amendment period begins,
(B) The date on which a plan amendment described in paragraph (b)(1)
of this section is adopted, or
(C) The date of which a plan amendment described in paragraph (b)(1)
of this section is made effective, or
(iv) December 31, 1976, but only in the case of a plan to which
section 411 (relating to minimum vesting standards) applies without
regard to section 411(e)(2), and only in the case of a remedial
amendment period which began on or after September 2, 1974.
For purposes of paragraphs (c)(2)(i), (c)(2)(ii), and (c)(2)(iii) of
this section, for any disqualifying provision described in paragraph
(b)(2)(ii) of this section, the remedial amendment period shall be
deemed to have begun with the first day of the first plan year which
begins after December 31, 1988.
For purposes of this paragraph (c)(2) of this section, a master or
prototype plan shall not be considered to be a plan maintained by more
than one employer, and whether or not a plan is maintained by more than
one employer, shall be determined without regard to section 414 (b) and
(c) except that if a plan is maintained solely by an affiliated group of
corporations (within the meaning of section 1504) which files a
consolidated income tax return pursuant to section 1501 for a taxable
year within which falls the latest of the dates described in paragraph
(c)(2)(i) of this section, such plan shall be deemed to be maintained by
one employer.
(d) Extensions of remedial amendment period -- (1) Opinion letter
request by sponsoring organization of master or prototype plan. In the
case of an employer who has adopted a master or prototype plan, a
remedial amendment period that began on or after September 2, 1974,
shall not end prior to the later of:
(i) June 30, 1977, or
(ii) The last day of the month that is six months after the month in
which:
(A) The opinion letter with respect to the request of the sponsoring
organization is issued by the Internal Revenue Service,
(B) Such request is withdrawn, or
(C) Such request is otherwise disposed of by the Internal Revenue
Service. The rules contained in this subparagraph apply only if the
sponsoring organization of such master or prototype plan has, after
September 2, 1974, and on or before December 31, 1976, filed a request
for an opinion letter with respect to the initial or continuing
qualification of the plan (or a trust which is part of the plan). The
provisions of this paragraph (d)(1) apply to a master or prototype plan
adopted to replace another plan even though the remedial amendment
period applicable to the replaced plan has expired at the time of
adoption of the replacement plan.
(2) Notification letter request by law firm sponsor of
district-approved plan. In the case of an employer who has adopted a
pattern plan, a remedial amendment period that began on or after
September 2, 1974, shall not end prior to the later of:
(i) June 30, 1977, or
(ii) The last day of the month that is six months after the month in
which:
(A) The notification letter with respect to the request of the
sponsoring law firm is issued by the Internal Revenue Service,
(B) Such request is withdrawn, or
(C) Such request is otherwise disposed of by the Internal Revenue
Service. The rules contained in this subparagraph shall apply only if
the sponsoring law firm of such pattern plan has, on or before December
31, 1976, filed a request for a notification letter with the Internal
Revenue Service with respect to the initial or continuing qualification
of the plan (or a trust which is part of the plan). The provisions of
this paragraph (d)(2) apply to a pattern plan adopted to replace another
plan even though the remedial amendment period applicable to the
replaced plan has expired at the time of the adoption of the replacement
plan.
(3) Determination letter request by employer or plan adminstrator.
If on or before the end of a remedial amendment period determined
without regard to this paragraph (d), or in a case to which paragraph
(d) (1) or (2) of this section applies, on or before the 90th day
following the later of the dates described in paragraph (d) (1) or (2)
of this section, the employer or plan administrator files a request
pursuant to 601.201(s) of this chapter (Statement of Procedural Rules)
for a determination letter with respect to the initial or continuing
qualification of the plan, or a trust which is part of such plan, such
remedial amendment period shall be extended until the expiration of 91
days after:
(i) The date on which notice of the final determination with respect
to such request for a determination letter is issued by the Internal
Revenue Service, such request is withdrawn, or such request is otherwise
finally disposed of by the Internal Revenue Service, or
(ii) If a petition is timely filed with the United States Tax Court
for a declaratory judgment under section 7476 with respect to the final
determination (or the failure of the Internal Revenue Service to make a
final determination) in response to such request, the date on which the
decision of the United States Tax Court in such proceeding becomes
final.
(4) Transitional rule. In the case of a request for a determination
letter described in and filed within the time prescribed in paragraph
(d)(3) of this section with respect to which a final determination is
issued by the Internal Revenue Service on or before September 28, 1976
the remedial amendment period described in paragraph (c) of this section
shall not end prior to the expiration of 150 days beginning on the date
of such final determination by the Internal Revenue Service.
(5) Disqualifying provision prior to September 2, 1974. If the
remedial amendment period with respect to a disqualifying provision
described in paragraph (b)(1) of this section began prior to September
2, 1974, and the provisions of subdivisions (i), (ii) and (iii) of this
subparagraph are satisfied, the remedial amendment period described in
paragraph (c) shall not end prior to December 31, 1976. This
subparagraph shall apply only if --
(i) A request pursuant to 601.201 of this chapter for a
determination letter with respect to the initial or continuing
qualification of the plan (or a trust which is part of the plan) was
filed not later than the later of:
(A) The time prescribed by law, including extensions, for filing the
income tax return (or partnership return of income) of the employer for
the employer's taxable year in which falls the date on which the
remedial amendment period began, or
(B) The date 6 months after the close of such taxable year,
(ii) The employer, either:
(A) While such request for a determination letter is or was under
consideration by the Internal Revenue Service or,
(B) Promptly after the date on which notice of the final
determination with respect to such request for a determination letter is
issued by the Internal Revenue Service, such request is withdrawn, or
such request is otherwise finally disposed of by the Internal Revenue
Service, adopts or adopted either a plan amendment retroactive to the
date on which the remedial amendment period began, or a prospective plan
amendment, and
(iii) The amendment described in paragraph (d)(5)(ii) of this section
would have resulted in the plan's satisfying the requirements of section
401(a) of the Code from the beginning of the remedial amendment period
to the date such amendment was made if this section had been in effect
during such period, and in the case of a prospective amendment, if such
amendment had been made retroactive to such beginning date.
(e) Discretionary extensions. At his discretion, the Commissioner
may extend the remedial amendment period or may allow a particular plan
to be amended after the expiration of its remedial amendment period and
any applicable extension of such period. In determining whether such an
extension will be granted, the Commissioner shall consider, among other
factors, whether substantial hardship to the employer would result if
such an extension were not granted, whether such an extension is in the
best interest of plan participants, and whether the granting of the
extension is adverse to the interests of the Government. The mere
absence of final regulations with respect to issues covered under the
Special Reliance Procedure announced by the Internal Revenue Service in
Technical Information Release 1416 on November 5, 1975, and as extended
by Internal Revenue Service News Release IR-1616 on May 14, 1976, shall
not be deemed to satisfy the criteria of this paragraph. With regard to
a particular plan, a request for extension of time pursuant to this
paragraph shall be submitted prior to the expiration of the remedial
amendment period determined without regard to this paragraph, or within
such time thereafter as the Internal Revenue Service may consider
resonable under the circumstances. The request should be submitted to
the appropriate District Director, determined under 601.201(s)(3)(xii)
of this chapter (Statement of Procedural Rules). This subparagraph
applies to disqualifying provisions that were adopted or became
effective prior to September 2, 1974, as well as disqualifying
provisions adopted or made effective on or after September 2, 1974.
(Secs. 401(b), 7805, Internal Revenue Code of 1954 (88 Stat. 943, 68A
Stat. 917; 26 U.S.C. 401(b), 7805))
(T.D. 7437, 41 FR 42653, Sept. 28, 1976, as amended by T.D. 7896, 48
FR 23817, May 27,1983; T.D. 7997, 49 FR 50645, Dec. 31, 1984; T.D.
8217, 53 FR 29662, Aug. 8, 1988)
26 CFR 1.401(e)-1 Definitions relating to plans covering self-employed
individuals.
(a) ''Keogh'' or ''H.R. 10'' plans, in general -- (1) Introduction
and organization of regulations. Certain self-employed individuals may
be covered by a qualified pension, annuity, or profit-sharing plan.
This section contains definitions contained in section 401(c) relating
to plans covering self-employed individuals and is applicable to
employer taxable years beginning after December 31, 1975, unless
otherwise specified.
The provisions of section 401(a) relating to qualification
requirements which are generally applicable to all qualified plans, and
other provisions relating to the special rules under section 401 (b),
(f), (g), (h), and (i), are also generally applicable to any plan
covering a self-employed individual. However, in addition to such
requirements and special rules, any plan covering a self-employed
individual is subject to the rules contained in 1.401 (e)-2, (e)-5,
and (j)-1 through (j)-5. Section 1.401(e)-2 contains general rules,
1.401(e)-5 contains a special rule limiting the contribution and benefit
base to the first $100,000 of annual compensation, and 1.401 (j)-1
through (j)-5 contains special rules for defined benefit plans. Section
1.401(e)-3 contains special rules which are applicable to plans covering
self-employed individuals when one or more of such individuals is an
owner-employee within the meaning of section 401(c)(3). Section
1.401(e)-4 contains rules relating to contributions on behalf of
owner-employees for premiums on annuity, etc., contracts and a
transitional rule for certain excess contributions made on behalf of
owner-employees for employer taxable years beginning before January 1,
1976. The provisions of this section and of 1.401(e)-2 through
1.401(e)-5 are applicable to employer taxable years beginning after
December 31, 1975, unless otherwise specified.
(2) (Reserved)
(T.D. 7636, 44 FR 47053, Aug. 10, 1979)
26 CFR 1.401(e)-2 General rules relating to plans covering
self-employed individuals.
(a) ''Keogh'' or ''H.R. 10'' plans; introduction and organization of
regulations. This section provides certain rules which supplement, and
modify, the qualification requirements of section 401(a) and the special
rules provided by 1.401(b)-1 and other special rules under subsections
(f), (g), (h), and (i) of section 401 in the case of a qualified
pension, annuity, or profit-sharing plan which covers a self-employed
individual who is an employee within the meaning of section 401(c)(1).
Section 1.401(e)-1(a)(1) sets forth other provisions which also
supplement, and modify, these requirements and special rules in the case
of a plan described in this section. The provisions of this section
apply to employer taxable years beginning after December 31, 1975,
unless otherwise specified.
(T.D. 7636, 44 FR 47053, Aug. 10, 1979)
26 CFR 1.401(e)-3 Requirements for qualification of trusts and plans
benefiting owner-employees.
(a) ''Keogh'' or ''H.R. 10'' plans covering owner-employees;
introduction and organization of regulations. This section prescribes
the additional requirements which must be met for qualification of a
trust forming part of a pension or profit-sharing plan, or of an annuity
plan, which covers any self-employed individual who is an owner-employee
as defined in section 401(c)(3). These additional requirements are
prescribed in section 401(d) and are made applicable to such a trust by
section 401(a)(10)(B) and to an annuity plan by section 404(a)(2).
However, to the extent that the provisions of 1.401(e)-1 and
1.401(e)-2 are not modified by the provisions of this section such
provisions are also applicable to a plan which covers an owner-employee.
The provisions of this section apply to taxable years beginning after
December 31, 1975, unless otherwise specified.
(T.D. 7636, 44 FR 47053, Aug. 10, 1979)
26 CFR 1.401(e)-4 Contributions for premiums on annuity, etc.,
contracts and transitional rule for certain excess contributions.
(a) In general. The provisions of this section prescribe the rules
specified in section 401(e) relating to certain contributions made under
a qualified pension, annuity, or profit-sharing plan on behalf of a
self-employed individual who is an owner-employee (as defined in section
401(c)(3) and the regulations thereunder) in taxable years of the
employer beginning after December 31, 1975. In addition, such plans are
also subject to the limitations on contributions and benefits under
section 415 for years beginning after December 31, 1975. However, the
defined contribution compensation limitation described in section
415(c)(1)(B) will not apply to any contribution described in this
section provided that the requirements specified in section 415(c)(7)
and 1.415-6(h) are satisfied. Solely for the purpose of applying
section 4972(b) (relating to excise tax on excess contributions for
self-employed individuals) to other contributions made by an
owner-employee as an employee, the amount of any employer contribution
which is not deductible under section 404 for the employer's taxable
year but which is described in section 401(e) and this section shall be
taken into account as a contribution made by such owner-employee as an
employee during the taxable year of his employer in which such
contribution is made.
(b) Contributions described in section 401(e) -- (1) An employer
contribution on behalf of an owner-employee is described in section
401(e), if --
(i) Under the provisions of the plan, the contribution is expressly
required to be applied (either directly or through a trustee) to pay the
premiums or other consideration for one or more annuity, endowment, or
life insurance contracts on the life of the owner-employee.
(ii) The employer contributions so applied meet the requirements of
subparagraphs (2) through (5) of this paragraph.
(iii) The amount of the contribution exceeds the amount deductible
under section 404 with respect to contributions made by the employer on
behalf of the owner-employee under the plan, and
(iv) The total employer contributions required to be applied annually
to pay premiums on behalf of any owner-employee for contracts described
in this paragraph do not exceed $7,500. For purposes of computing such
$7,500 limit, the total employer contributions include amounts which are
allocable to the purchase of life, accident, health, or other insurance.
(2)(i) The employer contributions must be paid under a plan which
satisfies all the requirements for qualification. Accordingly, for
example, contributions can be paid under the plan for life insurance
protection only to the extent otherwise permitted under sections 401
through 404 and the regulations thereunder. However, certain of the
requirements for qualification are modified with respect to a plan
described in this paragraph (see section 401(a)(10)(A)(ii) and (d)(5)).
(ii) A plan described in this paragraph is not disqualified merely
because a contribution is made on behalf of an owner-employee by his
employer during a taxable year of the employer for which the
owner-employee has no earned income. On the other hand, a plan will
fail to qualify if a contribution is made on behalf of an owner-employee
which results in the discrimination prohibited by section 401(a)(4) as
modified by section 401(a)(10)(A)(ii).
(3) The employer contributions must be applied to pay premiums or
other consideration for a contract issued on the life of the
owner-employee. For purposes of this subparagraph, a contract is not
issued on the life of an owner-employee unless all the proceeds which
are, or may become, payable under the contract are payable directly, or
through a trustee of a trust described in section 401(a) and exempt from
tax under section 501(a), to the owner-employee or to the beneficiary
named in the contract or under the plan. For example, a nontransferable
face-amount certificate described in section 401(g) and the regulations
thereunder is considered an annuity on the life of the owner-employee if
the proceeds of such contract are payable only to the owner-employee or
his beneficiary.
(4)(i) For any taxable year of the employer, the amount of
contributions by the employer on behalf of the owner-employee which is
applied to pay premiums under the contracts described in this paragraph
must not exceed the average of the amounts deductible under section 404
by such employer on behalf of such owner-employee for the most recent
three taxable years of the employer which are described in the
succeeding sentence. The three employer taxable years described in the
preceding sentence must be years, ending prior to the date the latest
contract was entered into or modified to provide additional, benefits,
in which the owner-employee derived earned income from the trade or
business with respect to which the plan is established. However, if
such owner-employee has not derived earned income for at least three
taxable years preceding such date, then, in determining the ''average of
the amounts deductible'', only so many of such taxable years as such
owner-employee was engaged in such trade or business and derived earned
income therefrom are taken into account.
(ii) For the purpose of making the computation described in
subdivision (i) of this subparagraph, the taxable years taken into
account include those years in which the individual derived earned
income from the trade or business but was not an owner-employee with
respect to such trade or business. Furthermore, taxable years of the
employer preceding the taxable year in which a qualified plan is
established are taken into account.
(iii) For purposes of making the computations described in
subdivisions (i) and (ii) of this subparagraph for any taxable year of
the employer the average of the amounts deductible under section 404 by
the employer on behalf of an owner-employee for the most recent three
relevant taxable years of the employer shall be determined as if section
404, as in effect for the taxable year for which the computation is to
be made, had been in effect for all three such years.
(5) For any taxable year of an employer in which contributions are
made on behalf of an individual as an owner-employee under more than one
plan, the amount of contributions described in this section by the
employer on behalf of such an owner-employee under all such plans must
not exceed $7,500.
(c) Transitional rule for excess contributions -- (1)(i) The rules of
this paragraph are inapplicable to a plan which was not in existence for
any taxable year of an employer which begins before January 1, 1976.
For taxable years of an employer which begin before January 1, 1976, the
rules with respect to excess contributions on behalf of owner-employees
set forth in section 401(d) (5) and (8) and in section 401(e), as these
sections were in effect on September 1, 1974, prior to their amendment
by section 2001(e) of the Employee Retirement Income Security Act of
1974 (hereinafter in this paragraph referred to as the ''Act'') (88
Stat. 954), shall apply except as provided by subparagraph (2) of this
paragraph. Section 1.401-13 generally provides the rules for excess
contributions on behalf of owner-employees set forth in these sections.
(ii) Notwithstanding the provisions of subdivision (i) of this
subparagraph, the rules set forth in such subsections (d) (5) and (8)
and (e) of section 401 with respect to excess contributions for such
taxable years beginning before January 1, 1976, apply even though the
application of those rules affects a subsequent taxable year. Thus, for
example, if, in 1975, a nonwillful excess contribution described in
section 401(e)(1) (prior to such amendment) is made on behalf of an
owner-employee, the plan will not be qualified unless the provisions
required by subparagraphs (A) and (B) of such 401(d)(8) are contained in
the plan and made applicable to excess contributions made for such
taxable years beginning before January 1, 1976. In such case, the
effect of such contribution on the plan, the employer, and the
owner-employee would be determined under paragraph (2) of section
401(e), as in effect on September 1, 1974. By reason of section
401(e)(2)(F), as in effect on September 1, 1974, the period for
assessing any deficiency by reason of the excess contribution will not
expire until the expiration of the 6-month period described in section
401(e)(2)(C), as in effect on September 1, 1974, even if the first day
of such 6-month period falls in a taxable year beginning after December
31, 1975. For the rules applicable to a willful excess contribution,
which generally divide an owner-employee's interest in a plan into two
parts on the basis of employer taxable years beginning before and after
December 31, 1975, see 1.72-17A(e)(2)(v). In the case of a willful
excess contribution, the rule specified in section 401(e)(2)(E)(iii), as
in effect on September 1, 1974, shall not apply to any taxable year of
an employer beginning on or after January 1, 1976. Thus, for example,
if a willful excess contribution was made to a plan on behalf of an
owner-employee with respect to his employer's taxable year beginning
January 1, 1975, the plan would not meet, for purposes of section 404,
the requirements of section 401(d) with respect to that owner-employee
for such year, but the 5 taxable years following such year would be
unaffected because those years begin on or after January 1, 1976.
(2)(i) For purposes of applying the excess contribution rules with
respect to the employer taxable years specified in subparagraph (1) of
this paragraph for such an employer taxable year which begins after
December 31, 1973, see section 404(e) and 1.404(e)-1A for rules
increasing the limitation on the amount of allowable employer deductions
on behalf of owner-employees under section 404. For purposes of
applying subparagraphs (A) and (B)(i) of section 401(e)(1) prior to the
amendment made by section 2001(e)(3) of the Act (88 Stat. 954), the
employer deduction allowable by section 404(e)(4) with respect to an
owner-employee in a defined contribution plan shall be deemed not to be
an excess contribution (see 1.404(e)-1A(c)(4)).
(ii) For purposes of applying the excess contribution rules with
respect to the employer taxable years specified in subparagraph (1) of
this paragraph to an employer's plan which was not in existence on
January 1, 1974, or to a plan in existence on January 1, 1974, which
elects under section 1017(d) of the Act (88 Stat. 934), in accordance
with regulations, to have the funding provisions of section 412 apply to
such an existing plan, see section 404 (a) (1), (a)(6), and (a)(7), as
amended by section 1013(c)(1), (2), and (3) of the Act (88 Stat. 922
and 923) for rules modifying the amount of employer deductions on behalf
of owner-employees.
(T.D. 7636, 44 FR 47053, Aug. 10, 1979)
26 CFR 1.401(e)-5 Limitation of contribution and benefit bases to first
$100,000 of annual compensation in case of plans covering self-employed
individuals.
(a) General rules -- (1) General rule. (1) Under section 401(a)(17),
a plan maintained by an employer which provided contributions or
benefits for employees some or all of whom are employees within the
meaning of section 401(c)(1) is a qualified plan only if the annual
compensation of each employee taken into account under the plan does not
exceed the first $100,000 of such compensation. For purposes of
applying section 401(a)(17) and the preceding sentence, all plans
maintained by such an employer with respect to the same trade or
business shall be treated as a single plan. See also sections 401(d)(9)
and (10) (relating to controlled trades or businesses where a plan
covers an owner-employee who controls more than one trade or business);
section 404(e) (relating to special limitations for self-employed
individuals); section 413(b)(7) (relating to determination of
limitations provided by section 404(a) in the case of certain plans
maintained pursuant to a collective bargaining agreement); and section
413(c)(6) (relating to determination of limitations provided by section
404(a) in the case of certain plans maintained by more than one
employer).
(2) Special section 414(b), (c) rule. This subparagraph (2) applies
to plans maintained by employers that are trades or businesses (whether
or not incorporated) that are under common control within the meaning of
section 414(c). All such plans that are described in paragraph (a)(1)
and 1.401(e)-6(a) (so called ''Subchapter S plans'') shall be treated
as a single plan in applying the limitation of paragraph (a)(1).
(b) Integrated plans. (1) In the case of a qualified plan, other
than a plan described in section 414(j), which is integrated with the
Social Security Act (chapter 21 of the Code), or with contributions or
benefits under chapter 2 of the Code (relating to tax on self-employment
income) or under any other Federal of State law, the $100,000 limitation
described in subparagraph (a) shall be determined without regard to any
adjustments to contributions or benefits under the plan on account of
such integration. See also subsections (a)(5), (a)(15), and (d)(6) of
section 401 and the regulations thereunder for other rules with respect
to plans which are integrated.
(2) In the case of a qualified defined benefit plan described in
section 414(j), see section 401(j)(4) for a special prohibition against
integration.
(c) Application of nondiscrimination requirement. (1) This paragraph
shall apply --
(i) In the case of a plan which provides contributions or benefits
for employees some or all of whom are employees within the meaning of
section 401(c)(1) and
(ii) For a year in which the compensation of any employee covered by
the plan exceeds $100,000. In the case of an employee who is an
employee within the meaning of section 401(c)(1), compensation includes
earned income within the meaning of section 401(c)(2).
(2) In applying section 401(a)(4) under the circumstances described
in subparagraph (1) of this paragraph, the determination whether the
rate of contributions or benefits under the plan discriminates in favor
of highly compensated employees shall be made as if the compensation for
the year of each employee described in the first sentence of
subparagraph (1)(ii) of this paragraph were $100,000, rather than the
compensation actually received by him for such year.
(d) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). A, a self-employed individual, has established the P
Profit-Sharing Plan, which covers A and his two commonlaw employees, B
and C. A's taxable year and the plan's plan year are both the calendar
year. For 1976, A has earned income of $150,000, and B and C each
receive compensation of less than $100,000 from A. If he wishes to
contribute $7,500 to the plan on his behalf for 1976, A must also
contribute to the accounts of B and C under the plan amounts at least
equal to 7 1/2 percent of their respective compensation for 1976.
Example (2). D, an owner-employee within the meaning of section
401(c)(3), is a participant in the Q Qualified Defined Contribution
Plan, which, in 1975, satisfies the requirements of section 401(d)(6)
and all other integration requirements applicable to qualified defined
contribution plans. The taxable years of D, the employer of D within
the meaning of section 401(c)(4), and the plan are all calendar years.
The plan provides for an integration level of $13,200 and a contribution
rate of 5 percent of compensation in excess of $13,200. For 1975, D has
earned income of $115,000. The maximum amount of earned income upon
which D's contribution can be determined is $86,800, and the
contribution based upon this maximum amount of earned income is $4,340,
computed as follows:
(e) Years to which section applies. This section applies to taxable
years of an employer beginning after December 31, 1975. However, if
employer contributions made under a plan for any employee for taxable
years of an employer beginning after December 31, 1973, exceed the
amounts permitted to be deducted for that employee under section 404(e),
as in effect on September 1, 1974, this section applies to such taxable
years of an employer.
Thus, for example, a plan of a calendar year employer which was
adopted on January 1, 1974, would be subject to this section in 1974, if
the employer made a contribution on behalf of any employee within the
meaning of section 401(c)(1) for such year in excess of the $2,500 or 10
percent earned income limit, whichever is applicable to that employee,
specified in section 404(e)(1) as in effect prior to the amendment to
such Code section made by section 2001(a)(1)(A) of the Employee
Retirement Income Security Act of 1974 (88 Stat. 952). The plan
described in the proceeding sentence would also be subject to this
section in 1974, if the employer made a contribution on behalf of any
employee within the meaning of section 401(c)(1) which is allowable as a
deduction only because of the addition of paragraph (4) to Code section
404(e) made by section 2001(a)(3) of such Act (88 Stat. 952).
(T.D. 7636, 44 FR 47055, Aug. 10, 1979)
26 CFR 1.401(e)-6 Special rules for shareholder-employees.
(a) Limitation of contributions and benefit bases to first $100,000
of annual compensation in case of plans covering shareholder-employees.
(1) Under section 401(a)(17), a plan which provides contributions or
benefits for employees, some or all of whom are shareholder-employees
within the meaning of section 1379(d), is subject to the same limitation
on annual compensation as a plan which provides such contributions or
benefits for employees some or all of whom are self-employed individuals
within the meaning of section 401(c)(1). Thus, a plan which provides
contributions or benefits for such shareholder-employees is subject to
the rules provided by 1.401(e)-5, unless otherwise specified. See also
section 1379. In the case of plans maintained by employers that are
corporations described in section 414(b) and that are described in this
subparagraph (1), the same rule described in 1.401(e)-5(a)(2) shall
apply.
(2) Subparagraph (1) applies to taxable years of an electing small
business corporation beginning after December 31, 1975. However, if
corporate contributions made under a plan on behalf of any
shareholder-employee for corporate taxable years beginning after
December 31, 1973, exceed the lesser of the amount of contributions
specified in section 1379(b)(1) (A) or (B), as in effect on September 1,
1974, for that shareholder-employee, subparagraph (1) applies to such
corporate taxable years. Thus, for example if an electing small
business corporation whose taxable year is the calendar year adopted a
plan on January 1, 1974, the plan would be subject to the provisions of
subparagraph (1) of this section in 1974, if the corporation made a
contribution in excess of $2,500 on behalf of any shareholder-employee
for such year.
(T.D. 7636, 44 FR 47056, Aug. 10, 1979)
26 CFR 1.401(f)-1 Certain custodial accounts and annuity contracts.
(a) Treatment of a custodial account or an annuity contract as a
qualified trust. Beginning on January 1, 1974, a custodial account or
an annuity contract may be used, in lieu of a trust, under any qualified
pension, profitsharing, or stock bonus plan if the requirements of
paragraph (b) of this section are met. A custodial account or an
annuity contract may be used under such a plan, whether the plan covers
common-law employees, self-employed individuals who are treated as
employees by reason of section 401(c), or both. The use of a custodial
account or annuity contract as part of a plan does not preclude the use
of a trust or another custodial account or another annuity contract as
part of the same plan. A plan under which a custodial account or an
annuity contract is used may be considered in connection with other
plans of the employer in determining whether the requirements of section
401 are satisfied. For regulations relating to the period before
January 1, 1974, see 1.401-8.
(b) Rules applicable to custodial accounts and annuity contracts.
(1) Beginning on January 1, 1974, a custodial account or an annuity
contract is treated as a qualified trust under section 401 if the
following requirements are met:
(i) The custodial account or annuity contract would, except for that
fact that it is not a trust, constitute a qualified trust under section
401; and
(ii) In the case of a custodial account, the custodian either is a
bank or is another person who demonstrates, to the satisfaction of the
Commissioner, that the manner in which he will hold the assets will be
consistent with the requirements of section 401. This demonstration
must be made in the same manner as the demonstration required by section
401(d)(1) and the regulations thereunder.
(2) If a custodial account would, except for the fact that it is not
a trust, constitute a qualified trust under section 401, it must, for
example, be created pursuant to a written agreement which constitutes a
valid contract under local law. In addition, the terms of the contract
must make it impossible, prior to the satisfaction of all liabilities
with respect to the employees and their beneficiaries covered by the
plan. For any part of the funds of the custodial account to be used
for, or diverted to, purposes other than for the exclusive benefit of
the employees or their beneficiaries as provided for in the plan (see
paragraph (a) of 1.401-2).
(3) An annuity contract would, except for the fact that it is not a
trust, constitute a qualified trust under section 401 if it is purchased
by an employer for an employee under a plan which meets the requirements
of section 404(a)(2) and the regulations thereunder, except that the
plan may be either a pension or a profit-sharing plan.
(c) Effect of this section. (1)(i) Any custodial account or annuity
contract which satisfies the requirements of paragraph (b) of this
section is treated as a qualified trust for all purposes of the Internal
Revenue Code of 1954. Such a custodial account or annuity contract is
treated as a separate legal person which is exempt from the income tax
under section 501(a). In addition, the person holding the assets of
such account or holding such contract is treated as the trustee thereof.
Accordingly, such person is required to file the returns described in
sections 6033 and 6047 and to supply any other information which the
trustee of a qualified trust is required to furnish.
(ii) Any procedure which has the effect of merely substituting one
custodian for another shall not be considered as terminating or
interrupting the legal existence of a custodial account which otherwise
satisfies the requirements of paragraph (b) of this section.
(2)(i) The beneficiary of a custodial account which satisfies the
requirements of paragraph (b) of this section is taxed in accordance
with section 402. In determining whether the funds of a custodial
account are distributed or made available to an employee or his
beneficiary, the rules which under section 402(a) are applicable to
trusts will also apply to the custodial account as though it were a
separate legal person and not an agent of the employee.
(ii) If a custodial account which has qualified under section 401
fails to qualify under such section for any taxable year, such custodial
account will not thereafter be treated as a separate legal person, and
the funds in such account shall be treated as made available within the
meaning of section 402(a)(1) to the employees for whom they are held.
(3) The beneficiary of an annuity contract which satisfies the
requirements of paragraph (b) of this section is taxed as if he were the
beneficiary of an annuity contract described in section 403(a).
(d) Definitions. For purposes of this section --
(1) The term bank means a bank as defined in section 401(d)(1).
(2) The term annuity means an annuity as defined in section 401(g).
Thus, any contract or certificate issued after December 31, 1962, which
is transferable is not treated as a qualified trust under this section.
(e) Other contracts. For purposes of this section, other than the
non-transferability restriction of paragraph (d)(2), a contract issued
by an insurance company qualified to do business in a state shall be
treated as an annuity contract. For purposes of the preceding sentence,
the contract does not include a life, health or accident, property,
casualty or liability insurance contract. For purposes of this
paragraph, a contract which is issued by an insurance company will not
be considered a life insurance contract merely because the contract
provides incidental life insurance protection. The provisions of this
paragraph are effective for taxable years beginning after December 31,
1975.
(f) Cross reference. For the requirement that the assets of an
employee benefit plan be placed in trust, and exceptions thereto, see
section 403 of the Employee Retirement Income Security Act of 1974, 29
U.S.C. 1103, and the regulations prescribed thereunder by the Secretary
of Labor.
(Secs. 401(f)(2), 7805, Internal Revenue Code of 1954 (88 Stat. 939
and 68A Stat. 917; 26 U.S.C. 401(f)(2), 7805))
(43 FR 41204, Sept. 15, 1978. Redesignated and amended by T.D. 7748,
46 FR 1695-1696, Jan. 7, 1981)
26 CFR 1.401(k)-0 Certain cash or deferred arrangements, table of
contents.
This section contains the captions that appear in 1.401(k)-1.
(a) General rules.
(1) Certain plans permitted to include cash or deferred arrangements.
(2) Rules applicable to cash or deferred arrangements generally.
(i) Definition of cash or deferred arrangement.
(ii) Treatment of after-tax employee contributions.
(iii) Treatment of elective contributions as plan assets.
(3) Rules applicable to cash or deferred elections generally.
(i) Definition of cash or deferred election.
(ii) Requirement that amounts not be currently available.
(iii) Amounts currently available.
(iv) Certain one-time elections not treated as cash or deferred
elections.
(v) Tax treatment of employees.
(vi) Examples.
(4) Rules applicable to qualified cash or deferred arrangements.
(i) Definition of qualified cash or deferred arrangement.
(ii) Treatment of elective contributions as employer contributions.
(iii) Tax treatment of employees.
(iv) Application of nondiscrimination requirements to plan that
includes a qualified cash or deferred arrangement.
(5) Rules applicable to nonqualified cash or deferred arrangements.
(i) Definition of nonqualified cash or deferred arrangement.
(ii) Treatment of elective contributions as employer contributions.
(iii) Tax treatment of employees.
(iv) Qualification of plan that includes a nonqualified cash or
deferred arrangement.
(6) Rules applicable to partnership cash or deferred arrangements.
(i) Application of general rules.
(ii) Definition of partnership cash or deferred arrangement.
(A) General rule.
(B) Timing of partner's cash or deferred election.
(C) Transition rule for partnership cash or deferred elections.
(iii) Treatment of certain matching contributions as elective
contributions.
(7) Rules applicable to collectively bargained plans.
(i) In general.
(ii) Example
(b) Coverage and nondiscrimination requirements.
(1) In general.
(2) Actual deferral percentage test.
(i) General rule.
(ii) Rule for plan years beginning after 1979 and before 1987.
(iii) Plan provision requirement.
(3) Aggregation of arrangements and plans.
(i) Aggregation of arrangements under plan.
(ii) Aggregation of plans.
(A) General rule.
(B) Prohibited aggregation.
(iii) Restructuring.
(iv) Collectively bargained plans.
(4) Elective contributions taken into account under the actual
deferral percentage test.
(i) General rule.
(ii) Elective contributions used to satisfy actual contribution
percentage test.
(iii) Elective contributions for partners.
(iv) Elective contributions not taken into account.
(5) Qualified nonelective contributions and qualified matching
contributions that may be taken into account under the actual deferral
percentage test.
(6) Examples.
(c) Nonforfeitability requirement.
(1) General rule.
(2) Example.
(d) Distribution limitation.
(1) General rule.
(2) Rules applicable to hardship distributions.
(i) Distribution must be on account of hardship.
(ii) Limit on distributable amount.
(iii) General hardship distribution standards.
(A) Immediate and heavy financial need.
(B) Distribution necessary to satisfy financial need.
(iv) Deemed hardship distribution standards.
(A) Deemed immediate and heavy financial need.
(B) Distribution deemed necessary to satisfy financial need.
(C) Commissioner may expand standards.
(3) Rules applicable to distributions upon plan termination.
(4) Rules applicable to distributions upon sale of assets or
subsidiary.
(i) Seller must maintain the plan.
(ii) Employee must continue employment.
(iii) Distribution must be in connection with disposition of assets
or subsidiary.
(iv) Definitions.
(A) Substantially all.
(B) Unrelated employer.
(5) Lump sum requirement for certain distributions.
(6) Rules applicable to all distributions.
(i) Impermissible distributions.
(ii) Deemed distributions.
(iii) ESOP dividend distributions.
(iv) Limitations apply after transfer.
(v) Required consent.
(7) Examples.
(e) Additional requirements for qualified cash or deferred
arrangements.
(1) Qualified profit-sharinq, stock bonus, pre-ERISA money purchase
or rural cooperative plan requirement.
(2) Cash availability requirement.
(3) Separate accounting requirement.
(i) General rule.
(ii) Failure to satisfy separate accounting requirement.
(4) Limitations on cash or deferred arrangements of state and local
governments and tax-exempt organizations.
(5) One-year eligibility requirement.
(6) Other benefits not contingent upon elective contributions.
(i) General rule.
(ii) Definition of other benefits.
(iii) Effect of certain statutory limits.
(iv) Nonqualified deferred compensation.
(v) Plan loans and distributions.
(7) Coordination with other plans.
(8) Recordkeeping requirements.
(9) Consistent application of separate lines of business rules.
(f) Correction of excess contributions.
(1) General rule.
(i) Permissible correction methods.
(ii) Combination of correction methods.
(iii) Impermissible correction methods.
(iv) Partial distributions.
(2) Amount of excess contributions.
(3) Recharacterization of excess contributions.
(i) General rule.
(ii) Treatment of recharacterized excess contributions.
(iii) Additional rules.
(A) Time of recharacterization.
(B) Employee contributions must be permitted under plan.
(C) Plans under which excess contributions may be recharacterized.
(iv) Transition rules.
(v) Example.
(4) Corrective distribution of excess contributions (and income).
(i) General rule.
(ii) Income allocable to excess contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating income.
(D) Safe harbor method of allocating gap period income.
(iii) No employee or spousal consent required.
(iv) Treatment of corrective distributions as employer contributions.
(v) Tax treatment of corrective distributions.
(A) General rule.
(B) Rule for de minimis distributions.
(C) Rule for certain 1987 and 1988 excess contributions.
(vi) No reduction of required minimum distribution.
(5) Rules applicable to all corrections.
(i) Coordination with distribution of excess deferrals.
(A) In general.
(B) Treatment of excess contributions that reduce excess deferrals.
(ii) Correction of family members.
(iii) Matching contributions forfeited because of excess deferral or
contribution.
(6) Failure to correct.
(i) Failure to correct within 2 1/2 months after end of plan year.
(ii) Failure to correct within 12 months after end of plan year.
(7) Examples.
(g) Definitions.
(1) Actual deferral percentage.
(i) General rule.
(ii) Actual deferral ratio.
(A) General rule.
(B) Employee eligible under more than one arrangement.
(1) Highly compensated employees.
(2) Nonhighly compensated employees.
(3) Treatment of plans with different plan years.
(C) Employees subject to family aggregation rules.
(1) Aggregation of elective contributions and other amounts.
(2) Effect on actual deferral percentage of nonhighly compensated
employees.
(3) Multiple family groups.
(2) Compensation.
(i) Years beginning after December 31, 1986.
(ii) Years beginning before January 1, 1987.
(A) General rule.
(B) Nondiscrimination requirement.
(3) Elective contributions.
(4) Eligible employee.
(i) General rule.
(ii) Certain one-time elections.
(5) Employee.
(6) Employer.
(7) Excess contributions and excess deferrals.
(i) Excess contributions.
(ii) Excess deferrals.
(8) Highly compensated employees.
(i) Plan years beginning after December 31, 1986.
(ii) Plan years beginning after December 31, 1979 and before January
1, 1987.
(9) Matching contributions.
(10) Nonelective contributions.
(11) Plan.
(i) General rule.
(ii) Separate asset pools are separate plans.
(iii) Mandatory disaggregation of certain plans.
(A) Plans benefiting collective bargaining unit employees.
(B) ESOPs and non-ESOPs.
(C) Plans benefiting employees of qualified separate lines of
business.
(D) Plans maintained by more than one employer.
(1) Multiple employer plans.
(2) Multiemployer plans.
(iv) Mandatory aggregation of certain plans.
(12) Pre-ERISA money purchase pension plan.
(13) Qualified matching contributions and qualified nonelective
contributions.
(i) Qualified matching contributions.
(ii) Qualified nonelective contributions.
(iii) Additional requirements.
(14) Rural cooperative plan.
(h) Effective dates.
(1) General rule.
(2) Collectively bargained plans.
(3) Transition rules.
(i) Cash or deferred arrangements in existence on June 27, 1974.
(ii) Plan years beginning after December 31, 1979, and before January
1, 1992.
(iii) Restructuring.
(A) General rule.
(B) Identification of component plans.
(1) Minimum coverage requirement.
(2) Commonality requirement.
(4) State and local government plans.
(i) Plans adopted before May 6, 1986.
(ii) Plan years beginning before January 1, 1993.
(iii) Collectively bargained plans.
(T.D. 8357, 56 FR 40516, Aug. 15, 1991, as amended by T.D. 8376, 56
FR 63431, Dec. 4, 1991)
26 CFR 1.401(k)-1 Certain cash or deferred arrangements.
(a) General rules -- (1) Certain plans permitted to include cash or
deferred arrangements. A plan, other than a profit-sharing, stock
bonus, pre-ERISA money purchase pension or rural cooperative plan, does
not satisfy the requirements of section 401(a) if the plan includes a
cash or deferred arrangement. A profit-sharing, stock bonus, pre-ERISA
money purchase pension, or rural cooperative plan does not fail to
satisfy the requirements of section 401(a) merely because the plan
includes a cash or deferred arrangement. A cash or deferred arrangement
is part of a plan for purposes of this section if any contributions to
the plan, or accruals or other benefits under the plan, are made or
provided pursuant to the cash or deferred arrangement.
(2) Rules applicable to cash or deferred arrangements generally --
(i) Definition of cash or deferred arrangement. Except as provided in
paragraph (a)(2)(ii) of this section, a cash or deferred arrangement is
an arrangement under which an eligible employee may make a cash or
deferred election with respect to contributions to, or accruals or other
benefits under, a plan that is intended to satisfy the requirements of
section 401(a) (including a contract that is intended to satisfy the
requirements of section 403(a)).
(ii) Treatment of after-tax employee contributions. A cash or
deferred arrangement does not include an arrangement under which amounts
contributed under a plan at an employee's election are designated or
treated at the time of contribution as after-tax employee contributions
(e.g., by reporting the contributions as taxable income subject to
applicable withholding requirements). See also section 414(h)(1). This
is the case even if the employee's election to make after-tax employee
contributions is made before the amounts subject to the election are
currently available to the employee.
(iii) Treatment of elective contributions as plan assets. The extent
to which elective contributions under a cash or deferred arrangement
constitute plan assets for purposes of the prohibited transaction
provisions of section 4975 of the Internal Revenue Code and title I of
the Employee Retirement Income Security Act of 1974 is determined in
accordance with regulations and rulings issued by the Department of
Labor.
(3) Rules applicable to cash or deferred elections generally -- (i)
Definition of cash or deferred election. A cash or deferred election is
any election (or modification of an earlier election) by an employee to
have the employer either --
(A) Provide an amount to the employee in the form of cash or some
other taxable benefit that is not currently available, or
(B) Contribute an amount to a trust, or provide an accrual or other
benefit, under a plan deferring the receipt of compensation.
A cash or deferred election includes a salary reduction agreement
between an employee and employer under which a contribution is made
under a plan only if the employee elects to reduce cash compensation or
to forgo an increase in cash compensation.
(ii) Requirement that amounts not be currently available. A cash or
deferred election can only be made with respect to an amount that is not
currently available to the employee on the date of the election.
Further, a cash or deferred election can only be made with respect to
amounts that would (but for the cash or deferred election) become
currently available after the later of the date on which the employer
adopts the cash or deferred arrangement or the date on which the
arrangement first becomes effective.
(iii) Amounts currently available. Cash or another taxable amount is
currently available to the employee if it has been paid to the employee
or if the employee is able currently to receive the cash or other
taxable amount at the employee's discretion. An amount is not currently
available to an employee if there is a significant limitation or
restriction on the employee's right to receive the amount currently.
Similarly, an amount is not currently available as of a date if the
employee may under no circumstances receive the amount before a
particular time in the future. The determination of whether an amount
is currently available to an employee does not depend on whether it has
been constructively received by the employee for purposes of section
451.
(iv) Certain one-time elections not treated as cash or deferred
elections. A cash or deferred election does not include a one-time
irrevocable election upon an employee's commencement of employment with
the employer or upon the employee's first becoming eligible under any
plan of the employer, to have contributions equal to a specified amount
or percentage of the employee's compensation (including no amount of
compensation) made by the employer on the employee's behalf to the plan
and to any other plan of the employer (including plans not yet
established) for the duration of the employee's employment with the
employer, or in the case of a defined benefit plan to receive accruals
or other benefits (including no benefits) under such plans. Thus, for
example, employer contributions pursuant to a one-time irrevocable
election described in this paragraph are not treated as having been made
pursuant to a cash or deferred election and are not includible in an
employee's gross income by reason of 1.402(a)-1(d). See paragraph
(a)(6)(ii)(C) of this section for an additional one-time election
permitted under a cash or deferred arrangement in which partners may
participate.
(v) Tax treatment of employees. An amount generally is includible in
an employee's gross income for the taxable year in which the employee
actually or constructively receives the amount. But for section
402(a)(8) and section 401(k), an employee is treated as having received
an amount that is contributed to a plan pursuant to the employee's cash
or deferred election. This is the case even if the election to defer is
made before the year in which the amount is earned, or before the amount
is currently available. See 1.402(a)-1(d).
(vi) Examples. The provisions of this paragraph (a)(3) are
illustrated by the following examples:
Example 1. An employer maintains a profit-sharing plan under which
each eligible employee has an election to defer an annual bonus payable
on January 30 each year. The bonus equals 10 percent of compensation
during the previous calendar year. Deferred amounts are not treated as
after-tax employee contributions. The bonus is currently available on
January 30. An election made prior to January 30 to defer all or part
of the bonus is a cash or deferred election, and the bonus deferral
arrangement is a cash or deferred arrangement.
Example 2. An employer maintains a profit-sharing plan under which
each eligible employee may elect to defer up to 10 percent of
compensation for each payroll period during the plan year. An election
to defer compensation for a payroll period is a cash or deferred
election if the election is made prior to the date on which the
compensation is to be paid to the employee and if the deferred amount is
not treated as an after-tax employee contribution at the time of
deferral.
(4) Rules applicable to qualified cash or deferred arrangements --
(i) Definition of qualified cash or deferred arrangement. A qualified
cash or deferred arrangement is a cash or deferred arrangement that
satisfies the requirements of paragraphs (b), (c), (d), and (e) of this
section and that is part of a plan that otherwise satisfies the
requirements of section 401(a).
(ii) Treatment of elective contributions as employer contributions.
Except as provided in paragraph (f) of this section, elective
contributions under a qualified cash or deferred arrangement are treated
as employer contributions. Thus, for example, elective contributions
are treated as employer contributions for purposes of sections 401(a)
and 401(k), 402(a), 404, 409, 411, 412, 415, 416, and 417.
(iii) Tax treatment of employees. Except as provided in section
402(g) and paragraph (f) of this section, elective contributions under a
qualified cash or deferred arrangement are neither includible in an
employee's gross income at the time the cash or other taxable amounts
would have been includible in the employee's gross income (but for the
cash or deferred election), nor at the time the elective contributions
are contributed to the plan. See 1.402(a)-1(d)(2)(i).
(iv) Application of nondiscrimination requirements to plan that
includes a qualified cash or deferred arrangement. A plan that includes
a qualified cash or deferred arrangement must satisfy the requirements
of section 401(a)(4). Thus, for example, the plan must satisfy section
401(a)(4) with respect to the amount of contributions or benefits and
the availability of benefits, rights and features under the plan. The
right to make each level of elective contributions under a cash or
deferred arrangement is a benefit, right or feature subject to this
requirement, and each of these rights must therefore generally be
available to a group of employees that satisfies section 410(b). Thus,
for example, if all employees are eligible to make a stated level of
elective contributions under a cash or deferred arrangement, but that
level of contributions can only be made from compensation in excess of a
stated amount, such as the Social Security taxable wage base, the
arrangement will generally favor highly compensated employees with
respect to the availability of elective contributions and thus will
generally not satisfy the requirements of section 401(a)(4). For plan
years beginning after December 31, 1984, the amount of elective
contributions under a qualified cash or deferred arrangement satisfies
the requirements of section 401(a)(4) only if the amount of elective
contributions satisfies the special nondiscrimination test of section
401 (k)(3) and paragraph (b)(2) of this section.
(5) Rules applicable to nonqualified cash or deferred arrangements --
(i) Definition of nonqualified cash or deferred arrangement. A
nonqualified cash or deferred arrangement is a cash or deferred
arrangement that is not a qualified cash or deferred arrangement. Thus,
if a cash or deferred arrangement fails to satisfy one or more of the
requirements in paragraph (b), (c), (d) or (e) of this section, the
arrangement is a nonqualified cash or deferred arrangement.
(ii) Treatment of elective contributions as employer contributions.
Except as specifically provided otherwise, elective contributions under
a nonqualified cash or deferred arrangement are treated as nonelective
employer contributions. Thus, for example, the elective contributions
are treated as nonelective employer contributions for purposes of
sections 401(a) (including section 401(a)(4)) and 401(k), 404, 409, 411,
412, 415, 416, and 417 and are not subject to the requirements of
section 401(m).
(iii) Tax treatment of employees. Elective contributions under a
nonqualified cash or deferred arrangement are includible in an
employee's gross income at the time the cash or other taxable amount
that the employee would have received (but for the cash or deferred
election) would have been includible in the employee's gross income.
See 1.402(a)-1(d)(1).
(iv) Qualification of plan that includes a nonqualified cash or
deferred arrangement. A profit-sharing, stock bonus, pre-ERISA money
purchase pension, or rural cooperative plan does not fail to satisfy the
requirements of section 401(a) merely because the plan includes a
nonqualified cash or deferred arrangement. In determining whether the
plan satisfies the requirements of section 401(a)(4), the special
nondiscrimination tests of sections 401(k)(3) and 401(m)(2) may not be
used.
(6) Rules applicable to partnership cash or deferred arrangements --
(i) Application of general rules. A partnership may maintain a cash or
deferred arrangement, and individual partners may make cash or deferred
elections with respect to compensation attributable to services rendered
to the partnership. Generally, the same rules apply to partnership cash
or deferred arrangements as apply to other cash or deferred
arrangements. Thus, a partnership cash or deferred arrangement is not a
qualified cash or deferred arrangement unless the requirements of
section 401(k) and this section are satisfied. For example, any
contributions made on behalf of an individual partner pursuant to a
partnership cash or deferred arrangement are elective contributions
unless they are designated or treated as after-tax employee
contributions. Consistent with 1.402(a)-1(d), the elective
contributions are includible in income and are not deductible under
section 404(a) unless the arrangement is a qualified cash or deferred
arrangement. Also, even if the arrangement is a qualified cash or
deferred arrangement, the elective contributions are includible in gross
income and are not deductible under section 404(a) to the extent they
exceed the applicable limit under section 402(g). See also
1.401(a)-30.
(ii) Definition of partnership cash or deferred arrangement -- (A)
General rule. Effective for contributions made for plan years beginning
after December 31, 1988, a cash or deferred arrangement includes any
arrangement that directly or indirectly permits individual partners to
vary the amount of contributions made on their behalf.
(B) Timing of partner's cash or deferred election. For purposes of
paragraph (a)(3)(ii) of this section, a partner's compensation is deemed
currently available on the last day of the partnership taxable year.
Accordingly, an individual partner may not make a cash or deferred
election with respect to compensation for a partnership taxable year
after the last day of that year. A partner's compensation for a
partnership taxable year ending with or within a plan year beginning
before January 1, 1992, is, however, deemed not to be currently
available until the due date, including extensions, for filing the
partnership's federal income tax return for its taxable year ending with
or within the plan year. See 1.401(k)-1(b)(4)(iii) for the rules
regarding when contributions are treated as allocated.
(C) Transition rule for partnership cash or deferred elections. A
one-time irrevocable election to participate or not to participate in a
plan in which partners may participate is not a cash or deferred
election if the election was made on or before the later of the first
day of the first plan year beginning after December 31, 1988, or March
31, 1989. This election may be made after the commencement of
employment or after the employee's first becoming eligible under any
plan of the employer. The election may be made even if the one-time
irrevocable election in 1.401(k)-1(a)(3)(iv) was previously made.
(iii) Treatment of certain matching contributions as elective
contributions. If a partnership makes matching contributions with
respect to an individual partner's elective contributions or employee
contributions, then the matching contributions are treated as elective
contributions made on behalf of the partner. In the case of a plan
that, on August 8, 1988, did not treat matching contributions as
elective contributions, the preceding sentence applies only to plan
years beginning after August 8, 1988. See also 1.401(m)-1(f)(12) and
1.404(e)-1A(f).
(7) Rules applicable to collectively bargained plans -- (i) In
general. The amount of employer contributions under a nonqualified cash
or deferred arrangement is treated as satisfying section 401(a)(4) if
the arrangement is part of a collectively bargained plan (including a
plan adopted by a state or local government before May 6, 1986) that
automatically satisfies the requirements of section 410(b). Except as
specifically provided otherwise, elective contributions under the
arrangement are treated as employer contributions. See
1.401(k)-1(a)(5)(ii). However, elective contributions under the
nonqualified cash or deferred arrangement are treated as employee
contributions for purposes of section 402(a) for plan years beginning
after December 31, 1992, and are therefore includible in gross income
under section 402(a)(8). See 1.402(a)-1(d)(3)(iv).
(ii) Example. The provisions of this paragraph (a)(7) are
illustrated by the following example:
Example. For the 1994 plan year, Employer A maintains a collectively
bargained plan that includes a cash or deferred arrangement. Employer
contributions under the cash or deferred arrangement not satisfy the
actual deferral percentage test of section 401(k)(3) and paragraph (b)
of this section. Therefore, the arrangement is a nonqualified cash or
deferred arrangement. The employer contributions under the cash or
deferred arrangement are considered to be nondiscriminatory under
section 401(a)(4), and the elective contributions are generally treated
as employer contributions. Under 1.402(a)-1(d)(1), however, elective
contributions are includible in an employee's gross income.
(b) Coverage and nondiscrimination requirements -- (1) In general. A
cash or deferred arrangement satisfies this paragraph (b) for a plan
year only if:
(i) The group of eligible employees under the cash or deferred
arrangement satisfies the requirements of section 410(b) (including the
average benefit percentage test, if applicable); and,
(ii) The cash or deferred arrangement satisfies the actual deferral
percentage test described in paragraph (b)(2) of this section.
(2) Actual deferral percentage test -- (i) General rule. For plan
years beginning after December 31, 1986, or such later date provided in
paragraph (h) of this section, a cash or deferred arrangement satisfies
this paragraph (b) for a plan year only if:
(A) The actual deferral percentage for the group of eligible highly
compensated employees is not more than the actual deferral percentage
for the group of all other eligible employees multiplied by 1.25; or
(B) The excess of the actual deferral percentage for the group of
eligible highly compensated employees over the actual deferral
percentage for the group of all other eligible employees is not more
than two percentage points, and the actual deferral percentage for the
group of eligible highly compensated employees is not more than the
actual deferral percentage for the group of all other eligible employees
multiplied by two.
An arrangement does not fail to satisfy the requirements of this
paragraph (b)(2) merely because all of the eligible employees under an
arrangement for a year are highly compensated employees.
(ii) Rule for plan years beginning after 1979 and before 1987. For
plan years beginning after December 31, 1979, and before January 1,
1987, or such later date provided in paragraph (h) of this section, a
cash or deferred arrangement satisfies this paragraph (b) for a plan
year only if:
(A) The actual deferral percentage for the group of eligible highly
compensated employees (top one-third) is not more than the actual
deferral percentage for the group of all other eligible employees (lower
two-thirds) multiplied by 1.5; or
(B) The excess of the actual deferral percentage for the top
one-third over the actual deferral percentage for the lower two-thirds
is not more than three percentage points, and the actual deferral
percentage for the top one-third is not more than the actual deferral
percentage for the lower two-thirds multiplied by 2.5.
(iii) Plan provision requirement. For plan years beginning after
December 31, 1986, or such later date provided in paragraph (h) of this
section, a plan that includes a cash or deferred arrangement does not
satisfy the requirements of section 401(a) unless it provides that the
actual deferral percentage test of section 401(k)(3) will be met. For
purposes of this paragraph (b)(2)(iii), the plan may incorporate by
reference the provisions of section 401(k)(3), this paragraph (b), and
if applicable, section 401(m)(9) and 1.401(m)-2.
(3) Aggregation of arrangements and plans -- (i) Aggregation of
arrangements under plan. Except as otherwise specifically provided in
this paragraph (b)(3), all cash or deferred arrangements included in a
plan are treated as a single cash or deferred arrangement. Thus, for
example, if two groups of employees are eligible for separate cash or
deferred arrangements under the same plan, the two cash or deferred
arrangements are treated as a single cash or deferred arrangement, even
if they have significantly different features, such as significantly
different limits on elective contributions. See 1.401(k)-1(g)(11) for
the definition of plan used for purposes of this section.
(ii) Aggregation of plans -- (A) General rule. Plans that are
aggregated for purposes of section 410(b) (other than for purposes of
the average benefit percentage test) are treated as a single plan for
purposes of section 401(k) and this section. Thus, cash or deferred
arrangements included in plans that are aggregated for purposes of
section 410(b) (other than the average benefit percentage test) are
treated as a single cash or deferred arrangement. For example, if an
employer maintains cash or deferred arrangements under separate
profit-sharing plans for its salaried and hourly employees, and treats
the plans as a single plan for purposes of section 410(b), the cash or
deferred arrangements included in the plans are treated as a single
arrangement. See also paragraph (g)(1)(ii) of this section for rules
requiring the aggregation of elective contributions under two or more
plans in computing the actual deferral ratios of certain employees.
(B) Prohibited aggregation. Except as specifically provided in this
paragraph (b) and 1.401(k)-1(g)(11), section 410(b) provides the
exclusive means for aggregating plans for purposes of this section. For
example, allocations under a plan or portion of a plan described in
section 4975(e) or 409 (an ESOP) may not be combined with contributions
or allocations under any plan or portion of a plan not described in
section 4975(e) or 409 (a non-ESOP) for purposes of determining whether
either the ESOP or the non-ESOP satisfies the requirements of section
401(k). Similarly, in the case of a plan maintained by more than one
employer to which section 413(c) applies, section 401(k) and this
section must be applied as if each employer maintained a separate plan.
Also, a cash or deferred arrangement covering both employees who are
included in a unit of employees covered by a collective bargaining
agreement and employees who are not so covered must be treated as two
separate arrangements (one for each group of eligible employees) for
purposes of section 401(k). Further, plans may not be aggregated unless
they have the same plan year. In addition, plans that could be
aggregated under section 410(b) but that are not actually aggregated for
a year for purposes of section 410(b) (other than the average benefit
percentage test) may not be aggregated for purposes of this section.
(iii) Restructuring. Effective for plan years beginning after
December 31, 1991, restructuring may not be used to demonstrate
compliance with the requirements of section 401(k). For plan years
beginning before January 1, 1992, see 1.401(k)-1(h)(3)(iii).
(iv) Collectively bargained plans. Participants in a collectively
bargained plan to which section 413(b) applies are treated as employed
by a single employer for purposes of section 401(k) (3) and (9), and
paragraphs (b), (g)(1), and (g)(2) of this section. This special rule
applies only if the participants are members of the collective
bargaining unit, are employed by employers that are parties to the
collective bargaining agreement, and are subject to the same
contribution formula.
(4) Elective contributions taken into account under the actual
deferral percentage test -- (i) General rule. An elective contribution
is taken into account under paragraph (b)(2) of this section for a plan
year only if each of the following requirements is satisfied:
(A) The elective contribution is allocated to the employee's account
under the plan as of a date within that plan year. For purposes of this
rule, an elective contribution is considered allocated as of a date
within a plan year only if --
(1) The allocation is not contingent upon the employee's
participation in the plan or performance of services on any date
subsequent to that date, and
(2) The elective contribution is actually paid to the trust no later
than the end of the 12-month period immediately following the plan year
to which the contribution relates.
(B) The elective contribution relates to compensation that either --
(1) Would have been received by the employee in the plan year but for
the employee's election to defer under the arrangement, or
(2) Is attributable to services performed by the employee in the plan
year and, but for the employee's election to defer, would have been
received by the employee within two and one-half months after the close
of the plan year.
(ii) Elective contributions used to satisfy actual contribution
percentage test. Except as provided in 1.401(m)-1(b)(5)(iii), elective
contributions treated as matching contributions must satisfy the actual
contribution percentage test of section 401(m)(2) and are not taken into
account under paragraph (b)(2) of this section.
(iii) Elective contributions for partners. For purposes of paragraph
(b)(2) of this section, a partner's distributive share of partnership
income is treated as received on the last day of the partnership taxable
year. Thus, an elective contribution made on behalf of a partner is
treated as allocated to the partner's account for the plan year that
includes the last day of the partnership taxable year, provided the
requirements of paragraph (b)(4)(i)(A) of this section are met.
(iv) Elective contributions not taken into account. Elective
contributions that do not satisfy the requirements of paragraph
(b)(4)(i) of this section may not use the special nondiscrimination rule
of section 401(k)(3) and paragraph (b)(2) of this section for the plan
year with respect to which the contributions were made, or for any other
plan year. Instead, the amount of the elective contributions must
satisfy the requirements of section 401(a)(4) (without regard to the
special nondiscrimination test in section 401(k)(3) and paragraph (b)(2)
of this section) for the plan year in which they are allocated under the
plan as if they were nonelective employer contributions and were the
only nonelective employer contributions for the year.
(5) Qualified nonelective contributions and qualified matching
contributions that may be taken into account under the actual deferral
percentage test. Except as specifically provided otherwise, for
purposes of paragraph (b)(2) of this section, all or part of the
qualified nonelective contributions and qualified matching contributions
made with respect to any or all employees who are eligible employees
under the cash or deferred arrangement being tested may be treated as
elective contributions under the arrangement, provided that each of the
following requirements (to the extent applicable) is satisfied:
(i) The amount of nonelective contributions, including those
qualified nonelective contributions treated as elective contributions
for purposes of the actual deferral percentage test, satisfies the
requirements of section 401(a)(4).
(ii) The amount of nonelective contributions, excluding those
qualified nonelective contributions treated as elective contributions
for purposes of the actual deferral percentage test and those qualified
nonelective contributions treated as matching contributions under
1.401(m)-1(b)(5) for purposes of the actual contribution percentage
test, satisfies the requirements of section 401(a)(4).
(iii) For plan years beginning before January 1, 1987, or such later
date provided in paragraph (h) of this section, the matching
contributions, including those qualified matching contributions treated
as elective contributions for purposes of the actual deferral percentage
test, satisfy the requirements of section 401(a)(4).
(iv) For plan years beginning before January 1, 1987, or such later
date provided in paragraph (h) of this section, the matching
contributions, excluding those qualified matching contributions treated
as elective contributions for purposes of the actual deferral percentage
test, satisfy the requirements of section 401(a)(4).
(v) The qualified nonelective contributions and qualified matching
contributions satisfy the requirements of paragraph (b)(4)(i)(A) of this
section for the plan year as if the contributions were elective
contributions.
(vi) For plan years beginning after December 31, 1988, or such later
date provided in paragraph (h) of this section, the plan that includes
the cash or deferred arrangement and the plan or plans to which the
qualified nonelective contributions and qualified matching contributions
are made, could be aggregated for purposes of section 410(b) (other than
the average benefit percentage test). If the plan year of the plan that
includes the cash or deferred arrangement is changed to satisfy the
requirement under section 410(b) that aggregated plans have the same
plan year, the qualified nonelective contributions and qualified
matching contributions may be taken into account in the resulting short
plan year only if the contributions satisfy the requirements of
paragraph (b)(4)(i) of this section with respect to the short year as if
the contributions were elective contributions and the aggregated plans
could otherwise be aggregated for purposes of section 410(b).
(6) Examples. The provisions of this paragraph (b) are illustrated
by the following examples.
Example 1. (i) Employees A, B, and C are eligible employees who earn
$30,000, $15,000, and $10,000, respectively, in 1989. ln addition,
their employer, X, contributes a bonus of up to 10 percent of their
regular compensation to a trust under a profit-sharing plan that
includes a cash or deferred arrangement. Under the arrangement, each
eligible employee may elect to receive none, all, or any part of the 10
percent in cash. The employer contributes the remainder to the trust.
The cash portion of the bonus, if any, is paid after the end of the plan
year. The 10 percent is therefore not included in compensation until
the year paid. Employee A is highly compensated. For the 1989 plan
year, A, B, and C make the following elections:
(ii) The ratios of employer contributions to the trust on behalf of
each eligible employee to the employee's compensation for the plan year
(calculated separately for each employee) are:
(iii) The actual deferral percentage for the highly compensated group
(Employee A) is 5.93 percent. The actual deferral percentage for the
nonhighly compensated group is 4.75 percent ((5%+4.5%)/2)). Because
5.93 percent is less than 5.94 percent (4.75% multiplied by 1.25), the
first percentage test is satisfied.
Example 2. (i) The facts are the same as in Example 1, except that
elective contributions are made pursuant to a salary reduction agreement
and no bonuses are paid. Compensation includes amounts that are
contributed by salary reduction. In addition, A defers $2,025. Thus,
the compensation and elective contributions for A, B, and C are:
(ii) The actual deferral percentage for the highly compensated group
(Employee A) is 6.75 percent. The actual deferral percentage for the
nonhighly compensated group is 4.75 percent ((5.00%+4.50%)/2). Because
6.75 percent exceeds 5.94 percent (4.75 1.25), the first percentage test
is not satisfied. However, since the actual deferral percentage equals
the maximum percentage allowed under the second percentage test,
(4.75+2=6.75), the second percentage test is satisfied.
Example 3. (i) Employees D through K are eligible employees in
Employer A's profit-sharing plan that contains a cash or deferred
arrangement. Each eligible employee may elect to defer up to six
percent of compensation under the cash or deferred arrangement.
Employees D and E are highly compensated. The compensation, elective
contributions, and actual deferral ratios of these employees for the
1989 plan year are shown below:
(ii) The actual deferral percentage for the highly compensated group
is 5.5 percent. The actual deferral percentage for the nonhighly
compensated group is 3.71 percent. Because 5.5 percent is greater than
4.64 percent (3.71% 1.25), the first percentage test is not satisfied.
However, because 5.5 percent is less than 5.71 percent (the lesser of
3.71%+2 or 3.71% 2), the second percentage test is satisfied.
Example 4. (i) Employer D maintains a profit-sharing plan that
contains a cash or deferred arrangement. The following amounts are
contributed under the plan:
(A) Six percent of each employee's compensation. These contributions
are not qualified nonelective contributions (QNCs).
(B) Two percent of each employee's compensation. These contributions
are QNCs.
(C) Three percent of each employee's compensation that the employee
may elect to receive as cash or to defer under the plan.
(ii) For the 1990 plan year, the compensation, elective
contributions, and actual deferral ratios of employees M through S were:
(iii) Both types of nonelective contributions are made for all
employees. Thus, both the six percent and the two percent employer
contributions satisfy the requirements of section 401(a)(4) and
paragraph (b)(5)(i) of this section.
(iv) The elective contributions alone do not satisfy the special
rules in paragraph (b)(4) of this section because the actual deferral
percentage for the highly compensated group, consisting of employees M
and N, is 2.5 percent and the actual deferral percentage for the
nonhighly compensated group is 0.6 percent. However, the two percent
QNCs may be taken into account in applying the special rules. The six
percent nonelective contributions may not be taken into account because
they are not QNCs.
(v) If the two percent QNCs are taken into account, the actual
deferral percentage for the highly compensated group is 4.5 percent, and
the actual deferral percentage for the nonhighly compensated group is
2.6 percent. Because 4.5 percent is not more than two percentage points
greater than 2.6 percent, and not more than two times 2.6, the actual
deferral percentage test of section 401(k)(3) and paragraph (b)(2) of
this section is satisfied. Thus, the plan satisfies this paragraph (b).
Example 5. (i) Employer N maintains a plan that contains a cash or
deferred arrangement. The plan year and the employer's taxable year are
the calendar year. The plan provides for employee contributions,
elective contributions, matching contributions, and qualified
nonelective contributions (QNCs), all of which meet the applicable
requirements of section 401(a)(4). Matching contributions on behalf of
nonhighly compensated employees are qualified matching contributions
(QMACs). Matching contributions on behalf of highly compensated
employees are not QMACs. For the 1988 plan year, elective contributions
and matching contributions with respect to highly compensated and
nonhighly compensated employees are shown in the following chart.
(ii) The plan fails to meet the requirements of section 401(k)(3)(A)
because 15 percent is more than 125 percent of, and more than two
percentage points greater than, 11 percent. However, the plan provides
that QMACs may be used to meet the requirements of section
401(k)(3)(A)(ii) to the extent needed under that section. Under this
provision, the plan takes QMACs of one percent of compensation into
account for each nonhighly compensated employee in applying the actual
deferral percentage test. After this adjustment, the actual deferral
and actual contribution percentages are as follows:
(iii) The elective contributions and QMACs taken into account under
section 401(k) meet the requirements of section 401(k)(3)(A)(ii) because
15 percent is 125 percent of 12 percent. The remaining matching
contributions meet the requirements of section 401(m) because five
percent is 125 percent of four percent.
(c) Nonforfeitability requirement -- (1) General rule. A cash or
deferred arrangement satisfies this paragraph (c) only if the elective
contributions meet each of the following requirements:
(i) Each employee's right to the amount attributable to elective
contributions is immediately nonforfeitable within the meaning of
section 411, and would be nonforfeitable under the plan regardless of
the age and service of the employee or whether the employee is employed
on a specific date. A contribution that is subject to forfeitures or
suspensions permitted by section 411(a)(3) does not satisfy the
requirements of this paragraph (c).
(ii) The contributions are disregarded for purposes of applying
section 411(a) to other contributions or benefits.
(iii) The contributions remain nonforfeitable even if the employee
makes no additional elective contributions under a cash or deferred
arrangement.
(2) Example. The provisions of this paragraph (c) are illustrated by
the following example:
Example. (i) Employees B and C are covered by Employer Y's stock
bonus plan, which includes a cash or deferred arrangement. Under the
plan, Employer Y makes a nonelective contribution on behalf of each
employee equal to four percent of compensation. All employees
participating in the plan have a nonforfeitable right to a percentage of
their accrued benefit derived from this contribution as shown in the
following table:
(ii) B and C have three and six years of service, respectively.
Employer Y also permits employees to elect to defer up to 6 percent of
compensation through salary reduction agreements. Amounts deferred
under these agreements are nonforfeitable at all times. In accordance
with paragraph (c)(1)(i) of this section, the nonforfeitable percentage
of Employer Y's nonelective contribution on behalf of B and C may not be
treated as a qualified nonelective contribution under paragraph (b)(3)
of this section, because these amounts are nonforfeitable by reason of
the completion by B and C of a stated number of years of service, and
not regardless of the age and service of B and C.
(d) Distribution limitation -- (1) General rule. A cash or deferred
arrangement satisfies this paragraph (d) only if amounts attributable to
elective contributions may not be distributed before one of the
following events, and any distributions so permitted also satisfy the
requirements of paragraphs (d) (2) through (6) of this section (to the
extent applicable):
(i) The employee's retirement, death, disability, or separation from
service.
(ii) In the case of a profit-sharing or stock bonus plan, the
employee's attainment of age 59 1/2, or the employee's hardship.
(iii) For plan years beginning after December 31, 1984, the
termination of the plan.
(iv) For plan years beginning after December 31, 1984, the date of
the sale or other disposition by a corporation of substantially all the
assets (within the meaning of section 409(d)(2)) used by the corporation
in a trade or business of the corporation to an unrelated corporation.
(v) For plan years beginning after December 31, 1984, the date of the
sale or other disposition by a corporation of its interest in a
subsidiary (within the meaning of section 409(d)(3)) to an unrelated
entity or individual.
(2) Rules applicable to hardship distributions -- (i) Distribution
must be on account of hardship. A distribution is treated as made after
an employee's hardship for purposes of paragraph (d)(1)(ii) of this
section only if it is made on account of the hardship. For purposes of
this rule, a distribution is made on account of hardship only if the
distribution both is made on account of an immediate and heavy financial
need of the employee and is necessary to satisfy the financial need.
The determination of the existence of an immediate and heavy financial
need and of the amount necessary to meet the need must be made in
accordance with nondiscriminatory and objective standards set forth in
the plan. See section 411(d)(6) and the regulations thereunder.
(ii) Limit on distributable amount. For plan years beginning after
December 31, 1988, a distribution on account of hardship must be limited
to the distributable amount. The distributable amount is equal to the
employee's total elective contributions as of the date of distribution,
reduced by the amount of previous distributions on account of hardship.
If the plan so provides, the employee's total elective contributions
used in determining the distributable amount may be increased by income
allocable to elective contributions, by amounts treated as elective
contributions under paragraph (b)(5) of this section, and by income
allocable to amounts treated as elective contributions. The
distributable amount may only include amounts that were credited to the
employee's account as of a date specified in the plan that is no later
than December 31, 1988, or if later the end of the last plan year ending
before July 1, 1989 (or such later date provided in paragraph (h) of
this section). g
(iii) General hardship distribution standards -- (A) Immediate and
heavy financial need. Whether an employee has an immediate and heavy
financial need is to be determined based on all relevant facts and
circumstances. Generally, for example, the need to pay the funeral
expenses of a family member would constitute an immediate and heavy
financial need. A distribution made to an employee for the purchase of
a boat or television would generally not constitute a distribution made
on account of an immediate and heavy financial need. A financial need
may be immediate and heavy even if it was reasonably foreseeable or
voluntarily incurred by the employee.
(B) Distribution necessary to satisfy financial need. A distribution
is not treated as necessary to satisfy an immediate and heavy financial
need of an employee to the extent the amount of the distribution is in
excess of the amount required to relieve the financial need or to the
extent the need may be satisfied from other resources that are
reasonably available to the employee. This determination generally is
to be made on the basis of all relevant facts and circumstances. For
purposes of this paragraph, the employee's resources are deemed to
include those assets of the employee's spouse and minor children that
are reasonably available to the employee. Thus, for example, a vacation
home owned by the employee and the employee's spouse, whether as
community property, joint tenants, tenants by the entirety, or tenants
in common, generally will be deemed a resource of the employee.
However, property held for the employee's child under an irrevocable
trust or under the Uniform Gifts to Minors Act is not treated as a
resource of the employee. The amount of an immediate and heavy
financial need may include any amounts necessary to pay any federal,
state, or local income taxes or penalties reasonably anticipated to
result from the distribution. A distribution generally may be treated
as necessary to satisfy a financial need if the employer relies upon the
employee's written representation, unless the employer has actual
knowledge to the contrary, that the need cannot reasonably be relieved:
(1) Through reimbursement or compensation by insurance or otherwise;
(2) By liquidation of the employee's assets;
(3) By cessation of elective contributions or employee contributions
under the plan; or
(4) By other distributions or nontaxable (at the time of the loan)
loans from plans maintained by the employer or by any other employer, or
by borrowing from commercial sources on reasonable commercial terms, in
an amount sufficient to satisfy the need.
For purposes of this paragraph (d)(2)(iii)(B), a need cannot
reasonably be relieved by one of the actions listed above if the effect
would be to increase the amount of the need. For example, the need for
funds to purchase a principal residence cannot reasonably be relieved by
a plan loan if the loan would disqualify the employee from obtaining
other necessary financing.
(iv) Deemed hardship distribution standards -- (A) Deemed immediate
and heavy financial need. A distribution is deemed to be on account of
an immediate and heavy financial need of the employee if the
distribution is for:
(1) Expenses for medical care described in section 213(d) previously
incurred by the employee, the employee's spouse, or any dependents of
the employee (as defined in section 152) or necessary for these persons
to obtain medical care described in section 213(d);
(2) Costs directly related to the purchase of a principal residence
for the employee (excluding mortgage payments);
(3) Payment of tuition and related educational fees for the next 12
months of post-secondary education for the employee, or the employee's
spouse, children, or dependents (as defined in section 152); or
(4) Payments necessary to prevent the eviction of the employee from
the employee's principal residence or foreclosure on the mortgage on
that residence.
(B) Distribution deemed necessary to satisfy financial need. A
distribution is deemed necessary to satisfy an immediate and heavy
financial need of an employee if all of the following requirements are
satisfied:
(1) The distribution is not in excess of the amount of the immediate
and heavy financial need of the employee. The amount of an immediate
and heavy financial need may include any amounts necessary to pay any
federal, state, or local income taxes or penalties reasonably
anticipated to result from the distribution.
(2) The employee has obtained all distributions, other than hardship
distributions, and all nontaxable (at the time of the loan) loans
currently available under all plans maintained by the employer.
(3) The plan and all other plans maintained by the employer limit the
employee's elective contributions for the next taxable year to the
applicable limit under section 402(g) for that year minus the employee's
elective contributions for the year of the hardship distribution.
(4) The employee is prohibited, under the terms of the plan or an
otherwise legally enforceable agreement, from making elective
contributions and employee contributions to the plan and all other plans
maintained by the employer for at least 12 months after receipt of the
hardship distribution. For this purpose the phrase ''all other plans
maintained by the employer'' means all qualified and nonqualified plans
of deferred compensation maintained by the employer. The phrase
includes a stock option, stock purchase, or similar plan, or a cash or
deferred arrangement that is part of a cafeteria plan within the meaning
of section 125. However, it does not include the mandatory employee
contribution portion of a defined benefit plan. It also does not
include a health or welfare benefit plan, including one that is part of
a cafeteria plan within the meaning of section 125. See
1.401(k)-1(g)(4)(i) for the continued treatment of suspended employees
as eligible employees.
(C) Commissioner may expand standards. The Commissioner may expand
the list of deemed immediate and heavy financial needs and may prescribe
additional methods for distributions to be deemed necessary to satisfy
an immediate and heavy financial need only in revenue rulings, notices,
and other documents of general applicability, and not on an individual
basis.
(3) Rules applicable to distributions upon plan termination. A
distribution may not be made under paragraph (d)(1)(iii) of this section
if the employer establishes or maintains a successor plan. For purposes
of this rule, a successor plan is any other defined contribution plan
maintained by the same employer. However, if fewer than two percent of
the employees who are eligible under the plan that includes the cash or
deferred arrangement at the time of its termination are or were eligible
under another defined contribution plan at any time during the 24 month
period beginning 12 months before the time of the termination, the other
plan is not a successor plan. The term ''defined contribution plan''
means a plan that is a defined contribution plan as defined in section
414(i), but does not include an employee stock ownership plan as defined
in section 4975(e) or 409 or a simplified employee pension as defined in
section 408(k). A plan is a successor plan only if it exists at the
time the plan including the cash or deferred arrangement is terminated
or within the period ending 12 months after distribution of all assets
from the plan.
(4) Rules applicable to distributions upon sale of assets or
subsidiary -- (i) Seller must maintain the plan. A distribution may be
made under section 401(k)(10) and paragraph (d)(1) (iv) or (v) of this
section only from a plan that the seller continues to maintain after the
disposition. This requirement is satisfied only if the purchaser does
not maintain the plan after the disposition. A purchaser maintains the
plan of the seller if it adopts the plan or otherwise becomes an
employer whose employees accrue benefits under the plan. A purchaser
also maintains the plan if the plan is merged or consolidated with, or
any assets or liabilities are transferred from the plan to, a plan
maintained by the purchaser in a transaction subject to section
414(l)(1). A purchaser is not treated as maintaining the plan merely
because a plan that it maintains accepts rollover contributions of
amounts distributed by the plan.
(ii) Employee must continue employment. A distribution may be made
under paragraph (d)(1) (iv) or (v) of this section only to an employee
who continues employment with the purchaser of assets or with the
subsidiary, whichever is applicable.
(iii) Distribution must be in connection with disposition of assets
or subsidiary. Elective contributions may not be distributed under
paragraph (d)(1) (iv) or (v) of this section except in connection with
the disposition that results in the employee's transfer to the
purchaser. Whether a distribution is made in connection with the
disposition of assets or a subsidiary depends on all of the facts and
circumstances. Except in unusual circumstances, however, a distribution
will not be treated as having been made in connection with a disposition
unless it was made by the end of the second calendar year after the
calendar year in which the disposition occurred.
(iv) Definitions -- (A) Substantially all. For purposes of paragraph
(d)(1)(iv) of this section, the sale of ''substantially all'' the assets
used in a trade or business means the sale of at least 85 percent of the
assets.
(B) Unrelated employer. For purposes of paragraph (d)(1) (iv) and
(v) of this section, an ''unrelated'' entity or individual is one that
is not required to be aggregated with the seller under section 414 (b),
(c), (m), or (o) after the sale or other disposition.
(5) Lump sum requirement for certain distributions. After March 31,
1988, a distribution may be made under paragraph (d)(1) (iii), (iv), or
(v) of this section only if it is a lump sum distribution. The term
''lump sum distribution'' has the meaning provided in section 402(e)(4),
without regard to subparagraphs (A) (i) through (iv), (B), and (H) of
that section.
(6) Rules applicable to all distributions -- (i) Impermissible
distributions. Amounts attributable to elective contributions may not
be distributed on account of any event not described in this paragraph
(d), such as completion of a stated period of plan participation or the
lapse of a fixed number of years. For example, if excess deferrals (and
income) for an employee's taxable year are not distributed within the
time prescribed in 1.402(g)-1(e) (2) or (3), the amounts may be
distributed only on account of an event described in this paragraph (d).
(ii) Deemed distributions. The cost of life insurance (P.S. 58
costs) is not treated as a distribution for purposes of section
401(k)(2) and this paragraph. The making of a loan is not treated as a
distribution, even if the loan is secured by the employee's accrued
benefit attributable to elective contributions or is includible in the
employee's income under section 72(p). However, the reduction, by
reason of default on a loan, of an employee's accrued benefit derived
from elective contributions is treated as a distribution.
(iii) ESOP dividend distributions. A plan does not fail to satisfy
the requirements of this paragraph (d) merely by reason of a dividend
distribution described in section 404(k)(2).
(iv) Limitations apply after transfer. The limitations of this
paraqraph (d) generally continue to apply to amounts attributable to
elective contributions (including amounts treated as elective
contributions) that are transferred to another qualified plan of the
same or another employer. Thus, the transferee plan will generally fail
to satisfy the requirements of section 401(a) and this section if
transferred amounts may be distributed before the times specified in
this paragraph (d). The limitations of paragraph (d) of this section
cease to apply after the transfer, however, if the amounts could have
been distributed at the time of the transfer (other than on account of
hardship), and the transfer is an elective transfer described in
1.411(d)-4, Q&A-3(b)(1).
(v) Required consent. A distribution may be made under this
paragraph (d) only if any consent or election required under section
411(a)(11) or 417 is obtained.
(7) Examples. The provisions of this paragraph (d) are illustrated
by the following examples:
Example 1. Employer C maintains a profit-sharing plan that includes
a cash or deferred arrangement. Elective contributions under the
arrangement may be withdrawn for any reason after two years following
the end of the plan year in which the contributions were made. Because
the plan permits distributions of elective contributions before the
occurrence of one of the events specified in section 401(k)(2)(B) and
this paragraph (d), the plan includes a nonqualified cash or deferred
arrangement and the elective contributions are currently includible in
income under section 402.
Example 2. Employer D maintains a pre-ERISA money purchase plan that
includes a cash or deferred arrangement. Elective contributions under
the arrangement may be distributed to an employee on account of
hardship. Under paragraph (d)(1) of this section, hardship is a
distribution event only in a profit-sharing or stock bonus plan. Since
elective contributions under the arrangement may be distributed before a
distribution event occurs, the cash or deferred arrangement does not
satisfy this paragraph (d), and is not a qualified cash or deferred
arrangement. Moreover, the plan is not a qualified plan because a
pension plan may not provide for payment of benefits upon hardship. See
1.401-1(b)(1)(i).
(e) Additional requirements for qualified cash or deferred
arrangements -- (1) Qualified profit-sharing, stock bonus, pre-ERISA
money purchase or rural cooperative plan requirement. A cash or
deferred arrangement satisfies this paragraph (e) only if the plan of
which it is a part is a profit-sharing, stock bonus, pre-ERISA money
purchase or rural cooperative plan that otherwise satisfies the
requirements of section 401(a) (taking into account the cash or deferred
arrangement). A plan that includes a cash or deferred arrangement may
provide for other contributions, including employer contributions (other
than elective contributions), employee contributions, or both. See
paragraph (e)(7) of this section, however, for limitations on the extent
to which elective contributions under a cash or deferred arrangement may
be taken into account in determining whether the other contributions
satisfy the requirements of section 401(a).
(2) Cash availability requirement. A cash or deferred arrangement
satisfies this paragraph (e) only if the arrangement provides that the
amount that each eligible employee may defer as an elective contribution
is available to the employee in cash. Thus, for example, if an eligible
employee is provided the option to receive a taxable benefit (other than
cash) or to have the employer contribute on the employee's behalf to a
profit-sharing plan an amount equal to the value of the taxable benefit,
the arrangement is not a qualified cash or deferred arrangement.
Similarly, if an employee has the option to receive a specified amount
in cash or to have the employer contribute an amount in excess of the
specified cash amount to a profit-sharing plan on the employee's behalf,
any contribution made by the employer on the employee's behalf in excess
of the specified cash amount is not treated as made pursuant to a
qualified cash or deferred arrangement. This cash availability
requirement applies even if the cash or deferred arrangement is part of
a cafeteria plan within the meaning of section 125.
(3) Separate accounting requirement -- (i) General rule. A cash or
deferred arrangement satisfies this paragraph (e) only if the portion of
an employee's benefit subject to the requirements of paragraphs (c) and
(d) of this section is determined by an acceptable separate accounting
between that portion and any other benefits. Separate accounting is not
acceptable unless gains, losses, withdrawals, and other credits or
charges are separately allocated on a reasonable and consistent basis to
the accounts subject to the requirements of paragraphs (c) and (d) of
this section and to other accounts. Subject to section 401(a)(4),
forfeitures are not required to be allocated to the accounts in which
benefits are subject to paragraphs (c) and (d) of this section.
(ii) Failure to satisfy separate accounting requirement. The
requirements of paragraph (e)(3)(i) of this section are treated as
satisfied if all amounts held under a plan that includes a cash or
deferred arrangement or under another plan, contributions under which
are taken into account under the arrangement for purposes of paragraph
(b) of this section are treated as attributable to elective
contributions subject to the requirements of paragraphs (c) and (d) of
this section.
(4) Limitations on cash or deferred arrangements of state and local
governments and tax-exempt organizations -- (i) A cash or deferred
arrangement does not satisfy the requirements of this paragraph (e) if
the arrangement is adopted:
(A) After May 6, 1986, by a state or local government or political
subdivision thereof, or any agency or instrumentality thereof (''a
governmental unit''), or
(B) After July 1, 1986, by any organization exempt from tax under
subtitle A of the Internal Revenue Code.
For purposes of paragraph (e)(4) of this section, whether an
organization is exempt from tax under subtitle A of the Internal Revenue
Code is determined without regard to section 414 (b), (c), (m) or (o).
(ii) A cash or deferred arrangement is treated as adopted after the
dates described in paragraph (e)(4)(i) of this section with respect to
all employees of any employer that adopts the arrangement after such
dates. If an employer adopted an arrangement prior to such dates, all
employees of the employer may participate in the arrangement.
(iii) For purposes of this paragraph (e)(4), an employer that has
made a legally binding commitment to adopt a cash or deferred
arrangement is treated as having adopted the arrangement on that date.
(iv) If a governmental unit adopted a cash or deferred arrangement
before May 7, 1986, then any cash or deferred arrangement adopted by the
unit at any time is treated as adopted before that date.
(v) This paragraph (e)(4) does not apply to a rural cooperative plan.
(vi) For purposes of this paragraph (e)(4), an employee
representative is treated as an employee of a tax exempt employer even
if the employee could be treated as an employee by another employer
under 1.413-1(i)(1).
(5) One-year eligibility requirement. For plan years beginning after
December 31, 1988, or such later date provided in paragraph (h) of this
section, a cash or deferred arrangement satisfies this paragraph (e)
only if no employee is required to complete a period of service greater
than one year (determined without regard to section 410(a)(1)(B)(i))
with the employer maintaining the plan to be eligible to make an
election under the arrangement.
(6) Other benefits not contingent upon elective contributions -- (i)
General rule. For plan years beginning after December 31, l988, or such
later date provided in paragraph (h) of this section, a cash or deferred
arrangement satisfies this paragraph (e) only if no other benefit is
conditioned (directly or indirectly) upon the employee's electing to
make or not to make elective contributions under the arrangement. The
preceding sentence does not apply to any matching contribution (as
defined in section 401(m)) made by reason of such an election or to any
benefit that is provided at the employee's election under a plan
described in section 125(d) in lieu of an elective contribution under a
qualified cash or deferred arrangement.
(ii) Definition of other benefits. Other benefits include, but are
not limited to, benefits under a defined benefit plan; nonelective
employer contributions under a defined contribution plan; the
availability, cost, or amount of health benefits; vacations or vacation
pay; life insurance; dental plans; legal services plans; loans
(including plan loans); financial planning services; subsidized
retirement benefits; stock options; property subject to section 83;
and dependent care assistance. Also, increases in salary and bonuses
(other than those actually subject to the cash or deferred election) are
benefits for purposes of this paragraph (e)(6). The ability to make
after-tax employee contributions is a benefit, but that benefit is not
contingent upon an employee's electing to make or not make elective
contributions under the arrangement merely because the amount of
elective contributions reduces dollar-for-dollar the amount of after-tax
employee contributions that may be made.
(iii) Effect of certain statutory limits. A benefit under a defined
benefit plan that is contingent upon elective contributions solely by
reason of the combined plan fraction of section 415(e) is not treated as
contingent for purposes of this paragraph (e)(6). Similarly, any
benefit under an excess benefit plan described in section 3(36) of the
Employee Retirement Income Security Act of l974 that is dependent on the
employee's electing to make or not to make elective contributions is not
treated as contingent.
(iv) Nonqualified deferred compensation. Participation in a
nonqualified deferred compensation plan is treated as contingent for
purposes of this paragraph (e)(6) only to the extent that an employee
may receive additional deferred compensation under the nonqualified plan
to the extent the employee makes or does not make elective
contributions. Deferred compensation under a nonqualified plan of
deferred compensation that is dependent on an employee's having made the
maximum elective deferrals under section 402(g) or the maximum elective
contributions permitted under the terms of the plan also is not treated
as contingent.
(v) Plan loans and distributions. A loan or distribution of elective
contributions is not a benefit conditioned on an employee's electing to
make or not make elective contributions under the arrangement merely
because the amount of the loan or distribution is based on the amount of
the employee's account balance.
(7) Coordination with other plans. For plan years beginning after
December 31, 1988, or such later date provided in paragraph (h) of this
section, a cash or deferred arrangement satisfies this paragraph (e)
only if no elective contributions (or qualified nonelective or qualified
matching contributions treated as elective contributions under paragraph
(b)(5) of this section) under the arrangement are taken into account for
purposes of determining whether any other contributions under any plan
(including the plan to which the elective contributions are made)
satisfy the requirements of section 401(a). For example, elective
contributions under a cash or deferred arrangement generally may not be
taken into account in determining whether a plan satisfies the minimum
contribution or benefit requirements of section 416. See 1.416-1,
M-20. However, qualified nonelective contributions that are treated as
elective contributions for purposes of section 401(k)(3) under paragraph
(b)(5) of this section may be used to enable a plan to satisfy the
minimum contribution or benefit requirements under section 416. See
1.416-1, M-18. This paragraph (e) does not apply for purposes of
determining whether a plan satisfies the average benefit percentage
requirement of section 410(b)(2)(A)(ii). See also 1.401(m)-1(b)(5) for
circumstances under which elective contributions may be used to
determine whether a plan satisfies the requirements of section 401(m).
(8) Recordkeeping requirements. For plan years beginning after
December 31, 1986, or such later date provided in paragraph (h) of this
section, a cash or deferred arrangement satisfies this paragraph (e)
only if the employer maintains the records necessary to demonstrate
compliance with the applicable nondiscrimination requirements of
paragraph (b) of this section, including the extent to which qualified
nonelective contributions and qualified matching contributions are taken
into account.
(9) Consistent application of separate line of business rules. If an
employer is treated as operating qualified separate lines of business
under section 414(r) in accordance with 1.414(r)-1(b) for purposes of
applying section 410(b), and applies the special rule for employer-wide
plans in 1.414(r)-1(c)(2)(ii) to the portion of the plan that consists
of contributions under the cash or deferred arrangement, then the
requirements of section 401(k) and this section must be applied on an
employer-wide rather than a qualified-separate-line-of-business basis to
all of the plans or portions of plans taken into account in determining
whether the cash or deferred arrangement is a qualified cash or deferred
arrangement, regardless of whether those plans or portions of plans also
satisfy the requirements necessary to apply the special rule in
1.414(r)-1(c)(2)(ii). Conversely, if an employer is treated as operating
qualified separate lines of business under section 414(r) in accordance
with 1.414(r)-1(b) for purposes of applying section 410(b), and does
not apply the special rule for employer-wide plans in
1.414(r)-1(c)(2)(ii) to the portion of the plan that consists of
contributions under the cash or deferred arrangement, then the
requirements of section 401(k) and this section must be applied on a
qualified-separate-line-of-business rather than an employer-wide basis
to all of the plans or portions of plans taken into account in
determining whether the cash or deferred arrangement is a qualified cash
or deferred arrangement, regardless of whether one or more of those
plans or portions of plans is tested under the special rule
1.414(r)-1(c)(2)(ii). This requirement applies solely for purposes of
determining whether the cash or deferred arrangement is a qualified cash
or deferred arrangement under section 401(k) and this section. The
rules of this paragraph are illustrated by the following example.
Example. (i) Employer A maintains a profit-sharing plan that includes
a cash or deferred arrangement in which all of the employees of Employer
A are eligible to participate. Employer A is treated as operating
qualified separate lines of business under section 414(r) in accordance
with 1.414(r)-1(b) for purposes of applying section 410(b). However,
Employer A applies the special rule for employer-wide plans in
1.414(r)-1(c)(2)(ii) to the portion of its profit-sharing plan that
consists of elective contributions under the cash or deferred
arrangement (and to no other plans or portions of plans). Employer A
makes qualified nonelective contributions to the profit-sharing plan for
the 1995 plan year, and the profit-sharing plan provides that these
qualified nonelective contributions may be used to satisfy the actual
deferral percentage test.
(ii) Under these facts, the requirements of sections 401(a)(4) and
410(b) must be applied on an employer-wide rather than a
qualified-separate-line-of-business basis in determining whether the
qualified nonelective contributions made to the profit-sharing plan
satisfy the requirements of 1.401(k)-1(b)(5), and thus whether they may
be taken into account under the actual deferral percentage test.
Therefore, in order for the nonelective contributions to be used to
satisfy the actual deferral percentage test, both (1) the total amount
of nonelective contributions under the profit-sharing plan, including
the qualified nonelective contributions to be used to satisfy the actual
deferral percentage test, and (2) the total amount of nonelective
contributions under the profit-sharing plan, excluding the qualified
nonelective contributions to be used to satisfy the actual deferral
percentage test, must satisfy the requirements of section 401(a)(4) on
an employer-wide basis. Of course, in order for the profit-sharing plan
to satisfy section 401(a), it must still satisfy sections 410(b) and
401(a)(4) on a qualified-separate-line-of-business basis.
(f) Correction of excess contributions -- (1) General rule -- (i)
Permissible correction methods. A cash or deferred arrangement does not
fail to satisfy the requirements of section 401(k)(3) or paragraph
(b)(2) of this section with respect to the amount of elective
contributions under the arrangement if the employer, in accordance with
the terms of the plan that includes the cash or deferred arrangement and
paragraph (b)(5) of this section, makes qualified nonelective
contributions or qualified matching contributions that are treated as
elective contributions under the arrangement and that, in combination
with the elective contributions, satisfy the requirements of paragraph
(b)(2) of this section. In addition, a cash or deferred arrangement
does not fail to satisfy the requirements of section 401(k)(3) or
paragraph (b)(2) of this section for a plan year with respect to the
amount of the elective contributions under the arrangement if, in
accordance with the terms of the plan that includes the cash or deferred
arrangement, excess contributions are recharacterized in accordance with
paragraph (f)(3) of this section, or excess contributions (and income
allocable thereto) are distributed in accordance with paragraph (f)(4)
of this section.
(ii) Combination of correction methods. A plan may use any of the
correction methods described in paragraph (f)(1)(i) of this section, may
limit elective contributions in a manner designed to prevent excess
contributions from being made, or may use a combination of these
methods, to avoid or correct excess contributions. Thus, for example, a
portion of the excess contributions for a highly compensated employee
may be recharacterized under paragraph (f)(3) of this section, and the
remaining portion of the excess contributions may be distributed under
paragraph (f)(4) of this section. A plan may require or permit a highly
compensated employee to elect whether any excess contributions are to be
recharacterized or distributed.
(iii) Impermissible correction methods. Excess contributions for a
plan year may not remain unallocated, or be allocated to a suspense
account for allocation to one or more employees in any future year. See
paragraph (f)(6) of this section with respect to the effects of a
failure to correct excess contributions.
(iv) Partial distributions. Any distribution of less than the entire
amount of excess contributions with respect to any highly compensated
employee is treated as a pro rata distribution of excess contributions
and allocable income or loss.
(2) Amount of excess contributions. The amount of excess
contributions for a highly compensated employee for a plan year is the
amount (if any) by which the employee's elective contributions must be
reduced for the employee's actual deferral ratio to equal the highest
permitted actual deferral ratio under the plan. To calculate the
highest permitted actual deferral ratio under a plan, the actual
deferral ratio of the highly compensated employee with the highest
actual deferral ratio is reduced by the amount required to cause the
employee's actual deferral ratio to equal the ratio of the highly
compensated employee with the next highest actual deferral ratio. If a
lesser reduction would enable the arrangement to satisfy the actual
deferral percentage test, only this lesser reduction may be made. This
process must be repeated until the cash or deferred arrangement
satisfies the actual deferral percentage test. The highest actual
deferral ratio remaining under the plan after leveling is the highest
permitted actual deferral ratio. In no case may the amount of excess
contributions to be recharacterized or distributed for a plan year with
respect to any highly compensated employee exceed the amount of elective
contributions made on behalf of the highly compensated employee for the
plan year.
(3) Recharacterization of excess contributions -- (i) General rule.
Excess contributions are recharacterized in accordance with this
paragraph (f)(3) only if the excess contributions are treated as
described in paragraph (f)(3)(ii) of this section, and all of the
conditions set forth in paragraph (f)(3)(iii) of this section are
satisfied.
(ii) Treatment of recharacterized excess contributions. Excess
contributions recharacterized under this paragraph (f)(3) are includible
in the employee's gross income on the earliest dates any elective
contribution made on behalf of the employee during the plan year would
have been received by the employee had the employee originally elected
to receive the amounts in cash, or on such later date permitted in
paragraph (f)(3)(iv) of this section. The recharacterized excess
contributions must be treated as employee contributions for purposes of
section 72, section 401(a)(4) and 401(m), and paragraphs (b) and (d) of
this section. This requirement is not treated as satisfied unless:
(A) The payor or plan administrator reports the recharacterized
excess contributions as employee contributions to the Internal Revenue
Service and the employee by --
(1) Timely providing such forms as the Commissioner may designate to
the employer and to employees whose excess contributions are
recharacterized under this paragraph (f)(3); and
(2) Timely taking such other action as the Commissioner may require;
and
(B) The plan administrator accounts for the amounts as contributions
by the employee for purposes of sections 72 and 6047.
Recharacterized excess contributions continue to be treated as
employer contributions that are elective contributions for all other
purposes under the Code, including sections 401(a) (other than 401(a)(4)
and 401(m)), 404, 409, 411, 415, 416, and 417, recharacterized excess
contributions remain subject to the requirements of paragraph (c) of
this section; must be deducted under section 404; and are treated as
employer contributions described in section 415(c)(2)(A) and 1.415-6(b).
In addition, these amounts are not treated as compensation for purposes
of sections 404 and 415, and may be treated as compensation for purposes
of sections 401(a)(4), 401(a)(5), 401(k), 401(l) and 414(s) only to the
extent that elective contributions may be treated, and are treated under
the plan, as compensation. Recharacterized excess contributions that
relate to plan years ending on or before October 24, 1988, may be
treated as either employer contributions or employee contributions for
purposes of paragraph (d) of this section. The amount of excess
contributions included in an employee's gross income is reduced as
provided under paragraph (f)(5)(i)(B) of this section.
(iii) Additional rules -- (A) Time of recharacterization. Excess
contributions may not be recharacterized under this paragraph (f)(3)
after the later of October 24, 1988, or 2 1/2 months after the close of
the plan year to which the recharacterization relates.
Recharacterization is deemed to have occurred on the date on which the
last of those highly compensated employees with excess contributions to
be recharacterized is notified in accordance with paragraph
(f)(3)(ii)(A) of this section. The Commissioner may designate the means
by which this notification is to be provided.
(B) Employee contributions must be permitted under plan. The amount
of recharacterized excess contributions, in combination with the
employee contributions actually made by the highly compensated employee,
may not exceed the maximum amount of employee contributions (determined
without regard to the actual contribution percentage test of section
401(m)(2)) that the highly compensated employee could have made under
the provisions of the plan in effect on the first day of the plan year
in the absence of recharacterization. See 1.401(m)-1(a)(2) for
requirements relating to the availability of employee contributions.
(C) Plans under which excess contributions may be recharacterized.
For plan years beginning after December 31, 1991, elective contributions
may be recharacterized under this paragraph (f)(3) only under the plan
under which they are made or under a plan with which that plan could be
aggregated for purposes of section 410(b) (other than the average
benefit percentage test). For plan years beginning before that date and
after December 31, 1988, or such later date provided under paragraph (h)
of this section, elective contributions may be recharacterized under
this paragraph (f)(3) only under the plan under which they are made or
under a plan with the same plan year as that plan.
(iv) Transition rules. If amounts recharacterized for any plan year
were not previously included in income, they must be treated as received
by employees for income tax purposes on the first day of the first plan
year ending after 1987. If notice of recharacterization was provided to
the affected highly compensated employees by October 24, 1988,
recharacterization is deemed to have occurred 2 1/2 months after the
close of the plan year and the penalty tax of section 4979 will not be
imposed. The rules in this paragraph (f)(3)(iv) are effective only for
plan years ending before August 9, 1988.
(v) Example. The provisions of this paragraph (f)(3) are illustrated
by the following example:
Example. (i) Employer X maintains Plan Y, a calendar year
profit-sharing plan that includes a qualified cash or deferred
arrangement. Under Plan Y, each eligible employee may elect to defer up
to 10 percent of compensation under a salary reduction agreement. An
eligible employee may also make employee contributions of up to 10
percent of compensation. X pays the amounts deferred to the trust on
the last day of each month. Salaries are paid on the same date.
(ii) (A) In January 1989, X determines that during 1988 the
compensation and actual deferral ratios (ADRs) of X's six employees were
as follows:
(B) The average deferral percentage (ADP) for X's highly compensated
group, A and B, is 8.75 percent ((10.00%+7.50%)/2). The ADP for X's
other employees is 3 percent ((5.00%+0% + 3.50% + 3.50%)/4). Because
8.75 percent is more than 2 times 3 percent and more than 3 percent plus
2 percentage points, the plan fails to satisfy paragraph (b)(2) of this
section. Neither A nor B made any employee contributions for the year.
(iii) Plan Y provides that each highly compensated participant will
have excess contributions, as defined in paragraph (g)(7) of this
section, recharacterized. The amount to be recharacterized will be
determined according to the method described in paragraph (f)(2) of this
section.
(iv) In order to satisfy paragraph (b)(2) of this section, Plan Y
must reduce the ADP for X's highly compensated employees to not more
than 5 percent. This will satisfy the test described in paragraph
(b)(2) of this section, because 5 percent is not more than 2 times 3
percent and is not more than 2 percentage points greater than 3 percent.
Plan Y first reduces A's ADR to 7.5 percent (the ADR of the highly
compensated employee having the next highest ADR). Since this is not
sufficient to satisfy the ADP test in paragraph (b)(2) of this section,
the ADR of both A and B must be reduced to 5 percent.
(v) The maximum dollar amount that may be deferred by each employee
is determined by using the formula D=(ADR S) where D is the maximum
allowable deferral, ADR is the reduced ADR, and S is the compensation.
Thus, A's maximum allowable deferral is $3,500 (.05 $70,000), and B's
maximum allowable deferral is $3,000 (.05 $60,000). The balance of the
original deferrals by A and B ($3,500 and $1,500 respectively) must be
included in their taxable wages for 2988, the year in which X would have
paid cash to A and B.
(vi) A deferred $583.33 per month, except for January, February,
March, and April, when A deferred $583.34. Pursuant to the first-in,
first-out rule in paragraph (f)(3)(ii) of this section, the deferrals
made in January, February, March, April, and May, as well as $583.31 of
the deferral made in June, are treated as employee contributions. A
similar procedure is undertaken with respect to B. X and the plan
administrator provide A and B with the forms and notices that the
Commissioner requires. If A and B had already filed income tax returns
for 1988, they must file amended returns. If Plan Y had a plan year
ending November 30, 1987, and A and B had made elective deferrals in
December 1987, they would also have to file amended returns for 1987.
In addition, the plan administrator must satisfy paragraph (f)(3)(ii)(B)
of this section. Of course, the actual contribution percentage test of
section 401(m)(2) must be satisfied for 1988, taking the recharacterized
amounts into account.
(4) Corrective distribution of excess contributions (and income) --
(i) General rule. Excess contributions (and income allocable thereto)
are distributed in accordance with this paragraph (f)(4) only if the
excess contributions and allocable income are designated by the employer
as a distribution of excess contributions (and income), and are
distributed to the appropriate highly compensated employees after the
close of the plan year in which the excess contributions arose and
within 12 months after the close of that plan year. In the event of a
complete termination of the plan during the plan year in which an excess
contribution arose, the corrective distribution must be made as soon as
administratively feasible after the date of termination of the plan, but
in no event later than 12 months after the date of termination. If the
entire account balance of a highly compensated employee is distributed
during the plan year in which an excess contribution arose, the
distribution is deemed to have been a corrective distribution of excess
contributions (and income) to the extent that a corrective distribution
would otherwise have been required.
(ii) Income allocable to excess contributions -- (A) General rule.
The income allocable to excess contributions is equal to the sum of the
allocable gain or loss for the plan year and, if the plan so provides,
the allocable gain or loss for the period between the end of the plan
year and the date of distribution (the ''gap period'').
(B) Method of allocating income. A plan may use any reasonable
method for computing the income allocable to excess contributions,
provided that the method does not violate section 401(a)(4), is used
consistently for all participants and for all corrective distributions
under the plan for the plan year, and is used by the plan for allocating
income to participants' accounts.
(C) Alternative method of allocating income. A plan may allocate
income to excess contributions by multiplying the income for the plan
year (and the gap period, if the plan so provides) allocable to elective
contributions and amounts treated as elective contributions by a
fraction. The numerator of the fraction is the excess contributions for
the employee for the plan year. The denominator of the fraction is
equal to the sum of:
(1) The total account balance of the employee attributable to
elective contributions and amounts treated as elective contributions as
of the beginning of the plan year; plus
(2) The employee's elective contributions and amounts treated as
elective contributions for the plan year and for the gap period if gap
period income is allocated.
(D) Safe harbor method of allocating gap period income. Under the
safe harbor method, income on excess contributions for the gap period is
equal to 10 percent of the income allocable to excess contributions for
the plan year (calculated under the method described in paragraph
(f)(4)(ii)(C)) of this section, multiplied by the number of calendar
months that have elapsed since the end of the plan year. For purposes
of calculating the number of calendar months that have elapsed under the
safe harbor method, a corrective distribution that is made on or before
the fifteenth day of the month is treated as made on the last day of the
preceding month. A distribution made after the fifteenth day of the
month is treated as made on the first day of the next month.
(iii) No employee or spousal consent required. A corrective
distribution of excess contributions (and income) may be made under the
terms of the plan without regard to any notice or consent otherwise
required under sections 411(a)(11) and 417.
(iv) Treatment of corrective distributions as employer contributions.
Excess contributions are treated as employer contributions for purposes
of sections 404 and 415 even if distributed from the plan.
(v) Tax treatment of corrective distributions -- (A) General rule.
Except as provided in paragraph (f)(4)(v) (B) or (C) of this section, a
corrective distribution of excess contributions (and income) that is
made within 2 1/2 months after the end of the plan year for which the
excess contributions were made is includible in the employee's gross
income on the earliest dates any elective contributions by the employee
during the plan year would have been received by the employee had the
employee originally elected to receive the amounts in cash. A
corrective distribution of excess contributions (and income) that is
made more than 2 1/2 months after the end of the plan year for which the
contributions were made is includible in the employee's gross income in
the employee's taxable year in which distributed. Regardless of when
the corrective distribution is made, it is not subject to the early
distribution tax of section 72(t) and is not treated as a distribution
for purposes of applying the excise tax under section 4980A. See
paragraph (f)(5)(i)(B) of this section for rules relating to the
taxation of excess contributions that reduce excess deferrals. See
paragraph (f)(6)(i) of this section for additional rules relating to the
employer excise tax on amounts distributed more than 2 1/2 months after
the end of the plan year.
(B) Rule for de minimis distributions. If the total amount of excess
contributions and excess aggregate contributions distributed to a
recipient under a plan for any plan year is less than $100 (excluding
income), a corrective distribution of excess contributions (and income)
is includible in the gross income of the recipient in the taxable year
of the recipient in which the corrective distribution is made.
(C) Rule for certain 1987 and 1988 excess contributions.
Distributions for plan years beginning in 1987 and 1988 to which the de
minimis rule of this section would otherwise apply may be reported by
the recipient, at the recipient's option, either in the year described
in paragraph (f)(4)(v)(A) of this section, or in the year described in
paragraph (f)(4)(v)(B) of this section. This special rule may be used
only for distributions made within 2 1/2 months after the close of the
plan year, but in no event later than April 17, 1989.
(vi) No reduction of required minimum distribution. A distribution
of excess contributions (and income) is not treated as a distribution
for purposes of determining whether the plan satisfies the minimum
distribution requirements of section 401(a)(9).
(5) Rules applicable to all corrections -- (i) Coordination with
distribution of excess deferrals -- (A) In general. The amount of
excess contributions to be recharacterized under paragraph (f)(3) of
this section or distributed under paragraph (f)(4) of this section with
respect to an employee for a plan year, is reduced by any excess
deferrals previously distributed to the employee for the employee's
taxable year ending with or within the plan year in accordance with
section 402(g)(2).
(B) Treatment of excess contributions that reduce excess deferrals.
Under 1.402(g)-1(e), the amount of excess deferrals that may be
distributed with respect to an employee for a taxable year is reduced by
any excess contributions previously distributed or recharacterized with
respect to the employee for the plan year beginning with or within the
taxable year. The amount of excess contributions includible in the
gross income of the employee, and the amount of excess contributions
reported by the payor or plan administrator as includible in the gross
income of the employee, does not include the amount of any reduction
under 1.402(g)-1(e)(6).
(ii) Correction of family members. The determination and correction
of excess contributions of a highly compensated employee whose actual
deferral ratio is determined under the family aggregation rules of
paragraph (g)(1)(ii)(C) of this section is accomplished by reducing the
actual deferral ratio as required under paragraph (f)(2) of this section
and allocating the excess contributions for the family group among the
family members in proportion to the elective contribution of each family
member that is combined to determine the actual deferral ratio.
(iii) Matching contributions forfeited because of excess deferral or
contribution. For purposes of section 401(k)(2)(C) and paragraph (c)(1)
of this section, a qualified matching contribution is not treated as
forfeitable merely because under the plan it is forfeited if the
contribution to which it relates is treated as an excess contribution,
excess deferral, or excess aggregate contribution.
(6) Failure to correct -- (i) Failure to correct within 2 1/2 months
after end of plan year. If a plan does not correct excess contributions
within 2 1/2 months after the close of the plan year for which the
excess contributions are made, the employer will be liable for a
10-percent excise tax on the amount of the excess contributions. See
section 4979 and 54.4979-1. Qualified nonelective contributions and
qualified matching contributions properly taken into account under
paragraph (b)(5) of this section for a plan year may enable a plan to
avoid having excess contributions, even if the contributions are made
after the close of the 2 1/2 month period.
(ii) Failure to correct within 12 months after end of plan year. If
excess contributions are not corrected within 12 months after close of
the plan year for which they were made, the cash or deferred arrangement
will fail to satisfy the requirements of section 401(k)(3) for the plan
year for which the excess contributions are made and all subsequent plan
years during which the excess contributions remain in the trust.
(7) Examples. The provisions of this paragraph (f) are illustrated
by the following examples:
Example 1. (i) The Y corporation maintains a cash or deferred
arrangement. The plan year is the calendar year. For plan year 1989,
all 10 of Y's employees are eligible to participate in the cash or
deferred arrangement. The employees' compensation, elective deferrals,
and actual deferral ratios are as shown in the following table:
(ii) Employees A, B, C, and D are highly compensated employees.
Employees E, F, G, H, I, and J are nonhighly compensated employees. The
actual deferral percentage (ADP) for the highly compensated group is
7.25 percent. The ADP for the nonhighly compensated group is 4.72
percent. These percentages do not meet the requirements of section
401(k)(3)(A)(ii).
(iii) Employees A and C have each received a distribution of excess
deferrals of $1,000. However, the ADR for employee A remains 4.0
percent and the actual deferral ratio for Employee C remains 10.0
percent. The ADP for the group of highly compensated employees remains
7.25 percent.
(iv) The ADP for the highly compensated group must be reduced to 6.72
percent. This is done by reducing the ADR of the highly compensated
employees with the highest ADR (Employees C and D) to 8.94 percent. This
makes Employee C's maximum elective contribution $6,258. This requires
a distribution or recharacterization of $742. But since $1,000 has
already been distributed as an excess deferral, no additional
distribution or recharacterization is required or permitted. Employee
D's elective contribution must be reduced by $689 ($6,500 -- .0894
($65,000)) to $5,811 through distribution or recharacterization.
Example 2. A, B, and C are highly compensated employees of Employer
R. Employer R maintains a cash or deferred arrangement. For the plan
year 1990, A, B, and C each earn $100,000 and contribute $7,000 to the
plan during the period January through June. B retires in November of
1990 and makes a withdrawal of B's entire account balance of $200,000.
In January of 1991, R computes the ADP test for its employees and learns
that the highly compensated employees should have contributed only five
percent of compensation. Since B made a contribution of $7,000 for
1990, B's contribution and compensation are used in determining the ADP
despite the subsequent $200,000 withdrawal. A, B, and C must each
receive a corrective distribution of $2,000 in order to meet the ADP
test. Since B has already withdrawn B's total account balance under the
plan, only A and C must receive a distribution of $2,000 each in order
for the plan to meet the ADP test of section 401(k)(3)(A)(ii). Pursuant
to the 1990 Form 1099-R Instructions, the plan must issue two Forms 1099
R to B, one reporting the portion of the distribution that was necessary
to correct the excess contribution (including income), and one reporting
the balance of the distribution. If B had withdrawn less than the total
account balance, B would have to withdraw the lesser of $2,000 or the
remaining account balance.
Example 3. Individual A has a child, B. Both participate in a cash
or deferred arrangement maintained by Employer X. A is one of the 10
most highly compensated employees and B is a nonhighly compensated
employee. A has compensation of $100,000 and defers $7,000 under the
cash or deferred arrangement; B has compensation of $40,000 and defers
$4,000 under the arrangement. The actual deferral ratio of the family
unit is 7.86 percent, calculated by aggregating the contributions and
compensation of A and B ($7,000+$4,000)/($100,000+$40,000). For the
plan, it is determined that under 1.401(k)-1(f)(2), the actual deferral
ratio of the aggregate family unit must be reduced to 7.20 percent. This
reduction is applied in proportion to A's and B's contributions. The
excess contributions are $920 ($11,000 total contributions minus $10,080
(7.20% $140,000)). A's share of the excess contributions is $585.45
($7,000/$11,000 $920); B's share is $334.55 ($4,000/$11,000 $920).
Example 4. (i) Employer T maintains a profit-sharing plan containing
a cash or deferred arrangement for all employees. Six employees are
covered by a collective bargaining agreement, the other seven employees
are not. The employee data for 1994 is shown in the following table:
(ii) For purposes of sections 410(b), 401(a)(4) and 401(k), the
portion of T's plan covering collectively bargained unit members must be
disaggregated from the portion covering other employees.
(iii) The ADPs for the collectively bargained highly compensated
group and nonhighly compensated group, respectively, are seven percent
and 4.5 percent. The ADPs for the other highly compensated and nonhighly
compensated employees, respectively, are eight percent and six percent.
(iv) The non-collectively bargained portion of the disaggregated plan
satisfies the ADP test for the 1994 plan year, but the collectively
bargained portion does not. Employer T is not required to make
corrections to the collectively bargained portion of the cash or
deferred arrangement, because a collectively bargained plan
automatically satisfies the nondiscrimination requirements of 401(a)(4).
However, unless Employer T corrects the ADP test failure in the
collectively bargained portion of the plan, either by reducing A's ADR
to seven percent or adding QNCs for the nonhighly compensated employees,
all elective contributions made by collectively bargained employees for
the year will be includible in income in l994.
(g) Definitions. The following definitions apply for purposes of
this section, unless the context clearly indicates otherwise:
(1) Actual deferral percentage -- (i) General rule. The actual
deferral percentage for a group of employees for a plan year is the
average of the actual deferral ratios of employees in the group for that
plan year. For plan years that begin after December 31, l988, or such
later date provided in paragraph (h) of this section, actual deferral
ratios and the actual deferral percentage for a group are calculated to
the nearest hundredth of a percentage point.
(ii) Actual deferral ratio -- (A) General rule. An employee's actual
deferral ratio for the plan year is the sum of the employee's elective
contributions and amounts treated as elective contributions for the plan
year, divided by the employee's compensation taken into account for the
plan year. If an eligible employee makes no elective contributions, and
no qualified matching contributions or qualified nonelective
contributions are taken into account with respect to the employee, the
actual deferral ratio of the employee is zero. See paragraphs (b)(4),
(b)(5), and (g)(2) of this section for rules regarding the elective
contributions, qualified nonelective contributions, and compensation
taken into account in calculating this fraction.
(B) Employee eligible under more than one arrangement -- (1) Highly
compensated employees. For plan years beginning after December 31,
1984, the actual deferral ratio of a highly compensated employee who is
eligible to participate in more than one cash or deferred arrangement of
the same employer is generally calculated by treating all the cash or
deferred arrangements in which the employee is eligible to participate
as one arrangement. However, plans that are not permitted to be
aggregated under 1.401(k)-1(b)(3)(ii)(B) are not aggregated for this
purpose, except as specifically provided in 1.401(m)-2(b)(1). For
example, if a highly compensated employee with compensation of $80,000
could make elective contributions under two separate cash or deferred
arrangements, the actual deferral ratio for the employee under each
arrangement would generally be calculated by dividing the total elective
contributions by the employee under both arrangements by $80,000. If
one of the cash or deferred arrangements were part of an ESOP, however,
while the other was not, the actual deferral percentage of the employee
under each arrangement would be calculated by dividing the employee's
elective contributions under each arrangement by $80,000 because the
ESOP portion is mandatorily disaggregated from the non-ESOP portion.
(2) Nonhighly compensated employees. For plan years beginning after
December 31, 1984, and before January 1, 1987 (or such later date
provided under paragraph (h) of this section), this paragraph
(g)(1)(ii)(B) applies to all employees, and not only to highly
compensated employees.
(3) Treatment of plans with different plan years. If the cash or
deferred arrangements that are treated as a single arrangement under
this paragraph (g)(1)(ii)(B) are parts of plans that have different plan
years, the cash or deferred arrangements are treated as a single
arrangement with respect to the plan years ending with or within the
same calendar year.
(C) Employees subject to family aggregation rules -- (1) Aggregation
of elective contributions and other amounts. For plan years beginning
after December 31, 1986, or any later date provided in paragraph (h) of
this section, if an eligible highly compensated employee is subject to
the family aggregation rules of section 414(q)(6) because that employee
is either a five-percent owner or one of the 10 most highly compensated
employees, the combined actual deferral ratio for the family group
(which is treated as one highly compensated employee) must be determined
by combining the elective contributions, compensation, and amounts
treated as elective contributions of all the eligible family members.
(2) Effect on actual deferral percentage of nonhighly compensated
employees. The elective contributions, compensation, and amounts
treated as elective contributions of all family members are disregarded
for purposes of determining the actual deferral percentage for the group
of nonhighly compensated employees.
(3) Multiple family groups. If an employee is required to be
aggregated as a member of more than one family group in a plan, all
eligible employees who are members of those family groups that include
that employee are aggregated as one family group.
(2) Compensation -- (i) Years beginning after December 31, 1986. For
plan years beginning after December 31, 1986, or such later date
provided in paragraph (h) of this section, the term ''compensation''
means compensation as defined in section 414(s). The period used to
determine an employee's compensation for a plan year must be either the
plan year or the calendar year ending within the plan year. Whichever
period is selected must be applied uniformly to determine the
compensation of every eligible employee under the plan for that plan
year for purposes of this section. An employer may, however, limit the
period taken into account under either method to that portion of the
plan year or calendar year in which the employee was an eligible
employee, provided that this limit is applied uniformly to all eligible
employees under the plan for the plan year for purposes of this section.
See also section 401(a)(17).
(ii) Years beginning before January 1, 1987 -- (A) General rule. An
employee's compensation for a plan year beginning before January 1,
1987, or such later date provided under paragraph (h) of this section,
is the amount taken into account under the plan (or plans) in
calculating the elective contribution that may be made on behalf of the
employee. In a plan that is top-heavy (as defined in section 416),
compensation may not exceed $200,000. Compensation may not exclude
amounts less than a stated amount, such as the integration level under
the plan. Compensation may include all compensation for the plan year,
including compensation for the period when an employee was ineligible to
make a cash or deferred election.
(B) Nondiscrimination requirement -- (1) If the plan's definition of
compensation has the effect of discriminating in favor of employees who
are highly compensated, a nondiscriminatory definition shall be
determined by the Commissioner.
(2) A plan's definition of compensation is treated as
nondiscriminatory if the plan defines compensation for a plan year
either as --
(i) an employee's total nondeferred compensation includible in gross
income plus elective contributions under the plan and elective
contributions under a plan described in section 125, and/or
(ii) an employee's W-2 or total nondeferred compensation includible
in gross income.
(3) Elective contributions. The term ''elective contribution'' means
employer contributions made to a plan that were subject to a cash or
deferred election under a cash or deferred arrangement (whether or not
the arrangement is a qualified cash or deferred arrangement under
paragraph (a)(4) of this section). No amount that has become currently
available to an employee or that is designated or treated, at the time
of deferral or contribution, as an after-tax employee contribution may
be treated as an elective contribution. See paragraphs (a)(2) and
(a)(3) of this section. See also paragraph (a)(6)(iii) of this section
for rules relating to the treatment as elective contributions of certain
matching contributions made by partnerships.
(4) Eligible employee -- (i) General rule. The term ''eligible
employee'' means an employee who is directly or indirectly eligible to
make a cash or deferred election under the plan for all or a portion of
the plan year. For example, if an employee must perform purely
ministerial or mechanical acts (e.g., formal application for
participation or consent to payroll withholding) in order to be eligible
to make a cash or deferred election for a plan year, the employee is an
eligible employee for the plan year without regard to whether the
employee performs the acts. An employee who is unable to make a cash or
deferred election because the employee has not contributed to another
plan is also an eligible employee. By contrast, if an employee must
perform additional service (e.g., satisfy a minimum period of service
requirement) in order to be eligible to make a cash or deferred election
for a plan year, the employee is not an eligible employee for the plan
year unless the service is actually performed. See paragraph (e)(5) of
this section, however, for certain limits on the use of minimum service
requirements. An employee who would be eligible to make elective
contributions but for a suspension due to a distribution, a loan, or an
election not to participate in the plan, is treated as an eligible
employee for purposes of section 401(k)(3) for a plan year even though
the employee may not make a cash or deferred election by reason of the
suspension. Finally, an employee does not fail to be treated as an
eligible employee merely because the employee may receive no additional
annual additions because of section 415(c)(1) or 415(e).
(ii) Certain one-time elections. An employee is not an eligible
employee merely because the employee, upon commencing employment with
the employer or upon the employee's first becoming eligible to make a
cash or deferred election under any arrangement of the employer, is
given the one-time opportunity to elect, and the employee does in fact
elect, not to be eligible to make a cash or deferred election under the
plan or any other plan maintained by the employer (including plans not
yet established) for the duration of the employee's employment with the
employer. This rule applies in addition to the rules in paragraphs
(a)(3)(iv) and (a)(6)(ii)(C) of this section relating to the definition
of a cash or deferred election.
(5) Employee. The term ''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 who is treated as an
employee of the employer-recipient pursuant to the provisions of section
414(n)(2) or section 414(o)(2), other than individuals who are excluded
by reason of section 414(n)(5). 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.
(6) Employer. The term ''employer'' means the employer maintaining
the plan and those employers required to be aggregated with the employer
under section 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.
(7) Excess contributions and excess deferrals -- (i) Excess
contributions. The term ''excess contribution'' means, with respect to
a plan year, the excess of the elective contributions, including
qualified nonelective contributions and qualified matching contributions
that are treated as elective contributions under paragraph (b)(2) of
this section, on behalf of eligible highly compensated employees for the
plan year over the maximum amount of the contributions permitted under
paragraph (b)(2) of this section. The amount of excess contributions
for each highly compensated employee is determined by using the method
described in paragraph (f)(2) of this section.
(ii) Excess deferrals. The term ''excess deferrals'' means excess
deferrals as defined in 1.402(g)-1(e)(3).
(8) Highly compensated employees -- (i) Plan years beginning after
December 31, 1986. For plan years beginning after December 31, 1986, or
such later date provided under paragraph (h) of this section, the term
''highly compensated employee'' has the meaning provided in section
414(q).
(ii) Plan years beginning after December 31, 1979, and before January
1, 1987. For plan years beginning after December 31, 1979, and before
January 1, 1987, or such later date provided under paragraph (h) of this
section, for purposes of the actual deferral percentage test, highly
compensated employees are the one-third of all eligible employees
(rounded to the nearest integer) who receive the most compensation.
When one or more employees of a group would be highly compensated
employees except that each member of the group receives the same amount
of compensation, the employer must designate which employees of the
group are highly compensated, so that one-third of all eligible
employees are considered highly compensated.
(9) Matching contributions. The term ''matching contribution'' means
matching contributions as defined in 1.401(m)-1(f)(12).
(10) Nonelective contributions. The term ''nonelective
contribution'' means employer contributions (other than matching
contributions) with respect to which the employee may not elect to have
the contributions paid to the employee in cash or other benefits instead
of being contributed to the plan.
(11) Plan -- (i) General rule. The term ''plan'' refers to a plan
described in section 401(a) that includes one or more trusts intended to
be exempt from tax under section 501(a) and to an annuity plan described
in section 403(a). As described in paragraph (g)(11)(ii) of this
section, each single plan under section 414(l) is to be treated as a
single plan. Furthermore, as described in paragraph (g)(11)(iii) of
this section certain single plans must be treated as comprising separate
plans, each of which is a single plan.
(ii) Separate asset pools are separate plans. Each single plan
within the meaning of section 414(l) is a separate plan. See
1.414(l)-1(b). A single plan under section 414(l) is a single plan
notwithstanding that the plan comprises separate written documents and
separate trusts, each of which have received separate determination
letters from the Internal Revenue Service. A plan does not comprise
separate plans merely because it includes more than one trust or 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.
(iii) Mandatory disaggregation of certain plans -- (A) Plans
benefiting collective bargaining unit employees. A plan that benefits
employees who are included in a unit of employees covered by a
collective bargaining agreement and employees who are not included in
such a collective bargaining unit is treated as comprising separate
plans. This paragraph (g)(11)(iii)(A) is applied separately with
respect to each collective bargaining unit. Thus, for example, if a
plan benefits employees in three categories -- employees included in
collective bargaining unit A, employees included in collective
bargaining unit B, and employees who are not included in any collective
bargaining unit -- the plan is treated as comprising three separate
plans, each of which benefits only one category of employees.
Similarly, if a plan benefits only employees who are included in
collective bargaining unit A and collective bargaining unit B, the plan
is treated as comprising two separate plans.
(B) ESOPs and non-ESOPs. The portion of a plan that is an employee
stock ownership plan described in section 4975(e) or 409 (an ESOP) and
the portion of the plan that is not an ESOP are treated as separate
plans, except as otherwise permitted under 54.4975-11(e) of this
chapter. Notwithstanding 54.4975-11(a)(5) of this chapter, an employer
may treat the rule in this paragraph (g)(11)(iii)(B) as not effective
for plan years beginning before January 1, 1990.
(C) Plans benefiting employees of qualified separate lines of
business. If an employer is treated as operating qualified separate
lines of business for purposes of section 410(b), the portion of a plan
that benefits employees of one qualified separate line of business is
treated as a separate plan from the portions of the same plan that
benefit employees of the other qualified separate lines of business of
the employer.
(D) Plans maintained by more than one employer -- (1) Multiple
employer plans. If a plan benefits employees of more than one employer,
and the employees are not included in a unit of employees covered by a
collective bargaining agreement (a multiple employer plan), the plan is
treated as comprising separate plans each of which is maintained by a
separate employer.
(2) Multiemployer plans. The portion of a plan that benefits
employees who are included in a collective bargaining unit, the portion
of the plan that benefits employees who are included in another
collective bargaining unit, and the portion of the plan that benefits
non-collective bargaining unit employees are all treated as separate
plans. Consistent with section 413(b), the portion of the plan that is
maintained pursuant to a collective bargaining agreement is treated as a
single plan maintained by a single employer that employs all the
employees benefiting under the same benefit computation formula and
covered pursuant to that collective bargaining agreement. The
noncollectively bargained portion of the plan is treated as maintained
by one or more employers, depending on whether the non-collective
bargaining unit employees who benefit under the plan are employed by one
or more employers.
(iv) Mandatory aggregation of certain plans. See
1.401(k)-1(b)(3)(ii) and 1.401(m)-1(b)(3)(i) for additional rules
requiring separate plans to be treated as a single plan in some cases.
(12) Pre-ERISA money purchase pension plan -- (i) A pre-ERISA money
purchase pension plan is a pension plan:
(A) That is a defined contribution plan (as defined in section
414(i));
(B) That was in existence on June 27, 1974, and as in effect on that
date, included a salary reduction agreement described in paragraph
(a)(3)(i) of this section; and
(C) Under which neither the employee contributions nor the employer
contributions, including elective contributions, may exceed the levels
(as a percentage of compensation) provided for by the contribution
formula in effect on June 27, 1974.
(ii) A plan was in existence on June 27, 1974, if it was a written
plan adopted on or before that date, even if no funds had yet been paid
to the trust associated with the plan.
(13) Qualified matching contributions and qualified nonelective
contributions -- (i) Qualified matching contributions. The term
''qualified matching contribution'' means matching contributions that
satisfy the additional requirements of paragraph (g)(13)(iii) of this
section.
(ii) Qualified nonelective contributions. The term ''qualified
nonelective contribution'' means employer contributions, other than
elective contributions and matching contributions, that satisfy the
additional requirements of paragraph (g)(13)(iii) of this section.
(iii) Additional requirements. Except to the extent that paragraphs
(c) and (d) of this section specifically provide otherwise, the matching
contributions and the nonelective contributions must satisfy the
requirements of paragraphs (c) and (d) of this section as though the
contributions were elective contributions, without regard to whether the
contributions are actually taken into account as elective contributions
under paragraph (b)(2) of this section. Thus, the matching and
nonelective contributions must satisfy the vesting requirements of
paragraph (c) of this section and be subject to the distribution
requirements of paragraph (d) of this section when they are contributed
to the plan. See 1.401(k)-1(f)(5)(iii) for rules regarding matching
contributions not treated as forfeitable under section 411(a)(3)(G)
because of excess deferrals or contributions.
(14) Rural cooperative plan. For purposes of this section, a rural
cooperative plan is a plan described in section 401(k)(7).
(h) Effective dates -- (1) General rule. Except as otherwise
provided in this paragraph (h) or as specifically provided elsewhere in
this section, this section applies to plan years beginning after
December 31, 1979.
(2) Collectively bargained plans. In the case of a plan maintained
pursuant to one or more collective bargaining agreements between
employee representatives and one or more employers ratified before March
1, 1986:
(i) The provisions of this section first effective for plan years
beginning after December 31, 1986, do not apply to years that begin
before the earlier of January 1, 1989, or the date on which the last of
the collective bargaining agreements terminates (determined without
regard to any extension thereof after February 28, 1986).
(ii) The provisions of this section first effective for plan years
beginning after December 31, 1988, do not apply to years beginning
before the earlier of:
(A) The later of January 1, 1989, or the date on which the last of
the collective bargaining agreements terminates (determined without
regard to any extension thereof after February 28, 1986); or
(B) January 1, 1991.
(3) Transition rules -- (i) Cash or deferred arrangements in
existence on June 27, 1974. See 1.402(a)-1(d)(3)(ii) for a transition
rule applicable to cash or deferred arrangements in existence on June
27, 1974.
(ii) Plan years beginning after December 31, 1979, and before January
1, 1992. For plan years beginning after December 31, 1979 (or, in the
case of a pre-ERISA money purchase plan, plan years beginning after July
18, 1984) and before January 1, 1992, a reasonable interpretation of the
rules set forth in section 401 (k) and (m) of the Internal Revenue Code
(as in effect during those years) may be relied upon to determine
whether a cash or deferred arrangement was qualified during those years.
(iii) Restructuring -- (A) General rule. In determining whether the
requirements of section 401(k) are satisfied for plan years beginning
before January 1, 1992, a plan may be treated as consisting of two or
more component plans, each consisting of all of the allocations and
other benefits, rights, and features provided to a group of employees
under the plan. An employee may not be included in more than one
component plan of the same plan for a plan year under this method. If
this method is used for a plan year, the requirements of section 401(k)
are applied separately with respect to each component plan for the plan
year. Thus, for example, the actual deferral ratio and the amount of
excess contributions, if any, of each eligible employee under each
component plan must be determined as if the component plan were a
separate plan. This method applies solely for purposes of section
401(k). Thus, for example, the requirements of section 410(b) must
still be satisfied by the entire plan.
(B) Identification of component plans -- (1) Minimum coverage
requirement. The group of eligible employees described in
1.401(k)-1(g)(4) under each component plan must separately satisfy the
requirements of section 410(b) as if the component plan were a separate
plan. Component plans may not be aggregated to satisfy this
requirement.
(2) Commonality requirement. The group of employees used to identify
a component plan must share some common attribute or attributes, other
than similar actual deferral ratios. Permissible common attributes
include, for example, employment at the same work site, in the same job
category, for the same division or subsidiary, or for a unit acquired in
a specific merger or acquisition, employment for the same number of
years, compensation under the same method (e.g., salaried or hourly),
coverage under the same contribution formula, and attributes that could
be used as the basis of a classification that would be treated as
reasonable under the average benefit percentage test of section
410(b)(1)(C) and (b)(2). Employees whose only common attribute is the
same or similar actual deferral ratios, or another attribute having
substantially the same effect as the same or similar actual deferral
ratios, are not considered as sharing a common attribute for this
purpose. This rule applies regardless of whether the component plan or
the plan of which it is a part satisfies the ratio or percentage test of
section 410(b).
(4) State and local government plans -- (i) Plans adopted before May
6, 1986. A plan adopted by a state or local government prior to May 6,
1986, is subject to the transitional rules of paragraph (h)(4) (ii) or
(iii) of this section.
(ii) Plan years beginning before January 1, 1993. The following
rules apply for plan years beginning before January 1, 1993, to a
governmental plan described in section 414(d) that is not a collectively
bargained plan and includes a nonqualified cash or deferred arrangement:
(A) The plan does not fail to satisfy the requirements of section
401(a) merely because of the nonqualified cash or deferred arrangement.
(B) Employer contributions under the nonqualified cash or deferred
arrangement are considered to satisfy the requirements of section
401(a)(4).
(C) Except as provided in paragraphs (a)(7) and (f) of this section,
elective contributions under the arrangement are treated as employer
contributions under the Internal Revenue Code of 1986, as if the
arrangement were a qualified cash or deferred arrangement. See
1.401(k)-1(a)(4)(ii). See 1.402(a)-1(d) for rules governing when
elective contributions under the arrangement are includible in an
employee's gross income.
(iii) Collectively bargained plans. The transition rules in
paragraph (h)(4)(ii) of this section apply to a plan maintained pursuant
to one or more collective bargaining agreements between employee
representatives and one or more employers and adopted by a state or
local government before May 6, 1986, effective on the date the
provisions of section 401(k) and this section would be effective under
paragraph (h)(2) of this section.
(T.D. 8357, 56 FR 40517, Aug. 15, 1991, as amended by T.D. 8376, 56
FR 63432, Dec. 4, 1991; T.D. 8357, 57 FR 10289, 10290, Mar. 25, 1992)
26 CFR 1.401(l)-0 Table of contents.
This section contains a listing of the headings of 1.401(l)-1
through 1.401(l)-6.
(a) Permitted disparity.
(1) In general.
(2) Overview.
(3) Exclusive rules.
(4) Exceptions.
(5) Additional rules.
(b) Relationship to other requirements.
(1) In general.
(2) Determination of accrued benefit to avoid reduction.
(c) Definitions.
(1) Accumulation plan.
(2) Average annual compensation.
(3) Base benefit percentage.
(4) Base contribution percentage.
(5) Benefit formula.
(6) Benefits, rights, and features.
(7) Covered compensation.
(i) In general.
(ii) Special rules.
(A) Rounded table.
(B) Proposed regulation definition.
(iii) Period for using covered compensation amount.
(8) Defined benefit plan.
(9) Defined contribution plan.
(10) Disparity.
(11) Employee.
(12) Employer.
(13) Employer contributions.
(14) Excess benefit percentage.
(15) Excess contribution percentage.
(16) Excess plan.
(i) Defined benefit excess plan.
(ii) Defined contribution excess plan.
(17) Final average compensation.
(i) In general.
(ii) Limitations.
(iii) Determination of section 414(s) compensation.
(18) Gross benefit percentage.
(19) Highly compensated employee.
(20) Integration level.
(21) Nonexcludable employee.
(22) Offset level.
(23) Offset percentage.
(24) Offset plan.
(25) Plan.
(26) Plan year compensation.
(27) Qualified plan.
(28) Section 401(l) plan.
(29) Section 414(s) compensation.
(30) Social security retirement age.
(31) Straight life annuity.
(32) Taxable wage base.
(33) Year of service.
(a) Requirements.
(1) In general.
(2) Excess plan requirement.
(3) Maximum disparity.
(4) Uniform disparity.
(5) Integration level.
(b) Maximum permitted disparity.
(1) In general.
(2) Maximum excess allowance.
(c) Uniform disparity.
(1) In general.
(2) Deemed uniformity.
(i) In general.
(ii) Overall permitted disparity.
(iii) Non-FICA employees.
(d) Integration level.
(1) In general.
(2) Taxable wage base.
(3) Single dollar amount.
(4) Intermediate amount.
(5) Prorated integration level for short plan year.
(e) Examples.
(a) Requirements.
(1) In general.
(2) Excess or offset plan requirement.
(3) Maximum disparity.
(4) Uniform disparity.
(5) Integration or offset level.
(6) Benefits, rights, and features.
(b) Maximum permitted disparity.
(1) In general.
(2) Maximum excess allowance.
(3) Maximum offset allowance.
(4) Rules of application.
(i) Disparity provided for the plan year.
(ii) Reductions in disparity rate.
(iii) Normal and optional forms of benefit.
(A) In general.
(B) Level annuity forms.
(C) Other forms.
(D) Post-retirement cost-of-living adjustments.
(1) In general.
(2) Requirements.
(E) Section 417(e) exception.
(5) Examples.
(c) Uniform disparity.
(1) In general.
(2) Deemed uniformity.
(i) In general.
(ii) Use of fractional accrual and disparity for 35 years.
(iii) Use of fractional accrual and disparity for fewer than 35
years.
(iv) Different social security retirement ages.
(v) Reduction for integration level.
(vi) Overall permitted disparity.
(vii) Non-FICA employees.
(viii) Average annual compensation adjustment for offset plan.
(3) Examples.
(d) Requirements for integration level or offset compensation.
(1) In general.
(2) Covered compensation.
(3) Uniform percentage of covered compensation.
(4) Single dollar amount.
(5) Intermediate amount.
(6) Intermediate amount safe harbor.
(7) Prorated integration level for short plan year.
(8) Demographic requirements.
(i) In general.
(ii) Attained age requirement.
(iii) Nondiscrimination requirement.
(A) Minimum percentage test.
(B) Ratio test.
(C) High dollar amount test.
(9) Reduction in the 0.75-percent factor if integration or offset
level exceeds covered compensation.
(i) In general.
(ii) Uniform percentage of covered compensation.
(iii) Single dollar amount.
(A) Plan-wide reduction.
(B) Individual reductions.
(iv) Reductions.
(A) Table.
(B) Interpolation.
(10) Examples.
(e) Adjustments to the 0.75-percent factor for benefits commencing at
ages other than social security retirement age.
(1) In general.
(2) Adjustments.
(i) Benefits commencing on or after age 55 and before social security
retirement age.
(ii) Benefits commencing after social security retirement age and on
or before age 70.
(iii) Benefits commencing before age 55.
(iv) Benefits commencing after age 70.
(3) Tables.
(4) Exception for certain disability benefits.
(5) Benefit commencement date.
(i) In general.
(ii) Qualified social security supplement.
(6) Examples.
(f) Benefits, rights, and features.
(1) Defined benefit excess plan.
(2) Offset plan.
(3) Examples.
(g) No reductions in 0.75-percent factor for death benefits.
(h) Benefits attributable to employee contributions not taken into
account.
(i) Multiple integration levels. (Reserved)
(j) Additional rules.
(a) In general.
(b) Defined contribution plans.
(1) In general.
(2) Single integration level method.
(i) In general.
(ii) Definitions.
(3) Two integration level method.
(i) In general.
(ii) Total disparity requirement.
(iii) Intermediate disparity requirement.
(iv) Definitions.
(c) Defined benefit excess plans.
(1) In general.
(2) Single integration level method.
(i) In general.
(ii) Definitions.
(3) Two integration level method.
(i) In general.
(ii) Employee with lower covered compensation.
(iii) Employee with lower railroad retirement covered compensation.
(iv) Definitions.
(d) Offset plans.
(1) In general.
(2) Maximum tier 2 and supplementary annuity offset allowance.
(e) Additional rules.
(1) Definitions.
(2) Adjustments to 0.75-percent factor.
(3) Adjustments to 0.56-percent factor.
(4) Overall permitted disparity.
(a) Introduction.
(1) In general.
(2) Plan requirements.
(3) Plans taken into account.
(b) Annual overall permitted disparity limit.
(1) In general.
(2) Total annual disparity fraction.
(3) Annual defined contribution plan disparity fraction.
(4) Annual defined benefit excess plan disparity fraction.
(5) Annual offset plan disparity fraction.
(6) Annual imputed disparity fraction.
(7) Annual nondisparate fraction.
(8) Determination of fraction.
(i) General rule
(ii) Multiple formulas.
(iii) Offset arrangements.
(A) In general.
(B) Defined benefit plans.
(C) Defined contribution plans.
(iv) Applicable percentages.
(9) Examples.
(c) Cumulative permitted disparity limit.
(1) In general.
(i) Employees who benefit under defined benefit plans.
(ii) Employees who do not benefit under defined benefit plans.
(iii) Certain plan years disregarded.
(iv) Determination of type of plan.
(2) Cumulative disparity fraction.
(3) Determination of total annual disparity fractions for prior
years.
(i) Pre-effective date years.
(ii) Option for any prior year.
(4) Examples.
(d) Additional rules.
(a) In general.
(b) Defined contribution plans.
(c) Defined benefit plans.
(d) Collectively bargained plans.
(T.D. 8359, 56 FR 47617, Sept. 19, 1991; 57 FR 10818, Mar. 31, 1992)
26 CFR 1.401(l)-1 Permitted disparity in employer-provided
contributions or benefits.
(a) Permitted disparity -- (1) In general. Section 401(a)(4)
provides that a plan is a qualified plan only if the amount of
contributions or benefits provided under the plan does not discriminate
in favor of highly compensated employees. See 1.401(a)(4)-1(b)(2).
Section 401(a)(5)(C) provides that a plan does not discriminate in favor
of highly compensated employees merely because of disparities in
employer-provided contributions or benefits provided to, or on behalf
of, employees under the plan that are permitted under section 401(l).
Thus, if a plan satisfies section 401(l), permitted disparities in
employer-provided contributions or benefits under a plan are
disregarded, by reason of section 401(a)(5)(C), in determining whether
the plan satisfies any of the safe harbors under 1.401(a)(4)-2(b)(3)
and 1.401(a)(4)-3(b). However, even if disparities in employer-provided
contributions or benefits under a plan are permitted under section
401(l) and thus do not cause the plan to fail to satisfy
1.401(a)(4)-1(b)(2), the plan may still fail to satisfy section
401(a)(4) for other reasons. Similarly, even if disparities in
employer-provided contributions or benefits under a plan are not
permitted under section 401(l) and thus may not be disregarded under
section 401(a)(4) by reason of section 401(l), the plan may still be
found to be nondiscriminatory under the tests of section 401(a)(4),
including the rules for imputing permitted disparity under
1.401(a)(4)-7.
(2) Overview. Rules relating to disparities in employer-provided
contributions under a defined contribution plan are provided in
1.401(l)-2. For rules relating to disparities in employer-provided
benefits under a defined benefit plan, see 401(l)-3. For rules
relating to the application of section 401(l) to a plan maintained by a
railroad employer, see 1.401(l)-4. For rules relating to the overall
permitted disparity limits, see 1.401(l)-5. For rules relating to the
effective date of section 401(l), see 1.401(l)-6.
(3) Exclusive rules. The rules provided in 1.401(l)-1 through
1.401(l)-6 are the exclusive means for a plan to satisfy sections 401(l)
and 401(a)(5)(C). Accordingly, a plan that provides disparities in
employer-provided contributions or benefits that are not permitted under
1.401(l)-1 through 1.401(l)-6 does not satisfy section 401(l) or
401(a)(5)(C). For example, a defined benefit plan that reduces an
employee's employer-provided benefit by an offset based on the
employee's benefits under the Social Security Act does not satisfy
section 401(l) and may not rely on section 401(l) to satisfy section
401(a)(4).
(4) Exceptions. Sections 401(a)(5)(C) and 401(l) are not available
in the following arrangements --
(i) A plan maintained by an employer, determined for purposes of the
Federal Insurance Contributions Act or the Railroad Retirement Tax Act,
as applicable, that does not pay any wages within the meaning of section
3121(a) or compensation within the meaning of section 3231(e). For this
purpose, a plan maintained for a self-employed individual within the
meaning of section 401(c)(1), who is also subject to the tax under
section 1401, is deemed to be a plan maintained by an employer that pays
wages within the meaning of section 3121(a).
(ii) A plan, or the portion of a plan, that is an employee stock
ownership plan described in section 4975(e)(7) (an ESOP) or a tax credit
employee stock ownership plan described in section 409(a) (a TRASOP),
except as provided in 54.4975-11(a)(7)(ii) of this chapter, which
contains a limited exception to this rule for certain ESOPs in existence
on November 1, 1977.
(iii) With respect to elective contributions as defined in
1.401(k)-1(g)(3) under a qualified cash or deferred arrangement as
defined in 1.401(k)-1(a)(4)(i) or with respect to employee or matching
contributions defined in 1.401(m)-1(f)(6) or (f)(12), respectively.
(iv) With respect to contributions to a simplified employee pension
made under a salary reduction arrangement described in section 408(k)(6)
(a SARSEP).
(5) Additional rules. The Commissioner may, in revenue rulings,
notices, or other documents of general applicability, prescribe
additional rules that may be necessary or appropriate to carry out the
purposes of section 401(l), including rules applying section 401(l) with
respect to an employer that pays wages within the meaning of section
3121(a) or compensation within the meaning of section 3231(e) for some
years and not other years.
(b) Relationship to other requirements -- (1) In general. Unless
explicitly provided otherwise, section 401(l) does not provide an
exception to any other requirement under section 401(a). Thus, for
example, even if the plan complies with section 401(l), the plan may not
adjust benefits in any manner that results either in a decrease in any
employee's accrued benefit in violation of section 411(d)(6) and section
411(b)(1)(G) or in a benefit lower than the minimum benefit required
under section 416. Similarly, see section 401(a)(15) for additional
rules relating to circumstances under which plan benefits may not be
decreased because of increases in social security benefits. A plan does
not fail to satisfy section 401(l) merely because, in order to comply
with section 411, an employee's accrued benefit under the plan is not
reduced, even though a strict application of the plan's benefit formula
and accrual method would otherwise result in a reduced benefit.
(2) Determination of accrued benefit to avoid reduction. If a strict
application of the plan's benefit formula and accrual method would
otherwise result in a benefit lower than the employee's accrued benefit
(for example, as a result of an increase in covered compensation), the
employee's accrued benefit for later years must be determined under the
formula contained in 1.401(a)(4)-13(c)(3) (formula with wear-away). In
applying that formula, the plan must use the last day of the plan year
immediately before the potential reduction in accrued benefit as the
fresh-start date and the plan's benefit formula as the formula
applicable to benefit accruals in the current plan year.
(c) Definitions. In applying 1.401(l)-1 through 1.401(l)-6, the
definitions in this paragraph (c) govern unless otherwise provided.
(1) Accumulation plan. Accumulation plan means an accumulation plan
within the meaning of 1.401(a)(4)-12.
(2) Average annual compensation. Average annual compensation means
average annual compensation within the meaning of 1.401(a)(4)-3(e)(2),
taking into account the special optional rules under
1.401(a)(4)-3(b)(8)(x).
(3) Base benefit percentage. Base benefit percentage means the rate
at which employer-provided benefits are determined under a defined
benefit excess plan with respect to an employee's average annual
compensation at or below the integration level (expressed as a
percentage of such average annual compensation).
(4) Base contribution percentage. Base contribution percentage means
the rate at which employer contributions are allocated to the account of
an employee under a defined contribution excess plan with respect to the
employee's plan year compensation at or below the integration level
(expressed as a percentage of such plan year compensation).
(5) Benefit formula. Benefit formula means benefit formula within
the meaning of 1.401(a)(4)-12.
(6) Benefits, rights, and features. Benefits, rights, and features
means benefits, rights, and features within the meaning of
1.401(a)(4)-12.
(7) Covered compensation -- (i) In general. Covered compensation for
an employee means the average (without indexing) of the taxable wage
bases in effect for each calendar year during the 35-year period ending
with the last day of the calendar year in which the employee attains (or
will attain) social security retirement age. A 35-year period is used
for all individuals regardless of the year of birth of the individual.
In determining an employee's covered compensation for a plan year, the
taxable wage base for all calendar years beginning after the first day
of the plan year is assumed to be the same as the taxable wage base in
effect as of the beginning of the plan year. An employee's covered
compensation for a plan year beginning after the 35-year period
applicable under this paragraph (c)(7)(i) is the employee's covered
compensation for the plan year during which the 35-year period ends. An
employee's covered compensation for a plan year beginning before the
35-year period applicable under this paragraph (c)(7)(i) is the taxable
wage base in effect as of the beginning of the plan year.
(ii) Special rules -- (A) Rounded table. For purposes of determining
the amount of an employee's covered compensation under paragraph
(c)(7)(i) of this section, a plan may use tables, provided by the
Commissioner, that are developed by rounding the actual amounts of
covered compensation for different years of birth.
(B) Proposed regulation definition. For plan years beginning before
January 1, 1995, in lieu of the definition of covered compensation
contained in paragraph (c)(7)(i) of this section, a plan may define
covered compensation as the average (without indexing) of the taxable
wage bases in effect for each calendar year during the 35-year period
ending with the last day of the calendar year preceding the calendar
year in which the employee attains (or will attain) social security
retirement age.
(iii) Period for using covered compensation amount. A plan must
generally provide that an employee's covered compensation is
automatically adjusted for each plan year. However, a plan may use an
amount of covered compensation for employees equal to each employee's
covered compensation (as defined in paragraph (c)(7)(i) or (c)(7)(ii) of
this section) for a plan year earlier than the current plan year,
provided the earlier plan year is the same for all employees and is not
earlier than the later of --
(A) The plan year that begins 5 years before the current plan year,
and
(B) The plan year beginning in 1989.
In the case of an accumulation plan, the benefit accrued for an
employee in prior years is not affected by changes in the employee's
covered compensation that occur in later years.
(8) Defined benefit plan. Defined benefit plan means a defined
benefit plan within the meaning of 1.410(b)-9.
(9) Defined contribution plan. Defined contribution plan means a
defined contribution plan within the meaning of 1.410(b)-9.
(10) Disparity. Disparity means --
(i) In the case of a defined contribution excess plan, the amount by
which the excess contribution percentage exceeds the base contribution
percentage,
(ii) In the case of a defined benefit excess plan, the amount by
which the excess benefit percentage exceeds the base benefit percentage,
and
(iii) In the case of an offset plan, the offset percentage.
(11) Employee. Employee means employee within the meaning of
1.401(a)(4)-12.
(12) Employer. Employer means the employer within the meaning of
1.410(b)-9.
(13) Employer contributions. Employer contributions means all
amounts taken into account with respect to an employee under a plan
under 1.401(a)(4)-2(c)(2)(ii).
(14) Excess benefit percentage. Excess benefit percentage means the
rate at which employer-provided benefits are determined under a defined
benefit excess plan with respect to an employee's average annual
compensation above the integration level (expressed as a percentage of
such average annual compensation).
(15) Excess contribution percentage. Excess contribution percentage
means the rate at which employer contributions are allocated to the
account of an employee under a defined contribution excess plan with
respect to the employee's plan year compensation above the integration
level (expressed as a percentage of such plan year compensation).
(16) Excess plan -- (i) Defined benefit excess plan. Defined benefit
excess plan means a defined benefit plan under which the rate at which
employer-provided benefits are determined with respect to average annual
compensation above the integration level under the plan (expressed as a
percentage of such average annual compensation) is greater than the rate
at which employer-provided benefits are determined with respect to
average annual compensation at or below the integration level (expressed
as a percentage of such average annual compensation).
(ii) Defined contribution excess plan. Defined contribution excess
plan means a defined contribution plan under which the rate at which
employer contributions are allocated to the account of an employee with
respect to plan year compensation above the integration level (expressed
as a percentage of such plan year compensation) is greater than the rate
at which employer contributions are allocated to the account of an
employee with respect to plan year compensation at or below the
integration level (expressed as a percentage of such plan year
compensation).
(17) Final average compensation -- (i) In general. Final average
compensation for an employee means the average of the employee's annual
section 414(s) compensation from the employer for the 3-consecutive-year
period ending with or within the plan year. The year in which an
employee terminates employment may be disregarded in determining final
average compensation. If, as of a plan year, an employee's entire
period of employment with the employer is less than 3 consecutive years,
the employee's final average compensation must be determined by
averaging the annual section 414(s) compensation received by the
employee from the employer during the employee's entire period of
employment with the employer. The definition of final average
compensation used in the plan must be applied consistently with respect
to all employees. For example, if the plan provides that the year in
which the employee terminates employment is disregarded in determining
final average compensation, the year must be disregarded for all
employees who terminate employment in that year. The plan may specify
any 3-consecutive-year period ending in the plan year, provided the
period is determined consistently for all employees.
(ii) Limitations. In determining an employee's final average
compensation under this paragraph (c)(17), annual section 414(s)
compensation for any year in excess of the taxable wage base in effect
at the beginning of that year must not be taken into account. A plan
may provide that each employee's final average compensation for a plan
year is limited to the employee's average annual compensation for the
plan year.
(iii) Determination of section 414(s) compensation. A plan must use
the same definition of section 414(s) compensation to determine final
average compensation as the plan uses to determine average annual
compensation (or plan year compensation in the case of an accumulation
plan).
(18) Gross benefit percentage. Gross benefit percentage means the
rate at which employer-provided benefits are determined under an offset
plan (before application of the offset) with respect to an employee's
average annual compensation (expressed as a percentage of average annual
compensation).
(19) Highly compensated employee. Highly compensated employee means
a highly compensated employee within the meaning of 1.401(a)(4)-12.
(20) Integration level. Integration level means the dollar amount
specified in an excess plan at or below which the rate of
employer-provided contributions or benefits (expressed in each case as a
percentage of an employee's plan year compensation or average annual
compensation up to the specified dollar amount) under the plan is less
than the rate of employer-provided contributions or benefits (expressed
in each case as a percentage of the employee's plan year compensation or
average annual compensation above the specified dollar amount) under the
plan above such dollar amount.
(21) Nonexcludable employee. Nonexcludable employee means an
employee within the meaning of 1.410(b)-9, other than an excludable
employee with respect to the plan as determined under 1.410(b)-6. A
nonexcludable employee may be either a highly or nonhighly compensated
nonexcludable employee, depending on the nonexcludable employee's status
under section 414(q).
(22) Offset level. Offset level means the dollar limit specified in
the plan on the amount of each employee's final average compensation
taken into account in determining the offset under an offset plan.
(23) Offset percentage. Offset percentage means the rate at which an
employee's employer-provided benefit is reduced or offset under an
offset plan (expressed as a percentage of the employee's final average
compensation up to the offset level).
(24) Offset plan. Offset plan means a defined benefit plan that is
not a defined benefit excess plan and that provides that each employee's
employer-provided benefit is reduced or offset by a specified percentage
of the employee's final average compensation up to the offset level
under the plan.
(25) Plan. Plan means a plan within the meaning of 1.401(a)(4)-12
or a component plan treated as a plan under 1.401(a)(4)-9(c).
(26) Plan year compensation. Plan year compensation means plan year
compensation within the meaning of 1.401(a)(4)-12.
(27) Qualified plan. Qualified plan means a qualified plan within
the meaning of 1.401(a)(4)-12.
(28) Section 401(l) plan. Section 401(l) plan means a section 401(l)
plan within the meaning of 1.401(a)(4)-12.
(29) Section 414(s) compensation. Section 414(s) compensation means
section 414(s) compensation within the meaning of 1.401(a)(4)-12.
(30) Social security retirement age. Social security retirement age
for an employee means the social security retirement age of the employee
as determined under section 415(b)(8).
(31) Straight life annuity. Straight life annuity means a straight
life annuity within the meaning of 1.401(a)(4)-12.
(32) Taxable wage base. Taxable wage base means the contribution and
benefit base under section 230 of the Social Security Act (42 U.S.C.
430).
(33) Year of service. Year of service means a year of service as
defined in the plan for purposes of the benefit formula and the accrual
method under the plan, unless the context clearly indicates otherwise.
An employee may be credited with no more than 1 year of service with
respect to any 12-consecutive-month period, except for those cases in
which additional service is required to be credited under section 410 or
411, whichever is applicable.
(T.D. 8359, 56 FR 47618, Sept. 19, 1991; 57 FR 10818, 10951, Mar.
31, 1992)
26 CFR 1.401(l)-2 Permitted disparity for defined contribution plans.
(a) Requirements -- (1) In general. Disparity in the rates of
employer contributions allocated to employees' accounts under a defined
contribution plan is permitted under section 401(l) and this section for
a plan year only if the plan satisfies paragraphs (a)(2) through (a)(5)
of this section. A plan that otherwise satisfies this paragraph (a)
will not be considered to fail section 401(l) merely because it contains
one or more provisions described in 1.401(a)(4)-2(b)(5). See
1.401(a)(4)-8(b)(3)(i)(E) for special rules applicable to target benefit
plans.
(2) Excess plan requirement. The plan must be a defined contribution
excess plan.
(3) Maximum disparity. The disparity for all employees under the
plan must not exceed the maximum permitted disparity prescribed in
paragraph (b) of this section.
(4) Uniform disparity. The disparity for all employees under the
plan must be uniform within the meaning of paragraph (c) of this
section.
(5) Integration level. The integration level specified in the plan
must satisfy paragraph (d) of this section.
(b) Maximum permitted disparity -- (1) In general. The disparity
provided for the plan year must not exceed the maximum excess allowance
as defined in paragraph (b)(2) of this section. In addition, the plan
must satisfy the overall permitted disparity limits of 1.401(l)-5.
(2) Maximum excess allowance. The maximum excess allowance for a
plan year is the lesser of --
(i) The base contribution percentage, or
(ii) The greater of --
(A) 5.7 percent, reduced as required under paragraph (d) of this
section, or
(B) The percentage rate of tax under section 3111(a), in effect as of
the beginning of the plan year, that is attributable to the old age
insurance portion of the Old Age, Survivors and Disability Insurance
provisions of the Social Security Act, reduced as required under
paragraph (d) of this section. For a year in which the percentage rate
of tax described in this paragraph (b)(2)(ii)(B) exceeds 5.7 percent,
the Commissioner will publish the rate of such tax and a revised table
under paragraph (d)(4) of this section.
(c) Uniform disparity -- (1) In general. The disparity provided
under a plan is uniform only if the plan uses the same base contribution
percentage and the same excess contribution percentage for all employees
in the plan.
(2) Deemed uniformity -- (i) In general. The disparity under a plan
does not fail to be uniform for purposes of this paragraph (c) merely
because the plan contains one or more of the provisions described in
paragraphs (c)(2) (ii) and (iii) of this section.
(ii) Overall permitted disparity. The plan provides that, in the
case of each employee who has reached the cumulative permitted disparity
limit applicable to the employee under 1.401(l)-5(c), employer
contributions are allocated to the account of the employee with respect
to the employee's total plan year compensation at the excess
contribution percentage.
(iii) Non-FICA employees. The plan provides that, in the case of
each employee under the plan with respect to whom none of the taxes
under section 3111(a), section 3221, or section 1401 is required to be
paid, employer contributions are allocated to the account of the
employee with respect to the employee's total plan year compensation at
the excess contribution percentage.
(d) Integration level -- (1) In general. The integration level under
the plan must satisfy paragraph (d)(2), (d)(3), or (d)(4) of this
section, as modified by paragraph (d)(5) of this section in the case of
a short plan year. If a reduction applies to the disparity factor under
this paragraph (d), the reduced factor is used for all purposes in
determining whether the permitted disparity rules for defined
contribution plans are satisfied.
(2) Taxable wage base. The requirement of this paragraph (d)(2) is
satisfied only if the integration level under the plan for each employee
is the taxable wage base in effect as of the beginning of the plan year.
(3) Single dollar amount. The requirement of this paragraph (d)(3)
is satisfied only if the integration level under the plan for all
employees is a single dollar amount (either specified in the plan or
determined under a formula specified in the plan) that does not exceed
the greater of $10,000 or 20 percent of the taxable wage base in effect
as of the beginning of the plan year.
(4) Intermediate amount. The requirement of this paragraph (d)(4) is
satisfied only if --
(i) The integration level under the plan for all employees is a
single dollar amount (either specified in the plan or determined under a
formula specified in the plan) that is greater than the highest amount
determined under paragraph (d)(3) of this section and less than the
taxable wage base, and
(ii) The plan adjusts the factor determined under paragraph
(b)(2)(ii) of this section in accordance with the table below.
(5) Prorated integration level for short plan year. If a plan uses
paragraph (2) or (4) of the definition of plan year compensation under
1.401(a)(4)-12 (i.e., section 414(s) compensation for the plan year or
the period of plan participation) and has a plan year that comprises
fewer than 12 months, the integration level under the plan for each
employee must be an amount equal to the otherwise applicable integration
level described in paragraph (d)(2), (d)(3), or (d)(4) of this section,
multiplied by a fraction, the numerator of which is the number of months
in the plan year, and the denominator of which is 12. No adjustment to
the maximum excess allowance is required as a result of the application
of this paragraph (d)(5), other than any adjustment already required
under paragraph (d)(4) of this section.
(e) Examples. The following examples illustrate this section. In
each example, 5.7 percent exceeds the percentage rate of tax described
in paragraph (b)(2)(ii)(B) of this section.
Example 1. Employer X maintains a profit-sharing plan with the
calendar year as its plan year. For the 1989 plan year, the plan
provides that the account of each employee who has plan year
compensation in excess of the taxable wage base in effect at the
beginning of the plan year will receive an allocation for the plan year
of 5.7 percent of plan year compensation in excess of the taxable wage
base. The plan provides that no allocation will be made to the account
of any employee for the plan year with respect to plan year compensation
not in excess of the taxable wage base. The maximum excess allowance is
exceeded for the 1989 plan year because the excess contribution
percentage (5.7 percent) for the plan year exceeds the base contribution
percentage (0 percent) for the plan year by more than the lesser of the
base contribution percentage (0 percent) or the percentage determined
under paragraph (b)(2)(ii) of this section (5.7 percent) for the plan
year.
Example 2. Employer Y maintains a money purchase pension plan with
the calendar year as its plan year. For the 1990 plan year, the plan
provides that the account of each employee will receive an allocation of
5 percent of the employee's plan year compensation up to the taxable
wage base in effect at the beginning of the plan year plus an allocation
of 10 percent of the employee's plan year compensation in excess of the
taxable wage base. The maximum excess allowance is not exceeded for the
plan year because the excess contribution percentage (10 percent) for
the plan year does not exceed the base contribution percentage (5
percent) for the plan year by more than the lesser of the base
contribution percentage (5 percent) or the percentage determined under
paragraph (b)(2)(ii) of this section (5.7 percent) for the plan year.
Example 3. Assume the same facts as in Example 2, except that the
plan provides that, with respect to plan year compensation in excess of
the taxable wage base, the account of each employee will receive an
allocation for the plan year of 12 percent of such compensation. The
maximum excess allowance is exceeded for the plan year because the
excess contribution percentage (12 percent) for the plan year exceeds
the base contribution percentage (5 percent) for the plan year by more
than the lesser of the base contribution percentage (5 percent) or the
percentage determined under paragraph (b)(2)(ii) of this section (5.7
percent) for the plan year.
Example 4. Employer Z maintains a money purchase pension plan with a
plan year beginning July 1 and ending June 30. The taxable wage base
for the 1990 calendar year is $51,300 and the taxable wage base for the
1991 calendar year is $53,400. For the plan year beginning July 1,
1990, and ending June 30, 1991, the plan provides that the account of
each employee will receive an allocation of 4 percent of the employee's
plan year compensation up to $53,400 plus an allocation of 6 percent of
the employee's plan year compensation in excess of $53,400. Although
the excess contribution percentage (6 percent) for the plan year does
not exceed the base contribution percentage (4 percent) for the plan
year by more than the lesser of the base contribution percentage (4
percent) or the percentage determined under paragraph (b)(2)(ii) of this
section (5.7 percent), the plan does not satisfy paragraph (a)(5) of
this section because the integration level of $53,400 exceeds the
maximum permitted integration level of $51,300 (the taxable wage base in
effect as of the beginning of the plan year).
Example 5. Assume the same facts as in Example 4, except that for
the plan year beginning July 1, 1990, and ending June 30, 1991, the plan
provides that the account of each employee will receive an allocation of
5 percent of the employee's plan year compensation up to $30,000 plus an
allocation of 9 percent of the employee's plan year compensation in
excess of $30,000. The integration level of $30,000 is 58 percent of
the taxable wage base of $51,300 for the 1990 calendar year. The
maximum excess allowance is not exceeded for the plan year because the
excess contribution percentage (9 percent) for the plan year does not
exceed the base contribution percentage (5 percent) for the plan year by
more than the lesser of the base contribution percentage (5 percent) or
the percentage determined under paragraphs (b)(2)(ii) and (d) of this
section (4.3 percent) for the plan year.
(T.D. 8359, 56 FR 47621, Sept. 19, 1991; 57 FR 10818, 10951, Mar.
31, 1992)
26 CFR 1.401(l)-3 Permitted disparity for defined benefit plans.
(a) Requirements -- (1) In general. Disparity in the rates of
employer-provided benefits under a defined benefit plan is permitted
under section 401(l) and this section for a plan year only if the plan
satisfies paragraphs (a)(2) through (a)(6) of this section. A plan that
otherwise satisfies this paragraph (a) will not be considered to fail
section 401(l) merely because it contains one or more provisions
described in 1.401(a)(4)-3(b)(8) (such as multiple formulas). Section
401(a)(5)(D) and 1.401(a)(5)-1(d) provide other rules under which
benefits provided under a defined benefit plan (including defined
benefit excess and offset plans) may be limited. See
1.401(a)(4)-3(b)(7)(viii) for special rules under which an insurance
contract plan may satisfy 1.401(a)(4)-1(b)(2) and section 401(l). See
1.401(a)(4)-8(c)(3)(iii)(B) for special rules applicable to cash balance
plans.
(2) Excess or offset plan requirement. The plan must be a defined
benefit excess plan or an offset plan.
(3) Maximum disparity. The disparity for all employees under the
plan must not exceed the maximum permitted disparity prescribed in
paragraph (b) of this section.
(4) Uniform disparity. The disparity for all employees under the
plan must be uniform within the meaning of paragraph (c) of this
section.
(5) Integration or offset level. The integration or offset level
specified in the plan must satisfy paragraph (d) of this section.
(6) Benefits, rights, and features. The benefits, rights, and
features provided under the plan must satisfy paragraph (f)(1) of this
section.
(b) Maximum permitted disparity -- (1) In general. In the case of a
defined benefit excess plan, the disparity provided for the plan year
may not exceed the maximum excess allowance as defined in paragraph
(b)(2) of this section. In the case of an offset plan, the disparity
provided for the plan year may not exceed the maximum offset allowance
as defined in paragraph (b)(3) of this section. In addition, either
type of plan must satisfy the overall permitted disparity limits of
1.401(l)-5.
(2) Maximum excess allowance. The maximum excess allowance for a
plan year is the lesser of --
(i) 0.75 percent, reduced as required under paragraphs (d) and (e) of
this section, or
(ii) The base benefit percentage for the plan year.
(3) Maximum offset allowance. The maximum offset allowance for a
plan year is the lesser of --
(i) 0.75 percent, reduced as required under paragraphs (d) and (e) of
this section, or
(ii) One-half of the gross benefit percentage, multiplied by a
fraction (not to exceed one), the numerator of which is the employee's
average annual compensation, and the denominator of which is the
employee's final average compensation up to the offset level.
(4) Rules of application -- (i) Disparity provided for the plan year.
Disparity provided for the plan year generally means the disparity
provided under the plan's benefit formula for the employee's year of
service with respect to the plan year. However, if a plan determines
each employee's accrued benefit under the fractional accrual method of
section 411(b)(1)(C), disparity provided under the plan also means the
disparity in the benefit accrued for the employee for the plan year.
Thus, a plan using the fractional accrual method must satisfy this
paragraph (b) with respect to the plan's benefit formula and with
respect to the benefits accrued for the plan year.
(ii) Reduction in disparity rate. Any reductions in the 0.75-percent
factor required under paragraphs (d) and (e) of this section are
cumulative.
(iii) Normal and optional forms of benefit -- (A) In general. A plan
satisfies the maximum permitted disparity requirement of this paragraph
(b) only if the plan satisfies this paragraph (b) with respect to each
optional form of benefit (including the normal form of benefit) provided
under the plan.
(B) Level annuity forms. In the case of an optional form of benefit
payable as a level annuity over a period of not less than the life of
the employee, the optional form must satisfy the maximum permitted
disparity requirement of this paragraph (b). Thus, for example, if the
form of a defined benefit plan's normal retirement benefit is an annuity
for life with a 10-year certain feature and the plan permits employees
to elect an optional form of benefit in the form of a straight life
annuity, the plan must satisfy the maximum disparity requirement of this
paragraph (b) with respect to each of the optional forms of benefit. An
annuity that decreases only after the death of the employee, or that
decreases only after the death of either the employee or the joint
annuitant, is considered a level annuity for purposes of this paragraph
(b).
(C) Other forms. In the case of an optional form of benefit that is
not described in paragraph (b)(4)(iii)(B) of this section, the optional
form must satisfy the maximum permitted disparity requirement of this
paragraph (b), when the respective portions of the optional form are
normalized under the rules of 1.401(a)(4)-3(d)(5)(iv) to a straight
life annuity commencing at the same time as the optional form of
benefit, regardless of whether the straight life annuity form is
actually provided under the plan. In the case of a defined benefit
excess plan, the respective portions are the portion of the optional
form attributable to average annual compensation up to the integration
level (the ''base portion'') and the portion of the optional form
attributable to average annual compensation in excess of the integration
level (the ''excess portion''). In the case of an offset plan, the
respective portions are the optional form determined without regard to
the offset (the ''gross amount'') and the offset applied to the gross
amount to determine the optional form (the ''offset amount'').
(D) Post-retirement cost-of-living adjustments -- (1) In general. A
benefit does not fail to be a level annuity described in paragraph
(b)(4)(iii)(B) of this section merely because it provides an automatic
post-retirement cost-of-living adjustment that satisfies paragraph
(b)(4)(iii)(D)(2) of this section. Thus, increases in the employee's
annuity pursuant to such a cost-of-living adjustment do not cause the
disparity provided under the optional form of benefit to exceed the
maximum disparity permitted under this paragraph (b). For rules on ad
hoc post-retirement cost-of-living adjustments, see 1.401(a)(4)-10(b).
(2) Requirements. A cost-of-living adjustment satisfies this
paragaph (b)(4)(iii)(D)(2) if --
(i) It is included in the accrued benefit of all employees, and.
(ii) It increases, on a uniform and consistent basis, the benefits of
all former employees who are no younger than age 62, at a rate no
greater than adjustments to social security benefits under section
215(i)(2)(A) of the Social Security Act that have occurred since the
later of the employee's attainment of age 62 or commencement of
benefits.
(E) Section 417(e) exception. A plan will not fail to satisfy this
paragraph (b) merely because the disparity in a benefit that is subject
to the interest rate restrictions of sections 401(a)(11) and 417(e)
exceeds the maximum disparity that would otherwise be allowed under this
paragraph (b) to the extent the increase in disparity is required to
satisfy 1.417(e)-1(d).
(5) Examples. The following examples illustrate this paragraph (b).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of a defined
benefit excess plan, the plan uses each employee's covered compensation
as the integration level; in the case of an offset plan, the plan uses
each employee's covered compensation as the offset level and provides
that an employee's final average compensation is limited to the
employee's average annual compensation. Each example discusses the
benefit formula applicable to an employee who has a social security
retirement age of 65.
Example 1. Plan N is a defined benefit excess plan that provides a
normal retirement benefit of 0.5 percent of average annual compensation
in excess of the integration level, for each year of service. The plan
provides no benefits with respect to average annual compensation up to
the integration level. The disparity provided under the plan exceeds
the maximum excess allowance because the excess benefit percentage (0.5
percent) exceeds the base benefit percentage (0 percent) by more than
the base benefit percentage (0 percent).
Example 2. Plan O is an offset plan that provides a normal
retirement benefit equal to 2 percent of average annual compensation,
minus 0.75 percent of final average compensation up to the offset level,
for each year of service up to 35. The disparity provided under the
plan satisfies this paragraph (b) because the offset percentage (0.75
percent) does not exceed the maximum offset allowance equal to the
lesser of 0.75 percent or one-half of the gross benefit percentage (1
percent).
Example 3. Plan P is a defined benefit excess plan that provides a
normal retirement benefit of 0.5 percent of average annual compensation
up to the integration level, plus 1.25 percent of average annual
compensation in excess of the integration level, for each year of
service up to 35. The disparity provided under the plan exceeds the
maximum excess allowance because the excess benefit percentage (1.25
percent) exceeds the base benefit percentage (0.5 percent) by more than
the base benefit percentage (0.5 percent).
Example 4. Plan Q is an offset plan that provides a normal
retirement benefit of 1 percent of average annual compensation, minus
0.75 percent of final average compensation up to the offset level, for
each year of service up to 35. The disparity under the plan exceeds the
maximum offset allowance because the offset percentage exceeds one-half
of the gross benefit percentage (0.5 percent).
Example 5. (a) Plan R is an offset plan that provides a normal
retirement benefit of 1 percent of average annual compensation, minus
0.5 percent of final average compensation up to the offset level, for
each year of service up to 35. The plan determines an employee's
average annual compensation using an averaging period comprising five
consecutive 12-month periods and taking into account the employee's
compensation for the ten consecutive 12-month periods ending with the
plan year. The plan does not provide that an employee's final average
compensation is limited to the employee's average annual compensation.
(b) Employee A has average annual compensation of $20,000, final
average compensation of $25,000, and covered compensation of $32,000.
The maximum offset allowance applicable to Employee A for the plan year
under paragraph (b)(3) of this section is one-half of the gross benefit
percentage multiplied by the ratio, not to exceed one, of Employee A's
average annual compensation to Employee A's final average compensation
up to the offset level. Thus, the maximum offset allowance is 0.4
percent ( 1/2 1 percent $20,000/$25,000). With respect to Employee A,
the benefit formula provides an offset that exceeds the maximum offset
allowance. The plan must therefore reduce Employee A's offset
percentage to 0.4 percent. (Under paragraph (c)(2)(viii) of this
section, Employee A's adjusted disparity rate is deemed uniform.)
(c) Alternatively, under 1.401(l)-1(c)(17)(ii) (the definition of
final average compensation), the plan could specify that an employee's
final average compensation is limited to the amount of the employee's
average annual compensation. Thus, the ratio of average annual
compensation to final average compensation would always be equal to at
least one, and the maximum offset allowance under the plan would be
one-half of the gross benefit percentage.
Example 6. Plan S is a defined benefit excess plan that provides a
base benefit percentage of 1 percent of average annual compensation up
to the integration level for each year of service. The plan also
provides, for each of the first 10 years of service, an excess benefit
percentage of 1.85 percent of average annual compensation in excess of
the integration level. For each year of service after 10, the plan
provides an excess benefit percentage of 1.65 percent of the employee's
average annual compensation in excess of the integration level. The
disparity provided under the plan exceeds the maximum excess allowance
because the excess benefit percentage for each of the first ten years of
service (1.85 percent) exceeds the base benefit percentage (1 percent)
by more than 0.75 percent.
Example 7. The facts are the same as in Example 6, except that the
plan provides an excess benefit percentage of 1.65 percent of average
annual compensation in excess of the integration level for each of the
first 10 years of service and an excess benefit percentage of 1.85
percent of average annual compensation in excess of the integration
level for each year of service after 10. The disparity provided under
the plan exceeds the maximum excess allowance because the excess benefit
percentage for each year of service after 10 (1.85 percent) exceeds the
base benefit percentage (1 percent) by more than 0.75 percent.
Example 8. Plan T is a defined benefit excess plan that provides a
normal retirement benefit of 1.0 percent of average annual compensation
up to the integration level, plus 1.7 percent of average annual
compensation in excess of the integration level, for each year of
service up to 35, payable in the form of a joint and survivor annuity.
The plan also allows an employee to receive the retirement benefit in
the form of an actuarially equivalent straight life annuity. The
actuarially equivalent straight life annuity equals 1.09 percent of
average annual compensation up to the integration level, plus 1.85
percent of average annual compensation in excess of the integration
level, for each year of service up to 35. The disparity provided under
the plan with respect to the straight life annuity form of benefit (0.76
percent) exceeds the maximum excess allowance because the excess benefit
percentage (1.85 percent) exceeds the base benefit percentage (1.09
percent) by more than 0.75 percent.
Example 9. Plan U is a defined benefit excess plan that provides a
normal retirement benefit of 1.0 percent of average annual compensation
up to the integration level, plus 1.7 percent of average annual
compensation in excess of the integration level, for each year of
service up to 35, payable in the form of a straight life annuity. Plan
U provides a single sum optional form of benefit at normal retirement
age equal to 100 times the monthly annuity payable at that age. Thus,
if an employee elects the single sum optional form of benefit, the base
portion of the single sum benefit is 100 percent (100 times 1.0 percent)
of average annual compensation up to the integration level per year of
service, and the excess portion of the single sum benefit is 170 percent
(100 times 1.7 percent) of average annual compensation in excess of the
integration level per year of service. Each respective portion of the
single sum option is normalized to a straight life annuity commencing at
normal retirement age, using 8-percent interest and the UP-84 mortality
table. After normalization, the base portion of the benefit is 1.02
percent of average annual compensation up to the integration level, and
the excess portion of the benefit is 1.73 percent of average annual
compensation in excess of the integration level. The single sum
optional form of benefit satisfies this paragraph (b) because the
disparity provided in the optional form of benefit does not exceed the
maximum excess allowance.
(c) Uniform disparity -- (1) In general. The disparity provided
under a defined benefit excess plan is uniform only if the plan uses the
same base benefit percentage and the same excess benefit percentage for
all employees with the same number of years of service. The disparity
provided under an offset plan is uniform only if the plan uses the same
gross benefit percentage and the same offset percentage for all
employees with the same number of years of service. The disparity
provided under a plan that determines each employee's accrued benefit
under the fractional accrual method of section 411(b)(1)(C) is uniform
only if the plan satisfies one of the deemed uniformity rules of
paragraph (c)(2) (ii) or (iii) of this section.
(2) Deemed uniformity -- (i) In general. The disparity provided
under a plan does not fail to be uniform for purposes of this paragraph
(c) merely because the plan contains one or more of the provisions
described in paragraphs (c)(2) (ii) through (viii) of this section.
(ii) Use of fractional accrual and disparity for 35 years. The plan
contains a benefit formula as described in paragraphs (c)(2)(ii) (A) and
(B) of this section, and the plan determines each employee's accrued
benefit under the method described in 1.401(a)(4)-3(b)(4)(i)(B) or
1.401(a)(4)-3(b)(5)(i)(B), i.e., by multiplying the employee's
fractional rule benefit (within the meaning of 1.411(b)-1(b)(3)(ii)(A))
by a fraction, the numerator of which is the employee's years of service
determined as of the plan year, and the denominator of which is the
employee's projected years of service as of normal retirement age.
(A) For each year of service at least up to 35, the benefit plan
formula provides the same base benefit percentage and the same excess
benefit percentage for all employees in the case of a defined benefit
excess plan or the same gross benefit percentage and the same offset
percentage for all employees in the case of an offset plan.
(B) For each additional year of service, the benefit formula provides
a uniform percentage of all average annual compensation that is no
greater than the excess benefit percentage or the gross benefit
percentage under paragraph (c)(2)(ii)(A) of this section, whichever is
applicable.
(iii) Use of fractional accrual and disparity for fewer than 35
years. The plan contains a benefit formula as described in paragraphs
(c)(2)(iii) (A) through (C) of this section, and the plan determines
each employee's accrued benefit under the method described in
1.401(a)(4)-3(b)(4)(i)(B) or 1.401(a)(4)-3(b)(5)(i)(B).
(A) For each year in the employee's initial period of service
comprising fewer than 35 years, the benefit formula provides the same
base benefit percentage and the same excess benefit percentage for all
employees in the case of a defined benefit excess plan or the same gross
benefit percentage and the same offset percentage for all employees in
the case of an offset plan.
(B) For each year of service after the initial period and at least up
to 35, the benefit formula provides a uniform percentage of all average
annual compensation, that is equal to the excess benefit percentage or
the gross benefit percentage under paragraph (c)(2)(iii)(A) of this
section.
(C) For each year of service after the period described in paragraph
(c)(2)(iii)(B) of this section, the benefit formula provides a uniform
percentage of all average annual compensation that is no greater than
the excess benefit percentage or the gross benefit percentage under
paragraph (c)(2)(iii)(A) of this section.
(iv) Different social security retirement ages. The benefit formula
uses the same excess benefit percentage or the same gross benefit
percentage for all employees with the same number of years of service
and, for employees with social security retirement ages later than age
65, adjusts the 0.75-percent factor in the maximum excess or offset
allowance as required under paragraph (e)(1) of this section, by
increasing the base benefit percentage in the case of a defined benefit
excess plan, or reducing the offset percentage in the case of an offset
plan.
(v) Reduction for integration level. The plan uses an integration
level or offset level greater than each employee's covered compensation
and makes individual reductions in the 0.75-percent factor, as permitted
under paragraph (d)(9)(iii)(B) of this section, by increasing the base
benefit percentage in the case of a defined benefit excess plan or
reducing the offset percentage in the case of an offset plan.
(vi) Overall permitted disparity. The benefit formula provides that,
with respect to each employee's years of service after reaching the
cumulative permitted disparity limit applicable to the employee under
1.401(l)-5(c), employer-provided benefits are determined with respect to
the employee's total average annual compensation at a rate equal to the
lesser of --
(A) The excess benefit percentage or gross benefit percentage
applicable to an employee with the same number of years of service, or
(B) The highest percentage permitted under the 133 1/3 percent
accrual rule of section 411(b)(1)(B).
(vii) Non-FICA employees. The plan provides that, in the case of
each employee under the plan with respect to whom none of the taxes
under section 3111(a), section 3221, or section 1401 is required to be
paid, employer-provided benefits are determined with respect to the
employee's total average annual compensation at the excess benefit
percentage or gross benefit percentage applicable to an employee with
the same number of years of service.
(viii) Average annual compensation adjustment for offset plan. In
the case of each employee whose final average compensation exceeds the
employee's average annual compensation, the plan adjusts the offset
percentage as required under paragraph (b)(3)(ii) of this section in
order to satisfy the maximum offset allowance.
(3) Examples. The following examples illustrate this paragraph (c).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of a defined
benefit excess plan, the plan uses each employee's covered compensation
as the integration level; in the case of an offset plan, the plan uses
each employee's covered compensation as the offset level and provides
that an employee's final average compensation is limited to the
employee's average annual compensation. Each example discusses the
benefit formula applicable to an employee who has a social security
retirement age of 65.
Example 1. Plan M is a defined benefit excess plan that satisfies
the 133 1/3 percent accrual rule of section 411(b)(1)(B). The plan
provides a normal retirement benefit of 1.0 percent of average annual
compensation up to the integration level, plus 1.65 percent of average
annual compensation in excess of the integration level, for each year of
service up to 25. The plan also provides a benefit of 1.0 percent of
all average annual compensation for each year of service in excess of
25. The disparity provided under the plan is uniform because the plan
uses the same base and excess benefit percentages for all employees with
the same number of years of service. If the plan formula were the same
except that it used a different excess benefit percentage for some of
the years of service between one and 25, the disparity under the plan
would continue to be uniform.
Example 2. Plan O is a defined benefit excess plan that provides a
normal annual compensation up to the integration level and 68.75 percent
of average annual compensation in excess of the integration level,
multiplied by a fraction, the numerator of which is the employee's
service, up to 25 years, and the denominator of which is 25. The plan
determines an employee's accrued benefit as described in
1.401(a)(4)-3(b)(5)(i)(B). Under the plan an employee accrues 1/25th of
the normal retirement benefit for each of the employee's first 25 years
of service. The plan thus provides a base benefit percentage of 2
percent (50 percent 1/25) and an excess benefit percentage of 2.75
percent (68.75 percent 1/25) for each of an employee's first 25 years
of service and no benefit for years of service after 25. The disparity
provided under the plan is not uniform within the meaning of this
paragraph (c) because the benefit formula does not satisfy either of the
uniform disparity rules for fractional accrual plans under paragraphs
(c)(2) (ii) and (iii) of this section.
Example 3. Plan P is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation for each
year of service up to 35, minus 0.75 percent of the final average
compensation up to the offset level for each year of service up to 25.
The plan determines an employee's accrued benefit under the method
described in 1.401(a)(4)-3(b)(4)(i)(B). Because the formula under the
plan provides the same gross benefit percentage and offset percentage
for 25 years of service (fewer than 35) and, for years of service after
25 and up to 35, provides a benefit at a uniform rate (equal to the
gross benefit percentage) of all average annual compensation, and the
plan accrues the benefit ratably, the disparity under the plan is deemed
to be uniform under paragraph (c)(2)(iii) of this section.
Example 4. Plan Q is an offset plan that benefits employees with
social security retirement ages of 65, 66, and 67. For each year of
service up to 35, the plan provides a normal retirement benefit equal to
2 percent of average annual compensation, minus an offset based on the
employee's final average compensation up to the offset level. For
employees with a social security retirement age of 65, the offset
percentage is 0.75 percent; for employees with a social security
retirement age of 66, the offset percentage is 0.70 percent; and for
employees with a social security retirement age of 67, the offset
percentage is 0.65 percent. The disparity under the plan is deemed to be
uniform under paragraph (c)(2)(iv) of this section because the plan uses
the same gross benefit percentage for all employees and reduces the
offset percentage for employees with social security retirement ages of
66 and 67 to comply with the adjustments in the 0.75-percent factor in
the maximum excess or offset allowance required under paragraph (e)(1)
of this section. (Because Plan Q effectively provides unreduced
benefits prior to the social security retirement age for employees with
social security retirement ages of 66 and 67, the 0.75-percent factor in
the maximum offset allowance must be reduced to 0.70 percent and 0.65
percent, respectively.) Alternatively, Plan Q could satisfy this
paragraph (c) if it provided a uniform offset percentage of 0.65 percent
for all employees because 0.65 percent is the maximum offset allowance
under the plan for an employee with a social security retirement age of
67.
Example 5. Plan R is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation, minus an
offset determined as a percentage of total final average compensation,
for each year of service up to 35. For an employee whose final average
compensation does not exceed the employee's covered compensation, the
offset percentage is 0.75 percent. For an employee whose final average
compensation exceeds the employee's covered compensation, the plan
reduces the offset percentage, as required by paragraph (d) of this
section. The reduced offset percentage is determined by comparing the
employee's final average compensation to the employee's covered
compensation as permitted under paragraph (d)(9)(iii)(B) of this
section. The disparity provided under the plan is deemed uniform under
paragraph (c)(2)(v) of this section because the plan uses the same gross
benefit percentage for all employees and makes individual reductions in
the 0.75-percent factor, as permitted under paragraph (d)(9)(iii)(B) of
this section, by reducing the offset percentage in the case of an
employee whose final average compensation exceeds covered compensation.
(d) Requirements for integration or offset level -- (1) In general.
The integration level under a defined benefit excess plan or the offset
level under an offset plan must satisfy paragraphs (d)(2), (d)(3),
(d)(4), (d)(5) or (d)(6) of this section, as modified by paragraph
(d)(7) of this section in the case of a short plan year. Paragraph
(d)(8) of this section contains demographic tests that apply to certain
defined benefit plans. Paragraph (d)(9) of this section explains
certain reductions required in the 0.75-percent factor under paragraph
(b)(2) or (b)(3) of this section. Paragraph (d)(10) of this section
contains examples. If a reduction applies to the 0.75-percent factor
under this paragraph (d), the reduced factor is used for all purposes in
determining whether the permitted disparity rules for defined benefit
plans are satisfied.
(2) Covered compensation. The requirement of this paragraph (d)(2)
is satisfied only if the integration or offset level under the plan for
each employee is the employee's covered compensation.
(3) Uniform percentage of covered compensation. The requirement of
this paragraph (d)(3) is satisfied only if --
(i) The integration or offset level under the plan for each employee
is a uniform percentage (greater than 100 percent) of each employee's
covered compensation,
(ii) In the case of a defined benefit excess plan, the integration
level does not exceed the taxable wage base in effect for the plan year,
and, in the case of an offset plan, the offset level does not exceed the
employee's final average compensation, and
(iii) The plan adjusts the 0.75-percent factor in the maximum excess
or offset allowance in accordance with paragraph (d)(9) of this section.
(4) Single dollar amount. The requirement of this paragraph (d)(4)
is satisfied only if the integration or offset level under the plan for
all employees is a single dollar amount (either specified in the plan or
determined under a formula specified in the plan) that does not exceed
the greater of $10,000 or one-half of the covered compensation of an
individual who attains social security retirement age in the calendar
year in which the plan year begins. In the case of a calendar year in
which no individual could attain social security retirement age, for
example, the year 2003, this rule is applied using covered compensation
of an individual attaining social security retirement age in the
preceding calendar year.
(5) Intermediate amount. The requirement of this paragraph (d)(5) is
satisfied only if --
(i) The integration or offset level under the plan for all employees
is a single dollar amount (either specified in the plan or determined
under a formula specified in the plan) that is greater than the highest
amount determined under paragraph (d)(4) of this section,
(ii) In the case of a defined benefit excess plan, the single dollar
amount does not exceed the taxable wage base in effect for the plan
year, and, in the case of an offset plan, the single dollar amount does
not exceed the employee's final average compensation,
(iii) The plan satisfies the demographic requirements of paragraph
(d)(8) of this section, and
(iv) The plan adjusts the 0.75-percent factor in the maximum excess
or offset allowance in accordance with paragraph (d)(9) of this section.
For purposes of this paragraph (d)(5), an offset level of each
employee's final average compensation is considered a single dollar
amount determined under a formula specified in the plan.
(6) Intermediate amount safe harbor. The requirement of this
paragraph (d)(6) is satisfied only if --
(i) The integration or offset level under the plan for all employees
is a single dollar amount described in paragraph (d)(5) of this section,
and
(ii) The 0.75-percent factor in the maximum excess or offset
allowance under paragraph (b)(2) or (b)(3) of this section is reduced to
the lesser of the adjusted factor determined under paragraph (d)(9) of
this section or 80 percent of the otherwise applicable factor under
paragraph (b)(2) or (b)(3) of this section, determined without regard to
paragraph (d)(9) of this section.
(7) Prorated integration level for short plan year. If an
accumulation plan uses paragraph (2) or (4) of the definition of plan
year compensation under 1.401(a)(4)-12 (i.e., section 414(s)
compensation for the plan year or the period of plan participation) and
has a plan year that comprises fewer than 12 months, the integration or
offset level under the plan for each employee must be an amount equal to
the otherwise applicable integration or offset level described in
paragraph (d)(2), (d)(3), (d)(4), (d)(5), or (d)(6) of this section,
multiplied by a fraction, the numerator of which is the number of months
in the plan year and the denominator of which is 12. No adjustment to
the maximum excess or offset allowance is required as a result of the
application of this paragraph (d)(7), other than any adjustment already
required under paragraph (d)(6) or (d)(9) of this section.
(8) Demographic requirements -- (i) In general. A plan that
satisfies the demographic requirements of paragraphs (d)(8)(ii) and
(iii) of this section may use an integration level described in
paragraph (d)(5) of this section.
(ii) Attained age requirement. The requirement of this paragraph
(d)(8)(ii) is satisfied only if the average attained age of the
nonhighly compensated employees in the plan is not greater than the
greater of --
(A) Age 50, or
(B) 5 plus the average attained age of the highly compensated
employees in the plan. For purposes of this paragraph (d)(8)(ii),
attained ages are determined as of the beginning of the plan year.
(iii) Nondiscrimination requirement. The requirement of this
paragraph (d)(8)(iii) is satisfied only if at least one of the following
three tests is satisfied.
(A) Minimum percentage test. This test is satisfied only if more
than 50 percent of the nonhighly compensated employees in the plan have
average annual compensation at least equal to 120 percent of the
integration or offset level.
(B) Ratio test. This test is satisfied only if the percentage of
nonhighly compensated nonexcludable employees, who are in the plan and
who have average annual compensation at least equal to 120 percent of
the integration or offset level, is at least 70 percent of the
percentage of highly compensated nonexcludable employees who are
employees in the plan.
(C) High dollar amount test. This test is satisfied only if the
integration or offset level exceeds 150 percent of the covered
compensation of an individual who attains social security retirement age
in the calendar year in which the plan year begins. In the case of a
calendar year in which no individual could attain social security
retirement age, for example, the year 2003, this rule is applied using
covered compensation of an individual attaining social security
retirement age in the preceding calendar year.
(9) Reduction in the 0.75-percent factor if integration or offset
level exceeds covered compensation -- (i) In general. If the
integration or offset level specified under the plan is each employee's
covered compensation as of the plan year, no reduction in the
0.75-percent factor in the maximum excess or offset allowance is
required for the plan year under this paragraph (d)(9). If a plan
specifies an integration or offset level that exceeds an employee's
covered compensation, the 0.75-percent factor in the maximum excess or
offset allowance must be reduced as required in paragraph (d)(9)(ii) or
(iii) of this section. Paragraph (d)(9)(iv) of this section contains a
table of the applicable reductions.
(ii) Uniform percentage of covered compensation. If a plan specifies
an integration or offset level that is a uniform percentage (in excess
of 100 percent) of each employee's covered compensation, the
0.75-percent factor in the maximum excess or offset allowance must be
reduced in accordance with the table in paragraph (d)(9)(iv) of this
section. Thus, for example, if a plan specifies an integration or
offset level of 120 percent of each employee's covered compensation, the
0.75-percent factor in the maximum excess or offset allowance must be
reduced to 0.69 percent in accordance with the table because the
specified integration or offset level is more than covered compensation
but not more than 125 percent of covered compensation.
(iii) Single dollar amount. If a plan specifies an integration or
offset level of a single dollar amount as permitted under paragraph
(d)(5) of this section (for example, $30,000), the applicable reduction
in the maximum excess or offset allowance must be determined under
paragraph (d)(9)(iii) (A) or (B) of this section, as specified under the
plan.
(A) Plan-wide reduction. The applicable reduction in the maximum
excess or offset allowance under the table in paragraph (d)(9)(iv) of
this section may be determined by comparing the single dollar amount
specified in the plan to the covered compensation of an individual
attaining social security retirement age in the calendar year in which
the plan year begins. Thus, for example, if a plan specifies a single
integration or offset level of $30,000 that is uniformly applicable to
all employees for a plan year and the covered compensation of an
individual attaining social security retirement age in the calendar year
in which the plan year begins is $20,000, the 0.75-percent factor in the
maximum excess or offset allowance must be reduced to 0.60 percent for
all employees in accordance with the table in paragraph (d)(9)(iv) of
this section because the specified integration or offset level of
$30,000 is more than 125 percent of $20,000 but not more than 150
percent of $20,000. In the case of a calendar year in which no
individual could attain social security retirement age (for example,
2003), the comparison is made with covered compensation of an individual
who attained social security retirement age in the preceding calendar
year. If an offset plan uses an offset level of each employee's final
average compensation, the reduction under this paragraph (d)(9)(iii)(A)
is determined by comparing the highest possible amount of final average
compensation to the covered compensation of an individual attaining
social security retirement age in the calendar year in which the plan
year begins.
(B) Individual reductions. The applicable reduction in the maximum
excess or offset allowance under the table in paragraph (d)(9)(iv) of
this section may be determined by comparing the single dollar amount
specified in the plan to the covered compensation of each employee under
the plan. Thus, for example, if a plan specifies a single integration
or offset level of $30,000 that is uniformly applicable to all employees
for a plan year, the 0.75-percent factor in the maximum excess or offset
allowance must be reduced to 0.60 percent for an employee with covered
compensation of $20,000, but need not be reduced for an employee whose
covered compensation is $30,000 or greater.
(iv) Reductions -- (A) Table.
(B) Interpolation. If the integration or offset level used under a
plan is between the percentages of covered compensation in the table,
the permitted disparity factor applicable to the plan can be determined
either by straight-line interpolation between the permitted disparity
factors in the table or by rounding the integration or offset level up
to the next highest percentage of covered compensation in the table.
(10) Examples. The following examples illustrate this paragraph (d).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of an offset
plan, the plan provides that an employee's final average compensation is
limited to the employee's average annual compensation. Each example
discusses the benefit formula applicable to an employee who has a social
security retirement age of 65.
Example 1. (a) Plan M is a defined benefit excess plan that uses the
calendar year as its plan year. For the 1989 plan year, the plan uses
an integration level of $20,000, which is 118 percent of the 1989
covered compensation of $16,968 for an individual reaching social
security retirement age in 1989. The plan may use that integration
level without satisfying paragraph (d)(8) of this section, provided the
adjustment to the 0.75-percent factor required under paragraph (d)(6) of
this section is made. That adjustment is the lesser of the factor
determined under paragraph (d)(9) of this section or 80 percent of the
factor otherwise applicable under paragraph (b)(2) or (b)(3) of this
section.
(b) The plan determines the factor under paragraph (d)(9) of this
section by comparing the integration level to the covered compensation
of an individual attaining social security retirement age in the
calendar year in which the plan year begins and by rounding the
integration level up to 125 percent of that covered compensation amount.
The 0.75-percent factor is therefore replaced by 0.69 percent pursuant
to the table in paragraph (d)(9) of this section. The 0.69-percent
factor is 92 percent of the 0.75-percent factor. Because the lesser of
80 percent and 92 percent is 80 percent, the 0.75-percent factor is
reduced to 0.6 percent (80 percent of 0.75 percent) under paragraph
(d)(6) of this section. The 0.6-percent factor applies to benefits
commencing at age 65 for an employee with a social security retirement
age of 65. In determining normal retirement benefits for employees with
social security retirement ages of 66 or 67, the applicable factors for
benefits commencing at age 65 are, respectively, 0.56 percent (80
percent of 0.7 percent) and 0.52 percent (80 percent of 0.65 percent).
(c) The plan could also determine the factor under paragraph (d)(9)
of this section by comparing the integration level to the covered
compensation of each employee under the plan, or by straight line
interpolation between the disparity factors contained in the table in
paragraph (d)(9) of this section, or both. (Of course, if the plan
satisfied paragraph (d)(8) of this section, the plan could use the
factor determined under paragraph (d)(9) of this section.)
Example 2. (a) Plan N, an accumulation plan, is a defined benefit
excess plan that, for each year of service up to 35, accrues a normal
retirement benefit of 1 percent of plan year compensation up to the
taxable wage base, plus 1.75 percent of plan year compensation above the
taxable wage base, for each year of service up to 35. An employee's
total retirement benefit is the sum of the accruals for all years. The
plan satisfies paragraph (d)(8) of this section.
(b) Because the plan uses the taxable wage base (an amount above
covered compensation) as the integration level, it must reduce the
0.75-percent factor in the maximum excess allowance as required under
paragraphs (d)(5) and (d)(9) of this section. The reduced factor, if
determined on a plan-wide basis under paragraph (d)(9)(iii)(A) of this
section, is 0.42 percent. The plan must therefore reduce the disparity
in the plan so that it does not exceed 0.42 percent.
Example 3. (a) For the 1990 plan year, Plan O provides a normal
retirement benefit of 2 percent of average annual compensation, minus a
percentage of final average compensation up to $48,000, for each year of
service up to 35. The plan satisfies paragraph (d)(8) of this section.
As permitted under paragraph (d)(9) of this section, the plan provides
that each employee's offset percentage is determined by comparing
$48,000 to the employee's covered compensation and by rounding the
result up to the next highest percentage of covered compensation.
(b) Employee A has a social security retirement age of 66 and covered
compensation of $40,000. Because the plan provides for commencement of
Employee A's benefit at age 65, the 0.75-percent factor in the maximum
offset allowance is reduced to 0.7 percent under paragraph (e)(1) of
this section (the ''paragraph (e) factor''). In addition, because
$48,000 is rounded up to 125 percent of Employee A's covered
compensation, the 0.75-percent factor in the maximum offset allowance is
reduced to 0.69 percent under paragraph (d)(9) of this section (the
''paragraph (d) factor''). The reductions are cumulative under
paragraph (b)(3)(ii) of this section.
(c) The cumulative reductions can be made by multiplying the
paragraph (e) facdtor by the ratio of the paragraph (d) factor to 0.75
percent or by multiplying the paragraph (d) factor by the ratio of the
paragraph (e) factor to 0.75 percent. The disparity factor for Employee
A is therefore 0.64 percent ((0.7 percent 0.69 percent/0.75 percent)
or (0.69 percent x 0.7 percent/0.75 percent)).
Example 4. Plan P is an offset plan that uses the calendar year as
the plan year and uses an offset level of each employee's final average
compensation. Assume that the taxable wage bases for 1990-1992 are the
following:
1990 -- $51,300 1991 -- $53.400 1992 -- $58,000
Employee B's final average compensation, determined as of the close
of the 1992 plan year, is the average of Employee B's annual
compensation for the period 1990-1992. Employee B's annual compensation
for each year is the following:
1990 -- $47,000 1991 -- $59,000 1992 -- $65,000
For purposes of determining the offset applied to Employee B's
employer-provided benefit under the plan, Employee's B's final average
compensation as of the close of the 1992 plan year is $52,800 ($47,000 +
$53,400 + $58,000/3). This is because annual compensation in excess of
the taxable wage base in effect at the beginning of the year may not be
taken into account in determining an employee's final average
compensation or in determining the employee's offset. If the plan
determines the offset applied to Employee B's benefit by reference to
compensation in excess of $52,800, the plan fails to satisfy this
paragraph (d).
(e) Adjustments to the 0.75-percent factor for benefits commencing at
ages other than social security retirement age -- (1) In general. The
0.75-percent factor in the maximum excess allowance and in the maximum
offset allowance applies to a benefit commencing at an employee's social
security retirement age. Except as provided in paragraph (e)(4) of this
section, if a benefit payable to an employee under a defined benefit
excess plan or a defined benefit offset plan commences at an age before
the employee's social security retirement age (including a benefit
payable at the normal retirement age under the plan), the 0.75-percent
factor in the maximum excess allowance or in the maximum offset
allowance, respectively, is reduced in accordance with paragraph
(e)(2)(i) of this section. If a benefit payable to an employee under a
defined benefit excess plan or a defined offset plan commences at an age
after the employee's social security retirement age, the 0.75-percent
factor in the maximum excess allowance or in the maximum offset
allowance, respectively, may be increased in accordance with paragraph
(e)(2)(ii) of this section. Paragraph (e)(5) of this section provides
rules on the age at which a benefit commences. See paragraph (f) of
this section for the requirements applicable to optional forms of
benefit.
(2) Adjustments -- (i) Benefits commencing on or after age 55 and
before social security retirement age. If benefits commence before an
employee's social security retirement age, the 0.75-percent factor in
the maximum excess allowance and in the maximum offset allowance must be
reduced for such early commencement of benefits in accordance with the
tables set forth in paragraph (e)(3) of this section.
(ii) Benefits commencing after social security retirement age and on
or before age 70. If benefits commence after an employee's social
security retirement age, the 0.75-percent factor in the maximum excess
allowance and in the maximum offset allowance may be increased for such
delayed commencement of benefits in accordance with the tables set forth
in paragraph (e)(3) of this section.
(iii) Benefits commencing before age 55. If benefits commence before
the employee attains age 55, the 0.75-percent factor in the maximum
excess allowance and in the maximum offset allowance is further reduced
(on a monthly basis to reflect the month in which benefits commence) to
a factor that is the actuarial equivalent of the 0.75-percent factor, as
adjusted under the tables in paragraph (e)(3) of this section,
applicable to a benefit commencing in the month in which the employee
attains age 55. In determining actuarial equivalence for this purpose,
a reasonable interest rate must be used. In addition, a reasonable
mortality table must be used to determine the actuarial present value,
as defined in 1.401(a)(4)-12, of the benefits commencing at age 55 and
at the earlier commencement age, and a reasonable mortality table may be
used to determine the actuarial present value at the earlier
commencement age of the benefits commencing at age 55. A standard
interest rate and a standard mortality table, as defined in
1.401(a)(4)-12, are considered reasonable.
(iv) Benefits commencing after age 70. If benefits commence after
the employee attains age 70, the 0.75-percent factor in the maximum
excess allowance and in the maximum offset allowance may be further
increased (on a monthly basis to reflect the month in which benefits
commence) to a factor that is the actuarial equivalent of the
0.75-percent factor (as adjusted in accordance with this paragraph (e))
applicable to a benefit commencing in the month in which the employee
attains age 70. In determining actuarial equivalence for this purpose,
a reasonable interest rate must be used. In addition, a reasonable
mortality table must be used to determine the actuarial present value,
as defined in 1.401(a)(4)-12, of the benefits commencing at age 70 and
at the later commencement age, and a reasonable mortality table may be
used to determine the value at the later commencement age of the
benefits commencing at age 70. A standard interest rate and a standard
mortality table, as defined in 1.401(a)(4)-12, are considered
reasonable.
(3) Tables. Tables I, II, and III provide the adjustments in the
0.75-percent factor in the maximum excess allowance and in the maximum
offset allowance applicable to benefits commencing on or after age 55
and on or before age 70 to an employee who has a social security
retirement age of 65, 66 or 67. Table IV is a simplified table for a
plan that uses a single disparity factor of 0.65 percent for all
employees at age 65. The factors in the following tables are applicable
to benefits that commence in the month the employee attains the
specified age. Accordingly, if benefits commence in a month other than
the month in which the employee attains the specified age, appropriate
adjustments in the 0.75-percent factor in the maximum excess allowance
and the maximum offset allowance must be made. For this purpose,
adjustments may be based on straight-line interpolation from the factors
in the tables or in accordance with the methods of adjustment specified
in paragraphs (e)(2)(iii) and (iv) of this section.
(4) Exception for certain disability benefits. The maximum excess
allowance and the maximum offset allowance are not subject to the
reductions set forth in paragraphs (e)(2)(i) and (iii) of this section
solely because the plan provides a temporary disability benefit
described in this paragraph (e)(4) commencing before an employee's
social security retirement age. However, if a disability benefit
commencing before an employee's social security retirement age is
payable under the plan and the disability benefit does not meet the
definition of a temporary disability benefit in this paragraph (e)(4),
the disability benefit will be treated as a benefit described in
paragraphs (e)(2)(i) and (iii) of this section and the 0.75-percent
factor in the maximum excess allowance or in the maximum offset
allowance applicable to the benefit must be reduced in accordance with
paragraphs (e)(2)(i) and (iii) of this section. For purposes of this
paragraph (e)(4), a disability benefit is a temporary disability benefit
only if --
(i) The benefit is payable under the plan solely on account of an
employee's disability, as determined by the Social Security
Administration,
(ii) The benefit terminates no later than at the employee's normal
retirement age,
(iii) The benefit is not in excess of the amount of the benefit that
would be payable to the employee under the plan if the employee had
separated from service at the employee's normal retirement age, and
(iv) Upon attainment of early or normal retirement age, an employee
receives a benefit that satisfies the accrual and vesting rules of
section 411 without taking into account the disability benefit payments
made up to that age.
(5) Benefit commencement date -- (i) In general. Except as provided
in paragraph (e)(5)(ii) of this section, a benefit commences for
purposes of this paragraph (e) on the first day of the period for which
the benefit is paid under the plan.
(ii) Qualified social security supplement. If a plan uses a
qualified social security supplement, as defined in 1.401(a)(4)-12, to
provide an aggregate benefit at retirement before social security
retirement age that is a uniform percentage of average annual
compensation, benefits will be considered to commence on the first day
of the period for which the qualified social security supplement is no
longer payable. In order for this paragraph (e)(5)(ii) to apply, the
uniform percentage must be equal to the excess benefit percentage in the
case of an excess plan or the gross benefit percentage in the case of an
offset plan.
(6) Examples. The following examples illustrate this paragraph (e).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of a defined
benefit excess plan, the plan uses each employee's covered compensation
as the integration level; in the case of an offset plan, the plan uses
each employee's covered compensation as the offset level and provides
that an employee's final average compensation is limited to the
employee's average annual compensation. Each example discusses the
benefit formula applicable to an employee who has a social security
retirement age of 65.
Example 1. Plan M is a defined benefit excess plan that, for an
employee with a social security retirement age of 65, provides a normal
retirement benefit of 1.25 percent of average annual compensation up to
the integration level, plus 2.0 percent of average annual compensation
in excess of the integration level, for each year of service up to 35.
For an employee with at least 20 years of service, the plan provides a
benefit commencing at age 55 that is equal to the benefit payable at age
65. For that employee, the disparity provided under the plan at age 55
is 0.75 percent (2 percent-1.25 percent). Because this disparity exceeds
the 0.375 percent factor provided in the table for a benefit payable at
age 55 to an employee with a social security retirement age of 65, the
plan fails to satisfy paragraphs (b) and (e) of this section with
respect to the early retirement benefit.
Example 2. Assume the same facts as in Example 1, except that the
base benefit percentage under the plan is 1.75 percent. Thus, the
disparity provided under the plan at age 55 is 0.25 percent (2
percent-1.75 percent). Because the disparity does not exceed the 0.375
percent factor provided in the table for a benefit payable at age 55 to
an employee with a social security retirement age of 65, the plan does
not fail to satisfy paragraphs (b) and (e) of this section with respect
to the early retirement benefit.
Example 3. Plan N is an offset plan that, for an employee with a
social security retirement age of 65, provides a normal retirement
benefit of 1.75 percent of average annual compensation, minus 0.75
percent of final average compensation up to the offset level, for each
year of service up to 35. For an employee with at least 20 years of
service, the plan provides a benefit commencing at age 55 that is equal
to the benefit payable at age 65. For that employee, the disparity
provided under the plan at age 55 is 0.75 percent. Because this
disparity exceeds the 0.375-percent factor provided in the table for an
offset applied to a benefit payable at age 55 to an employee with a
social security retirement age of 65, the plan fails to satisfy
paragraphs (b) and (e) of this section with respect to the early
retirement benefit. The plan would not fail to satisfy paragraphs (b)
and (e) of this section with respect to the early retirement benefit if
the applicable factor for determining the offset applied to the benefit
were reduced to 0.375 percent.
Example 4. Plan O is a defined benefit excess plan that, for an
employee with a social security retirement age of 65, provides a normal
retirement benefit of 1.25 percent of average annual compensation up to
the integration level, plus 2.0 percent of average annual compensation
in excess of the integration level, for each year of service up to 35.
The plan provides benefits commencing before normal retirement age with
the following reductions:
Under the plan, a benefit payable at age 64 is equal to 90 percent of
the normal retirement benefit payable at age 65. Thus, the excess
benefit percentage under the plan is 1.8 percent, the base benefit
percentage under the plan is 1.125 percent, and the disparity provided
under the plan at age 64 is 0.675 percent. Similarly, a benefit payable
at age 63 is equal to 85 percent of the normal retirement benefit
payable at age 65. Thus, the excess benefit percentage under the plan
is 1.7 percent, the base benefit percentage under the plan is 1.0625
percent, and the disparity provided under the plan at age 63 is 0.6375
percent. Finally, a benefit payable at age 62 is equal to 80 percent of
the normal retirement benefit payable at age 65. Thus, the excess
benefit percentage under the plan is 1.6 percent, the base benefit
percentage under the plan is 1.0 percent, and the disparity provided
under the plan at age 62 is 0.6 percent. Because the disparities
provided under the plan at each early commencement age do not exceed the
factors provided in the applicable table in paragraph (e)(3) of this
section, the plan does not fail to satisfy paragraphs (b) and (e) of
this section with respect to the early retirement benefits.
Example 5. Plan P is a defined benefit excess plan that provides a
normal retirement benefit of 0.75 percent of average annual compensation
up to the integration level, plus 1.5 percent of average annual
compensation in excess of the integration level, for each year of
service up to 35. The plan does not provide any benefits, other than
normal retirement benefits, commencing before an employee's social
security retirement age. Employee A, born in 1947, has a social
security retirement age of 66. Because the plan provides for the
distribution of normal retirement benefits before Employee A's social
security retirement age, the 0.75-percent factor in the maximum excess
allowance applicable to Employee A must be reduced to 0.70 percent in
accordance with this paragraph (e). Accordingly, the disparity provided
to A under the plan exceeds the maximum excess allowance because the
excess benefit percentage (1.5 percent) exceeds the base benefit
percentage (0.75 percent) by more than the maximum excess allowance of
0.70 percent, as reduced in accordance with this paragraph (e).
Example 6. Assume the same facts as in Example 5, except that the
plan also provides an early retirement benefit, commencing at age 62, to
an employee who satisfies the conditions for early retirement specified
in the plan. The early retirement benefit is based upon the employee's
accrued benefit at early retirement age and equals the amount that would
have been paid commencing at the employee's normal retirement age based
upon the employee's average annual compensation, covered compensation
and years of service at the date of the employee's early retirement.
Employee B, who has a social security retirement age of 65, meets the
conditions for early retirement under the plan and retires at age 62
with 30 years of service. At the time of early retirement, Employee B
has average annual compensation of $20,000 and covered compensation of
$16,000. Under the plan's benefit formula, Employee B has accrued a
normal retirement benefit, commencing at age 65, of $5,400 ((22.5
percent $16,000) + (45 percent $4,000)) based on Employee B's
average annual compensation, covered compensation and years of service
at early retirement. Accordingly, under the plan's early retirement
provisions, Employee B is entitled to receive, commencing at early
retirement, a benefit of $5,400. Because the early retirement benefit
is a benefit (other than a temporary disability benefit) commencing at
age 62 (before Employee B's social security retirement age), the
0.75-percent factor in the maximum excess allowance must be reduced to
0.60 percent in accordance with this paragraph (e). Accordingly, the
disparity provided to Employee B under the plan at early retirement
exceeds the maximum excess allowance.
Example 7. (a) Plan Q is a defined benefit excess plan that provides
a normal retirement benefit of 1.35 percent of average annual
compensation up to the integration level, plus 2 percent of average
annual compensation in excess of the integration level, for each year of
service up to 35. The plan provides that an employee with 10 years of
service at age 55 may receive an unreduced retirement benefit. The plan
also provides that employee with a supplemental benefit of 0.65 percent
of average annual compensation up to the integration level for each year
of service up to 35, payable from early retirement until age 65. The
supplemental benefit is a qualified social security supplement under
1.401(a)(4)-12. The effect of the supplement is to provide an employee
with a uniform benefit of 2 percent of average annual compensation from
early retirement until age 65, when the supplement is no longer payable.
Therefore, for purposes of this paragraph (e), the employee's benefit
will be considered to commence at age 65.
(b) Assume that Plan Q is instead an offset plan that provides a
normal retirement benefit of 2 percent of average annual compensation,
minus 0.65 percent of final average compensation up to the offset level,
for each year of service up to 35. The plan provides the same early
retirement benefit on the same conditions, except that the supplement is
0.65 percent of an employee's final average compensation up to the
offset level. An employee at age 55 thus receives a uniform benefit of
2 percent of average annual compensation until age 65, when the
supplement is no longer payable. Therefore, for purposes of this
paragraph (e), the employee's benefit will be considered to commence at
age 65.
(f) Benefits, rights, and features -- (1) Defined benefit excess
plan. In the case of a defined benefit excess plan, each benefit,
right, or feature provided under the plan with respect to
employer-provided benefits attributable to average annual compensation
above the integration level (an ''excess benefit, right, or feature'')
must also be provided on the same terms with respect to
employer-provided benefits attributable to average annual compensation
up to the integration level (a ''base benefit, right, or feature'').
Alternatively, an excess benefit, right, or feature may be provided on
different terms than the base benefit, right, or feature, if the terms
used to determine the base benefit, right, or feature produce a benefit,
right, or feature of inherently equal or greater value than the benefit,
right, or feature that would be produced under the terms used to
determine the excess benefit, right, or feature.
(2) Offset plan. In the case of an offset plan, each benefit, right,
or feature provided under the plan with respect to employer-provided
benefits before application of the offset (a ''gross benefit, right, or
feature'') must be provided on the same terms as those used to determine
the offset applied to the gross benefit, right, or feature.
Alternatively, a gross benefit, right, or feature may be provided on
different terms from those used to determine the offset applied to the
gross benefit, right, or feature, if the terms used to determine the
gross benefit, right, or feature produce a benefit, right, or feature of
inherently equal or greater value than the benefit, right, or feature
that would be produced under the terms used to determine the offset
applied to the gross benefit, right, or feature. In addition, if
benefits commence before an employee's normal retirement age, the gross
benefit percentage under the plan must be reduced by a number of
percentage points that is not less than the number of percentage points
by which the offset percentage must be reduced, from normal retirement
age to the age at which benefits commence, under the rules of paragraph
(e) of this section.
(3) Examples. The following examples illustrate this paragraph (f).
Unless otherwise provided, the following facts apply. The plan is
noncontributory and is the only plan ever maintained by the employer.
The plan uses a normal retirement age of 65 and contains no provision
that would require a reduction in the 0.75-percent factor under
paragraph (b)(2) or (b)(3) of this section. In the case of a defined
benefit excess plan, the plan uses each employee's covered compensation
as the integration level; in the case of an offset plan, the plan uses
each employee's covered compensation as the offset level and provides
that an employee's final average compensation is limited to the
employee's average annual compensation. Each example discusses the
benefit formula applicable to an employee who has a social security
retirement age of 65. All optional forms of benefit under each plan are
provided on the same terms.
Example 1. Plan M is a defined benefit excess plan that provides a
normal retirement benefit of 1 percent of average annual compensation up
to the integration level, plus 1.65 percent of average annual
compensation above the integration level, for each year of service up to
35. The plan provides an early retirement benefit for any employee who
terminates employment at or after age 55 with 10 or more years of
service. In determining an employee's early retirement, the 1.65
percent excess benefit percentage is reduced in accordance with the
table in paragraph (e)(3) of this section for a plan that uses a single
disparity factor of 0.65 percent for all employees at age 65. However,
a larger reduction factor is applied to determine the base benefit
percentage at early retirement. The plan violates this paragraph (f)
because the excess early retirement benefit is not provided on the same
terms as the base early retirement benefit, nor do the terms used to
determine the base early retirement benefit produce an early retirement
benefit of inherently equal or greater value than the early retirement
benefit that would be produced under the terms used to determine the
excess benefit, right, or feature.
Example 2. The facts are the same as in Example 1 except that the
plan determines the early retirement benefit by applying the same
reduction factors under paragraph (e)(3) of this section to the base and
excess benefit percentages. Furthermore, if an employee terminates
employment at or after age 55 with 30 or more years of service, the plan
provides that the base benefit percentage of 1 percent is not reduced.
Although the excess early retirement benefit is provided on different
terms than the base early retirement benefit, the plan satisfies this
paragraph (f) because the terms used to determine the base early
retirement benefit produce an early retirement of inherently equal or
greater value than the early retirement benefit that would be produced
under the terms used to determine the excess benefit, right, or feature.
Example 3. Plan N is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation, minus
0.65 percent of final average compensation up to the offset level, for
each year of service up to 35. In determining the qualified joint and
survivor (''QJSA'') form of the normal retirement benefit, the plan
applies a factor of 80 percent to the gross benefit percentage and a
factor of 100 percent to the offset percentage. Thus, the QJSA form is
1.6 percent of average annual compensation, minus 0.65 percent of final
average compensation up to the offset level, for each year of service up
to 35. The plan violates this paragraph (f) because the gross QJSA form
is not provided on the same terms as the terms used to determine the
offset applied to the QJSA, nor does it produce a QJSA benefit that is
of inherently equal or greater value than the QJSA benefit that would be
produced under the terms used to determine the offset under the plan.
Example 4. Plan O is a defined benefit excess plan that provides a
normal retirement benefit of 1 percent of average annual compensation up
to the integration level, plus 1.65 percent of average annual
compensation above the integration level, for each year of service up to
35. The plan also provides a single sum optional form of benefit
determined by applying a single interest rate and mortality assumption
to the entire normal retirement benefit. The plan satisfies this
paragraph (f) because the excess optional form is provided on the same
terms as the base optional form. The plan would also satisfy this
paragraph (f) if it used a lower interest rate to determine the base
optional form than used to determine the excess optional form because
the lower interest rate would produce an optional form of inherently
equal or greater value than the optional form produced by using the same
interest rate.
Example 5. Plan R is a defined benefit excess plan that provides a
normal retirement benefit of 1 percent of average annual compensation up
to the integration level, plus 1.65 percent of average annual
compensation above the integration level, for each year of service up to
35. If an employee continues to work after normal retirement age, the
plan provides that the employee receives credit for additional years of
service up to the service limit of 35. The plan also provides that the
disparity provided under the plan will increase as permitted under
paragraph (e) of this section for benefits commencing after social
security retirement age. However, the plan does not provide an increase
in the base benefit percentage to reflect the fact that the employee has
delayed commencement of benefits past normal retirement age. Thus, for
example, for an employee at age 68, the plan provides a benefit of 1
percent of average annual compensation up to the integration level, plus
1.86 percent of average annual compensation above the integration level,
for each year of service up to 35. The plan violates this paragraph (f)
because the excess benefit provided for an employee after normal
retirement age is not provided on the same terms as the base benefit,
nor do the terms used to determine the base benefit produce a benefit of
inherently equal or greater value than the benefit that would be
produced under the terms used to determine the excess benefit.
Example 6. Plan Q is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation, minus
0.65 percent of final average compensation up to the offset level, for
each year of service up to 35. In accordance with paragraph (e) of this
section, the plan reduces the offset percentage under the plan for early
retirement and provides a benefit at age 55 of 2 percent of average
annual compensation, minus 0.325 percent of final average compensation
up to the offset level, for each year of service up to 35. However, the
early retirement benefit does not meet this paragraph (f) because an
employee's gross benefit percentage is not reduced for early retirement.
Example 7. The facts are the same as in Example 6 except that the
plan reduces the gross benefit percentage for early retirement at age 55
to 1.675 percent. Because the gross benefit percentage is reduced by
0.325 percent (from 2.0 percent to 1.675 percent), the same percentage
point reduction made in the offset percentage (from 0.65 percent to
0.325 percent), the early retirement benefit meets this paragraph (f).
(g) No reductions in 0.75-percent factor for death benefits. For
purposes of applying the maximum excess allowance described in paragraph
(b)(2) of this section and the maximum offset allowance described in
paragraph (b)(3) of this section, no reduction is made to the
0.75-percent factor in the maximum excess allowance or in the maximum
offset allowance solely because the plan provides disparity in death
benefits that are unrelated to retirement benefits and are payable
before an employee's social security retirement age.
(h) Benefits attributable to employee contributions not taken into
account. Benefits attributable to employee contributions to a defined
benefit excess plan or to an offset plan are not taken into account in
determining whether the disparity provided under a defined benefit
excess plan or an offset plan exceeds the maximum permitted disparity
described in paragraph (b) of this section. Therefore, the base benefit
percentage and the excess benefit percentage under a defined benefit
excess plan for the plan year are reduced to the extent that benefits
are attributable to employee contributions. Similarly, the gross
benefit percentage under a defined benefit offset plan for the plan year
is reduced to the extent the benefit is attributable to employee
contributions. See 1.401(a)(4)-6(b) for methods of determining the
employer-provided benefit under a plan that includes employee
contributions not allocated to separate accounts (i.e., contributory
DBplan).
(i) Multiple integration levels -- (Reserved).
(j) Additional rules. The Commissioner may, in revenue rulings,
notices or other documents of general applicability, prescribe
additional rules as may be necessary or appropriate to carry out the
purposes of this section, including updated tables under paragraphs (d)
and (e) of this section providing for reductions in the 0.75-percent
factor in the maximum excess allowance and in the maximum offset
allowance and rules in paragraph (h) of this section for determining the
portion of an employee's benefit attributable to employee contributions.
(T.D. 8359, 56 FR 47622, Sept. 19, 1991; 57 FR 10818, 10819, 10951,
10952, Mar. 31, 1992)
26 CFR , 1.401(l)-4 Special rules for railroad plans.
(a) In general. Section 401(l)(6) provides that, in the case of a
plan maintained by a railroad employer that covers employees who are
entitled to benefits under the Railroad Retirement Act of 1974, in
determining whether such a plan satisfies section 401(l), rules similar
to the rules under section 401(l) apply and such rules take into account
the employer-derived portion of tier 2 and supplemental annuity benefits
provided under the railroad retirement system. In general, for purposes
of determining whether a defined contribution plan or a defined benefit
plan maintained by a railroad employer and covering employees described
in te preceding sentence, satisfies section 401(l), the employer-derived
portion of an employee's tier 2 benefits and supplementary annuity
benefits under the Railroad Retirement Act of 1974 are treated as though
such benefits were provided by the railroad employer under a qualified
plan. Paragraph (b) of this section contains rules for defined
contribution plans. Paragraph (c) of this section contains rules for
defined benefit excess plans. Paragraph (d) of this section contains
rules for offset plans. Paragraph (e) of this section contains
definitions and additional rules of application.
(b) Defined contribution plans -- (1) In general. A defined
contribution plan maintained by a railroad employer satisfies section
401(l) and 1.401(l)-2 for a plan year only if the plan satisfies
paragraph (b)(2) or (b)(3) of this section for the plan year.
(2) Single integration level method -- (i) In general. A plan
satisfies this paragraph (b)(2) if --
(A) The plan specifies a single integration level for all employees
that does not exceed the railroad retirement taxable wage base in effect
as of the beginning of the plan year,
(B) The plan uses the same base contribution percentage and the same
excess contribution percentage for all employees, and
(C) The excess contribution percentage does not exceed the sum of
11.4 percentage points and the base contribution percentage.
(ii) Definitions. The following definitions govern for purposes of
this paragraph (b)(2).
(A) Base contribution percentage means the rate at which employer
contributions are allocated to the account of an employee under the plan
with respect to the employee's plan year compensation at or below the
railroad retirement taxable wage base (expressed as a percentage of such
plan year compensation).
(B) Excess contribution percentage means the rate at which employer
contributions are allocated to the account of an employee under the plan
with respect to the employee's plan year compensation above the railroad
retirement taxable wage base (expressed as a percentage of such plan
year compensation).
(3) Two integration level method -- (i) In general. A plan satisfies
this paragraph (b)(3) if --
(A) The plan specifies two integration levels for all employees,
equal to the railroad retirement taxable wage base in effect as of the
beginning of the plan year and the taxable wage base in effect as of the
beginning of the plan year, and
(B) The plan satisfies paragraphs (b)(3) (ii) and (iii) of this
section.
(ii) Total disparity requirement. A plan satisfies this paragraph
(b)(3)(ii) if --
(A) The plan uses the same base contribution percentage and the same
excess contribution percentage for all employees, and
(B) The excess contribution percentage does not exceed the sum of
11.4 percentage points and the base contribution percentage.
(iii) Intermediate disparity requirement. A plan satisfies this
paragraph (b)(3)(iii) if --
(A) The plan uses the same base contribution percentage and the same
intermediate contribution percentage for all employees, and
(B) The intermediate contribution percentage does not exceed the sum
of 5.7 percentage points and the base contribution percentage.
(iv) Definitions. The following definitions govern for purposes of
this paragraph (b)(3).
(A) Base contribution percentage means the rate at which employer
contributions are allocated to the account of an employee under the plan
with respect to the employee's plan year compensation at or below the
railroad retirement taxable wage base (expressed as a percentage of such
plan year compensation).
(B) Intermediate contribution percentage means the rate at which
employer contributions are allocated to the account of an employee under
the plan with respect to the employee's plan year compensation between
the railroad retirement taxable wage base and the taxable wage base
(expressed as a percentage of such plan year compensation).
(C) Excess contribution percentage means the rate at which employer
contributions are allocated to the account of an employee under the plan
with respect to the employee's plan year compensation above the taxable
wage base (expressed as a percentage of such plan year compensation).
(c) Defined benefit excess plans -- (1) In general. A defined
benefit excess plan maintained by a railroad employer satisfies section
401(l) and 1.401(l)-3 for a plan year only if the plan satisfies
paragraph (c)(2) or (c)(3) of this section for the plan year.
(2) Single integration level method -- (i) In general. A plan
satisfies this paragraph (c)(2) if --
(A) The plan specifies a single integration level for all employees
that does not exceed railroad retirement covered compensation,
(B) The plan uses the same base benefit percentage and the same
excess benefit percentage for all employees, and
(C) The excess benefit percentage does not exceed the lesser of --
(1) Two times the sum of 0.56 percent and the base benefit
percentage, or
(2) 0.56 percent plus the base benefit percentage plus 0.75 percent.
(ii) Definitions. The following definitions govern for purposes of
this paragraph (c)(2).
(A) Base benefit percentage means the rate at which employer-provided
benefits are determined under the plan with respect to an employee's
average annual compensation at or below the employee's railroad
retirement covered compensation (expressed as a percentage of such
average annual compensation).
(B) Excess benefit percentage means the rate at which
employer-provided benefits are determined under the plan with respect to
an employee's average annual compensation above the employee's railroad
retirement covered compensation (expressed as a percentage of such
average annual compensation).
(3) Two integration level method -- (i) In general. A plan satisfies
this paragraph (c)(3) for a plan year if --
(A) The plan specifies two integration levels for all employees,
equal to each employee's railroad retirement covered compensation and
each employee's covered compensation, and
(B) The plan satisfies paragraph (c)(3) (ii) and (iii) of this
section.
(ii) Employee with lower covered compensation. A plan satisfies this
paragraph (c)(3)(ii) if, with respect to each employee whose lower
integration level is the employee's covered compensation --
(A) The plan uses the same base benefit percentage and the same
intermediate benefit percentage for all employees,
(B) The intermediate benefit percentage does not exceed the base
benefit percentage by more than the lesser of 0.75 percent or the base
benefit percentage,
(C) The plan uses the same intermediate benefit percentage and the
same excess benefit percentage for all employees, and
(D) The excess benefit percentage does not exceed the intermediate
benefit percentage by more than 0.56 percent.
(iii) Employee with lower railroad retirement covered compensation.
A plan satisfies this paragraph (c)(3)(iii) if, with respect to each
employee whose lower integration level is the employee's railroad
retirement covered compensation --
(A) The plan uses the same base benefit percentage and the same
excess benefit percentage for all employees,
(B) The excess benefit percentage does not exceed the lesser of --
(1) Two times the sum of 0.56 percent and the base benefit
percentage, or
(2) The sum of 0.56 percent plus the base benefit percentage plus
0.75 percent,
(C) The plan uses the same the base benefit percentage and the same
intermediate benefit percentage for all employees, and
(D) The intermediate benefit percentage does not exceed the sum of
0.56 percent plus the base benefit percentage.
(iv) Definitions. The following definitions govern for purposes of
this paragraph (c)(3).
(A) Base benefit percentage means the rate at which employer-provided
benefits are determined under the plan with respect to an employee's
average annual compensation at or below the lower integration level
specified in the plan (expressed as a percentage of such average annual
compensation).
(B) Intermediate benefit percentage means the rate at which
employer-provided benefits are determined under the plan with respect to
an employee's average annual compensation between the lower and higher
integration levels specified in the plan (expressed as a percentage of
such average annual compensation).
(C) Excess benefit percentage means the rate at which
employer-provided benefits are determined under the plan with respect to
an employee's average annual compensation above the higher integration
level specified in the plan (expressed as a percentage of such average
annual compensation).
(d) Offset plans -- (1) In general. An offset plan maintained by a
railroad employer satisfies section 401(l) and 1.401(l)-3 for a plan
year only if --
(i) The plan satisfies 1.401(l)-3 for the plan year without regard
to the offset for the employer-derived portion of tier 2 and
supplementary annuity benefits provided under the railroad retirement
system, and
(ii) The offset for the employer-derived portion of tier 2 and
supplementary annuity benefits provided under the railroad retirement
system does not exceed the maximum tier 2 and supplementary annuity
offset allowance.
(2) Maximum tier 2 and supplementary annuity offset allowance. For
purposes of paragraph (d)(1) of this section, the maximum tier 2 and
supplementary annuity offset allowance for a plan year is equal to 0.56
percent of the employee's railroad retirement covered compensation for
the plan year.
(e) Additional rules -- (1) Definitions. The following definitions
govern for purposes of this section.
(i) Railroad retirement taxable wage base means the applicable base,
as determined under section 3231(e)(2)B)(ii), for purposes of the tax
under section 3221(b) (the tier 2 tax).
(ii) Railroad retirement covered compensation for an employee means
12 multiplied by the average of the 60 highest monthly railroad
retirement taxable wage bases in effect for the employee's period of
employment. The monthly railroad retirement taxable wage base is
determined by dividing the railroad retirement taxable wage base for the
calendar year in which the month occurs by 12. An employee's railroad
retirement covered compensation for the plan year is determined as of
the beginning of the plan year. A plan must provide that an employee's
railroad retirement covered compensation is automatically adjusted for
each plan year. See 1.401(l)-1(b) for rules relating to prohibited
decreases in an employee's accrued benefit within the meaning of section
411(d)(6) or section 411(b)(1)(G).
(2) Adjustments to 0.75-percent factor. The 0.75-percent factor in
the maximum excess allowance and in the maximum offset allowance is
subject to the reductions prescribed in 1.401(l)-3 (d) and (e), except
that in the case of an employee with at least 30 years of service with a
railroad employer, the following tables are substituted for Tables I
through III contained in 1.401(l)-3(e)(3).
(3) Adjustments to 0.56-percent factor. The 0.56-percent factor for
defined benefit excess plans and offset plans under paragraphs (c) and
(d) of this section respectively is subject to the reductions prescribed
in 1.401(l)-3 (d) and (e), except that, for purposes of applying this
paragraph (e)(3) --
(i) ''Railroad retirement compensation'' is substituted for ''covered
compensation'' in 1.401(l)-3(d),
(ii) The reductions under 1.401(l)-3(d) are made by multiplying the
0.56-factor by the ratio of the applicable factor from the table in
1.401(l)-(3)(d)(9)(iv)(A) to 0.75, and
(iii) The following tables are substituted for Tables I through III
set forth in 1.401(l)-3(e)(3).
(A) Tables applicable to 0.56% factor for employees covered by tier 2
of railroad retirement with 30 or more years of railroad service.
(B) Tables applicable to 0.56% factor for employees covered by tier 2
of railroad retirement with less than 30 years of railroad service.
(4) Overall permitted disparity. The overall permitted disparity
rules of 1.401(l)-5 apply to employees who benefit under a plan
maintained by a railroad employer.
(T.D. 8359, 56 FR 47632, Sept. 19, 1991; 57 FR 10819, 10952, Mar.
31, 1992)
26 CFR 1.401(l)-5 Overall permitted disparity limits.
(a) Introduction -- (1) In general. The maximum excess allowance and
maximum offset allowance limit the disparity that can be provided under
a plan for a plan year. The overall permitted disparity rules apply to
limit the disparity provided for a plan year if an employee benefits
under more than one plan maintained by the employer (the ''annual
overall permitted disparity limit'') and to limit the disparity provided
for an employee's total years of service, either in a single plan or in
more than one plan of the employer (the ''cumulative overall permitted
disparity limit''). The overall permitted disparity rules take into
account the disparity provided under a section 401(l) plan and the
permitted disparity imputed under a plan that satisfies section
401(a)(4) by relying on 1.401(a)(4)-7. A plan that is not a section
401(l) plan is generally deemed to impute permitted disparity under
1.401(a)(4)-7 unless established otherwise. Paragraph (b) of this
section provides rules on the annual overall permitted disparity limit.
Paragraph (c) of this section provides rules on the cumulative overall
permitted disparity limit.
(2) Plan requirements. In order to satisfy section 401(l), a plan
must provide that the overall permitted disparity limits may not be
exceeded and must specify how employer-provided contributions or
benefits under the plan are adjusted, if necessary, to satisfy the
overall permitted disparity limits. Any adjustments made to satisfy the
overall permitted disparity limits must be made in a uniform manner for
all employees.
(3) Plans taken into account. For purposes of this section, all
plans of the employer are taken into account. In addition, all plans of
any other employer are taken into account for all periods of service
with the other employer for which the employee receives credit for
purposes of benefit accrual under any plan of the current employer.
(b) Annual overall permitted disparity limit -- (1) In general. If,
in the plan year, an employee benefits under more than one plan, the
annual overall permitted disparity limit is satisfied only if the
employee's total annual disparity fraction, as defined in paragraph
(b)(2) of this section, does not exceed one. Paragraphs (b)(3) through
(b)(8) of this section explain the determination of an employee's annual
disparity fractions. Paragraph (b)(9) of this section provides
examples.
(2) Total annual disparity fraction. An employee's total annual
disparity fraction is the sum of the employee's annual disparity
fractions, as defined in paragraphs (b)(3) through (b)(7) of this
section. An employee's total annual disparity fraction is determined as
of the end of the current plan year, based on the employee's annual
disparity fractions under all plans with plan years ending in the
current plan year.
(3) Annual defined contribution plan disparity fraction. For a plan
year, the annual defined contribution plan disparity fraction for an
employee benefiting under a defined contribution plan that is a section
401(l) plan is a fraction --
(i) The numerator of which is the disparity provided under the plan
for the plan year, and
(ii) The denominator of which is the maximum excess allowance under
1.401(l)-2(b)(2) for the plan year.
(4) Annual defined benefit excess plan disparity fraction. For a
plan year, the annual defined benefit excess plan disparity fraction for
an employee benefiting under a defined benefit excess plan that is a
section 401(l) plan is a fraction --
(i) The numerator of which is the disparity provided under the plan
for the plan year, and
(ii) The denominator of which is the maximum excess allowance under
1.401(l)-3(b)(2) for the plan year.
(5) Annual offset plan disparity fraction. For a plan year, the
annual offset plan disparity fraction for an employee benefiting under
an offset plan that is a section 401(l) plan is a fraction --
(i) The numerator of which is the disparity provided under the plan
for the plan year, and
(ii) The denominator of which is the maximum offset allowance under
1.401(l)-3(b)(3) for the plan year.
(6) Annual imputed disparity fraction. For a plan year, the annual
imputed disparity fraction for an employee benefiting under a plan that
imputes permitted disparity with respect to the employee under
1.401(a)(4)-7 is one.
(7) Annual nondisparate fraction. For a plan year, the annual
nondisparate fraction for an employee benefiting under a plan that
neither is a section 401(l) plan nor imputes permitted disparity under
1.401(a)(4)-7 is zero.
(8) Determination of fraction -- (i) General rule. A separate annual
disparity fraction is generally determined for each plan under which the
employee benefits. Thus, for example, if two plans are aggregated and
treated as a single plan for purposes of section 401(a)(4), a single
annual disparity fraction applies to the aggregated plan.
(ii) Multiple formulas. If a plan provides an allocation or benefit
equal to the sum of two or more formulas, each formula is considered a
separate plan for purposes of this section. If a plan provides an
allocation or benefit equal to the greater of two or more formulas, an
annual disparity fraction is calculated for the employee under each
formula and the largest of the fractions is the employee's annual
disparity fraction under the plan.
(iii) Offset arrangements -- (A) In general. If an employee benefits
under two plans of the employer described in paragraph (b)(8)(iii)(B) or
(C) of this section, the employee's annual disparity fraction under both
plans is the larger of the annual disparity fractions calculated
separately under each plan.
(B) Defined benefit plans. The employee's employer-provided accrued
benefit under a defined benefit plan is offset by the employee's total
employer-provided accrued benefit under another defined benefit plan or
by the actuarial equivalent (as defined in 1.401(a)(4)-12) of the
employee's total account balance under a defined contribution plan that
is attributable to employer contributions.
(C) Defined contribution plans. The amount allocated to the
employee's account under a defined contribution plan is offset by the
total amount allocated to the employee's account under another defined
contribution plan.
(iv) Applicable percentages. The disparity provided under a plan is
determined on the base and excess percentages under an excess plan and
the offset percentage under an offset plan, regardless of whether the
employee's plan year or average annual compensation exceeds the
integration or offset level under the plan.
(9) Examples. The following examples illustrate this paragraph (b).
Except as otherwise provided, each plan is a section 401(l) plan.
Example 1. (a) Employee A benefits for the plan year under a defined
contribution excess plan, Plan X, and a defined benefit excess plan,
Plan Y, of the employer. Plans X and Y have the same plan year.
Employee A benefits under no other plan of the employer for the plan
year of any other plan ending in the plan year of Plans X and Y. Plan X
provides a base contribution percentage of 5 percent and an excess
contribution percentage of 7 percent, thus providing Employee A with
disparity of 2 percent for the plan year. The maximum excess allowance
for the plan year under Plan X is 5 percent. Plan Y provides a base
benefit percentage of 1 percent and an excess benefit percentage of 1.35
percent, thus providing Employee A with disparity of 0.35 percent for
the plan year. The maximum excess allowance for the plan year under
Plan Y is 0.75 percent.
(b) Employee A's annual defined contribution plan disparity fraction
under Plan X for the plan year is 0.4 (2 percent divided by 5 percent).
Employee A's annual defined benefit excess plan disparity fraction under
Plan Y for the plan year is 0.47 (0.35 percent divided by 0.75 percent).
Employee A's total annual disparity fraction is the sum of 0.4 and 0.47
or 0.87. Because Employee A's total annual disparity fraction does not
exceed one, the plans satisfy the annual overall permitted disparity
limit with respect to Employee A for the plan year.
Example 2. (a) The facts are the same as in Example 1, except that
Plan Y is a defined contribution plan, rather than a defined benefit
plan. Plan X and Plan Y cover the same employees and are identical in
their terms except for the base and excess contribution percentages
provided under the plans. Plan Y provides a base contribution
percentage of 3 percent and an excess contribution percentage of 6
percent, thus providing Employee A with disparity of 3 percent for the
plan year. The maximum excess allowance for the plan year under Plan Y
is 3 percent.
(b) Employee A's annual defined contribution plan disparity fraction
under Plan X for the plan year is 0.4 (2 percent divided by 5 percent).
Employee A's annual defined contribution plan disparity fraction under
Plan Y for the plan year is 1 (3 percent divided by 3 percent). Because
Employee A's total annual disparity fraction (the sum of 0.4 and 1 or
1.4) exceeds one, the plans do not satisfy the annual overall permitted
disparity requirements with respect to Employee A for the plan year.
(c) Plan X and Plan Y are aggregated for purposes of section
401(a)(4) and form a single section 401(l) plan. Under the plan, the
base contribution percentage is 8 percent (5 percent plus 3 percent),
and the excess contribution percentage is 13 percent (7 percent plus 6
percent). A single annual defined contribution plan disparity fraction
is determined for Employee A for the plan year, the numerator of which
is the disparity of 5 percent provided under the plan (13 percent minus
8 percent), and the denominator of which is 5.7 percent, the maximum
excess allowance that applies to the plan. Because Employee A's only
annual disparity fraction of 0.88 (5 percent divided by 5.7 percent)
does not exceed one, Employee A's total annual disparity fraction also
does not exceed one. The plan thus satisfies the annual overall
permitted disparity limit with respect to Employee A for the plan year.
Example 3. Assume the same facts as in Example 2, except that Plan X
and Plan Y use different integration levels. Therefore, when Plan X and
Plan Y are aggregated to form a single plan for purposes of section
401(a)(4), the single plan does not satisfy section 401(l). In applying
the general test of 1.401(a)(4)-2(c), the plan imputes disparity under
1.401(a)(4)-7. Employee A's only annual disparity fraction is the annual
imputed disparity fraction of one. Employee A's total annual disparity
fraction is also one, and the plan satisfies the annual overall
permitted disparity limit with respect to Employee A for the plan year.
Example 4. (a) Employee B participates in two plans: Plan M, which
is a section 401(l) plan, and Plan N, which is subject to the general
test under 1.401(a)(4)-3(c). Plan M provides that the disparity
provided an employee for the plan year will be reduced to the extent
necessary to satisfy the annual overall permitted disparity limits. The
employer wishes to impute permitted disparity under 1.401(a)(4)-7 in
order for Plan N to satisfy section 401(a)(4). Employee B's imputed
disparity fraction under Plan N is therefore one, and Plan M provides no
disparity for Employee B for the plan year. As a result, Plan M
provides disparity that is neither uniform nor deemed uniform under
1.401(l)-3(c); Plan M therefore does not satisfy section 401(l).
(b) Assume instead that Plan M provides that the annual overall
permitted disparity limits must be satisfied without reducing the
disparity provided for an employee under Plan M, thus requiring a
reduction in the employee's annual disparity fraction under another
plan. In that case, the disparity provided under Plan M would be
uniform for the plan year and Plan M would continue to satisfy section
401(l). However, imputation of permitted disparity with respect to
Employee B would not be allowed under Plan N.
(c) Cumulative permitted disparity limit -- (1) In general -- (i)
Employees who benefit under defined benefit plans. In the case of an
employee who has benefited under one or more defined benefit plans for a
plan year beginning after December 31, 1991, the cumulative permitted
disparity limit is satisfied if the employee's cumulative disparity
fraction, as defined in paragraph (c)(2) of this section, does not
exceed 35.
(ii) Employees who do not benefit under defined benefit plans. In
the case of an employee who has not benefited under a defined benefit
plan for any plan year beginning after December 31, 1991, the cumulative
permitted disparity limit is satisfied.
(iii) Certain plan years disregarded. For purposes of this paragraph
(c), an employee is not treated as benefiting under a defined benefit
plan for a plan year beginning after December 31, 1991, if the employer
can establish that for that plan year the defined benefit plan was not a
section 401(l) plan and did not impute permitted disparity under
1.401(a)(4)-7.
(iv) Determination of type of plan. For purposes of this paragraph
(c), a target benefit plan that relies on the special rule of
1.401(a)(4)-8(b)(3) to satisfy section 401(a)(4) and a DB/DC plan within
the meaning of 1.401(a)(4)-9(a) are treated as defined benefit plans.
Similarly, a cash balance plan that relies on the special rule of
1.401(a)(4)-8(c)(3) to satisfy section 401(a)(4) is treated as a defined
contribution plan.
(2) Cumulative disparity fraction. An employee's cumulative
disparity fraction is the sum of the employee's total annual disparity
fractions, as defined in paragraph (b)(3) of this section, attributable
to the employee's total years of service under all plans.
(3) Determination of total annual disparity fractions for prior years
-- (i) Pre-effective date years. For each of the employee's years of
service under all plans as of the end of the last plan year beginning
before January 1, 1989, the employee's total annual disparity fraction
is one.
(ii) Option for any prior year. The total annual disparity fraction
for each prior year of service (or for each prior year of service as of
a single date specified in the plan) for each employee may be treated as
one. Thus, for example, in lieu of calculating annual disparity
fractions for all plan years, the employer may choose to assume that the
full annual disparity limit has been used in each prior plan year,
including years after 1988.
(4) Examples. The following examples illustrate this paragraph (c).
In each example the plan is noncontributory and, unless provided
otherwise, is the only plan ever maintained by the employer. Each plan
uses a normal retirement age of 65 and contains no provision that would
require a reduction in the 0.75-percent factor under paragraph (b)(2) or
(b)(3) of this section. Each example discusses the benefit formula
applicable to an employee who has a social security retirement age of
65.
Example 1. Plan M is a defined benefit excess plan that provides a
normal retirement benefit of 1 percent of average annual compensation up
to covered compensation, plus 1.75 percent of average annual
compensation above covered compensation, for each year of service
without limit. The disparity provided under the plan for the plan year
is 0.75 percent, the excess benefit percentage of 1.75 percent minus the
base benefit percentage of 1 percent. The maximum excess allowance for
the plan year is 0.75 percent. Thus, each employee's annual defined
benefit excess plan disparity fraction under the plan for each plan year
is one. Because the plan contains no limit on the years of service
taken into account under the plan, the sum of the total annual disparity
fractions for a potential employee with more than 35 years of service
will exceed 35. In addition, the plan does not provide that the overall
permitted disparity limits may not be exceeded as required by paragraph
(a)(2) of this section. The plan therefore does not satisfy the
cumulative permitted disparity limit of this paragraph (c).
Example 2. Plan N is an offset plan that provides a normal
retirement benefit of 2 percent of average annual compensation, minus
0.75 percent of final average compensation up to the lesser of covered
compensation and average annual compensation, for each year of service
up to 35. The disparity provided under the plan for the plan year is
0.75 percent, the offset percentage. The maximum offset allowance for
the plan year is 0.75 percent. Thus, each employee's annual offset plan
disparity fraction under the plan for each plan year is one. Because
the plan limits the years of service taken into account under the plan
to 35, the sum of the total annual disparity fractions for an employee
cannot exceed 35. The plan therefore satisfies the cumulative permitted
disparity limit of this paragraph (c).
Example 3. Plan O is a defined benefit excess plan that provides a
normal retirement benefit of 0.75 percent of average annual compensation
up to covered compensation, plus 1.25 percent of average annual
compensation above covered compensation, for each year of service up to
45. The disparity provided under the plan for the plan year is 0.5
percent, the excess benefit percentage of 1.25 percent minus the base
benefit percentage of 0.75 percent. The maximum excess allowance for the
plan year is 0.75 percent. Thus, each employee's annual defined benefit
excess plan disparity fraction under the plan for each plan year is 0.67
(0.5 percent divided by 0.75 percent). Because the plan limits the
years of service taken into account under the plan to 45, the sum of the
total annual disparity fractions for an employee cannot exceed 30 (0.67
x 45). The plan therefore satisfies the cumulative permitted disparity
limit of this paragraph (c).
Example 4. (a) Plan P is a defined contribution excess plan. Plan P
provides a base contribution percentage of 6 percent and an excess
contribution percentage of 11.7 percent, thus providing disparity of 5.7
percent for the plan year. Because the maximum excess allowance for
each plan year under Plan P is 5.7 percent, each employee's annual
defined contribution plan disparity fraction under Plan P for each plan
year is one. Plan Q is a defined benefit excess plan maintained by the
same employer. Plan Q provides a base benefit percentage of 1 percent
and an excess benefit percentage of 1.75 percent for each year of
service up to 35, thus providing disparity of 0.75 percent for the plan
year. Because the maximum excess allowance for each plan year under
Plan Q is 0.75 percent, each employee's annual defined benefit excess
plan disparity fraction under Plan Q for each plan year is one.
(b) Employee A benefits under Plan P for the 1980 through the 1994
plan years. The sum of Employee A's total annual disparity fractions
under Plan P is 15. (Under paragraph (c)(3)(i) of this section,
Employee A's annual disparity fraction for each year of service as of
the end of the 1988 plan year is one.) As of the 1995 plan year,
Employee A no longer benefits under Plan P and begins to benefit under
Plan Q for the first time. In order to satisfy the cumulative permitted
disparity limit of this paragraph (c), Plan Q must provide that no
disparity will be provided if the sum of an employee's total annual
disparity fractions reaches 35, taking into account the employee's
annual defined contribution plan disparity fractions under Plan P as
well as the employee's annual defined benefit excess plan disparity
fractions under Plan Q. Thus, after Employee A has benefited under Plan
Q for 20 years, Plan Q may not provide any disparity in additional
benefits accrued for Employee A.
(d) Additional rules. The Commissioner may prescribe additional
rules under this section as the Commissioner considers appropriate.
Additional rules may include (without being limited to) rules for
computing the fractions described in this section with respect to
terminated plans, rules for applying the overall permitted disparity
limits to employees who benefit under plans maintained by railroad
employers, and rules for determining which plans do not satisfy section
401(l) if the overall permitted disparity limits are exceeded.
(T.D. 8359, 56 FR 47634, Sept. 19, 1991; 57 FR 10819, 10952, Mar.
31, 1992)
26 CFR 1.401(l)-6 Effective dates and transition rules.
(a) In general. Section 401(a)(5)(C) is effective for plan years
beginning after December 31, 1988, and section 401(l) is effective with
respect to plan years, and benefits attributable to plan years,
beginning after December 31, 1988. The preceding sentence is applicable
to a plan without regard to whether the plan was in existence as of a
particular date.
(b) Defined contribution plans. A defined contribution plan
satisfies section 401(l) with respect to a plan year beginning after
December 31, 1988, if it satisfies the applicable requirements of
1.401(l)-1 through 1.401(l)-5 for the plan year.
(c) Defined benefit plans. A defined benefit excess plan or offset
plan satisfies section 401(l) with respect to all plan years, and
benefits attributable to all plan years, beginning after December 31,
1988, by satisfying the applicable requirements of 1.401(l)-1 through
1.401(l)-5 and the requirements of 1.401(a)(4)-13(c), using as the
fresh-start date the last day of the last plan year beginning before
January 1, 1989. A defined benefit excess plan or offset plan that does
not satisfy section 401(l) with respect to all plan years, and benefits
attributable to all plan years, beginning after December 31, 1988, may,
under the rules of 1.401(a)(4)-13(c), satisfy section 401(l) for plan
years beginning after a fresh-start date by satisfying the applicable
requirements of 1.401(l)-1 through 1.401(l)-5 after the fresh-start
date. See 1.401(a)(4)-13 (c)(5)(iii) and (d), which allow increases in
each employee's benefit accrued as of the fresh-start date to reflect
increases in the employee's compensation if the plan uses a fresh-start
date before the effective date applicable to the plan under
1.401(a)(4)-13 (a) or (b).
(d) Collectively bargained plans. (1) In the case of a plan
maintained pursuant to 1 or more collective bargaining agreements
between employee representatives and 1 or more employers ratified before
March 1, 1986, sections 401(a)(5) and 401(l) are applicable for plan
years beginning on or after the later of --
(i) January 1, 1989, or
(ii) The date on which the last of such collective bargaining
agreements terminates (determined without regard to any extension of any
such agreement occurring on or after March 1, 1986). However,
notwithstanding the preceding sentence, sections 401(a)(5) and 401(l)
apply to plans described in this paragraph (d) no later than the first
plan year beginning after January 1, 1991.
(2) For purposes of paragraph (d)(1)(ii) of this section, a change
made after October 22, 1986, in the terms or conditions of a
collectively bargained plan, pursuant to a collective bargaining
agreement ratified before March 1, 1986, is not treated as a change in
the terms and conditions of the plan.
(3) In the case of a collectively bargained plan described in
paragraph (d)(1) of this section, if the date in paragraph (d)(1)(ii) of
this section precedes November 15, 1988, then the date in this paragraph
(d) is replaced with the date on which the last of any collective
bargaining agreements in effect on November 15, 1988, terminates,
provided that the plan complies during this period with a reasonable
good faith interpretation of section 401(l).
(4) Whether a plan is maintained pursuant to a collective bargaining
agreement is determined under the principles applied under section
1017(c) of the Employee Retirement Income Security Act of 1974. See
H.R. Rep. No. 1280, 93d Cong., 2d Sess. 266 (1974). In addition, a
plan is not treated as maintained under a collective bargaining
agreement unless the employee representatives satisfy section
7701(a)(46) of the Internal Revenue Code after March 31, 1984. See
301.7701-17T of this chapter for other requirements for a plan to be
considered to be collectively bargained.
(T.D. 8359, 56 FR 47637, Sept. 19, 1991; 57 FR 10819, 10952, Mar.
31, 1992)
26 CFR 1.401(m)-0 Employee and matching contributions, table of
contents.
This section contains the captions that appear in 1.401(m)-1 and
1.401(m)-2.
(a) General rules.
(1) Nondiscriminatory amount of contributions.
(2) Other nondiscrimination rules.
(3) Rules applicable to collectively bargained plans.
(b) Actual contribution percentage test.
(1) General rule.
(2) Plan provision requirement.
(3) Aggregation of plans.
(i) General rule.
(ii) Prohibited aggregation.
(iii) Restructuring.
(4) Employee and matching contributions taken into account under the
actual contribution percentage test.
(i) Employee contributions.
(A) General rule.
(B) Recharacterized elective contributions.
(ii) Matching contributions.
(A) General rule.
(B) Matching contributions used to satisfy actual deferral percentage
test.
(C) Treatment of forfeited matching contributions.
(5) Qualified nonelective contributions and elective contributions
that may be taken into account under the actual contribution percentage
test.
(c) Additional requirements.
(1) Coordination with other plans.
(2) Recordkeeping requirement.
(3) Consistent application of separate line of business rules.
(d) Examples.
(e) Correction of excess aggregate contributions.
(1) General rule.
(i) Permissible correction methods.
(ii) Combination of correction methods.
(iii) Impermissible correction methods.
(iv) Partial correction.
(2) Amount of excess aggregate contributions.
(i) General rule.
(ii) Coordination with correction of excess contributions.
(iii) Correction of family members.
(3) Corrective distribution of excess aggregate contributions (and
income).
(i) General rule.
(ii) Income allocable to excess aggregate contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating income.
(D) Safe harbor method of allocating gap period income.
(E) Allocable income for recharacterized elective contributions.
(iii) No employee or spousal consent required.
(iv) Treatment of corrective distributions and forfeited
contributions as employer contributions.
(v) Tax treatment of corrective distributions.
(A) General rule.
(B) Rule for de minimis distributions.
(C) Rule for certain 1987 and 1988 excess aggregate contributions.
(vi) No reduction of required minimum distribution.
(4) Coordination with section 401(a)(4).
(5) Failure to correct.
(i) Failure to correct within 2 1/2 months after end of plan year.
(ii) Failure to correct within 12 months after end of plan year.
(6) Examples.
(f) Definitions.
(1) Actual contribution percentage.
(i) General rule.
(ii) Actual contribution ratio.
(A) General rule.
(B) Highly compensated employee eligible under more than one plan.
(C) Employees subject to family aggregation rules.
(1) Aggregation of employee contributions and other amounts.
(2) Effect on actual contribution percentage of nonhighly compensated
employees.
(3) Multiple family groups.
(2) Compensation.
(3) Elective contributions.
(4) Eligible employee.
(i) General.
(ii) Certain one-time elections.
(5) Employee.
(6) Employee contributions.
(7) Employer.
(8) Excess aggregate contributions.
(9) Excess contributions.
(10) Excess deferrals.
(11) Highly compensated employee.
(12) Matching contributions.
(i) In general.
(ii) Employer contributions made on account of employee or elective
contributions.
(iii) Contributions used to meet the requirements of section 416.
(13) Nonelective contributions.
(14) Plan.
(15) Qualified nonelective contributions.
(g) Effective dates.
(1) General rule.
(2) Collectively bargained plans.
(3) Certain annuity contracts.
(4) State and local government plans.
(5) Transition rule for plan years beginning before 1992.
(i) General rule.
(ii) Restructuring.
(A) General rule.
(B) Identification of component plans.
(1) Minimum coverage requirement.
(2) Commonality requirement.
(a) In general.
(b) General rule for determination of multiple use.
(1) In general.
(2) Alternative limitation.
(3) Aggregate limit.
(i) In general.
(ii) Relevant actual deferral percentage and relevant actual
contribution percentage defined.
(iii) Examples.
(c) Correction of multiple use.
(1) In general.
(2) Treatment of required reduction.
(3) Required reduction.
(4) Examples.
(d) Effective date.
(1) General rule.
(2) Transition rule.
(T.D. 8357, 56 FR 40534, Aug. 15, 1991, as amended by T.D. 8376, 56
FR 63432, Dec. 4, 1991)
26 CFR 1.401(m)-1 Employee and matching contributions.
(a) General rules -- (1) Nondiscriminatory amount of contributions.
A defined contribution plan does not satisfy section 401(a)(4) for a
plan year unless the amount of employee and matching contributions to
the plan for the plan year satisfies section 401(a)(4). Except as
specifically provided otherwise, for plan years beginning after December
31, 1986 (or such later date provided in paragraph (g) of this section)
the amount of employee and matching contributions under a plan satisfies
the requirements of section 401(a)(4) only if the employee and matching
contributions under the plan satisfy the actual contribution percentage
test of section 401(m)(2) and paragraph (b) of this section. For this
purpose, the employee and matching contributions are combined with the
elective and qualified nonelective contributions, if any, that are
treated as matching contributions, and the recharacterized elective
contributions, if any, that are treated as employee contributions for
purposes of section 401(m).
(2) Other nondiscrimination rules. Nondiscrimination requirements in
addition to those described in paragraph (a)(1) of this section apply to
employee and matching contributions under section 401(a)(4). For
example, under section 401(a)(4) a plan may not discriminate with
respect to the availability of benefits, rights, and features under the
plan. The right to make each level of employee contributions, and the
right to each level of matching contributions, are benefits, rights, or
features subject to this requirement, and each level must therefore
generally be available to a group of employees that satisfies section
410(b). Thus, for example, a plan does not satisfy section 401(a)(4) if
it provides a higher rate of matching contributions for highly
compensated employees than for nonhighly compensated employees. See
paragraph (e)(4) of this section for rules relating to the application
of section 401(a)(4) to the correction of excess aggregate
contributions.
(3) Rules applicable to collectively bargained plans. The
requirements of this section are treated as satisfied by employee and
matching contributions under a collectively bargained plan (or the
portion of a plan) that automatically satisfies section 410(b).
(b) Actual contribution percentage test -- (1) General rule. For
plan years beginning after December 31, 1986, or such later date
provided in paragraph (g) of this section, the actual contribution
percentage test is satisfied if:
(i) The actual contribution percentage for the group of eligible
highly compensated employees is not more than the actual contribution
percentage for the group of all other eligible employees multiplied by
1.25; or
(ii) The excess of the actual contribution percentage for the group
of eligible highly compensated employees over the actual contribution
percentage for the group of all other eligible employees is not more
than two percentage points, and the actual contribution percentage for
the group of eligible highly compensated employees is not more than the
actual contribution percentage for the group of all other eligible
employees multiplied by two.
(2) Plan provision requirement. For plan years beginning after
December 31, 1986, or such later date provided in paragraph (g) of this
section, a plan that permits employee or matching contributions does not
satisfy the requirements of section 401(a) unless it provides that the
actual contribution percentage test of section 401(m)(2) will be met.
For purposes of this paragraph (b)(2), the plan may incorporate the
provisions of section 401(m)(2), this paragraph (b), and, if applicable,
section 401(m)(9) and 1.401(m)-2.
(3) Aggregation of plans -- (i) General rule. Plans that are
aggregated for purposes of section 410(b) (other than the average
benefit percentage test) are treated as a single plan for purposes of
section 401(m) and this section. For example, if an employer provides
matching contributions under separate profit-sharing plans for its
salaried and hourly employees, and treats them as a single plan for
purposes of section 410(b), the plans are treated as a single plan for
purposes of section 401(m) and this section. See also paragraph
(f)(1)(ii) of this section for rules requiring the aggregation of
contributions under two or more plans in computing the actual
contribution ratios of highly compensated employees.
(ii) Prohibited aggregation. Section 410(b) provides the exclusive
means of aggregating plans for purposes of this section. For example,
allocations under a plan or portion of a plan described in section
4975(e)(7) or 409 (an ESOP) may not be combined with contributions or
allocations under any plan or portion of a plan not described in section
4975(e)(7) or 409 (a non-ESOP) for purposes of determining whether
either the ESOP or the non-ESOP satisfies the requirements of section
401(m). Similarly, in the case of a plan maintained by more than one
employer to which section 413(c) applies, section 401(m) and this
section must be applied as if each employer maintained a separate plan.
Also, a plan covering both employees who are included in a unit of
employees covered by a collective bargaining agreement and employees who
are not so covered must be treated as two separate plans (one for each
group of eligible employees) for purposes of section 401(m). Further,
two plans may not be aggregated unless they have the same plan year. In
addition, plans that are not actually aggregated for a year for purposes
of section 410(b) (other than the average benefit percentage test) may
not be aggregated for purposes of this section.
(iii) Restructuring. Effective for plan years beginning after
December 31, 1991, restructuring may not be used to demonstrate
compliance with the requirements of section 401(m). For plan years
beginning before January 1, 1992, see 1.401(k)-1(h)(3)(iii).
(4) Employee and matching contributions taken into account under the
actual contribution percentage test -- (i) Employee contributions -- (A)
General rule. An employee contribution is taken into account under
paragraph (b)(1) of this section for the plan year in which the
contribution is made to the trust. For this purpose, a payment by the
employee to an agent of the plan is treated as a contribution to the
trust at the time of payment to the agent if the funds paid are
transmitted to the trust within a reasonable period after the payment to
the agent.
(B) Recharacterized elective contributions. An excess contribution
that is recharacterized under 1.401(k)-1(f)(3) is taken into account as
an employee contribution for the plan year that includes the time at
which the excess contribution is includible in the gross income of the
employee under 1.401(k)-1(f)(3)(ii).
(ii) Matching contributions -- (A) General rule. A matching
contribution is taken into account under paragraph (b)(1) of this
section for a plan year only if the contribution is allocated to the
employee's account under the terms of the plan as of any date within the
plan year, is actually paid to the trust no later than 12 months after
the close of the plan year, and is made on behalf of an employee on
account of the employee's elective contributions or employee
contributions for the plan year. Matching contributions that do not
satisfy these requirements are not taken into account under paragraph
(b)(1) of this section for any plan year. Instead, the amount of these
matching contributions must satisfy the requirements of section
401(a)(4) (without regard to the special nondiscrimination rule in
paragraph (b)(1) of this section) for the plan year for which they are
allocated under the plan, as if they were nonelective contributions and
were the only nonelective employer contributions for that year.
(B) Matching contributions used to satisfy actual deferral percentage
test. A matching contribution that is treated as an elective
contribution is subject to the actual deferral percentage test of
section 401(k)(3) and is not taken into account under paragraph (b)(1)
of this section. See 1.401(k)-1(b)(5)(iii) for the rule relating to
years before January 1, 1987.
(C) Treatment of forfeited matching contributions. A matching
contribution that is forfeited to correct excess aggregate
contributions, or because the contribution to which it relates is
treated as an excess contribution, excess deferral, or excess aggregate
contribution, is not taken into account under paragraph (b)(1) of this
section.
(5) Qualified nonelective contributions and elective contributions
that may be taken into account under the actual contribution percentage
test. Except as specifically provided otherwise, for purposes of
paragraph (b)(1) of this section, all or part of the qualified
nonelective contributions and elective contributions made with respect
to any or all employees who are eligible employees under the plan of the
employer being tested may be treated as matching contributions provided
that each of the following requirements (to the extent applicable) is
satisfied:
(i) The amount of nonelective contributions, including those
qualified nonelective contributions treated as matching contributions
for purposes of the actual contribution percentage test, satisfies the
requirements of section 401(a)(4).
(ii) The amount of nonelective contributions, excluding those
qualified nonelective contributions treated as matching contributions
for purposes of the actual contribution percentage test and those
qualified nonelective contributions treated as elective contributions
under 1.401(k)-1(b)(5) for purposes of the actual deferral percentage
test, satisfies the requirements of section 401(a)(4).
(iii) The elective contributions, including those treated as matching
contributions for purposes of the actual contribution percentage test,
satisfy the requirements of section 401(k)(3).
(iv) The qualified nonelective contributions are allocated to the
employee under the plan as of a date within the plan year (within the
meaning of 1.401(k)-1(b)(4)(i)(A)), and the elective contributions
satisfy 1.401(k)-1(b)(4)(i) for the plan year.
(v) For plan years beginning after December 31, 1988, or such later
date provided in paragraph (g) of this section, the plan that takes
qualified nonelective contributions and elective contributions into
account in determining whether employee and matching contributions
satisfy the requirements of section 401(m)(2)(A), and the plans to which
the qualified nonelective contributions and elective contributions are
made, are or could be aggregated for purposes of section 410(b) (other
than the average benefit percentage test). If the plan year of the plan
being tested is changed to satisfy the requirement under section 410(b)
that the aggregated plans have the same plan year, the elective
contributions may be taken into account in the resulting short plan year
only if these contributions satisfy the requirements of
1.401(k)-1(b)(4) with respect to the short year, and the qualified
nonelective contributions may be taken into account in the resulting
short plan year only if these contributions satisfy the requirements of
1.401(k)-1(b)(4)(i)(A) with respect to the short year as if they were
elective contributions.
(c) Additional requirements -- (1) Coordination with other plans.
Except as expressly permitted under section 401(k) or 401(m), for plan
years beginning after December 31, 1988, or such later date provided in
paragraph (g) of this section, employee or matching contributions (or
qualified nonelective or elective contributions treated as matching
contributions under paragraph (b)(5) of this section) generally may not
be taken into account for purposes of determining whether any other
contributions under any plan (including the plan to which the employee
or matching contributions are made) satisfy the requirements of section
401(a). Matching contributions and qualified nonelective contributions
may be used to enable a plan to satisfy the minimum contribution or
benefit requirements under section 416, but matching contributions that
are used in this way generally may no longer be treated as matching
contributions, and must therefore satisfy the nondiscrimination
requirements of section 401(a)(4) without regard to section 401(k) or
401(m). See 1.416-1, M-18 and M-19 and paragraph (f)(l2)(iii) of this
section. See also 1.401(k)-1(b)(5) for circumstances under which
matching contributions may be used to determine whether a plan satisfies
the requirements of section 401(k). This paragraph does not apply for
purposes of determining whether a plan satisfies the average benefit
percentage test of section 410(b)(2)(A)(ii).
(2) Recordkeeping requirement. A plan satisfies this section only if
the employer maintains the records necessary to demonstrate compliance
with the applicable nondiscrimination requirements of paragraph (b) of
this section, including records showing the extent to which qualified
nonelective contributions and elective contributions are taken into
account.
(3) Consistent application of separate line of business rules. If an
employer is treated as operating qualified separate lines of business
under section 414(r) in accordance with 1.414(r)-1(b) for purposes of
applying section 410(b), and applies the special rule for employer-wide
plans in 1.414(r)-1(c)(2)(ii) to the portion of the plan that consists
of matching contributions or to the portion of the plan that consists of
employee contributions (the ''matching and employee contribution
portions''), then the requirements of this section, section 401(m), and
1.401(m)-2 must be applied on an employer-wide rather than a
qualified-separate-line-of-business basis to all of the plans or
portions of plans taken into account in determining whether those
requirements are satisfied by the matching and employee contribution
portions of the plan (regardless of whether the other plans or portions
of plans also satisfy the requirements necessary to apply the special
rule in 1.414(r)-1(c)(2)(ii)). Conversely, if an employer is treated
as operating qualified separate lines of business under section 414(r)
in accordance with 1.414(r)-1(b) for purposes of applying section
410(b), and does not apply the special rule for employer-wide plans in
1.414(r)1-(c)(2)(ii) to either the matching or employee contribution
portions of the plan, then the requirements of this section, section
401(m) and 1.401(m)-2 must be applied on a
qualified-separate-line-of-business rather than an employer-wide basis
to all of the plans or portions of plans taken into account in
determining whether those requirements are satisfied by the matching and
employee contribution portions of the plan (regardless of whether one or
more of the other plans or portions of plans is tested under the special
rule 1.414(r)-1(c)(2)(ii)). This requirement applies solely for
purposes of determining whether the requirements of this section,
section 401(m), and 1.401(m)-2 are satisfied by the matching and
employee contribution portions of the plan. The rules of this paragraph
are illustrated by the following example.
Example. (i) Employer A maintains a profit-sharing plan that includes
a cash or deferred arrangement in which all of the employees of Employer
A are eligible to participate. Under the profit-sharing plan, each
$1.00 of elective contributions under the cash or deferred arrangement
is matched by $0.50 of employer contributions. Employer A is treated as
operating qualified separate lines of business under section 414(r) in
accordance with 1.414(r)-1(b) for purposes of applying section 410(b).
However, Employer A applies the special rule for employer-wide plans in
1.414(r)-1(c)(2)(ii) to the portion of its profitsharing plan that
consists of matching contributions. Employer A makes qualified
nonelective contributions to the profit-sharing plan for the 1995 plan
year.
(ii) Under these facts, the requirements of sections 401(a)(4) and
410(b) must be applied on an employer-wide rather than a
qualified-separate-line-of-business basis in determining whether these
qualified nonelective contributions (and any elective contributions
under the cash or deferred arrangement) satisfy the requirements of
1.401(m)-1(b)(5), and thus whether they may be taken into account under
the actual contribution percentage test. Thus, in order for the
nonelective contributions to be used to satisfy the actual contribution
percentage test, both (1) the total amount of nonelective contributions
under the profit-sharing plan, including the qualified nonelective
contributions to be used to satisfy the actual contribution percentage
test, and (2) the total amount of nonelective contributions under the
profit-sharing plan, excluding the qualified nonelective contributions
to be used to satisfy the actual contribution percentage test, must
satisfy the requirements of section 401(a)(4) on an employer-wide basis.
Further, in order for any elective contributions under the cash or
deferred arrangement to be used to satisfy the actual contribution
percentage test, the total amount of elective contributions, including
any treated as matching contributions under the actual contribution
percentage test, must satisfy the requirements of section 401(k)(3) on
an employer-wide basis. Of course, in order for the profit-sharing plan
to satisfy section 401(a), it must still satisfy sections 410(b) and
401(a)(4) on a qualified-separate-line-of-business basis.
(d) Examples. The provisions of paragraphs (a) through (c) of this
section are illustrated by the following examples. Assume in each case
that the employer is a corporation, and that the employer's taxable year
and plan year are the calendar year. Also assume that the employee
contributions, elective contributions, matching contributions and
qualified nonelective contributions meet the applicable requirements of
sections 401(a)(4) and 410. For methods to be used to correct excess
aggregate contributions, see paragraph (e) of this section.
Example 1. (i) Employer L maintains a profit-sharing plan providing
for voluntary employee contributions. L does not maintain a plan that
includes a cash or deferred arrangement. For the 1988 plan year, the
actual contribution percentages (ACPs) for the highly compensated
employees and nonhighly compensated employees are shown in the following
chart:
(ii) This plan fails to qualify under either of the tests of section
401(m)(2)(A) because the ACP for highly compensated employees is more
than 125 percent of the ACP for nonhighly compensated employees, and
exceeds the ACP for the nonhighly compensated employees by more than two
percentage points. L must either reduce the ACP for the highly
compensated employees to seven percent (to satisfy the 200 percent/two
percentage point test) or increase the ACP of the nonhighly compensated
employees to eight percent (to satisfy the 125 percent test).
Example 2. (i) Employer M maintains a plan under which each dollar
of employee contributions is matched with $.50 of employer
contributions. M maintains no other plan. For the 1988 plan year, the
average percentage of compensation contributed to the plan for the
employees is shown in the following chart:
(ii) This plan fails to satisfy either of the tests of section
401(m)(2)(A). Employer M must either reduce the actual contribution
percentage of the highly compensated employees to 9.5 percent (to
satisfy the 200 percent/two percentage point test) or increase the
actual contribution percentage of the nonhighly compensated employees to
12 percent (to satisfy the 125 percent test).
Example 3. (i) Employer N maintains a plan that contains a cash or
deferred arrangement and permits employee contributions. For the 1988
plan year, the average percentages of compensation contributed to the
plan by the highly compensated and nonhighly compensated employees as
elective deferrals and employee contributions are shown in the chart
below. Elective contributions meet the requirements of paragraph (b)(5)
of this section.
(ii) The plan fails to meet the requirements of section 401(m)
because the actual contribution percentage (ACP) of highly compensated
employees is more than 125 percent of the ACP of the other employees,
and exceeds the ACP of the other employees by more than two percentage
points.
(iii) The plan provides that elective contributions made by nonhighly
compensated employees may be used to meet the requirements of section
401(m) to the extent needed under that section. Under this provision,
the plan uses elective contributions equal to two percent of the
compensation of the nonhighly compensated employees in the ACP test.
After this adjustment, the actual deferral percentages (ADPs) and ACPs
are as follows:
(iv) The ACP of the highly compensated employees meets the
requirements of section 401(m)(2)(A)(i) because it is 125 percent of
that for nonhighly compensated employees. The ADP of the highly
compensated employees similarly satisfies the 125 percent test. The
plan would also meet the requirements of section 401(m) if all elective
contributions were used in the ACP test. This is because the ACP for
the highly compensated employees (20 percent) would be 125 percent of
the ACP for the nonhighly compensated employees (16 percent).
Example 4. (i) Employer P maintains a plan that includes a cash or
deferred arrangement. Elective contributions, qualified nonelective
contributions (QNCs), employee contributions, and matching contributions
are made to the plan. The elective contributions and QNCs meet the
requirements of paragraph (b)(5) of this section. For the 1989 plan
year, the QNCs, elective contributions, and employee and matching
contributions are shown in the following table:
(ii) The elective contributions meet the test of section
401(k)(3)(A)(ii). The employee and matching contributions, however, do
not meet the actual contribution percentage (ACP) test. P may not use
any QNCs of the nonhighly compensated employees to meet the ACP test
because the remaining QNCs would discriminate in favor of the highly
compensated employees. However, P could make additional QNCs or
matching contributions of two percent of compensation on behalf of the
nonhighly compensated employees. Alternatively, P could treat all QNCs
for all employees and elective contributions equal to one percent of
compensation for nonhighly compensated employees as matching
contributions and make additional QNCs of 1.2 percent of compensation on
behalf of nonhighly compensated employees. The ACPs for highly and
nonhighly compensated employees would then be nine percent and 7.2
percent, respectively, thus satisfying the 125 percent test. The actual
deferral percentages would be five and three percent, respectively,
which would satisfy the 200 percent/two percentage point test.
Example 5. (i) Employer P maintains a cash or deferred arrangement.
Elective contributions, qualified nonelective contributions (QNCs),
employee contributions, and matching contributions are made to the plan.
The elective contributions and the QNCs meet the requirements of
paragraph (b)(5) of this section. For the 1989 plan year, the
contributions are shown in the following table:
(ii) The QNCs may be used in the actual deferral percentage (ADP)
test, the actual contribution percentage (ACP) test, or a combination of
the two. If P treats one-third of the QNCs as elective contributions
and two-thirds as matching contributions, the ADPs for the highly
compensated and nonhighly compensated employees are six and four
percent, respectively, and satisfy the 200 percent/two percentage point
test. Similarly, the ACPs for the two groups are six and five percent,
respectively, and satisfy the 125 percent test.
(e) Correction of excess aggregate contributions -- (1) General rule
-- (i) Permissible correction methods. A plan satisfies the
requirements of section 401(m)(2) and paragraph (b)(1) of this section
with respect to the amount of employee and matching contributions under
the plan if the employer, in accordance with the terms of the plan and
paragraph (b)(5) of this section, makes qualified nonelective
contributions or elective contributions that, in combination with
employee and matching contributions, satisfy the actual contribution
percentage test. In addition, a plan subject to the requirements of
section 401(m) satisfies section 401(m)(2) and paragraph (b)(1) of this
section if, in accordance with the terms of the plan, excess aggregate
contributions on behalf of highly compensated employees (and the income
allocable to these contributions) are distributed in accordance with
paragraph (e)(3) of this section. Matching contributions (and the
income allocable to matching contributions) that are not vested
(determined without regard to any increase in vesting that may occur
after the date of the forfeiture) may also be forfeited to correct
excess aggregate contributions. Finally, a plan may limit employee or
matching contributions in a manner that prevents excess aggregate
contributions from being made.
(ii) Combination of correction methods. The plan may permit a
combination of the methods listed in paragraph (e)(1)(i) of this section
to avoid or correct excess aggregate contributions.
(iii) Impermissible correction methods. Excess aggregate
contributions may not be corrected by forfeiting vested matching
contributions, recharacterizing matching contributions, or not making
matching contributions required under the terms of the plan. Excess
aggregate contributions for a plan year may not remain unallocated or be
allocated to a suspense account for allocation to one or more employees
in any future year. See paragraph (e)(5) of this section for the effect
of a failure to correct excess aggregate contributions. See
1.411(a)-4(b)(7) regarding permissible forfeitures of matching
contributions.
(iv) Partial correction. Any distribution of less than the entire
amount of excess aggregate contributions (and income) is treated as a
pro rata distribution of excess aggregate contributions and income.
(2) Amount of excess aggregate contributions -- (i) General rule.
The amount of excess aggregate contributions for a highly compensated
employee for a plan year is the amount (if any) by which the employee's
employee and matching contributions must be reduced for the employee's
actual contribution ratio to equal the highest permitted actual
contribution ratio under the plan. To calculate the highest permitted
actual contribution ratio under a plan, the actual contribution ratio of
the highly compensated employee with the highest actual contribution
ratio is reduced by the amount required to cause the employee's actual
contribution ratio to equal the ratio of the highly compensated employee
with the next highest actual contribution ratio. If a lesser reduction
would enable the arrangement to satisfy the actual contribution
percentage test, only this lesser reduction may be made. This process
must be repeated until the plan satisfies the actual contribution
percentage test. The highest actual contribution ratio remaining under
the plan after leveling is the highest permitted actual contribution
ratio. For each highly compensated employee, the amount of excess
aggregate contributions for a plan year is equal to the total employee
and matching contributions, plus qualified nonelective contributions and
elective contributions taken into account in determining the employee's
actual contribution ratio under paragraph (f)(1) of this section, minus
the amount determined by multiplying the employee's actual contribution
ratio (determined after application of this paragraph (e)(2)) by the
compensation used in determining the ratio. In no case may the amount
of excess aggregate contributions with respect to any highly compensated
employee exceed the amount of employee and matching contributions made
on behalf of the highly compensated employee for the plan year.
(ii) Coordination with correction of excess contributions. The
amount of excess aggregate contributions with respect to an employee for
a plan year is calculated after determining the excess contributions to
be recharacterized as employee contributions for the plan year.
(iii) Correction of family members. The determination and correction
of excess aggregate contributions of a highly compensated employee whose
actual contribution ratio is determined under the family aggregation
rules of paragraph (f)(1)(ii)(C) of this section, is accomplished by
reducing the actual contribution ratio as required under this paragraph
(e)(2) and allocating the excess aggregate contributions for the family
group among the family members in proportion to the employee and
matching contributions of each family member that are combined to
determine the actual contribution ratio.
(3) Corrective distribution of excess aggregate contributions (and
income) -- (i) Genera1 rule. Excess aggregate contributions (and income
allocable thereto) are distributed in accordance with this paragraph
(e)(3) only if the excess aggregate contributions and allocable income
are designated by the employer as a distribution of excess aggregate
contributions (and income), and are distributed to the appropriate
highly compensated employees after the close of the plan year in which
the excess aggregate contributions arose and within 12 months after the
close of that plan year. In the event of a complete termination of the
plan during the plan year in which an excess aggregate contribution
arose, the corrective distribution must be made as soon as
administratively feasible after the date of termination of the plan, but
in no event later than 12 months after the date of termination. If the
entire account balance of a highly compensated employee is distributed
during the plan year in which the excess aggregate contribution arose,
the distribution is deemed to have been a corrective distribution of
excess aggregate contributions (and income) to the extent that a
corrective distribution would otherwise have been required.
(ii) Income allocable to excess aggregate contributions -- (A)
General rule. The income allocable to excess aggregate contributions is
equal to the sum of the allocable gain or loss for the plan year and, if
the plan so provides, the allocable gain or loss for the period between
the end of the plan year and the date of distribution (the ''gap
period'').
(B) Method of allocating income. A plan may use any reasonable
method for computing the income allocable to excess aggregate
contributions, provided that the method does not violate section
401(a)(4), is used consistently for all participants and for all
corrective distributions under the plan for the plan year, and is used
by the plan for allocating income to participants' accounts.
(C) Alternative method of allocating income. A plan may allocate
income to excess aggregate contributions by multiplying the income for
the plan year (and the gap period, if the plan so provides) allocable to
employee contributions, matching contributions, and amounts treated as
matching contributions by a fraction. The numerator of the fraction is
the excess aggregate contributions for the employee for the plan year.
The denominator of the fraction is equal to the sum of:
(1) The total account balance of the employee attributable to
employee and matching contributions, and amounts treated as matching
contributions as of the beginning of the plan year; plus
(2) The employee and matching contributions, and amounts treated as
matching contributions for the plan year and for the gap period if gap
period income is allocated.
(D) Safe harbor method of allocating gap period income. Under the
safe harbor method, income on excess aggregate contributions for the gap
period is equal to 10 percent of the income allocable to excess
aggregate contributions for the plan year (calculated under the method
described in paragraph (e)(3)(ii)(C) of this section), multiplied by the
number of calendar months that have elapsed since the end of the plan
year. For purposes of calculating the number of calendar months that
have elapsed under the safe harbor method, a corrective distribution
that is made on or before the fifteenth day of the month is treated as
made on the last day of the preceding month. A distribution made after
the fifteenth day of the month is treated as made on the first day of
the next month.
(E) Allocable income for recharacterized elective contributions. If
recharacterized elective contributions are distributed as excess
aggregate contributions, the income allocable to the excess aggregate
contributions is determined as if recharacterized elective contributions
had been distributed as excess contributions. Thus, income must be
allocated to the recharacterized amounts distributed using the methods
in 1.401(k)-1(f)(4)(ii).
(iii) No employee or spousal consent required. A distribution of
excess aggregate contributions (and income) may be made under the terms
of the plan without regard to any notice or consent otherwise required
under sections 411(a)(11) and 417.
(iv) Treatment of corrective distributions and forfeited
contributions as employer contributions. Excess aggregate
contributions, including forfeited matching contributions, are treated
as employer contributions for purposes of sections 404 and 415 even if
distributed from the plan. Forfeited matching contributions that are
reallocated to the accounts of other participants for the plan year in
which the forfeiture occurs are treated under section 415 as annual
additions for the participants to whose accounts they are reallocated
and for the participants from whose accounts they are forfeited.
(v) Tax treatment of corrective distributions -- (A) Genera1 rule.
Except as otherwise provided in this paragraph (e)(3)(v), a corrective
distribution of excess aggregate contributions (and income) that is made
within 2 1/2 months after the end of the plan year for which the excess
aggregate contributions were made is includible in the employee's gross
income for the taxable year of the employee ending with or within the
plan year for which the excess aggregate contributions were made. A
corrective distribution of excess aggregate contributions (and income)
that is made more than 2 1/2 months after the plan year for which the
excess aggregate contributions were made is includible in the employee's
gross income in the taxable year of the employee in which distributed.
The portion of the distribution that is treated as an investment in the
contract under section 72 is determined without regard to any plan
contributions other than those distributed as excess aggregate
contributions. Regardless of when the corrective distribution is made,
it is not subject to the early distribution tax of section 72(t) and is
not treated as a distribution for purposes of applying the excise tax
under section 4980A. See paragraph (e)(5) of this section for
additional rules relating to the employer excise tax on amounts
distributed more than 2 1/2 months after the end of the plan year.
(B) Rule for de minimis distributions. If the total excess
contributions and excess aggregate contributions distributed to a
recipient under a plan for any plan year are less than $100 (excluding
income), a corrective distribution of excess aggregate contributions
(and income) is includible in gross income in the recipient's taxable
year in which the corrective distribution is made.
(C) Rule for certain 1987 and 1988 excess aggregate contributions.
Distributions for plan years beginning in 1987 and 1988 to which the de
minimis rule of this paragraph (e)(3)(v) of this section would otherwise
apply may be reported by the recipient, at the recipient's option,
either in the year described in paragraph (e)(3)(v)(A) of this section,
or in the year described in paragraph (e)(3)(v)(B) of this section.
This special rule may be used only for distributions made within 2 1/2
months after the close of the plan year, but not later than April 17,
1989.
(vi) No reduction of required minimum distribution. A distribution
of excess aggregate contributions (and income) is not treated as a
distribution for purposes of determining whether the plan satisfies the
minimum distribution requirements of section 401(a)(9).
(4) Coordination with section 401(a)(4). The method of distributing
excess aggregate contributions provided in the plan must satisfy the
requirements of section 401(a)(4). This requires that after correction
each level of matching contributions be effectively available to a group
of employees that satisfies section 410(b). Thus, a plan under which
employee contributions are distributed under this paragraph (e) to
highly compensated employees to the extent needed to meet the
requirements of section 401(m)(2), while matching contributions
attributable to employee contributions remain allocated to the highly
compensated employees' accounts does not meet the requirements of
section 401(a)(4). A method of distributing excess aggregate
contributions will not be considered discriminatory solely because, in
accordance with the terms of the plan, unmatched employee contributions
that exceed the highest rate at which employee contributions are matched
are distributed before matched employee contributions, or matching
contributions are distributed (or forfeited) prior to employee
contributions. See Example 6 in paragraph (e)(6) of this section.
(5) Failure to correct -- (i) Failure to correct within 2 1/2 months
after end of plan year. If a plan does not correct excess aggregate
contributions within 2 1/2 months after the close of the plan year for
which the excess aggregate contributions are made, the employer will be
liable for a 10 percent excise tax on the amount of the excess aggregate
contributions. See section 4979 and 54.4979-1. Qualified nonelective
contributions properly taken into account under paragraph (b)(5) of this
section for a plan year may enable a plan to avoid having excess
aggregate contributions, even if the contributions are made after the
close of the 2 1/2 month period.
(ii) Failure to correct within 12 months after end of plan year. If
excess aggregate contributions are not corrected within 12 months after
the close of the plan year for which they were made, the plan will fail
to meet the requirements of section 401(a)(4) for the plan year for
which the excess aggregate contributions were made and all subsequent
plan years in which the excess aggregate contributions remain in the
plan.
(6) Examples. The principles of this paragraph (e) are illustrated
by the following examples. Assume in each example that no income or
loss is allocable to elective, employee, or matching contributions.
Example 1. (i) Employer A maintains a thrift plan that does not
include a cash or deferred arrangement. In 1990, the actual
contribution percentage (ACP) for nonhighly compensated employees is
four percent. Thus, the ACP for the group of highly compensated
employees may not exceed six percent. The three highly compensated
employees who participate have the following compensation,
contributions, and actual contribution ratios (ACRs):
(ii) The maximum amount of employee and matching contributions
permitted on behalf of A, B, and C is determined by reducing
contributions in order of their ACRs, beginning with the highest ACR.
Thus, A's contribution is first reduced to $7,000 or 7.0 percent. Since
the resulting ACP of 6.33 percent still exceeds the permitted highly
compensated ACP of six percent, the contributions allocated to A and B
must be further reduced to 6.5 percent. This results in an ACP of six
percent, which meets the 200 percent/two percentage point test. The
excess aggregate contributions for A and B are $3,500 and $450,
respectively.
Example 2. Employee A is the sole highly compensated. participant
in a cash or deferred arrangement maintained by Employer X. The plan
that includes the arrangement, Plan X, provides a fully vested matching
contribution equal to 50 percent of elective and employee contributions.
Plan X is a calendar year plan. Plan X corrects excess contributions
by recharacterization. For the 1988 plan year, A's compensation is
$58,333, and A's elective contributions are $7,000. The actual deferral
percentages and actual contribution percentages of A and other employees
under Plan X are shown below:
(ii) In February 1989, Employer X determines that A's actual deferral
ratio must be reduced to 10 percent, or $5,833, which requires a
recharacterization of $1,167 as an employee contribution. This
increases A's actual contribution ratio to eight percent ($3,500 in
matching contributions plus $1,167 in employee contributions, divided by
$58,333 in compensation). Since A's actual contribution ratio must be
limited to six percent for Plan X to satisfy the actual contribution
percentage test, Plan X must distribute $1,167 of A's employee and
matching contributions.
Example 3. Same as Example 2, except that in 1988 A also had
elective contributions of $1,313 under Plan Y, maintained by an employer
unrelated to X. In January 1989, A requests and receives a distribution
of $1,000 in excess deferrals from Plan X. A forfeits the $500 match on
the excess deferrals. The $1,167 that would otherwise have been
recharacterized for Plan X to satisfy the actual deferral percentage
test is reduced by the $1,000 already distributed as an excess deferral,
leaving $167 to be recharacterized. A's actual contribution ratio is
now 5.43 percent ($3,000 in matching contributions plus $167 in employee
contributions, divided by $58,333 in compensation). Since Plan X
satisfies the actual contribution percentage test, no further
distribution is required or permitted.
Example 4. Same as Example 3, except that A does not request a
distribution of excess deferrals until March 1989. Employer X has
already recharacterized $1,167 as employee contributions, and
distributed it as an excess aggregate contribution (see Example 1).
Because the amount distributed is greater than the excess deferrals, A
is not entitled to a distribution of excess deferrals.
Example 5. For the 1987 plan year, Employee B defers $7,000 under
Plan C and $1,000 under plan D. Plans C and D are maintained by
unrelated employers; both Plans C and D have calendar plan years. Plan
C provides a fully vested, 100 percent matching contribution and does
not take elective contributions into account under section 401(m) or
take matching contributions into account under section 401(k). B timely
requests and receives a distribution of the $1,000 excess deferral from
Plan C, and forfeits the corresponding matching contribution. Employer
C subsequently determines that B has excess contributions of $600 and
excess aggregate contributions of $600. Plan C provides that excess
amounts are corrected by distribution. No distribution is required or
permitted to correct the excess contributions because $1,000 has been
distributed from this plan as excess deferrals. The distribution
required to correct the excess aggregate contributions is $600. If B
had corrected the excess deferrals of $1,000 by withdrawing $1,000 from
Plan D, Plan C would have had to correct the $600 excess contributions
in Plan C by distributing $600. Since B would have forfeited $600
(instead of $1,000) in matching contributions, B would have had $1,200
of excess aggregate contributions in Plan C. These would have been
corrected by distributing an additional $1,200 from Plan C.
Example 6. Employee B is the sole highly compensated employee in a
thrift plan under which the employer matches 100 percent of employee
contributions up to two percent of compensation, and 50 percent of
employee contributions up to the next four percent of compensation. For
the 1988 plan year, B has compensation of $100,000. B makes an employee
contribution of $7,000, or seven percent, and receives a four percent
matching contribution of $4,000. Thus, B's actual contribution ratio
(ACR) is 11 percent. The actual contribution percentage for the
nonhighly compensated employees is five percent, and the employer
determines that B's ACR must be reduced to seven percent to comply with
the rules of section 401(m). In this case, the plan satisfies the
requirements of this paragraph if it distributes the unmatched employee
contributions of $1,000, and $2,000 of matched employee contributions
with their related matches of $1,000. This would leave B with four
percent employee contributions, and three percent matching
contributions, for an ACR of seven percent. The plan could instead
distribute all matching contributions. The plan would fail to meet the
requirements of this paragraph if it distributed $4,000 (four percent)
of B's employee contributions and none of B's matching contributions.
See 1.401(m)-1(e)(2) and 1.401(m)-1(e)(4).
Example 7. (i) Employee C is a highly compensated employee in
Employer X's thrift plan, which matches 100 percent of employee
contributions up to five percent of compensation. The matching
contribution is vested at the rate of 20 percent per year. In 1991, C
makes $5,000 in employee contributions and receives $5,000 of matching
contributions. C is 60 percent vested in the matching contributions at
the end of the 1991 plan year.
(ii) In February 1992, X determines that C has excess aggregate
contributions of $1,000. The plan provides that only matching
contributions will be distributed as excess aggregate contributions.
(iii) X has two options available in distributing C's excess
contributions. The first option is to distribute $600 of vested
matching contributions and forfeit $400 of nonvested matching
contributions. These amounts are in proportion to C's vested and
nonvested interests in all matching contributions. The second option is
to distribute $1,000 of vested matching contributions, leaving the
nonvested matching contributions in the plan.
(iv) If the second option is chosen, the plan must also provide a
separate vesting schedule for vesting these nonvested matching
contributions. This is necessary because the nonvested matching
contributions must vest as rapidly as they would have had no
distribution been made. Thus, 50 percent must vest in each of the next
two years.
(v) The plan will not satisfy the nondiscriminatory availability
requirement of section 401(a)(4) if only nonvested matching
contributions are distributed because the effect is that matching
contributions for highly compensated employees vest more rapidly than
those for nonhighly compensated employees. See 1.401(m)-1(e)(4).
(f) Definitions. The following definitions apply for purposes of
this section and 1.401(m)-2 except as otherwise specifically provided:
(1) Actual contribution percentage -- (i) General rule. The actual
contribution percentage for a group of employees for a plan year is the
average of the actual contribution ratios of the employees in the group.
For plan years beginning after December 31, 1988, or such later date
provided in paragraph (g) of this section, actual contribution ratios
and the actual contribution percentage for a group are calculated to the
nearest one-hundredth of a percentage point.
(ii) Actual contribution ratio -- (A) General rule. An employee's
actual contribution ratio is the sum of the employee and matching
contributions allocated to the employee's account for the plan year, and
the qualified nonelective and elective contributions treated as matching
contributions for the plan year, divided by the employee's compensation
for the plan year. If an eligible employee makes no employee
contributions and no matching, qualified nonelective contributions, or
elective contributions are taken into account with respect to the
employee, the actual contribution ratio of the employee is zero. See
paragraphs (b)(4), (b)(5), and (f)(2) of this section for rules
regarding the employee and matching contributions, qualified nonelective
and elective contributions, and compensation that are taken into account
in calculating this fraction.
(B) Highly compensated employee eligible under more than one plan.
The actual contribution ratio of a highly compensated employee who is
eligible to participate in more than one plan of an employer to which
employee or matching contributions are made is calculated by treating
all the plans in which the employee is eligible to participate as one
plan. However, plans that are not permitted to be aggregated under
1.401(m)-1(b)(3)(ii) are not aggregated for this purpose. For example,
if a highly compensated employee with compensation of $80,000 may
receive matching contributions under two plans, the employee's actual
contribution ratio under each plan is calculated by dividing the
employee's total matching contributions under both plans by $80,000,
unless the plans are required to be disaggregated. In that case, the
actual contribution ratio of the employee under each plan is to be
calculated by dividing the employee's matching contributions under that
plan by $80,000. See paragraph (b)(3) of this section for the treatment
of certain multiple plans. For plan years beginning after December 31,
1988, or such later date provided in paragraph (g) of this section, if a
highly compensated employee participates in two or more plans that have
different plan years, this paragraph (f)(1)(ii) is applied by treating
all plans whose plan years end with or within the same calendar year as
a single plan.
(C) Employees subject to family aggregation rules -- (1) Aggregation
of employee contributions and other amounts. For plan years beginning
after December 31, 1986, or such later date provided in paragraph (g) of
this section, if a highly compensated employee is subject to the family
aggregation rules of section 414(q)(6) because that employee is either a
five-percent owner or one of the 10 most highly compensated employees,
the combined actual contribution ratio for the family group (treated as
one highly compensated employee) must be determined by combining the
employee contributions, matching contributions, amounts treated as
matching contributions, and compensation of all the eligible family
members.
(2) Effect on actual contribution percentage of nonhighly compensated
employees. The employee and matching contributions, amounts treated as
matching contributions, and compensation of all family members are
disregarded for purposes of determining the actual contribution
percentage for the group of highly compensated employees, and the group
of nonhighly compensated employees.
(3) Multiple family groups. If an employee is required to be
aggregated as a member of more than one family group in a plan, all
eligible employees who are members of those family groups that include
that employee are aggregated as one family group.
(2) Compensation. The term ''compensation'' means compensation as
defined in 1.401(k)-1(g)(2).
(3) Elective contributions. The term ''elective contribution'' means
elective contribution as defined in 1.401(k)-1(g)(3).
(4) Eligible employee -- (i) General rule. The term ''eligible
employee'' means an employee who is directly or indirectly eligible to
make an employee contribution or to receive an allocation of matching
contributions (including matching contributions derived from
forfeitures) under the plan for a plan year. For example, if an
employee must perform ministerial or mechanical acts (e.g., formal
application for participation or consent to payroll withholding) in
order to be eligible to make an employee contribution for a plan year,
the employee is an eligible employee for the plan year without regard to
whether the employee performs these acts. An employee who is unable to
make an employee contribution or to receive an allocation of matching
contributions because the employee has not contributed to another plan
is also an eligible employee. By contrast, if an employee must perform
additional service (e.g., satisfy a minimum period of service
requirement) in order to be eligible to make an employee contribution or
to receive an allocation of matching contributions for a plan year, the
employee is not an eligible employee for the plan year unless the
service is actually performed. An employee who would be eligible to
make employee contributions but for a suspension due to a distribution,
a loan, or an election not to participate in the plan, is an eligible
employee for purposes of section 401(m) for a plan year even though the
employee may not make an employee contribution or receive an allocation
of matching contributions by reason of the suspension. Finally, an
employee does not fail to be an eligible employee merely because the
employee may receive no additional annual additions because of section
415(c)(1) or 415(e).
(ii) Certain one-time elections. An employee is not an eligible
employee merely because the employee, upon commencing employment with
the employer or upon the employee's first becoming eligible under any
plan of the employer providing for employee or matching contributions,
is given a one-time opportunity to elect, and the employee does in fact
elect, not to be eligible to make employee contributions or to receive
allocations of matching contributions under the plan or any other plan
maintained by the employer (including plans not yet established) for the
duration of the employee's employment with the employer.
(5) Employee. The term ''employee'' means an employee as defined in
1.401(k)-1(g)(5).
(6) Employee contributions. The term ''employee contribution'' means
any mandatory or voluntary contribution to the plan that is treated at
the time of contribution as an after-tax employee contribution (e.g., by
reporting the contribution as taxable income subject to applicable
withholding requirements) and is allocated to a separate account to
which the attributable earnings and losses are allocated. See
1.401(k)-1(a)(2)(ii). The term includes:
(i) Employee contributions to the defined contribution portion of a
plan described in section 414(k);
(ii) Employee contributions to a qualified cost-of-living arrangement
described in section 415(k)(2)(B);
(iii) Employee contributions applied to the purchase of whole life
insurance protection or survivor benefit protection under a defined
contribution plan;
(iv) Amounts attributable to excess contributions within the meaning
of section 401(k)(8)(B) that are recharacterized as employee
contributions; and
(v) Employee contributions to an annuity contract described in
section 403(b).
The term does not include repayment of loans, repayment of
distributions described in section 411(a)(7)(C), or employee
contributions that are transferred to a plan from another plan. For
purposes of this paragraph (f)(6), employee contributions described in
paragraph (f)(6)(ii) of this section are deemed contributed to a defined
contribution plan.
(7) Employer. The term ''employer'' means the employer as defined in
1.401(k)-1(g)(6).
(8) Excess aggregate contributions. The term ''excess aggregate
contribution'' means, with respect to any plan year, the excess of the
aggregate amount of the employee and matching contributions (and any
qualified nonelective contribution or elective deferral taken into
account in computing the contribution percentage) actually made on
behalf of highly compensated employees for the plan year, over the
maximum amount of contributions permitted under the limitations of
section 401(m)(2)(A). The amount of excess aggregate contributions for
each highly compensated employee is determined by using the method
described in paragraph (e)(2) of this section. For purposes of this
paragraph, qualified matching contributions treated as elective
contributions in accordance with 1.401(k)-1(b)(5) are disregarded.
(9) Excess contributions. The term ''excess contribution'' means an
excess contribution as defined in 1.401(k)-1(g)(7)(i).
(10) Excess deferrals. The term ''excess deferrals'' means excess
deferral as defined in 1.402(g)-1(e)(1)(iii).
(11) Highly compensated employee. The term ''highly compensated
employee'' means a highly compensated employee as defined in section
414(q).
(12) Matching contributions -- (i) In general. The term ''matching
contribution'' means:
(A) Any employer contribution (including a contribution made at the
employer's discretion) to a defined contribution plan on account of an
employee contribution to a plan maintained by the employer;
(B) Any employer contribution (including a contribution made at the
employer's discretion) to a defined contribution plan on account of an
elective contribution to a plan maintained by the employer; and
(C) Any forfeiture allocated on the basis of employee contributions,
matching contributions, or elective contributions.
(ii) Employer contributions made on account of employee or elective
contributions. For purposes of paragraph (f)(12)(i) of this section,
whether an employer contribution is made on account of an employee
contribution or an elective contribution is determined on the basis of
all relevant facts and circumstances, including the relationship between
the employer contribution and employee actions outside the plan. Thus,
for example, an employer contribution made to a defined contribution
plan on account of contributions made by an employee under an
employer-sponsored savings arrangement that are not held in a plan that
is intended to be a qualified plan or a plan described in 1.402(g)-1(b)
is not a matching contribution. Notwithstanding the foregoing, for plan
years beginning before January 1, 1992, an employer may elect to take
into account as matching contributions, contributions made to a plan
pursuant to an arrangement under which the employer makes contributions
to the plan on account of either employee contributions to the plan or
contributions made by an employee to an employer-sponsored savings
arrangement that are not held in the plan, provided that the arrangement
was in effect prior to August 8, 1988.
(iii) Contributions used to meet the requirements of section 416.
For plan years beginning after December 31, 1988, a contribution or
allocation that is used to meet the minimum contribution or benefit
requirement of section 416 is not treated as made on account of an
employee or elective contribution and therefore is not a matching
contribution.
(13) Nonelective contributions. The term ''nonelective
contribution'' means nonelective contributions as defined in
1.401(k)-1(g)(10).
(14) Plan. The term ''plan'' means a plan as defined in
1.401(k)-1(g)(11).
(15) Qualified nonelective contributions. The term ''qualified
nonelective contribution'' means qualified nonelective contributions as
defined in 1.401(k)-1(g)(13)(ii).
(g) Effective dates -- (1) General rule. Except as provided in
paragraphs (g)(2), (g)(3), (g)(4), and (g)(5) of this section, or as
specifically provided otherwise in this section, this section is
effective for plan years beginning after December 31, 1986.
(2) Collectively bargained plans. In the case of a plan maintained
pursuant to one or more collective bargaining agreements between
employee representatives and one or more employers ratified before March
1, 1986, this section does not apply to years beginning before the
earlier of --
(i) January 1, 1989, or
(ii) The date on which the last collective bargaining agreement
terminates (determined without regard to any extension thereof after
February 28, 1986).
(3) Certain annuity contracts -- (i) In the case of an annuity
contract under section 403(b), not maintained pursuant to a collective
bargaining agreement, except as otherwise provided in paragraph (g)(5)
of this section, this section applies to plan years beginning after
December 31, 1988.
(ii) In the case of an annuity contract described in section 403(b)
maintained pursuant to a collective bargaining agreement described in
paragraph (g)(2)(i) of this section, this section does not apply to
years beginning before the earlier of
(A) The later of --
(1) January 1, 1989, or
(2) The date determined under paragraph (g)(2)(ii) of this section;
or
(B) January 1, 1991.
(4) State and local government plans. A governmental plan described
in section 414(d) is treated as satisfying section 401(m) for plan years
beginning before January 1, 1993.
(5) Transition rule for plan years beginning before 1992 -- (i)
General rule. For plan years beginning before January 1, 1992, a
reasonable interpretation of the rules set forth in section 401 (k) and
(m) of the Internal Revenue Code (as in effect during those years) may
be relied upon to determine whether a plan was qualified during those
years.
(ii) Restructuring -- (A) General rule. In determining whether the
requirements of section 401(m) are satisfied for plan years beginning
before January 1, 1992, a plan may be treated as consisting of two or
more component plans, each consisting of all of the allocations and
other benefits, rights, and features provided to a group of employees
under the plan. An employee may not be included in more than one
component plan of the same plan for a plan year under this method. If
this method is used for a plan year, the requirements of section 401(m)
are applied separately with respect to each component plan for the plan
year. Thus, for example, the actual contribution ratio and the amount
of excess aggregate contributions, if any, of each eligible employee
under each component plan must be determined as if the component plan
were a separate plan. This method applies solely for purposes of
section 401(m). Thus, for example, the requirements of section 410(b)
must still be satisfied by the entire plan.
(B) Identification of component plans -- (1) Minimum coverage
requirement. The group of eligible employees described in
1.401(m)-1(f)(4) under each component plan must separately satisfy the
requirements of section 410(b) as if the component plan were a separate
plan. Component plans may not be aggregated to satisfy this
requirement.
(2) Commonality requirement. The group of employees used to identify
a component plan must share some common attribute or attributes, other
than similar actual contribution ratios. Permissible common attributes
include, for example, employment at the same work site, in the same job
category, for the same division or subsidiary, or for a unit acquired in
a specific merger or acquisition, employment for the same number of
years, compensation under the same method (e.g., salaried or hourly),
coverage under the same contribution formula, and attributes that could
be used as the basis of a classification that would be treated as
reasonable under the average benefit percentage test of section
410(b)(1)(C) and (b)(2). Employees whose only common attribute is the
same or similar actual contribution ratios, or another attribute having
substantially the same effect as the same or similar actual contribution
ratios, are not considered as sharing a common attribute for this
purpose. This rule applies regardless of whether the component plan or
the plan of which it is a part satisfies the ratio or percentage test of
section 410(b).
(T.D. 8357, 56 FR 40534, Aug. 15, 1991, as amended by T.D. 8376, 56
FR 63432, Dec. 4, 1991; T.D. 8357, 57 FR 10290, Mar. 25, 1992)
26 CFR 1.401(m)-2 Multiple use of alternative limitation.
(a) In general. The rules in this section prevent the multiple use
of the alternative methods of compliance with sections 401 (k) and (m)
contained in section 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii)
respectively. Paragraph (b) of this section discusses the scope of this
section and contains the general rule for determination of a multiple
use of the alternative limitation. Paragraph (c) of this section
contains rules for the correction of multiple use.
(b) General rule for determination of multiple use -- (1) In general.
Multiple use of the alternative limitation occurs if all of the
conditions of this paragraph (b)(1) are satisfied:
(i) One or more highly compensated employees of the employer are
eligible employees in both a cash or deferred arrangement subject to
section 401(k) and a plan maintained by the employer subject to section
401(m).
(ii) The sum of the actual deferral percentage of the entire group of
eligible highly compensated employees under the arrangement subject to
section 401(k) and the actual contribution percentage of the entire
group of eligible highly compensated employees under the plan subject to
section 401(m) exceeds the aggregate limit of paragraph (b)(3) of this
section.
(iii) The actual deferral percentage of the entire group of eligible
highly compensated employees under the arrangement subject to section
401(k) exceeds the amount described in section 401(k)(3)(A)(ii)(1).
(iv) The actual contribution percentage of the entire group of
eligible highly compensated employees under the arrangement subject to
section 401(m) exceeds the amount described in section 401(m)(2)(A)(i).
The actual deferral percentage and actual contribution percentage of
the group of eligible highly compensated employees are determined after
use of qualified nonelective contributions and qualified matching
contributions to meet the requirements of section 401(k)(3)(A)(ii) and
after use of qualified nonelective contributions and elective
contributions to meet the requirements of section 401(m)(2)(A). The
actual deferral percentage and actual contribution percentage of the
group of eligible highly compensated employees are determined after any
corrective distribution or forfeiture of excess deferrals, excess
contributions, or excess aggregate contributions and after any
recharacterization of excess contributions required without regard to
this section. Only plans and arrangements maintained by the same
employer are taken into account under this paragraph (b)(1). If the
employer maintains two or more cash or deferred arrangements subject to
section 401(k) that are not aggregated pursuant to
1.401(k)-1(g)(11)(iii) (relating to mandatory disaggregation) multiple
use is tested separately with respect to each plan. Thus, for example,
if an employer maintains a cash or deferred arrangement with matching
contributions, under which elective contributions may be made under
either an ESOP or a non-ESOP, multiple use is tested separately with
respect to elective contributions and matching contributions under the
ESOP, and with respect to elective contributions and matching
contributions under the non-ESOP.
(2) Alternative limitation. For purposes of this section, the term
''alternative limitation'' means the 200 percent or 2 percentage point
limits in sections 401(k)(3)(A)(ii)(ii) and 401(m)(2)(A)(ii).
(3) Aggregate limit -- (i) In general. For purposes of this section,
the aggregate limit is the greater of:
(A) The sum of --
(1) 1.25 times the greater of the relevant actual deferral percentage
or the relevant actual contribution percentage, and
(2) Two percentage points plus the lesser of the relevant actual
deferral percentage or the relevant actual contribution percentage. In
no event, however, may this amount exceed twice the lesser of the
relevant actual deferral percentage or the relevant actual contribution
percentage; or
(B) The sum of --
(1) 1.25 times the lesser of the relevant actual deferral percentage
or the relevant actual contribution percentage, and
(2) Two percentage points plus the greater of the relevant actual
deferral percentage or the relevant actual contribution percentage. In
no event, however, may this amount exceed twice the greater of the
relevant actual deferral percentage or the relevant actual contribution
percentage.
(ii) Relevant actual deferral percentage and relevant actual
contribution percentage defined. For purposes of paragraph (b)(3)(i) of
this section, the term ''relevant actual deferral percentage'' means the
actual deferral percentage of the group of nonhighly compensated
employees eligible under the arrangement subject to section 401(k) for
the plan year, and the term ''relevant actual contribution percentage''
means the actual contribution percentage of the group of nonhighly
compensated employees eligible under the plan subject to section 401(m)
for the plan year beginning with or within the plan year of the
arrangement subject to section 401(k).
(iii) Examples. The provisions of this paragraph (b) are illustrated
by the following examples:
Example 1. (i) Assume that Employer G maintains a plan that contains
a cash or deferred arrangement under which the actual deferral
percentages of highly compensated and nonhighly compensated employees
are 5.5 and four percent respectively. The plan also permits employee
contributions, and the actual contribution percentages for the two
groups are 4.2 and three percent respectively. The multiple use of the
alternative limitation is tested as follows:
(ii) In this case, the sum of the actual deferral percentage and the
actual contribution percentage of highly compensated employees is 9.70
percent, which is less than the aggregate limit. Therefore, there is no
multiple use of the alternative limitation.
Example 2. Employer F maintains a plan subject to section 401(k)
with a plan year beginning January 1, and a plan subject to section
401(m) with a plan year beginning July 1. The plan subject to section
401(k) does not correct excess contributions by recharacterization. The
first actual deferral percentage taken into account is that for the plan
year beginning January 1, 1989. The first actual contribution
percentage taken into account is that for the plan year beginning July
1, 1989.
Example 3. (i) Employer E maintains a plan that contains a cash or
deferred arrangement and provides for matching contributions. The
actual deferral and contribution percentages for a plan year are as
follows:
(ii) The actual deferral percentage of the highly compensated
employees exceeds the normal limit (1.25 times 1.8, or 2.25%) but not
the alternative limit (two plus 1.8, but not more than twice 1.8, or
3.6%). The actual contribution percentage of the highly compensated
employees does not exceed the normal limit (1.25 times 1.35, or 1.69%).
Accordingly, the plan satisfies both the actual deferral and
contribution percentage tests. Since the actual contribution percentage
of the highly compensated employees does not exceed the normal limit,
condition (iv) of paragraph (b)(1) of this section is not satisfied.
Therefore, there is no multiple use of the alternative limitation.
(c) Correction of multiple use -- (1) In general. If multiple use of
the alternative limitation occurs with respect to two or more plans or
arrangements maintained by an employer, it must be corrected by reducing
the actual deferral percentage or actual contribution percentage of
highly compensated employees in the manner described in paragraph (c)(3)
of this section. Instead of making this reduction, the employer may
eliminate the multiple use of the alternative limitation by making
qualified nonelective contributions in accordance with 1.401(k)-1(b)(5)
and (f)(1) or 1.401(m)-1(b)(5) and (e)(1).
(2) Treatment of required reduction. The required reduction is
treated as an excess contribution under the arrangement subject to
section 401(k) or excess aggregate contribution under the plan subject
to section 401(m). However, if an excess contribution arising under
this section is recharacterized as an employee contribution, the
recharacterized amount is treated as an excess aggregate contribution.
(3) Required reduction. The amount of the reduction of the actual
deferral percentage of the entire group of highly compensated employees
eligible in the arrangement subject to section 401(k) is calculated in
the manner described in 1.401(k)-1(f)(2) or the amount of the reduction
of the actual contribution percentage of the entire group of highly
compensated employees eligible in the plan subject to section 401(m) is
calculated in the manner described in 1.401(m)-1(e)(2), as designated
in the plan, so that there is no multiple use of the alternative
limitation. The employer may elect to reduce the actual deferral ratios
or the actual contribution ratios, as designated in the plan, either for
all highly compensated employees under the plan or arrangements subject
to reduction or for only those highly compensated employees who are
eligible in both the arrangement subject to section 401(k) and the plan
subject to section 401(m).
(4) Examples. The principles of this paragraph (c) are illustrated
by the following examples. In all cases, the employer maintains both an
arrangement subject to section 401(k) and a plan subject to section
401(m). Assume that there is no income or loss allocable to the
elective, employee, or matching contributions.
Example 1. (i) All employees of Employer Q are eligible in both an
arrangement subject to section 401(k) and a plan subject to section
401(m). Both plans have a calendar plan year. The plans provide that
multiple use of the alternative limitation will be corrected in the plan
subject to section 401(m) and that any required reduction in actual
oontribution ratios will apply only to employees eligible to participate
in both arrangements. Employees X and Y are highly compensated. Each
received compensation of $100,000, deferred $6,000, received a $3,000
matching contribution, and made employee contributions of $3,000.
Actual deferral and contribution percentages under the arrangement and
plan for the 1989 plan year are shown below. No excess deferrals,
excess contributions, or excess aggregate contributions have yet been
required to be distributed, forfeited, or recharacterized under the
plan.
(ii) The aggregate limit and amount required, to be corrected are
determined as follows:
(iii) A similar correction must be made for Employee Y.
Example 2. Same as Example 1, but the plan corrects the multiple use
in the arrangement subject to section 401(k) and provides that excess
contributions are recharacterized. In this case, the aggregate limit
for the plans will be 11 percent. Similarly, the excess contributions
for Employees X and Y, determined in a manner analogous to that used in
Example 1, will be $1,000. When this is recharacterized, the actual
contribution percentage for these employees will increase to seven
percent, resulting in an excess aggregate contribution of $1,000 that
must be distributed.
Example 3. Same as Example 1, except that Employee Y is not eligible
to participate in the arrangement subject to section 401(k). No
reduction of Y's actual contribution ratio is required because Y is only
in the plan subject to section 401(m). In order to reduce the actual
contribution percentage of the entire group of highly compensated
employees eligible for the plan subject to section 401(m) to five
percent, the plan must reduce X's actual contribution percentage to four
percent. X's employee and matching contributions are limited to $4,000.
Therefore X has an excess aggregate contribution of $2,000.
(d) Effective date -- (1) General rule. This section is effective
for plan years beginning after December 31, 1988, or such later date
provided in 1.402(m)-1(g).
(2) Transition rule. For plan years beginning before January 1,
1992, a reasonable interpretation of the rules set forth in sections 401
(k) and (m) of the Internal Revenue Code (as in effect during those
years) may be relied upon to determine whether a plan was qualified
during those years. For plan years beginning before January 1, 1992, a
plan may be restructured only in accordance with 1.401(k)-1(h)(3)(iii)
or 1.401(m)-1(g)(5)(ii).
(T.D. 8357, 56 FR 40543, Aug. 15, 1991, as amended at 57 FR 10290,
Mar. 25, 1992)
26 CFR 1.402(a)-1 Taxability of beneficiary under a trust which meets
the requirements of section 401(a).
(a) In general. (1)(i) Section 402 relates to the taxation of the
beneficiary of an employees' trust. If an employer makes a contribution
for the benefit of an employee to a trust described in section 401(a)
for the taxable year of the employer which ends within or with a taxable
year of the trust for which the trust is exempt under section 501(a),
the employee is not required to include such contribution in his income
except for the year or years in which such contribution is distributed
or made available to him. It is immaterial in the case of contributions
to an exempt trust whether the employee's rights in the contributions to
the trust are forfeitable or nonforfeitable either at the time the
contribution is made to the trust or thereafter.
(ii) The provisions of section 402(a) relate only to a distribution
by a trust described in section 401(a) which is exempt under section
501(a) for the taxable year of the trust in which the distribution is
made. With two exceptions, the distribution from such an exempt trust
when received or made available is taxable to the distributee to the
extent provided in section 72 (relating to annuities). First, for
taxable years beginning before January 1, 1964, section 72(e)(3)
(relating to the treatment of certain lump sums), as in effect before
such date, shall not apply to such distributions. For taxable years
beginning after December 31, 1963, such distributions may be taken into
account in computations under sections 1301 through 1305 (relating to
income averaging). Secondly, certain total distributions described in
section 402(a)(2) are taxable as long-term capital gains. For the
treatment of such total distributions, see subparagraph (6) of this
paragraph. Under certain circumstances, an amount representing the
unrealized appreciation in the value of the securities of the employer
is excludable from gross income for the year of distribution. For the
rules relating to such exclusion, see paragraph (b) of this section.
Furthermore, the exclusion provided by section 105(d) is applicable to a
distribution from a trust described in section 401(a) and exempt under
section 501(a) if such distribution constitutes wages or payments in
lieu of wages for a period during which an employee is absent from work
on account of a personal injury or sickness. See 1.72-15 for the rules
relating to the tax treatment of accident or health benefits received
under a plan to which section 72 applies.
(iii) Except as provided in paragraph (b) of this section, a
distribution of property by a trust described in section 401(a) and
exempt under section 501(a) shall be taken into account by the
distributee at its fair market value.
(iv) If a trust is exempt for the taxable year in which the
distribution occurs, but was not so exempt for one or more prior taxable
years under section 501(a) (or under section 165(a) of the Internal
Revenue Code of 1939 for years to which such section was applicable),
the contributions of the employer which were includible in the gross
income of the employee for the taxable year when made shall, in
accordance with section 72(f), also be treated as part of the
consideration paid by the employee.
(v) If the trust is not exempt at the time the distribution is
received by or made available to the employee, see section 402(b) and
paragraph (b) of 1.402(b)-1.
(vi) For the treatment of amounts paid to provide medical benefits
described in section 401(h) as defined in paragraph (a) of 1.401-14,
see paragraph (h) of 1.72-15.
(2) If a trust described in section 401(a) and exempt under section
501(a) purchases an annuity contract for an employee and distributes it
to the employee in a year for which the trust is exempt, the contract
containing a cash surrender value which may be available to an employee
by surrendering the contract, such cash surrender value will not be
considered income to the employee unless and until the contract is
surrendered. For the rule as to nontransferability of annuity contracts
issued after 1962, see paragraph (b)(2) of 1.401-9. If, however, the
contract distributed by such exempt trust is a retirement income,
endowment, or other life insurance contract and is distributed after
October 26, 1956, the entire cash value of such contract at the time of
distribution must be included in the distributee's income in accordance
with the provisions of section 402(a), except to the extent that, within
60 days after the distribution of such contract, all or any portion of
such value is irrevocably converted into a contract under which no part
of any proceeds payable on death at any time would be excludable under
section 101(a) (relating to life insurance proceeds). If the contract
distributed by such trust is a transferable annuity contract issued
after 1962, or a retirement income, endowment, or other life insurance
contract which is distributed after 1962 (whether or not transferable),
then notwithstanding the preceding sentence the entire cash value of the
contract is includible in the distributee's gross income, unless within
such 60 days such contract is also made nontransferable.
(3) For the rules applicable to premiums paid by a trust described in
section 401(a) and exempt under section 501(a) for the purchase of
retirement income, endowment, or other contracts providing life
insurance protection payable upon the death of the employee-participant,
see paragraph (b) of 1.72-16.
(4) For the rules applicable to the amounts payable by reason of the
death of an employee under a contract providing life insurance
protection, or an annuity contract, purchased by a trust described in
section 401(a) and exempt under section 501(a), see paragraph (c) of
1.72-16.
(5) If pension or annuity payments or other benefits are paid or made
available to the beneficiary of a deceased employee or a deceased
retired employee by a trust described in section 401(a) which is exempt
under section 501(a), such amounts are taxable in accordance with the
rules of section 402(a) and this section. In case such amounts are
taxable under section 72, the ''investment in the contract'' shall be
determined by reference to the amount contributed by the employee and by
applying the applicable rules of sections 72 and 101(b)(2)(D). In case
the amounts paid to, or includible in the gross income of, the
beneficiaries of the deceased employee or deceased retired employee
constitute a distribution to which subparagraph (6) of this paragraph is
applicable, the extent to which the distribution is taxable is
determined by reference to the contributions of the employee, by
reference to any prior distributions which were excludable from gross
income as a return of employee contributions, and by applying the
applicable rules of sections 72 and 101(b).
(6)(i) If the total distributions payable with respect to any
employee under a trust described in section 401(a) which in the year of
distribution is exempt under section 501(a) are paid to, or includible
in the gross income of, the distributee within one taxable year of the
distributee on account of the employee's death or other separation from
the service, or death after such separation from service, the amount of
such distribution, to the extent it exceeds the net amount contributed
by the employee, shall be considered a gain from the sale or exchange of
a capital asset held for more than six months. The total distributions
payable are includible in the gross income of the distributee within one
taxable year if they are made available to such distributee and the
distributee fails to make a timely election under section 72(h) to
receive an annuity in lieu of such total distributions. The ''net
amount contributed by the employee'' is the amount actually contributed
by the employee plus any amounts considered to be contributed by the
employee under the rules of section 72(f), 101(b), and subparagraph (3)
of this paragraph, reduced by any amounts theretofore distributed to him
which were excludable from gross income as a return of employee
contributions. See, however, paragraph (b) of this section for rules
relating to the exclusion of amounts representing net unrealized
appreciation in the value of securities of the employer corporation. In
addition, all or part of the amount otherwise includible in gross income
under this paragraph by a non-resident alien individual in respect of a
distribution by the United States under a qualified pension plan may be
excludable from gross income under section 402(a)(4). For rules
relating to such exclusion, see paragraph (c) of this section. For
additional rules relating to the treatment of total distributions
described in this subdivision in the case of a nonresident alien
individual, see sections 871 and 1441 and the regulations thereunder.
(ii) The term ''total distributions payable'' means the balance to
the credit of an employee which becomes payable to a distributee on
account of the employee's death or other separation from the service or
on account of his death after separation from the service. Thus,
distributions made before a total distribution (for example, annuity
payments received by the employee after retirement), will not defeat
application of the capital gains treatment with respect to the total
distributions received by a beneficiary upon the death of the employee
after retirement. However, a distribution on separation from service
will not receive capital gains treatment unless it constitutes the total
amount in the employee's account at the time of his separation from
service. If the total amount in the employee's account at the time of
his death or other separation from the service or death after separation
from the service is paid or includible in the gross income of the
distributee within one taxable year of the distributee, such amount is
entitled to the capital gains treatment notwithstanding that in a later
taxable year an additional amount, attributable to the last year of
service, is credited to the account of the employee and distributed.
(iii) If an employee retires and commences to receive an annuity but
subsequently, in some succeeding taxable year, is paid a lump sum in
settlement of all future annuity payments, the capital gains treatment
does not apply to such lump sum settlement paid during the lifetime of
the employee since it is not a payment on account of separation from the
service, or death after separation, but is on account of the settlement
of future annuity payments.
(iv) If the ''total distributions payable'' are paid or includible in
the gross income of several distributees within one taxable year on
account of the employee's death or other separation from the service or
on account of his death after separation from the service, the capital
gains treatment is applicable. The total distributions payable are paid
within one taxable year of the distributees when, for example, a portion
of such total is distributed in cash to one distributee and the balance
is used to purchase an annuity contract which is distributed to the
other distributee. However, if the share of any distributee is not paid
or includible in his gross income within the same taxable year in which
the shares of the other distributees are paid or includible in their
gross income, none of the distributees is entitled to the capital gains
treatment, since the total distributions payable are not paid or
includible in the distributees' gross income within one taxable year.
For example, if the total distributions payable are made available to
each of two distributees and one elects to receive his share in cash
while the other makes a timely election under section 72(h) to receive
his share in installment payments from the trust, the capital gains
treatment does not apply to either distributee.
(v) For regulations as to certain plan terminations, see 1.402(e)-1.
(vi) The term ''total distributions payable'' does not include United
States Retirement Plan Bonds held by a trust to the credit of an
employee. Thus, a distribution by a qualified trust may constitute a
total distributions payable with respect to an employee even though the
trust retains retirement plan bonds registered in the name of such
employee. Similarly, the proceeds of a retirement plan bond received as
a part of the total amount to the credit of an employee will not be
entitled to capital gains treatment. See section 405(e) and paragraph
(a)(4) of 1.405-3.
(vii) For purposes of determining whether the total distributions
payable to an employee have been distributed within one taxable year,
the term ''total distributions payable'' includes amounts held by a
trust to the credit of an employee which are attributable to
contributions on behalf of the employee while he was a self-employed
individual in the business with respect to which the plan was
established. Thus, a distribution by a qualified trust is not a total
distributions payable with respect to an employee if the trust retains
amounts which are so attributable.
(viii) The term ''total distributions payable'' does not include any
amount which has been placed in a separate account for the funding of
medical benefits described in section 401(h) as defined in paragraph (a)
of 1.401-14. Thus, a distribution by a qualified trust may constitute a
total distributions payable with respect to an employee even though the
trust retains amounts attributable to the funding of medical benefits
described in section 401(h).
(7) The capital gains treatment provided by section 402(a)(2) and
subparagraph (6) of this paragraph is not applicable to distributions
paid to a distributee to the extent such distributions are attributable
to contributions made on behalf of an employee while he was a
self-employed individual in the business with respect to which the plan
was established. For the taxation of such amounts, see 1.72-18. For
the rules for determining the amount attributable to contributions on
behalf of an employee while he was self-employed, see paragraphs (b)(4)
and (c)(2) of such section.
(8) For purposes of this section, the term ''employee'' includes a
self-employed individual who is treated as an employee under section
401(c)(1), and paragraph (b) of 1.401-10, and the term ''employer''
means the person treated as the employer of such individual under
section 401(c)(4).
(b) Distributions including securities of the employer corporation --
(1) In general. (i) If a trust described in section 401(a) which is
exempt under section 501(a) makes a distribution to a distributee, and
such distribution includes securities of the employer corporation, the
amount of any net unrealized appreciation in such securities shall be
excluded from the distributee's income in the year of such distribution
to the following extent:
(a) If the distribution constitutes a total distribution to which the
regulations of paragraph (a)(6) of this section are applicable, the
amount to be excluded is the entire net unrealized appreciation
attributable to that part of the total distribution which consists of
securities of the employer corporation; and
(b) If the distribution is other than a total distribution to which
paragraph (a)(6) of this section is applicable, the amount to be
excluded is that portion of the net unrealized appreciation in the
securities of the employer corporation which is attributable to the
amount considered to be contributed by the employee to the purchase of
such securities.
The amount of net unrealized appreciation which is excludable under
the regulations of (a) and (b) of this subdivision shall not be included
in the basis of the securities in the hands of the distributee at the
time of distribution for purposes of determining gain or loss on their
subsequent disposition. In the case of a total distribution the amount
of net unrealized appreciation which is not included in the basis of the
securities in the hands of the distributee at the time of distribution
shall be considered as a gain from the sale or exchange of a capital
asset held for more than six months to the extent that such appreciation
is realized in a subsequent taxable transaction. However, if the net
gain realized by the distributee in a subsequent taxable transaction
exceeds the amount of the net unrealized appreciation at the time of
distribution, such excess shall constitute a long-term or short-term
capital gain depending upon the holding period of the securities in the
hands of the distributee.
(ii) For purposes of section 402(a) and of this section, the term
''securities'' means only shares of stock and bonds or debentures issued
by a corporation with interest coupons or in registered form, and the
term ''securities of the employer corporation'' includes securities of a
parent or subsidiary corporation (as defined in subsections (e) and (f)
of section 425) of the employer corporation.
(2) Determination of net unrealized appreciation. (i) The amount of
net unrealized appreciation in securities of the employer corporation
which are distributed by the trust is the excess of the market value of
such securities at the time of distribution over the cost or other basis
of such securities to the trust. Thus, if a distribution consists in
part of securities which have appreciated in value and in part of
securities which have depreciated in value, the net unrealized
appreciation shall be considered to consist of the net increase in value
of all of the securities included in the distribution. For this
purpose, two or more distributions made by a trust to a distributee in a
single taxable year of the distributee shall be treated as a single
distribution.
(ii) For the purpose of determining the net unrealized appreciation
on a distributed security of the employer corporation, the cost or other
basis of such security to the trust shall be computed in accordance with
whichever of the following rules is applicable:
(a) If a security was earmarked for the account of a particular
employee at the time it was purchased by or contributed to the trust so
that the cost or other basis of such security to the trust is reflected
in the account of such employee, such cost or other basis shall be used.
(b) If as of the close of each taxable year of the trust (or other
specified period of time not in excess of 12 consecutive calendar
months) the trust allocates among the accounts of participating
employees all securities acquired by the trust during the period
(exclusive of securities unallocated under a plan providing for
allocation in whole shares only), the cost or other basis to the trust
of any securities allocated as of the close of a particular allocation
period shall be the average cost or other basis to the trust of all
securities of the same type which were purchased or otherwise acquired
by the trust during such allocation period. For purposes of determining
the average cost to the trust of securities included in a subsequent
allocation, the actual cost to the trust of the securities unallocated
as of the close of a prior allocation period shall be deemed to be the
average cost or other basis to the trust of securities of the same type
allocated as of the close of such prior allocation period.
(c) In a case where neither (a) nor (b) of this subdivision is
applicable, if the trust fund, or a specified portion thereof, is
invested exclusively in one particular type of security of the employer
corporation, and if during the period the distributee participated in
the plan none of such securities has been sold except for the purpose of
paying benefits under the trust or for the purpose of enabling the
trustee to obtain funds with which to exercise rights which have accrued
to the trust, the cost or other basis to the trust of all securities
distributed to such distributee shall be the total amount credited to
the account of such distributee (or such portion thereof as was
available for investment in such securities) reduced by the amount
available for investment but uninvested on the date of distribution. If
at the time of distribution to a particular distributee a portion of the
amount credited to his account is forfeited, appropriate adjustment
shall be made with respect thereto in determining the cost or other
basis to the trust of the securities distributed.
(d) Salary reduction, cash or deferred arrangements -- (1) Inclusion
in income. Whether a contribution to an exempt trust or plan described
in section 401(a) or 403(a) is made by the employer or the employee is
determined on the basis of the particular facts and circumstances of
each case. Nevertheless, an amount contributed to a plan or trust will,
except as otherwise provided under paragraph (d)(2) of this section, be
treated as contributed by the employee if it was contributed at the
employee's election, even though the election was made before the year
in which the amount was earned by the employee or before the year in
which the amount became currently available to the employee. Any amount
treated as contributed by the employee is includible in the gross income
of the employee for the year in which the amount would have been
received by the employee but for the election. Thus, for example,
amounts contributed to an exempt trust or plan by reason of a salary
reduction agreement under a cash or deferred arrangement are treated as
received by the employee when they would have been received by the
employee but for the election to defer. Accordingly, they are
includible in the gross income of the employee for that year (except as
provided under paragraph (d)(2) of this section). See
1.401(k)-1(a)(3)(iii) and (2)(i) for the meaning of currently available
and cash or deferred arrangement, respectively.
(2) Amounts not included in income -- (i) Qualified cash or deferred
arrangement. Elective contributions as defined in 1.401(k)-l (g)(3)
for a plan year made by an employer on behalf of an employee pursuant to
a cash or deferred election under a qualified cash or deferred
arrangement, as defined in 1.401(k)-1(a)(4)(i), are not treated as
received by or distributed to the employee or as employee contributions.
For plan years beginning after December 31, 1992, whether a cash or
deferred election is made under a qualified cash or deferred arrangement
is determined without regard to the special rules for certain
collectively bargained plans contained in 1.401(k)-1(a)(7). As a
result, elective contributions under these plans are treated as employee
contributions for purposes of this section if the cash or deferred
arrangement does not satisfy the actual deferral percentage test of
section 401(k)(3) or otherwise fails to be a qualified cash or deferred
arrangement.
(ii) Matching contributions. Matching contributions described in
1.401(m)-1(f)(12) and section 401(m)(4) are not treated as contributed
by an employee merely because they are made by the employer as a result
of an employee's election.
(iii) Effect of certain one-time elections. Amounts contributed to
an exempt plan or trust described in section 401(a) or 403(a) pursuant
to the one-time irrevocable employee election to participate in a plan
described in 1.401(k)-1(a)(3)(iv) are not treated as contributed by an
employee. Similarly, amounts contributed to an exempt plan or trust
described in section 401(a) or 403(a) in which self-employed individuals
may participate pursuant to the one-time irrevocable election described
in 1.401(k)-1(a)(6)(ii)(C) are not treated as contributed by an
employee.
(3) Effective date and transition rules -- (i) Effective date. In
the case of a plan or trust that does not include a salary reduction or
cash or deferred arrangement in existence on June 27, 1974, this
paragraph applies to taxable years ending after that date.
(ii) Transition rule for cash or deferred arrangements in existence
on June 27, 1974 -- (A) General rule. In the case of a plan or trust
that includes a salary reduction or a cash or deferred arrangement in
existence on June 27, 1974, this paragraph applies to plan years
beginning after December 31, 1979 (or, in the case of a pre-ERISA money
purchase plan, as defined in 1.401(k)-1(g)(12), plan years beginning
after July 18, 1984). For plan years beginning prior to January 1, 1980
(or, in the case of a pre-ERISA money purchase plan, plan years
beginning before July 19, 1984), the taxable year of inclusion in gross
income of the employee of any amount so contributed by the employer to
the trust is determined in a manner consistent with Rev. Rul. 56-497,
1956-2 CB 284, Rev. Rul. 63-180, 1963-2 CB 189, and Rev. Rul. 68-89,
1968-1 CB 402.
(B) Meaning of cash or deferred arrangement in existence on June 27,
1974. A cash or deferred arrangement is considered as in existence on
June 27, 1974, if, on or before that date, it was reduced to writing and
adopted by the employer (including, in the case of a corporate employer,
formal approval by the employer's board of directors and, if required,
shareholders), even though no amounts had been contributed pursuant to
the terms of the arrangement as of that date.
(iii) Reasonable interpretation for plan years beginning after 1979
and before 1992. For plan years beginning after December 31, 1979 (or
in the case of a pre-ERISA money purchase plan, plan years beginning
after July 18, 1984) and before January 1, 1992, a reasonable
interpretation of the rules set forth in section 401(k) (as in effect
during those years) may be relied upon to determine whether
contributions were made under a qualified cash or deferred arrangement.
(iv) Special rule for governmental and collectively bargained plans.
For plan years beginning before January 1, 1993, a nonqualified cash or
deferred arrangement will be treated as satisfying section 401(k)(3)
solely for purposes of paragraph (d)(2)(i) of this section if it is part
of either a plan adopted by a state or local government before May 6,
1986, or a plan (or portion of a plan) that automatically satisfies
section 401(a)(4) under 1.401(k)-l(a)(7), relating to certain
collectively bargained plans.
(T.D. 8217, 53 FR 29673, Aug. 8, 1988, as amended by T.D. 8357, 56 FR
40545, Aug. 15, 1991; 57 FR 10290, Mar. 25, 1992)
26 CFR 1.402(a)(5)-1T Rollovers of partial distributions from qualified
trusts and annuities. (Temporary)
Q-1: Can an employee or the surviving spouse of a deceased employee
roll over to an individual retirement account or annuity, described in
section 408 (a) or (b), the taxable portion of a partial distribution
from a qualified trust described in section 401(a), a qualified plan
described in section 403(a), or a tax-sheltered annuity contract under
section 403(b)?
A-1: Yes. For distributions made after July 18, 1984, the taxable
portion of a partial distribution may be rolled over within 60 days of
the distribution to an individual retirement account or annuity.
Q-2: Are there special requirements applicable to rollovers of
partial distributions?
A-2: Yes. Section 402(a)(5)(D)(i) specifies that no part of a
partial distribution may be rolled over unless the distribution is equal
to at least 50 percent of the balance to the credit of the employee in
the contract or plan immediately before the distribution, and the
distribution is not one of a series of periodic payments. For purposes
of this section, the balance to the credit of an employee does not
include any accumulated deductible employee contributions (within the
meaning of section 72(o)). In addition, in calculating the balance to
the credit for purposes of the 50 percent test, qualified plans are not
to be aggregated with other qualified plans and tax-sheltered annuity
contracts are not to be aggregated with other tax-sheltered annuity
contracts. Also, in applying the 50 percent test to a surviving spouse,
the balance to the credit is the maximum amount the spouse is entitled
to receive under the plan or contract, rather than the total balance to
the credit of the employee. The rollover of a partial distribution may
result in adverse tax consequences; see section 402(a)(5)(D) (iii) and
(iv).
Q-3: Are there any other requirements applicable to rollovers of
partial distribution?
A-3: Yes. Section 402(a)(5)(D)(i)(III) requires the employee to
elect, in conformance with Treasury regulations, to treat a contribution
of a partial distribution to an IRA as a rollover contribution. An
election is made by designating, in writing, to the trustee or issuer of
the IRA at the time of the contribution that the contribution is to be
treated as a rollover contribution. This requirement of a written
designation to the trustee or issuer of the IRA is effective for
contributions paid to the trustee or issuer of the IRA after March 20,
1986. For contributions paid to the trustee or issuer before March 21,
1986, an election is made by computing the individual's income tax
liability on the income tax return for the taxable year in which the
distribution occurs in a manner consistent with not including the
distribution (or portion thereof) in gross income. Both such elections
are irrevocable, except that an election made on an income tax return
filed before March 21, 1986 is revocable.
Q-4: Does the election requirement apply to rollovers of qualified
total distributions or rollover contributions described in section
402(a) (5) or (7), 403(a)(4), 403(b)(8), 405(d)(3), or 408(d)(3) to
individual retirement accounts and annuities (IRAs)?
A-4: Yes. No amounts may be treated as a rollover contribution to an
IRA under section 402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 405(d)(3)
(as amended by section 491(c) of the TRA of 1984), or 408(d)(3) unless
the requirements described in Q & A-3 of this section are satisfied.
Thus, once any portion of a total distribution is irrevocably designated
as a rollover contribution, such distribution is not taxable under
section 402 or 403 and, therefore, is not eligible for the special
capital gains and separate tax treatment under section 402 (a) and (e).
Election requirements for rollover contributions to IRAs described in
this Q &A-4 are subject to the same effective date rules set forth in Q
&A-3.
(T.D. 8073, 51 FR 4320, Feb. 4, 1986)
26 CFR 1.402(b)-1 Treatment of beneficiary of trust not exempt under
section 501(a).
(a) Taxation by reason of employer contributions made after August 1,
1969 -- (1) Taxation of contributions. Section 402(b) provides rules
for taxing an employee on contributions made on his behalf by an
employer to an employees' trust that is not exempt under section 501(a).
In general, any such contributions made after August 1, 1969, during a
taxable year of the employer which ends within or with a taxable year of
the trust for which it is not so exempt shall be included as
compensation in the gross income of the employee for his taxable year
during which the contribution is made, but only to the extent that the
employee's interest in such contribution is substantially vested at the
time the contribution is made. The preceding sentence does not apply to
contracts referred to in the transitional rule of paragraph (d)(1) (ii)
or (iii) of this section. For the definition of the terms
''substantially vested'' and ''substantially nonvested'' see 1.83-3(b).
(2) Determination of amount of employer contributions. If, for an
employee, the actual amount of employer contributions referred to in
paragraph (a)(1) of this section for any taxable year of the employee is
not known, such amount shall be either an amount equal to the excess of
--
(i) The amount determined in accordance with the formula described in
1.403(b)-1(d)(4) as the end of such taxable year, over
(ii) The amount determined in accordance with the formula described
in 1.403(b)-1(d)(4) as of the end of the prior taxable year,
or the amount determined under any other method utilizing recognized
actuarial principles that are consistent with the provisions of the plan
under which such contributions are made and the method adopted by the
employer for funding the benefits under the plan.
(b) Taxability of employee when rights under nonexempt trust change
from nonvested to vested -- (1) In general. If rights of an employee
under a trust become substantially vested during a taxable year of the
employee (ending after August 1, 1969), and a taxable year of the trust
for which it is not exempt under section 501(a) ends with or within such
year, the value of the employee's interest in the trust on the date of
such change shall be included in his gross income for such taxable year,
to the extent provided in paragraph (b)(3) of this section. When an
employees' trust that was exempt under section 501(a) ceases to be so
exempt, an employee shall include in his gross income only amounts
contributed to the trust during a taxable year of the employer that ends
within or with a taxable year of the trust in which it is not so exempt
(to the same extent as if the trust had not been so exempt in all prior
taxable years).
(2) Value of an employee's interest in a trust. (i) For purposes of
this section, the term ''the value of an employee's interest in a
trust'' means the amount of the employee's beneficial interest in the
net fair market value of all the assets in the trust as of any date on
which some or all of the employee's interest in the trust becomes
substantially vested. The net fair market value of all the assets in
the trust is the total amount of the fair market values (determined
without regard to any lapse restriction, as defined in 1.83-3(h)) of
all the assets in the trust, less the amount of all the liabilities
(including taxes) to which such assets are subject or which the trust
has assumed (other than the rights of any employee in such assets), as
of the date on which some or all of the employee's interest in the trust
becomes substantially vested.
(ii) If a separate account in a trust for the benefit of two or more
employees is not maintained for each employee, the value of an
employee's interest in such trust shall be determined in accordance with
the formula described in 403(b)-1(d)(4) or any other method utilizing
recognized actuarial principles that are consistent with the provisions
of the plan under which the contributions are made and the method
adopted by the employer for funding the benefits under the plan.
(iii) If there is no valuation of a nonexempt trust's assets on the
date of the change referred to in paragraph (b)(1) of this section, the
value of an employee's interest in such trust is determined by taking
the weighted average of the values on the nearest valuation dates
occurring before and after the date of such change. The average is to
be determined in the manner described in 20.2031-2(b)(1).
(3) Extent to which value of an employee's interest is includible in
gross income. For purposes of paragraph (b)(1) of this section, there
shall be included in the gross income of the employee for his taxable
year in which his rights under the trust become substantially vested
only that portion of the value of his interest in the trust that is
attributable to contributions made by the employer after August 1, 1969.
However, the preceding sentence shall not apply --
(i) To the extent such value is attributable to a contribution made
on the date of such change, and
(ii) To the extent such value is attributable to contributions
described in paragraph (d)(1) (ii) or (iii) of this section (relating to
contributions made pursuant to a binding contract entered into before
April 22, 1969).
For purposes of this (3), if the value of an employee's interest in a
trust which is attributable to contributions made by the employer after
August 1, 1969, is not known, it shall be deemed to be an amount which
bears the same ratio to the value of the employee's interest as the
contributions made by the employer after such date bear to the total
contributions made by the employer.
(4) Partial vesting. For purposes of paragraph (b)(1) of this
section, if only part of an employee's interest in the trust becomes
substantially vested during any taxable year, then only the
corresponding part of the value of the employee's interest in such trust
is includible in his gross income for such year. In such a case, it is
first necessary to compute, under the rules in paragraphs (b) (1) and
(2) of this section, the amount that would be includdible if his entire
interest had changed to a substantially vested interest during such a
year. The amount that is includible under this paragraph (4) is the
amount determined under the preceding sentence multiplied by the percent
of the employee's interest which became substantially vested during the
taxable year.
(5) Basis. The basis of any employee's interest in a trust to which
this section applies shall be increased by the amount included in his
gross income under this section.
(6) Treatment as owner of trust. In general, a beneficiary of a
trust to which this section applies may not be considered to be the
owner under subpart E, part I, subchapter J, chapter I of the Code of
any portion of such trust which is attributable to contributions to such
trust made by the employer after August 1, 1969, or to incidental
contributions made by the employee after such date. However, where
contributions made by the employee are not incidental when compared to
contributions made by the employer, such beneficiary shall be considered
to be the owner of the portion of the trust attributable to
contributions made by the employee, if the applicable requirements of
such subpart E are satisfied. For purposes of this paragraph (6),
contributions made by an employee are not incidental when compared to
contributions made by the employer if the employee's total contributions
as of any date exceed the employer's total contributions on behalf of
the employee as of such date.
(7) Example. The provisions in this paragraph may be illustrated by
the following example:
Example. On January 1, 1968 M corporation establishes an employees'
trust, which is not exempt under section 501(a), for some of its
employees, including A, reserving the right to discontinue contributions
at any time. M corporation contributes $5,000 on A's behalf to the
trust on February 1, 1968. At the time of contribution 50 percent of
A's interest was substantially vested. On January 1, 1971, and January
1, 1974, M corporation makes additional $5,000 contributions to the
trust on A's behalf. A's interest in the trust changed from a 50
percent substantially vested to a 100 percent substantialy vested
interest in the trust on December 31, 1974. Assume that the value of
A's interest in the trust on December 31, 1974, which is attributable to
employer contributions made after August 1, 1969, is calculated to be
$11,000 under paragraph (b)(3) of this section. The amount includible
in A's gross income for 1971 and 1974 is computed as follows:
(i) Amount of M corporation's contribution made on January 1, 1971,
to the trust which is includible in A's gross income under paragraph
(b)(1) of this section (50 percent substantially vested interest in the
trust times $5,000 contribution) -- $2,500.
(i) Amount of M corporation's contribution made on January 1, 1974,
to the trust which is includible in A's gross income under paragraph
(b)(1) of this section (50 percent substantially vested interest in the
trust times $5,000 contribution) -- $2,500.
(ii) Amount which would have been includible if A's entire interest
had changed to a substantially vested interest (value of employee's
interest in the trust attributable to employer contributions made after
August 1, 1969 -- $11,000.
(iii) Percent of A's interest that became substantially vested on
December 31, 1974 -- 50 percent.
(iv) Amount includible in A;s gross income for 1974 in respect of his
percentage change from a substantially nonvested to a substantially
vested interest in the trust (50 percent of $11,000) -- $5,500.
(v) Total amount includible in A's gross income for 1974 ((i) plus
(iv)) -- $8,000.
(c) Taxation of distributions from trust not exempt under section
501(a) -- (1) In general. Any amount actually distributed or made
available to any distributee by an employees' trust in a taxable year in
which it is not exempt under section 501(a) shall be taxable under
section 72 (relating to annuities) to the distributee in the taxable
year in which it is so distributed or made available. For taxable years
beginning after December 31, 1963, such amounts may be taken into
account in computations under sections 1301 through 1305 (relating to
income averaging). If, for example, the distribution from such a trust
consists of an annuity contract, the amount of the distribution shall be
considered to be the entire value of the contract at the time of
distribution. Such value is includible in the gross income of the
distributee to the extent that such value exceeds the investment in the
contract, determined by applying sections 72 and 101(b). The
distributions by such a trust shall be taxed as provided in section 72
whether or not the employee's rights to the contributions become
substantially vested beforehand. For rules relating to the treatment of
employer contributions to a nonexempt trust as part of the consideration
paid by the employee, see section 72(f). For rules relating to the
treatment of the limited exclusion allowable under section 101(b)(2)(D)
as additional consideration paid by the employee, see the regulations
under that section.
(2) Distributions before annuity starting date. Any amount
distributed or made available to any distributee before the annuity
starting date (as defined in section 72(c)(4)) by an employees' trust in
a taxable year in which it is not exempt under section 501(a) shall be
treated as distributed in the following order --
(i) First, from that portion of the employee's interest in the trust
attributable to contributions made by the employer after August 1, 1969
(other than those referred to in paragraph (d)(1) (ii) or (iii) of this
section) that has not been previously includible in the employee's gross
income, to the extent that such a distribution is permitted under the
trust (or the plan of which the trust is a part);
(ii) Second, from that portion of the employee's interest in the
trust attributable to contributions made by the employer on or before
August 1, 1969 (or contributions referred to in paragraph (d)(1) (ii) or
(iii) of this section);
(iii) Third, from the remaining portion of the employee's interest in
the trust attributable to contributions made by the employer.
If the employee has made contributions to the trust, amounts
attributable thereto shall be treated as distributed prior to any
amounts attributable to the employer's contributions, to the extent
provided by the trust (or the plan of which the trust is a part).
However, the portion of such amounts attributable to income earned on
the employee's contributions made after August 1, 1969, shall be treated
as distributed prior to any return of such contributions.
(d) Taxation by reason of employer contributions made on or before
August 1, 1969. (1) Except as provided in section 402(d) (relating to
taxable years beginning before January 1, 1977), any contribution to a
trust made by an employer on behalf of an employee --
(i) On or before August 1, 1969, or
(ii) After such date, pursuant to a binding contract (as defined in
1.83-3(b)(2)) entered into before April 22, 1969, or
(iii) After August 1, 1969, pursuant to a written plan in which the
employee participated on April 22, 1969, and under which the obligation
of the employer on such date was essentially the same as under a binding
written contract, during a taxable year of the employer which ends
within or with a taxable year of the trust for which the trust is not
exempt under section 501(a) shall be included in income of the employee
for his taxable year during which the contribution is made, if the
employee's beneficial interest in the contribution is nonforfeitable at
the time the contribution is made. If the employee's beneficial
interest in the contribution is forfeitable at the time the contribution
is made, even though his interest becomes nonforfeitable later the
amount of such contribution is not required to be included in the income
of the employee at the time his interest becomes nonforfeitable.
(2)(i) An employee's beneficial interest in the contribution is
nonforfeitable, within the meaning of sections 402(b), 403(c), and
404(a)(5) prior to the amendments made thereto by the Tax Reform Act of
1969 and section 403(b), at the time the contribution is made if there
is no contingency under the plan that may cause the employee to lose his
rights in the contribution. Similarly, an employee's rights under an
annuity contract purchased for him by his employer change from
forfeitable to nonforfeitable rights within the meaning of section
403(d) prior to the repeal thereof by the Tax Reform Act of 1969 at that
time when, for the first time, there is no contingency which may cause
the employee to lose his rights under the contract. For example, if
under the terms of a pension plan, an employee upon termination of his
services before the retirement date, whether voluntarily or
involuntarily, is entitled to a deferred annuity contract to be
purchased with the employer's contributions made on his behalf, or is
entitled to annuity payments which the trustee is abligated to make
under the terms of the trust instrument based on the contributions made
by the employer on his behalf, the employee's beneficial interest in
such contributions is nonforfeitable.
(ii) On the other hand, if, under the terms of a pension plan, an
employee will lose the right to any annuity purchased from or to be
provided by, contributions made by the employer if his services should
be terminated before retirement, his beneficial interest in such
contributions is nonforfeitable.
(iii) The mere fact that an employee may not live to the retirement
date, or may live only a short period after the retirement date, and may
not be able to enjoy the receipt of annuity or pension payments, does
not make his beneficial interest in the contributions made by the
employer on his behalf forfeitable. If the employer's contributions
have been irrevocably applied to purchase an annuity contract for the
employee, or if the trustee is obligated to use the employer's
contributions to provide an annuity for the employee provide only that
the employee is alive on the dates the annuity payments are due, the
employee's rights in the employer's contributions are nonforfeitable.
(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat.
588; 68A Stat. 917; 26 U.S.C. 83 and 7805))
(T.D. 7554, 43 FR 31922, July 24, 1978)
26 CFR 1.402(c)-1 Taxability of beneficiary of certain foreign situs
trusts.
Section 402(c) has the effect of treating, for purposes of section
402, the distributions from a trust which at the time of the
distribution is located outside the United States in the same manner as
distributions from a trust which is located in the United States. If
the trust would qualify for exemption from tax under section 501(a)
except for the fact that it fails to comply with the provisions of
paragraph (a)(3)(i) of 1.401-1, which restricts qualification to trusts
created or organized in the United States and maintained here, section
402(a) and 1.402(a)-1 are applicable to the distributions from such a
trust. Thus, for example, a total distribution from such a trust is
entitled to the long-term capital gains treatment of section 402(a)(2),
except in the case of a nonresident alien individual (see section 871
and 1441 and the regulations thereunder). However, if the plan fails to
meet any requirement of section 401 and the regulations thereunder in
addition to paragraph (a)(3)(i) of 1.401-1, section 402(b) and
1.402(b)-1 are applicable to the distributions from such a trust.
(T.D. 6500, 25 FR 11679, Nov. 26, 1960)
26 CFR 1.402(d)-1 Effect of section 402(d).
(a) If the requirements of section 402(d) are met, a contribution
made by an employer on behalf of an employee to a trust which is not
exempt under section 501(a) shall not be included in the income of the
employee in the year in which the contribution is made. Such
contribution will be taxable to the employee, when received in later
years, as provided in section 72 (relating to annuities). For taxable
years beginning before January 1, 1964, section 72(e)(3) (relating to
the treatment of certain lump sums), as in effect before such date,
shall not apply to such contributions. For taxable years beginning
after December 31, 1963, such contributions, when received, may be taken
into account in computations under sections 1301 through 1305 (relating
to income averaging). See paragraph (b) of 1.403(c)-1. The intent and
purpose of section 402(d) is to give those employees, covered under
certain non-exempt trusts to which such section applies, essentially the
same tax treatment as those covered by trusts described in section
401(a) and exempt under section 501(a), except that the capital gains
treatment referred to in section 402(a)(2) does not apply.
(b) Every person claiming the benefit of section 402(d) must be able
to demonstrate to the satisfaction of the Commissioner that all of the
provisions of such section are met. The taxpayer must produce
sufficient evidence to prove:
(1) That, before October 21, 1942, he was employed by the particular
employer making the contribution in question and was at such time
definitely covered by a written agreement, entered into before October
21, 1942, between himself and the employer, or between the employer and
the trustee of a trust established by the employer before October 21,
1942, and that the contribution by the employer was made pursuant to
such agreement. The fact that an employee may have been potentially
covered is not sufficient. Evidence that the employment was entered
into, or the agreement executed, ''as of'' a date before October 21,
1942, or that the agreement or trust instrument which did not
theretofore meet the requirements of section 402(d) was modified or
amended after October 20, 1942, so as to come within the provisions of
such section, will not satisfy the requirements of section 402(d).
(2) That such contribution, pursuant to the terms of such agreement,
was to be applied for the purchase of an annuity contract for the
taxpayer. In the case of a contribution by the employer of an annuity
contract purchased by such employer and transferred by him to the
trustee of the trust, evidence should be presented to prove that such
contract was purchased for the taxpayer by the employer pursuant to the
terms of a written agreement between the employer and the employee or
between the employer and the trustee, entered into before October 21,
1942.
(3) That under the written terms of the trust agreement the taxpayer
is not entitled during his lifetime, except with the consent of the
trustee, to any payments other than annuity payments under the annuity
contract or contracts purchased by the trustee or by the employer and
transferred to the trustee, and that the trustee may grant or withhold
such consent free from control by the taxpayer, the employer, or any
other person. However, such control will not be presumed from the fact
that the trustee is himself an officer or employee of the employer. As
used in section 402(d) the phrase ''if * * * under the terms of the
trust agreement the employee is not entitled'' means that the trust
instrument must make it impossible for the prohibited distribution to
occur whether by operation or natural termination of the trust, whether
by power of revocation or amendment, other than with the consent of the
trustee, whether by the happening of a contingency, by collateral
arrangement, or any other means. It is not essential that the employer
relinquish all power to modify or terminate the trust but it must be
impossible, except with the consent of the trustee, to be received by
the taxpayer contracts purchased by the trustee, or by the employer and
transferred to the trustee, to be received by the taxpayer directly or
indirectly, other than as annuity payments.
(4) The nature and amount of such contribution and the extent to
which income taxes have been paid thereon before January 1, 1949, and
not credited or refunded.
(5) If it is claimed that section 402(d) applies to amounts
contributed to a trust after June 1, 1949, the taxpayer must prove to
the satisfaction of the Commissioner that the trust did not, on June 1,
1949, qualify for exemption under section 165(a) of the Internal Revenue
Code of 1939. Where an employer buys an annuity contract which is
transferred to the trustee, the date of the purchase of the annuity
contract and not the date of the transfer to the trustee is the
controlling date in determining whether or not the contribution was made
to the trust after June 1, 1949.
(T.D. 6500, 25 FR 11679, Nov. 26, 1960, as amended by T.D. 6885, 31
FR 7801, June 2, 1966)
26 CFR 1.402(e)-1 Certain plan terminations.
Distributions made after December 31, 1953, and before January 1,
1955, as a result of the complete termination of an employees' trust
described in section 401(a) which is exempt under section 501(a) shall
be considered distributions on account of separation form service for
purposes of section 402(a)(2) if the employer who established the trust
is a corporation, and the termination of the plan is incident to the
complete liquidation of the corporation before August 16, 1954,
regardless of whether such liquidation is incident to a reorganization
as defined in section 368.
(T.D. 6500, 25 FR 11680, Nov. 26, 1960)
26 CFR 1.402(f)-1 Required explanation of rollovers, capital gains, and
the separate tax on lump sum distributions.
(a) General rules. Section 402(f) requires plan administrators to
give recipients of certain distributions a written explanation of the
rules relating to the taxation of certain amounts as capital gains under
section 402(a)(2), the separate tax on the ordinary income portion of
lump sum distributions under section 402(e), and the exclusion from
gross income under section 402(a)(5) for amounts rolled over into
eligible retirement plans. This notice must be provided to the
recipient of any qualified total distribution or any partial
distribution satisfying section 402(a)(5)(D)(i) that is made after
December 31, 1984, not later than two weeks after the distribution is
made.
(b) Future safe-harbor notices. The Commissioner may publish
safe-harbor notices to aid plan administrators in complying with the
section 402(f) requirements.
(T.D. 8219, 53 FR 31851, Aug. 22, 1988)
26 CFR 1.402(g)-0 Limitation on exclusion for elective deferrals, table
of contents.
This section contains the captions that appear in 1.402(g)-1.
(a) In general.
(b) Elective deferrals.
(c) Certain one-time irrevocable elections.
(d) Applicable limit.
(1) In general.
(2) Special adjustment for elective deferrals with respect to a
section 403(b) annuity contract.
(3) Special adjustment for elective deferrals with respect to a
section 403(b) annuity contract for certain long-term employees.
(4) Example.
(e) Treatment of excess deferrals.
(1) Plan qualification.
(i) Effect of excess deferrals.
(ii) Treatment of excess deferrals as employer contributions.
(iii) Definition of excess deferrals.
(2) Correction of excess deferrals after the taxable year.
(3) Correction of excess deferrals during taxable year.
(4) Plan provisions.
(5) Income allocable to excess deferrals.
(i) General rule.
(ii) Method of allocating income.
(iii) Alternative method of allocating income.
(iv) Safe harbor method of allocating gap period income.
(6) Coordination with distribution or recharacterization of excess
contributions.
(7) No employee or spousal consent required.
(8) Tax treatment.
(i) Corrective distributions on or before April 15 after close of
taxable year.
(ii) Special rule for 1987 and 1988 excess deferrals.
(iii) Distributions of excess deferrals after correction period.
(9) No reduction of required minimum distribution.
(10) Partial correction.
(11) Examples.
(f) Community property laws.
(g) Effective date.
(1) In general.
(2) Deferrals under collective bargaining agreements.
(3) Transition rule.
(4) Partnership cash or deferred arrangements.
(T.D. 8357, 56 FR 40545, Aug. 15, 1991)
26 CFR 1.402(g)-1 Limitation on exclusion for elective deferrals.
(a) In general. The excess of an individual's elective deferrals for
any taxable year over the applicable limit for the year may not be
excluded from gross income under sections 402(a)(8), 402(h)(1)(B),
403(b), 408(k)(6), or 501(c)(18). Thus, an individual's elective
deferrals in excess of the applicable limit for a taxable year (i.e.,
the individual's excess deferrals for the year) must be included in
gross income for the year.
(b) Elective deferrals. An individual's elective deferrals for a
taxable year are the sum of the following:
(1) Any elective contribution under a qualified cash or deferred
arrangement (as defined in section 401(k)) to the extent not includible
in the individual's gross income for the taxable year on account of
section 402(a)(8) (before applying the limits of section 402(g) or this
section).
(2) Any employer contribution to a simplified employee pension (as
defined in section 408(k)) to the extent not includible in the
individual's gross income for the taxable year on account of section
402(h)(1)(B) (before applying the limits of section 402(g) or this
section).
(3) Any employer contribution to an annuity contract under section
403(b) under a salary reduction agreement (within the meaning of section
3121(a)(5)(D)) to the extent not includible in the individual's gross
income for the taxable year on account of section 403(b) (before
applying the limits of section 402(g) or this section).
(4) Any employee contribution designated as deductible under a trust
described in section 501(c)(18) to the extent deductible from the
individual's income for the taxable year on account of section
501(c)(18) (before appying the limits of section 402(g) or this
section). For purposes of this section, the employee contribution is
treated as though it were excluded from the individual's gross income.
(c) Certain one-time irrevocable elections. An employer contribution
is not treated as an elective deferral under paragraph (b) of this
section if the contribution is made pursuant to a one-time irrevocable
election made by the employee:
(1) In the case of an annuity contract under section 403(b), at the
time of initial eligibility to participate in the salary reduction
agreement;
(2) In the case of a qualified cash or deferred arrangement, at a
time when, under 1.401(k)-1(a)(3)(iv), the election is not treated as a
cash or deferred election;
(3) In the case of a trust described in section 501(c)(18), at the
time of initial eligibility to have the employer contribute on the
employee's behalf to the trust.
(d) Applicable limit -- (1) In general. Except as adjusted under
paragraphs (d)(2) and (d)(3) of this section, the applicable limit for
an individual's taxable year beginning in the 1987 calendar year is
$7,000. This amount is increased for the taxable year beginning in 1988
and subsequent calendar years in the same manner as the $90,000 amount
is adjusted under section 415(d).
(2) Special adjustment for elective deferrals with respect to a
section 403(b) annuity contract. The applicable limit for an individual
who makes elective deferrals described in paragraph (b)(3) of this
section for a taxable year is adjusted by increasing the applicable
limit otherwise determined under paragraph (d)(1) of this section by the
amount of the individual's elective deferrals described in paragraph
(b)(3) of this section for the taxable year. This adjustment cannot
cause the applicable limit for any taxable year to exceed $9,500.
(3) Special adjustment for elective deferrals with respect to a
section 403(b) annuity contract for certain long-term employees. The
applicable limit for an individual who is a qualified employee (as
defined in section 402(g)(8)(C)) and has elective deferrals described in
paragraph (b)(3) of this section for a taxable year is adjusted by
increasing the applicable limit otherwise determined under paragraphs
(d)(1) and (d)(2) of this section in accordance with section
402(g)(8)(A).
(4) Example. The provisions of this paragraph (d) are illustrated by
the following example.
Example. Employer X maintains a cash or deferred arrangement under
section 401(k), and offers its employees section 403(b) contracts to
which elective deferrals may be made. For the 1987 taxable year, three
of X's employees, A, B, and C, contribute $3,500, $1,000, and $8,500,
respectively, as elective deferrals under the section 403(b) contract.
The maximum amounts that A, B, and C may contribute to the cash or
deferred arrangement are $6,000, $7,000, and $1,000, respectively. B
may only contribute $7,000 under the cash or deferred arrangement
because the special adjustment under paragraph (d)(2) of this section
applies only to section 403(b) annuity contracts. B could, of course,
contribute up to $2,500 under the section 403(b) contract (to the extent
otherwise permitted), in addition to the $7,000 under the cash or
deferred arrangement.
(e) Treatment of excess deferrals -- (1) Plan qualification -- (i)
Effect of excess deferrals. For plan years beginning before January 1,
1988, a plan, annuity contract, simplified employee pension, or trust
does not fail to meet the requirements of section 401(a), section
403(b), section 408(k), or section 501(c)(18), respectively, merely
because excess deferrals are made with respect to the plan, contract,
pension, or trust. For plan years beginning after December 3l, 1987,
see section 401(a)(30) and 1.401(a)-30 for the effect of excess
deferrals on the qualification of a plan or trust under section 401(a).
For purposes of determining whether a plan or trust complies in
operation with section 401(a)(30), excess deferrals that are distributed
under paragraph (e)(2) or (3) of this section are disregarded. Similar
rules apply to annuity contracts under section 403(b), simplified
employee pensions under section 408(k), and plans or trusts under
section 501(c)(28).
(ii) Treatment of excess deferrals as employer contributions. For
other purposes of the Code, including sections 401(a)(4), 401(k)(3),
404, 409, 411, 412, and 416, excess deferrals must be treated as
employer contributions even if they are distributed in accordance with
paragraph (e)(2) or (3) of this section. However, excess deferrals of a
nonhighly compensated employee are not taken into account under section
401(k)(3) (the actual deferral percentage test) to the extent the excess
deferrals are prohibited under section 401(a)(30). Excess deferrals are
also treated as employer contributions for purposes of section 415
unless distributed under paragraph (e)(2) or (3) of this section.
(iii) Definition of excess deferrals. The term ''excess deferrals''
means the excess of an individual's elective deferrals for any taxable
year, as defined in 1.402(g)-1(b), over the applicable limit under
section 402(g)(1) for the taxable year.
(2) Correction of excess deferrals after the taxable year. A plan
may provide that if any amount is included in the gross income of an
individual under paragraph (a) of this section for a taxable year:
(i) Not later than the first April 15 (or such earlier date specified
in the plan) following the close of the individual's taxable year, the
individual may notify each plan under which deferrals were made of the
amount of the excess deferrals received by that plan. A plan may
provide that an individual is deemed to have notified the plan of excess
deferrals to the extent the individual has excess deferrals for the
taxable year calculated by taking into account only elective deferrals
under the plan and other plans of the same employer. A plan may instead
provide that the employer may notify the plan on behalf of the
individual under these circumstances.
(ii) Not later than the first April 15 following the close of the
taxable year, the plan may distribute to the individual the amount
designated under paragraph (e)(2)(i) of this section (and any income
allocable to that amount).
(3) Correction of excess deferrals during taxable year -- (i) A plan
may provide that an individual who has excess deferrals for a taxable
year may receive a corrective distribution of excess deferrals during
the same year. This corrective distribution may be made only if all of
the following conditions are satisfied:
(A) The individual designates the distribution as an excess deferral.
A plan may provide that an individual is deemed to have designated the
distribution to the extent the individual has excess deferrals for the
taxable year calculated by taking into account only elective deferrals
under the plan and other plans of the same employer. A plan may instead
provide that the employer may make the designation on behalf of the
individual under these circumstances.
(B) The correcting distribution is made after the date on which the
plan received the excess deferral.
(C) The plan designates the distribution as a distribution of excess
deferrals.
(ii) The provisions of this paragraph (e)(3) are illustrated by the
following example:
Example. S is a 62 year old individual who participates in Employer
Y's qualified cash or deferred arrangement. In January 1991, S
withdraws $5,000 from Y's cash or deferred arrangement. From February
through September, S defers $900 per month. On October 1, S leaves
Employer Y and becomes employed by Employer Z (unrelated to Y). During
the remainder of 1991, S defers $1,800 under Z's qualified cash or
deferred arrangement. In January 1992, S realizes that S has deferred a
total of $9,000 in 1991, and therefore has a $525 excess deferral
($9,000 minus $8,475, the applicable limit for 1991). An additional
$525 must be distributed to S before April 15, 1992, to correct the
excess deferral. The $5,000 withdrawal did not correct the excess
deferral because it occurred before the excess deferral was made.
(4) Plan provisions. In order to distribute excess deferrals
pursuant to paragraphs (e)(2) or (e)(3) of this section, a plan must
contain language permitting distribution of excess deferrals. A plan
may require the notification in paragraphs (e)(2) and (e)(3) of this
section to be in writing and may require that the employee certify or
otherwise establish that the designated amount is an excess deferral. A
plan need not permit distribution of excess deferrals.
(5) Income allocable to excess deferrals -- (i) General rule. The
income allocable to excess deferrals is equal to the sum of the
allocable gain or loss for the taxable year of the individual and, if
the plan so provides, the allocable gain or loss for the period between
the end of the taxable year and the date of distribution (the ''gap
period'').
(ii) Method of allocating income. A plan may use any reasonable
method for computing the income allocable to excess deferrals, provided
that the method does not violate section 401(a)(4), is used consistently
for all participants and for all corrective distributions under a plan
for the plan year, and is used by the plan for allocating income to
participants' accounts.
(iii) Alternative method of allocating income. A plan may allocate
income to excess deferrals by multiplying the income for the taxable
year (and the gap period, if the plan so provides) allocable to elective
contributions by a fraction. The numerator of the fraction is the
excess deferrals by the employee for the taxable year. The denominator
of the fraction is equal to the sum of:
(A) The total account balance of the employee attributable to
elective contributions as of the beginning of the taxable year, plus
(B) The employee's elective contributions for the taxable year (and
the gap period, if the plan so provides).
(iv) Safe harbor method of allocating gap period income. Under the
safe harbor method, income on excess deferrals for the gap period is
equal to 10 percent of the income allocable to excess deferrals for the
taxable year (calculated under the method described in paragraph
(e)(5)(iii) of this section), multiplied by the number of calendar
months that have elapsed since the end of the taxable year. For
purposes of calculating the number of calendar months that have elapsed
under the safe harbor method, a corrective distribution that is made on
or before the fifteenth day of the month is treated as made on the last
day of the preceding month. A distribution made after the fifteenth day
of the month is treated as made on the first day of the next month.
(6) Coordination with distribution or recharacterization of excess
contributions. The amount of excess deferrals that may be distributed
under this paragraph (e) with respect to an employee for a taxable year
is reduced by any excess contributions previously distributed or
recharacterized with respect to the employee for the plan year beginning
with or within the taxable year. In the event of a reduction under this
paragraph (e)(6), the amount of excess contributions includible in the
gross income of the employee and reported by the employer as a
distribution of excess contributions is reduced by the amount of the
reduction under this paragraph (e)(6). See 1.401(k)-1(f)(5)(i). In no
case may an individual receive from a plan as a corrective distribution
for a taxable year under paragraph (e)(2) or (e)(3) of this section an
amount in excess of the individual's total elective deferrals under the
plan for the taxable year.
(7) No employee or spousal consent required. A corrective
distribution of excess deferrals (and income) may be made under the
terms of the plan without regard to any notice or consent otherwise
required under sections 411(a)(11) or 417.
(8) Tax treatment -- (i) Corrective distributions on or before April
15 after close of taxable year. A corrective distribution of excess
deferrals within the period described in paragraph (e)(2) or (e)(3) of
this section is excludable from the employee's gross income. However,
the income allocable to excess deferrals is includible in the employee's
gross income for the taxable year in which the allocable income is
distributed. The corrective distribution of excess deferrals (and
income) is not subject to the early distribution tax of section 72(t)
and is not treated as a distribution for purposes of applying the excise
tax under section 4980A.
(ii) Special rule for 1987 and 1988 excess deferrals. Income on
excess deferrals for 1987 or 1988 that were timely distributed on or
before April 17, 1989, may be reported by the recipient either in the
year described in paragraph (e)(8)(i) of this section, or in the year in
which the employee would have received the elective deferrals had the
employee originally elected to receive the amounts in cash.
(iii) Distributions of excess deferrals after correction period. If
excess deferrals (and income) for a taxable year are not distributed
within the period described in paragraphs (e)(2) and (e)(3) of this
section, they may only be distributed when permitted under section
401(k)(2)(B). These amounts are includible in gross income when
distributed, and are treated for purposes of the distribution rules
otherwise applicable to the plan as elective deferrals (and income) that
were excludable from the individual's gross income under section 402(g).
Thus, any amount includible in gross income for any taxable year under
this section that is not distributed by April 15 of the following
taxable year is not treated as an investment in the contract for
purposes of section 72 and is includible in the employee's gross income
when distributed from the plan. Excess deferrals that are distributed
under this paragraph (e)(8)(iii) are treated as employer contributions
for purposes of section 415 when they are contributed to the plan.
(9) No reduction of required minimum distribution. A distribution of
excess deferrals (and income) under paragraphs (e)(2) and (e)(3) of this
section is not treated as a distribution for purposes of determining
whether the plan meets the minimum distribution requirements of section
401(a)(9).
(10) Partial correction. Any distribution under paragraphs (e)(2) or
(e)(3) of this section of less than the entire amount of excess
deferrals (and income) is treated as a pro rata distribution of excess
deferrals and income.
(11) Examples. The provisions of this paragraph are illustrated by
the following examples. Assume in Examples 1 and 2 that there is no
income or loss allocable to the elective deferrals.
Example 1. Employee A is a 60-year old highly compensated employee
who participates in Employer M's cash or deferred arrangement. During
the period of January through September of 1988, A contributed $7,000 to
the arrangement in elective deferrals. During the same period A also
contributed $813 in elective deferrals under a plan of an unrelated
employer. In December of 1988, A made a withdrawal of $1,000 from
Employer M's plan but did not designate this as a withdrawal of an
excess deferral. In January of 1989, A notifies Employer M of an excess
deferral, specifying a distribution of $500 for 1988. To correct the
excess deferrals, A must receive this additional $500 even though A has
already withdrawn $1,000 for 1988. A may exclude from income in 1988
only $7,313. However, if the $500 is distributed by April 25, 1989, the
distribution is excludable from A's gross income in 1989. Even if A
withdraws the $500, M must take into account the entire $7,000 in
computing A's actual deferral percentage for 1988.
Example 2. (i) Corporation X maintains a cash or deferred
arrangement. The plan year is the calendar year. For plan year 1989,
all 10 of X's employees are eligible to participate in the plan. The
employees' compensation, contributions, and actual deferral ratios are
shown in the following table:
(ii) Employees A, B, and C are highly compensated employees within
the meaning of section 414(q). Employees D, E, F, G, H, I, and J are
nonhighly compensated employees. The actual deferral percentages for
the highly compensated employees and nonhighly compensated employees are
8.33 percent and 4.43 percent, respectively. These percentages do not
satisfy the requirements of section 401(k)(3)(A)(ii). The actual
deferral percentage for the highly compensated employees may not exceed
6.43 percent.
(iii) The plan reduces the actual deferral ratios of B and C to 7.14
percent by distributing $2,002 ($7,000^.0714 $70,000) to each in January
1990. Section 401(k)(3)(A)(ii) is therefore satisfied.
(iv) In February 1990, B notifies X that B made elective deferrals of
$2,000 under a qualified cash or deferred arrangement maintained by an
unrelated employer in 1989, and requests distribution of $2,000 from X's
plan. However, since B has already received a distribution of $2,002 to
meet the ADP test, no additional amounts may be distributed as excess
deferrals by this plan. But X must report $2,000 as a distribution of
an excess deferral and $2 as a distribution of an excess contribution.
(v) Excess deferrals distributed to B are taken into account in
calculating B's actual deferral ratio. See paragraph (e)(1)(ii) of this
section. Therefore B's actual deferral ratio must be recalculated as
10.00 percent ($6,998 divided by $70,000). The actual deferral
percentages do not satisfy section 401(k)(3)(A)(ii). Further correction
must be made.
Example 3. Employee T has excess deferrals of $1,000. The income
attributable to excess deferrals is $100. T properly notifies the
employer, and requests a distribution of the excess deferral (and
income) on February 1. The plan distributes $1,000 to T by April 15.
Because the plan did not distribute any additional amount as income,
$909 is treated as a distribution of excess deferrals, and $91 is
treated as a distribution of earnings. With respect to amounts
remaining in the account, $91 is treated as an elective deferral and is
not included in T's investment in the contract. Because it was not
distributed by the required date, the $91 is includible in gross income
upon distribution as well as in the year of deferral.
(f) Community property laws. This section is applied without regard
to community property laws.
(g) Effective date -- (1) In general. Except as otherwise provided,
the provisions of this section are effective for taxable years beginning
after December 31, 1986.
(2) Deferrals under collective bargaining agreements. In the case of
a plan maintained pursuant to one or more collective bargaining
agreements between employee representatives and one or more employers
ratified before March 1, 1986, the provisions of this section do not
apply to contributions made pursuant to the collective bargaining
agreement for taxable years beginning before the earlier of January 1,
1989, or the date on which the agreement terminates (determined without
regard to any extension thereof after February 28, 1986). These
contributions under a collective bargaining agreement are taken into
account for purposes of applying this section to elective deferrals
under plans not described in this paragraph (g)(2).
(3) Transition rule. For taxable years beginning before January 1,
1992, a plan or an individual may rely on a reasonable interpretation of
the rules set forth in section 402(g), as in effect during those years.
(4) Partnership cash or deferred arrangements. For purposes of
section 402(g), employer contributions for any plan year beginning after
December 31, 1986, and before January 1, 1989, under an arrangement that
directly or indirectly permits individual partners to vary the amount of
contributions made on their behalf will be treated as elective
contributions only if the arrangement was intended to satisfy and did
satisfy the nondiscrimination test of section 401(k)(3) and
1.401(k)-1(b) for the plan year.
(T.D. 8357, 56 FR 40546, Aug. 15, 1991)
26 CFR 1.403(a)-1 Taxability of beneficiary under a qualified annuity
plan.
(a) An employee or retired or former employee for whom an annuity
contract is purchased by his employer is not required to include in his
gross income the amount paid for the contract at the time such amount is
paid, whether or not his rights to the contract are forfeitable, if the
annuity contract is purchased under a plan which meets the requirements
of section 404(a)(2). For purposes of the preceding sentence, it is
immaterial whether the employer deducts the amounts paid for the
contract under such section 404(a)(2). See 1.403(b)-1 for rules
relating to annuity contracts which are not purchased under qualified
plans but which are purchased by organizations described in section
501(c)(3) and exempt under section 501(a) or which are purchased for
employees who perform services for certain public schools.
(b) The amounts received by or made available to any employee
referred to in paragraph (a) of this section under such annuity contract
shall be included in gross income of the employee for the taxable year
in which received or made available, as provided in section 72 (relating
to annuities), except that certain total distributions described in
section 403(a)(2) are taxable as long-term capital gains. For the
treatment of such total distributions, see 1.403(a)-2. However, for
taxable years beginning before January 1, 1964, section 72(e)(3)
(relating to the treatment of certain lump sums), as in effect before
such date, shall not apply to such amounts. For taxable years beginning
after December 31, 1963, such amounts may be taken into account in
computations under sections 1301 through 1305 (relating to income
averaging).
(c) If upon the death of an employee or of a retired employee, the
widow or other beneficiary of such employee is paid, in accordance with
the terms of the annuity contract relating to the deceased employee, an
annuity or other death benefit, the extent to which the amounts received
by or made available to the beneficiary must be included in the
beneficiary's income under section 403(a) shall be determined in
accordance with the rules presented in paragraph (a)(5) of 1.402(a)-1.
(d) An individual contract issued after December 31, 1962, or a group
contract, which provides incidental life insurance protection may be
purchased under a qualified annuity plan. For the rules as to
nontransferability of such contracts issued after December 31, 1962, see
1.401-9. For the rules relating to the taxation of the cost of the life
insurance protection and the proceeds thereunder, see 1.72-16. Section
403(a) is not applicable to premiums paid after October 26, 1956, for
individual contracts which were issued prior to January 1, 1963, and
which provide life insurance protection.
(e) As to inclusion of full-time life insurance salesmen within the
class of persons considered to be employees, see section 7701(a)(20).
(f) For purposes of this section and 1.403(a)-2, the term
''employee'' includes a self-employed individual who is treated as an
employee under section 401(c)(1) and paragraph (b) of 1.401-10, and the
term ''employer'' means the person treated as the employer of such
individual under section 401(c)(4). For the rules relating to annuity
plans covering self-employed individuals, see section 404(a)(2) and
1.404(a)-8 and 1.401-10 through 1.401-13.
(g) For the treatment of amounts paid to provide medical benefits
described in section 401(h) as defined in 1.401-14, see paragraph (h)
of 1.72-15.
(T.D. 6500, 25 FR 11680, Nov. 26, 1960, as amended by T.D. 6676, 28
FR 10143, Sept. 17, 1963; T.D. 6722, 29 FR 5073, Apr. 14, 1964; T.D.
6783, 29 FR 18359, Dec. 24, 1964; T.D. 6885, 31 FR 7801, June 2, 1966)
26 CFR 1.403(a)-2 Capital gains treatment for certain distributions.
(a) If the total amounts payable with respect to any employee for
whom an annuity contract has been purchased by an employer under a plan
which --
(1) Is a plan described in section 403(a)(1) and 1.403(a)-1, and
(2) Requires that refunds of contributions with respect to annuity
contracts purchased under such plan be used to reduce subsequent
premiums on the contracts under the plan,
are paid to, or includible in gross income of, the payee within one
taxable year of the payee by reason of the employee's death or other
separation from the service, or death after such separation from the
service, such total payments, to the extent they exceed the net amount
contributed by the employee, shall be considered a gain from the sale or
exchange of a capital asset held for more than six months. The ''net
amount contributed by the employee'' is the amount actually contributed
by the employee plus any amounts considered to be contributed by the
employee under the rules of sections 72(f), 101(b), and paragraph (d) of
1.403(a)-1, reduced by any amounts theretofore distributed to him which
were excludable from his gross income as a return of employee
contributions. For example, if under an annuity contract purchased
under a plan described in this section, the total distributions payable
to the employee's widow are paid to her in the year in which the
employee dies, in the amount of $8,000, and if $5,000 thereof is
excludable under section 101(b), and if the employee made contributions
of $600 and had received no payments, the remaining amount of $2,400
will be considered a gain from the sale or exchange of a capital asset
held for more than six months.
(b)(1) The term ''total amounts'' means the balance to the credit of
an employee with respect to all annuities under the annuity plan which
becomes payable to the payee by reason of the employee's death or other
separation from the service, or by reason of his death after separation
from the service. If an employee commences to receive annuity payments
on retirement and then a lump sum payment is made to his widow upon his
death, the capital gains treatment applies to the lump sum payment, but
it does not apply to amounts received before the time the ''total
amounts'' become payable. However, if the total amount to the credit of
the employee at the time of his death or other separation from the
service or death after separation from the service is paid or includible
in the gross income of the payee within one taxable year of the payee,
such amount is entitled to the capital gains treatment notwithstanding
that in a later taxable year an additional amount is credited to the
employee and paid to the payee.
(2) If more than one annuity contract is received under the plan, the
capital gains treatment does not apply to any amount received on the
surrender thereof unless all contracts under the plan with respect to a
particular employee are surrendered either at the time of the employee's
death or other separation from the service or death after separation
from the service. Thus, if an employee receives two contracts on
separation from the service and surrenders one of them in the year of
separation and receives payments under the other until his death, the
capital gains treatment is applicable to the balance paid to his
beneficiary on his death if paid within one taxable year of the
beneficiary. The amount received by the employee on surrender of the
contract in the year of his separation from the service, however, would
not receive capital gains treatment since the balance to the credit of
the employee with respect to all amounts under the plan did not become
payable at that time.
(3) If an employee retires and commences to receive an annuity but
subsequently in some succeeding taxable year, he is paid a lump sum in
settlement of all future annuity payments, the capital gains treatment
does not apply to such lump sum settlement paid during the lifetime of
the employee since it is not a payment on account of separation from the
service, or death after separation, but is on account of the settlement
of future annuity payments.
(4) If the ''total amounts'' payable under all annuity contracts
under the plan with respect to a particular employee are paid or
includible in the gross income of several payees within one taxable year
on account of the employee's death or other separation from the service
or on account of his death after separation from the service, the
capital gains treatment is applicable. Thus, if the balance to the
credit of a deceased employee under all annuity contracts provided under
an annuity plan becomes payable to two payees, the capital gains
treatment is applicable provided the ''total amounts'' payable are
received by or includible in the gross income of both payees within the
same taxable year. However, if the ''total amounts'' payable are made
available to each payee and one elects to receive his share in cash
while the other makes a timely election under section 72(h) to receive
his share as an annuity, the capital gains treatment does not apply to
either payee.
(5) For purposes of determining whether the total amounts payable to
an employee have been paid within one taxable year, the term ''total
amounts'' includes amounts under a plan which are attributable to
contributions on behalf of an individual while he was self-employed in
the business with respect to which the plan was established. Thus, the
''total amounts'' payable are not paid within one taxable year if
amounts remain payable which are so attributable.
(6) The term ''total amounts'' does not include any amount which has
been placed in a separate account for the funding of benefits described
in section 401(h). Thus, a distribution under a qualified annuity plan
may constitute a distribution of the total amounts payable with respect
to an employee even though amounts attributable to the funding of
section 401(h) medical benefits as defined in paragraph (a) of 1.401-14
are not so distributed.
(c) The provisions of this section are not applicable to any amounts
paid to a payee to the extent such amounts are attributable to
contributions made on behalf of an employee while he was a self-employed
individual in the business with respect to which the plan was
established. For the taxation of such amounts, see 1.72-18. For the
rules for determining the amount attributable to contributions on behalf
of an employee while he was self-employed, see paragraphs (b)(4) and
(c)(2) of such section.
(T.D. 6500, 25 FR 11681, Nov. 26, 1960, as amended by T.D. 6676, 28
FR 10143, Sept. 17, 1963; T.D. 6722, 29 FR 5073, Apr. 14, 1964)
26 CFR 1.403(b)-1 Taxability of beneficiary under annuity purchased by
a section 501(c)(3) organization or public school.
(a) Amounts paid by employer during taxable years beginning before
January 1, 1958 -- (1) In general. If an amount is paid during a
taxable year of an employee (or a retired or former employee) beginning
before January 1, 1958, toward the purchase for such employee of an
annuity contract and such purchase is not part of an annuity plan which
meets the requirements of section 404(a)(2), then such amount is not
required to be included in the gross income of such employee for such
taxable year --
(i) If such amount is paid by an employer which, at the time of the
payment, is an organization described in section 501(c)(3) and exempt
from tax under section 501(a), and
(ii) If the purchase of the annuity contract is merely a supplement
to the past or current compensation of such employee (within the meaning
of subparagraph (2) of this paragraph).
For purposes of this paragraph, it is immaterial whether or not the
employee's rights to the annuity contract are forfeitable.
(2) Supplement to past or current compensation. For purposes of this
paragraph, whether the purchase of an annuity contract is merely a
''supplement to past or current compensation'' is to be determined by
all the surrounding facts and circumstances. One of the pertinent facts
to be taken into consideration is the ratio of the consideration paid by
the employer for an employee's contract to the amount of his past or
current compensation. For example, if the annual premium paid for an
employee's contract is $1,000 and his annual salary is $10,000, the
ratio indicates that the premium paid for the contract is merely a
supplement to the employee's current compensation. If, however, an
employee receives no current compensation, or the annual premiums paid
for his annuity contract approximate his annual salary, the amount paid
for his contract will be considered to be current compensation and
taxable to the employee in the year in which it is paid by the employer.
Other pertinent considerations are whether the annuity contract is
purchased as a result of an agreement for a reduction of the employee's
annual salary, or whether it is purchased at his request in lieu of an
increase in current compensation to which he otherwise might be
entitled. In such cases, the amount paid for the contract shall also be
considered to be current compensation.
(b) Amounts paid by employer during taxable years beginning after
December 31, 1957 -- (1) In general. If amounts are contributed by an
employer during a taxable year of an employee (or a retired or former
employee) beginning after December 31, 1957, toward the purchase for
such employee of an annuity contract and such purchase is not part of an
annuity plan which meets the requirements of section 404(a)(2), then, to
the extent such amounts do not exceed the exclusion allowance for such
taxable year, they are not required to be included in the gross income
of such employee for such taxable year, if at the time of the
contribution --
(i) The employer is an organization described in section 501(c)(3)
and exempt from tax under section 501(a), or
(ii) The employer is a State, a political subdivision of a State, or
an agency or instrumentality of any one or more of the foregoing, and
the employee is performing (or has performed) services for an
educational institution (as defined in section 151(e)(4)), and
(iii) The employee's rights under the annuity contract are
nonforfeitable except for failure to pay future premiums.
See paragraph (d) of this section for rules relating to the
computation of an employee's exclusion allowance for a taxable year.
(2) Forfeitable rights which change to nonforfeitable rights. If an
employee's rights under an annuity contract change from forfeitable to
nonforfeitable rights, the amount which, under section 403(d), is
includible in the gross income of such employee by reason of such change
(computed without regard to subparagraph (1) of this paragraph) shall,
for purposes of subparagraph (1) of this paragraph, be considered an
amount contributed by the employer for such annuity contract as of the
time the employee's rights under the contract change to nonforfeitable
rights. Such amount will, therefore, be excludable from the employee's
gross income for the taxable year in which the change occurs to the
extent that it is so excludable under the rules contained in this
section. In determining the extent to which such amount is excludable,
this section shall be applied in the same manner as in the case of
current employer contributions. Thus, no part of such amount is
excludable if the employer is not an employer described in subparagraph
(1) of this paragraph at the time the employee's rights under the
annuity contract change from forfeitable to nonforfeitable rights. In
addition, such amount will be excludable only to the extent it does not
exceed the employee's exclusion allowance for the taxable year in which
the change occurs. Since such an amount is considered as an amount
contributed by the employer at the time the change occurs, it is
immaterial whether the employer was an employer described in
subparagraph (1) of this paragraph at the time the actual contributions
were made.
(3) Agreement to take a reduction in salary or to forego an increase
in salary. (i) There is no requirement that the purchase of an annuity
contract for an employee must be merely a ''supplement to past or
current compensation'' in order for the exclusion provided by this
paragraph to apply to employer contributions for such annuity contract.
Thus, the exclusion provided by this paragraph is applicable to amounts
contributed by an employer for an annuity contract as a result of an
agreement with an employee to take a reduction in salary, or to forego
an increase in salary, but only to the extent such amounts are earned by
the employee after the agreement becomes effective. Such an agreement
must be legally binding and irrevocable with respect to amounts earned
while the agreement is in effect. Except as provided in subdivision
(ii) of this subparagraph, the employee must not be permitted to make
more than one agreement with the same employer during any taxable year
of such employee beginning after December 31, 1963; the exclusion
provided by this paragraph shall not apply to any amounts which are
contributed under any further agreement made by such employee during the
same taxable year beginning after such date. However, the employee may
be permitted to terminate the entire agreement with respect to amounts
not yet earned.
(ii) An individual who is employed by an organization described in
section 415(c)(4) may make a salary reduction agreement for his taxable
year beginning in 1976 or 1977 at any time before the end of the 1976 or
1977 taxable year, respectively, without the agreement's being
considered a new agreement within the meaning of this subparagraph. The
agreement for 1976 may be made on or before June 15, 1977, and the
agreement for 1977 may be made on or before April 17, 1978. This
special rule only applies if the individual makes a statement of
intention in accordance with 11.415(c)(4)-1(b) electing, or determines
his income tax liability for the taxable year in a way which is
consistent with, one of the alternative limitations under section
415(c)(4) for 1976 or 1977 (as the case may be). The salary reduction
agreement for 1976 may be made effective with respect to any amount
earned during the taxpayer's most recent one-year period of service (as
defined in paragraph (f) of this section) ending not later than the end
of the 1976 taxable year, notwithstanding subdivision (i) of this
subparagraph. Similarly, the salary reduction agreement for 1977 may be
made effective with respect to such period of service ending not later
than the end of the 1977 taxable year. If the salary reduction
agreement for 1976 is entered into at any time after December 31, 1976,
or if the salary reduction agreement for 1977 is entered into at any
time after December 31, 1977, an amended Form W-2 must be filed on
behalf of the individual.
(iii) The rules of subdivision (i) of this subparagraph may be
illustrated by the following example:
Example. A is an employee of X Organization (an employer described in
section 501(c)(3) and exempt from tax under section 501(a)) for the
entire calendar year 1964. A uses the calendar year as a taxable year.
A's annual salary as of January 1, 1964, is $12,000. On February 1,
1964, A and his employer enter a binding and irrevocable agreement
whereby A is to take a 10-percent reduction in salary (from $1,000 per
month to $900 per month) and X Organization is to contribute $100 per
month for an annuity contract described in section 403(b). The
agreement also provides that A may terminate the entire agreement with
respect to amounts not yet earned. Since the agreement to reduce A's
salary and invest the amount of such reduction in an annuity contract
was made after A earned his salary for January, A's current compensation
for January is $1,000 even though the agreement may provide that X
Organization shall contribute $100 with respect to January for the
benefit of A for an annuity contract described in section 403(b). For
February and subsequent months ending before July 1, 1964, X
Organization contributes $100 per month for A's annuity. Thus, A's
current compensation for each of these months is $900, and the $100
which is contributed during such months by X Organization for an annuity
contract for A is an employer contribution to which the exclusion
provided in this paragraph applies. On July 1, 1964, A becomes entitled
to a salary increase of $200 per month and, pursuant to the agreement of
February 1, 1964, X Organization contributes 10 percent of such increase
or an additional $20 per month for a section 403(b) annuity. For July
and subsequent months ending before October 1, 1964, X Organization
contributes $120 per month for A's annuity. Thus, A's current
compensation for each of these months is $1,080, and the $120 which is
contributed during such months by X Organization for an annuity contract
for A is an employer contribution to which the exclusion provided in
this paragraph applies. On November 1, 1964, A terminates the entire
agreement with respect to amounts not yet earned. Since the termination
occurred after A earned his salary for the month of October, the
contribution for October is an employer contribution to which the
exclusion provided in this paragraph applies. For the months November
and December, A's full salary of $1,200 per month is includible in his
gross income whether or not his employer makes contributions for a
section 403(b) annuity.
(4) Two or more annuity contracts. If, during a taxable year of an
employee, this paragraph applies to amounts contributed (including
amounts which are considered to be contributed under subparagraph (2) of
this paragraph) by his employer for two or more annuity contracts for
such employee, such two or more annuity contracts shall, for such
taxable year, be considered a single contract for purposes of applying
the rules contained in this paragraph.
(5) Employees performing services for public schools. For purposes
of this section, a person shall be considered an employee who performs
services for an educational institution (as defined in section
151(e)(4)) if he is performing services as an employee directly or
indirectly for such an institution. Thus, for example, the principal,
clerical employees, custodial employees, and teachers at a public
elementary school are employees performing services directly for such an
educational institution. An employee who performs services involving
the operation or direction of a State's, or political subdivision's,
education program as carried on through educational institutions (as
defined in section 151(e)(4)) is an employee performing services
indirectly for such institutions. An employee participating in an
''in-home'' teaching program is included since such program is merely an
extension of the activities carried on by such educational institutions.
On the other hand, a person occupying an elective or appointive public
office is not an employee performing services for an educational
institution unless such office is one to which an individual is elected
or appointed only if he has received training, or is experienced, in the
field of education. The term ''public office'' includes any elective or
appointive office of a State, a political subdivision of a State, or an
agency or instrumentality of any one or more of the foregoing. Thus,
for example, a regent or trustee of a State university or a member of a
board of education is not an employee performing services for an
educational institution. On the other hand, a commissioner or
superintendent of education will generally be considered an employee
performing services for an educational institution.
(c) Taxation of amounts received under annuity contracts -- (1) In
general. The amounts received by or made available to any employee
under an annuity contract to which paragraph (a) or (b) of this section
applies shall be included in the gross income of the employee for the
taxable year in which received or made available, as provided in section
72 (relating to annuities). For taxable years beginning before January
1, 1964, section 72(e)(3) (relating to the treatment of certain lump
sums), as in effect before such date, shall not apply to any amount
received by or made available to any such employee under such an annuity
contract. For taxable years beginning after December 31, 1963, amounts
received or made available to any such employee under such annuity
contract may be taken into account in computations under sections 1301
through 1305 (relating to income averaging).
(2) Taxation of beneficiaries. If, upon the death of an employee or
of a retired employee, the widow or other beneficiary of such employee
is paid, in accordance with the terms of the annuity contract relating
to the deceased employee, an annuity or other death benefit, the extent
to which the amounts received by or made available to the beneficiary
must be included in the beneficiary's income under subparagraph (1) of
this paragraph shall be determined in accordance with the rules
presented in paragraph (a)(5) of 1.402(a)-1.
(3) Life insurance protection. An individual contract issued after
December 31, 1962, or a group contract, which provides incidental life
insurance protection may be purchased as an annuity contract to which
paragraph (a) or (b) of this section applies. For the rules as to
nontransferability of such contracts issued after December 31, 1962, see
1.401-9. For the rules relating to the taxation of the cost of the life
insurance protection and the proceeds thereunder, see 1.72-16. Section
403(b) is not applicable to premiums paid after October 26, 1956, for
individual contracts which were issued prior to January 1, 1963, and
which provide life insurance protection.
(d) Exclusion allowance -- (1) In general. For purposes of paragraph
(b) of this section, an employee's exclusion allowance for a taxable
year is an amount equal to the excess, if any, of --
(i) The amount determined by multiplying (a) 20 percent of such
employee's includible compensation in respect of such taxable year, by
(b) such employee's total number of years of service as of the close of
such taxable year, over
(ii) The aggregate of (a) the amounts which have been contributed by
the employer for annuity contracts for such employee and which were
excludable from the gross income of the employee for any taxable year
prior to the taxable year for which the exclusion allowance is being
determined, and (b) the amounts of compensation excludable from the
gross income of the employee under section 457(a) (relating to eligible
State deferred compensation plans) for any prior taxable year that is
taken into account as a year of service under paragraph (f) of this
section.
Compensation deferred under an eligible State deferred compensation
plan shall be taken into account as described in subdivision (ii) of
this subparagraph even if the entity sponsoring the eligible plan is not
the employer purchasing the annuity contract with respect to which the
employee's exclusion allowance is to be determined. See paragraph (e)
of this section for the definition of an employee's includible
compensation in respect of a taxable year and paragraph (f) of this
section for rules for computing an employee's total number of years of
service for an employer.
(2) More than one employer. If, during a taxable year of an
employee, amounts are contributed for annuity contracts for such
employee by two or more employers described in paragraph (b)(1) (i) or
(ii) of this section, a separate exclusion allowance shall be computed
with respect to each employer. In such a case, therefore, there shall
not be taken into account, in computing the exclusion allowance with
respect to one employer, the ''includible compensation'' received by the
employee from any other employer, the employee's years of service with
any other employer, or amounts which have been contributed by any other
employer for annuity contracts for such employee.
(3) Amounts previously contributed by the employer which were
excludable from the employee's gross income. In computing, for purposes
of subparagraph (1)(ii) of this paragraph, the aggregate of the amounts
which have been contributed by an employer for annuity contracts for an
employee and which were excludable from the gross income of the employee
for any taxable year prior to the taxable year for which the exclusion
allowance is being determined, there shall be included all contributions
made by the employer for the benefit of the employee --
(i) Which, under section 402(a) or section 403(a), were excludable
from the employee's gross income for any such prior taxable year by
reason of being contributions to a trust described in section 401(a) and
exempt from tax under section 501(a) or contributions toward the
purchase of an annuity contract under a plan which meets the
requirements of section 404(a)(2) (whether forfeitable or
nonforfeitable); or
(ii) Which, under section 405(d), were excludable from the employee's
gross income for any such prior taxable year by reason of being
contributions toward the purchase of United States bonds under a plan
which meets the requirements of section 405(a)(1); or
(iii) Which were excludable from the employee's gross income for any
such prior taxable year by reason of being contributions described in
paragraph (a) or (b) of this section; or
(iv) (a) Which were excludable from the employee's gross income for
the taxable year when made solely by reason of the fact that the
employee's rights to such contributions were forfeitable at the time
they were made (and not for any of the reasons described in subdivisions
(i), (ii), and (iii) of this subparagraph);
(b) With respect to which the employee's rights changed to
nonforfeitable rights prior to the taxable year for which the exclusion
allowance is being determined; and
(c) Which were not, under section 403(d) and without regard to
paragraph (b) of this section, includible in the employee's gross income
for the taxable year in which his rights to such contributions changed
from forfeitable to nonforfeitable rights.
For purposes of subdivisions (i) and (iii) of this subparagraph, all
references to provisions of the Internal Revenue Code of 1954 and to
provisions of the regulations under such Code shall also be considered
references to the corresponding provisions of prior law and regulations.
See subparagraph (4) of this paragraph for rules relating to the
allocation of employer contributions to an employee where the actual
contributions are not allocated among individual employees; or
(v) Which were contributions to a section 403(b) annuity contract for
a prior taxable year and which exceeded the limitations of section
415(c)(1) applicable to the employee. See 1.415-6(e)(1)(ii) for a more
detailed discussion of this rule. See also 1.415-9(c) for rules
relating to the treatment of certain contributions to a section 403(b)
annuity contract which are excess contributions because of the
aggregation of the annuity contract with a qualified plan.
(4) Determination of excludable amounts by allocation of
contributions. If, for any employee, the actual amounts of employer
contributions to a defined benefit plan described in subparagraph (3) of
this paragraph are not known, such amounts shall be determined under the
formula described in this subparagraph or under any other method
utilizing recognized actuarial principles which are consistent with the
provisions of the plan under which such contributions are made and the
method adopted by the employer for funding the benefits under the plan.
If the formula described in this subparagraph is to be used, the
contributions made by the employer for the benefit of the employee as of
the end of any taxable year shall be deemed to be the product of the
quantities described in subdivisions (i), (ii), (iii), and (iv) of this
subparagraph. Such quantities are --
(i) The projected annual amount of the employee's pension (as of the
end of the taxable year) to be provided at normal retirement age from
employer contributions, based upon the provisions of the plan in effect
at such time and upon the assumption of the employee's continued
employment with his present employer at his then current salary rate.
(ii) The value, from Table I below, at normal retirement age of an
annuity of $1.00 per annum payable in equal monthly installments during
the life of the employee, based upon the normal retirement age as
defined in the plan.
(iii) The amount from Table II below (representing the level annual
contribution which will accumulate to $1.00 at normal retirement age)
for the sum of (a) the number of years remaining from the end of the
taxable year to normal retirement age and (b) the lesser of the number
of years of service credited through the end of the taxable year or the
number of years that the plan has been in existence at such time.
(iv) The lesser of the number of years of service credited through
the end of the taxable year or the number of years that the plan has
been in existence at such time.
Note: If the normal form of retirement benefit under the plan is
other than a straight life annuity, the value from Table I above should
be divided by the figure set forth below opposite the normal form of
retirement benefit provided by the plan:
(5) Election to have allowance determined under section 415 rules.
Under section 415(c)(4)(D), an employee may elect to have the provisions
of section 415(c)(4)(C) (relating to special limitations for annuity
contracts purchased by educational organizations, hospitals and home
health service agencies) apply for a taxable year. If the employee so
elects, his exclusion allowance is the maximum amount under section 415
that could be contributed by the employer for the benefit of the
employee if the annuity contract for the benefit of the employee were
treated as a defined contribution plan maintained by the employer.
Thus, the exclusion allowance for the taxable year of an employee who
makes the election may not exceed the limitation on contributions and
other additions (as described in 1.415-6) applicable to the employee
for that taxable year. See 1.415-7 for provisions applicable in the
event an employer maintains a defined benefit plan and a defined
contribution plan for the same employee. See 1.415-8 for provisions
applicable in the event an employer maintains more than one defined
contribution plan covering the same employee.
(e) Includible compensation -- (1) In general. For purposes of
computing, under paragraph (d) of this section, an employee's exclusion
allowance for a taxable year, such employee's includible compensation in
respect of such taxable year means the amount of compensation from the
employer --
(i) Which was earned during the most recent period (ending not later
than the close of the employee's taxable year for which the exclusion
allowance is being determined) that, under paragraph (f) of this
section, may be counted as one-year of service,
(ii) Which is includible in the employee's gross income, and
(iii) In the case of an employee of an employer described in
paragraph (b)(1)(ii) of this section, which is attributable to services
performed for an educational institution (as defined in section
151(e)(4)).
See subparagraph (2) of this paragraph for special rules for
determining the amount of compensation which is includible in the
employee's gross income.
(2) Special rules for determining the amount of compensation
includible in the employee's gross income. For purposes of subparagraph
(1) of this paragraph, the amount of compensation which is includible in
the employee's gross income shall be computed without regard to the
exclusions allowed by section 105(d) (relating to wage continuation
plans) and section 911 (relating to earned income from sources without
the United States). Therefore, although amounts received by the
employee from the employer while he is absent from work on account of
personal injuries or sickness may be excludable from his gross income
under section 105(d), such amounts are, nevertheless, considered as
includible in his gross income for purposes of computing his includible
compensation. On the other hand, in computing the amount which is
includible in the gross income of the employee for purposes of
subparagraph (1) of this paragraph, there shall not be included any
amount which is contributed by the employer for an annuity contract to
which paragraph (b) of this section applies. Thus, although the amount
of any employer contributions for an annuity contract to which paragraph
(b) of this section applies is, to the extent it exceeds in any taxable
year the employee's exclusion allowance for such year, includible in the
employee's gross income for that year, such amount is not considered as
includible in the employee's gross income for purposes of computing his
includible compensation for that year.
(3) Period during which compensation must be earned. For purposes of
computing an employee's exclusion allowance for a taxable year, there
may not be taken into account, as includible compensation, any
compensation which was earned by the employee during a taxable year
ending after the taxable year for which the exclusion allowance is being
determined. On the other hand, an employee's includible compensation
may include all or part of his compensation earned during a taxable year
prior to the taxable year for which the exclusion allowance is being
determined. Such a situation can occur, for example, when an employer
purchases an annuity contract for a retired employee, or when an
employer purchases an annuity contract for a part-time employee whose
most recent one-year period of service (within the meaning of paragraph
(f) of this section) extends over more than one taxable year of such
employee. For purposes of this subparagraph, it is immaterial when the
compensation is actually received by the employee or for what taxable
year it is includible in his gross income.
(4) Status of employer. In computing an employee's exclusion
allowance for a taxable year, there is not taken into account, as
includible compensation, any compensation which was earned during a
period when the employer was not an employer described in paragraph
(b)(1) (i) or (ii) of this section since under paragraph (f)(2) of this
section an employee is not considered to be in the service of the
employer for any such period. On the other hand, it is immaterial
whether the employer is an employer described in paragraph (b)(1) (i) or
(ii) of this section at the time the compensation is actually received
by the employee. Thus, if an employee receives compensation during his
1961 taxable year for services performed during his 1960 taxable year,
such compensation can qualify as includible compensation if his employer
was an employer described in paragraph (b)(1) (i) or (ii) of this
section during 1960, even though such employer was not such an employer
during 1961. See, also, paragraph (b) of this section which provides
that the exclusion allowance is only applicable with respect to
contributions which are made by an employer at a time when such employer
is an employer described in paragraph (b)(1) (i) or (ii) of this
section.
(f) Years of service -- (1) In general. In computing an employee's
exclusion allowance for a taxable year, it is necessary to determine
such employee's number of years of service for the employer as of the
close of such taxable year. For this purpose, the number of years of
service of an employee for an employer shall be determined in accordance
with the rules set forth in this paragraph. In addition, such rules are
applicable in determining, for purposes of paragraph (e) of this
section, an employee's most recent one-year period of service.
(2) Exempt status requirement. For purposes of determining an
employee's number of years of service for an employer and his most
recent one-year period of service for such employer, an employee shall
not be considered to be employed by the employer, or to be in the
service of the employer, during any period that the employer is not an
employer described in paragraph (b)(1) (i) or (ii) of this section, or,
in the case of an employee of an employer described in paragraph
(b)(1)(ii) of this section, during any period when the employee is not
performing services for an educational institution (as defined in
section 151(e)(4)). The rule in this subparagraph may be illustrated by
the following example: A was employed on a full-time basis by the X
scientific organization during the whole of 1959 and 1960 and during
half of 1961. Both A and the X Organization use the calendar year as
their taxable year. The X Organization was an organization described in
section 501(c)(3) and exempt from tax under section 501(a) during the
years 1959 and 1961, but not during the year 1960. For purposes of
determining A's exclusion allowance for 1961, he is considered to have 1
1/2 years of service (his service during 1959 and 1961) and his most
recent one-year period of service ending not later than the close of
1961 consists of his service during 1961 (which is equal to 1/2 year of
service) and his service during the last half of 1959 (which is equal to
another 1/2 year of service).
(3) Service included. For purposes of computing an employee's
exclusion allowance for a taxable year, there may be taken into account,
in determining his number of years of service, all service performed by
him as of the close of such taxable year. Therefore, whenever possible,
service performed during each of the employee's taxable years should be
considered separately in arriving at his total number of years of
service. For example, if an employee who reports his income on a
calendar year basis is employed on a full-time basis on July 1, 1959,
and continues on a full-time basis through December 31, 1960, his number
of years of service as of the close of his 1960 taxable year should, if
possible, be computed as follows:
However, in determining what constitutes a full year of service, the
employer's annual work period, and not the employee's taxable year, is
the standard of measurement. For example, in determining whether a
professor is employed full time, the number of months in the school's
academic year shall be the standard of measurement.
(4) Full-time employee for full year. (i) Each full year during
which an individual was employed full time shall be considered as one
year of service. In determining whether an individual is employed
full-time, the amount of work which he is required to perform shall be
compared with the amount of work which is normally required of
individuals holding the same position with the same employer and who
generally derive the major portion of their personal service income from
such position.
(ii)(a) In measuring the amount of work required of individuals
holding a particular position, any method that reasonably and accurately
reflects such amount may be used. For example, the number of hours of
classroom instruction is only an indication of the amount of work
required, but it may be used as a measure.
(b) In determining whether positions with the same employer are the
same, all of the facts and circumstances concerning the positions shall
be considered, including the work performed, the methods by which
compensation is computed, and the descriptions (or titles) of the
positions. For example, an assistant professor employed in the English
department of a university will be considered a full-time employee if
the amount of work that he is required to perform is the same as the
amount of work normally required of assistant professors of English at
that university who derive the main portion of their personal service
income from such position.
(c) In case an individual's position is not the same as another with
his employer, the rules of this paragraph shall be applied by
considering the same position with similar employers or similar
positions with the same employer.
(iii) A full year of service for a particular position means the
usual annual work period of individuals employed full-time in that
general type of employment at the place of employment. For example, if
a doctor employed by a hospital works throughout the 12 months of a year
except for a one-month vacation, such doctor will be considered as being
employed for a full year, if the other doctors at that hospital work 11
months of the year with a one-month vacation. Similarly, if the usual
annual work period at a university consists of the fall and spring
semesters, an instructor at that university who teaches those semesters
will be considered as working a full year.
(5) Other employees. (i) An individual shall be treated as having a
fraction of a year of service for each year during which he was a
full-time employee for part of the year or for each year during which he
was a part-time employee for the entire year or for a part of the year.
(ii) In determining the fraction which represents the fractional year
of service for an individual employed full time for part of a year, the
numerator shall be the number of weeks (or months) during which the
individual was a full-time employee in a position during that year, and
the denominator shall be the number of weeks (or months) which is
considered under subparagraph (4)(iii) of this paragraph as the usual
annual work period for that position. For example, if an instructor is
employed full time by a university for the 1959 spring semester (which
lasts from February 1959 through May 1959), and the academic year of the
university is 8 months long, beginning in October 1958, and ending in
May 1959, then he is considered as having completed 4/8 of a year of
service.
(iii) In determining the fraction which represents the fractional
year of service of an individual who is employed part time for a full
year, the numerator shall be the amount of work required to be performed
by the individual, and the denominator shall be the amount of work
normally required of individuals who hold the same position. The amount
of work required to be performed by the individual and the amount of
work normally required of individuals holding the same position shall be
determined in accordance with the principles of subparagraph (4) of this
paragraph. Thus, if a practicing physician teaches one course at a
local medical school 3 hours per week for two semesters and other
faculty members at that medical school teach 9 hours per week for two
semesters, then the practicing physician is considered as having
completed 3/9 of a year of service.
(iv) In determining the fraction representing the fractional year of
service of an individual who is employed part time for part of a year,
it is necessary to compute the fractional year of service if the
individual were a part-time employee for a full year, and the fractional
year of service if the individual were a full-time employee for the part
of a year. The two fractions shall be multiplied and the product is the
fractional year of service of such individual who is employed part time
for part of a year. For example, if an attorney who is a specialist in
a subject teaches a course in that subject for 3 hours per week for one
semester at a nearby law school, and the full-time instructors at that
law school teach 12 hours per week for two semesters, then the
fractional part of a year of service for such part-time instructor is
computed as follows: The fractional year of service if the instructor
were a part-time employee for a full year is 3/12 (number of hours
employed divided by the usual number of hours of work required for that
position); the fractional year of service if the instructor were a
full-time employee for part of a year is 1/2 (period worked or one
semester, divided by usual work period, or 2 semesters). These
fractions are multiplied to obtain the fractional year of service: 3/12
times 1/2, or 3/24 ( 1/8).
(6) Less than one year of service considered as one year. If, at the
close of a taxable year, an employee has, under the rules in this
paragraph, a period of service of less than one year, such employee
shall, nevertheless, be considered to have one year of service for
purposes of computing his exclusion allowance for that taxable year.
Such period of service of less than one year shall also be considered to
be such employee's most recent one-year period of service for purposes
of determining his includible compensation.
(7) Most recent one-year period of service. (i) In determining, for
purposes of paragraph (e) of this section (relating to includible
compensation), an employee's most recent one-year period of service,
there is first taken into account all service performed by the employee
during the taxable year for which the exclusion allowance is being
determined. For this purpose, therefore, an employee's most recent
one-year period of service may not be the same as his employer's most
recent annual work period. The rule in this subdivision may be
illustrated by the following example: A, a professor who reports his
income on a calendar year basis, is employed by a university on a
full-time basis during the university's 1959-1960 and 1960-1961 academic
years (October through May). For purposes of computing A's exclusion
allowance for his 1960 taxable year, his most recent one-year period of
service consists of his service performed during January through May,
1960 (which is part of the 1959-1960 academic year) and his service
performed during October through December 1960 (which is part of the
1960-1961 academic year).
(ii) In the case of a part-time employee or a full-time employee who
is employed for only part of a year, it will be necessary to aggregate
his most recent periods of service to determine his most recent one-year
period of service. In such a case, there is first taken into account
his service during the taxable year for which the exclusion allowance is
being determined; then there is taken into account his service during
his next preceding taxable year and so forth until his service equals,
in the aggregate, one year of service. For example, if an employee, who
reports his income on the calendar year basis, is employed on a
full-time basis during the months July through December 1959 ( 1/2 year
of service), July through December 1960 ( 1/2 year of service), and
October through December 1961 ( 1/4 year of service), his most recent
one-year period of service for purposes of computing his exclusion
allowance for 1961 consists of his service during 1961 ( 1/4 year of
service), his service during 1960 ( 1/2 year of service), and his
service during the months October through December 1959 ( 1/4 year of
service).
(g) Illustration of computation of exclusion allowance. The
exclusion provided under paragraph (b) of this section may be
illustrated by the following example: A, a professor who reports his
income on the calendar year basis, became a full-time employee of X
University on October 1, 1958 (beginning of X University's 1958-1959
academic year) and continued as a full-time employee for the academic
years 1958-1959, 1959-1960, and 1960-1961. X University was, during all
such academic years, an organization described in section 501(c)(3) and
exempt from tax under section 501(a). X University's academic year runs
for a period of 8 months: October through May. A received an annual
salary, all of which was includible in his gross income, of $8,000 for
the 1958-1959 academic year, $8,800 for the 1959-1960 academic year, and
$9,600 for the 1960-1961 academic year. Starting in 1958, X University
contributed amounts toward the purchase of annuity contracts for A and
such purchase was not part of a qualified annuity plan. X University
paid, as premiums for such contracts, $1,000 in 1958, $2,000 in 1959,
$2,400 in 1960, and $1,400 in 1961. The amount of such premiums which
is excludable from A's gross income for the year in which paid is
computed as follows:
(T.D. 6783, 29 FR 18360, Dec. 24, 1964, as amended by T.D. 6885, 31
FR 7802, June 2, 1966; T.D. 7748, 46 FR 1696, Jan. 7, 1981; T.D.
7836, 47 FR 42337, Sept. 27, 1982; T.D. 8115, 51 FR 45736, Dec. 19,
1986)
26 CFR 1.403(c)-1 Taxability of beneficiary under a nonqualified
annuity.
(a) Taxability of vested interest in premiums. If after August 1,
1969, an employer (whether or not exempt under section 501(a)) pays
premiums for an annuity contract for the benefit of an employee, the
amount of such premiums shall be included as compensation in the gross
income of the employee for the taxable year during which such premiums
are paid, but only to the extent that the employees's rights in such
premiums are substantially vested (as defined in 1.83-3(b)) at the time
such premiums are paid. The preceding sentence shall not apply to
contracts referred to in the transitional rule of paragraph (d) (1),
(ii), or (iii) of this section, or to premiums subject to 1.403(a)-1(a)
or excludible under 1.403(b)-1(b). If any employer has purchased
annuity contracts and transfered them to a trust (other than one
described in section 401(a)) that is to provide annuity contracts or
benefits for his employees, the amounts so paid shall be treated as
contributions to a trust described in section 402(b). For the rules
relating to the taxation of the cost of life insurance protection when
rights in a life insurance contract are substantially nonvested, see
1.83-1(a)(2).
(b) Taxability of employee when rights under annuity contract change
from nonvested to vested -- (1) In general. If, during a taxable year
of an employee ending after August 1, 1969, the rights of such employee
under an annuity contract purchased for him by an employer (whether or
not exempt under section 501(a) or 521(a)) become substantially vested,
the value of the annuity contract on the date of such change shall be
included in the employee's gross income for such year, to the extent
provided in paragraph (b)(2) of this section. The preceding sentence
shall not apply, however, to an annuiity contract purchased and held as
part of a plan which met at the time of such purchase, and continues to
meet, the requirements of section 404(a)(2) or an annuity contract
referred to in paragraph (d) (ii) or (iii) of this section. For
purposes of this section, the value of an annuity contract on the date
the employee's rights become substantially vested means the cash
surrender value of such contract on such date.
(2) Extent to which value of annuity contract is includible in
employee's gross income. For purposes of paragraph (b)(1) of this
section, the only amount includible in the gross income of the employee
is that the portion of the value of the contract on the date of the
change that is attributable to premiums which were paid by the employer
after August 1, 1969, and which were not excludible from the employer's
gross income under 1.403(b)-1(b). However, the includible portion does
not include --
(i) The value attributable to a premium paid on the date of such
change, and
(ii) The value attributable to premiums described in the transitional
rule of paragraph (d)(1) (ii) or (iii) of this section.
See 1.403(b)-1(b)(2) for the treatment of an amount otherwise
includible in gross income under section 403(c) as an employer
contribution for purposes of the exclusion under section 403(b).
(3) Partial vesting. If, during any taxable year of an employee,
only part of his beneficial interest in an annuity contract becomes
substantially vested, then only the corresponding part of the value of
the annuity contract on the date of such change is includible in the
employee's gross income for such taxable year. In such a case, it is
first necessary to compute, under the rules in paragraphs (b)(1) and (2)
of this section but without regard to any exclusion allowable under
1.403(b)-1(b), the amount which would be includible in the employee's
gross income for the taxable year if his entire beneficial interest in
the annuity contract had changed to a substantially vested interest
during such year. The amount that is includible under this (3) (without
regard to the section 403(b) exclusion) is equal to the amount
determined under the preceding sentence multiplied by the percent of the
employee's beneficial interest which became substantially vested during
the taxable year.
(c) Amounts paid or made available under an annuity contract. The
amounts paid or made available to the employee under an annuity contract
subject to this section shall be included in the gross income of the
employee for the taxable year in which paid or made available, as
provided in section 72 (relating to annuities). Such amounts may be
taken into account in computations under sections 1301 through 1305
(relating to income averaging). For rules relating to the treatment of
employer contributions as part of the consideration paid by the
employee, see section 72(f). See also section 101(b)(2)(D) for rules
relating to the treatment of the limited exclusion provided thereunder
as part of the consideration paid by the employee.
(d) Taxability of beneficiary under a nonqualified annuity on or
before August 1, 1969. (1) Except as provided in section 402(d)
(relating to taxable years beginning before Janaury 1, 1977), if an
employer purchases an annuity contract and if the amounts paid for the
contract.
(i) On or before August 1, 1969, or
(ii) After such date, if pursuant to a binding written contract (as
defined in 1.83-8(b)(2)) entered into before April 22, 1969, or
(iii) After August 1, 1969, pursuant to a written plan in which the
employee participated on April 22, 1969 and under which the obligation
of the employer is essentially the same as under a binding written
contract, are not subject to paragraph (a) of 1.403(a)-1 or paragraph
(a) of 1.403-1, the amount of such contribution shall, to the extent it
is not excludible under paragraph (b) of 1.403(b)-1, be included in the
income of the employee for the taxable year during which such
contribution is made if, at at the time the contribution is made, the
employee's rights under the annuity contract are nonforfeitable, except
for failure to pay future premiums. If the annuity contract was
purchased by an employer which is not exempt from tax under section
501(a) or section 521(a), and if the employee's rights under the annuity
contract in such a case were forfeitable at the time the employer's
contribution was made for the annuity contract, even though they become
nonforfeitable later the amount of such contribution is not required to
be included in the income of the employee at the time his rights under
the contract become nonforfeitable. On the other hand, if the annuity
contract is purchased by an employer which is exempt from tax under
section 501(a) or section 521(a), all or part of the value of the
contract may be includible in the employee's gross income at the time
his rights under the contract become nonforfeitable (see section 403(d)
prior to the repeal thereof by the Tax Reform Act of 1969 and the
regulations thereunder). As to what constitutes nonforfeitable rights
of an employee, see 1.402(b)-1(d)(2). The amounts received by or made
available to the employee under the annuity contract shall be included
in the gross income of the employee for the taxable year in which
received or made available, as provided in section 72 (relating to
annuities). For taxable years beginning before Janaury 1, 1964,
sections 72(e)(3) (relating to the treatment of certain lump sums), as
in effect before such date, shall not apply to such amounts. For
taxable years beginning after December 31, 1963, such amounts may be
taken into account in computations under sections 1301 through 1305
(relating to income averaging). For rules relating to the treatment of
employer contributions as part of the consideration paid by the
employee, see section 72(f). See also section 101(b)(2)(D) for rules
relating to the treatment of the limited exclusion provided thereunder
as part of the consideration paid by the employee.
(2) If an employer has purchased annuity contracts and transferred
them to a trust, or if an employer has made contributions to a trust for
the purpose of providing annuity contracts for his employees as provided
in section 402(d) (see paragraph (a) of 1.402(D)-1, the amount so paid
or contributed is not required to be included in the income of the
employee, but any amount received by or made available to the employee
under the annuity contract shall be includible in the gross income of
the employee for the taxable year in which received or made available,
as provided in section 72 (relating to annuities). For taxable years
beginning before January 1, 1964, section 72(e)(3) (relating to the
treatment of certain lump sums), as in effect before such date, shall
not apply to any amount received by or made available to the employee
under the annuity contract. For taxable years beginning after December
31, 1963, amounts received by or made available to the employee under
the annuity contract may be taken into account in computations under
sections 1301 through 1305 (relating to income averaging). In such case
the amount paid or contributed by the employer shall not constitute
consideration paid by the employee for such annuity contract in
determining the amount of annuity payments required to be included in
his gross income under section 72 unless the employee has paid income
tax for any taxable year beginning before January 1, 1949, with respect
to such payment or contribution by the employer for such year and such
tax is not credited or refunded to the employee. In the event such tax
has been paid and not creditid or refunded the amount paid or
contributed by the employer for such year shall constitute consideration
paid by the employee for the annuity contract in determining the amount
of the annuity required to be included in the income of the employee
under section 72.
(3) For taxable years beginning before January 1, 1958, the
provisions contained in section 403(c) prior to the amendment made
thereto by the Tax Reform Act of 1969 were included in section 403(b) of
the Internal Revenue Code of 1954. Therefore, the regulations contained
in this paragraph shall, for such taxable years, be considered as the
regulations under section 403(b) as in effect for such taxable years.
For the rules with respect to contributions paid after August 1, 1969,
see paragraphs (a), (b), and (c) of this section.
(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat.
588; 68A Stat. 917; 26 U.S.C. 83 and 7805))
(T.D. 7554, 43 FR 31924, July 24, 1978)
26 CFR 1.403(d)-1 Taxability of employee when rights under contracts
purchased by exempt organizations change from forfeitable to
nonforfeitable.
(a) In general. The provisions of section 403(d), repealed by
section 321(b) of the Tax Reform Act of 1969 (83 Stat. 571), applied for
taxable years beginning after December 31, 1957, only with respect to
amounts paid for an annuity contract --
(1) On or before August 1, 1969, or
(2) After such date, if pursuant to a binding written contract (as
defined in 1.83-8(b)(2)) entered into before April 22, 1969, or
(3) After August 1, 1969, pursuant to a written plan in which the
employee participated on April 22, 1969, and under which the obligation
of the employer is essentially the same as under a binding written
contract.
If, during a taxable year of an employee beginning after December 31,
1957, the rights of such employee under an annuity contract purchased
for him by an employer which is exempt from tax under section 501(a) or
521(a) change from forfeitable to nonforfeitable rights, then (except in
the case of contracts to which 1.403(c) -- 1(b) applies for taxable
years ending after August 1, 1969) the value of such annuity contract on
the date of such change shall be included in the employee's gross income
for such taxable year, to the extent provided in paragraph (b) of this
section. However, the preceding sentence does not apply to an annuity
contract purchased and held as part of a plan that at the time of such
purchase and at all times thereafter meets the requirements of section
404(a)(2). For purposes of this section, the value of an annuity
contract on the date the employee's rights change from forfeitable to
nonforfeitable rights means the cash surrender value of such contract on
such date. As to what constitutes nonforfeitable rights of an employee,
see 1.402(b)-1(d)(2). For the rules with respect to amounts paid after
August 1, 1969, under an annuity contract purchased for an employee by
an employer which is exempt from tax under section 501(a) or 521(a), see
generally section 403(c) and the regulations thereunder.
(b) Extent to which value of annuity contract is includible in
employee's gross income. For purposes of paragraph (a) of this section,
there shall be included in the gross income of an employee for his
taxable year in which his rights under an annuity contract change from
forfeitable to nonforfeitable rights only an amount equal to the portion
of the value of such contract on the date of such change (1) that is
attributable to contributions:
(i) Which were made by the employer while it was exempt from tax
under section 501(a) or 521(a);
(ii) Which were made after December 31, 1957; and
(iii) Which were not, at the time they were made, excludable from the
employee's gross income under paragraph (a) of 1.403(b)-1;
and (2) that is not excludable from the employee's gross income under
paragraph (b) of 1.403(b)-1. Thus, although amounts are contributed by
an employer after December 31, 1957, toward the purchase for an employee
of an annuity contract and, at the time of the contribution, such
employer is an organization described in section 501(c)(3) and exempt
from tax under section 501(a), the value of such annuity contract
attributable to such contributions would not be includible in the
employee's gross income for the taxable year in which his rights under
the contract change to nonforfeitable rights if such amounts were
contributed during a taxable year of the employee beginning before
January 1, 1958, and were, therefore, excludable from the employee's
gross income under paragraph (a) of 1.403(b)-1. Similarly, the value
of such an annuity contract is not includible in the gross income of the
employee for the year in which the change occurs to the extent that it
is excludable under paragraph (b) of 1.403(b)-1. See paragraph (b)(2)
of 1.403(b)-1 which provides that the amount otherwise includible in
gross income under section 403(d) is considered to be a contribution by
the employer for purposes of the exclusion provided in paragraph (b) of
1.403(b)-1. In addition, the portion of the value of an annuity contract
attributable to contributions made by the employer while it was not
exempt from tax under either section 501(a) or 521(a) is not includible
in the gross income of the employee at the time his rights under the
contract change to nonforfeitable rights even though the employer is
exempt from tax under section 501(a) or 521(a) at the time of such
change. On the other hand, the value of the annuity contract purchased
by an organization exempt from tax under section 501(a) or 521(a) may be
includible in the gross income of an employee for the year during which
his rights under the contract change to nonforfeitable rights even
though such organization is not exempt on the date of such change.
(c) Partial vesting -- (1) General rule. If, during any taxable year
of an employee, only part of his beneficial interest in an annuity
contract changes from a forfeitable to a nonforfeitable interest, then
only the corresponding part of the value of the annuity contract on the
date of such change is includible in the employee's gross income for
such taxable year. In such a case, it is first necessary to compute,
under the rules in paragraphs (a) and (b) of this section but without
regard to any exclusion allowable under paragraph (b) of 1.403(b)-1,
the amount which would be includible in the employee's gross income for
the taxable year if his entire beneficial interest in the annuity
contract had changed to a nonforfeitable interest during such year. The
amount that is includible (without regard to any exclusion allowed by
paragraph (b) of 1.403(b)-1) in the gross income of the employee for
the taxable year in which the change occurs is an amount equal to the
amount determined under the preceding sentence multiplied by the percent
of the employee's beneficial interest which changed to a nonforfeitable
interest during the taxable year. If at the time the employee's
interest changes to a nonforfeitable interest, the employer is an
organization described in section 501(a)(3) and exempt from tax under
section 501(a), then the amount that is includible in the employee's
gross income under this subparagraph is considered as an employer
contribution to which the exclusion provided in paragraph (b) of
1.403(b)-1 applies (see paragraph (b)(2) of 1.403(b)-1).
(2) Example. The provisions in paragraph (c)(1) of this section may
be illustrated by the following example:
Example. X organization purchased an annuity contract for A, one of
its employees who reports his income on a calendar year basis. X
contributed 1/3 of of amount necessary to purchase the contract before
January 1, 1958, and the remaining 2/3 after December 31, 1957. At the
time of the contributions, X was an organization exempt from tax under
section 501(a) and A's rights under the contract were forfeitable. The
annuity contract was not purchased as part of a qualified plan and A
made no contributions toward the purchase of the contract. On December
31, 1965, 50 percent of A's interest in the contract changed from a
forfeitable to a nonforfeitable interest, and on December 31, 1968, the
remaining 50 percent of A's interest in the contract changed to a
nonforfeitable interest. The cash surrender value of the contract was
$9,900 on December 31, 1965, and $12,000 on December 31, 1968. The
amount includible in A's gross income for 1965 and 1968 is computed as
follows --
(i) Amount which would have been includible if A's entire interest
had changed to a nonforfeitable interest (cash surrender value of
contract on December 31, 1965, attributable to contributions made after
December 31, 1957), 2/3 $9,900, $6,600.
(ii) Percent of A's interest that changed to a nonforfeitable
interest on December 31, 1965, 50 percent.
(iii) Amount includible in A's gross income for 1965 ((ii) (i)),
$3,300.
(iv) Amount which would have been includible if A's entire interest
had changed to a nonforfeitable interest (cash surrender value of
contract on December 31, 1968, attributable to contributions made after
December 31, 1957), 2/3 $12,000, $8,000.
(v) Percent of A's interest that changed to a nonforfeitable interest
on December 31, 1968, 50 percent.
(vi) Amount includible in A's gross income for 1968 ((v) (iv)),
$4,500.
If, on December 31, 1965, X is an organization described in section
501(c)(3) and exempt from tax under section 501(a), then only so much of
the $3,300 as is not excludable under paragraph (b) of 1.403(b)-1 is
includible in A's gross income for 1965. Similarly, if, on December 31,
1968, X is an organization described in section 501(c)(3) and exempt
from tax under section 501(a), then only so much of the $4,000 as is not
excludable under paragraph (b) of 1.403(b)-1 is includible in A's gross
income for 1968.
(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat.
588; 68A Stat. 917; 26 U.S.C. 83 and 7805))
(T.D. 6783, 29 FR 18365, Dec. 24, 1964, as amended by T.D. 7554, 43
FR 31925, July 24, 1978)
26 CFR 1.404(a)-1 Contributions of an employer to an employees' trust
or annuity plan and compensation under a deferred payment plan; general
rule.
(a)(1) Section 404(a) prescribes limitations upon deductions for
amounts contributed by an employer under a pension, annuity, stock
bonus, or profit-sharing plan, or under any plan of deferred
compensation. It is immaterial whether the plan covers present
employees only, or present and former employees, or only former
employees. Section 404(a) also governs the deductibility of unfunded
pensions and death benefits paid directly to former employees or their
beneficiaries (see 1.404(a)-12). For taxable years beginning after
1962, certain self-employed individuals may be covered by pension,
annuity, or profit-sharing plans. For the rules relating to the
deduction of contributions on behalf of such individuals, see paragraph
(a)(2) of 1.404(a)-8 and 1.404(e)-1.
(2) Section 404(a) does not apply to a plan which does not defer the
receipt of compensation. Furthermore, section 404(a) does not apply to
deductions for contributions under a plan which is solely a dismissal
wage or unemployment benefit plan, or a sickness, accident,
hospitalization, medical expense, recreation, welfare, or similar
benefit plan, or a combination thereof. For example, if under a plan an
employer contributes 5 percent of each employee's compensation per month
to a fund out of which employees who are laid off will be paid benefits
for temporary periods, but employees who are not laid off have no rights
to the funds, such a plan is an unemployment benefit plan, and the
deductibility of the contributions to it is determined under section
162. As to the deductibility of such contributions, see 1.162-9.
(3) If, however, the contributions to a pension, profit-sharing,
stock bonus, or other plan of deferred compensation can be used to
provide any of the benefits referred to in subparagraph (2) of this
paragraph, then, except as provided in section 404(c), section 404(a)
applies to the entire contribution to the plan. Thus, if in the example
described in subparagraph (2) of this paragraph, the employer's
contribution on behalf of each employee is set up as a separate account,
and if any amount which remains in an employee's account at the time of
retirement is paid to him at such time, the deductibility of the
contributions to the plan is determined under section 404(a). For the
regulations for determining whether the benefits referred to in
subparagraph (2) of this paragraph can be included in a qualified
pension or profit-sharing plan, see 1.401-1(b).
(4) As to inclusion of full-time life insurance salesmen within the
class of persons considered to be employees, see section 7701(a)(20).
(b) In order to be deductible under section 404(a), contributions
must be expenses which would be deductible under section 162 (relating
to trade or business expenses) or 212 (relating to expenses for
production of income) if it were not for the provision in section 404(a)
that they are deductible, if at all, only under section 404(a).
Contributions may therefore be deducted under section 404(a) only to the
extent that they are ordinary and necessary expenses during the taxable
year in carrying on the trade or business or for the production of
income and are compensation for personal services actually rendered. In
no case is a deduction allowable under section 404(a) for the amount of
any contribution for the benefit of an employee in excess of the amount
which, together with other deductions allowed for compensation for such
employee's services, constitutes a reasonable allowance for compensation
for the services actually rendered. What constitutes a reasonable
allowance depends upon the facts in the particular case. Among the
elements to be considered in determining this are the personal services
actually rendered in prior years as well as the current year and all
compensation and contributions paid to or for such employee in prior
years as well as in the current year. Thus, a contribution which is in
the nature of additional compensation for services performed in prior
years may be deductible, even if the total of such contributions and
other compensation for the current year would be in excess of reasonable
compensation for services performed in the current year, provided that
such total plus all compensation and contributions paid to or for such
employee in prior years represents a reasonable allowance for all
services rendered by the employee by the end of the current year. A
contribution under a plan which is primarily for the benefit of
shareholders of the employer is not deductible. Such a contribution may
constitute a dividend within the meaning of section 316. See also
1.162-6 and 1.162-8. In addition to the limitations referred to above,
deductions under section 404(a) are also subject to further conditions
and limitations particularly provided therein.
(c) Deductions under section 404(a) are generally allowable only for
the year in which the contribution or compensation is paid, regardless
of the fact that the taxpayer may make his returns on the accrual method
of accounting. Exceptions are made in the case of overpayments as
provided in paragraphs (1), (3), and (7) of section 404(a), and, as
provided by section 404(a)(6), in the case of payments made by a
taxpayer on the accrual method of accounting not later than the time
prescribed by law for filing the return for the taxable year of accrual
(including extensions thereof). This latter provision is intended to
permit a taxpayer on the accrual method to deduct such accrued
contribution or compensation in the year of accrual, provided payment is
actually made not later than the time prescribed by law for filing the
return for the taxable year of accrual (including extensions thereof),
but this provision is not applicable unless, during the taxable year on
account of which the contribution is made, the taxpayer incurs a
liability to make the contribution, the amount of which is accruable
under section 461 for such taxable year. See section 461 and the
regulations thereunder. There is another exception in the case of
certain taxpayers who are required to make additional contributions as a
result of the Act of June 15, 1955 (Public Law 74, 84th Cong., 69 Stat.
134), and the regulations thereunder.
(T.D. 6500, 25 FR 11682, Nov. 26, 1960, as amended by T.D. 6676, 28
FR 10144, Sept. 17, 1963)
26 CFR 1.404(a)-1(T) Questions and answers relating to deductibility of
deferred compensation and deferred benefits for employees. (Temporary)
Q-1: How does the amendment of section 404(b) by the Tax Reform Act
of 1984 affect the deduction of contributions or compensation under
section 404(a)?
A-1: As amended by the Tax Reform Act of 1984, section 404(b)
clarifies that section 404(a) shall govern the deduction of
contributions paid and compensation paid or incurred by the employer
under a plan, or method or arrangement, deferring the receipt of
compensation or providing for deferred benefits to employees, their
spouses, or their dependents. See section 404(b) and 1.404(b)-1T.
Section 404 (a) and (d) requires that such a contribution or
compensation be paid or incurred for purposes of section 162 or 212 and
satisfy the requirements for deductibility under either of those
sections. However, notwithstanding the above, section 404 does not
apply to contributions paid or accrued with respect to a ''welfare
benefit fund'' (as defined in section 419(e)) after July 18, 1984, in
taxable years of employers (and payors) ending after that date. Also,
section 463 shall govern the deduction of vacation pay by a taxpayer
that has elected the application of such section. For rules relating to
the deduction of contributions paid or accured with respect to a welfare
benefit fund, see section 419, 1.419-1T and 1.419A-2T. For rules
relating to the deduction of vacation pay for which an election is made
under section 463, see 10.2 of this chapter and 1.463-1T.
(T.D. 8073, 51 FR 4320, Feb. 4, 1986)
26 CFR 1.404(a)-2 Information to be furnished by employer claiming
deductions; taxable years ending before December 31, 1971.
(a) For the first taxable year for which a deduction from gross
income is claimed under section 404(a) (1), (2), (3), or (7), the
employer must file the following information (unless such information
has been previously filed in accordance with the regulations under
section 23(p) of the Internal Revenue Code of 1939) for each plan
involved to establish that it meets the requirements of section 401(a)
or 404(a)(2), and that deductions claimed do not exceed the amount
allowable under paragraphs (1), (2), (3), and (7) of section 404(a), as
the case may be:
(1) Verified copies of all the instruments constituting or evidencing
the plan, including trust indentures, group annuity contracts, specimen
copy of each type of individual contract, and specimen copy of formal
announcement and comprehensive detailed description to employees, with
all amendments to any such instruments.
(2) A statement describing the plan which identifies it and which
sets forth the name or names of the employers, the effective date of the
plan and of any amendments thereto, the method of distribution or of
disbursing benefits (whether by trustee, insurance company, or
otherwise), the dates when the instruments or amendments were executed,
the date of formal announcement and the dates when comprehensive
detailed description of the plan and of each amendment thereto were made
available to employees generally, the dates when the plan and when the
trust or the contract evidencing the plan and of any amendments thereto
were put into effect so that contributions thereunder were irrevocable
and a summary of the provisions and rules relating to --
(i) Employee eligibility requirements for participation in the plan,
(ii) Employee contributions,
(iii) Employer contributions,
(iv) The basis or formula for determining the amount of each type of
benefit and the requirements for obtaining such benefits and the vesting
conditions,
(v) The medium of funding (e. g., self-insured, unit purchase group
annuity contract, individual level annual premium retirement endowment
insurance contracts, etc.) and, if not wholly insured, the medium of
contributions and the kind of investments, and
(vi) The discontinuance or modification of the plan and distributions
or benefit payments upon liquidation or termination.
(3) A tabulation in columnar form showing the information specified
below with respect to each of the 25 highest paid employees covered by
the plan in the taxable year, listed in order of their nondeferred
compensation (where there are several plans of deferred compensation,
the information for each of the plans may be shown on a single
tabulation without repetition of the information common to the several
plans):
(i) Name.
(ii) Whether an officer.
(iii) Percentage of each class of stock owned directly or indirectly
by the employee or members of his family.
(iv) Whether the principal duties consist in supervising the work of
other employees.
(v) Year of birth.
(vi) Length of service for employer to the close of the year.
(vii) Total nondeferred compensation paid or accrued during the
taxable year with a breakdown of such compensation into the following
components:
(a) Basic compensation and overtime pay,
(b) Other direct payments, such as bonuses and commissions,
(c) Compensation paid other than in cash, such as goods, services,
insurance not directly related to the benefits or provided from funds
under the plan, etc.
(viii) Amount allocated during the year for the benefit of the
employee or his beneficiary (including any insurance provided thereby or
directly related thereto), less the employee's contributions during the
year, under each other plan of deferred compensation.
(ix) Amount allocated during the year for the benefit of the employee
or his beneficiary (including any insurance provided thereby or directly
related thereto), less the employee's contributions during the year,
under the plan. If a profit-sharing or stock bonus plan, also a
breakdown of such amounts into the following components:
(a) Amounts originally allocated in the year, and
(b) Amounts reallocated in the year.
(x) Amounts of employee contributions during the year under the plan,
(xi) If a pension or annuity plan,
(a) The retirement age and date and the form of the retirement
benefit,
(b) The annual rate or amount of the retirement benefit, and
(c) The aggregate of all of the employee's contributions under the
plan,
all based, in the case of an employee who is not on retirement
benefit under the plan, upon the assumption of his continued employment
at his current rate of compensation until his normal retirement age (or
the end of the current year if later) and retirement on such date with
the normal form of retirement benefit under the plan.
(4) The following totals:
(i) Total nondeferred compensation paid or accrued during the taxable
year for all employees covered under the plan and also for all employees
of the employer.
(ii) Total amount allocated during the year for the benefit of
employees, former or retired employees, or their beneficiaries
(including any insurance provided thereby or directly related thereto),
less employee contributions during the year under the plan and, if a
profit-sharing or stock bonus plan, also a breakdown of such total into
the following components:
(a) Amount originally allocated in the year, and
(b) Amount reallocated in the year.
(5) A schedule showing the total number of employees as of the close
of the year for each of the following groups, based on reasonable
estimates:
(i) All employees ineligible for coverage under the plan because of
requirements as to employment classification, specifying the reasons
applicable to the group (as, for example, temporary, seasonal, part
time, hourly pay basis, etc.).
(ii) All employees ineligible for coverage under the plan because of
requirements as to length of service and not included in subdivision (i)
of this subparagraph.
(iii) All employees ineligible for coverage under the plan because of
requirements as to minimum age and not included in subdivision (i) or
(ii) of this subparagraph.
(iv) All employees ineligible for coverage under the plan solely
because of requirements as to minimum rate of compensation.
(v) All employees ineligible for coverage under the plan other than
those employees included in subdivision (i), (ii), (iii), or (iv) of
this subparagraph, specifying the reason applicable to the group.
(vi) All employees ineligible for coverage under the plan for any
reasons, which should be the sum of subdivisions (i) to (v), inclusive,
of this subparagraph.
(vii) All employees eligible for coverage but not covered under the
plan.
(viii) All employees covered under the plan.
(ix) All employees of the employer, which should be the sum of
subdivisions (vi), (vii), and (viii) of this subparagraph.
If it is claimed that the requirements of section 401(a)(3)(A) are
satisfied, also the data and computations necessary to show that such
requirements are satisfied.
(6) In the case of a trust, a detailed balance sheet and a detailed
statement of receipts and disbursements during the year; in the case of
a nontrusteed annuity plan, a detailed statement of the names of the
insurers, the contributions paid by the employer and by the employees,
and a statement as to the amounts and kinds of premium refunds or
similar credits made available and the disposition of such credits in
the year.
(7) If a pension or annuity plan, a detailed description of all the
methods, factors, and assumptions used in determining costs and in
adjusting the costs for actual experience under the plan (including any
loadings, contingency reserves, or special factors and the basis of any
insured costs or liabilities involved therein) explaining their source
and application in sufficient detail to permit ready analysis and
verification thereof, and, in the case of a trust, a detailed
description of the basis used in valuing the investments held.
(8) A statement of the applicable limitations under section 404(a)
(1), (2), (3), or (7) and an explanation of the method of determining
such limitations, a summary of the data, and a statement of computations
necessary to determine the allowable deductions for the taxable year.
Also, in the case of a pension or annuity plan, a summary of the costs
or liabilities and adjustments for the year under the plan based on the
application of the methods, factors, and assumptions used under the
plan, in sufficient detail to permit ready verification of the
reasonableness thereof.
(9) A statement of the contributions paid under the plan for the
taxable year showing the date and amount of each payment. Also, a
summary of the deductions claimed for the taxable year for the plan with
a breakdown of the deductions claimed into the following components:
(i) For contributions paid in the taxable year before giving effect
to the provisions of paragraph (7) of section 404(a).
(ii) For contributions paid in prior taxable years beginning after
December 31, 1941, in accordance with the carryover provisions of
paragraphs (1) and (3) of section 404(a), before giving effect to the
provisions of paragraph (7) thereof, and in accordance with the
carryover provisions of section 404(d).
(iii) Any reductions or increases in the deductions in accordance
with the provisions of paragraph (7) of section 404(a). However, if the
information in this subdivision is filed prior to the filing of the
information required by subparagraph (8) of this paragraph, then, in
determining the limit of deduction under paragraph (7) of section
404(a), the applicable percentage of the compensation otherwise paid or
accrued during the year may be used.
(b) For taxable years subsequent to the year for which all of the
applicable information under paragraph (a) of this section (or
corresponding provisions of prior regulations) has been filed,
information is to be filed only to the following extent:
(1) If there is any change in the plan, instruments, methods,
factors, or assumptions upon which the data and information specified in
paragraph (a) (1), (2), or (7) of this section are based, a detailed
statement explaining the change and its effect is to be filed only for
the taxable year in which the change is put into effect. However, if
there is no such change, unless otherwise requested by the district
director, merely a statement that there is no such change is to be
filed.
(2) The information specified in paragraph (a)(3) of this section
which has been filed for a taxable year, unless otherwise requested by
the district director and so long as the plan and the method and basis
of allocations are not changed, is to be filed for subsequent years only
to the extent of showing in the tabulation such information with respect
to employees who, at any time in the taxable year, own, directly or
indirectly, more than 5 percent of the voting stock, considering stock
so owned by an individual's spouse or minor lineal descendant as owned
by the individual for this purpose.
(3) The information specified in paragraph (a) (4), (5), (6), (8),
and (9) of this section.
In the case of corporate employers, the information required to be
submitted by this paragraph shall, except as otherwise provided by the
Commissioner, be filed on Form 2950 for taxable years ending on or after
December 31, 1961. In the case of other employers, the information
required to be submitted by this paragraph shall, except as otherwise
provided by the Commissioner, be filed on Form 2950 for taxable years
ending on or after December 31, 1962.
(c) If a deduction is claimed under section 404(a)(5) for the taxable
year, the taxpayer shall furnish such information as is necessary to
show that the deduction is not allowable under the other paragraphs of
section 404(a), that the amount paid is an ordinary and necessary
expense or an expense for the production of income, and that the
employees' rights to, or derived from, such employer's contribution or
such compensation were nonforfeitable at the time the contribution or
compensation was paid. In the case of corporate employers, the
information required to be submitted by this paragraph shall, except as
otherwise provided by the Commissioner, be filed on Form 2950 for
taxable years ending on or after December 31, 1961. In the case of
other employers, the information required to be submitted by this
paragraph shall, except as otherwise provided by the Commissioner, be
filed on Form 2950 for taxable years ending on or after December 31,
1962.
(d) For the purpose of the information required by this section,
contributions paid in a taxable year shall include those deemed to be so
paid in accordance with the provisions of section 404(a)(6) and shall
exclude those deemed to be paid in the prior taxable year in accordance
with such provisions. As used in this section, ''taxable year'' refers
to the taxable year of the employer and, unless otherwise requested by
the district director, a ''year'' which is not specified as a ''taxable
year'' may be taken as the taxable year of the employer or as the plan,
trust, valuation, or group contract year with respect to which
deductions are being claimed provided the same rule is followed
consistently so that there is no gap or overlap in the information
furnished for each item. In any case the date or period to which each
item of information furnished relates should be clearly shown. All the
information required by this section should be filed with the tax return
for the taxable year in which the deduction is claimed, except that,
unless sooner requested by the district director, such information,
other than that specified in paragraph (a)(4)(i) and (9) of this
section, may be filed within 12 months after the close of the taxable
year provided there is filed with the tax return a statement that the
information cannot reasonably be filed therewith, setting forth the
reasons therefor.
(e) In any case all the information and data required by this section
must be filed in the office of the district director in which the
employer files his tax returns and must be filed independently of any
information and data otherwise submitted in connection with a
determination of the qualification of the trust or plan under section
401(a). The district director may, in addition, require any further
information that he considers necessary to determine allowable
deductions under section 404 or qualification under section 401. For
taxable years ending on or before December 31, 1961, the district
director may waive the filing of such information required by this
section which he finds unnecessary in a particular case. For taxable
years ending after December 31, 1961, the Commissioner may waive the
filing of such information.
(f) Records substantiating all data and information required by this
section to be filed must be kept at all times available for inspection
by internal revenue officers at the main office or place of business of
the employer.
(g) In the case of a plan which covers employees, some or all of whom
are self-employed individuals and with respect to which a deduction is
claimed under section 404(a) (1), (2), (3), or (7), paragraphs (a) and
(b) of this section, and the provision of paragraph (d) of this section
relating to the time for filing the information required by this
section, shall not apply, but in lieu of the information required to be
submitted by paragraphs (a) and (b) of this section, the employer shall,
with the return for the taxable year in which the deduction is claimed,
submit the information required by the form provided by the Internal
Revenue Service for such purpose.
(h) When a custodial account forms a part of a plan for which a
deduction is claimed under section 404(a) (1), (2), (3), or (7), the
information which under this section is to be submitted with respect to
a qualified trust must be submitted with respect to such custodial
account. Thus, for purposes of this section --
(1) The term ''trust'' includes custodial account,
(2) The term ''trustee'' includes custodian, and
(3) The term ''trust indenture'' includes custodial agreement.
(i) Except as provided under 1.503(d)-1(a) and 601.201 of this
chapter (Statement of Procedural Rules) in the case of a request for the
determination of qualification of a trust under section 401 and
exemption under section 501, paragraphs (a) through (h) of this section
shall not apply for taxable years ending on or after December 31, 1971.
For information to be furnished for taxable years ending on or after
December 31, 1971, see 1.404(a)-2A.
(T.D. 6500, 25 FR 11683, Nov. 26, 1960, as amended by T.D. 6599, 27
FR 4475, May 10, 1962; T.D. 6676, 28 FR 10144, Sept. 17, 1963; T.D.
7165, 37 FR 5025, Mar. 9, 1972; T.D. 7168, 37 FR 5491, Mar. 16, 1972)
26 CFR 1.404(a)-2A Information to be furnished by employer; taxable
years ending on or after December 31, 1971, and before December 31,
1975.
(a) In general. For any taxable year ending on or after December 31,
1971, any employer who maintains a pension, annuity, stock bonus,
profit-sharing, or other funded plan of deferred compensation shall file
the forms prescribed by this section. An employer (including a
self-employed individual) maintaining such a plan shall furnish such
information as is required by the forms and the instructions relating
thereto. The forms shall be filed in the manner and at the time
prescribed under paragraph (c) of this section. See 1.404(a)-2 with
respect to information to be furnished for taxable years ending before
December 31, 1971. For purposes of this section, in the case of a plan
of several employers described in 1.401-1(d), each employer shall be
deemed to be maintaining a separate plan corresponding to the plan of
which the trust is a part. For information required to be furnished
with respect to a funded deferred compensation plan maintained by an
employer who is exempt from tax under section 501(a), see
1.6033-2(a)(2)(ii)(i).
(b) Forms. The forms prescribed by this section are:
(1) Form 4848, generally relating to information concerning the
qualification of the plan, and deductions for contributions made on
behalf of employees or self-employed individuals,
(2) Form 4849, generally relating to the financial position of the
trust, fund, or custodial or fiduciary account which is a part of the
plan, and
(3) For any taxable year ending on or after December 31, 1971, and
before December 31, 1972, Forms 2950 and 2950SE, relating to the
identification of plans to which an employer has made a contribution and
information with respect to a deduction for a contribution made on
behalf of a self-employed individual, respectively.
(c) Filing requirements. (1) Form 4848 shall be filed by the
employer for each taxable year during which he maintains a pension,
annuity, stock bonus, profit-sharing, or other funded plan of deferred
compensation. Such form shall be filed on or before the 15th day of the
5th month following the close of the employer's taxable year. For rules
relating to the extension of time for filing, see section 6081 and the
regulations thereunder and the instructions for Form 4848.
(2) Form 4849 shall be filed by the employer as an attachment to Form
4848 for each taxable year during which he maintains a pension, annuity,
stock bonus, profit-sharing, or other funded plan of deferred
compensation unless the employer (i) has been notified in writing that
Form 4849 will be filed by the fiduciary for such plan as an attachment
to Form 990-P or (ii) is not required to file Form 4849 under the
instructions relating thereto.
(3) For any taxable year ending on or after December 31, 1971, and
before December 31, 1972, Form 2950 shall be filed with the employer's
tax return for any such taxable year during which a pension, annuity,
stock bonus, profit-sharing, or other funded plan of deferred
compensation is maintained.
(4) For any taxable year ending on or after December 31, 1971, and
before December 31, 1972, Form 2950SE shall be filed by each
self-employed individual with his income tax return for any such taxable
year in which he claims a deduction for contributions made on his
behalf.
(d) Additional information. In addition to the information otherwise
required to be furnished by this section, the district director may
require any further information that he considers necessary to determine
allowable deductions under section 404 or qualification under section
401.
(e) Records. Records substantiating all data and information
required by this section to be filed must be kept at all times available
for inspection by internal revenue officers at the main office or place
of business of the employer.
(T.D. 7165, 37 FR 5025, Mar. 9, 1972, as amended by T.D. 7223, 37 FR
24748, Nov. 21, 1972; T.D. 7551, 43 FR 29292, July 7, 1978)
26 CFR 1.404(a)-3 Contributions of an employer to or under an
employees' pension trust or annuity plan that meets the requirements of
section 401(a); application of section 404(a)(1).
(a) If contributions are paid by an employer to or under a pension
trust or annuity plan for employees and the general conditions and
limitations applicable to deductions for such contributions are
satisfied (see 1.404(a)-1), the contributions are deductible under
section 404(a) (1) or (2) if the further conditions provided therein are
also satisfied. As used in this section, a ''pension trust'' means a
trust forming part of a pension plan and an ''annuity plan'' means a
pension plan under which retirement benefits are provided under annuity
or insurance contracts without a trust. This section is also applicable
to contributions to a foreign situs pension trust which could qualify
for exemption under section 501(a) except that it is not created or
organized and maintained in the United States. For the meaning of
''pension plan'' as used in this section, see paragraph (b)(1)(i) of
1.401-1. Where disability pensions, insurance, or survivorship benefits
incidental and directly related to the retirement benefits under a
pension or annuity plan are provided for the employees or their
beneficiaries by contributions under the plan, deductions on account of
such incidental benefits are also covered under section 404(a) (1) or
(2). See paragraph (b)(2) of 1.72-16 as to taxability to employees of
cost of incidental life insurance protection. Similarly, where medical
benefits described in section 401(h) as defined in paragraph (a) of
1.401-14 are provided for retired employees, their spouses, or their
dependents under the plan, deductions on account of such subordinate
benefits are also covered under section 404(a) (1) or (2). In order to
be deductible under section 404(a)(1), contributions to a pension trust
must be paid in a taxable year of the employer which ends with or within
a year of the trust for which it is exempt under section 501(a).
Contributions paid in such a taxable year of the employer may be carried
over and deducted in a succeeding taxable year of the employer in
accordance with section 404(a)(1)(D), whether or not such succeeding
taxable year ends with or within a taxable year of the trust for which
it is exempt under section 501(a). See 1.404(a)-7 for rules relating
to the limitation on the amount deductible in such a succeeding taxable
year of the employer. See 1.404(a)-8 as to conditions for deductions
under section 404(a)(2) in the case of an annuity plan. In either case,
the deductions are also subject to further limitations provided in
section 404(a)(1). The limitations provided in section 404(a)(1) are,
with an exception provided for certain years under subparagraph (A)
thereof (see 1.404(a)-4), based on the actuarial costs of the plan.
(b) In determining costs for the purpose of limitations under section
404(a)(1), the effects of expected mortality and interest must be
discounted and the effects of expected withdrawals, changes in
compensation, retirements at various ages, and other pertinent factors
may be discounted or otherwise reasonably recognized. A properly
weighted retirement age based on adequate analyses of representative
experience may be used as an assumed retirement age. Different basic
assumptions or rates may be used for different classes of risks or
different groups where justified by conditions or required by contract.
In no event shall costs for the purpose of section 404(a)(1) exceed
costs based on assumptions and methods which are reasonable in view of
the provisions and coverage of the plan, the funding medium, reasonable
expectations as to the effects of mortality and interest, reasonable and
adequate regard for other factors such as withdrawal and deferred
retirement (whether or not discounted) which can be expected to reduce
costs materially, reasonable expenses of operation, and all other
relevant conditions and circumstances. In any case, in determining the
costs and limitations, an adjustment shall be made on account of any
experience more favorable than that assumed in the basis of limitations
for prior years. Unless such adjustments are consistently made every
year by reducing the limitations otherwise determined by any decrease in
liability or cost arising from experience in the next preceding taxable
year which was more favorable than the assumptions on which the costs
and limitations were based, the adjustment shall be made by some other
method approved by the Commissioner.
(c) The amount of a contribution to a pension or annuity plan that is
deductible under section 404(a) (1) or (2) depends upon the methods,
factors, and assumptions which are used to compute the costs of the plan
and the limitation of section 404(a)(1) which is applied. Since the
amount that is deductible for one taxable year may affect the amount
that is deductible for other taxable years, the methods, factors, and
assumptions used in determining costs and the method of determining the
limitation which have been used for determining the deduction for a
taxable year for which the return has been filed shall not be changed
for such taxable year, except when the Commissioner determines that the
methods, factors, assumptions, or limitations were not proper, or except
when a change is necessitated by reason of the use of different methods,
factors, assumptions, or limitations for another taxable year. However,
different methods, factors, and assumptions, or a different method of
determining the limitation, if they are proper, may be used in
determining the deduction for a subsequent taxable year.
(d) Any expenses incurred by the employer in connection with the
plan, such as trustee's and actuary's fees, which are not provided for
by contributions under the plan are deductible by the employer under
section 162 (relating to trade or business expenses), or 212 (relating
to expenses for production of income) to the extent that they are
ordinary and necessary.
(e) In case deductions are allowable under section 404(a)(3), as well
as under section 404(a) (1) or (2), the limitations under section 404(a)
(1) and (3) are determined and applied without giving effect to the
provisions of section 404(a)(7) but the amounts allowable as deductions
are subject to the further limitations provided in section 404(a)(7).
See 1.404(a)-13.
(f)(1) Amounts contributed by an employer under the plan for the
funding of medical benefits described in section 401(h) as defined in
paragraph (a) of 1.401-14 must satisfy the general requirements which
are applicable to deductions allowable under section 404 and which are
set forth in 1.404(a)-1 including, for example, the requirements
described in paragraph (b) of such section. Accordingly, such amounts
must constitute an ordinary and necessary expense relating to either the
trade or business or the production of income and must not, when added
to all other compensation paid by the employer to the employee on whose
behalf such a contribution is made, constitute more than reasonable
compensation. However, in determining the amount which is deductible
with respect to contributions to provide retirement benefits under the
plan, amounts contributed for the funding of medical benefits described
in section 401(h) shall not be taken into consideration.
(2) The amounts deductible with respect to employer contributions to
fund medical benefits described in section 401(h) shall not exceed the
total cost of providing such benefits. The total cost of providing such
benefits shall be determined in accordance with any generally accepted
actuarial method which is reasonable in view of the provisions and
coverage of the plan, the funding medium, and other applicable
considerations. The amount deductible for any taxable year with respect
to such cost shall not exceed the greater of --
(i) An amount determined by distributing the remaining unfunded costs
of past and current service credits as a level amount, or as a level
percentage of compensation, over the remaining future service of each
employee, or
(ii) 10 percent of the cost which would be required to completely
fund or purchase such medical benefits.
In determining the amount deductible, an employer must apply either
subdivision (i) of this subparagraph for all employees or subdivision
(ii) of this subparagraph for all employees. If contributions paid by
an employer in a taxable year to fund such medical benefits under a
pension or annuity plan exceed the limitations of this subparagraph but
otherwise satisfy the conditions for deduction under section 404, then
the excess contributions are carried over and are deductible in
succeeding taxable years of the employer which end with or within
taxable years of the trust for which it is exempt under section 501(a)
in order of time to the extent of the difference between the amount paid
and deductible in each succeeding year and the limitation applicable to
such year under this subparagraph. For purposes of subdivision (i) of
this subparagraph, if the remaining future service of an employee is one
year or less, it shall be treated as one year.
(T.D. 6500, 25 FR 11685, Nov. 26, 1960, as amended by T.D. 6722, 29
FR 5073, Apr. 14, 1964; T.D. 7165, 37 FR 5025, Mar. 9, 1972)
26 CFR 1.404(a)-4 Pension and annuity plans; limitations under section
404(a)(1)(A).
(a) Subject to the applicable general conditions and limitations (see
1.404(a)-3), the initial limitation under section 404(a)(1)(A) is 5
percent of the compensation otherwise paid or accrued during the taxable
year to all employees under the pension or annuity plan. This initial
5-percent limitation applies to the first taxable year for which a
deduction is allowed for contributions to or under such a plan and also
applies to any subsequent year (other than one described in paragraph
(d) of this section) for which the 5-percent figure is not reduced as
provided in this section. For years to which the initial 5-percent
limitation applies, no adjustment on account of prior experience is
required. If the contributions do not exceed the initial 5-percent
limitation in the first taxable year to which this limitation applies,
the taxpayer need not submit actuarial data for such year.
(b) For the first taxable year following the first year to which the
initial 5-percent limitation applies, and for every fifth year
thereafter, or more frequently where preferable to the taxpayer, the
taxpayer shall submit with his return an actuarial certification of the
amount reasonably necessary to provide the remaining unfunded cost of
past and current service credits of all employees under the plan with a
statement explaining all the methods, factors, and assumptions used in
determining such amount. This amount may be determined as the sum of
(1) the unfunded past service cost as of the beginning of the year, and
(2) the normal cost for the year. Such costs shall be determined by
methods, factors, and assumptions appropriate as a basis of limitations
under section 404(a)(1)(C). Whenever requested by the district
director, a similar certification and statement shall be submitted for
the year or years specified in such request. The district director will
make periodical examinations of such data at not less than 5-year
intervals. Based upon such examinations the Commissioner will reduce
the limitation under section 404(a)(1)(A) below the 5-percent limitation
for the years with respect to which he finds that the 5-percent
limitation exceeds the amount reasonably necessary to provide the
remaining unfunded cost of past and current service credits of all
employees under the plan. Where the limitation is so reduced, the
reduced limitation shall apply until the Commissioner finds that a
subsequent actuarial valuation shows a change to be necessary. Such
subsequent valuation may be made by the taxpayer at any time and
submitted to the district director with a request for a change in the
limitation. See, however, paragraph (d) of this section with respect to
taxable years to which the limitation under section 404(a)(1)(A) does
not apply.
(c) For the purpose of limitations under section 404(a)(1)(A),
''compensation otherwise paid or accrued'' means all of the compensation
paid or accrued except that for which a deduction is allowable under a
plan that qualifies under section 401(a), including a plan that
qualifies under section 404(a)(2). Where two or more pension or annuity
plans cover the same employee, under section 404(a)(1)(A) the deductions
with respect to each such plan are subject to the limitations applicable
to the particular plan and the total deductions for all such plans are
also subject to the limitations which would be applicable thereto if
they constituted a single plan. Where, because of the particular
provisions applicable to a large class of employees under a plan, the
costs with respect to such employees are nominal in comparison with
their compensation, after the first year to which the initial 5-percent
limitation applies, deductions under section 404(a)(1)(A) are subject to
limitations determined by considering the plan applicable to such class
as if it were a separate plan. Deductions are allowable to the extent
of the applicable limitations under section 404(a)(1)(A) even where
these are greater than the applicable limitations under section
404(a)(1)(B) or section 404(a)(1)(C).
(d) The limitation under section 404(a)(1)(A) shall not be used for
purposes of determining the amount deductible for a taxable year of the
employer which ends with or within a taxable year of the pension trust
during which it is not exempt under section 501(a), or, in the case of
an annuity plan, during which it does not meet the requirements of
section 404(a)(2), or which ends after the trust or plan has terminated.
See 1.404(a)-7 for rules relating to the limitation which is
applicable for purposes of determining the amount deductible for such a
taxable year of the employer.
(T.D. 6500, 25 FR 11685, Nov. 26, 1960, as amended by T.D. 6534, 26
FR 515, Jan. 20, 1961)
26 CFR 1.404(a)-5 Pension and annuity plans; limitations under section
404(a)(1)- (B).
(a) Subject to the applicable general conditions and limitations (see
1.404(a)-3), under section 404(a)(1)(B), deductions may be allowed to
the extent of limitations based on costs determined by distributing the
remaining unfunded cost of the past and current service credits with
respect to all employees covered under the trust or plan as a level
amount or level percentage of compensation over the remaining service of
each such employee except that, as to any three individuals with respect
to whom more than 50 percent of such remaining unfunded cost
attributable to such individuals shall be distributed evenly over a
period of at least five taxable years. See, however, paragraph (e) of
this section with respect to taxable years to which the limitation under
section 404(a)(1)(B) does not apply.
(b) The statutory limitation for any taxable year under section
404(a)(1)- (B) is any excess of the amount of the costs described in
paragraph (a) of this section for the year over the amount allowable as
a deduction under section 404(a)(1)(A).
(c) For this purpose, such excess, adjusted for prior experience, may
be computed for each year as follows, all determinations being made as
of the beginning of the year:
(1) Determine the value of all benefits expected to be paid, after
the beginning of the year for all employees, any former employees, and
any other beneficiaries, then covered under the plan.
(2) If employees contribute under the plan, determine the value of
all contributions expected to be made after the beginning of the year by
employees then covered under the plan.
(3) Determine the value of all funds of the plan as of the beginning
of the year.
(4) Determine the amount remaining to be distributed as a level
amount or as a level percentage of compensation over the remaining
future service of each employee by subtracting from subparagraph (1) of
this paragraph the sum of subparagraphs (2) and (3) of this paragraph.
(5) Determine the value of all compensation expected to be paid after
the beginning of the year to all employees then covered under the plan.
(6) Determine an accrual rate for each employee by dividing
subparagraph (5) of this paragraph into subparagraph (4) of this
paragraph.
(7) Compute the excess under section 404(a)(1)(B) for the year by
multiplying the compensation paid to all employees covered under the
plan during the year by any excess of subparagraph (6) of this paragraph
over 5 percent. In general, where this method is used, the limitation
under section 404(a)(1)(B) will be equal to the excess so computed
without further adjustment on account of prior favorable experience,
provided all the factors and assumptions used are reasonable in view of
all applicable considerations (see 1.404(a)-3) and provided
subparagraph (5) of this paragraph is not less than five times the
annual rate of compensation in effect at the beginning of the year.
(d) Instead of determining the excess deductible under section
404(a)(1)(B) by the method shown in paragraph (c), such excess may be
based upon cost determined by some other method which is reasonable and
appropriate under the circumstances. Thus, such excess may be based on
the amounts necessary with respect to each individual covered employee
to provide the remaining unfunded cost of all his benefits under the
plan distributed as a level amount over the period remaining until the
normal commencement of his retirement benefits, in accordance with other
generally accepted actuarial methods which are reasonable and
appropriate in view of the provisions of the plan, the funding medium,
and other applicable considerations.
(e) The limitation under section 404(a)(1)(B) shall not be used for
purposes of determining the amount deductible for a taxable year of the
employer which ends with or within a taxable year of the pension trust
during which it is not exempt under section 501(a), or, in the case of
an annuity plan, during which it does not meet the requirements of
section 404(a)(2), or which ends after the trust or plan has terminated.
See 1.404(a)-7 for rules relating to the limitation which is
applicable for purposes of determining the amount deductible for such a
taxable year of the employer.
(T.D. 6500, 25 FR 11686, Nov. 26, 1960, as amended by T.D. 6534, 26
FR 515, Jan. 20, 1961)
26 CFR 1.404(a)-6 Pension and annuity plans; limitations under section
404(a)(1)(C).
(a) Application to a taxable year of the employer which ends with or
within a taxable year of the pension trust or annuity plan for which it
is exempt under section 501(a) or meets the requirements of section
404(a)(2). (1) The rules in this paragraph are applicable with respect
to the limitation under section 404(a)(1)(C) for taxable years of the
employer which end with or within a taxable year of the pension trust
for which it is exempt under section 501(a), or, in the case of an
annuity plan, during which it meets the requirements of section
404(a)(2). See paragraph (b) of this section for rules relating to the
limitation under section 404(a)(1)(C) for other taxable years of the
employer.
(2) Subject to the applicable general conditions and limitations (see
1.404(a)-3), in lieu of amounts deductible under the limitations of
section 404(a)(1)(A) and section 404(a)(1)- (B), deductions may be
allowed under section 404(a)(1)(C) to the extent of limitations based on
normal and past service or supplementary costs of providing benefits
under the plan. ''Normal cost'' for any year is the amount actuarially
determined which would be required as a contribution by the employer in
such year to maintain the plan if the plan had been in effect from the
beginning of service of each then included employee and if such costs
for prior years had been paid and all assumptions as to interest,
mortality, time of payment, etc., had been fulfilled. Past service or
supplementary cost at any time is the amount actuarially determined
which would be required at such time to meet all the future benefits
provided under the plan which would not be met by future normal costs
and employee contributions with respect to the employees covered under
the plan at such time.
(3) The limitation under section 404(a)(1)(C) for any taxable year to
which this paragraph applies is the sum of normal cost for the year plus
an amount not in excess of one-tenth of the past service or
supplementary cost as of the date the past service or supplementary
credits are provided under the plan. For this purpose, the normal cost
may be determined by any generally accepted actuarial method and may be
expressed either as (i) the aggregate of level amounts with respect to
each employee covered under the plan, (ii) a level percentage of payroll
with respect to each employee covered under the plan, or (iii) the
aggregate of the single premium or unit costs for the unit credits
accruing during the year with respect to each employee covered under the
plan, provided, in any case, that the method is reasonable in view of
the provisions and coverage of the plan, the funding medium, and other
applicable considerations. The limitation may include one-tenth of the
past service or supplementary cost as of the date the provisions
resulting in such cost were put into effect, but it is subject to
adjustments for prior favorable experience. See 1.404(a)-3. In any
case, past service or supplementary costs shall not be included in the
limitation for any year in which the amount required to fund fully or to
purchase such past service or supplementary credits has been deducted,
since no deduction is allowable for any amount (other than the normal
cost) which is paid in after such credits are fully funded or purchased.
(b) Application to a taxable year of the employer which does not end
with or within a taxable year of the pension trust or annuity plan for
which it is exempt under section 501(a) or meets the requirements of
section 404(a)(2). (1) The rules in this paragraph are applicable with
respect to the limitation under section 404(a)(1)(C) for taxable years
of the employer which end with or within a taxable year of the pension
trust during which it is not exempt under section 501(a), or, in the
case of an annuity plan, during which it does not meet the requirements
of section 404(a)(2), or which end after the trust or plan has
terminated. Since contributions paid in such taxable years of the
employer are not deductible under section 404(a) (1) or (2) (except as
provided in section 404(a)(6)), the limitation under section
404(a)(1)(C) for such taxable years relates only to the amount of any
excess contributions that may be carried over to such taxable years
under section 404(a)(1)(D).
(2) Subject to the applicable general conditions and limitations (see
1.404(a)-3), deductions may be allowed under section 404(a)(1)(C) for
taxable years of the employer to which this paragraph applies to the
extent of limitations based on past service or supplementary costs of
providing benefits under the plan. For definition of the ''past service
or supplementary cost at any time'', see paragraph (a)(2) of this
section.
(3) The limitation under section 404(a)(1)(C) for any taxable year to
which this paragraph applies is an amount not in excess of one-tenth of
the past service or supplementary cost as of the date the past service
or supplementary credits are provided under the plan. The limitation
under section 404(a)(1)(C) is subject, however, to adjustments for prior
favorable experience. In any case, no amounts are deductible under
section 404(a)(1)(C) for any year to which this paragraph applies if the
amount required to fund fully or to purchase the past service or
supplementary credits has been deducted in prior taxable years of the
employer.
(T.D. 6534, 26 FR 515, Jan. 20, 1961)
26 CFR 1.404(a)-7 Pension and annuity plans; contributions in excess
of limitations under section 404(a)(1); application of section
404(a)(1)(D).
When contributions paid by an employer in a taxable year to or under
a pension or annuity plan exceed the limitations applicable under
section 404(a)(1) but otherwise satisfy the conditions for deduction
under section 404(a) (1) or (2), then in accordance with section
404(a)(1)(D), the excess contributions are carried over and are
deductible in succeeding taxable years of the employer in order of time
pursuant to the following rules:
(a) In the case of a succeeding taxable year of the employer which
ends with or within a taxable year of the pension trust during which it
is not exempt under section 501(a), or, in the case of an annuity plan,
during which it meets the requirements of section 404(a)(2), such excess
contributions are deductible to the extent of the difference between the
amount paid and deductible in such succeeding taxable year and the
limitation applicable to such year under section 404(a)(1) (A), (B), or
(C).
(b) In the case of a succeeding taxable year of the employer which
ends with or within a taxable year of the pension trust during which it
is not exempt under section 501(a), or, in the case of an annuity plan,
during which it does not meet the requirements of section 404(a)(2), or
which ends after the trust or plan has terminated, such excess
contributions are deductible to the extent of the limitation applicable
to such year under section 404(a)(1)(C) (see paragraph (b) of
1.404(a)-6).
The provisions of section 404(a)(1)(D) are to be applied before
giving effect to the provisions of section 404(a)(7) for any year. The
carryover provisions of section 404(a)(1)(D), before effect has been
given to section 404(a)(7), may be illustrated by the following example
for a plan put into effect in a taxable year ending December 31, 1954:
26 CFR 1.404(a)-8 Contributions of an employer under an employees'
annuity plan which meets the requirements of section 401(a);
application of section 404(a)(2).
(a) If contributions are paid by an employer under an annuity plan
for employees and the general conditions and limitations applicable to
deductions for such contributions are satisfied (see 1.404(a)-1), the
contributions are deductible under section 404(a)(2) if the further
conditions provided therein are satisfied. For the meaning of ''annuity
plan'' as used here, see 1.404(a)-3. In order that contributions by the
employer may be deducted under section 404(a)(2), all of the following
conditions must be satisfied:
(1) The contributions must be paid toward the purchase of retirement
annuities (or for disability, severance, insurance, survivorship
benefits incidental and directly related to such annuities, or medical
benefits described in section 401(h) as defined in paragraph (a) of
1.404(h)-1) under an annuity plan for the exclusive benefit of the
employer's employees or their beneficiaries.
(2) The contributions must be paid in a taxable year of the employer
which ends with or within a year of the plan for which it meets the
applicable requirements set forth in section 401(a) (3), (4), (5), (6),
(7), (8), (11), (12), (13), (14), (15), (16), and (19). In the case of
a plan which covers a self-employed individual, the contributions must
be paid in a taxable year of the employer which ends with or within a
year of the plan for which it also meets the requrements of section
401(a), (9), (10), (17), and (18) and of section 401(d) (other than
paragraph (1)). In the case of a plan which covers a
shareholder-employee within the meaning of section 1379(d), the
contributions must be paid in a taxable year of the employer which ends
with or within a year of the plan for which it also meets the
requirements of section 401(a) (17) and (18). See section 401(a) and
the regulations thereunder for the requirements and the applicable
effective dates of the respective paragraphs set forth in section
401(a). Any contributions of an employer which are paid in a taxable
year of the employer ending with or within a year of the plan for which
it meets the applicable requirements of section 401 may be carried over
and deducted in a succeeding taxable year of the employer in accordance
with section 404(a)(1)(D), whether or not such succeeding taxable year
ends with or within a taxable year of the plan for which it meets the
requirements set out in section 401 (a) and (d). See section 401(b) and
the regulations thereunder for special rules allowing certain plan
amendments to be given retroactive effect. See section 404(a)(6) for a
special rule for determining the time when a contribution is deemed to
have been made.
(3) There must be a definite written arrangement between the employer
and the insurer that refunds of premiums, if any, shall be applied
within the taxable year of the employer in which received or within the
next succeeding taxable year toward the purchase of retirement annuities
(or for disability, severance, insurance, survivorship benefits
incidental and directly related to such annuities, or medical benefits
described in section 401(h) as defined in paragraph (a) of 1.401(h)-1
under the plan. For the purpose of this condition, ''refunds of
premiums'' means payments by the insurer on account of credits such as
dividends, experience rating credits, or surrender or cancellation
credits. The arrangement may be in the form of contract provisions or
written directions of the employer or partly in one form and partly in
another. This condition will be considered satisfied where --
(i) All credits are applied regularly, as they are determined, toward
the premiums next due under the contracts before any further employer
contributions are so applied, and
(ii) Under the arrangement,
(A) No refund of premiums may be made during continuance of the plan
unless applied as aforesaid, and
(B) If refunds of premiums may be made after discontinuance or
termination, whichever is applicable, of the plan on account of
surrenders or cancellations before all retirement annuities provided
under the plan with respect to service before its discontinuance or
termination have been purchased, such refunds will be applied in the
taxable year of the employer in which received, or in the next
succeeding taxable year, to purchase retirement annuities for employees
by a procedure which does not contravene the conditions of section
401(a)(4). If the plan also includes medical benefits described in
section 401(h) as defined in paragraph (a) of 1.401(h)-1, any refund of
premiums attributable to such benefits must, in accordance with these
rules, be applied toward the purchase of medical benefits described in
section 401(h).
(4) Any amounts described in subparagraph (3) of this paragraph which
are attributable to contributions on behalf of a self-employed
individual must be applied toward the purchase of retirement benefits.
Amounts which are so applied are not contributions and thus are not
taken into consideration in determining --
(i) The amount deductible with respect to contributions on his
behalf, nor
(ii) In the case of an owner-employee, the maximum amount of
contributions that may be made on his behalf.
(b) Where the above conditions are satisfied, the amounts deductible
under section 404(a)(2) are governed by the limitations provided in
section 404(a)(1). See 1.404(a)-3 to 1.404(a)-7, inclusive.
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C.
411))
(T.D. 7501, 42 FR 42321, Aug. 23, 1977)
26 CFR 1.404(a)(8)-1T Deductions for plan contributions on behalf of
self-employed individuals. (Temporary)
Q: How does the amendment to section 404(a)(8)(D), made by section
713(d)(6) of the Tax Reform Act of 1984 (TRA of 1984), affect section
404(a)(8)(C)?
A: In applying the rules of section 404(a)(8)(C), the Service will
treat the amendment to section 404(a)(8)(D) as also having been made to
section 404(a)(8)(C), pending enactment of technical corrections to TRA
of 1984. The effect of treating the amendment as having also been made
to section 404(a)(8)(C) is to increase the amount of contributions on
behalf of a self-employed individual that will be treated as satisfying
section 162 or 212. Generally, therefore, a contribution on behalf of a
self-employed individual is treated as satisfying section 162 or 212 if
it is not in excess of the individual's earned income for the year,
determined without regard to the deduction allowed by section 404 for
the self-employed individual's contribution.
(T.D. 8073, 51 FR 4321, Feb. 4, 1986)
26 CFR 1.404(a)-9 Contributions of an employer in an employees'
profit-sharing or stock bonus trust that meets the requirements of
section 401(a); application of section 404(a)(3)(A).
(a) If contributions are paid by an employer to a profit-sharing or
stock bonus trust for employees and the general conditions and
limitations applicable to deductions for such contributions are
satisfied (see 1.404(a)-1), the contributions are deductible under
section 404(a)(3)(A) if the further conditions provided therein are also
satisfied. In order to be deductible under the first, second, or third
sentence of section 404(a)(3)(A), the contributions must be paid (or
deemed to have been paid under section 404(a)(6)) in a taxable year of
the employer which ends with or within a taxable year of the trust for
which it is exempt under section 501(a) and the trust must not be
designed to provide retirement benefits for which the contributions can
be determined actuarially. Excess contributions paid in such a taxable
year of the employer may be carried over and deducted in a succeeding
taxable year of the employer in accordance with the third sentence of
section 404(a)(3)(A), whether or not such succeeding taxable year ends
with or within a taxable year of the trust for which it is exempt under
section 501(a). This section is also applicable to contributions to a
foreign situs profit-sharing or stock bonus trust which could qualify
for exemption under section 501(a) except that it is not created or
organized and maintained in the United States.
(b) The amount of deductions under section 404(a)(3)(A) for any
taxable year is subject to limitations based on the compensation
otherwise paid or accrued by the employer during such taxable year to
employees who are beneficiaries under the plan. For purposes of
computing this limitation, the following rules are applicable:
(1) In the case of a taxable year of the employer which ends with or
within a taxable year of the trust for which it is exempt under section
501(a), the limitation shall be based on the compensation otherwise paid
or accrued by the employer during such taxable year of the employer to
the employees who, in such taxable year of the employer, are
beneficiaries of the trust funds accumulated under the plan.
(2) In the case of a taxable year of the employer which ends with or
within a taxable year of the trust during which it is not exempt under
section 501(a), or which ends after the trust has terminated, the
limitation shall be based on the compensation otherwise paid or accrued
by the employer during such taxable year of the employer to the
employees who, at any time during the one-year period ending on the last
day of the last calendar month during which the trust was exempt under
section 501(a), were beneficiaries of the trust funds accumulated under
the plan.
For purposes of this paragraph, ''compensation otherwise paid or
accrued'' means all of the compensation paid or accrued except that for
which a deduction is allowable under a plan that qualifies under section
401(a), including a plan that qualifies under section 404(a)(2). The
limitations under section 404(a)(3)(A) apply to the total amount
deductible for contributions to the trust regardless of the manner in
which the funds of the trust are invested, applied, or distributed, and
no other deduction is allowable on account of any benefits provided by
contributions to the trust or by the funds thereof. Where contributions
are paid to two or more profit-sharing or stock bonus trusts satisfying
the conditions for deduction under section 404(a)(3)(A), such trusts are
considered as a single trust in applying these limitations.
(c) The primary limitation on deductions for a taxable year is 15
percent of the compensation otherwise paid or accrued by the employer
during such taxable year to the employees who are beneficiaries under
the plan. See paragraph (b) of this section for rules for determining
who are the beneficiaries under the plan.
(d) In order that the deductions may average 15 percent of
compensation otherwise paid or accrued over a period of years, where
contributions in some taxable year are less than the primary limitation
but contributions in some succeeding taxable year exceed the primary
limitation, deductions in each succeeding year are subject to a
secondary limitation instead of to the primary limitation. The
secondary limitation for any year is equal to the lesser of (1) twice
the primary limitation for the year, or (2) any excess of (i) the
aggregate of the primary limitations for the year and for all prior
years over (ii) the aggregate of the deductions allowed or allowable
under the limitations provided in section 404(a)(3)(A) for all prior
years. Since contributions paid into a profit-sharing or stock bonus
trust are deductible under section 404(a)(3)(A) only if they are paid
(or deemed to have been paid under section 404(a)(6)) in a taxable year
of the employer which ends with or within a taxable year of the trust
for which it is exempt under section 501(a), the secondary limitation
described in this paragraph is not applicable with respect to
determining amounts deductible for a taxable year of the employer which
ends with or within a taxable year of the trust during which it is not
exempt under section 501(a), or which ends after the trust has
terminated. See paragraph (e) of this section for rules relating to
amounts which are deductible in such a taxable year.
(e) In any case when the contributions in a taxable year exceed the
amount allowable as a deduction for the year under section 404(a)(3)(A),
the excess is deductible in succeeding taxable years, in order of time,
in accordance with the following limitations:
(1) If the succeeding taxable year ends with or within a taxable year
of the trust for which it is exempt under section 501(a), such excess is
deductible in any such succeeding taxable year in which the
contributions are less than the primary limitation for that year; but
the total deduction for such succeeding taxable year cannot exceed the
lesser of (i) the primary limitation for such year, or (ii) the sum of
the contributions in such year and the excess contributions not deducted
under the limitations of section 404(a)(3)(A) for prior years.
(2) If the succeeding taxable year ends with or within a taxable year
of the trust during which it is not exempt under section 501(a), or if
such succeeding taxable year ends after the trust has terminated, the
total deduction for such succeeding taxable year cannot exceed the
lesser of (i) the primary limitation for such succeeding taxable year,
or (ii) the excess contributions not deducted under the limitations of
section 404(a)(3)(A) for prior years.
In no case, however, are excess contributions deductible in a
succeeding taxable year if such contributions were not paid (or deemed
to have been paid under section 404(a)(6)) in a taxable year of the
employer which ends with or within a taxable year of the trust for which
it is exempt under section 501(a).
(f) In case deductions are allowable under section 404(a) (1) or (2),
as well as under section 404(a)(3)(A), the limitations under section
404(a) (1) and (3)(A) are determined and applied without giving effect
to the provisions of section 404(a)(7), but the amounts allowable as
deductions are subject to the further limitations provided in section
404(a)(7). See 1.404(a)-13.
(g) The provisions of section 404(a)(3)(A) before giving effect to
section 404(a)(7), may be illustrated as follows:
(T.D. 6500, 25 FR 11687, Nov. 26, 1960, as amended by T.D. 6534, 26
FR 516, Jan. 20, 1961)
26 CFR 1.404(a)-10 Profit-sharing plan of an affiliated group;
application of section 404(a)(3)(B).
(a) Section 404(a)(3)(B) allows a corporation a deduction to the
extent provided in paragraphs (b) and (c) of this section for a
contribution which it makes for another corporation to a profit-sharing
plan or a stock bonus plan under which contributions are determined by
reference to profits, provided the following tests are met:
(1) The corporation for which the contribution is made and the
contributing corporation are members of an affiliated group of
corporations as defined in section 1504, relating to the filing of
consolidated returns, and both such corporations participate in the
plan. However, it is immaterial whether all the members of such group
participate in the plan.
(2) The corporation for which the contribution is made is required
under the plan to make the contribution, but such corporation is
prevented from making such contribution because it has neither current
nor accumulated earnings or profits, or because its current and
accumulated earnings or profits are insufficient to make the required
contribution. To the extent that such a corporation has any current or
accumulated earnings or profits, it is not considered to be prevented
from making its required contribution to the plan.
(3) The contribution is made out of the current or accumulated
earnings or profits of the contributing corporation.
(b) The amount that is deductible under section 404(a)(3)(B) is
determined by applying the rules of section 404(a)(3)(A) and 1.404(a)-9
as if the contribution were made by the corporation for which it is
made. For example, the primary limitation described in paragraph (e) of
1.404(a)-9 is determined by reference to the compensation otherwise
paid or accrued to the employees of the corporation for which the
contribution is made, and the secondary limitation described in
paragraph (d) of 1.404(a)-9 and the contribution carryover described in
paragraph (c) of 1.404(a)-9 are determined by reference to the prior
contributions and deductions of such corporation. The contributing
corporation may deduct the amount so determined subject to the
limitations contained in paragraph (c) of this section. The
contributing corporation shall not treat such amount as a contribution
made by it in applying the rules of section 404(a)(3)(A) and 1.404(a)-9
either for the taxable year for which the contribution is made or for
succeeding taxable years. The corporation for which the contribution is
made shall treat the contribution as having been made by it in applying
the rules of section 404(a)(3)(A) and 1.404(a)-9 for succeeding taxable
years.
(c) The allowance of the deduction under section 404(a)(3)(B) does
not depend upon whether the affiliated group does or does not file a
consolidated return. If a consolidated return is filed, it is
immaterial which of the participating corporations makes the
contribution and takes the deduction or how the contribution or the
deduction is allocated among them. However, if a consolidated return is
not filed, the contribution which is deductible under section
404(a)(3)(B) by each contributing corporation shall be limited to that
portion of its total current and accumulated earnings or profits
(adjusted for its contribution deductible without regard to section
404(a)(3)(B)) which the prevented contribution bears to the total
current and accumulated earnings or profits of all the participating
members of the group having such earnings or profits (adjusted for all
contributions deductible without regard to section 404(a)(3)(B)). For
the purpose of this section, current earnings or profits shall be
computed as of the close of the taxable year without diminution by
reason of any dividends during the taxable year, and accumulated
earnings or profits shall be computed as of the beginning of the taxable
year.
(d) The application of section 404(a)(3)(B) may be illustrated by the
following example in which the affiliated group does not file a
consolidated return:
(T.D. 6500, 25 FR 11688, Nov. 26, 1960)
26 CFR 1.404(a)-11 Trusts created or organized outside the United
States; application of section 404(a)(4).
In order that a trust may constitute a qualified trust under section
401(a) and be exempt under section 501(a), it must be created or
organized in the United States and maintained at all times as a domestic
trust. See paragraph (a) of 1.401-1. Paragraph (4) of section 404(a)
provides, however, that an employer which is a resident, a corporation,
or other entity of the United States, making contributions to a foreign
stock bonus, pension, or profit-sharing trust, shall be allowed
deductions for such contributions, under the applicable conditions and
within the prescribed limits of section 404(a), if such foreign trust
would qualify for exemption under section 501(a) except for the fact
that it is a trust created, organized, or maintained outside the United
States. Moreover, if a nonresident alien individual, foreign
corporation, or other entity is engaged in trade or business within the
United States and makes contributions to a foreign stock bonus, pension,
or profit-sharing trust, which would qualify under section 401(a) and be
exempt under section 501(a) except that it is created, organized, or
maintained outside the United States, such contributions are deductible
subject to the conditions and limitations of section 404(a) and to the
extent allowed by section 873 or 882(c).
(T.D. 6500, 25 FR 11689, Nov. 26, 1960)
26 CFR 1.404(a)-12 Contributions of an employer under a plan that does
not meet the requirements of section 401(a); application of section
404(a)(5).
(a) In general. Section 404(a)(5) covers all cases for which
deductions are allowable under section 404(a) (for contributions paid by
an employer under a stock bonus, pension, profit sharing, or annuity
plan or for any compensation paid on account of any employee under a
plan deferring the receipt of such compensation) but not allowable under
paragraph (1), (2), (3), (4), or (7) of such section. For the rules
with respect to the taxability of an employee when rights under a
nonexempt trust become substantially vested, see section 402(b) and the
regulations thereunder.
(b) Contributions made after August 1, 1969 -- (1) In general. A
deduction is allowable for a contribution paid after August 1, 1969,
under section 404(a)(5) only in the taxable year of the employer in
which or with which ends the taxable year of an employee in which an
amount attributable to such contribution is includible in his gross
income as compensation, and then only to the extent allowable under
section 404(a). See 1.404(a)-1. For example, if an employer A
contributes $1,000 to the account of its employee E for its taxable
(calendar) year 1977, but the amount in the account attributable to that
contribution is not includible in E's gross income until his taxable
(calendar) year 1980 (at which time the includible amount is $1,150),
A's deduction for that contribution is $1,000 in 1980 (if allowable
under section 404(a)). For purposes of this (1), a contribution is
considered to be so includible where the employee or his beneficiary
excludes it from his gross income under section 101(b) or subchapter N.
To the extent that property of the employer is transferred in connection
with such a contribution, such transfer will constitute a disposition of
such property by the employer upon which gain or loss is recognized,
except as provided in section 1032 and the regulations thereunder. The
amount of gain or loss recognized from such disposition shall be the
difference between the value of such property used to measure the
deduction allowable under this section and the employer's adjusted basis
in such property.
(2) Special rule for unfunded pensions and certain death benefits.
If unfunded pensions are paid directly to former employees, such
payments are includible in their gross income when paid, and
accordingly, such amounts are deductible under section 404(a)(5) when
paid. Similarly, if amounts are paid as a death benefit to the
beneficiaries of an employee (for example, by continuing his salary for
a reasonable period), and if such amounts meet the requirements of
section 162 or 212, such amounts are deductible under section 404(a)(5)
in any case when they are not includible under the other paragraphs of
section 404(a).
(3) Separate accounts for funded plans with more than one employee.
In the case of a funded plan under which more than one employee
participates, no deduction is allowable under section 404(a)(5) for any
contribution unless separate accounts are maintained for each employee.
The requirement of separate accounts does not require that a separate
trust be maintained for each employee. However, a separate account must
be maintained for each employee to which employer contributions under
the plan are allocated, along with any income earned thereon. In
addition, such accounts must be sufficiently separate and independent to
qualify as separate shares under section 663(c). Nothing shall preclude
a trust which loses its exemption under section 501(a) from setting up
such acounts and meeting the separate account requirement of section
404(a)(5) with respect to the taxable years in which such accounts are
set up and maintained.
(c) Contributions paid on or before August 1, 1969. No deduction is
allowable under section 404(a)(5) for any contribution paid on or before
August 1, 1969, by an employer under a stock bonus, pension,
profit-sharing, or annuity plan, or for any compensation paid on account
of any employee under plan deferring the receipt of such compensation,
except in the year when paid, and then only to the extent allowable
under section 404(a). See 1.404(a)-1. If payments are made under such
a plan and the amounts are not deductible under the other paragraphs of
section 404(a), they are deductible under section 404(a)(5) to the
extent that the rights of individual employees to, or derived from, such
employer's contribution or such compensation are nonforfeitable at the
time the contribution or compensation is paid. If unfunded pensions are
paid directly to former employees, their rights to such payments are
nonforfeitable, and accordingly, such amounts are deductible under
section 404(a)(5) when paid. Similarly, if amounts are paid as a death
benefit to the beneficiaries of an employee (for example, by continuing
his salary for a reasonable period), and if such amounts meet the
requirements of section 162 or 212, such amounts are deductible under
section 404(a)(5) in any case where they are not deductible under the
other paragraphs of section 404(a). As to what constitutes
nonforfeitable rights of an employee in other cases, see
1.402(b)-1(d)(2). If an amount is accrued but not paid during the
taxable year, no deduction is allowable for such amount for such year.
If an amount is paid during the taxable year to a trust or under a plan
and the employee's rights to such amount are forfeitable at the time the
amount is paid, no deduction is allowable for such amount for any
taxable year.
(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat.
588; 68A Stat. 917; 26 U.S.C. 83 and 7805))
(T.D. 7554, 43 FR 31926, July 24, 1978)
26 CFR 1.404(a)-13 Contributions of an employer where deductions are
allowable under section 404(a) (1) or (2) and also under section
404(a)(3); application of section 404(a)(7).
(a) Where deductions are allowable under section 404(a) (1) or (2) on
account of contributions under a pension or annuity plan and deductions
are also allowable under section 404(a)(3) for the same taxable year on
account of contributions to a profit-sharing or stock bonus trust, the
total deductions under these sections are subject to the provisions of
section 404(a)(7) unless no employee who is a beneficiary under the
trusts or plans for which deductions are allowable under section 404(a)
(1) or (2) is also a beneficiary under the trusts for which deductions
are allowable under section 404(a)(3). The provisions of section
404(a)(7) apply only to deductions for overlapping trusts or plans,
i.e., for all trusts or plans for which deductions are allowable under
section 404(a) (1), (2), or (3) except (1) any trust or plan for which
deductions are allowable under section 404(a) (1) or (2) and which does
not cover any employee who is also covered under a trust for which
deductions are allowable under section 404(a) (3), and (2) any trust for
which deductions are allowable under section 404(a)(3) and which does
not cover any employee who is also covered under a trust or plan for
which deductions are allowable under section 404(a) (1) or (2). The
limitations under section 404(a)(7) for any taxable year of the employer
are based on the compensation otherwise paid or accrued during the year
by the employer to all employees who, in such year, are beneficiaries of
the funds accumulated under one or more of the overlapping trusts or
plans. For purposes of the preceding sentence, if the taxable year of
the employer with respect to which the limitation is being computed ends
with or within a taxable year of any of the overlapping trusts or plans
during which any such trust is not exempt under section 501(a) or, in
the case of a plan, during which it does not meet the requirements of
section 404(a)(2), or if such taxable year of the employer ends after
any such trust or plan has terminated, then, with respect to such trust
or plan, those employees, and only those employees, who, at any time
during the one-year period ending on the last day of the last calendar
month during which the trust was exempt under section 501(a), or the
plan met the requirements of section 404(a)(2), were beneficiaries of
the funds accumulated under such trust or plan shall be considered the
beneficiaries of such trust or plan in the taxable year of the employer
with respect to which the limitation is being computed. For purposes of
this paragraph, ''compensation otherwise paid or accrued'' means all of
the compensation paid or accrued except that for which a deduction is
allowable under a plan that qualifies under section 401(a), including a
plan that qualifies under section 404(a)(2).
(b) Under section 404(a)(7), any excess of the total amount otherwise
deductible for the taxable year under section 404(a) (1), (2), or (3) as
contributions to overlapping trusts or plans over 25 percent of the
compensation otherwise paid or accrued during the year to all the
employees who are beneficiaries under such trusts or plans, is not
deductible for such year but is deductible for succeeding taxable years,
in order of time, so that the total deduction for contributions to such
trusts or plans for a succeeding taxable year is equal to the lesser of
--
(1) 30 percent of the compensation otherwise paid or accrued during
the taxable year to all the employees who are beneficiaries under such
trusts or plans in the year, or
(2) The sum of (i) the smaller of (a) 25 percent of the compensation
otherwise paid or accrued during the taxable year to all employees who
are beneficiaries under such trusts or plans in the year, or (b) the
total of the amounts otherwise deductible under section 404(a) (1), (2),
or (3) for the year for such trusts or plans and (ii) any carryover to
the year from prior years under section 404(a)(7), i.e., any excess
otherwise deductible under section 404(a) (1), (2), or (3), but not
deducted for a prior taxable year because of the limitations under
section 404(a)(7).
(c) The limitations under section 404(a)(7) are determined and
applied after all the limitations, deductions otherwise allowable, and
carryovers under section 404(a) (1), (2), and (3) have been determined
and applied, and, in particular, after effect has been given to the
carryover provision in section 404(a)(1)(D) and in the second and third
sentences of section 404(a)(3)(A). Where the limitations under section
404(a)(7) reduce the total amount deductible, the excess deductible in
succeeding years is treated as a carryover which is distinct from, and
additional to, any excess contributions carried over and deductible in
succeeding years under the provisions in section 404(a)(1)(D) or in the
third sentence of section 404(a)(3)(A). The application of the
provisions of section 404(a)(7) and the treatment of carryovers for a
case where the taxable years are calendar years and the overlapping
trusts or plans consist of a pension trust and a profit-sharing trust
put into effect in 1954 and covering the same employees may be
illustrated as follows:
(T.D. 6500, 25 FR 11689, Nov. 26, 1960, as amended by T.D. 6534, 26
FR 517, Jan. 20, 1961)
26 CFR 1.404(a)-14 Special rules in connection with the Employee
Retirement Income Security Act of 1974.
(a) Purpose of this section. This section provides rules for
determining the deductible limit under section 404(a)(1)(A) of the
Internal Revenue Code of 1954 for defined benefit plans.
(b) Definitions. For purposes of this section --
(1) Section 404(a). The term ''old section 404(a)'' means section
404(a) as in effect on September 1, 1974. Any reference to section 404
without the designation ''old'' is a reference to section 404 as amended
by the Employee Retirement Income Security Act of 1974.
(2) Ten-year amortization base. The term ''10-year amortization
base'' means either the past service and other supplementary pension and
annuity credits described in section 404(a)(1)(A)(iii) or any base
established in accordance with paragraph (g) of this section. A plan
may have several 10-year amortization bases to reflect different plan
amendments, changes in actuarial assumptions, changes in funding method,
and experience gains and losses of previous years.
(3) Limit adjustment. The term ''limit adjustment'' with respect to
any 10-year amortization base is the lesser of --
(i) The level annual amount necessary to amortize the base over 10
years using the valuation rate, or
(ii) The unamortized balance of the base,
in each case using absolute values (solely for the purpose of
determining which is the lesser). To compute the level amortization
amount, the base may be divided by the present value of an annuity of
one dollar, obtained from standard annuity tables on the basis of a
given interest rate (the valuation rate) and a known period (the
amortization period).
(4) Absolute value. The term ''absolute value'' for any number is
the value of that number, treating negative numbers as if they were
positive numbers. For example, the absolute value of 5 is 5 and the
absolute value of minus 3 is 3. On the other hand, the true value of
minus 3 is minus 3. This term is relevant to the computation of the
limit adjustment described in paragraph (b)(3) and the remaining
amortization period of combined bases described in paragraph (i)(3) of
this section.
(5) Valuation rate. The term ''valuation rate'' means the assumed
interest rate used to value plan liabilities.
(c) Use of plan in determining deductible limit for employer's
taxable year. Although the deductible limit applies for an employer's
taxable year, the deductible limit is determined on the basis of a plan
year. If the employer's taxable year coincides with the plan year, the
deductible limit for the taxable year is the deductible limit for the
plan year that coincides with that year. If the employer's taxable year
does not coincide with the plan year, the deductible limit under section
404(a)(1)(A) (i), (ii), or (iii) for a given taxable year of the
employer is one of the following alternatives:
(1) The deductible limit determined for the plan year commencing
within the taxable year.
(2) The deductible limit determined for the plan year ending within
the taxable year, or
(3) A weighted average of alternatives (1) and (2). Such an average
may be based, for example, upon the number of months of each plan year
falling within the taxable year.
The employer must use the same alternative for each taxable year
unless consent to change is obtained from the Commissioner under section
446 (e).
(d) Computation of deductible limit for a plan year -- (1) General
rules. The computation of the deductible limit for a plan year is based
on the funding methods, actuarial assumptions, and benefit structure
used for purposes of section 412, determined without regard to section
412(g) (relating to the alternative minimum funding standard), for the
plan year. The method of valuing assets for purposes of section 404
must be the same method of valuing assets used for purposes of section
412.
(2) Special adjustments of computations under section 412. To apply
the rules of this section (i.e., rules regarding the computation of
normal cost with aggregate type funding methods, unfunded liabilities,
and the full funding limitation described in paragraph (k) of the
section, where applicable) with respect to a given plan year in
computing deductible limits under section 404 (a)(1)(A), the following
adjustments must be made:
(i) There must be excluded from the total assets of the plan the
amount of any plan contribution for a plan year for which the plan was
qualified under section 401(a), 403(a) or 405(a) that has not been
previously deducted, even though that amount may have been credited to
the funding standard account under section 412(b)(3). In the case of a
plan using a spread gain funding method which maintains an unfunded
liability (e.g., the frozen initial liability method, but not the
aggregate method), the amount described in the preceding sentence must
be included in the unfunded liability of the plan.
(ii) There must be included in the total assets of the plan for a
plan year the amount of any plan contribution that has been deducted
with respect to a prior plan year, even though that amount is considered
under section 412 to be contributed in a plan year subsequent to that
prior plan year. In the case of a plan using a spread gain funding
method which does not maintain an unfunded liability, the amount
described in the preceding sentence must be excluded from the unfunded
liability of the plan.
The special adjustments described in paragraph (d)(2) (i) and (ii) of
this section apply on a year-by-year basis for purposes of section
404(a)(1)(A) only. Thus, the adjustments have no effect on the
computation of the minimum funding requirement under section 412.
(e) Special computation rules under section 404(a)(1)(A)(i) -- (1) In
general. For purposes of determining the deductible limit under section
404(a)(1)(A)(i), the deductible limit with respect to a plan year is the
sum of --
(i) The amount required to satisfy the minimum funding standard of
section 412(a) (determined without regard to section 412(g)) for the
plan year and
(ii) An amount equal to the includible employer contributions. The
term ''includible employer contributions'' means employer contributions
which were required by section 412 for the plan year immediately
preceding such plan year, and which were not deductible under section
404(a) for the prior taxable year of the employer solely because they
were not contributed during the prior taxable year (determine with
regard to section 404(a)(6)).
(2) Rule for an employer using alternative minimum funding standard
account and computing its deduction under section 404(a)(1)(A)(i). This
paragraph (e)(2) applies if the minimum funding requirements for the
plan are determined under the alternative minimum funding standard
described in section 412(g) for both the current plan year and the
immediately preceding plan year. In that case, the deductible limit
under section 404(a)(1)(A)(i) (regarding the minimum funding requirement
of section 412) for the current year is the sum of the amount determined
under the rules of paragraph (e)(1) of this section.
(i) Plus the charge under section 412(b)(2)(D), and
(ii) Less the credit under section 412(b)(3)(D),
that would be required if in the current plan year the use of the
alternative method were discontinued.
(f) Special computation rules under section 404(a)(1)(A) (ii) and
(iii) -- (1) In general. Subject to the full funding limitation
described in paragraph (k) of this section, the deductible limit under
section 404(a)(1)(A)(ii) and (iii) is the normal cost of the plan
(determined in accordance with paragraph (d) of this section).
(2) Adjustments in calculating limit under section 404
(a)(1)(A)(iii). In calculating the deductible limit under section
404(a)(1)(A)(iii), the normal cost of the plan is --
(i) Decreased by the limit adjustments to any unamortized bases
required by paragraph (g) of this section, for example, bases that are
due to a net experience gain, a change in actuarial assumptions, a
change in funding method, or a plan provision or amendment which
decreases the accrued liability of the plan, and
(ii) Increased by the limit adjustments of any unamortized 10-year
amortization bases required by paragraph (g) or (j) of this section, for
example, bases that are due to a net experience loss, a change in
actuarial assumptions, a change in funding method, or a plan provision
or amendment which increases the accrued liability.
(3) Timing for computations and interest adjustments under section
404(a)(1)(A) (ii) and (iii). Regardless of the actual time when
contributions are made to a plan, in computing the deductible limit
under section 404(a)(1)(A) (ii) and (iii) the normal cost and limit
adjustments shall be computed as of the date when contributions are
assumed to be made (''the computation date'') and adjusted for interest
at the valuation rate from the computation date to the earlier of --
(i) The last day of the plan year used to compute the deductible
limit for the taxable year, or
(ii) The last day of that taxable year. For additional provisions
relating to the timing of computations and interest adjustments, see
paragraph (h)(6) of this section (relating to the timing of computations
and interest adjustments in the maintenance of 10-year amortization
bases). For taxable years beginning before April 22, 1981, computations
under the preceding sentence may, as an alternative, be based on prior
published positions of the Internal Revenue Service under section
404(a).
(4) Special limit under section 404(a)(1)(A)(ii). If the deduction
for the plan year is determined solely on the basis of section
404(a)(1)(A)(ii) (that is, without regard to clauses (i) or (iii)), the
special limitation contained in section 404(a)(1)(A)(ii), regarding the
unfunded cost with respect to any three individuals, applies,
notwithstanding the rules contained in paragraphs (d)(2) and (f)(1) of
this section.
(g) Establishment of a 10-year amortization base -- (1) Experience
gains and losses. In the case of a plan valued by the use of a funding
method which is an immediate gain type of funding method (and therefore
separately amortizes rather than includes experience gains and losses as
a part of the normal cost of the plan), a 10-year amortization base must
be established in any plan year equal to the net experience gain or loss
required under section 412 to be determined with respect to that plan
year. The base is to be maintained in accordance with paragraph (h) of
this section. Such a base must not be established if the deductible
limit is determined by use of a funding method which is a spread gain
type of funding method (under which experience gains and losses are
spread over future periods as a part of the plan's normal cost).
Examples of the immediate gain type of funding method are the unit
credit method, entry age normal cost method, and the individual level
premium cost method. Examples of the spread gain type of funding method
are the aggregate cost method, frozen initial liability cost method, and
the attained age normal cost method.
(2) Change in actuarial assumptions. (i) If the creation of an
amortization base is required under the rules of section 412(b)
(2)(B)(v) or (3)(B)(iii) (as applied to the funding method used by the
plan), a 10-year amortization base must be established at the time of a
change in actuarial assumptions used to value plan liabilities. The
amount of the base is the difference between the accrued liability
calculated on the basis of the new assumptions and the accrued liability
calculated on the basis of the old assumptions. Both computations of
accrued liability are made as of the date of the change in assumptions.
(ii) A plan using a funding method of the spread gain type does not
directly determine an accrued liability. If a plan using such a method
is required under section 412(b) (2)(B)(v) or (3)(B)(iii) to create an
amortization base, it must establish a base as described in paragraph
(g)(2)(i) of this section for a change in actuarial assumptions by
determining an accrued liability on the basis of another funding method
(of the immediate gain type) that does determine an accrued liability.
(The aggregate method is an example of a funding method that is not
required under section 412(b) (2)(B)(v) or (3)(B)(iii) to create an
amortization base.) The funding method chosen to determine the accrued
liability of the plan in these cases must be the same method used to
establish all other 10-year amortization bases maintained by the plan,
if any. These bases must be maintained in accordance with paragraph (h)
of this section.
(3) Past service or supplemental credits. A 10-year base must be
established when a plan is established or amended, if the creation of an
amortizable base is required under the rules of section 412(b)(2)(B)
(ii) or (iii), or (b)(3)(B)(i) (as applied to the funding method used by
the plan). The amount of the base is the accrued liability arising
from, or the decrease in accrued liability resulting from, the
establishment or amendment of the plan. The base must be maintained in
accordance with paragraph (h) of this section.
(4) Change in funding method. If a change in funding method results
in an increase or decrease in an unfunded liability required to be
amortized under section 412, a 10-year base must be established equal to
the increase or decrease in unfunded liability resulting from the change
in funding method. The base must be maintained in accordance with
paragraph (h) of this section.
(h) Maintenance of 10-year amortization base -- (1) In general. Each
time a 10-year amortization base is established, whether by a change in
funding method, by plan amendment, by change in actuarial assumptions,
or by experience gains and losses, the base must, except as provided in
paragraph (i) of this section, be separately maintained in order to
determine when the unamortized amount of the base is zero. The sum of
the unamortized balances of all of the 10-year bases must equal the
plan's unfunded liability with the adjustments described in paragraph
(d) of this section, if applicable. When the unamortized amount of a
base is zero, the deductible limit is no longer adjusted to reflect the
amortization of the base.
(2) First year's base. See either paragraph (g) or paragraph (i) of
this section for rules applicable with respect to the first year of a
base.
(3) Succeeding year's base. For any plan year after the first year
of a base, the unamortized amount of the base is equal to --
(i) The unamortized amount of the base as of the valuation date in
the prior plan year, plus
(ii) Interest at the valuation rate from the valuation date in the
prior plan year to the valuation date in the current plan year on the
amount described in subdivision (i), minus
(iii) The contribution described in paragraph (h)(4) of this section
with respect to the base for the prior plan year.
The valuation date is the date as of which plan liabilities are
valued under section 412(c)(9). If such a valuation is performed less
often than annually for purposes of section 412, bases must be adjusted
for purposes of section 404 each year as of the date on which a section
412 valuation would be performed were it required on an annual basis.
See paragraph (b)(3) of this section for the definition of valuation
rate.
(4) Contribution allocation with respect to each base. A portion of
the total contribution for the prior plan year is allocated to each
base. Generally, this portion equals the product of --
(i) The total contribution described in paragraph (h)(6) of this
section with respect to all bases, and
(ii) The ratio of the amount described in paragraph (b)(3)(i) of this
section with respect to the base to the sum (using true rather than
absolute values) of such amounts with respect to all remaining bases.
However, if the result of this computation with respect to a
particular base exceeds the amount necessary to amortize such base
fully, the smaller amount shall be deemed the contribution made with
respect to such base. The unallocated excess with respect to a now
fully amortized base shall be allocated among the other bases as
indicated above.
(5) Other allocation methods. The Commissioner may authorize the use
of methods other than the method described in paragraph (h)(4) of this
section for allocating contributions to bases.
(6) Total contribution for all bases. The contribution with respect
to all bases for the prior plan year (see paragraph (h)(3)(iii) of this
section) is the difference between --
(i) The sum of (A) the total deduction (including a carryover
deduction) for the prior year, (B) interest on the actual contributions
for the prior year (whether or not deductible) at the valuation rate for
the period between the dates as of which the contributions are credited
under section 412 and the valuation date in the current plan year, and
(C) interest on the carryover described in section 404(a)(1)(D) that is
available at the beginning of the prior taxable year at the valuation
rate for the period between the current and prior valuation dates, and
(ii) The normal cost for the prior plan year and interest on it at
the valuation rate from the date as of which the normal cost is
calculated to the current valuation date.
(7) Effect of failure to contribute normal cost plus interest on
unamortized amounts. The failure to make a contribution at least equal
to the sum of the normal cost plus interest on the unamortized amounts
has the following effects under the preceding rules of this section --
(i) It does not create a new base.
(ii) It results in an increase in the unamortized amount of each base
and consequently extends the time before the base is fully amortized.
(iii) The limit adjustment for any base is not increased (in absolute
terms) even if the unamortized amount computed under paragraph (h) of
this section exceeds the initial 10-year amortization base. Thus, if
the total unamortized amount of the plan's bases at the beginning of the
plan year is $100,000 (which is also the unfunded liability of the
plan), and a required $50,000 normal cost contribution is not made for
the plan year, the following effects occur. The total unamortized
balance of the plan's bases increases by the $50,000 normal cost for the
year (adjusted for interest), plus interest on the $100,000 balance of
the bases; and, because of that increase, it will take a longer period
to amortize the remaining balance of the bases. (The annual
amortization amount does not change.)
(8) Required adjustment to a 10-year base limit adjustment if
valuation rate changed. If there is a change in the valuation rate, the
limit adjustment for all unamortized 10-year amortization bases must be
changed, in addition to establishing a new base as provided in paragraph
(g)(2) of this section. The new limit adjustment for any base is the
level amount necessary to amortize the unamortized amount of the base
over the remaining amortization period using the new valuation rate.
The remaining amortization period of the base is the number of years at
the end of which the unamortized amount of the base would be zero if the
contribution made with respect to that base equaled the limit adjustment
each year. This calculation of the remaining period is made on the
basis of the valuation rate used before the change. Both the remaining
amortization period and the revised limit adjustment may be determined
through the use of standard annuity tables. The remaining period may be
computed in terms of fractional years, or it may be rounded off to a
full year. The unamortized amount of the base as of the valuation date
and the remaining amortization period of that base shall not be changed
by any change in the valuation rate.
(i) Combining bases -- (1) General method. For purposes of section
404 only, and not for purposes of section 412, different 10-year
amortization bases may be combined into a single 10-year amortization
base if such single base satisfies all of the requirements of paragraph
(i) (2), (3), and (4) of this section at the time of the combining of
the different bases.
(2) Unamortized amount. The unamortized amount of the single base
equals the sum, as of the date the combination is made, of the
unamortized amount of the bases being combined (treating negative bases
as having negative unamortized amounts).
(3) Remaining amortization period. The remaining amortization period
of the single base is equal to (i) the sum of the separate products of
(A) the unamortized amount of each of these bases (using absolute
values) and (B) its remaining amortization period, divided by (ii) the
sum of the unamortized amounts of each of the bases (using absolute
values). For purposes of this paragraph (i)(3), the remaining
amortization period of each base being combined is that number of years
at the end of which the unamortized amount of the base would be zero if
the contribution made with respect to that base equaled the limit
adjustment of that base in each year. This number may be determined
through the use of standard annuity tables. The remaining amortization
period described in this paragraph may be computed in terms of
fractional years, or it may be rounded off to a whole year.
(4) Limit adjustment. The limit adjustment for the single base is
the level amount necessary to amortize the unamortized amount of the
combined base over the remaining amortization period described in
paragraph (i)(3) of this section, using the valuation rate. This amount
may be determined through the use of standard annuity tables.
(5) Fresh start alternative. In lieu of combining different 10-year
amortization bases, a plan may replace all existing bases with one new
10-year amortization base equal to the unfunded liability of the plan as
of the time the new base is being established. This unfunded liability
must be determined in accordance with the general rules of paragraphs
(d) and (f) of this section. The unamortized amount of the base and the
limit adjustment for the base will be determined as though the base were
newly established.
(j) Initial 10-year amortization base for existing plan -- (1) In
general. In the case of a plan in existence before the effective date
of section 404(a), the 10-year amortization base on the effective date
of section 404(a) is the sum of all 10 percent bases existing
immediately before section 404(a) became effective for the plan,
determined under the rules of old section 404(a).
(2) Limit adjustment. The limit adjustment for the initial base is
the lesser of the unamortized amount of such base or the sum of the
amounts determined under paragraph (b)(3) of this section using the
original balances of the remaining bases (under old section 404(a)
rules) as the amount to be amortized.
(3) Unamortized amount. The employer may choose either to establish
a single initial base reflecting both all prior 10-percent bases and the
experience gain or loss for the immediately preceding actuarial period,
or to establish a separate base for the prior 10-percent bases and
another for the experience gain or loss for the immediately preceding
period. If the initial 10-year amortization base reflects the net
experience gain or loss from the immediately preceding actuarial period,
the unamortized amount of the initial base shall equal the total
unfunded liability on the effective date of section 404(a) determined in
accordance with the general rules of paragraphs (d) and (f) of this
section. If, however, a separate base will be used to reflect that gain
or loss, the unamortized amount of the initial base shall equal such
unfunded liability on the effective date of section 404(a), reduced by
the net experience loss or increased by the net experience gain for the
immediately preceding actuarial period. In this case, a separate
10-year amortization base must be established on the effective date
equal to the net experience gain or loss. Thus, if the effective date
unfunded liability is $100,000 and an experience loss of $15,000 is
recognized on that date, and if the loss is to be treated as a separate
base, the unamortized balances of the two bases would be $85,000 and
$15,000. If the unfunded liability were the same $100,000, but a gain
of $15,000 instead of a loss were recognized on that date, the
unamortized balances of the two bases would be $115,000 and a credit
base of $15,000. In both cases, if only one 10-year base is to be
established on the effective date, its unamortized balance would be
$100,000 (the unfunded liability of the plan). See paragraphs (d) and
(f) for rules for determining the unfunded liability of the plan.
(k) Effect of full funding limit on 10-year-amortization bases. The
amount deductible under section 404(a)(1)(A) (i), (ii), or (iii) for a
plan year may not exceed the full funding limitation for that year. See
section 412 and paragraphs (d), (e), and (f) of this section for rules
to be used in the computation of the full funding limitation. If the
total deductible contribution (including carryover) for a plan year
equals or exceeds the full funding limitation for the year, all 10-year
amortization bases maintained by the plan will be considered fully
amortized, and the deductible limit for subsequent plan years will not
be adjusted to reflect the amortization of these bases.
(l) Transitional rules -- (1) Plan years beginning before April 22,
1981. In determining the deductible limit for plan years beginning
before April 22, 1981, a contribution will be deductible under section
404(a)(1)(A) if the computation of the deductible limit is based on an
interpretation of section 404(a)(1)(A) that is reasonable when
considered with prior published positions of the Internal Revenue
Service. A computation of the deductible limit may satisfy the
preceding sentence even if it does not satisfy the rules contained in
paragraphs (c) through (i) of this section.
(2) Transitional approaches. The deductible limit determined for the
first plan year with respect to which a plan applies the rules contained
in paragraphs (c) through (i) of this section must be computed using one
of the following approaches --
(i) The plan (whether or not in existence before the effective date
of section 404(a)) may apply the rules of paragraph (j) for establishing
the initial base for an existing plan, treating 10-year bases (if any)
as 10 percent bases in adding bases.
(ii) The plan may apply the fresh start alternative for combining
bases under paragraph (i)(5).
(iii) The plan may retroactively establish 10-year amortization bases
for years with respect to which section 404(a)(1)(A) and the rules of
this section would have applied but for the transition rule contained in
paragraph (l)(1) of this section. Contributions actually deducted are
used in retroactively establishing and maintaining these bases under
paragraph (h). However, a deduction already taken shall not be
recomputed because of the retroactive establishment of a base.
(m) Effective date of section 404(a). In the case of a plan which
was in existence on January 1, 1974, section 404(a) generally applies
for contributions on account of taxable years of an employer ending with
or within plan years beginning after December 31, 1974. In the case of
a plan not in existence on January 1, 1974, section 404(a) generally
applies for contributions on account of taxable years of an employer
ending with or within plan years beginning after September 4, 1974. See
1.410(a)-2(c) for rules concerning the time of plan existence. See
also 1.410(a)-2(d), which provides that a plan in existence on January
1, 1974, may elect to have certain provisions, including the amendments
to section 404(a) contained in section 1013 of the Employee Retirement
Income Security Act of 1974, apply to a plan year beginning after
September 2, 1974, and before the otherwise applicable effective date
contained in that section.
(T.D. 7760, 46 FR 6914, Jan. 22, 1981; 46 FR 15685, Mar. 9, 1981)
26 CFR 1.404(b)-1 Method of contribution, etc., having the effect of a
plan; effect of section 404(b).
Section 404(a) is not confined to formal stock bonus, pension,
profit- sharing, and annuity plans, or deferred compensation plans, but
it includes any method of contributions or compensation having the
effect of a stock bonus, pension, profit-sharing, or annuity plan, or
similar plan deferring the receipt of compensation. Thus, where a
corporation pays pensions to a retired employee or employees or to their
beneficiaries in such amounts as may be determined from time to time by
the board of directors or responsible officers of the company, or where
a corporation is under an obligation, whether funded or unfunded, to pay
a pension or other deferred compensation to an employee or his
beneficiaries, there is a method having the effect of a plan deferring
the receipt of compensation for which deductions are governed by section
404(a). If an employer on the accrual basis defers paying any
compensation to an employee until a later year or years under an
arrangement having the effect of a stock bonus, pension, profit-sharing,
or annuity plan, or similar plan deferring the receipt of compensation,
he shall not be allowed a deduction until the year in which the
compensation is paid. This provision is not intended to cover the case
where an employer on the accrual basis defers payment of compensation
after the year of accrual merely because of inability to pay such
compensation in the year of accrual, as, for example, where the funds of
the company are not sufficient to enable payment of the compensation
without jeopardizing the solvency of the company, or where the liability
accrues in the earlier year, but the amount payable cannot be exactly
determined until the later year.
(T.D. 6500, 25 FR 11690, Nov. 26, 1960)
26 CFR 1.404(b)-1T Method or arrangement of contributions, etc.,
deferring the receipt of compensation or providing for deferred
benefits. (Temporary)
Q-1: As amended by the Tax Reform Act of 1984, what does section
404(b) of the Internal Revenue Code provide?
A-1: As amended, section 404(b) clarifies that any plan, or method
or arrangement, deferring the receipt of compensation or providing for
deferred benefits (other than compensation) is to be treated as a plan
deferring the receipt of compensation for purposes of section 404 (a)
and (d). Accordingly, section 404 (a) and (d) (in the case of employees
and nonemployees; respectively) shall govern the deduction of
contributions paid or compensation paid or incurred with respect to such
a plan, or method or arrangement. Section 404 (a) and (d) requires that
such a contribution or compensation be paid or incurred for purposes of
section 162 or 212 and satisfy the requirements for deductibility under
either of those sections. Thus, for example, under section 404 (a)(5)
and (b), if otherwise deductible under section 162 or 212, a
contribution paid or incurred with respect to a nonqualified plan, or
method or arragement, providing for deferred benefits is deductible in
the taxable year of the employer in which or with which ends the taxable
year of the employee in which the amount attributable to the
contribution is includible in the gross income of the employee (without
regard to any applicable exclusion under Chapter 1, Subtitle A, of the
Internal Revenue Code). Section 404 (a) and (d) applies to all
compensation and benefit plans, or methods or arrangements, however
denominated, which defer the receipt of any amount of compensation or
benefit, including fees or other payments. Thus, a limited partnership
(using the accrual method of accounting) may not accrue deductions for a
fee owed to an unrelated person (using the cash method of accounting )
who performs services for the partnership until the partnership taxable
year in which or with which ends the taxable year of the service
provider in which the fee is included in income. However,
notwithstanding the above, section 404 does not apply to contributions
paid or accrued with respect to a ''welfare benefit fund'' (as defined
in section 419(e)) after July 18, 1984, in taxable years of employers
(and payors) ending after that date. Also, section 463 shall govern the
deduction of vacation pay by a taxpayer that has elected the application
of such section. For rules relating to the deduction of contributions
paid or accrued with respect to a welfare benefit fund, see section 419,
1.419-1T and 1.419A-2T. For rules relating to the deduction of
vacation pay for which an election is made under section 463, see 10.2
of this chapter and 1.463-1T.
Q-2: When does a plan, or method or arrangement, defer the receipt
of compensation or benefits for purposes of section 404 (a), (b), and
(d)?
A-2: (a) For purposes of section 404 (a), (b), and (d), a plan, or
method or arrangement, defers the receipt of compensation or benefits to
the extent it is one under which an employee receives compensation or
benefits more than a brief period of time after the end of the
employer's taxable year in which the services creating the right to such
compensation or benefits are performed. The determination of whether a
plan, or method or arrangement, defers the receipts of compensation or
benefits is made separately with respect to each employee and each
amount of compensation or benefit. Compensation or benefits received by
an employee's spouse or dependent or any other person, but taxable to
the employee, are treated as received by the employee for purposes of
section 404. An employee is determined to receive compensation or
benefits within or beyond a brief period of time after the end of the
employer's taxable year under the rules provided in this Q&A. For the
treatment of expenses with respect to transactions between related
taxpayers, see section 267.
(b)(1) A plan, or method or arrangement, shall be presumed to be one
deferring the receipt of compensation for more than a brief period of
time after the end of an employer's taxable year to the extent that
compensation is received after the 15th day of the 3rd calendar month
after the end of the employer's taxable year in which the related
services are rendered (''the 2 1/2 month period''). Thus, for example,
salary under an employment contract or a bonus under a year-end bonus
declaration is presumed to be paid under a plan, or method or
arrangement, deferring the receipt of compensation, to the extent that
the salary or bonus is received beyond the applicable 2 1/2 month
period. Further, salary or a year-end bonus received beyond the
applicable 2 1/2 month period by one employee shall be presumed to
constitute payment under a plan, or method or arrangement, deferring the
receipt of compensation for such employee even though salary or bonus
payments to all other employees are not similarly treated because they
are received within the 2 1/2 month period. Benefits are ''deferred
benefits'' if, assuming the benefits were cash compensation, such
benefits would be considered deferred compensation. Thus, a plan, or
method or arrangement, shall be presumed to be one providing for
deferred benefits to the extent benefits for services are received by an
employee after the 2 1/2 month period following the end of the
employer's taxable year in which the related services are rendered.
(2) The taxpayer may rebut the presumption established under the
previous subparagraph with respect to an amount of compensation or
benefits only by setting forth facts and circumstances the preponderance
of which demonstrates that it was impracticable, either administratively
or economically, to avoid the deferral of the receipt by an employee of
the amount of compensation or benefits beyond the applicable 2 1/2 month
period and that, as of the end of the employer's taxable year such
impracticability was unforeseeable. For example, the presumption may be
rebutted with respect to an amount of compensation to the extent that
receipt of such amount is deferred beyond the applicable 2 1/2 month
period (i) either because the funds of the employer were not sufficient
to make the payment within the 2 1/2 month period without jeopardizing
the solvency of the employer or because it was not reasonably possible
to determine within the 2 1/2 month period whether payment of such
amount was to be made, and (ii) the circumstance causing the deferral
described in (i) was unforeseeable as of the close of the employer's
taxable year. Thus, the presumption with respect to the receipt of an
amount of compensation or benefit is not rebutted to the extent it was
foreseeable, as of the end of the employer's taxable year, that the
amount would be received after the applicable 2 1/2 month period. For
example, if, as of the end of the employer's taxable year, it is
foreseeable that calculation of a year-end bonus to be paid to an
employee under a given formula will not be completed and thus the bonus
will not be received (and is in fact not received) by the end of the
applicable 2 1/2 month period, the presumption that the bonus is
deferred compensation is not rebutted.
(c) A plan, or method or arrangement, shall not be considered as
deferring the receipt of compensation or benefits for more than a brief
period of time after the end of the employer's taxable year to the
extent that compensation or benefits are received by the employee on or
before the end of the applicable 2 1/2 month period. Thus, for example,
salary under an employment contract or a bonus under a year-end bonus
declaration is not considered paid under a plan, or method or
arrangement, deferring the receipt of compensation to the extent that
such salary or bonus is received by the employee on or before the end of
the applicable 2 1/2 month period.
(d) Solely for purposes of applying the rules of paragraphs (b) and
(c) of this Q&A, in the case of an employer's taxable year ending on or
after July 18, 1984, and on or before March 21, 1986, compensation or
benefits that relate to services rendered in such taxable year shall be
deemed to have been received within the applicable 2 1/2 month period if
such receipt actually occurs after such 2 1/2 month period but on or
before March 21, 1986.
Q-3: When does section 404(b), as amended by the Tax Reform Act of
1984, become effective?
A-3: With the exceptions discussed below, section 404(b), as
amended, and the rules under Q&A-2 are effective with respect to amounts
paid or incurred after July 18, 1984, in taxable years of employers (and
payors) ending after that date. In the case of an extended vacation pay
plan maintained pursuant to a collective bargaining agreement (a)
between employee representatives and one or more employers, and (b) in
effect on June 22, 1984, section 404(b) is not effective before the date
on which such collective bargaining agreement terminates (determined
without regard to any extension thereof agreed to after June 22, 1984).
For purposes of the preceding sentence, any plan amendment made pursuant
to a collective bargaining agreement relating to the plan which amends
the plan solely to conform to any requirement added under section 512 of
the Tax Reform Act of 1984 shall not be treated as a termination of such
collective bargaining agreement. For purposes of this section, an
''extended vacation pay plan'' is one under which covered employees
gradually over a specified period of years earn the right to additional
vacation benefits, no part of which, under the terms of the plan, can be
taken until the end of the specified period.
(T.D. 8073, 51 FR 4321, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986; 51
FR 11303, Apr. 2, 1986)
26 CFR 1.404(c)-1 Certain negotiated plans; effect of section 404(c).
(a) Section 404(a) does not apply to deductions for contributions
paid by an employer under a negotiated plan which meets the following
conditions:
(1) The contributions under the plan are held in trust for the
purpose of paying, either from principal or income or both, for the
benefit of employees and their families, at least medical or hospital
care, and pensions on retirement or death of employees; and
(2) Such plan was established before January 1, 1954, as a result of
an agreement between employee representatives and the Government of the
United States during a period of Government operation, under seizure
powers, of a major part of the productive facilities of the industry in
which such employer is engaged.
If these conditions are met, such contributions shall be deductible
under section 162, to the extent that they constitute ordinary and
necessary business expenses.
(b) The term ''as a result of an agreement'' is intended primarily to
cover a trust established under the terms of an agreement referred to in
paragraph (a)(2) of this section. It will also include a trust
established under a plan of an employer, or group of employers, who are
in competition with the employers whose facilities were seized by reason
of producing the same commodity, and who would therefore be expected to
establish such a trust as a reasonable measure to maintain a sound
position in the labor market producing the commodity. Thus, for
example, if a trust was established under such an agreement in the
bituminous coal industry, a similar trust established about the same
time in the anthracite coal industry would be covered by this provision.
(c) If any such trust becomes qualified for exemption under section
501(a), the deductibility of contributions by an employer to such trust
on or after the date of such qualification would no longer be governed
by section 404(c), even though the trust may later lose its exemption
under section 501(a).
(T.D. 6500, 25 FR 11690, Nov. 26, 1960)
26 CFR 1.404(d)-1T Questions and answers relating to deductibility of
deferred compensation and deferred benefits for independent contractors.
(Temporary)
Q-1: How does the amendment of section 404(b) by the Tax Reform Act
of 1984 affect the deduction of contributions or compensation under
section 404(d)?
A-1: As amended by the Tax Reform Act of 1984, section 404(b)
clarifies that section 404(d) shall govern the deduction of
contributions paid and compensation paid or incurred by a payor under a
plan, or method or arrangement, deferring the receipt of compensation or
providing for deferred benefits for service providers with respect to
which there is no employer-employee relationship. In such a case,
section 404 (a) and (b) and the regulations thereunder apply as if the
person providing the services were the employee and the person to whom
the services are provided were the employer. Section 404(a) requires
that such a contribution or compensation be paid or incurred for
purposes of section 162 or 212 and satisfy the requirements for
deductibility under either of those sections. However, notwithstanding
the above, section 404 does not apply to contributions paid or accrued
with respect to a ''welfare benefit fund'' (as defined in section
419(e)) after June 18, 1984, in taxable years of employers (and payors)
ending after that date. Also, section 463 shall govern the deduction of
vacation pay by a taxpayer that has elected under such section. For
rules relating to the deduction of contributions paid or accrued with
respect to a welfare benefit fund, see section 419, 1.419-1T and
1.419A-2T. For rules relating to the deduction of vacation pay for which
an election is made under section 463, see 10.2 of this chapter and
1.463-1T.
(T.D. 8073, 51 FR 4322, Feb. 4, 1986)
26 CFR 1.404(e)-1 Contributions on behalf of a self-employed individual
to or under a pension, annuity, or profit-sharing plan meeting the
requirements of section 401; application of section 404(a) (8), (9),
and (10) and section 404 (e) and (f).
(a) In general. (1) The Self-Employed Individuals Tax Retirement Act
of 1962 (76 Stat. 809) permits certain self-employed individuals to be
treated as employees for purposes of pension, annuity, and
profit-sharing plans included in paragraph (1), (2), or (3) of section
404(a). Therefore, for taxable years of an employer beginning after
December 31, 1962, employer contributions to qualified plans on behalf
of self-employed individuals are deductible under section 404 subject to
the limitations of paragraphs (b) and (c) of this section.
(2) In the case of contributions to qualified plans on behalf of
self-employed individuals, the amount deductible differs from the amount
allowed as a deduction. In general, the amount deductible is 10 percent
of the earned income derived by the self-employed individual from the
trade or business with respect to which the plan is established, or
$2,500, whichever is the lesser. This is the amount referred to in
section 401 when reference is made to the amounts which may be deducted
under section 404 or the amount of contributions deductible under
section 404. Thus, this is the amount taken into consideration in
determining whether contributions under the plan are discriminatory.
The amount allowed as a deduction with respect to contributions on
behalf of a self-employed individual is one-half of the amount
deductible. The amount allowed as a deduction is relevant only for
purposes of determining the amount an employer may deduct from gross
income.
(b) Determination of the amount deductible. (1) If a plan covers
employees, some of whom are self-employed individuals, the determination
of the amount deductible is made on the basis of independent
consideration of the common-law employees and of the self-employed
individuals. See subparagraphs (2) and (3) of this paragraph. For
purposes of determining the amount deductible with respect to
contributions on behalf of a self-employed individual, such
contributions shall be considered to satisfy the conditions of section
162 (relating to trade or business expenses) or 212 (relating to
expenses for the production of income), but only to the extent that such
contributions do not exceed the earned income of such individual derived
from the trade or business with respect to which the plan is
established. However, the portion of such contribution, if any,
attributable to the purchase of life, accident, health, or other
insurance protection shall be considered payment of a personal expense
which does not satisfy the requirements of section 162 or 212. See
paragraph (f) of this section. For the additional rules applicable
where contributions are made by more than one employer on behalf of a
self-employed individual, see paragraph (d) of this section.
(2) If contributions are made to a plan included in section 404(a)
(1), (2), or (3) on behalf of employees, some of whom are self-employed
individuals, the amount deductible with respect to contributions on
behalf of the common-law employees covered under the plan shall be
determined as if such employees were the only employees for whom
contributions and benefits are provided under the plan. Accordingly,
for purposes of such determination, the percentage of compensation
limitations of section 404(a) (1), (3), and (7) are applicable only with
respect to the compensation otherwise paid or accrued during the taxable
year by the employer to the common-law employees. Similarly, the costs
referred to in section 404(a)(1) (B) and (C) shall be the costs of
funding the benefits of the common-law employees. Also, the provisions
of section 404(a)(1)(D), (3), and (7), relating to certain carryover
deductions, shall be applicable only to amounts contributed, or to the
amounts deductible, on behalf of such employees.
(3) If contributions are made to a plan included in section 404(a)
(1), (2), or (3) on behalf of individuals some or all of whom are
self-employed individuals, the amount deductible in any taxable year
with respect to contributions on behalf of such individuals shall be
determined as follows:
(i) The provisions of section 404(a) (1), (2), (3), and (7) shall be
applied as if such individuals were the only participants for whom
contributions and benefits are provided under the plan. Thus, the costs
referred to in such provisions shall be the costs of funding the
benefits of the self-employed individuals. If such costs are less than
an amount equal to the amount determined under subdivision (iii) of this
subparagraph, the maximum amount deductible with respect to such
individuals shall be the costs of their benefits.
(ii) The provisions of section 404(a)(1)(D), the second and third
sentences of section 404(a)(3)(A), and the second sentence of section
404(a)(7), relating to certain carryover deductions, are not applicable
to contributions on behalf of self-employed individuals. Contributions
on behalf of self-employed individuals are deductible, if at all, only
in the taxable year in which the contribution is paid or deemed paid
under section 404(a)(6).
(iii) The amount deductible for the taxable year of the employer with
respect to contributions on behalf of a self-employed individual shall
not exceed the lesser of $2,500 or 10 percent of the earned income
derived by such individual for such taxable year from the trade or
business with respect to which the plan is established.
(iv) If a self-employed individual receives in any taxable year
earned income with respect to which deductions are allowable to two or
more employers, the aggregate amounts deductible shall not exceed the
lesser of $2,500 or 10 percent of such earned income. See paragraph (d)
of this section.
(c) Special limitation on the amount allowed as a deduction for
self-employed individuals. The amount allowed as a deduction under
section 404(a) (1), (2), (3), and (7) in any taxable year with respect
to contributions made on behalf of a self-employed individual shall be
an amount equal to one-half of the amount deductible with respect to
such contributions under paragraph (b)(3) of this section. However, for
purposes of section 401, the amount which may be deducted, or the amount
deductible, under section 404 with respect to contributions made on
behalf of self-employed individuals shall be determined without regard
to the special limitation of this paragraph.
(d) Rules applicable where contributions are made by more than one
employer on behalf of a self-employed individual. (1) Under paragraph
(b)(3)(iv) of this section, if a self-employed individual receives in
any taxable year earned income with respect to which deductions are
allowable to two or more employers, the aggregate amounts deductible
shall not exceed the lesser of $2,500 or 10 percent of such earned
income. This limitation does not apply to contributions made under a
plan on behalf of an employee who is not self-employed in the trade or
business with respect to which the plan is established, even though such
employee may be covered as a self-employed individual under a plan or
plans established by other trades or businesses.
(2) In any case in which the application of subparagraph (1) of this
paragraph reduces the amount otherwise deductible, the amount deductible
by each employer shall be that amount which bears the same ratio to the
aggregate amount deductible with respect to all trades or businesses (as
determined in subparagraph (1) of this paragraph) as the earned income
derived from that employer bears to the aggregate of the earned income
derived from all of the trades or businesses with respect to which plans
are established. The amount allowed as a deduction to each employer is
one-half of the amount determined (in accordance with the preceding
sentence) to be deductible by such employer.
(e) Partner's distributive share of contributions and deductions.
For purposes of sections 702(a)(8) and 704, a partner's distributive
share of contributions on behalf of self-employed individuals under a
qualified pension, annuity, or profit-sharing plan is the contribution
made on his behalf, and his distributive share of deductions allowed the
partnership under section 404 for contributions on behalf of
self-employed individuals is that portion of the deduction which is
attributable to contributions made on his behalf under the plan. The
contribution on behalf of a partner and the deduction with respect
thereto must be accounted for separately by such partner, for his
taxable year with or within which the partnership's taxable year ends,
as an item described in section 702(a)(8).
(f) Contributions allocable to insurance protection. For purposes of
determining the amount deductible with respect to contributions on
behalf of a self-employed individual, amounts allocable to the purchase
of life, accident, health, or other insurance protection shall not be
taken into account. Such amounts are neither deductible nor considered
as contributions for purposes of determining the maximum amount of
contributions that may be made on behalf of an owner-employee. The
amount of a contribution allocable to insurance shall be an amount equal
to a reasonable net premium cost, as determined by the Commissioner, for
such amount of insurance for the appropriate period. See paragraph
(b)(5) of 1.72-16.
(g) Rules applicable to loans. For purposes of section 404, any
amount paid, directly or indirectly, by an owner-employee in repayment
of any loan which under section 72(m)(4)(B) was treated as an amount
received from a qualified trust or plan shall be treated as a
contribution to such trust or under such plan on behalf of such
owner-employee.
(h) Definitions. For purposes of section 404 and the regulations
thereunder --
(1) The term ''employee'' includes an employee as defined in section
401(c)(1) and paragraph (b) of 1.401-10, and the term ''employer''
means the person treated as the employer of such individual under
section 401(c)(4);
(2) The term ''owner-employee'' means an owner-employee as defined in
section 401(c)(3) and paragraph (d) of 1.401-10;
(3) The term ''earned income'' means earned income as defined in
section 401(c)(2) and paragraph (c) of 1.401-10; and
(4) The term ''compensation'' when used with respect to an individual
who is an employee described in subparagraph (1) of this paragraph shall
be considered to be a reference to the earned income of such individual
derived from the trade or business with respect to which the plan is
established.
(i) Years to which this section applies. This section applies to
taxable years of employers beginning before January 1, 1974. For
taxable years beginning after December 31, 1973, see 1.404(e)-1A.
(T.D. 6673, 28 FR 10145, Sept. 17, 1963; as amended by T.D. 7636, 44
FR 47056, Aug. 10, 1979)
26 CFR 1.404(e)-1A Contributions on behalf of a self-employed
individual to or under a qualified pension, annuity, or profit-sharing
plan.
(a) In general. This section provides rules relating to employer
contributions to qualified plans on behalf of self-employed individuals
described in subsections (a) (8) and (9), (e), and (f) of section 404.
Unless otherwise specifically provided, this section applies to taxable
years of an employer beginning after December 31, 1973. See section
1.404(e)-1 for rules relating to plans for self-employed individuals for
taxable years beginning before January 1, 1974. Paragraph (b) of this
section provides general rules of deductibility, paragraph (c) provides
rules relating to defined contribution plans, paragraph (d) provides
rules relating to defined benefit plans, paragraph (e) provides rules
relating to combinations of plans, paragraph (f) provides rules for
partnerships, paragraph (g) provides rules for insurance, paragraph (h)
provides rules for loans, and paragraph (i) provides definitions.
(b) Determination of the amount deductible. (1) If a defined
contribution plan covers employees, some of whom are self-employed
individuals, the determination of the amount deductible is made on the
basis of independent consideration of the common-law employees and of
the self-employed individuals. See subparagraphs (2) and (3) of this
paragraph. For purposes of determining the amount deductible with
respect to contributions on behalf of a self-employed individual, such
contributions shall be considered to satisfy the conditions of section
162 (relating to trade or business expenses) or 212 (relating to
expenses for the production of income), but only to the extent that such
contributions do not exceed the earned income of such individual derived
from the trade or business with respect to which the plan is
established. However, the portion of such contribution, if any,
attributable to the purchase of life, accident, health, or other
insurance protection shall be considered payment of a personal expense
which does not satisfy the requirements of section 162 or 212. See
paragraph (g) of this section.
(2)(i) If contributions are made on behalf of employees, some of whom
are self-employed individuals, to a defined contribution plan described
in section 414(i) and included in section 404(a) (1), (2), or (3), the
amount deductible with respect to contributions on behalf of the
common-law employees covered under the plan shall be determined as if
such employees were the only employees for whom contributions and
benefits are provided under the plan. Accordingly, for purposes of such
determination, the percentage of compensation limitations of section
404(a) (3) and (7) are applicable only with respect to the compensation
otherwise paid or accrued during the taxable year by the employer with
respect to the common-law employees. Similarly, the costs referred to
in section 404(a)(1) (A) and (B) shall be the costs of funding the
benefits of the common-law employees. Also, the provisions of section
404(a)(1)(D), (3), and (7), relating to certain carryover deductions,
shall be applicable only to amounts contributed or to the amounts
deductible on behalf of such employees.
(ii) The amount deductible, by reason of contributions on behalf of
employees to a defined benefit plan, shall be determined without regard
to the self-employed or common law status of each employee.
(3)(i) If contributions are made on behalf of individuals, some or
all of whom are self-employed individuals, to a defined contribution
plan described in section 414(i) and included in section 404(a) (1),
(2), or (3), the amount deductible in any taxable year with respect to
contributions on behalf of such individuals shall be determined as
follows:
(A) The provisions of section 404(a) (1), (2), (3), and (7) shall be
applied as if such individuals were the only participants for whom
contributions and benefits are provided under the plan. Thus, the costs
referred to in such provisions shall be the costs of funding the
benefits of the self-employed individuals. If such costs are less than
an amount equal to the amount determined under paragraph (c) of this
section, the maximum amount deductible with respect to such individuals
shall be the cost of their benefits.
(B) The provisions of section 404(a) (1), (D), the third sentence of
section 404(a) (3), (A), and the second sentence of section 404(a)(7),
relating to certain carryover deductions are applicable to contributions
on behalf of self-employed individuals made in taxable years of an
employer beginning after December 31, 1975.
(C) For any employer taxable year in applying the 15 percent limit on
deductible contributions set forth section in 404(a)(3) and the 25
percent limit in section 404(a)(7) for any taxable year of the employer,
the amount deductible under section 404(e)(4) and paragraph (c)(4) of
this section (relating to the minimum deduction of $750 or 100 percent
of earned income) shall be substituted for such limits with respect to
the self-employed individuals on whose behalf contributions are
deductible under section 404(e)(4) for the taxable year of the employer.
In addition, although the limitations of section 415 are applicable to
the plan for plan years beginning after December 31, 1975, the defined
contribution compensation limitation described in section 415(c)(1)(B)
shall not be less than the amount deductible under section 404(e)(4) and
paragraph (c)(4) of this section with respect to any self-employed
individual for the taxable year of the employer wnding with or within
the limitation year. The special rule in the second sentence of
paragraph (3)(A) of section 404(a) is not applicable in determining the
amounts deductible on behalf of self-employed individuals.
(ii) The limitations of this subparagraph are not applicable to a
defined benefit plan for self-employed individuals.
(c) Defined contribution plans. (1) Under section 404(e)(1) in the
case of a defined contribution plan, as defined in section 414(i), the
amount deductible for the taxable year of the employer with respect to
contributions on behalf of a self-employed individual shall not exceed
the lesser of $7,500 or 15 percent of the earned income derived by such
individual for such taxable year from the trade or business with respect
to which the plan is established.
(2) Under section 404(e)(2)(A) if a self-employed individual receives
in any taxable year earned income with respect to which deductions are
allowable to two or more employers under two or more defined
contribution plans the aggregate amounts deductible shall not exceed the
lesser of $7,500 or 15 percent of such earned income. This limitation
does not apply to contributions made under a plan on behalf of an
employee who is not self-employed in the trade or business with respect
to which the plan is established.
(3) Under section 404(e)(2)(B) in any case in which the applicable
limitation of subparagraph (2) of this paragraph reduces the amount
otherwise deductible with respect to contributions on behalf of any
employee within the meaning of section 401(c)(1), the amount deductible
by each employer for such employee shall be that amount which bears the
same ratio to the aggregate amount deductible for such employee with
respect to all trades or businesses (as determined in subparagraph (1)
of this paragraph) as his earned income derived from the employer bears
to the aggregate of his earned income derived from all of the trades or
businesses with respect to which plans are established.
Under section 404(e)(4), notwithstanding the provisions of
subparagraphs (1) and (2) of this paragraph, the limitations on the
amount deductible for the taxable year of the employer with respect to
contributions on behalf of a self-employed individual shall not be less
than the lesser of $750 or 100 percent of the earned income derived by
such individual for such taxable year from the trade or business with
respect to which the plan is established. If such individual receives
in any taxable year earned income with respect to which deductions are
allowable to two or more employers, 100 percent of such earned income
shall be taken into account for purposes of the limitations determined
under this subparagraph. This subparagraph does not apply to any
taxable year beginning after December 31, 1975, to any employee whose
adjusted gross income for that taxable year is greater than $15,000. In
applying the preceding sentence, the adjusted gross income of an
employee for a taxable year is determined separately for each
individual, without regard to any community property laws, and without
regard to the deduction allowable under section 404(a).
(d) Defined benefit plans. In the case of a defined benefit plan, as
defined in section 401(j), the special limitations provided by section
404(e) and paragraph (c) of this section do not apply. See section
401(j) for requirements applicable to defined benefit plans.
(e) Combination of plans. For special rules applied if a
self-employed individual in any taxable year is a paraticipant in both a
defined benefit plan and a defined contribution plan, see section 401(j)
and the regulations thereunder.
(f) Partner's distributive share of contributions and deductions.
(1) For purposes of sections 702(a)(8) and 704 in the case of a defined
contribution plan, a partner's distributive share of contributions on
behalf of self-employed individuals under such a plan is the
contribution made on his behalf, and his distributive share of
deductions allowed the partnership under section 404 for contributions
on behalf of a self-employed individual is that portion of the deduction
which is attributable to contributions made on his behalf under the
plan. The contribution on behalf of a partner and the deduction with
respect thereto must be accounted for separately by such partner, for
his taxable year with or within which the partnership's taxable year
ends, as an item described in section 702(a)(8).
(2) In the case of a defined benefit plan, a partner's distributive
share of contributions on behalf of self-employed individuals and his
distributive share of deductions allowed the partnership under section
404 for such contributions is determined in the same manner as his
distributive share of partnership taxable income. See section 704,
relating to the determination of the distributive share and the
regulations thereunder.
(g) Contributions allocable to insurance protection. Under Section
404(e)(3), for purposes of determining the amount deductible with
respect to contributions on behalf of a self-employed individual,
amounts allocable to the purchase of life, accident, health, or other
insurance protection shall not be taken into account. Such amounts are
neither deductible nor considered as contributions for purposes of
determining the maximum amount of contributions that may be made on
behalf of an owner-employee. The amount of a contribution allocable to
insurance shall be an amount equal to a reasonable net premium cost, as
determined by the Commissioner, for such amount of insurance for the
appropriate period. See paragraph (b)(5) of 1.72-16.
(h) Rules applicable to loans. Under section 404(f), for purposes of
section 404, any amount paid, directly or indirectly, by an
owner-employee in repayment of any loan which under section 72(m)(4)(B)
was treated as an amount recieved from a qualified trust or plan shall
be treated as a contribution to such trust or under such plan on behalf
of such owner-employee.
(i) Definitions. Under section 404(a)(8), for purposes of section
404 and the regulations thereunder --
(1) The term ''employee'' includes an employee as defined in section
401(c)(1) and the term ''employer'' means the person treated as the
employer of such individual under section 401(c)(4);
(2) The term ''owner-employee'' means an owner-employee as defined in
section 401(c)(3);
(3) The term ''earned income'' means earned income as defined in
section 401(c)(2); and
(4) The term ''compensation'' when used with respect to an individual
who is an employee described in subparagraph (1) of this paragraph shall
be considered to be a reference to the earned income of such individual
derived from the trade or business with respect to which the plan is
established.
(T.D. 7636, 44 FR 47056, Aug. 10, 1979)
26 CFR 1.404 (g)-1 Deduction of employer liability payments.
(a) General rule. Employer liability payments shall be treated as
contributions to a stock bonus, pension, profit-sharing, or annuity plan
to which section 404 applies. Such payments that satisfy the
limitations of this section shall be deductible under section 404 when
paid without regard to any other limitations in section 404.
(b) Employer liability payments. For purposes of this section,
employer liability payments mean:
(1) Any payment to the Pension Benefit Guaranty Corporation (PBGC)
for termination or withdrawal liability imposed under section 4062
(without regard to section 4062(b)(2)), 4063, or 4064 of the Employee
Retirement Insurance Security Act of 1974 (ERISA). Any bond or escrow
payment furnished under section 4063 of ERISA shall not be considered as
a payment of liability until applied against the liability of the
employer.
(2) Any payment to a non-multiemployer plan pursuant to a commitment
to the PBGC made in accordance with PBGC Determination of Plan
Sufficiency and Termination of Sufficient Plans. See PBGC regulations,
29 CFR 2617.13(b) for rules concerning these commitments. Such payments
shall not exceed an amount necessary to provide for, and used to fund,
the benefits guaranteed under section 4022 of ERISA.
(3) Any payment to a multiemployer plan for withdrawal liability
imposed under part 1 of subtitle E of title IV of ERISA. Any bond or
escrow payment furnished under such part shall not be considered as a
payment of liability until applied against the liability of the
employer.
(c) Limitations, etc. -- (1) Permissible expenses. A payment shall
be deductible under section 404(g) and this section only if the payment
satisfies the conditions of section 162 or section 212. Payments made
by an entity which is liable for such payments because it is a member of
a commonly controlled group of corporations, or trades or businesses,
within the meaning of section 414 (b) or (c), shall not fail to satisfy
such conditions merely because the entity did not directly employ
participants in the plan with respect to which the liability payments
were made.
(2) Qualified plan. A payment shall be deductible under section
404(g) and this section only if the payment is made in a taxable year of
the employer ending within or with a taxable year of the trust for which
the trust is exempt under section 501(a). For purposes of this
paragraph, the payment timing rules of section 404(a)(6) shall apply.
(3) Full funding limitation. (i) If the employer liability payment
is to a plan, the total amount deductible for such payment and for other
plan contributions may not exceed an amount equal to the full funding
limitation as defined in section 412(c)(7) for the taxable year with
respect to which the contributions are deemed made under section 404.
(ii) If the total contributions to the plan for the taxable year
including the employer liability payment exceed the amount equal to this
full funding limitation, the employer liability payment shall be
deductible first.
(iii) Any amount paid in a taxable year in excess of the amount
deductible in such year under the full funding limitation shall be
treated as a liability payment and be deductible in the succeeding
taxable years in order of time to the extent of the difference between
the employer liability payments made in each succeeding year and the
maximum amount deductible for such year under the full funding
limitation.
(4) Maximum deduction allowable under section 404. The amount
deductible under section 404 is limited to the higher of the maximum
amount deductible by the employer under section 404(a) or the amount
otherwise deductible under section 404(g). If the contributions are to
a plan to which more than one employer contributes, this limit shall
apply to each employer separately rather than all employers in the
aggregate. Thus, each employer may deduct the greater of its allocable
share of the deduction determined under sections 404(a) and 413(b)(7) or
413(c)(6) or its allocable share of the amount deductible under section
404(g). However, pursuant to the rule in subdivision (ii) of
subparagraph (3), in determining each employer's allocable share under
section 404(a), the total amount deductible under section 404(a) by all
employers shall not exceed the difference between the full funding
limitation and the total amount deductible by all employers under
section 404(g).
(5) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. In the 1983 taxable year, Employer A makes a withdrawal
liability payment of $700,000 to multiemployer Plan X to which Employer
A and Employer B are required to contribute. Employer A's allocable
share of the deduction allowable under sections 404(a) and 413(b)(7) in
the 1983 taxable year is $600,000. Employer B's allocable share of the
deduction allowable under section 404(a) and 413(b)(7) in the 1983
taxable year is $400,000.
The full funding limitation for the 1983 taxable year is $1,000,000.
Based on paragraph (c)(4) of this section, Employer A may deduct
$700,000, the amount of the withdrawal liability payment. However, the
deduction of Employer B is limited to $300,000, the difference between
the full funding limitation and the amount deductible under section
404(g).
(d) Effective date etc. -- (1) General rule. This section is
effective for employer payments made after September 25, 1980.
(2) Transitional rule. For employer payments made before September
26, 1980, for purposes of section 404, any amount paid by an employer
under section 4062, 4063, or 4064 of the Employee Retirement Income
Security Act of 1974 shall be treated as a contribution to which section
404 applies by such employer to or under a stock bonus, pension,
profit-sharing, or annuity plan.
(T.D. 8085, 51 FR 16297, May 2, 1986)
26 CFR 1.404(k)-1T Questions and answers relating to the deductibility
of certain dividend distributions. (Temporary)
Q-1: What does section 404(k) provide?
A-1: Section 404(k) allows a corporation a deduction for dividends
actually paid in accordance with section 404(k)(2) with respect to stock
of such corporation held by an employee stock ownership plan (as defined
in section 4975(e)(7)) maintained by the corporation (or by any other
corporation that is a member of a ''controlled group of corporations''
within the meaning of section 409(l)(4) that includes the corporation),
but only if such dividends may be immediately distributed under the
terms of the plan and all of the applicable qualification and
distribution rules. The deduction is allowed under section 404(k) for
the taxable year of the corporation during which the dividends are
received by the participants.
Q-2: Is the deductibility of dividends paid to plan participants
under section 404(k) affected by a plan provision which permits
participants to elect to receive or not receive payment of dividends?
A-2: No. Dividends actually paid in cash to plan participants in
accordance with section 404(k) are deductible under section 404(k)
despite such an election provision.
Q-3: Are dividends paid in cash directly to plan participants by the
corporation and dividends paid to the plan and then distributed in cash
to plan participants under section 404(k) treated as distributions under
the plan holding stock to which the dividends relate for purposes of
sections 72, 401 and 402?
A-3: Generally, yes. However, a deductible dividend under section
404(k) is treated for purposes of section 72 as paid under a contract
separate from any other contract that is part of the plan. Thus, a
deductible dividend is treated as a plan distribution and as paid under
a separate contract providing only for payment of deductible dividends.
Therefore, a deductible dividend under section 404(k) is a taxable plan
distribution even though an employee has unrecovered employee
contributions or basis in the plan.
(T.D. 8073, 51 FR 4322, Feb. 4, 1986)
26 CFR 1.405-1 Qualified bond purchase plans.
(a) Introduction. Section 405 relates to the requirements for
qualification of, and the tax treatment of funds contributed to,
retirement plans of an employer for the benefit of his employees which
are funded through the purchase of United States retirement plan bonds.
Such bonds may be purchased under a qualified bond purchase plan
described in section 405(a) and paragraph (b) of this section. The
qualified bond purchase plan is an alternative method of providing some
of the deferred compensation benefits provided by plans described in
section 401. In addition, retirement bonds may be purchased under a
qualified pension or profit-sharing plan described in section 401. A
qualified bond purchase plan or a qualified pension or profit-sharing
plan under which retirement bonds are purchased may cover only
common-law employees, self-employed individuals, or both. A qualified
bond purchase plan may be established after December 31, 1962, and
retirement bonds may be purchased by a qualified pension or
profit-sharing plan after December 31, 1962. For the terms and
conditions of the retirement bonds, see section 405(b) and Treasury
Department Circular, Public Debt Series -- No. 1-63.
(b) Qualified bond purchase plans. (1) A qualified bond purchase
plan is a definite written program and arrangement which is communicated
to the employees and established and maintained by an employer solely to
purchase for and distribute to his employees or their beneficiaries
retirement bonds. These bonds must be purchased in the name of the
employee on whose behalf the contributions are made. The plan must be a
permanent plan which meets the requirements of section 401(a) (3), (4),
(5), (6), (7), (8), (16), and (19), and, if applicable, the requirements
of section 401(a) (9) and (10) and of section 401(d) (other than
paragraphs (1), (5)(B), (8), (16), and (19)). The rules set forth in
the regulations relating to those provisions shall be applicable to
qualified bond purchase plans.
(2) A qualified bond purchase plan must provide that an employee's
right to the proceeds of a bond purchased in his name are nonforfeitable
and will in no event inure to the benefit of the employer or be
reallocated in any manner.
(c) Benefits under a qualified bond purchase plan. (1) Except as
provided in subparagraph (2) of this paragraph, a qualified bond
purchase plan must conform to the definition of a pension plan in
paragraph (b)(1)(i) of 1.401-1, or the definition of a profit-sharing
plan in paragraph (b)(1)(ii) of 1.401-1. For example, if the qualified
bond purchase plan is a profit-sharing plan, the plan must include the
definite allocation formula described in paragraph (b)(1)(ii) of
1.401-1. In addition, if such a profit-sharing plan covers any
owner-employee, the plan must also include the definite contribution
formula described in section 401(d)(2)(B).
(2)(i) Under a qualified bond purchase plan, the bonds may be
distributed to the employees at any time, and the plan need not prohibit
the distribution or redemption of the bonds until the retirement of the
employee. Accordingly, even though a qualified bond purchase plan is
designed as a pension plan, it need not provide systematically for the
payment of definitely determinable benefits. However, provisions for
distribution must apply in a nondiscriminatory manner.
(ii) A qualified bond purchase plan which is designed as a pension
plan may not contain a formula for contributions or benefits which might
require the reallocation of amounts to an employee's credit or which
might provide for the reversion of any amounts to the employer.
(d) Contributions under a qualified bond purchase plan. (1) The
retirement bonds will be issued in the denominations of $50, $100, $500,
and $1,000. Therefore, the contribution otherwise called for under the
plan may not coincide with an amount that can be invested in retirement
bonds. Accordingly, the plan must provide that the contributions on
behalf of an individual employee for any year shall be rounded to the
nearest multiple of $50.
(2) Since the employee's rights to any bonds purchased for him under
a qualified bond purchase plan must be nonforfeitable, a qualified bond
purchase plan must, in order to conform to the requirements of section
401(a)(4) with respect to the early termination of the plan, restrict
the contributions on behalf of any employee to the amount which could be
allocated to him under paragraph (c) of 1.401-4.
(e) Definitions. For purposes of this section and 1.405-2 and
1.405-3 --
(1) The term ''employee'' includes an employee as defined in section
401(c)(1) and paragraph (b) of 1.401-10, and the term ''employer''
means the person treated as the employer of such individual under
section 401(c)(4);
(2) The term ''owner-employee'' means an owner-employee as defined in
section 401(c)(3) and paragraph (d) of 1.401-10;
(3) The term ''earned income'' means earned income as defined in
section 401(c)(2) and paragraph (c) of 1.401-10; and
(4) The term ''retirement bond'' means a United States Retirement
Plan Bond, as described in section 405(b) and Treasury Department
Circular, Public Debt Series -- No. 1-63.
(T.D. 6675, 28 FR 10131, Sept. 17, 1963, as amended by T.D. 7748, 46
FR 1697, Jan. 7, 1981)
26 CFR 1.405-2 Deduction of contributions to qualified bond purchase
plans.
(a) In general. An employer shall be allowed a deduction for
contributions paid to or under a qualified bond purchase plan in the
same manner and to the same extent as if such contributions were made to
a trust described in section 401(a) which is exempt from tax under
section 501(a). A deduction will be allowed only for the taxable year
in which the contributions are paid, or treated as paid, except as
provided by section 404(a) (1), (3), and (7). For purposes of the
deduction, a contribution is paid at the time the application for the
bond is made and the full purchase price paid.
(b) Rules for applying section 404. If a qualified bond purchase
plan is designed as a pension plan as defined in paragraph (b)(1)(i) of
1.401-1, the limitations of section 404 applicable to qualified pension
trusts shall apply. See 1.404(a)-3 through 1.404(a)-7. Similarly, if
a qualified bond purchase plan is designed as a profit-sharing plan as
defined in paragraph (b)(1)(ii) of 1.401-1, the limitations of section
404 applicable to qualified profit-sharing trusts shall apply. See
1.404(a)-9 and 1.404(a)-10. In addition, if a qualified bond purchase
plan designed as a pension plan covers some or all of the employees who
are covered by a qualified profit-sharing plan established and
maintained by the same employer, or if a qualified bond purchase plan
which is designed as a profit-sharing plan covers some or all the
employees who are also covered by a qualified pension or annuity plan
established and maintained by the same employer, section 404(a)(7) is
applicable. See 1.404(a)-(13). Furthermore, if a qualified bond
purchase plan covers employees some or all of whom are employees within
the meaning of section 401(c)(1), the provisions of section 404(a) (8),
(9), and (10) and 404(e) shall also apply.
(c) Accrual method taxpayers. In the case of a taxpayer using the
accrual method of accounting, a contribution to a qualified bond
purchase plan will be deemed paid on the last day of the year of accrual
if --
(1) During the taxable year of accrual the taxpayer incurs a
liability to make the contribution, the amount of which is accruable
under section 461 for such taxable year, and
(2) Payment is in fact made no later than the time prescribed by the
law for filing the return for the taxable year of accrual (including
extensions thereof).
(T.D. 6675, 28 FR 10131, Sept. 17, 1963)
26 CFR 1.405-3 Taxation of retirement bonds.
(a) In general. (1) As in the case of employer contributions under a
qualified pension, annuity, profit-sharing, or stock bonus plan,
employer contributions on behalf of his common-law employees under a
qualified bond purchase plan are not includible in the gross income of
the employees when made, and employer contributions on behalf of
self-employed individuals are deductible as provided in section 405(c)
and 1.405-2. Further, an employee or his beneficiary does not realize
gross income upon the receipt of a retirement bond pursuant to a
qualified bond purchase plan or from a trust described in section 401(a)
which is exempt from tax under section 501(a). Upon redemption of such
a bond, ordinary income will be realized to the extent the proceeds
thereof exceed the basis (determined in accordance with paragraph (b) of
this section) of the bond. The proceeds of a retirement bond are not
entitled to the special tax treatment of section 72(n) and 1.72-18.
(2) In the event a retirement bond is surrendered for partial
redemption and reissuance of the remainder, the person surrendering the
bond shall be taxable on the proceeds received to the extent such
proceeds exceed the basis in the portion redeemed. In such case, the
basis shall be determined (in accordance with paragraph (b) of this
section) as if the portion redeemed and the portion reissued had been
issued as separate bonds.
(3) In the event a retirement bond is redeemed after the death of the
registered owner, the amount taxable (as determined in accordance with
subparagraph (1) of this paragraph) is income in respect of a decedent
under section 691.
(4) The provisions of section 402(a)(2) are not applicable to a
retirement bond. In general, section 402(a)(2) provides for capital
gains treatment of certain distributions from a qualified trust which
constitute the total distributions payable with respect to any employee.
The proceeds of a retirement bond received upon redemption will not be
entitled to such capital gain treatment even though the bond is received
as a part of, or as the whole of, such a total distribution. Nor will
such a bond be taken into consideration in determining whether the
distribution represents the total amount payable by the trust with
respect to an employee. Thus, a distribution by a qualified trust may
constitute a total distribution payable with respect to an employee for
purposes of section 402(a)(2) even though the trust retains retirement
bonds registered in the name of such employee.
(b) Basis. (1) This paragraph is applicable in determining the basis
of any retirement bond distributed pursuant to a qualified bond purchase
plan or distributed by a trust qualifying under section 401. In the
case of such a bond purchased for an individual at the time he is a
common-law employee, the basis is that portion of the purchase price
attributable to employee contributions. In the case of such a bond
purchased for an individual at the time he is a self-employed
individual, the basis shall be determined under subparagraph (3) of this
paragraph.
(2) At the time a retirement bond is purchased, there shall be
indicated on the application for the retirement bond whether the
individual for whom the retirement bond is purchased is a common-law
employee or a self-employed individual, and in the case of common-law
employees the amount of the purchase price, if any, attributable to the
employee's contribution. The answers to these questions will appear on
the retirement bond, and when the retirement bond is purchased for a
common-law employee, the basis for the retirement bond is presumed to be
the amount of the purchase price which the retirement bond indicates was
contributed by the employee.
(3)(i) Except as provided in subdivision (ii) of this subparagraph,
for purposes of determining the basis of retirement bonds purchased for
an individual while he was a self-employed individual, all such bonds
redeemed during a taxable year shall be considered in the aggregate as a
single retirement bond. The basis of such retirement bonds shall be the
difference between the aggregate of their face amounts and the lesser
of:
(a) One-half the aggregate of their face amounts, or
(b) The aggregate of the unused amounts allowed as a deduction at the
end of the taxable year (as determined in subparagraph (4) of this
paragraph).
(ii) The basis of a retirement bond purchased for a self-employed
individual which is redeemed after his death is the amount determined by
multiplying the face amount of such retirement bond by a fraction --
(a) The numerator of which is the aggregate of the face amounts of
all the bonds registered in the individual's name at his death which
were purchased while he was a self-employed individual reduced by the
aggregate of the unused amounts allowed as a deduction at his death (as
determined in subparagraph (4) of this paragraph), and
(b) The denominator of which is the aggregate of the face amounts of
all such bonds.
(4)(i) In the case of retirement bonds purchased under a qualified
bond purchase plan, the aggregate of the unused amounts allowed as a
deduction at the end of any taxable year shall be an amount equal to the
total of the amounts allowable for such taxable year, and the amounts
allowed in all prior taxable years, as a deduction under section 405(c)
for contributions used to purchase retirement bonds for the registered
owner while he was a self-employed individual, reduced by an amount
equal to the portion of the face amounts of such retirement bonds
redeemed in prior taxable years which were included in the registered
owner's gross income.
(ii) In the case of retirement bonds purchased by a trust described
in section 401(a) and exempt under section 501(a), there shall be
allocated to the retirement bond the deduction under section 404
attributable to the contributions used to purchase the retirement bond.
The amount so allocated shall be treated in the same manner as the
deduction allowed under section 405(c) for purposes of computing the
unused amounts allowed as a deduction under subdivision (i) of this
subparagraph. Further, the amount so allocated shall not be included in
the investment in the contract for purposes of section 72 in determining
the portion of the other assets distributed by the trust included in
gross income.
(5) The application of the rule of subparagraphs (3) and (4) of this
paragraph may be illustrated by the following examples:
Example (1). B, a self-employed individual, adopts a qualified bond
purchase plan in 1963. During 1963 the plan purchased $2,000 worth of
retirement bonds in his name. As a result of overestimating his income
for 1963, only $400 was allowed B as a deduction pursuant to section
405(c). In 1964, prior to B's retirement in June of that year, the plan
purchased a $500 retirement bond in B's name for which a deduction was
allowable pursuant to section 405(c) in the amount of $250. B redeemed
a retirement bond with a face amount of $500 in September of 1964 and
another with a face amount of $500 in October of 1964. Of the proceeds
received in 1964 from the redemption of the bonds, $1,000 plus interest,
B shall exclude from his gross income $500 (face amount of the
retirement bonds, $1,000, less $500, one-half of the face amount, the
latter being less than the aggregate of the unused amounts allowed as a
deduction, $250 allowable for the taxable year in which the bonds were
redeemed plus $400, the unused amounts allowed in prior taxable years,
or $650). The aggregate of the unused amounts allowed as a deduction
shall be reduced by the amount so excluded ($650^$500=$150). During the
following year, B redeems another retirement bond with a face amount of
$500. Of the proceeds received from the redemption of such retirement
bond, $500 plus interest, B shall exclude from his gross income $350
(face amount of the retirement bonds, $500, less $150, the aggregate of
the unused amounts allowed as a deduction, the latter being less than
one-half of the face amount of the bond, $250). The aggregate of the
unused amounts allowed as a deduction is reduced to zero ($150^$150=0).
Upon redemption of the remaining retirement bonds registered in B's
name, B shall exclude from his gross income with respect to such
proceeds an amount equal to the face amounts of the bonds redeemed.
Example (2). C, a self-employed individual, participated in a
qualified bond purchase plan during the years 1963 through 1966. The
plan purchased in his name retirement bonds in the aggregate of $10,000.
C deducted $4,000 from his gross income for the four years ($1,000 for
each year) with respect to the purchase of such retirement bonds. C
retired in December of 1966 and during the following year redeemed one
retirement bond with a face amount of $1,000. C excluded from his gross
income $500 of the proceeds of the bond. C died without redeeming any
of the remaining retirement bonds registered in his name. The basis of
each remaining retirement bond shall be determined by multiplying the
face amount of each retirement bond by $5,500 $9,000. The numerator is
the aggregate of the face amounts registered in C's name (as a
self-employed individual) at his death, $9,000, reduced by the aggregate
of the unused amounts allowed as a deduction at his death, $3,500
(amounts allowed as a deduction under section 405(c), $4,000, reduced by
the portion of the face amount of the retirement bond redeemed by C
which was included in C's gross income, $500), or $5,500. The
denominator is the face amount of the retirement bonds registered in his
name as a self-employed individual at his death, $9,000.
(T.D. 6675, 28 FR 10131, Sept. 17, 1963)
26 CFR 1.406-1 Treatment of certain employees of foreign subsidiaries
as employees of the domestic corporation.
(a) Scope -- (1) General rule. For purposes of applying the rules in
part 1 of subchapter D of chapter 1 of subtitle A of the Code and the
regulations thereunder with respect to a pension, profit-sharing, or
stock bonus plan described in section 401(a), an annuity plan described
in section 403(a), or a bond purchase plan described in section 405(a),
of a domestic corporation, an individual who is a citizen of the United
States and who is an employee of a foreign subsidiary (as defined in
section 3121(1)(8) and the regulations thereunder) of such domestic
corporation shall be treated as an employee of such domestic corporation
if the requirements of paragraph (b) of this section are satisfied.
(2) Cross-references. For rules relating to nondiscrimination
requirements and the determination of compensation, see paragraph (c) of
this section. For rules under which termination of the status of an
individual as an employe of the domestic corporation in certain
instances will not be considered as separation from service for certain
purposes, see paragraph (d) of this section. For rules regarding
deductibility of contribution, see paragraph (e) of this section. For
rules regarding treatment of such individual as an employee of the
domestic corporation under related provisions, see paragraph (f) of this
section.
(b) Application of this section -- (1) Requirements. This section
shall apply and the employee of the foreign subsidiary shall be treated
as an employee of domestic corporation for the purposes set forth in
paragraph (a)(1) of this section only if each of the following
requirements is satisfied:
(i) The domestic corporation must have entered into an agreement
under section 3121(l) to provide social security coverage which applies
to the foreign subsidiary of which such individual is an employee and
which has not been terminated under section 3121(l)(3) or (4).
(ii) The plan, referred to in paragraph (a)(1) of this section, must
expressly provide for contributions or benefits for individuals who are
citizens of the United States and who are employees of one or more of
its foreign subsidiaries to which an agreement entered into by such
domestic corporation under section 3121(l) applies. The plan must apply
to all of the foreign subsidiaries to which such agreement applies.
(iii) Contributions under a funded plan of deferred compensation
(whether or not a plan described in section 401(a), 403(a), or 405(a))
must not be provided by any other person with respect to the
remuneration paid to such individual by the foreign subsidiary.
(2) Supplementary rules. Subparagraph (l)(ii) of this paragraph does
not modify the requirements for qualification of a plan described in
section 401(a), 403(a), or 405(a) and the regulations thereunder. It is
not necessary that the plan provide benefits or contributions for all
United States citizens who are employees of such foreign subsidiaries.
If the plan is amended to cover individuals who are employees by reason
of paragraph (a)(1) of this section, the plan will not qualify unless it
meets the coverage requirements of section 410(b)(1) (section 401(a)(3),
as in effect on September 1, 1974, for plan years to which section 410
does not apply; see 1.410(a)-2 for the effective dates of section 401)
and the nondiscrimination requirements of section 401(a)(4). In
addition, the administrative rules contained in 1.401(a)-3(e) (relating
to the determination of the contributions or benefits provided by the
employer under the Social Security Act) will also apply for purposes of
determining whether the plan meets the requirements of section 401. For
purposes of subparagraph (1)(iii) of this paragraph, contributions will
not be considered as provided under a funded plan merely because the
foreign subsidiary is required under the laws of the foreign
jurisdiction to pay social insurance taxes or to make similar payments
with respect to the wages paid to the employee.
(c) Special rules -- (1) Nondiscrimination requirements. For
purposes of applying sections 401(a)(4) and 410(b)(1)(B) (section
401(a)(3)(B), as in effect on September 1, 1974, for plan years to which
section 410 does not apply) and the regulations thereunder (relating to
nondiscrimination concerning benefits and contributions and coverage of
employees) with respect to an employee of the foreign subsidiary who is
treated as an employee of the domestic corporation under paragraph
(a)(1) of this section --
(i) If the employee is an officer, shareholder, or (with respect to
plan years to which section 410 does not apply) person whose principal
duties consist in supervising the work of other employees of the foreign
subsidiary of the domestic corporation, he shall be treated as having
such capacity with respect to the domestic corporation; and
(ii) The determination as to whether the employee is a highly
compensated employee shall be made by comparing his total compensation
(determined under subparagraph (2) of this paragraph) with the
compensation of all the employees of the domestic corporation (including
individuals treated as employees of the domestic corporation pursuant to
section 406 and this section).
(2) Determination of compensation. For purposes of applying section
401(a) (5) and the regulations thereunder, relating to classifications
that will not be considered discriminatory, with respect to an employee
of the foreign subsidiary who is treated as an employee of the domestic
corporation under paragraph (a)(1) of this section --
(i) The total compensation of the employee shall be the remuneration
of the employee from the foreign subsidiary (including any allowances
that are paid to the employee because of his employment in a foreign
country) which would constitute his total compensation if his services
had been performed for the domestic corporation;
(ii) The basic or regular rate of compensation of the employee shall
be determined for the employee in the same manner as it is determined
under section 401 for other employees of the domestic corporation; and
(iii) The amount paid by the domestic corporation which is equivalent
to the tax imposed with respect to the employee by section 3101
(relating to the tax on employees under the Federal Insurance
Contributions Act) shall be treated as having been paid by the employee
and shall be included in his compensation.
(d) Termination of status as deemed employee not to be treated as
separation from service for purposes of capital gain provisions and
limitation of tax. For purposes of applying the rules, relating to the
treatment of certain distributions which are made after an employee's
separation from service, set forth in section 72(n) as in effect on
September 1, 1974 (with respect to taxable years ending after December
31, 1969, and to which section 402(e) does not apply), and in sections
402(a)(2) and (e) and 403(a)(2) with respect to distributions or
payments made after December 31, 1973, and in taxable years beginning
after December 31, 1973) with respect to an employee of a foreign
subsidiary who is treated as an employee of a domestic corporation under
paragraph (a)(1) of this section, the employee shall not be considered
as separated from the service of the domestic corporation solely by
reason of the occurrence of any one or more of the following events:
(1) The termination, under the provisions of section 3121(l), of the
agreement entered into by the domestic corporation under that section
which covers the employment of the employee;
(2) The employee's becoming an employee of another foreign subsidiary
of the domestic corporation with respect to which such agreement does
not apply,
(3) The employee's ceasing to be an employee of the foreign
subsidiary by reason of which employment he was treated as an employee
of such domestic corporation, if he becomes an employee of another
corporation controlled by such domestic corporation; or
(4) The termination of the provision of the plan described in
paragraph (b)(1)(ii) of this section, for coverage of United States
citizens who are employees of foreign subsidiaries covered by an
agreement under section 3121(l).
For purposes of subparagraph (3) of this paragraph, a corporation is
considered to be controlled by a domestic corporation if such domestic
corporation owns directly or indirectly more than 50 percent of the
voting stock of the corporation.
(e) Deductibility of contributions -- (1) In general. For purposes
of applying sections 404 and 405(c) with respect to the deduction for
contributions made to or under a pension, profit-sharing, or stock bonus
plan described in section 401(a), an annuity plan described in section
403(a), or a bond purchase plan described in section 405(a), by a
domestic corporation, or by another corporation which is entitled to
deduct its contributions under section 404(a)(3)(B), on behalf of an
employee of a foreign subsidiary treated as an employee of the domestic
corporation under paragraph (a)(1) of this section --
(i) Except as provided in subdivision (ii) of this subparagraph, no
deduction shall be allowed to such domestic corporation or to any other
corporation which would otherwise be entitled to deduct its
contributions on behalf of such employee under one of such sections;
(ii) There shall be allowed as a deduction from the gross income of
the foreign subsidiary which is effectively connected with the conduct
of a trade or business within the United States (within the meaning of
section 882 and the regulations thereunder) an amount which is allocable
and apportionable to such gross income under the rules of 1.861-8 and
which in no event may exceed the amount which (but for subdivision (i)
of this subparagraph) would be deductible under section 404 or section
405(c) by the domestic corporation if the individual were an employee of
the domestic corporation and if his compensation were paid by the
domestic corporation; and
(iii) Any reference to compensation shall be considered to be a
reference to the total compensation of such individual (determined by
applying paragraph (c)(2) of this section).
(2) Year of deduction. Any amount deductible by the foreign
subsidiary under section 406(d) and this paragraph shall be deductible
for its taxable year with or within which ends the taxable year of the
domestic corporation for which the contribution was made.
(3) Special rules. Whether contributions to a plan on behalf of an
employee of the foreign subsidiary who is treated as an employee of the
domestic corporation under paragraph (a)(1) of this section, or whether
forfeitures with regard to such employee, will require an inclusion in
the income of the domestic corporation or an adjustment in the basis of
its stock in the foreign subsidiary, shall be determined in accordance
with the rules of general application of subtitle A of chapter 1 of the
Code (relating to income taxes). For example, an unreimbursed
contribution by the domestic corporation to a plan which meets the
requirements of section 401(a) will be treated, to the extent each
employee's rights to the contribution are nonforfeitable, as a
contribution of capital to the foreign subsidiary to the extent that
such contributions are made on behalf of the employees of such
subsidiary.
(f) Treatment as an employee of the domestic corporation under
related provisions. An individual who is treated as an employee of a
domestic corporation under paragraph (a)(1) of this section shall also
be treated as an employee of such domestic corporation, with respect to
the plan having the provision described in paragraph (b)(1)(ii) of this
section, for purposes of applying section 72(d) (relating to employees'
annuities), section 72(f) (relating to special rules for computing
employees' contributions), section 101(b) (relating to employees' death
benefits), section 2039 (relating to annuities), and section 2517
(relating to certain annuities under qualified plans) and the
regulations thereunder.
(g) Nonexempt trust. If the plan of the domestic corporation is a
qualified plan described under section 401(a), the fact that a trust
which forms a part of such plan is not exempt from tax under section
501(a) shall not affect the treatment of an employee of a foreign
subsidiary as an employee of a domestic corporation under section 406(a)
and paragraph (a)(1) of this section.
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C.
411))
(T.D. 7501, 42 FR 42321, Aug. 23, 1978)
26 CFR 1.407-1 Treatment of certain employees of domestic subsidiaries
engaged in business outside the United States as employees of the
domestic parent corporation.
(a) Scope -- (1) General rule. For purposes of applying the rules in
part 1 of subchapter D of chapter 1 of subtitle A of the Code and the
regulations thereunder with respect to a pension, profit-sharing, or
stock bonus plan described in section 401(a), an annuity plan described
in section 403(a), or a bond purchase plan described in section 405(a),
of a domestic parent corporation (as defined in paragraph (b)(3)(ii) of
this section), an individual who is a citizen of the United States and
who is an employee of a domestic subsidiary (as defined in paragraph
(b)(3)(i) of this section) of such domestic parent corporation shall be
treated as an employee of such domestic parent corporation if the
requirements of paragraph (b) of this section are satisfied.
(2) Cross-references. For rules relating to nondiscrimination
requirements and the determination of compensation, see paragraph (c) of
this section. For rules under which termination of the status of an
individual as an employee of the domestic parent corporation in certain
instances will not be considered as separation from service for certain
purposes, see paragraph (d) of this section. For rules regarding
deductibility of contributions, see paragraph (e) of this section. For
rules regarding treatment of such individual as an employee of the
domestic parent corporation under related provisions, see paragraph (f)
of this section.
(b) Application of this section -- (1) Requirements. This section
shall apply and the employee of the domestic subsidiary shall be treated
as an employee of the domestic parent corporation for the purposes set
forth in paragraph (a)(1) of this section only if each of the following
requirements is satisfied:
(i) The plan, referred to in paragraph (a)(1) of this section, must
expressly provide for contributions of benefits for individuals who are
citizens of the United States and who are employees of one or more of
the domestic subsidiaries of the domestic parent corporation. The plan
must apply to every domestic subsidiary.
(ii) Contributions under a funded plan of deferred compensation
(whether or not a plan described in section 401(a), 403(a), or 405(a))
must not be provided by any other person with respect to the
remuneration paid to such individual by the domestic subsidiary.
(2) Supplementary rules. Subparagraph (1)(i) of this paragraph does
not modify the requirements for qualification of a plan described in
section 401(a), 403(a), or 405(a) and the regulations thereunder. It is
not necessary that the plan provide benefits or contributions for all
United States citizens who are employees of such domestic subsidiaries.
It the plan is amended to cover individuals who are employees by reason
of paragraph (a)(1) of this section, the plan will not qualify unless it
meets the coverage requirements of section 410(b)(1) (section 401(a)(3),
as in effect on September 1, 1974, for plan years to which section 410
does not apply; see 1.410 (a)-2 for the effective dates of section
401) and the nondiscrimination requirements of section 410(a)(4). The
administrative rules contained in 1.401 (a)-3(e) (relating to the
determination of the contributions or benefits provided by the employer
under the Social Security Act) will also apply for purposes of
determining whether the plan meets the requirements of section 401. For
purposes of subparagraph (1)(ii) of this paragraph, contributions will
not be considered as provided under a funded plan merely because the
domestic subsidiary employer pays the tax imposed by section 3111
(relating to tax on employers under the Federal Insurance Contributions
Act) with respect to such employee or is required under the laws of a
foreign jurisdiction to pay social insurance taxes or to make similar
payments with respect to the wages paid to the employee.
(3) Definitions -- (i) Domestic subsidiary. For purposes of this
section, a corporation shall be treated as a domestic subsidiary for any
taxable year only if each of the following requirements is satisfied:
(A) It is a domestic corporation 80 percent or more of the
outstanding voting stock of which is owned by another domestic
corporation;
(B) 95 percent of more of its gross income for the three-year period
immediately preceding the close of its taxable year which ends on or
before the close of the taxable year of such other domestic corporation
(or for such part of such period during which it was in existence) was
derived from sources without the United States, determined pursuant to
sections 861 through 864 and the regulations thereunder; and
(C) 90 percent or more of its gross income for such period (or such
part) was derived from the active conduct of a trade or business.
If for the period (or part thereof) referred to in (B) and (C) of
this subdivision such corporation has no gross income, the provisions of
(B) and (C) shall be treated as satisfied if it is reasonable to
anticipate that, with respect to the first taxable year thereafter for
which such corporation has gross income, such provisions will be
satisfied.
(ii) Domestic parent corporation. The domestic parent corporation of
any domestic subsidiary is the domestic corporation which owns 80
percent or more of the outstanding voting stock of such domestic
subsidiary.
(c) Special rules -- (1) Nondiscrimination requirements. For
purposes of applying sections 401(a)(4) and 410(b)(1)(B) (section
401(a)(3)(B), as in effect on Septemeber 1, 1974, for plan years to
which section 410 does not apply) and the regulation thereunder
(relating to nondiscrimination concerning benefits and contributions and
coverage of employees) with respect to an employee of the domestic
subsidiary who is treated as an employee of the domestic parent
corporation under paragraph (a)(1) of this section --
(i) If the employee is an officer, shareholder, or (with respect to
plan years to which section 410 does not apply) a person whose principal
duties consist in supervising the work of other employees of the
domestic subsidiary of the domestic parent corporation, he shall be
treated as having such capacity with respect to the domestic parent
corporation; and
(ii) The determination as to whether the employee is a highly
compensated employee shall be made by comparing his total compensation
determined under subparagraph (2) of this paragraph with the
compensation of all the employees of the domestic parent corporation
(including individuals treated as employees of the domestic parent
corporation pursuant to section 407 and this section).
(2) Determination of compensation. For purposes of applying section
401(a) (5) and the regulations thereunder, relating to classifications
that will not be considered discriminatory, with respect to an employee
of the domestic subsidiary who is treated as an employee of the domestic
parent corporation under paragraph (a)(1) of this section --
(i) The total compensation of the employee shall be the remuneration
of the employee from the domestic subsidiary (including any allowances
that are paid to the employee because of his employment in a foreign
country) which would constitute his total compensation if his services
had been performed for such domestic parent corporation; and
(ii) The basic or regular rate of compensation of the employee shall
be determined for the employee in the same manner as it is determined
under section 401 for other employees of the domestic parent
corporation.
(d) Termination of status as deemed employee not to be treated as
separation from service for purposes of captial gain provisions and
limitation of tax. For purposes of applying the rules, relating to
treatment of certain distributions which are made after an employee's
separation from service, set forth in section 72(n) as in effect on
September 1, 1974 (with respect to taxable years ending after December
31, 1969, and to which section 402(e) does not apply), and in sections
402 (a)(2) and (e) and 403(a)(2) (with respect to distributions or
payments made after December 31, 1973, and in taxable years beginning
after December 31, 1973) with respect to an employee of a domestic
subsidiary who is treated as an employee of a domestic parent
corporation under paragraph (a)(1) of this section, the employee shall
not be considered as separated from the service of the domestic parent
corporation solely by reason of the occurrence of any one or more of the
following events:
(1) The fact that the corporation of which such individual is an
employee ceases, for any taxable year, to be a domestic subsidiary
within the mean of paragraph (b)(3)(i) of this section;
(2) The employee' ceasing to be an employee of the domestic
subsidiary of such domestic parent corporation, if he becomes an
employee of another corporation controlled by such domestic parent
corporation; or
(3) The termination of the provision of the plan described in
paragraph (b)(1)(i) of this section, requiring coverage of the United
States citizens who are employees of domestic subsidiaries of the
domestic parent corporation.
For purposes of subparagraph (2) of this paragraph, a corporation is
considered to be controlled by a domestic parent corporation if the
domestic parent corporation owns directly or indirectly more than 50
percent of the voting stock of the corporation.
(e) Deductibility of contributions -- (1) In general. For purposes
of applying sections 404 and 405(c) with respect to the deduction for
contributions made to or under a pension, profit-sharing, or stock bonus
plan described in section 401(a), and annuity plan described in section
403(a), or a bond purchase plan described in section 405(a), by a
domestic parent corporation, or by another corporation which is entitled
to deduct its contributions under section 404(a)(3)(B), on behalf of an
employee of a domestic subsidiary treated as an employee of the domestic
parent corporation under paragraph (a)(1) of this section --
(i) Except as provided in subdivision (ii) of this subparagraph, no
deduction shall be allowed to the domestic parent corporation which
would otherwise be entitled to deduct its contributions on behalf of
such employee under one of such sections;
(ii) There shall be allowed as a deduction to the domestic subsidiary
of which such individual is an employee an amount equal to the amount
which (but for subdivision (i) of this subparagraph) would be deductible
under section 404 or section 405(c) by the domestic parent corporation
if the individual were an employee of the domestic parent corporation
and if his compensation were paid by the domestic corporation; and
(iii) Any reference to compensation shall be considered to be a
reference to the total compensation of such individual determined by
applying paragraph (c)(2) of this section).
(2) Year of deduction. Any amount deductible by the domestic
subsidiary under section 407(d) and this paragraph shall be deductible
for its taxable year with or within which ends the taxable year of the
domestic parent corporation for which the contribution was made.
(3) Special rules. Whether contributions to a plan on behalf of an
employee of the domestic subsidiary who is treated as an employee of the
domestic parent corporation under paragraph (a)(1) of this section, or
whether forfeitures with regard to such employee, will require an
inclusion in the income of the domestic parent corporation or an
adjustment in the basis of its stock in the domestic subsidiary, shall
be determined in accordance with the rules of general application of
subtitle A of chapter 1 of the Code (relating to income taxes). For an
example, and unreimbursed contribution by the domestic parent
corporation to a plan which meets the requirements of section 401(a)
will be treated, to the extent each employee's rights to the
contribution are nonforfeitable, as a contribution of capital to the
domestic subsidiary to the extent that such contributions are made on
behalf of the employees of such subsidiary.
(f) Treatment as an employee of the domestic parent corporation under
related provisions. An individual who is treated as an employee of a
domestic parent corporation under paragraph (a)(1) of this section shall
also be treated as an employee of such domestic corporation, with
respect to the plan having the provision described in paragraph
(b)(1)(i) of this section, for purposes of applying section 72(d)
(relating to special rules for computing employees' contributions),
section 72(f) (relating to special rules for computing employees'
contributions), section 101(b) (relating to employees' section 101(b)
(relating to employees' death benefits), section 2039 (relating to
annuities), and section 2517 (relating to certain annuities under
qualified plans) and the regulations thereunder.
(g) Nonexempt trust. If the plan of the domestic parent corporation
is a qualified plan described under section 401(a), the fact that a
trust which forms a part of such plan is not exempt from tax under
section 501(a) shall not affect the treatment of an employee of a
domestic subsidiary as an employee of a domestic parent corporation
under section 407(a) and paragraph (a)(1) of this section.
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C.
411))
(T.D. 7501, 42 FR 42323, Aug. 23, 1977)
26 CFR 1.408-1 General rules.
(a) In general. Section 408 prescribes rules relating to individual
retirement accounts and individual retirement annuities. In addition to
the rules set forth in 1.408-2 and 1.408-3, relating respectively to
individual retirement accounts and individual retirement annuities, the
rules set forth in this section shall also apply.
(b) Exemption from tax. The individual retirement account or
individual retirement annuity is exempt from all taxes under subtitle A
of the Code other than the taxes imposed under section 511, relating to
tax on unrelated business income of charitable, etc., organizations.
(c) Sanctions -- (1) Excess contributions. If an individual
retirement account or individual retirement annuity accepts and retains
excess contributions, the individual on whose behalf the account is
established or who is the owner of the annuity will be subject to the
excise tax imposed by section 4973.
(2) Prohibited transactions by owner or beneficiary of individual
retirement account -- (i) Under section 408(e)(2), if, during any
taxable year of the individual for whose benefit any individual
retirement account is established, that individual or the individual's
beneficiary engages in any transaction prohibited by section 4975 with
respect to such account, such account ceases to be an individual
retirement account as of the first day of such taxable year. In any
case in which any individual retirement account ceases to be an
individual retirement account by reason of the preceding sentence as of
the first day of any taxable year, section 408(d)(1) applies as if there
were a distribution on such first day in an amount equal to the fair
market value (on such first day) of all assets in the account (on such
first day). The preceding sentence applies even though part of the fair
market value of the individual retirement account as of the first day of
the taxable year is attributable to excess contributions which may be
returned tax-free under section 408(d)(4) or 408(d)(5).
(ii) If the trust with which the individual engages in any
transaction described in subdivision (i) of this subparagraph is
established by an employer or employee association under section 408(c),
only the employee who engages in the prohibited transaction is subject
to disqualification of his separate account.
(3) Prohibited transaction by person other than owner or beneficiary
of account. If any person other than the individual on whose behalf an
individual retirement account is established or the individual's
beneficiary engages in any transaction prohibited by section 4975 with
respect to such account, such person shall be subject to the taxes
imposed by section 4975.
(4) Pledging account as security. Under section 408(e)(4), if,
during any taxable year of the individual for whose benefit an
individual retirement account is established, that individual uses the
account or any portion thereof as security for a loan, the portion so
used is treated as distributed to that individual.
(5) Borrowing on annuity contract. Under section 408(e)(3), if
during any taxable year the owner of an individual retirement annuity
borrows any money under or by use of such contract, the contract ceases
to be an individual retirement annuity as of the first day of such
taxable year. See 1.408-3(c).
(6) Premature distributions. If a distribution (whether a deemed
distribution or an actual distribution) is made from an individual
retirement account, or individual retirement annuity, to the individual
for whose benefit the account was established, or who is the owner of
the annuity, before the individual attains age 59 1/2 (unless the
individual has become disabled within the meaning of section 72(m)(7)),
the tax under Chapter 1 of the Code for the taxable year in which such
distribution is received is increased under section 408(f)(1) or (f)(2).
The increase equals 10 percent of the amount of the distribution which
is includible in gross income for the taxable year. Except in the case
of the credits allowable under section 31, 39, or 42, no credit can be
used to offset the increased tax described in this subparagraph. See,
however, 1.408-4(c)(3).
(d) Limitation on contributions and benefits. An individual
retirement account or individual retirement annuity is subject to the
limitation on contributions and benefits imposed by section 415 for
years beginning after December 31, 1975.
(e) Community property laws. Section 408 shall be applied without
regard to any community property laws.
(T.D. 7714, 45 FR 52790, Aug. 8, 1980)
26 CFR 1.408-2 Individual retirement accounts.
(a) In general. An individual retirement account must be a trust or
a custodial account (see paragraph (d) of this section). It must
satisfy the requirements of paragraph (b) of this section in order to
qualify as an individual retirement account. It may be established and
maintained by an individual, by an employer for the benefit of his
employees (see paragraph (c) of this section), or by an employee
association for the benefit of its members (see paragraph (c) of this
section).
(b) Requirements. An individual retirement account must be a trust
created or organized in the United States (as defined in section
7701(a)(9)) for the exclusive benefit of an individual or his
beneficiaries. Such trust must be maintained at all times as a domestic
trust in the United States. The instrument creating the trust must be
in writing and the following requirements must be satisfied.
(1) Amount of acceptable contributions. Except in the case of a
contribution to a simplified employee pension described in section
408(k) and a rollover contribution described in section 408(d)(3),
402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8) or 409(b)(3)(C), the trust
instrument must provide that contributions may not be accepted by the
trustee for the taxable year in excess of $1,500 on behalf of any
individual for whom the trust is maintained. An individual retirement
account maintained as a simplified employee pension may provide for the
receipt of up to $7,500 for a calendar year.
(2) Trustee. (i) The trustee must be a bank (as defined in section
401(d)(1) and the regulations thereunder) or another person who
demonstrates, in the manner described in paragraph (b)(2)(ii) of this
section, to the satisfaction of the Commissioner, that the manner in
which the trust will be administered will be consistent with the
requirements of section 408 and this section.
(ii) A person may demonstrate to the satisfaction of the Commissioner
that the manner in which he will administer the trust will be consistent
with the requirements of section 408 only upon the filing of a written
application to the Commissioner of Internal Revenue, Attention: E:EP,
Internal Revenue Service, Washington, D.C. 20224. Such application must
meet the applicable requirements of the regulations under section
401(d)(1), relating to nonbank trustees of pension and profit-sharing
trusts benefiting owner-employees.
(iii) Section 11.408(a)(2)-1 of the Temporary Income Tax Regulations
under the Employee Retirement Income Security Act of 1974 is superseded
by this subparagraph (2).
(3) Life insurance contracts. No part of the trust funds may be
invested in life insurance contracts. An individual retirement account
may invest in annuity contracts which provide, in the case of death
prior to the time distributions commence, for a payment equal to the sum
of the premiums paid or, if greater, the cash value of the contract.
(4) Nonforfeitability. The interest of any individual on whose
behalf the trust is maintained in the balance of his account must be
nonforfeitable.
(5) Prohibition against commingling. (i) The assets of the trust
must not be commingled with other property except in a common trust fund
or common investment fund.
(ii) For purposes of this subparagraph, the term ''common investment
fund'' means a group trust created for the purpose of providing a
satisfactory diversification or investments or a reduction of
administrative expenses for the individual participating trusts, and
which group trust satisfies the requirements of section 408(c) (except
that it need not be established by an employer or an association of
employees) and the requirements of section 401(a) in the case of a group
trust in which one of the individual participating trusts is an
employees' trust described in section 401(a) which is exempt from tax
under section 501(a).
(iii) For purposes of this subparagraph, the term ''individual
participating trust'' means an employees' trust described in section
401(a) which is exempt from tax under section 501(a) or a trust which
satisfies the requirements of section 408(a) provided that in the case
of such an employees' trust, such trust would be permitted to
participate in such a group trust if all the other individual
participating trusts were employees' trusts described in section 401(a)
which are exempt from tax under section 501(a).
(6) Distribution of interest. (i) The trust instrument must provide
that the entire interest of the individual for whose benefit the trust
is maintained must be distributed to him in accordance with paragraph
(b)(6)(ii) or (iii) of this section.
(ii) Unless the provisions of paragraph (b)(6)(iii) of this section
apply, the entire interest of the individual must be actually
distributed to him not later than the close of his taxable year in which
he attains age 70 1/2.
(iii) In lieu of distributing the individual's entire interest as
provided in paragraph (b)(6)(ii) of this section, the interest may be
distributed commencing not later than the taxable year described in such
paragraph (b)(6)(ii). In such case, the trust must expressly provide
that the entire interest of the individual will be distributed to the
individual and the individual's beneficiaries, in a manner which
satisfies the requirements of paragraph (b)(6)(v) of this section, over
any of the following periods (or any combination thereof) --
(A) The life of the individual,
(B) The lives of the individual and spouse,
(C) A period certain not extending beyond the life expectancy of the
individual, or
(D) A period certain not extending beyond the joint life and last
survivor expectancy of the individual and spouse.
(iv) The life expectancy of the individual or the joint life and last
survivor expectancy of the individual and spouse cannot exceed the
period computed by use of the expected return multiples in 1.72-9, or,
in the case of payments under a contract issued by an insurance company,
the period computed by use of the mortality tables of such company.
(v) If an individual's entire interest is to be distributed over a
period described in paragraph (b)(6)(iii) of this section, beginning in
the year the individual attains 70 1/2 the amount to be distributed each
year must be not less than the lesser of the balance of the individual's
entire interest or an amount equal to the quotient obtained by dividing
the entire interest of the individual in the trust at the beginning of
such year (including amounts not in the individual retirement account at
the beginning of the year because they have been withdrawn for the
purpose of making a rollover contribution to another individual
retirement plan) by the life expectancy of the individual (or the joint
life and last survivor expectancy of the individual and spouse
(whichever is applicable)), determined in either case as of the date the
individual attains age 70 in accordance with paragraph (b)(6)(iv) of
this section, reduced by one for each taxable year commencing after the
individual's attainment of age 70 1/2. An annuity or endowment contract
issued by an insurance company which provides for non-increasing
payments over one of the periods described in paragraph (b)(6)(iii) of
this section beginning not later than the close of the taxable year in
which the individual attains age 70 1/2 satisfies this provision.
However, no distribution need be made in any year, or a lesser amount
may be distributed, if beginning with the year the individual attains
age 70 1/2 the aggregate amounts distributed by the end of any year are
at least equal to the aggregate of the minimum amounts required by this
subdivision to have been distributed by the end of such year.
(vi) If an individual's entire interest is distributed in the form of
an annuity contract, then the requirements of section 408(a)(6) are
satisfied if the distribution of such contract takes place before the
close of the taxable year described in subdivision (ii) of this
subparagraph, and if the individual's interest will be paid over a
period described in subdivision (iii) of this subparagraph and at a rate
which satisfies the requirements of subdivision (v) of this
subparagraph.
(vii) In determining whether paragraph (b)(6)(v) of this section is
satisfied, all individual retirement plans maintained for an
individual's benefit (except those under which he is a beneficiary
described in section 408(a)(7)) at the close of the taxable year in
which he reaches age 70 1/2 must be aggregated. Thus, the total
payments which such individual receives in any taxable year must be at
least equal to the amount he would have been required to receive had all
the plans been one plan at the close of the taxable year in which he
attained age 70 1/2.
(7) Distribution upon death. (i) The trust instrument must provide
that if the individual for whose benefit the trust is maintained dies
before the entire interest in the trust has been distributed to him, or
if distribution has been commenced as provided in paragraph (b)(6) of
this section to the surviving spouse and such spouse dies before the
entire interest has been distributed to such spouse, the entire interest
(or the remaining part of such interest if distribution thereof has
commenced) must, within 5 years after the individual's death (or the
death of the surviving spouse) be distributed or applied to the purchase
of an immediate annuity for this beneficiary or beneficiaries (or the
beneficiary or beneficiaries of the surviving spouse) which will be
payable for the life of such beneficiary or beneficiaries (or for a term
certain not extending beyond the life expectancy of such beneficiary or
beneficiaries) and which annuity contract will be immediately
distributed to such beneficiary or beneficiaries. A contract described
in the preceding sentence is not includible in gross income upon
distribution. Section 1.408-4(e) provides rules applicable to the
taxation of such contracts. The first sentence of this paragraph (b)(7)
shall have no application if distributions over a term certain commenced
before the death of the individual for whose benefit the trust was
maintained and the term certain is for a period permitted under
paragraph (b)(6)(iii) (C) or (D) of this section.
(ii) Each such beneficiary (or beneficiary of a surviving spouse) may
elect to treat the entire interest in the trust (or the remaining part
of such interest if distribution thereof has commenced) as an account
subject to the distribution requirements of section 408(a)(6) and
paragraph (b)(6) of this section instead of those of section 408(a)(7)
and paragraph (b)(7) of this section. Such an election will be deemed
to have been made if such beneficiary treats the account in accordance
with the requirements of section 408(a)(6) and paragraph (b)(6) of this
section. An election will be considered to have been made by such
beneficiary if either of the following occurs: (A) any amounts in the
account (including any amounts that have been rolled over, in accordance
with the requirements of section 408(d)(3)(A)(i), into an individual
retirement account, individual retirement annuity, or retirement bond
for the benefit of such individual) have not been distributed within the
appropriate time period required by section 408(a)(7) and paragraph
(b)(7) of this section; or (B) any additional amounts are contributed
to the account (or to the account, annuity, or bond to which the
beneficiary has rolled such amounts over, as described in (1) above)
which are subject, or deemed to be subject, to the distribution
requirements of section 408(a)(6) and paragraph (b)(6) of this section.
(8) Definition of beneficiaries. The term ''beneficiaries'' on whose
behalf an individual retirement account is established includes (except
where the context indicates otherwise) the estate of the individual,
dependents of the individual, and any person designated by the
individual to share in the benefits of the account after the death of
the individual.
(c) Accounts established by employers and certain association of
employees -- (1) In general. A trust created or organized in the United
States (as defined in section 7701(a)(9)) by an employer for the
exclusive benefit of his employees or their beneficiaries, or by an
association of employees for the exclusive benefit of its members or
their beneficiaries, is treated as an individual retirement account if
the requirements of paragraphs (c)(2) and (c)(3) of this section are
satisfied under the written governing instrument creating the trust. A
trust described in the preceding sentence is for the exclusive benefit
of employees or members even though it may maintain an account for
former employees or members and employees who are temporarily on leave.
(2) General requirements. The trust must satisfy the requirements of
paragraphs (b) (1) through (7) of this section.
(3) Special requirement. There must be a separate accounting for the
interest of each employee or member.
(4) Definitions -- (i) Separate accounting. For purposes of
paragraph (c)(3) of this section, the term ''separate accounting'' means
that separate records must be maintained with respect to the interest of
each individual for whose benefit the trust is maintained. The assets
of the trust may be held in a common trust fund, common investment fund,
or common fund for the account of all individuals who have an interest
in the trust.
(ii) Employee association. For purposes of this paragraph and
section 408(c), the term ''employee association'' means any organization
composed of two or more employees, including but not limited to, an
employee association described in section 501(c)(4). Such association
may include employees within the meaning of section 401(c)(1). There
must be, however, some nexus between the employees (e.g., employees of
same employer, employees in the same industry, etc.) in order to qualify
as an employee association described in this subdivision (ii).
(d) Custodial accounts. For purposes of this section and section
408(a), a custodial account is treated as a trust described in section
408(a) if such account satisfies the requirements of section 408(a)
except that it is not a trust and if the assets of such account are held
by a bank (as defined in section 401(d)(1) and the regulations
thereunder) or such other person who satisfies the requirements of
paragraph (b)(2)(ii) of this section. For purposes of this chapter, in
the case of a custodial account treated as a trust by reason of the
preceding sentence, the custodian of such account will be treated as the
trustee thereof.
(T.D. 7714, 45 FR 52791, Aug. 8, 1980)
26 CFR 1.408-3 Individual retirement annuities.
(a) In general. An individual retirement annuity is an annuity
contract or endowment contract (described in paragraph (e) (1) of this
section) issued by an insurance company which is qualified to do
business under the law of the jurisdiction in which the contract is sold
and which satisfies the requirements of paragraph (b) of this section.
A participation certificate in a group contract issued by an insurance
company described in this paragraph will be treated as an individual
retirement annuity if the contract satisfies the requirements of
paragraph (b) of this section; the certificate of participation sets
forth the requirements of paragraphs (1) through (5) of section 408 (b);
the contract provides for a separate accounting of the benefit
allocable to each participant-owner; and the group contract is for the
exclusive benefit of the participant owners and their beneficiaries.
For purposes of this title, a participant-owner of a group contract
described in this paragraph shall be treated as the owner of an
individual retirement annuity. A contract will not be treated as other
than an individual retirement annuity merely because it provides for
waiver of premium on disability. An individual retirement annuity
contract which satisfies the requirements of section 408 (b) need not be
purchased under a trust if the requirements of paragraph (b) of this
section are satisfied. An individual retirement endowment contract may
not be held under a trust which satisfies the requirements of section
408 (a). Distribution of the contract is not a taxable event.
Distributions under the contract are includible in gross income in
accordance with the provisions of 1.408-4 (e).
(b) Requirements -- (1) Transferability. The annuity or the
endowment contract must not be transferable by the owner. An annuity or
endowment contract is transferable if the owner can transfer any portion
of his interest in the contract to any person other than the issuer
thereof. Accordingly, such a contract is transferable if the owner can
sell, assign, discount, or pledge as collateral for a loan or as
security for the performance of an obligation or for any other purpose
his interest in the contract to any person other than the issuer
thereof. On the other hand, a contract is not to be considered
transferable merely because the contract contains: a provision
permitting the individual to designate a beneficiary to receive the
proceeds in the event of his death, a provision permitting the
individual to elect a joint and survivor annuity, or other similar
provisions.
(2) Annual premium. Except in the case of a contribution to a
simplified employee pension described in section 408 (k), the annual
premium on behalf of any individual for the annuity or the endowment
contract cannot exceed $1,500. Any refund of premiums must be applied
before the close of the calendar year following the year of the refund
toward the payment of future premiums or the purchase of additional
benefits.
(3) Distribution. The entire interest of the owner must be
distributed to him in the same manner and over the same period as
described in 1.408-2 (b) (6).
(4) Distribution upon death. If the owner dies before the entire
interest has been distributed to him, or if distribution has commenced
to the surviving spouse, the remaining interest must be distributed in
the same manner, over the same period, and to the same beneficiaries as
described in 1.408-2 (b) (7).
(5) Nonforfeitability. The entire interest of the owner in the
annuity or endowment contract must be nonforfeitable.
(6) Flexible premium. (Reserved)
(c) Disqualification. If during any taxable year the owner of an
annuity borrows any money under the annuity or endowment contract or by
use of such contract (including, but not limited to, pledging the
contract as security for any loan), such contract will cease to be an
individual retirement annuity as of the first day of such taxable year,
and will not be an individual retirement annuity at any time thereafter.
If an annuity or endowment contract which constitutes an individual
retirement annuity is disqualified as a result of the preceding
sentence, an amount equal to the fair market value of the contract as of
the first day of the taxable year of the owner in which such contract is
disqualified is deemed to be distributed to the owner. Such owner shall
include in gross income for such year an amount equal to the fair market
value of such contract as of such first day. The preceding sentence
applies even though part of the fair market value of the individual
retirement annuity as of the first day of the taxable year is
attributable to excess contributions which may be returned tax-free
under section 408(d)(4) or 408(d)(5).
(d) Premature distribution tax on deemed distribution. If the
individual has not attained age 59 1/2 before the beginning of the year
in which the disqualification described in paragraph (c) of this section
occurs, see section 408(f)(2) for additional tax on premature
distributions.
(e) Endowment contracts -- (1) Additional requirement for endowment
contracts. No contract providing life insurance protection issued by a
company described in paragraph (a) of this section shall be treated as
an endowment contract for purposes of this section if --
(i) Such contract matures later than the taxable year in which the
individual in whose name the contract is purchased attains the age of 70
1/2;
(ii) Such contract is not for the exclusive benefit of such
individual or his beneficiaries;
(iii) Premiums under the contract may increase over the term of the
contract;
(iv) When all premiums are paid when due, the case value of such
contract at maturity is less than the death benefit payable under the
contract at any time before maturity;
(v) The death benefit does not, at some time before maturity, exceed
the greater of the cash value or the sum of premiums paid under the
contract;
(vi) Such contract does not provide for a cash value;
(vii) Such contract provides that the life insurance element of such
contract may increase over the term of such contract, unless such
increase is merely because such contract provides for the purchase of
additional benefits;
(viii) Such contract provides insurance other than life insurance and
waiver of premiums upon disability; or
(ix) Such contract is issued after November 6, 1978.
(2) Treatment of proceeds under endowment contract upon death of
individual. In the case of the payment of a death benefit under an
endowment contract upon the death of the individual in whose name the
contract is purchased, the portion of such payment which is equal to the
cash value immediately before the death of such individual is not
excludable from gross income under section 101(a) and is treated as a
distribution from an individual retirement annuity. The remaining
portion, if any, of such payment constitutes current life insurance
protection and is excludable under section 101(a). If a death benefit
is paid under an endowment contract at a date or dates later than the
death of the individual, section 101(d) is applicable only to the
portion of the benefit which is attributable to the amount excludable
under section 101(a).
(T.D. 7714, 45 FR 52792, Aug. 8, 1980)
26 CFR 1.408-4 Treatment of distributions from individual retirement
arrangements.
(a) General rule -- (1) Inclusion in income. Except as otherwise
provided in this section, any amount actually paid or distributed or
deemed paid or distributed from an individual retirement account or
individual retirement annuity shall be included in the gross income of
the payee or distributee for the taxable year in which the payment or
distribution is received.
(2) Zero basis. Notwithstanding section 1015(d) or any other
provision of the Code, the basis (or investment in the contract) of any
person in such an account or annuity is zero. For purposes of this
section, an assignment of an individual's rights under an individual
retirement account or an individual retirement annuity shall, except as
provided in 1.408-4(g) (relating to transfer incident to divorce), be
deemed a distribution to such individual from such account or annuity of
the amount assigned.
(b) Rollover contribution -- (1) To individual retirement
arrangement. Paragraph (a)(1) of this section shall not apply to any
amount paid or distributed from an individual retirement account or
individual retirement annuity to the individual for whose benefit the
account was established or who is the owner of the annuity if the entire
amount received (including the same amount of money and any other
property) is paid into an individual retirement account, annuity (other
than an endowment contract), or bond created for the benefit of such
individual not later than the 60th day after the day on which he
receives the payment or distribution.
(2) To qualified plan. Paragraph (a)(1) of this section does not
apply to any amount paid or distributed from an individual retirement
account or individual retirement annuity to the individual for whose
benefit the account was established or who is the owner of the annuity
if --
(i) No amount in the account or no part of the value of the annuity
is attributable to any source other than a rollover contribution from an
employees' trust described in section 401(a) which is exempt from tax
under section 501(a) or a rollover contribution from an annuity plan
described in section 403(a) and the earnings on such sums, and
(ii) The entire amount received (including the same amount of money
and any other property) represents the entire amount in the account and
is paid into another such trust or plan (for the benefit of such
individual) not later than the 60th day after the day on which the
payment or distribution is received.
This subparagraph does not apply if any portion of the rollover
contribution described in paragraph (b)(2)(i) of this section is
attributable to an employees' trust forming part of a plan or an annuity
under which the individual was an employee within the meaning of section
401(c)(1) at the time contributions were made on his behalf under the
plan.
(3) To section 403(b) contract. (Reserved)
(4) Frequency limitation. (i) For taxable years beginning on or
before December 31, 1977, paragraph (b)(1) of this section does not
apply to any amount received by an individual from an individual
retirement account, annuity or bond if at any time during the 3-year
period ending on the day of receipt, the individual received any other
amount from an individual retirement account, annuity or bond which was
not includible in his gross income because of the application of
paragraph (b)(1) of this section.
(ii) (Reserved)
(c) Excess contributions returned before due date of return -- (1)
Excess contribution. For purposes of this paragraph, excess
contributions are the excess of the amounts contributed to an individual
retirement account or paid for an individual retirement annuity during
the taxable year over the amount allowable as a deduction under section
219 or 220 for the taxable year.
(2) General rule. (i) Paragraph (a)(1) of this section does not
apply to the distribution of any excess contribution paid during a
taxable year to an account or annuity if: the distribution is received
on or before the date prescribed by law (including extensions) for
filing the individual's return for such taxable year; no deduction is
allowed under section 219 or section 220 with respect to the excess
contribution; and the distribution is accompanied by the amount of net
income attributable to the excess contribution as of the date of the
distribution as determined under subdivision (ii).
(ii) The amount of net income attributable to the excess
contributions is an amount which bears the same ratio to the net income
earned by the account during the computation period as the excess
contribution bears to the sum of the balance of the account as of the
first day of the taxable year in which the excess contribution is made
and the total contribution made for such taxable year. For purposes of
this paragraph, the term ''computation period'' means the period
beginning on the first day of the taxable year in which the excess
contribution is made and ending on the date of the distribution from the
account.
(iii) For purposes of paragraph (c)(2)(ii), the net income earned by
the account during the computation period is the fair market value of
the balance of the account immediately after the distribution increased
by the amount of distributions from the account during the computation
period, and reduced (but not below zero) by the sum of: (A) the fair
market value of the balance of the account as of the first day of the
taxable year in which the excess contribution is made and (B) the
contributions to the account made during the computation period.
(3) Time of inclusion. (i) For taxable years beginning before
January 1, 1977, the amount of net income determined under subparagraph
(2) is includible in the gross income of the individual for the taxable
year in which it is received. The amount of net income thus distributed
is subject to the tax imposed by section 408(f)(1) for the year
includible in gross income.
(ii) (Reserved)
(4) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. On January 1, 1975, A, age 55, who is a calendar-year
taxpayer, contributes $1,500 to an individual retirement account
established for his benefit. For 1975, A is entitled to a deduction of
$1,400 under section 219. For 1975, A does not claim as deductions any
other items listed in section 62. A's gross income for 1975 is $9,334.
On April 1, 1976, $107 is distributed to A from his individual
retirement account. As of such date, the balance of the account is
$1,498 ($1,605 ^ $107). There were no other distributions from the
account as of such date. The net amount of income earned by the account
is $105 ($1,498 + $107 ^ (0 + $1,500)). The net income attributable to
the excess contribution is $7. ($105 ($100/$1,500)). A's adjusted
gross income for 1975 is his gross income for 1975 ($9,334) reduced by
the amount allowable to A as a deduction under section 219 ($1,400), or
$7,934. A will include the $7 of the $107 distributed on April 1, 1976,
in his gross income for 1976. Further, A will pay an additional income
tax of $.70 for 1976 under section 408(f)(1).
(d) Deemed distribution -- (1) General rule. In any case in which an
individual retirement account ceases to be an individual retirement
account by reason of the application of section 408(e)(2), paragraph
(a)(1) of this section shall apply as if there were a distribution on
the first day of the taxable year in which such account ceases to be an
individual retirement account of an amount equal to the fair market
value on such day of all of the assets in the account on such day. In
the case of a deemed distribution from an individual retirement annuity,
see 1.408-3(d).
(2) Using account as security. In any case in which an individual
for whose benefit an individual retirement account is established uses,
directly or indirectly, all or any portion of the account as security
for a loan, paragraph (a)(1) of this section shall apply as if there
were distributed on the first day of the taxable year in which the loan
was made an amount equal to that portion of the account used as security
for such loan.
(e) Distribution of annuity contracts. Paragraph (a)(1) of this
section does not apply to any annuity contract which is distributed from
an individual retirement account and which satisfies the requirements of
paragraphs (b) (1), (3), (4) and (5) of section 408. Amounts
distributed under such contracts will be taxable to the distributee
under section 72. For purposes of applying section 72 to a distribution
from such a contract, the investment in such contract is zero.
(f) Treatment of assets distributed from an individual retirement
account for the purchase of an endowment contract. Under section
408(e)(5), if all, or any portion, of the assets of an individual
retirement account are used to purchase an endowment contract described
in 1.408-3(e) for the benefit of the individual for whose benefit the
account is established --
(1) The excess, if any, of the total amount of assets used to
purchase such contract over the portion of the assets attributable to
life insurance protection shall be treated as a rollover contribution
described in section 408(d)(3), and
(2) The portion of the assets attributable to life insurance
protection shall be treated as a distribution described in paragraph
(a)(91) of this section, except that the provisions of section 408(f)
shall not apply to such amount.
(g) Transfer incident to divorce -- (1) General rule. The transfer
of an individual's interest, in whole or in part, in an individual
retirement account, individual retirement annuity, or a retirement bond,
to his former spouse under a valid divorce decree or a written
instrument incident to such divorce shall not be considered to be a
distribution from such an account or annuity to such individual or his
former spouse; nor shall it be considered a taxable transfer by such
individual to his former spouse notwithstanding any other provision of
Subtitle A of the Code.
(2) Spousal account. The interest described in this paragraph (g)
which is transferred to the former spouse shall be treated as an
individual retirement account of such spouse if the interest is an
individual retirement account; an individual retirement annuity of such
spouse if such interest is an individual retirement annuity; and a
retirement bond of such spouse if such interest is a retirement bond.
(T.D. 7714, 45 FR 52793, Aug. 8, 1980)
26 CFR 1.408-5 Annual reports by trustees or issuers.
(a) In general. The trustee of an individual retirement account or
the issuer of an individual retirement annuity shall make annual
calendar year reports concerning the status of the account or annuity.
The report shall contain the information required in paragraph (b) and
be furnished or filed in the manner and time specified in paragraph (c).
(b) Information required to be included in the annual reports. The
annual calendar year report shall contain the following information for
transactions occurring during the calendar year --
(1) The amount of contributions;
(2) The amount of distributions;
(3) In the case of an endowment contract, the amount of the premium
paid allocable to the cost of life insurance;
(4) The name and address of the trustee or issuer; and
(5) Such other information as the Commissioner may require.
(c) Manner and time for filing. (1) The annual report shall be
furnished to the individual on whose behalf the account is established
or in whose name the annuity is purchased (or the beneficiary of the
individual or owner). The report shall be furnished on or before the
30th day of June following the calendar year for which the report is
required.
(2) The Commissioner may require the annual report to be filed with
the Service at the time the Commissioner specifies.
(d) Penalties. Section 6693 prescribes penalties for failure to file
the annual report.
(e) Effective date. This section shall apply to reports for calendar
years after 1978.
(f) Reports for years prior to 1979. For years prior to 1979, a
trustee or issuer shall make reports in the time and manner as the
Commissioner requires.
(T.D. 7714, 45 FR 52795, Aug. 8, 1980)
26 CFR 1.408-6 Disclosure statements for individual retirement
arrangements.
(a) In general -- (1) General rule. Trustees and issuers of
individual retirement accounts and annuities are, under the authority of
section 408 (i), required to provide disclosure statements. This
section sets forth these requirements.
(b) -- (c) (Reserved)
(d) Requirements. (1) -- (3) (Reserved)
(4) Disclosure statements -- (i) Under the authority contained in
section 408(i), a disclosure statement shall be furnished in accordance
with the provisions of this subparagraph by the trustee of an individual
retirement account described in section 408(a) or the issuer of an
individual retirement annuity described in section 408(b) or of an
endowment contract described in section 408(b) to the individual
(hereinafter referred to as the ''benefited individual'') for whom such
an account, annuity, or contract is, or is to be, established.
(ii)(A)(1) The trustee or issuer shall furnish, or cause to be
furnished, to the benefited individual, a disclosure statement
satisfying the requirements of subdivisions (iii) through (viii) of this
subparagraph, as applicable, and a copy of the governing instrument to
be used in establishing the account, annuity, or endowment contract.
The copy of such governing instrument need not be filled in with
financial and other data pertaining to the benefited individual;
however, such copy must be complete in all other respects. The
disclosure statement and copy of the governing instrument must be
received by the benefited individual at least seven days preceding the
earlier of the date of establishment or purchase of the account,
annuity, or endowment contract. A disclosure statement or copy of the
governing instrument required by this subparagraph may be received by
the benefited individual less than seven days preceding, but no later
than, the earlier of the date of establishment or purchase, if the
benefited individual is permitted to revoke the account, annuity, or
endowment contract pursuant to a procedure which satisfies the
requirements of subdivision (ii)(A)(2) of this subparagraph.
(2) A procedure for revocation satisfies the requirements of this
subdivision (ii)(A)(2) of this subparagraph if the benefited individual
is permitted to revoke the account, or endowment contract by mailing or
delivering, at his option, a notice of revocation on or before a day not
less than seven days after the earlier of the date of establishment or
purchase and, upon revocation, is entitled to a return of the entire
amount of the consideration paid by him for the account, annuity, or
endowment contract without adjustment for such items as sales
commissions, administrative expenses or fluctuation in market value.
The procedure may require that the notice be in writing or that it be
oral, or it may require both a written and an oral notice. If an oral
notice is required or permitted, the procedure must permit it to be
delivered by telephone call during normal business hours. If a written
notice is required or permitted, the procedure must provide that, if
mailed, it shall be deemed mailed on the date of the postmark (or if
sent by certified or registered mail, the date of certification or
registration) if it is deposited in the mail in the United States in an
envelope, or other appropriate wrapper, first class postage prepaid,
properly addressed.
(B) If after a disclosure statement has been furnished, or caused to
be furnished, to the benefited individual pursuant to paragraph
(d)(4)(ii)(A) of this section and --
(1) On or before the earlier of the date of establishment or
purchase, or
(2) On or before the last day on which the benefited individual is
permitted to revoke the account, annuity, or endowment contract (if the
benefited individual has a right to revoke the account, annuity, or
endowment contract pursuant to the rules of subdivision (ii)(A) of this
subparagraph).
there becomes effective a material adverse change in the information
set forth in such disclosure statement or a material change in the
governing instrument to be used in establishing the account, annuity, or
contract, the trustee or issuer shall furnish, or cause to be furnished,
to the benefited individual such amendments to any previously furnished
disclosure statement or governing instrument as may be necessary to
adequately inform the benefited individual of such change. The trustee
or issuer shall be treated as satisfying this subdivision (ii)(B) of
this subparagraph only if material required to be furnished by this
subdivision is received by the benefited individual at least seven days
preceding the earlier of the date of establishment or purchase of the
account, annuity, or endowment contract or if the benefited individual
is permitted to revoke the account, annuity, or endowment contract on or
before a date not less than seven days after the date on which such
material is received, pursuant to a procedure for revocation otherwise
satisfying the provisions of subdivision (ii)(A)(2) of this
subparagraph.
(C) If the governing instrument is amended after the account,
annuity, or endowment contract is no longer subject to revocation
pursuant to subdivision (ii)(A) or (B) of this subparagraph, the trustee
or issuer shall not later than the 30th day after the later of the date
on which the amendment is adopted or becomes effective, deliver or mail
to the last known address of the benefited individual a copy of such
amendment and, if such amendment affects a matter described in
subdivisions (iii) through (viii) of this subparagraph, a disclosure
statement with respect to such matter meeting the requirements of
subdivision (iv) of this subparagraph.
(D) For purposes of subdivision (ii) (A) and (B) of this
subparagraph, if a disclosure statement, governing instrument, or an
amendment to either, is mailed to the benefited individual, it shall be
deemed (in the absence of evidence to the contrary) to be received by
the benefited individual seven days after the date of mailing.
(E) In the case of a trust described in section 408(c) (relating to
certain retirement savings arrangements for employees or members of
associations of employees), the following special rules shall be
applied:
(1) For purposes of this subparagraph, references to the benefited
individual's account, annuity, or endowment contract shall refer to the
benefited individual's interest in such trust, and
(2) The provisions of subdivision (ii) of this subparagraph shall be
applied by substituting ''the date on which the benefited individual's
interest in such trust commences'' for ''the earlier of the date of
establishment or purchase'' wherever it appear therein.
Thus, for example, if an employer establishes a trust described in
section 408(c) for the benefit of employees, and the trustee furnishes
an employee with a disclosure statement and a copy of the governing
instrument (as required by this subparagraph) on the date such
employee's interest in the trust commences, such employee must be given
a right to revoke such interest within a period of at least seven days.
If any contribution has been made within such period (whether by the
employee or by the employer), the full amount of such contribution must
be paid to such employee pursuant to subdivision (ii)(A)(2) of this
subparagraph.
(iii) The disclosure statement required by this subparagraph shall
set forth in nontechnical language the following matters as such matters
relate to the account, annuity, or endowment contract (as the case may
be);
(A) Concise explanations of --
(1) The statutory requirements prescribed in section 408(a) (relating
to an individual retirement account) or section 408(b) (relating to an
individual retirement annuity and an endowment contract), and any
additional requirements (whether or not required by law) that pertain to
the particular retirement savings arrangement.
(2) The income tax consequences of establishing an account, annuity,
or endowment contract (as the case may be) which meets the requirements
of section 408(a) relating to an individual retirement account) or
section 408(b) (relating to an individual retirement annuity and an
endowment contract), including the deductibility of contributions to,
the tax treatment of distributions (other than premature distributions)
from, the availability of income tax free rollovers to and from, and the
tax status of such account, annuity, or endowment contract.
(3) The limitations and restrictions on the deduction for retirement
savings under section 219, including the ineligibility of certain
individuals who are active participants in a plan described in section
219(b)(2)(A) or for whom amounts are contributed under a contract
described in section 219(b)(2)(B) to make deductible contributions to an
account or for an annuity or endowment contract.
(4) The circumstances under which the benefited individual may revoke
the account, annuity, or endowment contract, and the procedure therefor
(including the name, address, and telephone number of the person
designated to receive notice of such revocation). Such explanation
shall be prominently displayed at the beginning of the disclosure
statement.
(B) Statements to the effect that --
(1) If the benefited individual or his beneficiary engages in a
prohibited transaction, described in section 4975(c) with respect to an
individual retirement account, the account will lose its exemption from
tax by reason of section 408(e)(2)(A), and the benefited individual must
include in gross income, for the taxable year during which the benefited
individual or his beneficiary engages in the prohibited transaction the
fair market value of the account.
(2) If the owner of an individual retirement annuity or endowment
contract described in section 408(b) borrows any money under, or by use
of, such annuity or endowment contract, then, under section 408(e)(3),
such annuity or endowment contract loses its section 408(b)
classification, and the owner must include in gross income, for the
taxable year during which the owner borrows any money under, or by use
of, such annuity or endowment contract, the fair market value of the
annuity or endowment contract.
(3) If a benefited individual uses all or any portion of an
individual retirement account as security for a loan, then, under
section 408(e)(4), the portion so used is treated as distributed to such
individual and the benefited individual must include such distribution
in gross income for the taxable year during which he so uses such
account.
(4) An additional tax of 10 percent is imposed by section 408(f) on
distributions (including amounts deemed distributed as the result of a
prohibited loan or use as security for a loan) made before the benefited
individual has attained age 59 1/2, unless such distribution is made on
account of death or disability, or unless a rollover contribution is
made with such distribution.
(5) Sections 2039(e) (relating to exemption from estate tax of
annuities under certain trusts and plans) and 2517 (relating to
exemption from gift tax of specified transfers of certain annuities
under qualified plans) apply (including the manner in which such
sections apply) to the account, annuity, or endowment contract.
(6) Section 402(a)(2) and (e) (relating to tax on lump sum
distributions) is not applicable to distributions from an account,
annuity, or endowment contract.
(7) A minimum distribution is required under section 408(a) (6) or
(7) and 408(b) (3) or (4) (including a brief explanation of the amount
of minimum distribution) and that if the amount distributed from an
account, annuity, or endowment contract during the taxable year of the
payee is less than the minimum required during such year, an excise tax,
which shall be paid by the payee, is imposed under section 4974, in an
amount equal to 50 percent of the excess of the minimum required to be
distributed over the amount actually distributed during the year.
(8) An excise tax is imposed under section 4973 on excess
contributions (including a brief explanation of an excess contribution).
(9) The benefited individual must file Form 5329 (Return for
Individual Retirement Savings Arrangement) with the Internal Revenue for
each taxable year during which the account, annuity, or endowment
contract is maintained.
(10) The account or contract has or has not (as the case may be) been
approved as to form for use as an account, annuity, or endowment
contract by the Internal Revenue Service. For purposes of this
subdivision, if a favorable opinion or determination letter with respect
to the form of a prototype trust, custodial account, annuity, or
endowment contract has been issued by the Internal Revenue Service, or
the instrument which establishes an individual retirement trust account
or an individual retirement custodial account utilizes the precise
language of a form currently provided by the Internal Revenue Service
(including any additional language permitted by such form), such account
or contract may be treated as approved as to form.
(11) The Internal Revenue Service approval is a determination only as
to the form of the account, annuity, or endowment contract, and does not
represent a determination of the merits of such account, annuity, or
endowment contract.
(12) The proceeds from the account, annuity or endowment contract may
be used by the benefited individual as a rollover contribution to
another account or annuity or retirement bond in accordance with the
provisions of section 408(d)(3).
(13) In the case of an endowment contract described in section
408(b), no deduction is allowed under section 219 for that portion of
the amounts paid under the contract for the taxable year properly
allocable to the cost of life insurance.
(14) If applicable, in the event that the benefited individual
revokes the account, annuity, or endowment contract, pursuant to the
procedure described in the disclosure statement (see subdivision (A)(4)
of this subdivision (iii)), the benefited individual is entitled to a
return of the entire amount of the consideration paid by him for the
account, annuity, or endowment contract without adjustment for such
items as sales commissions, administrative expenses or fluctuation in
market value.
(15) Further information can be obtained from any district office of
the Internal Revenue Service.
To the extent that information on the matters described in
subdivisions (iii) (A) and (B) of this subparagraph is provided in a
publication of the Internal Revenue Service relating to individual
retirement savings arrangements, such publication may be furnished by
the trustee or issuer in lieu of providing information relating to such
matters in a disclosure statement.
(C) The financial disclosure required by paragraph (d)(4) (v), (vi),
and (vii) of this section.
(iv) In the case of an amendment to the terms of an account, annuity,
or endowment contract described in paragraph (d)(4)(i) of this section,
the disclosure statement required by this subparagraph need not repeat
material contained in the statement furnished pursuant to paragraph
(d)(4)(iii) of this section, but it must set forth in nontechnical
language those matters described in paragraph (d)(4)(iii) of this
section which are affected by such amendment.
(v) With respect to an account, annuity, or endowment contract
described in paragraph (d)(4)(i) of this section (other than an account
or annuity which is to receive only a rollover contribution described in
paragraph (d)(4)(vi) of this section and to which no deductible
contributions will be made), the disclosure statement must set forth in
cases where either an amount is guaranteed over period of time (such as
in the case of a nonparticipating endowment or annuity contract), or a
projection of growth of the value of the account, annuity, or endowment
contract can reasonably be made (such as in the case of a participating
endowment or annuity contract (other than a variable annuity) or
passbook savings account), the following:
(A) To the extent that an amount is guaranteed,
(1) The amount, determined without regard to any portion of a
contribution which is not deductible, that would be guaranteed to be
available to the benefited individual if (i) level annual contributions
in the amount of $1,000 were to be made on the first day of each year,
and (ii) the benefited individual were to withdraw in a single sum the
entire amount of such account, annuity, or endowment contract at the end
of each of the first five years during which contributions are to be
made, at the end of the year in which the benefited individual attains
the ages of 60, 65, and 70, and at the end of any other year during
which the increase of the guaranteed available amount is less than the
increase of the guaranteed available amount during any preceding year
for any reason other than decrease of cessation of contributions, and
(2) A statement that the amount described in subdivision (v)(A)(1) of
this subparagraph is guaranteed, and the period for which guaranteed;
(B) To the extent a projection of growth of the value of the account,
annuity, or endowment contract can reasonably be made but the amounts
are not guaranteed.
(1) The amount, determined without regard to any portion of a
contribution which is not deductible, and upon the basis of an earnings
rate no greater than, and terms no different from, those currently in
effect, that would be available to the benefited individual if (i) level
annual contributions in the amount of $1,000 were to be made on the
first day of each year, and (ii) the benefited individual were to
withdraw in a single sum the entire amount of such account, annuity, or
endowment contract at the end of each of the first five years during
which contributions are to be made, at the end of each of the years in
which the benefited individual attains the ages of 60, 65, and 70, and
at the end of any other year during which the increase of the available
amount is less than the increase of the available amount during any
preceding year for any reason other than decrease or cessation of
contributions, and
(2) A statement that the amount described in paragraph
(d)(4)(v)(B)(1) of this section is a projection and is not guaranteed
and a statement of the earnings rate and terms on the basis of which the
projection is made;
(C) The portion of each $1,000 contribution attributable to the cost
of life insurance, which would not be deductible, for each year during
which contributions are to be made; and
(D) The sales commission (including any commission attributable to
the sale of life insurance), if any, to be charged in each year,
expressed as a percentage of gross annual contributions (including any
portion attributable to the cost of life insurance) to be made for each
year.
(vi) With respect to an account or annuity described in paragraph
(d)(4)(i) of this section to which a rollover contribution described in
section 402(a)(5)(A), 403(a)(4)(A), 408(d)(3)(A) or 409(b)(3)(C) will be
made, the disclosure statement must set forth, in cases where an amount
is guaranteed over a period of time (such as in the case of a
non-participating annuity contract, or a projection of growth of the
value of the account or annuity can reasonably be made (such as in the
case of a participating annuity contract (other than a variable annuity)
or a passbook savings account), the following:
(A) To the extent guaranteed,
(1) The amount that would be guaranteed to be available to the
benefited individual if (i) Such a rollover contribution in the amount
of $1,000 were to be made on the first day of the year, (ii) No other
contribution were to be made, and (iii) The benefited individual were to
withdraw in a single sum the entire amount of such account or annuity at
the end of each of the first five years after the contribution is made,
at the end of the year in which the benefited individual attains the
ages of 60, 65, and 70, and at the end of any other year during which
the increase of the guaranteed available amount is less than the
increase of the guaranteed available amount during any preceding year,
and
(2) A statement that the amount described in paragraph (d)(vi)(A)(1)
of this section is guaranteed;
(B) To the extent that a projection of growth of the value of the
account or annuity can reasonably be made but the amounts are not
guaranteed,
(1) The amount, determined upon the basis of an earnings rate no
greater than, and terms no different from, those currently in effect,
that would be available to the benefited individual if (i) such a
rollover contribution in the amount of $1,000 were to be made on the
first day of the year, (ii) no other contribution were to be made, and
(iii) the benefited individual were to withdraw in a single sum the
entire amount of such account or annuity at the end of each of the first
five years after the contribution is made, at the end of each of the
years in which the benefited individual attains the ages 60, 65, 70, and
at the end of any other year during which the increase of the available
amount is less than the increase of the available amount during any
preceding year, and
(2) A statement that the amount described in paragraph (d)(4)(vi)(B)
(1) of this section is a projection and is not guaranteed and a
statement of the earnings rate and terms on the basis of which the
projection is made; and
(C) The sales commission, if any, to be charged in each year,
expressed as a percentage of the assumed $1,000 contribution.
(vii) With respect to an account, annuity, or endowment contract
described in paragraph (d)(4)(i) of this section, in all cases not
subject to paragraph (d)(4) (v) or (vi) of this section (such as in the
case of a mutual fund or variable annuity), the disclosure statement
must set forth information described in subdivisions (A) through (C) of
this subdivisions (vii) based (as applicable with respect to the type or
types of contributions to be received by the account, annuity, or
endowment contract) upon the assumption of (1) level annual
contributions of $1,000 on the first day of each year, (2) a rollover
contribution of $1,000 on the first day of the year and no other
contributions, or (3) a rollover contribution of $1,000 on the first day
of the year plus level annual contributions of $1,000 on the first day
of each year.
(A) A description (in nontechnical language) with respect to the
benefited individual's interest in the account, annuity, or endowment
contract, of:
(1) Each type of charge, and the amount thereof, which may be made
against a contribution,
(2) The method for computing and allocating annual earnings, and
(3) Each charge (other than those described in complying with
paragraph (d)(4)(vii)(A)(1) of this section) which may be applied to
such interest in determining the net amount of money available to the
benefited individual and the method of computing each such charge;
(B) A statement that growth in value of the account, annuity, or
endowment contract is neither guaranteed nor projected; and
(C) The portion of each $1,000 contribution attributable to the cost
of life insurance, which would not be deductible, for every year during
which contributions are to be made.
(viii) A disclosure statement, or an amendment thereto, furnished
pursuant to the provisions of this subparagraph may contain information
in addition to that required by paragraph (d)(4)(iii) through (vii) of
this section. However, such disclosure statement will not be considered
to comply with the provisions of this subparagraph if the substance of
such additional material or the form in which it is presented causes
such disclosure statement to be false or misleading with respect to the
information required to be disclosed by this paragraph.
(ix) The provisions of section 6693, relating to failure to provide
reports on individual retirement accounts or annuities, shall apply to
any trustee or issuer who fails to furnish, or cause to be furnished, a
disclosure statement, a copy of the governing instrument, or an
amendment to either, as required by this paragraph.
(x) This section shall be effective for disclosure statements and
copies of governing instruments mailed, or delivered without mailing,
after February 14, 1977.
(xi) This section does not reflect the amendments made by section
1501 of the Tax Reform Act of 1976 (90 Stat. 1734) relating to
retirement savings for certain married individuals.
(T.D. 7714, 45 FR 52795, Aug. 8, 1980; 45 FR 56802, Aug. 26, 1980)
26 CFR 1.408-7 Reports on distributions from individual retirement
plans.
(a) Requirement of report. The trustee of an individual retirement
account or the issuer of an individual retirement annuity who makes a
distribution during any calendar year to an individual from such account
or under such annuity shall make a report on Form W-2P (in the case of
distributions that are not total distributions) or Form 1099R (in the
case of total distributions), and their related transmittal forms, for
such year. The return must show the name and address of the person to
whom the distribution was made, the aggregate amount of such
distribution, and such other information as is required by the forms.
(b) Amount subject to this section. The amounts subject to reporting
under paragraph (a) include all amounts distributed or made available to
which section 408(d) applies.
(c) Time and place for filing. The report required under this
section for any calendar year shall be filed after the close of that
year and on or before February 28 of the following year with the
appropriate Internal Revenue Service Center.
(d) Statement to recipients. (1) Each trustee or issuer required to
file Form 1099R or Form W-2P under this section shall furnish to the
person whose identifying number is (or should be) shown on the forms a
copy of the form.
(2) Each statement required by this paragraph to be furnished to
recipients shall be furnished to such person after November 30 of the
year of the distribution and on or before January 31 of the following
year.
(e) Effective date. This section is effective for calendar years
beginning after December 31, 1977.
(T.D. 7714, 45 FR 52798, Aug. 8, 1980)
26 CFR 1.409-1 Retirement bonds.
(a) In general. Section 409 authorizes the issuance of bonds under
the Second Liberty Bond Act the purchase price of which would be
deductible under section 219. Section 409 also prescribes the tax
treatment of such bonds. See paragraph (b) of this section.
(b) Income tax treatment of bonds -- (1) General rule. Except as
provided in paragraph (b)(2) of this section, the entire proceeds upon
redemption of a retirement bond described in section 409(a) shall be
included in the gross income of the taxpayer entitled to such proceeds.
If a bond has not been tendered for redemption by the registered owner
before the close of the taxable year in which he attains age 70 1/2, he
must include in his gross income for such taxable year the amount of the
proceeds he would have received if the bond had been redeemed at age 70
1/2. The provisions of sections 72 and 1232 do not apply to a
retirement bond.
(2) Exceptions. (i) If a retirement bond is redeemed within 12
months after the issue date, the proceeds are excluded from gross income
if no deduction is allowed under section 219 on account of the purchase
of such bond. For definition of issue date, see 31 CFR 346.1(c).
(ii) If a retirement bond is redeemed after the close of the taxable
year in which the registered owner attains age 70 1/2 the proceeds from
the redemption of the bond are excludable from the gross income of the
registered owner or his beneficiary to the extent that such proceeds
were includible in the gross income of the registered owner for such
taxable year.
(iii) If a retirement bond is surrendered for reissuance in the same
or lesser face amount, the difference between current redemption value
of the bond surrendered for reissuance and the current surrender value
of the bond reissued is includible in the gross income of the registered
owner.
(3) Basis. The basis of a retirement bond is zero.
(c) Rollover. The first sentence of paragraph (b)(1) of this section
shall not apply in any case in which a retirement bond is redeemed by
the registered owner before the close of the taxable year in which he
attains the age of 70 1/2 if he transfers the entire amount of the
proceeds of such redemption to --
(1) An individual retirement account described in section 408(a) or
an individual retirement annuity described in section 408(b) (other than
an endowment contract described in 1.408-3(e)), or
(2) An employees' trust which is described in section 401(a) which is
exempt from tax under section 501(a), or an annuity plan described in
section 403(a), for the benefit of the registered owner, on or before
the 60th day after the day on which he received the proceeds of such
redemption. This subparagraph shall not apply in the case of a transfer
to a trust or plan described in (c)(2) of this section unless no part of
the purchase price of the retirement bond redeemed is attributable to
any source other than a rollover contribution from such an employees'
trust or annuity plan (other than an annuity plan or employees' trust
forming part of a plan under which the individual was an employee within
the meaning of section 401(c)(1) at the time contributions were made on
his behalf under the plan).
(d) Additional tax -- (1) Early redemption. Except as provided in
paragraph (d)(2) of this section, under section 409(c) if a retirement
bond is redeemed by the registered owner before he attains age 59 1/2,
his tax under chapter 1 of the Code is increased by an amount equal to
10 percent of the proceeds of the redemption includible in his gross
income for the taxable year. Except in the case of the credits
allowable under sections 31, 39, or 42, no credit can be used to offset
the tax described in the preceding sentence.
(2) Limitations. Paragraph (d)(1) of this section shall not apply if
--
(i) During the taxable year of the registered owner in which a
retirement bond is redeemed, the registered owner becomes disabled
within the meaning of section 72(m)(7), or
(ii) A retirement bond is tendered for redemption in accordance with
paragraph (b)(2)(i) of this section.
(T.D. 7714, 45 FR 52799, Aug. 8, 1980)
26 CFR 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
1.410(a)-3,
(2) The maximum age requirements of section 410(a)(2) and
1.410(a)-4, and
(3) The minimum coverage requirements of section 410(b)(1) and
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 1.410(a)-5 for rules under section 410(a)(3)(B)
relating to seasonal industries and for certain rules under section
410(a)(5) relating to breaks in service.
(6) Breaks in service. Section 1.410(a)-6 provides special rules
under section 1017(f) of the Employee Retirement Income Security Act of
1974 relating to amendment of break in service rules.
(7) Elapsed time. Section 1.410 (a)-7 provides rules under sections
410 and 411 relating to the elapsed time method of crediting years of
service.
(8) Coverage. Section 1.410(b)-1 provides rules relating to the
minimum coverage requirements provided by section 410(b)(1).
(9) Church election. Section 1.410(d)-1 provides rules relating to
the election by a church to have participation, vesting, funding, etc.,
provisions apply.
(c) Application of participation standards to certain plans -- (1)
General rule. Except as provided in subparagraph (2) of this paragraph,
section 410 does not apply to --
(i) A governmental plan (within the meaning of section 414(d) and the
regulations thereunder),
(ii) A church plan (within the meaning of section 414(e) and the
regulations thereunder) which has not made the election provided by
section 410(d) and the regulations thereunder,
(iii) A plan which has not provided for employer contributions at any
time after September 2, 1974, and
(iv) A plan established and maintained by a society, order, or
association described in section 501(c) (8) or (9), if no part of the
contributions to or under such plan are made by employers of
participants in such plan.
(2) Participation requirements. A plan described in subparagraph (1)
of this paragraph shall, for purposes of section 401(a), be treated as
meeting the requirements of section 410 if such plan meets the coverage
requirements resulting from the application of section 401(a)(3) as in
effect on September 1, 1974. Such coverage requirements include the
rules in 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
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)
26 CFR 1.410(a)-2 Effective dates.
(a) Plans not in existence on January 1, 1974. Under section 1017(a)
of the Employee Retirement Income Security Act of 1974, in the case of a
plan which was not in existence on January 1, 1974, section 410 and the
regulations thereunder apply for plan years beginning after September 2,
1974. See paragraph (c) of this section for time plan is considered in
existence.
(b) Plans in existence on January 1, 1974. Under section 1017(b) of
the Employee Retirement Income Security Act of 1974, in the case of a
plan which was in existence on January 1, 1974, section 410 and the
regulations thereunder apply for plan years beginning after December 31,
1975. See paragraph (c) of this section for time plan is considered to
be in existence.
(c) Time of plan existence -- (1) General rule. For purposes of this
section, a plan is considered to be in existence on a particular day if
--
(i) The plan on or before that day was reduced to writing and adopted
by the employer (including, in the case of a corporate employer, formal
approval by the employer's board of directors and, if required,
shareholder), even though no amounts had been contributed under the plan
as of such day, and
(ii) The plan was not terminated on or before that day.
(2) Collectively bargained plan. Notwithstanding subparagraph (1) of
this paragraph, a plan described in section 413(a), relating to a plan
maintained pursuant to a collective bargaining agreement, is considered
to be in existance on a particular day if --
(i) On or before that day there is a legally enforceable agreement to
establish such a plan signed by the employer, and
(ii) The employer contributions to be made to the plan are set forth
in the agreement.
(3) Special rule. If a plan is considered to be in existence on
January 1, 1974, under subparagraph (1) of this paragraph, any other
plan with which such existing plan is merged or consolidated shall also
be considered to be in existence on such date.
(d) Certain existing plans may elect new provisions -- (1) In
general. The plan administrator (as defined in section 414(g)) of a
plan that was in existence on January 1, 1974, may elect to have the
provisions of the Code relating to participation, vesting, funding, and
form of benefit (as in effect from time to time) apply to a plan year
selected by the plan year selected by the plan administrator which
begins after September 2, 1974, but before the otherwise applicable
effective dates determined under section 1017 (b) or (c), 1021, or 1024
of the Employee Retirement Income Security Act of 1974, and to all
subsequent plan years. The provisions referred to are the amendments to
the Code made by sections 1011, 1012, 1013, 1015, 1016(a) (1) through
(11) and (13) through (27), 1021, and 1022(b) of the Employee Retirement
Income Security Act of 1974.
(2) Election is irrevocable. Any election made under this paragraph,
once made shall be irrevocable.
(3) Procedure and time for making election. An election under this
paragraph shall be made by attaching a statement to either the annual
return required under section 6058(a) (or an amended return) with
respect to the plan which is filed for the first plan year for which the
election is effective or to a written request for a determination letter
relating to the qualification of the plan under section 401(a), 403(a),
or 405(a) of the Code and, if trusteed, the exempt status under section
501(a) of the Code of a trust consituting a part of the plan. If the
election is made with a written request for a determination letter, the
election may be conditioned upon issuance of a favorable determination
letter and will become irrevocable upon issuance of such letter. The
statement shall indicate that the election is made under section 1017(d)
of the Employee Retirement Income Security Act of 1974 and the first
plan year for which the election is effective.
(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)
26 CFR 1.410(a)-3 Minimum age and service conditions.
(a) General rule. Except as provided by paragraph (b) or (c) of this
section, a plan is not a qualified plan (and a trust forming a part of
such plan is not a qualified trust) if the plan requires, as a condition
of participation in the plan, that an employee complete a period of
service with the employer or employers maintaining the plan extending
beyond the later of --
(1) Age 25. The date on which the employee attains the age of 25;
or
(2) One year of service. The date on which the employee completes 1
year of service.
(b) Special rule for plan with 3-year 100 percent vesting. A plan
which provides that after not more than 3 years of service each
participant's right to his accrued benefit under the plan is completely
nonforfeitable (within the meaning of section 411 and the regulations
thereunder) at the time such benefit accrues satisfies the requirements
of paragraph (a) of this section if the period of service required by
the plan as a condition of participation does not extend beyond the
later of --
(1) Age 25. The date on which the employee attains the age of 25;
or
(2) Three years of service. The date on which the employee completes
3 years of service.
(c) Special rule for employees of certain educational institutions.
A plan maintained exclusively for employees of an educational
institution (as defined in section 170(b)(1)(A)(ii)) by an employer
exempt from tax under section 501(a) which provides that after 1 year of
service each participant's right to his accrued benefit under the plan
is completely nonforfeitable (within the meaning of section 411 and the
regulations thereunder) at the time such benefit accrues satisfies the
requirements of paragraph (a) of this section if the period of service
required by the plan as a condition of participation does not extend
beyond the later of --
(1) Age 30. The date on which the employee attains the age of 30;
or
(2) One year of service. The date on which the employee completes 1
year of service.
(d) Other conditions. Section 410(a), 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)
26 CFR 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 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)
26 CFR 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 1.411(a)-7.
For purposes of this paragraph, a target benefit plan is a defined
contribution plan under which the amount of employer contributions
allocated to each participant is determined under a plan formula which
does not allow employer discretion and on the basis of the amount
necessary to provide a target benefit specified by the plan for such
participant. Such target benefit must be the type of benefit which is
provided by a defined benefit plan and the targeted benefit must not
discriminate in favor of employees who are officers, shareholders, or
highly compensated. For purposes of this paragraph, in the
determination of the time an employee begins employment, any such time
which is included in a period of service which may be disregarded under
the break in service rules need not be taken into account.
(2) Examples. The rules provided by this paragraph are illustrated
by the following examples:
Example (1). A defined benefit plan provides that an employee will
become a participant upon completion of 3 years of service if at such
time the employee is less than age 60. The normal retirement age under
the plan is age 65. The plan also provides full and immediate vesting
for each of the plan's participants. Under the plan, an employee hired
at age 58 would be denied participation on account of service for the
first 3 years and on account of maximum age for the remaining years even
though the employee was hired more than 5 years prior to the normal
retirement date. The plan therefore does not satisfy section 410(a)(2).
Example. (2). A defined benefit plan provides a normal retirement age
of the later of age 65 or completion of 10 years of service. Because no
employee could ever be hired within 5 years of his normal retirement
age, the plan could not exclude employees for being over a specified
age.
Example (3). Prior to the effective date of section 410, a defined
benefit plan with a normal retirement age of 65 contained a maximum age
55 requirement for participation. Because of the maximum age
requirement, and employee hired at age 58 was excluded from the plan.
This employee is age 61 at the time that section 410 first applies to
the plan. The employee cannot be excluded from participation because of
age. The exclusion under section 410(a)(2) is not applicable in this
instance because the employee's age at the time of hire, 58, was not
within 5 years of the normal retirement age specified in the plan.
Example (4). Employee A was hired at age 50 and participated in a
defined benefit plan until separating from service at age 55 with 5
years of service and with no vested benefit. At age 61, employee A was
rehired within 5 years of the normal retirement age of 65 after he
incurred 6 consecutive breaks in service. Because A's consecutive
number of 1-year breaks (6) exceeds his years of service prior to such
breaks (5), his service before the breaks may be disregarded.
Consequently, A's initial employment date falling within such period may
be disregarded and the plan could exclude A on account of his age
because his employment commenced within 5 years of normal retirement
age.
(b) Time of participation -- (1) General rule. A plan is not a
qualified plan (and a trust forming a part of such plan is not a
qualified trust) unless under the plan any employee who has satisfied
the applicable minimum age and service requirements specified in
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 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
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)
26 CFR 1.410(a)-5 Year of service; break in service.
(a) Year of service. For the rules relating to years of service
under subparagraphs (A), (C), and (D) of section 410(a)(3), see
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530,
relating to minimum standards for employee pension benefit plans.
Rules relating to a general rule for a year of service, hours of
service, and maritime industries apply for purposes of section 410(a)
and the regulations thereunder.
(b) Seasonal industries. For rules which relate to seasonal
industries under section 410(a)(3)(B), see regulations prescribed by the
Secretary of Labor under 29 CFR Part 2530, relating to minimum standards
for employee pension benefits plans.
(c) Breaks in service -- (1) General rule. This paragraph provides
rules with respect to breaks in service under section 410(a)(5). Except
as provided in subparagraphs (2), (3), (4), and (5) of this paragraph,
all of an employee's years of service with the employer or employers
maintaining a plan are taken into account in computing his period of
service under the plan for purposes of section 410(a)(1) and
1.410(a)-3.
(2) Employees under 3-year 100 percent vesting schedule -- (i)
General rule. In the case of an employee who incurs a 1-year break in
service under a plan which provides that after not more than 3 years of
service, each participant's right to his accrued benefit under the plan
in completely nonforfeitable (within the meaning of section 411 and the
regulations thereunder) at the time such benefit accrues, the employee's
service before the break in service is not required to be taken into
account after the break in service in determining the employee's years
of service under section 410(a)(1) and 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.
(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 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 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 11.410(a)-3. Because the employee completed a year of service for
the 12-month period ending December 31, 1982, however, his period of
service is redetermined as of January 1, 1982. Upon completion of a
year of service for 1982, the employee's period of service, determined
as of any date occurring in 1982, includes service prior to December 31,
1981.
(4) Nonvested participants -- (i) General rule. In the case of a
participant in a plan who does not have any nonforfeitable right under
the plan to his employer-derived accrued benefit and who incurs a 1-year
break in service, for purposes of section 410(a)(1) and 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)
26 CFR 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)
26 CFR 1.410(a)-7 Elapsed time.
(a) In general -- (1) Introduction to elapsed time method of
crediting service. (i) 29 CFR 2530.200b-2 sets forth the general method
of crediting service for an employee. The general method is based upon
the actual counting of hours of service during the applicable
12-consecutive-month computation period. The equivalencies set forth in
29 CFR 2530.200b-3 are also methods for crediting hours of service
during computaton periods. Under the general method and the
equivalencies an employee receives a year's credit (in units of years of
service or years of participation) for a computation period during which
the employee is credited with a specified number of hours of service.
In general, an employee's statutory entitlement with respect to
eligibility to participate, vesting and benefit accrual is determined by
totalling the number of years' credit to which an employee is entitled.
(ii) Under the alternative method set forth in this section, by
contrast, an employee's statutory entitlement with respect to
eligibility to participate, vesting and benefit accrual is not based
upon the actual completion of a specified number of hours of service
during a 12-consecutive-month period. Instead, such entitlement is
determined generally with reference to the total period of time which
elapses while the employee is employed (i.e., while the employment
relationship exists) with the employer or employers maintaining the
plan. The alternative method set forth in this section is designed to
enable a plan to lessen the administrative burdens associated with the
maintenance of records of an employee's hours of service by permitting
each employee to be credited with his or her total period of service
with the employer or employers maintaining the plan, irrespective of the
actual hours of service completed in any 12-consecutive-month period.
(2) Overview of the operation of the elapsed time method. (i) Under
the elapsed time method of crediting service, a plan is generally
required to take into account the period of time which elapses while the
employee is employed (i.e., while the employment relationship exists)
with the employer or employers maintaining the plan, regardless of the
actual number of hours he or she completes during such period. Under
this alternative method of crediting service, an employee's service is
required to be taken into account for purposes of eligibility to
participate and vesting as of the date he or she first performs an hour
of service within the meaning of 29 CFR 2530.200b-2 (a) (1) for the
employer or employers maintaining the plan. Service is required to be
taken into account for the period of time from the date the employee
first performs such an hour of service until the date he or she severs
from service with the employer or employers maintaining the plan.
(ii) The date the employee severs from service is the earlier of the
date the employee quits, is discharged, retires or dies, or the first
anniversary of the date the employee is absent from service for any
other reason (e.g., disability, vacation, leave of absence, layoff,
etc.). Thus, for example, if an employee quits, the severance from
service date is the date the employee quits. On the other hand, if an
employee is granted a leave of absence (and if no intervening event
occurs), the severance from service date will occur one year after the
date the employee was first absent on leave, and this one year of
absence is required to be taken into account as service for the employer
or employers maintaining the plan. Because the severance from service
date occurs on the earlier of two possible dates (i.e., quit, discharge,
retirement or death or the first anniversary of an absence from service
for any other reason), a quit, discharge, retirement or death within the
year after the beginning of an absence for any other reason results in
an immediate severance from service. Thus, for example, if an employee
dies at the end of a four-week absence resulting from illness, the
severance from service date is the date of death, rather than the first
anniversary date of the first day of absence for illness.
(iii) In addition, for purposes of eligibility to participate and
vesting under the elapsed time method of crediting service, an employee
who has severed from service by reason of a quit, discharge or
retirement may be entitled to have a period of time of 12 months or less
taken into account by the employer or employers maintaining the plan if
the employee returns to service within a certain period of time and
performs an hour of service within the meaning of 29 CFR 2530.200b-2 (a)
(1). In general, the period of time during which the employee must
return to service begins on the date the employee severs from service as
a result of a quit, discharge or retirement and ends on the first
anniversary of such date. However, if the employee is absent for any
other reason (e.g., layoff) and then quits, is discharged or retires,
the period of time during which the employee may return and receive
credit begins on the severance from service date and ends one year after
the first day of absence (e.g., first day of layoff). As a result of
the operation of these rules, a severance from service (e.g., a quit),
or an absence (e.g., layoff) followed by a severance from service, never
results in a period of time of more than one year being required to be
taken into account after an employee severs from service or is absent
from service.
(iv) For purposes of benefit accrual under the elapsed time method of
crediting service, an employee is entitled to have his or her service
taken into account from the date he or she begins to participate in the
plan until the severance from service date. Periods of severance under
any circumstances are not required to be taken into account. For
example, a participant who is discharged on December 14, 1980 and
rehired on October 14, 1981 is not required to be credited with the 10
month period of severance for benefit accrual purposes.
(3) Overview of certain concepts relating to the elapsed time method
-- (i) In general. The rules with respect to the elapsed time method of
crediting service are based on certain concepts which are defined in
paragraph (b) of this section. These concepts are applied in the
substantive rules contained in paragraphs (c), (d), (e), (f) and (g) of
this section. The purpose of this subparagraph is to summarize these
concepts.
(ii) Employment commencement date. (A) A concept which is necessary
in order to credit service accurately under any service crediting method
is the establishment of a starting point for crediting service. The
employment commencement date, which is the date on which an employee
first performs an hour of service within the meaning of 29 CFR
2530.200b-2 (a) (1) for the employer or employers maintaining the plan,
is used to establish the date upon which an employee must begin to
receive credit for certain purposes (e.g., eligibility to participate
and vesting).
(B) In order to credit accurately an employee's total service with an
employer or employers maintaining the plan, a plan also may provide for
an ''adjusted'' employment commencement date (i.e., a recalculation of
the employment commencement date to reflect noncreditable periods of
severance) or a reemployment commencement date as defined in paragraph
(b) (3) of this section. Fundamentally, all three concepts rely upon
the performance of an hour of service to provide a starting point for
crediting service. One purpose of these three concepts is to enable
plans to satisfy the requirements of this section in a variety of ways.
(C) The fundamental rule with respect to these concepts is that any
plan provision is permissible so long as it satisfies the minimum
standards. Thus, for example, although the rules of this section
provide that credit must begin on the employment commencement date, a
plan is permitted to ''adjust'' the employment commencement date to
reflect periods of time for which service is not required to be
credited. Similarly, a plan may wish to credit service under the
elapsed time method as discrete periods of service and provide for a
reemployment commencement date. Certain plans may wish to provide for
both concepts, although it is not a requirement of this section that
plans so provide.
(iii) Severance from service date. Another fundamental concept of
the elapsed time method of crediting service is the severance from
service date, which is defined as the earlier of the date on which an
employee quits, retires, is discharged or dies, or the first anniversary
of the first date of absence for any other reason. One purpose of the
severance from service date is to provide the endpoint for crediting
service under the elapsed time method. As a general proposition,
service is credited from the employment commencement date (i.e., the
starting point) until the severance from service date (i.e., the
endpoint). A complementary purpose of the severance from service date
is to establish the starting point for measuring a period of severance
from service in order to determine a ''break in service'' (see paragraph
(a)(3)(v) of this section). A third purpose of such date is to
establish the starting point for measuring the period of time which may
be required to be taken into account under the service spanning rules
(see paragraph (a)(3)(vi) of this section).
(iv) Period of service. A third elapsed time concept is the use of
the ''period of service'' rather than the ''year of service'' in
determining service to be taken into account for purposes of eligibility
to participate, vesting and benefit accrual. For purposes of
eligibility to participate and vesting, the period of service runs from
the employment commencement date or reemployment commencement date until
the severance from service date. For purposes of benefit accrual, a
period of service runs from the date that a participant commences
participation under the plan until the severance from service date.
Because the endpoint of the period of service is marked by the severance
from service date, an employee is credited with the period of time which
runs during any absence from service (other than for reason of a quit,
retirement, discharge or death) which is 12 months or less. Thus, for
example, a three week absence for vacation is taken into account as part
of a period of service and does not trigger a severance from service
date.
(v) Period of severance. A period of severance begins on the
severance from service date and ends when an employee returns to service
with the employer or employers maintaining the plan. The purpose of the
period of severance is to apply the statutory ''break in service'' rules
to an elapsed time method of crediting service.
(vi) Service spanning. Under the elapsed time method of crediting
service, a plan is required to credit periods of service and, under the
service spanning rules, certain periods of severance of 12 months or
less for purposes of eligibility to participate and vesting. Under the
first service spanning rule, if an employee severs from service as a
result of quit, discharge or retirement and then returns to service
within 12 months, the period of severance is required to be taken into
account. Also, a situation may arise in which an employee is absent
from service for any reason other than quit, discharge, retirement or
death and during the absence a quit, discharge or retirement occurs.
The second service spanning rule provides in that set of circumstances
that a plan is required to take into account the period of time between
the severance from service date (i.e., the date of quit, discharge or
retirement) and the first anniversary of the date on which the employee
was first absent, if the employee returns to service on or before such
first anniversary date.
(4) Organization and applicability. (i) The substantive rules for
crediting service under the elapsed time method with respect to
eligibility to participate are contained in paragraph (c), the rules
with respect to vesting are contained in subparagraph (d), and the rules
with respect to benefit accrual are contained in paragraph (e). The
format of the rules is designed to enable a plan to use the elapsed time
method of crediting service either for all purposes or for any one or
combination of purposes under sections 410 and 411. Thus, for example,
a plan may credit service for eligibility to participate purposes by the
use of the general method of crediting service set forth in 29 CFR
2530.200b-2 or by the use of any of the equivalences set forth in 29 CFR
2530.200b-3, while the plan may credit service for vesting and benefit
accrual purposes by the use of the elapsed time method of crediting
service.
(ii) A plan using the elapsed time method of crediting service for
one or more classifications of employees covered under the plan may use
the general method of crediting service set forth in 29 CFR 2530.200b-2
or any of the equivalencies set forth in 29 CFR 2530.200b-3 for other
classifications of employees, provided that such classifications are
reasonable and are consistently applied. Thus, for example, a plan may
provide that part-time employees are credited under the general method
of crediting service set forth in 29 CFR 2530.200b-2 and full-time
employees are credited under the elapsed time method. A classification,
however, will not be deemed to be reasonable or consistently applied if
such classification is designed with an intent to preclude an employee
or employees from attaining his or her statutory entitlement with
respect to eligibility to participate, vesting or benefit accrual. For
example, a classification applied so that any full-time employee
credited with less than 1,000 hours of service during a given
12-consecutive-month period would be considered part-time and subject to
the general method of crediting service rather than the elapsed time
method would not be reasonable.
(iii) Notwithstanding paragraph (a) (4) (i) and (ii) of this section,
the use of the elapsed time method for some purposes or the use of the
elapsed time method for some employees may, under certain circumstances,
result in discrimination prohibited under section 401(a)(4), even though
the use of the elapsed time method for such purposes, and for such
employees, is permitted under this section.
(5) More than one employer plans. For special rules for computing
years of service in the case of a plan maintained by more than one
employer, see 29 CFR Part 2530 (Department of Labor regulations relating
to minimum standards for employee pension benefit plans).
(b) Definitions -- (1) Employment commencement date. For purposes of
this section, the term ''employment commencement date'' shall mean the
date on which the employee first performs an hour of service within the
meaning of 29 CFR 2530.200b-2 (a)(1) for the employer or employers
maintaining the plan.
(2) Severance from service date. For purposes of this section, a
''severance from service'' shall occur on the earlier of --
(i) The date on which an employee quits, retires, is discharged or
dies; or
(ii) The first anniversary of the first date of a period in which an
employee remains absent from service (with or without pay) with the
employer or employers maintaining the plan for any reason other than
quit, retirement, discharge or death, such as vacation, holiday,
sickness, disability, leave of absence or layoff.
(3) Reemployment commencement date. For purposes of this section,
the term ''reemployment commencement date'' shall mean the first date,
following a period of severance from service which is not required to be
taken into account under the service spanning rules in paragraphs
(c)(2)(iii) and (d)(1)(iii) of this section, on which the employee
performs an hour of service within the meaning of 29 CFR
2530.200b-2(a)(1) for the employer or employers maintaining the plan.
(4) Participation commencement date. For purposes of this section,
the term ''participation commencement date'' shall mean the date a
participant first commences participation under the plan.
(5) Period of severance. For purposes of this section, the term
''period of severance'' shall mean the period of time commencing on the
severance from service date and ending on the date on which the employee
again performs an hour of service within the meaning of 29 CFR
2530.200b-2(a)(1) for an employer or employers maintaining the plan.
(6) Period of service -- (i) General rule. For purposes of this
section, the term ''period of service'' shall mean a period of service
commencing on the employee's employment commencement date or
reemployment commencement date, whichever is applicable, and ending on
the severance from service date.
(ii) Aggregation rule. Unless a plan provides in some manner for an
''adjusted'' employment commencement date or similar method of
consolidating periods of service, periods of service shall be aggregated
unless such periods may be disregarded under section 410(a)(5) or
411(a)(4).
(iii) Other federal law. Nothing in this section shall be construed
to alter, amend, modify, invalidate, impair or supersede any law of the
United States or any rule or regulation issued under such law. Thus,
for example, nothing in this section shall be construed as denying an
employee credit for a ''period of service'' if credit is required by a
separate federal law. Furthermore, the nature and extent of such credit
shall be determined under such law.
(c) Eligibility to participate -- (1) General rule. For purposes of
section 410(a)(1)(A), a plan generally may not require as a condition of
participation in the plan that an employee complete a period of service
with the employer or employers maintaining the plan extending beyond the
later of --
(i) The date on which the employee attains the age of 25; or
(ii) The date on which the employee completes a one-year period of
service. See the regulations under section 410(a) (relating to
eligibility to participate).
(2) Determination of one-year period of service. (i) For purposes of
determining the date on which an employee satisfies the service
requirement for initial eligibility to participate under the plan, a
plan using the elapsed time method of crediting service shall provide
that an employee who completes the 1-year period of service requirement
on the first anniversary of his employment commencement date satisfies
the minimum service requirement as of such date. In the case of an
employee who fails to complete a one-year period of service on the first
anniversary of his employment commencement date, a plan which does not
contain a provision permitted by section 410(a)(5)(D) (rule of parity)
shall provide for the aggregation of periods of service so that a
one-year period of service shall be completed as of the date the
employee completes 12 months of service (30 days are deemed to be a
month in the case of the aggregation of fractional months) or 365 days
of service.
(ii) For purposes of section 410(a)(1)(B)(i), a ''3-year period of
service'' shall be deemed to be ''3 years of service.''
(iii) Service spanning rules. In determining a 1-year period of
service for purposes of initial eligibility to participate and a period
of service for purposes of retention of eligibility to participate, in
addition to taking into account an employee's period of service, a plan
shall take into account the following periods of severance --
(A) If an employee severs from service by reason of a quit, discharge
or retirement and the employee then performs an hour of service within
the meaning of 29 CFR 2530.200b-2(a)(1) within 12 months of the
severance from service date, the plan is required to take into account
the period of severance; and
(B) Notwithstanding paragraph (c)(2)(iii)(A) of this section, if an
employee severs from service by reason of a quit, discharge or
retirement during an absence from service of 12 months or less for any
reason other than a quit, discharge, retirement or death, and then
performs an hour of service within the meaning of 29 CFR
2530.200b-2(a)(1) within 12 months of the date on which the employee was
first absent from service, the plan is required to take into account the
period of severance.
(iv) For purposes of determining an employee's retention of
eligibility to participate in the plan, a plan shall take into account
an employee's entire period of service unless certain periods of service
may be disregarded under section 410(a)(5) of the Code.
(v) Example. Employee W, age 31, completed 6 months of service and
was laid off. After 2 months of layoff, W quit. Five months later, W
returned to service. For purposes of eligibility to participate, W was
required to be credited with 13 months of service (8 months of service
and 5 months of severance). If, on the other hand, W had not returned
to service within the first 10 months of severance (i.e., within 12
months after the first day of layoff), W would be required to be
credited with only 8 months of service.
(3) Entry date requirements -- (i) General rule. For purposes of
section 410(a)(4), it is necessary for a plan to provide that any
employee who has satisfied the minimum age and service requirements, and
who is otherwise entitled to participate in the plan, commences
participation in the plan no later than the earlier of --
(A) The first day of the first plan year beginning after the date on
which such employee satisfied such requirements, or
(B) The date six months after the date on which he satisfied such
requirements, unless such employee was separated from service before the
date referred to in subdivision (i) (A) or (B), whichever is applicable.
See the regulations under section 410(a) (relating to eligibility to
participate).
(ii) Separation from service -- (A) Definition. For purposes of this
section, the term ''separated from service'' includes a severance from
service or an absence from service for any reason other than a quit,
discharge, retirement or death, regardless of the duration of such
absence. Accordingly, if an employee is laid off for a period of six
weeks, the employee shall be deemed to be ''separated from service''
during such period for purposes of the entry date requirements.
(B) Application. A period of severance which is taken into account
under the service spanning rules in paragraph (c)(2)(iii) of this
section or an absence of 12 months or less may result in an employee
satisfying the plan's minimum service requirement during such period of
time. In addition, once an employee satisfies the plan's minimum
service requirement, either before or during such period of time, such
period of time may contain an entry date applicable to such employee.
In the case of an employee whose period of severance is taken into
account and such period contains an entry date applicable to the
employee, he or she shall be made a participant in the plan (if
otherwise eligible) no later than the date on which he or she ended the
period of severance. In the case of an employee whose period of absence
contains an entry date applicable to such employee, he or she, no later
than the date such absence ended, shall be made a participant in the
plan (if otherwise eligible) as of the first applicable entry date which
occurred during such absence from service.
(iii) Examples. For purposes of the following examples, assume that
the plan provides for a minimum age requirement of 25 and a minimum
service requirement of one year, and provides for semi-annual entry
dates.
(A) Employee A, age 35, worked for 10 months in a job classification
covered under the plan, became disabled for nine consecutive months and
then returned to service. During the period of absence, A completed a
1-year period of service and passed a semi-annual entry date after
satisfying the minimum service requirement. Accordingly, the plan is
required to make A a participant no later than his return to service
effective as of the applicable entry date.
(B) Employee B, after satisfying the minimum age and service
requirements, quit work before the next semi-annual entry date, and then
returned to service before incurring a 1-year period of severance, but
after such semi-annual entry date. Employee B is entitled to become a
participant immediately upon his return to service effective as of the
date of his return.
(4) Break in service. For purposes of applying the break in service
rules under section 410(a)(5) (B) and (C), the term ''1-year period of
severance'' shall be substituted for the term ''1-year break in
service''. A 1-year period of severance shall be determined on the
basis of a 12-consecutive-month period beginning on the severance from
service date and ending on the first anniversary of such date, provided
that the employee during such 12-consecutive-month period does not
perform an hour of service within the meaning of 29 CFR
2530.200b-2(a)(1) for the employer or employers maintaining the plan.
(5) One-year hold-out -- (i) General rule. (A) For purposes of
section 410(a)(5)(C), in determining the period of service of an
employee who has incurred a 1-year period of severance, a plan may
disregard the employee's period of service before such period of
severance until the employee completes a 1-year period of service after
such period of severance.
(B) Example. Assume that a plan provides for a minimum service
requirement of 1-year and provides for semi-annual entry dates, but does
not contain the provisions permitted by section 410(a)(5)(D) (relating
to the rule of parity). Employee G, age 40, completed a seven-month
period of service, quit and then returned to service 15 months later,
thereby incurring a 1-year period of severance. After working four
months, G was laid off for nine months and then returned to work again.
Although the plan may hold employee G out from participation in the plan
until the completion of a 1-year period of service after the 1-year (or
greater) period of severance, once the 1-year hold-out is completed, the
plan is required to provide the employee with such statutory entitlement
as arose during the 1-year hold-out. Accordingly, employee G satisfied
the 1-year hold-out requirement as of the eighth month of layoff, and G
is entitled to become a participant in the plan immediately upon his
return to service after the nine-month layoff effective as of the first
applicable entry date occurring after the date on which he satisfied the
1-year of service requirement (i.e., the first applicable entry date
after the first month of layoff). See the regulations under section 410
(a) (relating to eligibility to participate).
(6) Rule of parity -- (i) General rule. For purposes of section
410(a)(5)(D), in the case of a participant who does not have any
nonforfeitable right under the plan to his accrued benefit derived from
employer contributions and who incurs a 1-year period of severance, a
plan, in determining an employee's period of service for purposes of
section 410(a)(1), may disregard his period of service if his latest
period of severance equals or exceeds his prior periods of service,
whether or not consecutive, completed before such period of severance.
See the regulations under section 410(a) (relating to eligibility to
participate).
(ii) In determining whether a completely nonvested employee's service
may be disregarded under the rule of parity, a plan is not permitted to
apply the rule until the employee incurs a 1-year period of severance.
Accordingly, a plan may not disregard a period of service of less than
one year until an employee has incurred a period of severance of at
least one year.
(iii) Example. Assume that a plan provides for a minimum service
requirement of one year and provides for the rule of parity. An
employee works for three months, quits and then is rehired 10 months
later. Such employee is entitled to receive 13 months of credit for
purposes of eligibility to participate and vesting (see the service
spanning rules). Although the period of severance exceeded the period
of service, the three months of service may not be disregarded because
no 1-year period of severance occurred.
(d) Vesting -- (1) General rule. (i) For purposes of section
411(a)(2), relating to vesting in accrued benefits derived from employer
contributions, a plan which determines service to be taken in account on
the basis of elapsed time shall provide that an employee is credited
with a number of years of service equal to at least the number of whole
years of the employee's period of service, whether or not such periods
of service were completed consecutively.
(ii) In order to determine the number of whole years of an employee's
period of service, a plan shall provide that non-successive periods of
service must be aggregated and that less than whole year periods of
service (whether or not consecutive) must be aggregated on the basis
that 12 months of service (30 days are deemed to be a month in the case
of the aggregation of fractional months) or 365 days of service equal a
whole year of service.
(iii) Service spanning rules. In determining a participant's period
of service for vesting purposes, a plan shall take into account the
following periods of severance --
(A) If an employee severs from service by reason of a quit, discharge
or retirement and the employee then performs an hour of service within
the meaning of 29 CFR 2530.200b-2(a)(1) within 12 months of the
severance from service date, the plan is required to take into account
the period of severance; and
(B) Nothwithstanding paragraph (d)(1)(iii)(A) of this section, if an
employee severs from service by reason of a quit, discharge or
retirement during an absence from service of 12 months or less for any
reason other than a quit, discharge, retirement or death, and then
performs an hour of service within the meaning of 29 CFR
2530.200b-2(a)(1) within 12 months of the date on which the employee was
first absent from service, the plan is required to take into account the
period of severance.
(iv) For purposes of determining an employee's nonforfeitable
percentage of accrued benefits derived from employer contributions, a
plan, after calculating an employee's period of service in the manner
prescribed in this paragraph, may disregard any remaining less than
whole year, 12-month or 365-day period of service. Thus, for example,
if a plan provides for the statutory five to fifteen year graded
vesting, an employee with a period (or periods) of service which yield 5
whole year periods of service and an additional 321-day period of
service is twenty-five percent vested in his or her employer-derived
accrued benefits (based solely on the 5 whole year periods of service).
(2) Service which may be disregarded. (i) For purposes of section
411(a)(4), in determining the nonforfeitable percentage of an employee's
right to his or her accrued benefits derived from employer
contributions, all of an employee's period or periods of service with an
employer or employers maintaining the plan shall be taken into account
unless such service may be disregarded under paragraph (d)(2)(ii) of
this section.
(ii) For purposes of paragraph (d)(2)(i) of this section, the
following periods of service may be disregarded --
(A) The period of service completed by an employee before the date on
which he attains age 22;
(B) In the case of a plan which requires mandatory employee
contributions, the period of service which falls within the period of
time to which a particular employee contribution relates, if the
employee had the opportunity to make a contribution for such period of
time and failed to do so;
(C) The period of service during any period for which the employer
did not maintain the plan or a predecessor plan;
(D) The period of service which is not required to be taken into
account by reason of a period of severance which constitutes a break in
service within the meaning of paragraph (d)(4) of this section;
(E) The period of service completed by an employee prior to January
1, 1971, unless the employee completes a period of service of at least 3
years at any time after December 31, 1970; and
(F) The period of service completed before the first plan year for
which this section applies to the plan, if such service would have been
disregarded under the plan rules relating to breaks in service in effect
at that time. See the regulations under section 411(a) (relating to
vesting).
(3) Seasonal industry. (Reserved)
(4) Break in service. For purposes of applying the break in service
rules, the term ''1-year period of severance'' shall be substituted for
the term ''1-year break in service''. A 1-year period of severance
shall be a 12-consecutive-month period beginning on the severance from
service date and ending on the first anniversary of such date, provided
that the employee during such 12-consecutive-month period fails to
perform an hour of service within the meaning of 29 CFR
2530.200b-2(a)(1) for an employer or employers maintaining the plan.
(5) One-year hold-out. For purposes of section 411(a)(6)(B), in
determining the nonforfeitable percentage of the right to accrued
benefits derived from employer contributions of an employee who has
incurred a 1-year period of severance, the period of service completed
before such period of severance is not required to be taken into account
until the employee has completed a 1-year period of service after his
return to service. See the regulations under section 411(a) (relating
to vesting).
(6) Vesting in pre-break accruals. For purposes of section
411(a)(6)(C), a ''1-year period of severance'' shall be deemed to
constitute a ''1-year break in service.'' See the regulations under
section 411(a) (relating to vesting).
(7) Rule of partity -- (i) General rule. For purposes of section
411(a)(6)(D), in the case of an employee who is a nonvested participant
in employer-derived benefits at the time he incurs a 1-year period of
severance, the period of service completed by such participant before
such period of severance is not required to be taken into account for
purposes of determining the vested percentage of his or her right to
employer-derived benefits if at such time the consecutive period of
severance equals or exceeds his prior periods of service, whether or not
consecutive, completed before such period of severance. See the
regulations under section 411(a) (relating to vesting).
(e) Benefit accrual. (1) For purposes of section 411(b), a plan may
provide that a participant's service with an employer or employers
maintaining the plan shall be determined on the basis of the
participant's total period of service beginning on the participation
commencement date and ending on the severance from service date.
(2) Under section 411(b)(3)(A), a defined benefit pension plan may
determine an employee's service for purposes of benefit accrual on any
basis which is reasonable and consistent and which takes into account
all service during the employee's participation in the plan which is
included in a period of service required to be taken into account under
section 410(a)(5) (relating to service which must be taken into account
for purposes of determining an employee's eligibility to participate).
A plan which provides for the determination of an employee's service
with an employer or employers maintaining the plan on the basis
permitted under paragraph (e)(1) of this section will be deemed to meet
the requirements of section 411(b)(3)(A), provided that the plan meets
the requirements of 29 CFR 2530.204-3, relating to plans which determine
an employee's service for purposes of benefit accrual on a basis other
than computation periods. Specifically, under 29 CFR 2530.204-3, it
must be possible to prove that, despite the fact that benefit accrual
under such a plan is not based on computation periods, the plan's
provisions meet at least one of the three benefit accrual rules of
section 411(b)(1) under all circumstances. Further, 29 CFR 2530.204-3
prohibits such a plan from disregarding service under section
411(b)(3)(C) (which would otherwise permit a plan to disregard service
performed by an employee during a computation period in which the
employee is credited with less than 1,000 hours). See the regulations
under section 411(b) (relating to benefit accrual).
(f) Transfers between methods of crediting service -- (1) Single
plan. A plan may provide that an employee's service for purposes of
eligibility to participate, vesting or benefit accrual shall be
determined on the basis of computation periods under the general method
set forth in 29 CFR 2530.200b-2 for certain classes of employees but
under the alternative method permitted under this section for other
classes of employees if the plan provides as follows --
(i) In the case of an employee who transfers from a class of
employees whose service is determined on the basis of computation
periods to a class of employees whose service is determined on the
alternative basis permitted under this section, the employee shall
receive credit for a period of service consisting of --
(A) A number of years equal to the number of years of service
credited to the employee before the computation period during which the
transfer occurs; and
(B) The greater of (1) the period of service that would be credited
to the employee under the elapsed time method for his service during the
entire computation period in which the transfer occurs or (2) the
service taken into account under the computation periods method as of
the date of the transfer.
In addition, the employee shall receive credit for service subsequent
to the transfer commencing on the day after the last day of the
computation period in which the transfer occurs.
(ii) In the case of an employee who transfers from a class of
employees whose service is determined on the alternative basis permitted
under this section to a class of employees whose service is determined
on the basis of computation periods --
(A) The employee shall receive credit, as of the date of the
transfer, for a number of years of service equal to the number of 1-year
periods of service credited to the employee as of the date of the
transfer, and
(B) The employee shall receive credit, in the computation period
which includes the date of the transfer, for a number of hours of
service determined by applying one of the equivalencies set forth in 29
CFR 2530.200b-3 (e) (1) to any fractional part of a year credited to the
employee under this section as of the date of the transfer. Such
equivalency shall be set forth in the plan and shall apply to all
similarly situated employees.
(2) More than one plan. In the case of an employee who transfers
from a plan using either the general method of determining service on
the basis of computation periods set forth in 29 CFR 2530.200b-2 or the
method of determining service permitted under this section to a plan
using the other method of determining service, all service required to
be credited under the plan to which the employee transfers shall be
determined by applying the rules of paragraph (f)(1) of this section.
(g) Amendments to change method of crediting service. A plan may be
amended to change the method of crediting service for any purpose or for
any class of employees between the general method set forth in 29 CFR
2530.200-2 and the method permitted under this section, if such
amendment contains provisions under which each employee with respect to
whom the method of crediting service is changed is treated in the same
manner as an employee who transfers from one class of employees to
another under paragraph (f)(1) of this section.
(h) Transitional rule. For plans in existence on (insert the date of
the publication of this document), the provisions of paragraph (f) of
this section are effective for plan years beginning after December 31,
1983.
(T.D. 7703, 45 FR 40980, June 17, 1980)
26 CFR 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)
26 CFR 1.410(a)-9 Maternity and paternity absence.
(a) Elapsed time -- (1) Rule. For purposes of applying the rules of
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)
26 CFR 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 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.
Note: Employee A will have satisfied the plan's service requirement
at the end of year 2, Employee B at the end of year 3, and Employee C at
the end of year 5.
(3) One-year break in service --
(i) (Reserved)
(ii) Examples. The rules provided by this subparagraph are
illustrated by the following examples:
Example (1). Employee A completes a year of service under a plan
computing service by the actual counting of hours for the 12-month
period ending December 31, 1989, and incurs a 1-year break in service
for the 12-month period ending December 31, 1990. The plan does not
contain the provisions permitted by section 410(a)(5)(B) (relating to
2-year 100 percent vesting) and section 410(a)(5)(D) (relating to
nonvested participants). Thereafter, he does not complete a year of
service. As of January 1, 1991, in computing his period of service
under the plan his service prior to December 31, 1990, is not required
to be taken into account for purposes of section 410(a)(1) and
1.410(a)-3.
(T.D. 8170, 53 FR 239, Jan. 6, 1988)
26 CFR 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)
26 CFR 1.410(b)-0 Table of Contents.
This section contains a listing of the headings of 1.410(b)-1
through 1.410(b)-10.
1.410(b)-1 Minimum coverage requirements (before 1989).
(a) In general.
(b) Coverage tests.
(1) Percentage test.
(2) Classification test.
(c) Exclusion of certain employees.
(1) Bargaining unit.
(2) Air pilots.
(3) Nonresident aliens.
(d) Special rules.
(1) Highly compensated.
(2) Discrimination.
(3) Multiple plans.
(4) Profit-sharing plans.
(5) Certain classifications.
(6) Integration with Social Security Act.
(7) Different age and service requirements.
(i) Application.
(ii) General rule.
(8) Certain controlled groups.
(9) Transitional rule.
(e) Example.
1.410(b)-2 Minimum coverage requirements (after 1988).
(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.
(i) In general.
(ii) Special rule.
(d) Nonelective contributions under section 403(b) plans.
(e) Certain governmental and church plans.
(f) Certain acquisitions or dispositions.
(g) Additional rules.
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 plan limits.
(iv) Benefit offset arrangements.
(v) Post-normal retirement age adjustments.
(3) Examples.
(b) Former employees benefiting under a plan.
(1) In general.
(2) Examples.
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.
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 on a contributions basis.
(6) Determination on a benefits basis.
(7) Requirements for certain plans providing early retirement
benefits.
(i) General rule.
(ii) Exception.
(8) Use of optional methods provided in section 401(a)(4)
regulations.
(i) General rule.
(ii) Certain restrictions on options involving defined benefit plans.
(9) Determination of testing age.
(i) General rule.
(ii) Different ages permitted under certain conditions.
(e) Additional optional rules.
(1) Overview.
(2) Determination of employee benefit percentages as sum of
separately determined rates.
(i) General rule.
(ii) Determination of rates.
(iii) Treatment of permitted disparity.
(iv) Determination of compensation.
(3) Determination of employee benefit percentages without regard to
plans of a different type.
(i) General rule.
(ii) Effect of use of separate testing group determination method.
(iii) Treatment of permitted disparity.
(iv) Consistency rules.
(v) Example.
(4) Accrued-to-date method.
(i) General rule.
(ii) Application to separate rate method.
(iii) Treatment of permitted disparity.
(iv) Uniform testing service assumption.
(v) Fresh-start alternative.
(5) Optional computation methods provided under section 401(a)(4).
(6) Alternative annual method for determining employee benefit
percentages for certain defined benefit plans.
(7) Alternative method for converting benefits to contributions.
(8) Imputation of permitted disparity.
(i) Use of excess benefit and gross benefit percentages.
(ii) Uniform compensation assumption.
(9) Three-year averaging period.
(i) General rule.
(ii) Consistency rule.
(10) Alternative methods of determining compensation.
(i) Use of average annual compensation.
(ii) Rules for determining whether alternative definitions are
discriminatory.
(iii) Use of different definitions for different groups of employees.
(f) Special rule for certain collectively bargained plans.
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 rule for certain employees who cease to be collectively
bargained employees.
(iii) Covered by a collective bargaining agreement.
(iv) Examples.
(e) Employees of qualified separate lines of business.
(f) Certain terminating employees.
(1) In general.
(2) Hours of service.
(3) Examples.
(g) Employees of certain governmental or tax-exempt entities
precluded from maintaining a section 401(k) plan.
(h) Former employees.
(1) In general.
(2) Employees terminated before a specified date.
(i) Previously excludable employees.
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 employees of qualified separate line of
business.
(5) Plans benefiting collectively bargained employees.
(6) Plans maintained by more than one employer.
(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.
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.
1.410(b)-9 Definitions.
Collectively bargained employee.
Defined benefit excess plan.
Defined benefit plan.
Defined contribution plan.
Employee.
Employer.
ESOP.
Excess benefit percentage.
Former employee.
Gross benefit percentage.
Highly compensated employee.
Highly compensated former employee.
Multiemployer plan.
Noncollectively bargained employee.
Nonhighly compensated employee.
Nonhighly compensated former employee.
Offset plan.
Plan year.
Plan year compensation.
Professional employee.
Ratio percentage.
Section 401(k) plan.
Section 401(l) plan.
Section 401(m) plan.
1.410(b)-10 Effective dates and transition rules.
(a) General rule.
(b) Transition rules.
(1) Nondiscriminatory classification test.
(2) Average benefit percentage test.
(c) Employees who benefit under a plan.
(d) Aggression of two or more plans.
(e) Special rules for certain collective bargaining agreements.
(1) In general.
(2) Example.
(3) Plan maintained pursuant to a collective bargaining agreement.
(T.D. 8363, 56 FR 47641, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992)
26 CFR 1.410(b)-1 Minimum coverage requirements (before 1989).
(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 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 1.410(b)-2 for plan years beginning on or after the
applicable effective date set forth in 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).
(d) Special rules -- (1) Highly compensated. The classification of
an employee as highly compensated for purposes of section 410(b)(1)(B)
and 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 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 1.410(a)-1(c)(1)); plans
satisfying the alternative minimum age and service requirements of
section 410(a)(1)(B) but not satisfying the requirements of section
410(a)(1)(A); and plans which provide contributions or benefits for
employees, some or all of whom are owner-employees (see section
401(a)(10)).
(ii) General rules. A provision for different age and service
requirements for present and future employees either upon establishment
or subsequent amendment is not, of itself, discriminatory under section
410(b)(1)(B) even though present employees who are officers,
shareholders, or highly compensated cannot meet the age and service
requirements for future employees at the time the plan is established or
amended and even though present participants who are officers,
shareholders, or highly compensated would not have satisfied the age and
service requirements for future employees at the time they became
participants in the plan. Furthermore, prohibited discrimination will
be deemed not to arise in operation, solely because of such different
requirements, when future employees are added to the employer's work
force.
(8) Certain controlled groups. In applying the percentage test and
classification test described in paragraph (b) (1) and (2) of this
section for a year, all the employees of corporations or trades and
businesses whose employees are treated as employed by a single employer
by reason of section 414 (b) or (c) must be taken into account. The
preceding sentence shall apply for a plan year if, on 1 day in each
quarter of such plan year, such corporations are members of a controlled
group of corporations (within the meaning of section 414(b)) of such
trades or businesses are under common control (within the meaning of
section 414(c)).
(9) Transitional rule. In the case of a cash and deferred
profit-sharing plan, in existence on June 27, 1974, the requirements of
paragraph (b)(2) of this section are satisfied if over one-half of the
participants in the plan are among the lowest paid two-thirds of all
eligible employees. This subparagraph shall not apply after December
31, 1977.
(e) Example. The rules provided by this section are illustrated by
the following example:
Example. An employer established a non-contributory defined benefit
plan covering all employees of its ABC Division who are hired prior to
age 60 and who are at least 25 years old. The normal retirement age
under the plan is age 65. The employer has 100 employees including 20
employees who are under age 25 and 10 employees who were hired over age
60. The plan does not cover 15 employees who are over age 25 and were
hired before age 60 because they are not in the ABC Division. Of these
15 excluded employees, 3 have less than 1 year of service. In addition,
12 of the 55 employees covered have less than one year of service. The
plan can be shown not to satisfy the requirements of IRC section
410(b)(1)(A) as follows:
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)
26 CFR 1.410(b)-2 Minimum coverage requirements (after 1988).
(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 1.410(b)-7 for rules for determining the ''plan''
subject to section 410(b).
(b) Requirements with respect to employees -- (1) In general. A plan
satisfies this paragraph (b) for a plan year if and only if it satisfies
at least one of the tests in paragraphs (b)(2) through (b)(7) of this
section for the plan year.
(2) Ratio percentage test -- (i) In general. A plan satisfies this
paragraph (b)(2) for a plan year if and only if the plan's ratio
percentage for the plan year is at least 70 percent. This test
incorporates both the percentage test of section 410(b)(1)(A) and the
ratio test of section 410(b)(1)(B). See 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 1.410(b)-4 and the average benefit percentage
test of 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 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 1.410(b)-7(b)) benefits both collectively bargained
employees and noncollectively bargained employees for a plan year,
1.410(b)-7(c)(5) 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
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 -- (i) In general. A plan satisfies
section 410(b) with respect to former employees if it satisfies one of
the tests in paragraphs (b)(2) through (b)(7) of this section with
respect to former employees. For this purpose, these tests are applied
by substituting ''former employee'' for ''employee,'' ''nonhighly
compensated former employee'' for ''nonhighly compensated employee,''
and ''highly compensated former employee'' for ''highly compensated
employee,'' whenever those terms are used.
(ii) Special rule. A defined benefit plan satisfies section 410(b)
with respect to former employees for a plan year if the plan benefits at
least five former employees, and if either --
(A) More than 95 percent of all former employees with vested accrued
benefits under the plan benefit under the plan for the plan year, or
(B) At least 60 percent of the former employees who benefit under the
plan for the plan year are nonhighly compensated former employees.
(d) Nonelective contributions under section 403(b) plans. For plan
years beginning on or after January 1, 1989, a plan subject to section
403(b)(12)(A)(i) with respect to nonelective contributions (i.e.,
contributions not made pursuant to a salary reduction agreement) is
treated as a plan subject to the requirements of this section. For this
purpose, a plan described in the preceding sentence must satisfy the
requirements of this section without regard to section 410(c) and
paragraph (e) of this section. For plan years beginning before January
1, 1993, 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 January 1,
1993, any plan described in section 410(c)(1)(A) (regarding governmental
plans) satisfies section 401(a)(3) as in effect on September 1, 1974.
(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. Section
410(b)(6)(C) does not apply to acquisitions or dispositions that
occurred prior to the first plan year to which section 410(b), as
amended by the Tax Reform Act of 1986, applies. 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
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)
26 CFR 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 employee receives
an allocation taken into account under 1.401(a)(4)-2(c)(2)(ii), or in
the case of a defined benefit plan, the employee receives an increase in
the dollar amount of a benefit accrued or treated as an accrued benefit
under section 411(d)(6).
(2) Exceptions to allocation or accrual requirement -- (i) Section
401(k) and 401(m) plans. Notwithstanding paragraph (a)(1) of this
section, an employee is treated as benefiting under a section 401(k)
plan for a plan year if and only if the employee is an eligible employee
under the plan as defined in 1.401(k)-1(g)(4) for the plan year.
Similarly, an employee is treated as benefiting under a section 401(m)
plan for a plan year if and only if the employee is an eligible employee
as defined in 1.401(m)-1(f)(4) for the plan year.
(ii) Section 415 limits. In determining whether an employee is
treated as benefiting under a 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 (which
would have been greater but for the application of section 415(b)) due
solely to adjustments under section 415(d)(1) is also disregarded, but
only if such provision applies uniformly to all employees in the plan.
(iii) Certain plan limits. 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 for the plan year but fails
to accrue the benefit solely because of a benefit limit under the plan
that is uniformly applicable to all employees in the plan. Thus, for
example, if a defined benefit plan takes into account only the first 30
years of service for accrual purposes, a participant who has completed
more than 30 years of service is still treated as benefiting under the
plan.
(iv) Benefit offset arrangements. An employee is treated as
benefiting under a plan for a plan year even if the employee's current
benefit accrual under the plan is offset by the contributions or
benefits provided on behalf of the employee under another qualified
plan, if the employee has satisfied all other conditions for a current
benefit accrual under the plan. If the other plan is maintained by
another employer, the employee whose benefits are subject to the offset
must have become an employee of the employer maintaining the plan
pursuant to a transaction described in 1.401(b)-2(f) (regarding certain
acquisitions and dispositions) between the two employers.
(v) Post-normal retirement age adjustments. An employee is treated
as benefiting under a defined benefit plan for a plan year if the
employee has attained normal retirement age and fails to accrue a
benefit solely because of the provisions of section 411(b)(1)(H)(iii)
regarding adjustments for delayed retirement.
(3) Examples. The following examples illustrate the determination of
whether an employee is benefiting under a plan for purposes of section
410(b).
Example 1. An employer has 35 employees who are eligible under a
defined benefit plan. The plan requires 1,000 hours of service to
accrue a benefit. Only 30 employees satisfy the 1,000-hour requirement
and accrue a benefit. The five employees who do not satisfy the
1,000-hour requirement during the plan year are taken into account in
testing the plan under section 410(b) but are treated as not benefiting
under the plan.
Example 2. An employer maintains a section 401(k) plan. Only
employees who are at least age 21 and who complete one year of service
are eligible employees under the plan within the meaning of
1.401(k)-1(g)(4). Under the rule of paragraph (a)(2)(i) of this section,
only employees who have satisfied these age and service conditions are
treated as benefiting under the plan.
Example 3. The facts are the same as in Example 2, except that the
employer also maintains a section 401(m) plan that provides matching
contributions contingent on elective contributions under the section
401(k) plan. The matching contributions are contingent on employment on
the last day of the plan year. Under 1.401(m)-1(f)(4), because
matching contributions are contingent on employment on the last day of
the plan year, not all employees who are eligible employees under the
section 401(k) plan are eligible employees under the section 401(m)
plan. Thus, employees who have satisfied the age and service conditions
but who do not receive a matching contribution because they are not
employed on the last day of the plan year are treated as not benefiting
under the section 401(m) portion of the plan.
(b) Former employees benefiting under a plan -- (1) In general. A
former employee is treated as benefiting for a plan year if and only if
the plan provides an allocation or benefit increase described in
paragraph (a)(1) of this section to the former employee for the plan
year. Thus, for example, a former employee benefits under a defined
benefit plan for a plan year if the plan is amended to provide an ad hoc
cost-of-living adjustment in the former employee's benefits. In
contrast, because an increase in benefits payable under a plan pursuant
to an automatic cost-of-living provision adopted and effective before
the beginning of the plan year is previously accrued, a former employee
is not treated as benefiting in a subsequent plan year merely because
the former employee receives an increase pursuant to such an automatic
cost-of-living provision. Any accrual or allocation for an individual
during the plan year that arises from the individual's status as an
employee is treated as an accrual or allocation of an employee.
Similarly, any accrual or allocation for an individual during the plan
year that arises from the individual's status as a former employee is
treated as an accrual or allocation of a former employee. It is
possible for an individual to accrue a benefit both as an employee and
as a former employee in a given plan year. During the plan year in
which an individual ceases performing services for the employer, the
individual is treated as an employee in applying section 410(b) with
respect to 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)
26 CFR 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 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 1.410(b)-5) exceeds 70 percent.
(4) Definitions -- (i) Safe harbor percentage. The safe harbor
percentage of an employer is 50 percent, reduced by 3/4 of a percentage
point for each whole percentage point by which the nonhighly compensated
employee concentration percentage exceeds 60 percent. See paragraph
(c)(4)(iv) for a table that illustrates the safe harbor percentage and
unsafe harbor percentage.
(ii) Unsafe harbor percentage. The unsafe harbor percentage of an
employer is 40 percent, reduced by 3/4 of a percentage point for each
whole percentage point by which the nonhighly compensated employee
concentration percentage exceeds 60 percent. However, in no case is the
unsafe harbor percentage less than 20 percent.
(iii) Nonhighly compensated employee concentration percentage. The
nonhighly compensated employee concentration percentage of an employer
is the percentage of all the employees of the employer who are nonhighly
compensated employees. Employees who are excludable employees for
purposes of the average benefit test are not taken into account.
(iv) Table. The following table sets forth the safe harbor and
unsafe harbor percentages at each nonhighly compensated employee
concentration percentage:
(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 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 1.410(b)-2(b)(2).
Employer B's nonhighly compensated employee concentration percentage is
96 percent (9,600/10,000); thus, Employer B's safe harbor percentage is
23 percent, and its unsafe harbor percentage is 20 percent. Because the
plan's ratio percentage (25.00 percent) is greater than the safe harbor
percentage (23.00 percent), the plan's classification satisfies the safe
harbor of paragraph (c)(2) of this section.
Example 5. The facts are the same as in Example 4, except that the
plan benefits only 400 nonhighly compensated employees. The plan's
ratio percentage is thus 16.67 percent
((400/9,600)/(100/400)=4.17%/25%=0.1667). The plan's ratio percentage is
below the unsafe harbor percentage and thus the classification is
considered discriminatory.
Example 6. The facts are the same as in Example 4, except that the
plan benefits 500 nonhighly compensated employees. The plan's ratio
percentage is thus 20.83 percent
((500/9,600)/(100/400)=5.21%/25%=0.2083), above the unsafe harbor
percentage (20 percent) and below the safe harbor percentage (23
percent). The Commissioner may determine that the classification is
nondiscriminatory after considering all the facts and circumstances.
(T.D. 8363, 56 FR 47645, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992)
26 CFR 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 additional optional
rules 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. For
this purpose, the amount of benefits derived from employee contributions
that are not allocated to separate accounts must be determined under the
method in 1.401(a)(4)-6(b)(1) (section 411(c) method), (b)(4)
(grandfather rule for plans in existence on May 14, 1990), (b)(5)
(government plan method), or (b)(6) (cessation-of-employee-contributions
method). See paragraph (e)(5) of this section, however, for a rule
allowing the safe harbor methods in 1.401(a)(4)-6(b)(2)
(composition-of-workforce method) and (b)(3) (minimum benefit method) to
be used if certain conditions are satisfied.
(3) Plans and plan years taken into account -- (1) Testing group.
All plans included in the testing group under 1.410(b)-7(e)(1), and
only those plans, are taken into account in determining an employee's
employee benefit percentage. See paragraph (e)(3) of this section,
however, for an optional rule permitting employee benefit percentages to
be determined separately with respect to defined benefit plans and
defined contribution plans in the testing group.
(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.''
See paragraph (e)(9) of this section, however, for an optional rule
permitting employee benefit percentages to be determined over a
three-year averaging 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. See paragraph (e)(3) of this section, however, for an
optional rule permitting employee benefit percentages to be determined
separately with respect to defined benefit plans and defined
contribution plans in the testing group.
(5) Determination on a contributions basis. If employee benefit
percentages for a testing group are determined on a contributions basis
for a testing period, each employee's employee benefit percentage is
determined as follows --
(i) Determine the dollar amount of the allocations taken into account
with respect to the employee under 1.401(a)(4)-2(c)(2)(ii) for the
relevant plan year for each defined contribution plan to which the
permitted disparity rules of section 401(l) are available.
(ii) Determine the actuarial present value of the increase in the
employee's normalized accrued benefit for the relevant plan year under
each defined benefit plan to which the permitted disparity rules of
section 401(l) are available, using the method prescribed in
1.401(a)(4)-8(c)(2)(i)(A) through (C).
(iii) Add the allocations and equivalent allocations determined in
paragraphs (d)(5)(i) and (ii) of this section, and divide the total by
the employee's plan year compensation for any one of the relevant plan
years in the testing period. A relevant plan year may not be used for
this purpose unless the employee actually benefited under the plan for
that plan year. In addition, a relevant plan year may not be used if it
is a short plan year, unless it is the longest of any plan year in the
testing period. Plan year compensation may not be limited to an
employee's period of plan participation during a relevant plan year
unless the period of participation taken into account includes the
employee's longest period of participation in any plan in the testing
group during that year. Plan year compensation for this purpose must be
determined by applying the requirements of section 401(a)(17) as if all
plans in the testing group were a single plan.
(iv) Adjust the amount determined in paragraph (d)(5)(iii) of this
section by imputing permitted disparity to the extent allowed under the
rules of 1.401(a)(4)-7 using the method in 1.401(a)(4)-7(b). This
adjustment is permitted, but not required. If it is made with respect
to any nonhighly compensated employee's employee benefit percentage
under the testing group for a testing period, however, it must be made
with respect to all highly compensated employees' employee benefit
percentages under the testing group for the testing period. In
determining an employee's adjusted allocation rate under
1.401(a)(4)-7(b), the percentage amount determined under paragraph
(d)(5)(iii) of this section is substituted for the employee's unadjusted
allocation rate.
(v) Add the employee's allocations and equivalent allocations for the
relevant plan year under any defined contribution or defined benefit
plans to which the permitted disparity rules of section 401(l) are not
available, using the rules in paragraphs (d)(5)(i) and (d)(5)(ii) of
this section, and divide the total by the employee's plan year
compensation used in paragraph (d)(5)(iii) of this section.
(vi) Add the rate determined in paragraph (d)(5)(v) of this section
to the rate determined in paragraph (d)(5)(iv) of this section (or
paragraph (d)(5)(iii) of this section, if permitted disparity is not
taken into account). This is the employee's employee benefit percentage
for the testing period with respect to the testing group.
(6) Determination on a benefits basis. If employee benefit
percentages for a testing group are determined on a benefits basis for a
testing period, each employee's employee benefit percentage is
determined as follows --
(i) Determine the increase in the employee's normalized accrued
benefit determined under 1.401(a)(4)-3(d)(2)(i)(E) for the relevant
plan year under each defined benefit plan to which the permitted
disparity rules of section 401(l) are available.
(ii) Determine the dollar amount of the allocations taken into
account with respect to the employee under 1.401(a)(4)-2(c)(2)(ii) for
the relevant plan year for each defined contribution plan to which the
permitted disparity rules of section 401(l) are available, and convert
these allocations into equivalent accruals using the method prescribed
in 1.401(a)(4)-8(b)(2)(i)(A) and (B).
(iii) Add the accruals and equivalent accruals determined in
paragraphs (d)(6)(i) and (d)(6)(ii) of this section, and divide the
total by the employee's plan year compensation for any one of the
relevant plan years in the testing period. A relevant plan year may not
be used for this purpose unless the employee actually benefited under
the plan for that plan year. In addition, a relevant plan year may not
be used if it is a short plan year, unless it is the longest of any plan
year in the testing period. Plan year compensation may not be limited
to an employee's period of plan participation during a relevant plan
year unless the period of participation taken into account includes the
employee's longest period of participation in any plan in the testing
group during that year. Plan year compensation for this purpose must be
determined by applying the requirements of section 401(a)(17) as if all
plans in the testing group were a single plan.
(iv) Adjust the amount determined in paragraph (d)(6)(iii) of this
section by imputing permitted disparity to the extent allowed under the
rules of 1.401(a)(4)-7 using the annual method in
1.401(a)(4)-7(c)(4)(iv)(C). This adjustment is permitted, but not
required. If it is made with respect to any nonhighly compensated
employee's employee benefit percentage under the testing group for a
testing period, however, it must be made with respect to all highly
compensated employees' employee benefit percentages under the testing
group for the testing period. In determining an employee's adjusted
accrual rate under 1.401(a)(4)-7(c), the percentage amount determined
under paragraph (d)(6)(iii) of this section is substituted for the
employee's unadjusted accrual rate.
(v) Add the employee's accruals and equivalent accruals for the
relevant plan year under any defined benefit or defined contribution
plans to which the permitted disparity rule of section 401(l) are not
available, using the rules in paragraphs (d)(6)(i) and (d)(6)(ii) of the
section, and divide the total by the employee's plan year compensation
used in paragraph (d)(6)(iii) of this section.
(vi) Add the rate determined in paragraph (d)(6)(v) of this section
to the rate determined in paragraph (d)(6)(iv) of this section (or
paragraph (d)(6)(iii) of this section, if permitted disparity is not
taken into account). This is the employee's employee benefit percentage
for the testing period with respect to the testing group.
(7) Requirements for certain plans providing early retirement
benefits -- (i) General rule. If any defined benefit plan in the
testing group provides for early retirement benefits in addition to
normal retirement benefits to any highly compensated employee, and the
average actuarial reduction for any one of these benefits commencing in
the 5 years prior to the plan's normal retirement age is less than 4
percent per year, then the increase in the normalized accrued benefit
used in paragraphs (d)(5)(ii), (d)(5)(v), (d)(6)(i), and (d)(6)(v) of
this section must be replaced by the largest amount determined under
1.401(a)(4)-3(d)(2)(ii)(A) through (G).
(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
1.401(a)(4)-4(b), under plans in the testing group to a percentage of
nonexcludable nonhighly compensated employees that is at least 70
percent of the percentage of nonexcludable highly compensated employees
to whom these benefits are currently available.
(8) Use of optional methods provided in section 401(a)(4) regulations
-- (i) General rule. Except as otherwise provided in this paragraph
(d), any optional methods or rules for determining allocations,
accruals, compensation, and other items that are used in determining
employee benefit percentages under this section that would be available
in determining whether a plan satisfies the nondiscriminatory amount
requirement of 1.401(a)(4)-1(b)(2) may be used in determining employee
benefit percentages under this section, provided that the optional
methods or rules selected are applied on a consistent basis to all
employees in the testing group. Thus, for example, employee benefits
percentages may generally be calculated using any of the alternative
methods of determining plan year compensation under 1.401(a)(4)-12, and
using any underlying definition of compensation that satisfies section
414(s). On the other hand, employee benefit percentages may not be
calculated using the projected method in 1.401(a)(4)-3(d)(4), the
grouping rules in 1.401(a)(4)-3(d)(6)(iv), or the floor on most
valuable accrual rates in 1.401(a)(4)-3(d)(6)(v), for example, since
those rules relate exclusively to the determination of accrual rates,
and not to the determination of allocations, accruals, compensation, or
other items actually used in determining employee benefit percentages
under this section.
(ii) Certain restrictions on options involving defined benefit plans.
Optional methods or rules described in paragraph (d)(8)(i) of this
section that may not be used in determining whether a DB/DC plan (within
the meaning of 1.401(a)(4)-9(a)) satisfies the nondisciminatory amount
requirement of 1.401(a)(4)-1(b)(2) also may not be used in determining
employee benefit percentages, regardless of whether such percentages are
determined on a contributions or benefits basis. See
1.401(a)(4)-9(b)(2)(v)(B). Thus, for example, alternative actuarial
assumptions available under 1.401(a)(4)-3(d)(5)(iv)(B) may not be used
unless they are standard interest rates or mortality assumptions based
on a standard mortality table (as defined in 1.401(a)(4)-12), plan
provisions providing for actuarial increases after normal retirement age
under 1.401(a)(4)-3(f)(3) may not be disregarded, and benefits may not
be determined other than on a plan-year basis under
1.401(a)(4)-3(f)(6). Further, as noted in paragraph (d)(2) of this
section, the amount of benefits derived from employee contributions not
allocated to a separate account must be determined under the method in
1.401(a)(4)-6(b)(1) (section 411(c) method), (b)(4) (grandfather rule
for plans in existence on May 14, 1990), (b)(5) (government plan
method), or (b)(6) (cessation-of-employee-contributions method). See
paragraph (e)(5) of this section, however, for an optional rule
permitting certain of these optional methods and rules to be used when
employee benefit percentages are determined separately with respect to
defined benefit and defined contribution plans in the testing group.
(9) Determination of testing age -- (i) General rule. For purposes
of this section, an employee's testing age must be determined under this
definition of testing age in 1.401(a)(4)-12 as if all plans in the
testing group were a single plan. Thus, for example, in determining the
increase in an employee's normalized accrued benefit for a relevant plan
year for purposes of paragraph (d)(6)(i) of this section, benefits must
be normalized to the same testing age for all employees, and the same
testing age must be used in determining the employee's equivalent
accruals for purposes of paragraph (d)(6)(ii) of this section.
(ii) Different ages permitted under certain conditions.
Notwithstanding paragraph (d)(9)(i) of this section, employee benefit
percentages may be determined using the respective testing ages
determined for each plan in the testing group, if it is reasonable to
believe that use of the different testing ages for different plans does
not result in an average benefit percentage that is significantly higher
than the average benefit percentage that would be determined using a
single testing age for all plans in the testing group.
(e) Additional optional rules -- (1) Overview. This paragraph (e)
contains various optional rules that may be used, alone or in
combination, by an employer in determining employee benefit percentages
for a testing period. Except as specifically provided, each optional
rule used for a testing period must be applied, to the extent possible,
on a consistent basis in determining the employee benefit percentages of
all employees under all plans in the testing group for that testing
period. It is not necessary, however, that a rule be used consistently
from testing period to testing period. The rules in this paragraph (e)
supplement and do not replace the rules in paragraph (d) of this
section. Thus, for example, unless otherwise provided, the rules of
paragraph (d)(7) of this section (regarding plans providing subsidized
early retirement benefits) and of paragraph (d)(8) of this section
(restricting the use of optional methods provided in the section
401(a)(4) regulations) continue to apply.
(2) Determination of employee benefit percentages as sum of
separately determined rates -- (i) General rule. If employee benefit
percentages are determined on a contributions basis, an employer may
substitute the sum of an employee's separately determined allocation or
equivalent allocation rates for the testing period under all plans in
the testing group for the percentage amount determined in paragraph
(d)(5)(vi) of this section. Similarly, if employee benefit percentages
are determined on a benefits basis, an employer may sustitute the sum of
an employee's separately determined accrual or equivalent accrual rates
for the testing period under all plans in the testing group for the
percentage amount determined in paragraph (d)(6)(vi) of this section.
(ii) Determination of rates. For purposes of this paragraph (e)(2),
an employee's allocation and accrual rates are determined under the
rules of 1.401(a)(4)-2(c)(2) and 1.401(a)(4)-3(d)(2)(i), respectively,
and an employee's equivalent accrual and allocation rates are determined
under the rules of 1.401(a)(4)-8(b)(2)(i) and (c)(2)(i), respectively.
If paragraph (d)(7) of this section requires employee benefit
percentages to be determined by taking early retirement benefits into
account, an employee's most valuable accrual and most valuable
equivalent allocation rates, as determined under
1.401(a)(4)-3(d)(2)(ii) and 1.401(a)(4)-8(c)(2)(ii), must be substituted
for the employee's accrual and equivalent allocation rates.
(iii) Treatment of permitted disparity. Permitted disparity may be
taken into account in determining an employee's actual or equivalent
accrual or allocation rates to the extent allowed under the rules of
1.401(a)(4)-7. If permitted disparity is taken into account in
determining an employee's actual or equivalent accrual or allocation
rate under any one plan in the testing group, it may not be taken into
account in determining the employee's actual or equivalent accrual or
allocation rates under any other plan in the testing group.
(iv) Determination of compensation -- (A) Plan year compensation used
as testing compensation. If employee benefit percentages are determined
on a benefits basis, an employee's plan year compensation must be used
for purposes of 1.401(a)(4)-3(e)(3)(i) as the employee's testing
compensation in determining the employee's actual or equivalent accrual
rates for purposes of this paragraph (e)(2).
(B) Consistency requirement. Under the consistency requirement of
paragraphs (d)(8) and (e)(1) of this section, the same period must
generally be used to determine each employee's plan year compensation
used in determining the employee's actual and equivalent allocation and
accrual rates under paragraph (e)(2)(ii) of this section under all plans
in the testing group. This consistency requirement is not treated as
violated, however, merely because the periods for determining employees'
plan year compensation differ for different plans in the testing group
because the plans have different plan years. Furthermore, this
consistency requirement is not treated as violated merely because
different optional determination periods permitted under the definition
of plan year compensation in 1.401(a)(4)-12 (e.g., the plan year or a
12-month period ending in the plan year) are used in determining
employees' actual or equivalent accrual or allocation rates under one or
more plans in the testing group, provided that the period is actually
used in determining whether the plan satisfies the nondiscriminatory
amount requirement of 1.401(a)(4)-1(b)(2) for the relevant plan year.
(3) Determination of employee benefit percentages without regard to
plans of a different type -- (i) General rule. An employer may
determine employee benefit percentages under plans of one type (i.e.,
defined benefit or defined contribution plans) without regard to plans
of a different type (i.e., defined contribution or defined benefit
plans, respectively), using the method provided in this paragraph
(e)(3). 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 all allocations under any defined
contribution plans in the same testing group must be treated as zero.
Thus, for example, if all of the defined contribution plans in a testing
group satisfy the ratio percentage test of 1.410(b)-2(b)(2), these
plans are not required to satisfy the average benefit percentage test,
and are also disregarded in determining whether any defined benefit
plans in the testing group satisfy the average benefit percentage test.
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 all benefits under any
defined benefit plans in the same testing group must be treated as zero.
Employees may not be treated as excludable employees solely because
they are deemed to receive no benefit accrual or allocation under a plan
under this optional method. This optional method may not be used for a
testing period if any of the plans in the testing group relies on any of
the cross-testing methods provided in 1.401(a)(4)-8 (b)(2) or (c)(2) to
satisfy section 401(a)(4) for a relevant plan year.
(ii) Effect of 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 of the
employer of a different type (i.e., defined benefit plan or defined
contribution plan) than the plan being tested satisfies the average
benefit test of 1.410(b)-2(b)(3) using this method or satisfies the
ratio percentage test of 1.410(b)-2(b)(2).
(iii) Treatment of permitted disparity -- (A) Plans of both types
using method. If the method provided in this paragraph (e)(3) is used
to determine whether one or more defined benefit plans and one or more
defined contribution plans in a testing group satisfy the average
benefit percentage test, permitted disparity may generally be taken into
account, to the extent permitted under this section, in determining
employee benefit percentages with respect to both the group of defined
benefit plans in the testing group and the group of defined contribution
plans in the testing group. If any employee benefits under both a
defined benefit and a defined contribution plan in the testing group in
the testing period, however, permitted disparity may be taken into
account for any employee in any plan in the testing group only with
respect to the group of defined benefit plans in the testing group, or
with respect to the group of defined contribution plans in the testing
group, but not both.
(B) Plans of only one type using method. If the method in this
paragraph (e)(3) is used to determine whether one or more defined
benefit plans or one or more defined contribution plans in a testing
group, but not plans of both types, satisfy the average benefit
percentage test (for example, where each plan in one group of plans
satisfies the ratio percentage test of 1.410(b)-2(b)(2)), permitted
disparity may be taken into account in determining employee benefit
percentages under the group of plans subject to the average benefit
percentage test only for those employees with respect to whom permitted
disparity is not taken into account (i.e., either under section 401(l)
or 1.401(a)(4)-7), in testing any plans in the other group for
nondiscrimination under section 401(a)(4). For this purpose, permitted
disparity is treated as taken into account with respect to all employees
benefiting under a section 401(l) plan.
(iv) Consistency rules. If the method in this paragraph (e)(3) is
used, the consistency requirement of paragraphs (d)(8) and (e)(1) of
this section may be applied separately with respect to the group of
defined benefit plans and the group of defined contribution plans in the
testing group.
(v) Example. Employer A maintains two defined benefit plans, neither
of which covers a group of employees that satisfies the ratio percentage
test of 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 1.410(b)-2(b)(2). The defined benefit
plans will satisfy the average benefit percentage test if the ratio of
the actual benefit percentages 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) Accrued-to-date method -- (i) General rule. An employer may use
the accrued-to-date method to determine an employee's employee benefit
percentage on a benefits basis under paragraph (d)(6) of this section.
If this method is used, the accrual used in paragraph (d)(6) (i) and (v)
of this section is replaced with the amount determined for the employee
under 1.401(a)(4)-3(d)(3)(i) (A) through (C) (or, if paragraph (d)(7)
of this section requires employee benefit percentages to be determined
by taking early retirement benefits into account, the largest amount
determined for the employee under 1.401(a)(4)-3(d)(3)(ii) (A) through
(E)). Also, the allocations used in paragraphs (d)(6)(ii) and (d)(6)(v)
of this section are replaced by the employee's adjusted account balance,
as defined in 1.401(a)(4)-8(b)(2)(ii)(C), divided by the employee's
testing service, as defined in 1.401(a)(4)-12. Finally, the employee's
plan year compensation (modified as provided in
1.401(a)(4)-3(e)(3)(ii)) is used in lieu of the employee's plan year
compensation in paragraphs (d)(6)(iii) and (d)(6)(v) of this section.
(ii) Application to separate rate method. If the accrued-to-date
method provided in this paragraph (e)(4) is used in combination with the
optional rule for determining employee benefit percentages as the sum of
separately determined rates provided in paragraph (e)(2) of this
section, an employee's actual and equivalent accrual rates must be
determined using the accrued-to-date method in 1.401(a)(4)-3(d)(3)(i)
(or, if paragraph (d)(7) of this section requires employee benefit
percentages to be determined by taking early retirement benefits into
account, 1.401(a)(4)-3(d)(3)(ii)) and 1.401(a)(4)-8(b)(2)(ii),
respectively.
(iii) Treatment of permitted disparity. If the accrued-to-date
method provided in this paragraph (e)(4) is used, disparity must be
imputed, if at all, using the accrued-to-date method in
1.401(a)(4)-7(c)(4)(iii)(D). In imputing permitted disparity for this
purpose, the employee's plan year compensation, modified as provided in
1.401(a)(4)-3(e)(3)(ii), must be used, notwithstanding
1.401(a)(4)-7(c)(4)(vi) (generally requiring the use of average annual
compensation).
(iv) Uniform testing service assumption. If the average of the
testing service as defined in 1.401(a)(4)-12 for the nonhighly
compensated employees in a plan in the testing group is no greater than
the average of the testing service for the highly compensated employees
in that plan, an employer may assume that all employees in that plan
have the same number of years of testing service for purposes of
dividing an employee's benefit or adjusted account balance under that
plan by the employee's testing service in paragraph (e)(4)(i) of this
section. The years of testing service selected must be a reasonable
approximation of the average testing service of either the highly
compensated employees or the nonhighly compensated employees, or an
amount in between.
(v) Fresh-start alternative. The consistency requirements of
paragraphs (d)(8) and (e)(1) of this section are not violated merely
because the option to disregard allocations made or benefits accrued for
plan years that begin before a fresh-start date described in
1.401(a)(4)-3(d)(6)(vii) or 1.401(a)(4)-8(b)(2)(ii)(B) is used by some
but not all plans in the testing group, or if different fresh-start
dates are used by different plans in the testing group. In applying
1.401(a)(4)-3(d)(6)(vii) to determine an employee's employee benefit
percentage, any adjustments provided for under 1.401(a)(4)-13(d) are
not included in the frozen accrued benefit as of the fresh-start date
under 1.401(a)(4)-3(d)(6)(vii)(B)(2) (or
1.401(a)(4)-3(d)(6)(vii)(C)(2) if paragraph (d)(7) of this section
requires employee benefit percentages to be determined by taking into
account early retirement benefits), unless the only plans included in
the testing group are defined benefit plans, or the option provided in
this paragraph (e)(4) is applied solely to defined benefit plans tested
under the method in paragraph (e)(3) of this section.
(5) Optional computation methods provided under section 401(a)(4).
If the only plans included in the testing group are defined benefit
plans (or the option is applied solely to defined benefit plans tested
under the method in paragraph (e)(3) of this section), and if employee
benefit percentages under these defined benefit plans are determined on
a benefits basis, then, notwithstanding the consistency requirement of
paragraphs (d)(8) and (e)(1) of this section, any of the optional
methods for determining the accruals, compensation, and other items that
are used in determining employee benefit percentages under this section
that would be available in determining whether a plan satisfies the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2) may also be
used for purposes of this section. Thus, for example, if the conditions
on use of the option in this paragraph (e)(5) are satisfied, employee
benefit percentages may be determined using any of the alternative
actuarial assumptions permitted under 1.401(a)(4)-3(d)(5)(iv)(B); plan
provisions providing for an actuarial increase in benefits after normal
retirement age under 1.401(a)(4)-3(f)(3) may be disregarded; and
accruals may be determined other than on a plan year basis under
1.401(a)(4)-3(f)(6). In addition, if the conditions on use of the option
in this paragraph (e)(5) are satisfied, the safe harbor methods of
1.401(a)(4)-6(b)(2) (composition-of-workforce method) or (b)(3) (minimum
benefit method) may be used in determining employees' accrual rates for
purposes of paragraph (e)(2)(ii) of this section. As noted in paragraph
(d)(8)(i) of this section, except as otherwise provided in this section,
optional methods for adjusting employees' actual or equivalent normal or
most valuable accrual rates are not available in determining employee
benefit percentages.
(6) Alternative annual method for determining employee benefit
percentages for certain defined benefit plans. An employer may
substitute for the increase in an employee's normalized accrued benefit
under a plan for the relevant plan year in paragraphs (d)(6) (i) and (v)
of this section an amount determined by: determining the ratio of the
normalized accrued benefit in 1.401(a)(4)-3(d)(2)(i)(D) to the
employee's testing compensation as defined in 1.401(a)(4)-3(e)(3) for
the prior relevant plan year, and the ratio of the normalized accrued
benefit in 1.401(a)(4)-3(d)(2)(i)(C) to the employee's testing
compensation for the current relevant plan year; determining the excess
(if any) of the second ratio over the first ratios; and multiplying the
difference by the employee's testing compensation for the current
relevant plan year. If paragraph (d)(7)(i) of this section requires
employee benefit percentages to be determined by taking early retirement
benefits into account, the employer must substitute the largest of the
sums of the normalized QJSAs and QSUPPs determined for each age in
1.401(a)(4)-3(d)(2)(ii)(C) for the normalized accrued benefit for the
current relevant plan year, and the largest of the sums of the
normalized QJSAs and QSUPPs determined for each age in
1.401(a)(4)-3(d)(2)(ii)(D) for the normalized accrued benefit for the
prior relevant plan year in the previous sentence. If this method is
used, the testing compensation used in determining the increase in an
employee's normalized accrued benefit must also be used, subject to the
requirements of paragraph (e)(10) of this section, for purposes of
paragraph (d)(6)(iii) of this section. This method may not be used
unless the only plans included in the testing group are defined benefit
plans (or the method is applied to defined benefit plans tested under
the method in paragraph (e)(3) of this section), and employee benefit
percentages under these defined benefit plans are determined on a
benefits basis.
(7) Alternative method for converting benefits to contributions. An
employer may convert an employee's most valuable accruals under a
defined benefit plan for a relevant plan year into equivalent most
valuable allocations for purposes of paragraph (d)(5) (ii) and (v) of
this section using the method used by the employer for determining any
increase in current liability (as defined in section 412(l)(7)) that are
attributable to the employee for the year. For this purpose, current
liability may include amounts attributable to projected accruals for the
relevant plan year for which the determination of current liability is
being made, if the projections are made on a reasonable basis applied
consistently from year to year. Thus, for example, an employer may
treat any increase in current liability attributable to an employee
under a plan from one relevant plan year to the next as the employee's
equivalent most valuable allocation for the second year.
(8) Imputation of permitted disparity -- (i) Use of excess benefit
and gross benefit percentages. An employee's excess benefit percentage
under a defined benefit excess plan, or gross benefit percentage under
an offset plan, multiplied by the employee's average annual compensation
used under the plan in determining benefit accruals, may be substituted
for the amount determined under paragraph (d)(6)(i) of this section as
provided in this paragraph (e)(8)(i). If the option in paragraph (e)(2)
of this section is used, permitted disparity may be taken into account
under paragraph (e)(2)(iii) of this section by substituting an
employee's excess benefit percentage or gross benefit percentage for the
rate that would otherwise be determined under paragraph (e)(2)(iii) of
this section. Neither of these methods may be used unless --
(A) The only plans included in the testing group are defined benefit
plans (or the method is applied to defined benefit plans tested under
the method in paragraph (e)(3) of this section, and those plans are
allowed to impute permitted disparity under that paragraph), and
employee benefit percentages under these defined benefit 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 defined benefit excess plan or offset plan either is a
section 401(l) plan that satisfies the ratio percentage test of
1.410(b)-2(b)(2), or consists exclusively of component plans (as defined
in 1.401(a)(4)-9(c)) each of which is a section 401(l) plan that
separately satisfies the ratio percentage test of 1.410(b)-2(b)(2).
(D) Permitted disparity is imputed, to the extent possible, under
paragraph (d)(6)(iv) of this section (or paragraph (e)(2)(iii) of this
section, if applicable) with respect to all other defined benefit plans
in the testing group, but only for employees not benefiting under the
defined benefit excess plan or offset plan.
(ii) Uniform compensation assumption. For purposes of imputing
disparity under paragraphs (d)(5)(iv) and (d)(6)(iv) of this section,
the compensation of an employee who is benefiting only under one or more
plans in the testing group that do not determine benefit accruals or
allocations by reference to individual employees' compensation (for
example, plans granting flat dollar accruals for each year of service)
may be deemed to be equal to the average compensation of all
nonexcludable employees benefiting under such plans. This average must
be determined using the method actually used to determine the employee's
compensation for purposes of this section, or, if none, any other
uniform method permitted under this section. In addition, the covered
compensation of the employee may be determined based on the average age
of all such nonexcludable employees benefiting under such plans.
Covered compensation is defined in 401(l)-1(c)(7).
(9) Three-year averaging period -- (i) General rule. An employer may
determine an employee's employee benefit percentage for a testing period
as the average of the employee's employee benefit percentages determined
separately for the testing period and for the immediately preceding one
or two testing periods (referred to in this section as an ''averaging
period'').
(ii) Consistency rule. Employee benefit percentages of a particular
employee that are averaged together within an averaging period must be
determined on a consistent basis. Thus, for example, they must be
determined as a percentage of the same definition of compensation.
(10) Alternative methods of determining compensation -- (i) Use of
average annual compensation. If employee benefit percentages are
determined on a benefits basis (or the option provided in this paragraph
(e)(10)(i) is applied exclusively to defined benefit plans tested on a
benefits basis under the method in paragraph (e)(3) of this section), an
employee's average annual compensation as defined in
1.401(a)(4)-3(e)(2) may be used in lieu of plan year compensation for
purposes of paragraph (d)(6)(iii), (e)(2), or (e)(4) of this section.
(ii) Rules for determining whether alternative definitions are
discriminatory. As under section 401(a)(4), an underlying definition of
compensation that is not a definition described in 1.414(s)-1(c) may
not be used in determining employee benefit percentages unless the
definition satisfies the requirements of 1.414(s)-1(d) applicable to
alternative definitions of compensation, including the nondiscrimination
requirement of 1.414(s)-1(d)(3). All employees taken into account in
determining whether the average benefit percentage test is satisfied who
benefit under one or more plans in the testing group are taken into
account in determining whether this nondiscrimination requirement is
satisfied. See 1.414(s)-1(d)(3)(iii). The nondiscrimination
requirement of 1.414(s)-1(d)(3) is deemed to be met for purposes of the
average benefit percentage test, however, if it is reasonable to believe
that the definition used does not result in an average benefit
percentage that is significantly higher than the average benefit
percentage that would be determined using a definition that actually
satisfies the nondiscrimination requirement in 1.414(s)-1(d)(3) taking
into account all employees in all plans in the testing group.
(iii) Use of different definitions for different groups of employees.
Notwithstanding the consistency requirement of paragraphs (d)(8) and
(e)(1) of this section, different periods for determining compensation
otherwise permitted under this section, and different underlying
definitions of compensation, may be used to determine employee benefit
percentages for employees benefiting under different plans or groups of
plans in the testing group, if both of the following requirements are
satisfied --
(A) It is reasonable to believe that use of different methods of
determining compensation, or different underlying definitions of
compensation, for different groups of employees does not result in an
average benefit percentage that is significantly higher than the average
benefit percentage that would be determined using the same method of
determining compensation, and the same underlying definition of
compensation, to determine the employee benefit percentages for all
employees in all plans in the testing group.
(B) If any of the underlying definitions of compensation used to
measure the compensation of employees in a plan or group of plans is not
described in 1.414(s)-1(c), and thus must satisfy the nondiscrimination
requirement of 1.414(s)-1(d)(3), the definition would satisfy that
nondiscrimination requirement if the only employees taken into account
were the employees in the plan or group of plans to which the definition
is applied. The special rule in paragraph (e)(10)(ii) of this section
for determining whether those requirements are satisfied may not be used
for this purpose.
(f) Special rule for certain collectively bargained plans. A plan
(as determined without regard to the mandatory disaggregation rule of
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
1.410(b)-2(b)(2), if 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)
26 CFR 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 (h) 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 1.410(b)-2(b)(2), paragraphs (b) through (h) 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 1.410(b)-7(d) satisfy the ratio
percentage test of 1.410(b)-2(b)(2), paragraphs (b) through (h) 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 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 any employee with the same age and service
would be eligible to commence participation in the plan, as provided in
section 410(b)(4)(C).
(2) Multiple age and service conditions. If a plan, including a plan
for which an employer chooses the treatment under paragraph (b)(3) of
this section, has two or more different sets of minimum age and service
eligibility conditions, those employees who fail to satisfy all of the
different sets of age and service conditions are excludable employees.
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.
(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 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 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 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.
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 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 1.410(b)-7(b)) benefits both collectively
bargained employees and noncollectively bargained employees for a plan
year, 1.410(b)-7(c)(5) 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 301.7701-17T (Temporary) of this Chapter for
additional requirements applicable to the collective bargaining
agreement.
(ii) Special rules for certain employees who cease to be collectively
bargained employees -- (A) Employees who were collectively bargained
employees in prior plan year. An employee who was a collectively
bargained employee throughout the prior plan year, but who ceases to be
a collectively bargained employee during the current plan year, may be
treated as a collectively bargained employee until the end of the
current plan year if the collective bargaining agreement that covers the
unit of employees of which the employee was a member in the prior plan
year requires the employee to benefit, in the current plan year, under a
multiemployer plan maintained pursuant to the collective bargaining
agreement. For plan years beginning before January 1, 1992, any
employee may be treated as a collectively bargained employee for a plan
year if a collective bargaining agreement required the employee to
benefit, for that year, under a multiemployer plan maintained pursuant
to the collective bargaining agreement.
(B) Employees who were collectively bargained employees during a
portion of the current plan year. An employee who performs services for
an employer that is a party to a collective bargaining agreement that
requires the employee to benefit under a multiemployer plan both as a
collectively bargained employee and as a noncollectively bargained
employee during a plan year may be treated as a collectively bargained
employee with respect to all of the employee's hours of service during
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) Consistency requirement. The rules in paragraph (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
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 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:
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 1.410(b)-7(c)(5),
the employer must apply the ratio percentage test of 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 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 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 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
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
last day of the plan year. Two of the five employees who terminated
employment before the last day of the plan year had 500 or fewer hours
of service during the plan year, and the remaining three had more than
500 hours of service during the year. Of the five employees who were no
longer employed on the last day of the plan year, the two with 500 hours
of service or less during the plan year are treated as excludable
employees for purposes of section 410(b), and the remaining three who
had over 500 hours of service during the plan year are taken into
account in testing the plan under section 410(b) but are treated as not
benefiting under the plan.
Example 2. An employer has 30 employees who are eligible to
participate under a defined contribution plan. The plan requires 1,000
hours of service to receive an allocation of contributions or
forfeitures. Ten employees do not receive an allocation because of
their failure to complete 1,000 hours of service. Three of the 10
employees who failed to satisfy the minimum service requirement
completed 500 or fewer hours of service and terminated their employment.
Two of the employees completed more than 500, but fewer than 1,000
hours of service and terminated their employment. The remaining five
employees did not terminate employment. Under the rule in paragraph (f)
of this section, the three terminated employees who completed 500 or
fewer hours of service are treated as excludable employees for the
portion of the plan year they are employed. The other seven employees
who do not receive an allocation are taken into account in testing the
plan under section 410(b) but are treated as not benefiting under the
plan.
Example 3. An employer maintains two plans, Plan A for salaried
employees and Plan B for hourly employees. Of the 100 salaried
employees, two do not receive an allocation under Plan A for the plan
year because they terminate employment before completing 500 hours of
service. Of the 300 hourly employees, 50 do not receive an allocation
under Plan B for the plan year because they terminate employment before
completing 500 hours. In applying section 410(b) to Plan A, the two
employees who did not receive an allocation under Plan A are excludable
employees, but the 50 who did not receive an allocation under Plan B are
not excludable employees, because they were not eligible to participate
under Plan A.
(g) Employees of certain governmental or tax-exempt entities
precluded from maintaining a section 401(k) plan. For purposes of
testing a section 401(k) plan or a section 401(m) plan that consists
solely of employer matching contributions or employee after-tax
contributions that are tied to elective contributions under a section
401(k) plan, an employer may treat as excludable those employees of
governmental or tax-exempt entities who are precluded from being
eligible employees under a section 401(k) plan by reason of section
401(k)(4)(B), if more than 95 percent of the employees of the employer
who are not precluded from being eligible employees by section
401(k)(4)(B) benefit under the plan for the plan year.
(h) Former employees -- (1) In general. For purposes of applying
section 410(b) with respect to former employees, all former employees of
the employer are taken into account, except that the employer may treat
a former employee described in paragraph (h)(2) or (h)(3) of this
section as an excludable former employee. If either (or both) of the
former employee exclusion rules under paragraphs (h)(2) and (h)(3) of
this section is applied, it must be applied to all former employees for
the plan year on a consistent basis.
(2) Employees terminated before a specified date. The employer may
treat a former employee as excludable if --
(i) The former employee became a former employee either prior to
January 1, 1984, or prior to the tenth calendar year preceding the
calendar year in which the current plan year begins, and
(ii) The former employee became a former employee in a calendar year
that precedes the earliest calendar year in which any former employee
who benefits under the plan in the current plan year became a former
employee.
(3) Previously excludable employees. The employer may treat a former
employee as excludable if the former employee was an excludable employee
(or would have been an excludable employee if these regulations had been
in effect) under the rules of paragraphs (b) through (g) of this section
during the plan year in which the former employee became a former
employee. If the employer treats a former employee as excludable
pursuant to this paragraph (h)(3), the former employee is not taken into
account with respect to a plan even if the former employee is benefiting
under the plan.
(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)
26 CFR 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 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 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) 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 1.401(k)-1(b)(4)(iv) (i.e., contributions
that fail to satisfy the allocation or compensation requirements
applicable to elective contributions and are therefore required to be
tested separately) and the portion of the plan that does not consist of
such contributions are treated as separate plans for purposes of section
410(b). Similarly, the portion of a plan that consists of contributions
described in 1.410(m)-1(b)(4)(ii) (i.e., matching contributions that
fail to satisfy the allocatioin 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 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
410(b)-6(b)(3)(ii) for rules about testing otherwise excludable
employees.
(4) Plans benefiting employees of qualified separate lines of
business. If an employer is treated as operating qualified separate
lines of business for purposes of section 410(b) in accordance with
1.414(r)-1(b), the portion of a plan that benefits employees of one
qualified separate line of business is treated as a separate plan from
the portions of the same plan that benefit employees of the other
qualified separate lines of business of the employer. See
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). If a plan
satisfies the reasonable classification requirement of 1.410(b)-4(b)
before the application of this paragraph (c)(4), then any portion of
that plan that is treated as a separate plan as a result of the
application of this paragraph (c)(4) is deemed to satisfy that
requirement. The rule in this paragraph (c)(4) does not apply to a plan
that is tested under the special rule for employer-wide plans in
1.414(r)-1(c) (2) (ii) for a plan year.
(5) Plans benefiting collectively bargained employees. The portion
of a plan that benefits collectively bargained employees is treated as a
separate plan from the portion of the same plan that benefits
noncollectively bargained employees. In addition, the portion of a plan
that benefits collectively bargained employees covered under one
collective bargaining agreement is treated as a separate plan from the
portion of the same plan that benefits collectively bargained employees
covered under another collective bargaining agreement.
(6) Plans maintained by more than one employer. If a plan benefits
employees of more than one employer, the plan is treated as comprising
separate plans each of which is maintained by a separate employer and
must satisfy section 410(b) by reference only to such employer's
employees.
(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 1.410(b)-2(b)(2) or the nondiscriminatory
classification test of 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 54.4975-11(e) of this Chapter.
(3) Duplicative aggregation. A plan may not be combined with two or
more plans to form more than one single plan. Thus, for example, an
employer that maintains plans A, B, and C may not aggregate plans A and
B and plans A and C to form two single plans. However, the employer may
apply the permissive aggregation rules of this paragraph (d) to form any
one (and only one) of the following combinations: plan ABC, plans AB
and C, plans AC and B, or plans A and BC.
(4) Special rule for plans benefiting employees of a qualified
separate line of business. For purposes of paragraph (d)(1) of this
section, an employer that is treated as operating qualified separate
lines of business for purposes of section 410(b) in accordance with
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
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)(5) of
this section, but may not aggregate a plan that is tested under the
special rule for employer-wide plans in 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)(5)
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
1.414(r)-1(b). See 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. See 1.410(b)-10 for a special effective
date.
(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 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
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) through (c)(3) 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
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
1.410(b)-2(b)(2) on a qualified-separate-line-of-business basis, but
does satisfy the nondiscriminatory classification test of 1.410(b)-4 on
both an employer-wide and a qualified-separate-line-of-business basis.
Therefore, to satisfy section 410(b), Plan F must satisfy the average
benefit percentage test of 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 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
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 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 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
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, 10952, Mar. 31, 1992)
26 CFR 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 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
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 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 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 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.
(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)
26 CFR 1.410(b)-9 Definitions.
In applying this section and 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
1.410(b)-6(d)(2).
Defined benefit excess plan. Defined benefit excess plan means a
defined benefit excess plan as defined in 1.401(l)-1-(c)(16)(i).
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.
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).
Excess benefit percentage. Excess benefit percentage means excess
benefit percentage as defined in 1.401(l)-1(c)(14).
Former employee. Former employee means an individual who was an
employee but has ceased performing services 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 for the
employer. Thus, an individual who ceases performing services 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) even if the individual is not
performing services for the employer during a period for which the plan
credits the individual with imputed compensation that satisfies
1.414(s)-1(e)(3) or imputed service that satisfies
1.401(a)(4)-11(d)(2).
Gross benefit percentage. Gross benefit percentage means gross
benefit percentage as defined in 1.401(l)-1(c)(18).
Highly compensated employee. Highly compensated employee means a
highly compensated employee within the meaning of section 414(q).
Highly compensated former employee. Highly compensated former
employee means a highly compensated former employee within the meaning
of section 414(q)(9).
Multiemployer plan. Multiemployer plan means a multiemployer plan
within the meaning of section 414(f).
Noncollectively bargained employee. Noncollectively bargained
employee means an employee who is not a collectively bargained employee.
Nonhighly compensated employee. Nonhighly compensated employee means
an employee who is not a highly compensated employee.
Nonhighly compensated former employee. Nonhighly compensated former
employee means a former employee who is not a highly compensated former
employee.
Offset plan. Offset plan means an offset plan as defined in
1.401(l)-1(c)(24).
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 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, engineer, 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 1.40(k)-1(g)(3) under a qualified
cash or deferred arrangement described in 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 1.401(k)-1(b)(5).
Section 401(l) plan. Section 401(l) plan means a plan that --
(1) Provides for a disparity in employer-provided benefits or
contributions that satisfies section 401(l) in form, and
(2) Relies on one of the safe harbors of 1.401(a)(4)-2(b)(3),
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 1.401(m)-1(f)(6) or matching
contributions described in 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 1.401(m)-1(b)(5).
(T.D. 8363, 56 FR 47657, Sept. 19, 1991; 57 FR 10817, 10954, Mar.
31, 1992)
26 CFR 1.410(b)-10 Effective dates and transition rules.
(a) General rule. The minimum coverage rules of section 410(b), as
amended by section 1112 of the Tax Reform Act of 1986, and 1.410(b)-2
through 1.410(b)-9, other than 1.410(b)-5, apply to plan years
beginning on or after January 1, 1989. See paragraph (b)(2) of this
section for the effective date of 1.410(b)-5. Notwithstanding the first
sentence of this paragraph (a) and 54.4975-11(a)(5) of this Chapter, an
employer may treat the rule in 1.410(b)-7(c)(2), regarding mandatory
disaggregation of ESOPs and non-ESOPs, as not effective for plan years
beginning before January 1, 1990, except for purposes of the rule in
1.410(b)-7(d)(2) prohibiting aggregation of two or more separate plans
that would be disaggregated under the rules of 1.410(b)-7(c) if they
were portions of the same plan.
(b) Transition rules -- (1) Nondiscriminatory classification test.
Notwithstanding paragraph (a) of this section, in applying the average
benefit test for any plan year beginning after December 31, 1988, and
before January 1, 1990 (the ''1989 plan year''), whether or not a plan's
classification is nondiscriminatory may be determined either by applying
the rules in 1.410(b)-4 or solely on the basis of facts and
circumstances, at the employer's election. 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
1989 plan year.
(2) Average benefit percentage test. Section 1.410(b)-5 applies to
plan years beginning on or after January 1, 1992. For plan years
beginning before that date and on or after the first day of the first
plan year to which the amendments made to section 410(b) by section
1112(a) of the Tax Reform Act of 1986 apply, a plan must be operated in
accordance with a reasonable, good faith interpretation of sections
410(b)(2)(A)(ii) and 410(b)(2)(B) through (E). Whether a plan is
operated in accordance with a reasonable, good faith interpretation of
sections 410(b)(2)(A)(ii) and 410(b)(2)(B) through (E) will generally be
determined based on all relevant facts and circumstances, including the
extent to which an employer has resolved unclear issues in its favor. A
plan will be deemed to be operated in accordance with a reasonable, good
faith interpretation of sections 410(b)(2)(A)(ii) and 410(b)(2)(B)
through (E) if it is operated in accordance with the terms of
1.410(b)-5.
(c) Employees who benefit under a plan. Notwithstanding paragraph
(a) of this section, for the first plan year beginning after December
31, 1988, and before January 1, 1990, any employee who is eligible to
participate under the plan and who fails to accrue a benefit solely
because of the failure to satisfy either a minimum-period-of-service
requirement of 1,000 hours of service or less or a
last-day-of-the-plan-year requirement may be treated as benefiting under
the plan, provided that all such employees are treated as benefiting
under the plan.
(d) Aggregation of two or more plans. Notwithstanding paragraph (a)
of this section, an employer may treat the rule of 1.410(b)-7(d)(5)
(requiring plans permissively aggregated under 1.410(b)-7(d) to have
the same plan years) as not effective for plan years beginning before
January 1, 1990.
(e) Special rule for collective bargaining agreements -- (1) In
general. 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, and 1.410(b)-2 through 1.410(b)-9 do not apply to
employees covered by any such agreement in plan years beginning before
the earlier of --
(i) January 1, 1991, or
(ii) 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 (e)(1)(ii), any extension or renegotiation of a
collective bargaining agreement, which extension or renegotiation is
ratified after February 28, 1986, is to be disregarded in determining
the date on which the agreement terminates.
(2) Example. The following example illustrates this paragraph (e).
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.
(3) Plan maintained pursuant to a collective bargaining agreement.
For purposes of this paragraph (e), 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 (e).
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 (e) 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).
(T.D. 8363, 56 FR 47658, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992)
26 CFR 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 1.410(a)-2(d). Therefore, for
a plan in existence on Janurary 1, 1974, an election under section
410(d) of the Code may be made for a plan year beginning before January
1, 1976, only if an election has been made under section 1017(d) of the
Act with respect to that plan year.
(2) By whom election is to be made. The election provided by this
section may be made only by the plan administrator of the church plan.
(3) Manner of making election. The plan administrator may elect to
have the provisions of the Code described in paragraph (a) of this
section apply to the church plan as it is were not a church plan by
attaching the statement described in subparagraph (5) of this paragraph
to either (i) the annual return required under section 6058(a) (or an
amended return) with respect to the plan which is filed for the first
plan year for which the election is effective 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)
26 CFR 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 1.411(a)-7(c)) is nonforfeitable (see
1.411(a)-4) upon and after the attainment of normal retirement age (see
1.411(a)-7(b)),
(2) The plan provides that an employee's rights in his accrued
benefit derived from his own contributions (see 1.411(c)-1) are
nonforfeitable at all times, and
(3) The plan satisfies the requirements of --
(A) Section 411(a)(2) and 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
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 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 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 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 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).
(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 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)
26 CFR 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 1.410(a)-2(d) for rules relating to such an election.
(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)
26 CFR 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 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:
(d) Rule of 45. A plan satisfies the requirements of section
411(a)(2)(C) and this paragraph if an employee is entitled to the
greater of the two percentages determined under paragraph (d) (1) or (2)
of this section.
(1) Age and service test. An employee who is not separated from the
service, who has completed at least 5 years of service, and with respect
to whom the sum of his age and years of service equals of exceeds 45,
has a nonforfeit- able right to a percentage of his accrued benefit
derived from employer contributions which is not less than the
nonforfeitable percentage corresponding to his number of completed years
of service to to the sum of his age and completed years of service
(whichever percentage is the lesser) determined under the following
table:
(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:
(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:
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:
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)
26 CFR 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:
(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.
(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:
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:
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)
26 CFR 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 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 1.411(a)-7(d) (2) and (3).
(ii) Class year plans. For forfeiture rules pertaining to class year
plans, see 1.411(d)-3(b).
(iii) Additional requirements. For additional requirements relating
to nonforfeitability of benefits in the event of a withdrawal by the
employee, see section 401(a)(19) and 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.
(7) Certain matching contributions. A matching contribution (within
the meaning of section 401(m)(4)(A) and 1.40l(m)-1(f)(12)) is not
treated as forfeitable even if under the plan it may be forfeited under
1.401(m)-1(e)(1) because the contribution to which it relates is treated
as an excess contribution (within the meaning of 1.402(k)-1(f)(2) and
(g)(7)), excess deferral (within the meaning of 1.402(g)-1(e)(1)(iii)),
or excess aggregate contribution (within the meaning of
1.401(m)-1(f)(8)).
(c) Examples. The rules of this section are illustrated by the
following examples:
Example (1). Corporation A's plan provides that an employee is fully
vested in his employer-derived accrued benefit after completion of 5
years of service. The plan also provides that, if an employee works for
a competitor he forfeits his rights in the plan. Such provision could
result in the forfeiture of an employee's rights which are required to
be nonforfeitable under section 411 and therefore the plan would not
satisfy the requirements of section 411. If the plan limited the
forfeiture to employees who completed less than 10 years of service, the
plan would not fail to satisfy the requirements of section 411 because
the forfeitures under this provision are limited to rights which are in
excess of the minimum required to be nonforfeitable under section
411(a)(2)(A).
Example (2). Plan B provides that if an employee does not apply for
benefits within 5 years after the attainment of normal retirement age,
the employee loses his plan benefits. Such a plan provision could
result in forfeiture of an employee's rights which are required to be
nonforfeitable under section 411 and, therefore, the plan would not
satisfy the requirements of section 411.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
(T.D. 7501, 42 FR 42326, Aug. 23, 1977, as amended by T.D. 8357, 56
FR 40549, Aug. 15, 1991)
26 CFR 1.411(a)-4T Forfeitures, suspensions, etc. (temporary).
(a) Nonforfeitability. Certain rights in an accrued benefit must be
nonforfeitable to satisfy the requirements of section 411(a). This
section defines the term ''nonforfeitable'' for purposes of these
requirements. For purposes of section 411 and the regulations
thereunder, a right to an accrued benefit is considered to be
nonforfeitable at a particular time if, at that time and thereafter, it
is an unconditional right. Except as provided by paragraph (b) of this
section, a right which, at a particular time, is conditioned under the
plan upon a subsequent event, subsequent performance, or subsequent
forbearance which will cause the loss of such right is a forfeitable
right at that time. Certain adjustments to plan benefits, such as
adjustments in excess of reasonable actuarial reductions, can result in
rights being forfeitable. Rights which are conditioned upon a
sufficiency of plan assets in the event of a termination or partial
termination are considered to be forfeitable because of such condition.
However, a plan does not violate the nonforfeitability requirements
merely because in the event of a termination an employee does not have
any recourse toward satisfaction of his nonforfeitable benefits from
other than the plan assets, the Pension Benefit Guaranty Corporation, or
a trust established and maintained pursuant to sections 4041(c)(3)(B)
(ii) or (iii) and section 4049 of ERISA with respect to the plan.
Furthermore, nonforfeitable rights are not considered to be forfeitable
by reason of the fact that they may be reduced as allowed under sections
401(a)(5) and 401(l). To the extent that rights are not required to be
nonforfeitable to satisfy the minimum vesting standards, or the
nondiscrimination requirements of section 401(a)(4), they may be
forfeited without regard to the limitations on forfeitability required
by this section. The right of an employee to repurchase his accrued
benefit for example under section 411(a)(3)(D), is an example of a right
which is required to satisfy such standards. Accordingly, such a right
is subject to the limitations on forfeitability. Rights which are
required to be prospectively nonforfeitable under the vesting standards
are nonforfeitable and may not be forfeited until it is determined that
such rights are, in fact, in excess of the vesting standards. Thus,
employees have a right to vest in the accrued benefits if they continue
in employment of employers maintaining the plan unless a forfeitable
event recognized by section 411 occurs. For example, if a plan covered
employees in 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)
26 CFR 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
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 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 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 1.410(a)-7, the service which may be disregarded is
the period with respect to which the mandatory contribution is not made.
(3) Plan not maintained -- (i) In general. An employee's years of
service with an employer during any period for which the employer did
not maintain the plan or a predecessor plan may be disregarded for
purposes of section 411(a)(2). Paragraph (b)(3)(ii) of this section
provides rules regarding the period prior to the adoption of a plan.
Paragraph (b)(3)(iii) of this section provides rules regarding the
period after the termination of a plan. Paragraph (b)(3)(iv) of this
section provides rules regarding employers who have certain
relationships with other employers maintaining the plan.
(ii) Period prior to adoption. The period for which a plan is not
maintained by an employer includes the period before the plan was
established. For purposes of this subdivision, a plan is established on
the first day of the plan year in which the plan is adopted even though
the plan is adopted after such first day. Except as provided in
paragraph (b)(3)(iv) of this section if an employer adopts a plan which
has previously been established by another employer or group of
employers, the plan is not maintained by the adopting employer prior to
the first day of the plan year in which the plan is adopted by the
adopting employer. In the case of a transfer of assets or liabilities
(including a merger or consolidation) involving two plans maintained by
a single employer, the successor (or transferee) plan is treated as if
it was established at the same time as the date of the establishment of
the earliest component plan. In the case of a plan merger,
consolidation, or transfer of plan assets or liabilities involving plans
of two or more employers, the successor plan is treated as if it were
established on each of the separate dates on which such component plan
was established for the employees of each employer. Thus, for example,
if employer A establishes a plan January 1, 1970, and employer B
establishes a plan January 1, 1980, and the plans were subsequently
merged, then the merged plan would be treated as if it were in existence
on January 1, 1970, with respect to A's employees and as if it were in
existence on January 1, 1980, with respect to B's employees.
(iii) Period after termination or withdrawal. The period for which a
plan is not maintained by an employer includes the period after the plan
is terminated. For purposes of this section, a plan is terminated at
the date there is a termination of the plan within the meaning of
section 411(d)(3)(A) and the regulations thereunder. Notwithstanding
the preceding sentence, if contributions to or under a plan are made
after termination, the plan is treated as being maintained until such
contributions cease, whether or not accruals are made after such
termination. If, after termination of a plan in circumstances under
which the employer may be liable to the Pension Benefit Guaranty
Corporation under section 4062 of the Act, employer contributions are
made to or under the plan to fund benefits accrued at the time of
termination, such contributions shall, for purposes of this paragraph,
be deemed to be payments in satisfaction of employer liability to such
Corporation rather than contributions to or under the plan. In the case
of a plan maintained by more than one employer, the period for which the
plan is not maintained by the withdrawing employer includes the period
after the withdrawal from the plan.
(iv) Certain employers. For purposes of this subparagraph --
(A) Predecessor employers. Service with a predecessor employer who
maintained the plan of the current employer is treated as service with
such current employer (see section 414(a)(1) and the regulations
thereunder), and certain service with a predecessor employer who did not
maintain the plan of the current employer is treated as service with the
current employer (see section 414(a)(2) and the regulations thereunder).
(B) Related employers. Service with an employer is treated as
service for certain related employers for the period during which the
employers are related. These related employers include members of a
controlled group of corporations (within the meaning of section 1563(a),
determined without regard to subsections (a)(4) and (e)(3) (C) thereof)
and trades or businesses (whether or not incorporated) which are under
common control (see section 414 (b) and (c) and 29 CFR Part 2530,
Department of Labor regulations relating to minimum standards for
employee pension benefits plans).
(C) Plan maintained by more than one employer. Service with an
employer who maintains a plan is treated as service for each other
employer who maintains that plan for the period during which the
employers are maintaining the plan (see section 413 (b)(4) and (c)(3)
and 29 CFR Part 2530, Department of Labor regulations relating to
minimum standards for employee pension benefit plans).
(v) Predecessor plan -- (A) General rule. In the case of an employee
who was covered by a predecessor plan, the time the successor of such
plan is maintained for such employee includes the time the predecessor
plan was maintained if, as of the later of the time the predecessor plan
is terminated or the 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 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 1.411(a)-9 for requirements relating to certain amendments to
the break in service rules of a plan.
(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)
26 CFR 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
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
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 participatants. In the case of an employee who is a
nonvested participant in employer-derived benefits at the time he incurs
a 1-year break in service, years of service completed by such
participant before such break are not required to be taken into account
for purposes of determining the nonforfeitable percentage of his right
to employer-derived benefits if at such time the number of consecutive
1-year breaks in service included in his most recent break in service
equals or exceeds the aggregate number of his years of service, whether
or not consecutive, completed before such break. In the case of a plan
utilizing the elapsed time method described in 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:
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)
26 CFR 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 1.411(c)-(5) of the accrued
benefit determined under the plan. In general, the term ''accrued
benefits'' refers only to pension or retirement benefits. Consequently,
accrued benefits do not include ancillary benefits not directly related
to retirement benefits such as payment of medical expenses (or insurance
premiums for such expenses), disability benefits not in excess of the
qualified disability benefit (see section 411(a)(9) and paragraph (c)(3)
of this section), life insurance benefits payable as a lump sum,
incidental death benefits, current life insurance protection, or medical
benefits described in section 401(h). For purposes of this paragraph a
subsidized early retirement benefit which is provided by a plan is not
taken into account, except to the extent of determining the normal
retirement benefit under the plan (see section 411(a)(9) and paragraph
(c) of this section). The accrued benefit includes any optional
settlement at normal retirement age under actuarial assumptions no less
favorable than those which would be applied if the employee were
terminating his employment at normal retirement age. The accrued benefit
does not include any subsidized value in a joint and survivor annuity to
the extent that the annual benefit of the joint and survivor annuity
does not exceed the annual benefit of a single life annuity.
(2) Defined contribution plan. In the case of a defined contribution
plan, the balance of the employee's account held under the plan.
(b) Normal retirement age -- (1) General rule. For the purposes of
section 411 and the regulations thereunder, the term ''normal retirement
age'' means the earlier of --
(i) The time specified by a plan at which a plan participant attains
normal retirement age, or
(ii) The later of --
(A) The time the plan participant attains age 65, or
(B) The 10th anniversary of the date the plan participant commences
participation in the plan.
If a plan, or the employer sponsoring the plan, imposes a requirement
that an employee retire upon reaching a certain age, the normal
retirement age may not exceed that mandatory retirement age. The
preceding sentence will apply if the employer consistently enforces a
mandatory retirement age rule, whether or not set forth in the plan or
any related document. For purposes of subdivision (i) of this
subparagraph, if an age is not specified by a plan as the normal
retirement age then the normal retirement age under the plan is the
earliest age beyond which the participant's benefits under the plan are
not greater solely on account of his age or service. For purposes of
paragraph (b)(1)(ii)(B) of this section, participation commences on the
first day of the first year in which the participant commenced his
participation in the plan, except that years which may be disregarded
under section 410(a)(5)(D) may be disregarded in determining when
participation commenced.
(2) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example (1). Plan A defines normal retirement age as age 65. Under
the plan, benefits payable to participants who retire at or after age 60
are not reduced on account of early retirement. For purposes of section
411 and the vesting regulations, normal retirement age under Plan A is
age 65 (determined under subparagraph (1)(i) of this paragraph). This
is true even if in operation all participants retire at age 60.
Example (2). Plan B does not specify any age as the normal
retirement age. Under the plan, participants who have attained age 55
are entitled to benefits commencing upon retirement but the benefits of
participants who retire before attaining age 70 are subject to reduction
on account of early retirement. For purposes of section 411 and the
vesting regulations the normal retirement age under Plan B is the later
of (i) age 65, or (ii) the 10th anniversary of the date a plan
participant commences participation in the plan (assuming such date is
prior to age 70).
Example (3). The facts are the same as in example (2). Employee X
first became a participant in Plan B on January 1, 1980 at age 53. His
participation continued until December 31, 1980, when he separated from
the service with no vested benefits. After incurring 5 consecutive
1-year breaks in service, Employee X again becomes an employee and a
plan participant on January 1, 1986, at age 59. For purposes of section
411, Employee X's normal retirement age under Plan B is age 69, the 10th
anniversary of the date on which his year of plan participation
commenced. His participation in 1980 may be disregarded under the last
sentence of paragraph (b)(1) of this section.
(c) Normal retirement benefit -- (1) In general. For purposes of
section 411 and the regulations thereunder, the term ''normal retirement
benefit'' means the periodic benefit under the plan commencing upon
early retirement (if any) or at normal retirement age, whichever benefit
is greater.
(2) Periodic benefit. For purposes of subparagraph (1) of this
paragraph --
(i) In the case of a plan under which a benefit is payable as an
annuity in the same form upon early retirement and at normal retirement
age, the greater benefit is determined by comparing the amount of such
annuity payments.
(ii) In the case of a plan under which an annuity benefit payable
upon early retirement is not in the same form as an annuity benefit
payable at normal retirement age, the greater benefit is determined by
converting the annuity benefit payable upon early retirement age into
the same form of annuity benefit as is payable at normal retirement age
and by comparing the amount of the converted early retirement benefit
payment with the amount of the normal retirement benefit payment.
(iii) In the case of a plan which is integrated with the Social
Security Act or any other Federal or State law, the periodic benefit
payable upon and after early retirement age is adjusted for any
increases in such benefits occurring on or after early retirement age
which are taken into account under the plan. See however, section
401(a)(15) and the regulations thereunder.
(3) Benefits included. For purposes of this paragraph, the normal
retirement benefit under a plan shall be determined without regard to
ancillary benefits not directly related to retirement benefits such as
medical benefits or disability benefits not in excess of the qualified
disability benefit; see section 411(a)(7) and paragraph (a)(1) of this
section. For this purpose, a qualified disability benefit is a
disability benefit which is not in excess of the amount of the benefit
which would be payable to the participant if he separated from service
at normal retirement age.
(4) Early retirement benefit; social security supplement. (i) For
purposes of this paragraph, the early retirement benefit under a plan
shall be determined without regard to any social security supplement.
(ii) For purposes of this subparagraph, a social security supplement
is a benefit for plan participants which --
(A) Commences before the age and terminates before the age when
participants are entitled to old-age insurance benefits, unreduced on
account of age, under title II of the Social Security Act, as amended
(see section 202 (a) and (g) of such Act), and
(B) Does not exceed such old-age insurance benefit.
(5) Special limitation. If a defined benefit plan bases its normal
retirement benefits on employee compensation, the compensation must
reflect the compensation which would have been paid for a full year of
participation within the meaning of section 411(b)(3). If an employee
works less than a full year of participation, the compensation used to
determine benefits under the plan for such year of participation must be
multiplied by the ratio of the number of hours for a complete year of
participation to the number of hours worked in such year. A plan whose
benefit formula is computed on a computation base which cannot decrease
is not required to adjust employee compensation in the manner described
in the previous sentence. Thus, for example, if a plan provided a
benefit based on an employee's compensation for his highest five
consecutive years or a separate benefit for each year of participation
based on the employee's compensation for such year the plan would not
have to so adjust compensation. However, if a plan provided a benefit
based on an employee's compensation for the employee's last five years
or the five highest consecutive years out of the last 10 years, the
compensation, would have to be so adjusted. For special rules for
applying the limitations on proration of a year of participation for
benefit accrual, see regulations prescribed by the Secretary of Labor
under 29 CFR Part 2530, relating to minimum standards for employee
pension benefit plans.
(6) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example (1). Plan A provides for a benefit equal to 1% of high 5
years compensation for each year of service and a normal retirement age
of 65. The plan also provides for a full unreduced accrued benefit
without any actuarial reduction for any employee at age 55 with 30 years
of service. Even though the actuarial value of the early retirement
benefit could exceed the value of the benefit at the normal retirement
age, the normal retirement benefit would not include the greater value
of the early retirement benefit because actuarial subsidies are ignored.
Example (2). Plan B provides the following benefits: (1) at normal
retirement age 65, $300/mo. for life and (2) at early retirement age
60, $400/mo. for life. The normal retirement benefit is $400/mo., the
greater of the benefit payable at normal retirement age ($300) or early
retirement ($400).
Example (3). Assume the same facts as example (2) except that the
early retirement benefit of $400 is reduced to $300 upon attainment of
age 65. If each employee's social security benefit at age 65 is not
less than $100, the $100 would be considered to be a social security
supplement and would therefore be ignored. Consequently, the normal
retirement benefit would be $300.
Example (4). Plan C provides a benefit at normal retirement age
equal to 1% per year of service, multiplied by the participant's
compensation averaged over the 5 years immediately prior to retirement.
An early retirement benefit is provided upon attainment of age 60 equal
to the benefit accrued to date of early retirement reduced by 4 percent
for each year by which the early retirement date precedes the normal
retirement age of 65. Employee A was hired at age 30, participated
immediately, and retired at age 65. Employee A's annual compensation
was $50,000 between ages 55-60 and was reduced to $33,000 after age 60.
The following table indicates the amount of annual benefit that would
have been provided by the plan formula if the employee retired at or
after age 60:
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 1.411(c)-1) before he has become a 50 percent vested
participant (within the meaning of 1.401(a)-19(b)(2)). For purposes of
determining the vested percentage, the plan may disregard service after
the withdrawal. For example, assume that a plan utilizes 1000 hours for
computing years of service and that for the computation period employee
A had 1000 hours of service. If A was 40 percent vested at the
beginning of the period but only had 800 hours at the time of the
withdrawal, the plan could treat A as only 40 percent vested because
service after the withdrawal can be disregarded. On the other hand, if
A had 1000 hours at the time of the withdrawal, he must receive a year
of service for the computation period, even though service is not taken
into account until the end of such period.
(ii) Plan repayment provision. (A) Subdivision (i) of this
subparagraph shall not apply unless, at the time the amount described in
such subdivision is withdrawn by the participant, the plan provides the
employee with a right to restoration of his employer-derived accrued
benefit to the extent forfeited in accordance with such subdivision upon
repayment to the plan of the full amount of the withdrawal.
(B) In the case of a defined benefit plan (as defined in section
414(j)) the restoration of the employee's employer-derived accrued
benefit may be conditioned upon repayment of interest on the full amount
of the distribution. Such interest shall be computed on the amount of
the distribution from the date of such distribution to the date of
repayment, compounded annually from the date of distribution, at the
rate determined under section 411(c)(2)(C) in 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 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 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 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 1.411(c)-1(c)(4)) is made after
September 2, 1974.
(ii) Defined contribution plan. In the case of a defined
contribution plan, the portion of a participant's employer-derived
benefit which accrued prior to September 2, 1974, shall be determined on
the basis of a separate accounting between benefits accruing before and
after such date. Gains, losses, withdrawals, forfeitures, and other
credits or charges must be separately allocated to such benefits. Any
allocation made on a reasonable and consistent basis prior to September
1, 1977, shall satisfy the requirements of this subdivision.
(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 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. See 1.411(a)(11)-1.
(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 subdivision (iv) of this subparagraph in effect at the
time of the distribution.
A distribution shall be deemed to be made due to the termination of
an employe'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. For purposes of determining the entire
nonforfeitable benefit, the plan may disregard service after the
distribution, as illustrated in subparagraph (2)(i) of this paragraph.
(ii) Voluntary cash-outs. For purposes of determining an employee's
accrued benefit derived from employer contributions under a plan, the
plan may disregard service performed by the employee with respect to
which --
(A) The employee receives a distribution of the present value of his
nonforfeitable benefit attributable to such service at the time of such
distribution,
(B) The employee voluntarily elects to receive such distribution,
(C) The distribution is made on termination of the employee's
participation in the plan, and
(D) The plan has a repayment provision in effect at the time of the
distribution which satisfies the requirements of subdivision (iv) of
this subparagraph.
A distribution shall be deemed to be made on termination of
participation in the plan if it is made not later than the close of the
second plan year following the plan year in which such termination
occurs. For purposes of determining the nonforfeitable benefit, the
plan may disregard service after the distribution as illustrated in
subparagraph (2)(i) of this subparagraph.
(iii) Disregard of service. Service of an employee permitted to be
disregarded under subdivision (i) or (ii) of the subparagraph is not
required to be taken into account in computing the employee's accrued
benefit under the plan. In the case of a voluntary distribution
described in subdivision (ii) of this subparagraph which is less than
the present value of the employee's total nonforfeitable benefit
immediately prior to the distribution, the accrued benefit not required
to be taken into account is such total accrued benefit multiplied by a
fraction, the numerator of which is the amount of the distribution and
the denominator of which is the present value of his total
nonforfeitable benefit immediately prior to such distribution. For
example, A who is 50 percent vested in an account balance of $1,000
receives a voluntary distribution of $250. The accrued benefit which
can be disregarded equals $1,000 times $250/$500, or $500. However,
such service may not by reason of this paragraph be disregarded for
purposes of determining an employee's years of service under sections
410(a)(3) and 411(a)(4).
(iv) Plan repayment provision. (A) A plan repayment provision
satisfies the requirements of this subdivision if, under the provision,
the accrued benefit of an employee that is disregarded by a plan under
this subparagraph is restored upon repayment to the plan by the employee
of the full amount of the distribution. An accrued benefit is not
restored unless all of the optional forms of benefit and subsidies
relating to such benefit are also restored. A plan is not required to
provide for repayment of an accrued benefit unless the employee --
(1) Received a distribution that is in a plan year to which section
411 applies (see 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.
(5) Vesting requirement for defined contribution plans -- (i)
Application. The requirements of this subparagraph apply to a defined
contribution plan which makes distributions to employees from their
accounts attributable to employer contributions at a time when --
(A) Employees are less than 100 percent vested in such accounts, and
(B) Under the plan, employees can increase their percentage of
vesting in such accounts after the distributions.
(ii) Requirements. In order for a plan, to which this subparagraph
applies, to satisfy the vesting requirements of section 411, account
balances under the plan (with respect to which percentage vesting can
increase) must be computed in a manner which satisfies either
subdivision (iii) (A) or (B) of this subparagraph.
(iii) Permissible methods. A plan many provide for either of the
following methods, but not both, for computing account balances with
respect to which percentage vesting can increase and from which
distributions are made:
(A)(1) A separate account is established for the employee's interest
in the plan as of the time of the distribution, and
(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 D))^(R 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 $250))^(2
$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 1.401(a)-11(a)(2)
(relating to joint and survivor annuities) for special rules applicable
to certain distributions described in this paragraph.
(iii) Plan repayments. (A) Under subparagraphs (2) and (4) of this
paragraph, a plan may be required to restore accrued benefits in the
event of repayment by an employee.
(B) For purposes of applying the limitations of section 415 (c) and
(e), in the case of a defined contribution plan, the repayment by the
employee and the restoration by the employer shall not be treated as
annual additions.
(C) In the case of a defined contribution plan, the permissible
sources for restoration of the accrued benefit are: income or gain to
the plan, forfeitures, or employer contributions. Notwithstanding the
provisions of 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)
26 CFR 1.411(a)-8 Changes in vesting schedule.
(a) Requirement of prior schedule. Under section 411(a)(10)(A), for
plan years for which section 411 applies, a plan will be treated as not
meeting the minimum vesting standards of section 411(a)(2) if the plan
does not satisfy the requirements of this paragraph. If the vesting
schedule of a plan is amended, then as of the date such amendment is
adopted, the plan satisfies the requirements of this paragraph if, under
the plan as amended, in the case of an employee who is a participant on
--
(1) The date the amendment is adopted, or
(2) The date the amendment is effective, if later.
The nonforfeitable percentage (determined as of such date) of such
employee's right to his employer-derived accrued benefit is not less
than his percentage computed under the plan without regard to such
amendment.
(b) Election of former schedule -- (1) In general. Under section 411
(a)(10)(B), for plan years for which section 411 applies, if the vesting
schedule of a plan is amended, the plan will not be treated as meeting
the minimum vesting standards of section 411 (a)(2) unless the plan as
amended, provides that each participant whose nonforfeitable percentage
of his accrued benefit derived from employer contributions is determined
under such schedule, and who has completed at least 5 years of service
with the employer, may elect, during the election period, to have the
nonforfeitable percentage of his accrued benefit derived from employer
contributions determined without regard to such amendment.
Notwithstanding the preceding sentence, no election need be provided for
any participant whose nonforfeitable percentage under the plan, as
amended, at any time cannot be less than such percentage determined
without regard to such amendment.
(2) Election period. For purposes of subparagraph (1) of this
paragraph, the election period under the plan must begin no later than
the date the plan amendment is adopted and end no earlier than the
latest of the following dates:
(i) The date which is 60 days after the day the plan amendment is
adopted,
(ii) The date which is 60 days after the day the plan amendment
becomes effective, or
(iii) The date which is 60 days after the day the participant is
issued written notice of the plan amendment by the employer or plan
administrator.
(3) Service requirement. For purposes of subparagraph (1) of this
paragraph, a participant shall be considered to have completed 5 years
of service if such participant has completed 5 years of service, whether
or not consecutive, without regard to the exceptions of section
411(a)(4) prior to the expiration of the election period described in
subparagraph (2) of this paragraph. For the meaning of the term ''year
of service'', see regulations prescribed by the Secretary of Labor under
29 CFR Part 2530, relating to minimum standards for employee pension
benefit plans.
(4) Election only by participant. The election described in
subparagraph (1) of this paragraph is available only to an individual
who is a participant in the plan at the time such election is made.
(5) Election may be irrevocable. A plan, as amended, shall not fail
to meet the minimum vesting standards of section 411(a)(2) by reason of
section 411(a)(10)(B) merely because such plan provides that the
election described in subparagraph (1) of this paragraph is irrevocable.
(6) Relationship with section 411(a)(2). The election described in
subparagraph (1) of this paragraph is available for a vesting schedule
which does not satisfy the requirements of section 411(a)(2) only if
under such schedule all participants have a 50 percent nonforfeitable
right after 10 years of service, and a 100 percent nonforfeitable right
after 15 years of service, in their employer-derived accrued benefit.
If the vesting schedule provides less vesting than the percentages
required by the preceding sentence, the plan can be amended to provide
for such vesting.
(c) Special rules -- (1) Amendment of vesting schedule. For purposes
of this section, an amendment of a vesting schedule is each plan
amendment which directly or indirectly affects the computation of the
nonforfeitable percentage of employees' rights to employer-derived
accrued benefits. Consequently, such an amendment, for example,
includes each change in the plan which affects either the plan's
computation of years of service or of vesting percentages for years of
service.
(2) Aggregation of amendments. All plan amendments which are: (i)
amendments of a vesting schedule within the meaning of subparagraph (1)
of this paragraph and (ii) adopted and effective at the same time, shall
be deemed to be a single amendment for purposes of applying the rules in
paragraphs (a) and (b) of this section.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
(T.D. 7501, 42 FR 42333, Aug. 23, 1977)
26 CFR 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
1.411(a)-3T(e)(1), this section shall be applied by substituting ''5
years of service'' for ''3 years of service'' where such language
appears.
(2) Election period. For purposes of subparagraph (1) of this
paragraph, the election period under the plan must begin no later than
the date the plan amendment is adopted and end no earlier than the
latest of the following dates:
(i) The date which is 60 days after the day the plan amendment is
adopted,
(ii) The date which is 60 days after the day the plan amendment
becomes effective, or
(iii) The date which is 60 days after the day the participant is
issued written notice of the plan amendment by the employer or plan
administrator.
(3) Service requirement. For purposes of subparagraph (1) of this
paragraph, a participant shall be considered to have completed 3 years
of service if such participant has completed 3 years of service, whether
or not consecutive, without regard to the exceptions of section
411(a)(4) prior to the expiration of the election period described in
subparagraph (2) of this paragraph. For the meaning of the term ''year
of service'', see regulations prescribed by the Secretary of Labor under
29 CFR Part 2530, relating to minimum standards for employee pension
benefit plans.
(T.D. 8170, 53 FR 241, Jan. 6, 1988)
26 CFR 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 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)
26 CFR 1.411(a)-11 Restriction and valuation of distributions.
(a) Scope -- (1) In general. Section 411(a)(11) restricts the
ability of a plan to distribute any portion of a participant's accrued
benefit without the participant's consent. Section 411(a)(11) also
restricts the ability of defined benefit plans to distribute any portion
of a participant's accrued benefit in optional forms of benefit without
complying with specified valuation rules for determining the amount of
the distribution. If the consent requirements or the valuation rules of
this section are not satisfied, the plan fails to satisfy the
requirements of section 411(a).
(2) Accrued benefit. For purposes of this section, an accrued
benefit is valued taking into consideration the particular optional form
in which the benefit is to be distributed. The value of an accrued
benefit is the present value of the benefit in the distribution form
determined under the plan. For example, a plan that provides a
subsidized early retirement annuity benefit may specify that the
optional single sum distribution form of benefit available at early
retirement age is the present value of the subsidized early retirement
annuity benefit. In this case, the subsidized early retirement annuity
benefit must be used to apply the valuation requirements of this section
and the resulting amount of the single sum distribution. However, if a
plan that provides a subsidized early retirement annuity benefit
specifies that the single sum distribution benefit available at early
retirement age is the present value of the normal retirement annuity
benefit, then the normal retirement annuity benefit is used to apply the
valuation requirements of this section and the resulting amount of the
single sum distribution available at early retirement age.
(b) General consent rules. A plan must satisfy the participant
consent requirement with respect to the distribution of a participant's
nonforfeitable accrued benefit with a present value in excess of $3,500.
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, and an
explanation of the relative values of, the optional forms of benefit
available under the plan in a manner that would satisfy the notice
requirements of section 417(a)(3). See 1.401(a)-20 Q&A-36. In
addition, so long as a benefit is immediately distributable, a
participant must be informed of his 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) A plan must provide participants with notice of their rights
specified in this subparagraph no less than 30 days and no more than 90
days before the annuity starting date. Written consent of the
participant to the distribution must not be made before the participant
receives the notice and must not be made more than 90 days before the
annuity starting date. See 1.401(a)-20 Q&A-10 for the definition of
annuity starting date.
(iii) See 1.401(a)-20 Q&A-24 for a special rule applicable to
consents to plan loans.
(3) $3,500. 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 $3,500. The consent requirements are deemed satisfied
if such value does not exceed $3,500 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 1.417(e)-1(d). If the present value determined at the time of a
distribution to the participant exceeds $3,500, then the present value
at any subsequent time shall be deemed to exceed $3,500.
(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 1.401(a)-20 Q&A 23 for
guidance on these requirements. Notwithstanding any provision to the
contrary in section 401(a)(14) or 1.401(a)-14, a plan may not
distribute a participant's nonforfeitable accrued benefit with a present
value in excess of $3,500 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
1.401(a)-14.
(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
1.417(e)-1(d). This paragraph (d) applies both before and after the
participant's death regardless of whether the accrued benefit is
immediately distributable. This paragraph also applies whether or not
the participant's consent is required under paragraphs (b) and (c) of
this section.
(e) Special rules -- (1) Plan termination. The requirements of this
section apply before, on and after a plan termination. If a defined
contribution plan terminates and the plan does not offer an annuity
option (purchased from a commercial provider), then the plan may
distribute a participant's accrued benefit without the participant's
consent. The preceding sentence does not apply if the employer, or any
entity within the same controlled group as the employer, maintains
another defined contribution plan, other than an employee stock
ownership plan (as defined in section 4975(e)(7)). In such a case, the
participant's accrued benefit may be transferred without the
participant's consent to the other plan if the participant does not
consent to an immediate distribution from the terminating plan. See
section 411(d)(6) and the regulations thereunder for other rules
applicable to transferee plans and plan terminations.
(2) ESOP dividends. The requirements of this section do not apply to
any distribution of dividends to which section 404(k) applies.
(3) Other rules. See 1.401(a)-20 Q&As 14, 17 and 24 for other rules
that apply to the section 411(a)(11) requirements.
(T.D. 8219, 53 FR 31853, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988)
26 CFR 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.
(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 (12 $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 ($1,920 12)) as of the
close of the plan year. Under the M Corporation plan, A is entitled to
an accrued benefit of $576 ((12 12) $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 $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 ($1,440 12)) as of the
close of the plan year. Under the M Corporation plan, A is entitled to
an accrued benefit of $576 ((12 $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 50 percent of
average compensation for the highest 3 consecutive years of compensation
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 (0.050 $15,000)
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 an served continuously until normal retirement age (65) is an
annual benefit of $6,000 (30 200). 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 $6,000 15) as of December 31, 1990. Under the R Corporation plan,
B is entitled to an accrued benefit of $3,000 ($200 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 0.02 10) and an accrued
benefit on January 1, 1996 of at least $1,800 ($6,000 0.03 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 $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 $1,440 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 $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 $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 $1,440 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 $48). Thus, with respect to D, the accrued benefit provided
under the X Company plan does not satisfy the requirements of this
subparagraph.
(2) 133 1/3 percent rule -- (i) General rule. A defined benefit plan
satisfies the requirements of this subparagraph for a particular plan
year if --
(A) Under the plan the accrued benefit payable at the normal
retirement age (determined under the plan) is equal to the normal
retirement benefit (determined under the plan), and
(B) The annual rate at which any individual who is or could be a
participant can accrue the retirement benefits payable at normal
retirement age under the plan for any later plan year cannot be more
than 133 1/3 percent of the annual rate at which he can accrue benefits
for any plan year beginning on or after such particular plan year and
before such later plan year.
(ii) Special rules. For purposes of this subparagraph --
(A) Plan amendments. Any amendment to the plan which is in effect
for the current plan year shall be treated as if it were in effect for
all other plan years.
(B) Change in accrual rate. Any change in an accrual rate which
change does not apply to any individual who is of could be a participant
in the plan year is disregarded. Thus, for example, if for its plan
year beginning January 1, 1980, a defined benefit plan provides an
accrued benefit in plan year 1980 of 2 percent of a participant's
average compensation for his highest 3 years of compensation for each
year of service and provides that in plan year 1981 the accrued benefit
will be 3 percent of such average compensation, the plan will not be
treated as failing to satisfy the requirements of this subparagraph for
plan year 1980 because in plan year 1980 the change in the accrual rate
does not apply to any individual who is or could be a participant in
plan year 1980. However, if, for example, a defined benefit plan
provided for an accrued benefit of 1 percent of a participant's average
compensation for his highest 3 years of compensation for each of the
first 10 years of service and 1.5 percent of such average compensations
for each year of service thereafter, the plan will be treated as failing
to satisfy the requirements of this subparagraph for the plan year even
though no participant is actually accruing at the 1.5 percent rate
because an individual who could be a participant and who had over 10
years of service would accrue at the 1.5 percent rate, which rate
exceeds 133 1/3 percent of the 1 percent rate.
(C) Early retirement benefits. The fact that certain benefits under
the plan may be payable to certain participants before normal retirement
age is disregarded. Thus, the requirements of subdivision (i) of this
subparagraph must be satisfied without regard to any benefit payable
prior to the normal retirement benefit (such as an early retirement
benefit which is not the normal retirement benefit (see 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.
(iii) Examples. The application of this subparagraph is illustrated
by the following examples:
Example (1). On January 1, 1980, the R Corporation's defined benefit
plan provides for an annual benefit (commencing at age 65) of a
percentage of a participant's average compensation for the period of 5
consecutive years of participation for which his compensation is the
highest. The percentage is 2 percent for each of the first 20 years of
participation and 1 percent per year thereafter. The appropriate
computation period is the calendar year. The R Corporation's plan
satisfies the requirements of this subparagraph because the 133 1/3
percent rule does not restrict subsequent accrual rate decreases.
Example (2). On January 1, 1980, the J Corporation's defined benefit
plan provides for an annual benefit (commencing at age 65) of a
percentage of a participant's average compensation for the period of his
final 5 consecutive years of participation. The percentage is 1 percent
for each of the first 5 years of participation; 1 1/3 percent for each
of the next 5 years of participation; and 1 7/9 percent for each year
thereafter. The appropriate computation period is the calendar year.
Even though no single accrual rate under the J Corporation's plan
exceeds 133 1/3 percent of the immediately preceding accrual rate, the J
Corporation's plan does not satisfy the requirements of this
subparagraph because the rate of accrual for all years of participation
in excess of 10 (1 7/9 percent) exceeds 133 1/3 percent of the rate of
accrual for any of the first 5 years of participation (1 percent).
Example (3). On January 1, 1980, the C Corporation's defined benefit
plan provides for an annual benefit (commencing at age 65) of a
percentage of a participant's average compensation for the period of 3
consecutive years of participation for which his compensation is the
highest. The percentage is 2 percent for each of the first 5 years of
participation; 1 percent for each of the next 5 years of participation;
and 1 1/2 percent for each year thereafter. The appropriate
computation period is the calendar year. Even though the average rate
of accrual under the C Corporation's plan is not less rapidly than
ratably, the C Corporation's plan does not satisfy the requirements of
this subparagraph because the rate of accrual for all years of
participation in excess of 10 (1 1/2 percent) for any employee who is
actually accruing benefits or who could accrue benefits exceeds 133 1/3
percent of the rate of accrual for the sixth through tenth years of
participation, respectively (1 percent).
(3) Fractional rule -- (i) In general. A defined benefit plan
satisfies the requirements of this paragraph if the accrued benefit to
which any participant is entitled is not less than the fractional rule
benefit multiplied by a fraction (not exceeding 1) --
(A) The numerator of which is his total number of years of
participation in the plan, and
(B) The denominator of which is the total number of years he would
have participated in the plan if he separated from the service at the
normal retirement age under the plan.
(ii) Special rules. For purposes of this subparagraph --
(A) Fractional rule benefit. The ''fractional rule benefit'' is the
annual benefit commencing at the normal retirement age under the plan to
which a participant would be entitled if he continued to earn annually
until such normal retirement age the same rate of compensation upon
which his normal retirement benefit would be computed. Such rate of
compensation shall be computed on the basis of compensation taken into
account under the plan (but taking into account average compensation for
no more than the 10 years of service immediately preceding the
determination). For purposes of this subdivision (A), the normal
retirement benefit shall be determined as if the participant had
attained normal retirement age on the date any such determination is
made.
(B) Social security, etc. For purposes of this subparagraph, for any
plan year, social security benefits and all relevant factors used to
compute benefits, e.g., consumer price index, are treated as remaining
constant as of the beginning of the current plan year for all subsequent
plan years.
(C) Postponed retirement. A plan shall not be treated as failing to
satisfy the requirements of this subparagraph merely because no benefits
under the plan accrue to a participant who continues service with the
employer after such participant has attained normal retirement age under
the plan.
(D) Computation in certain cases. In the case of any plan to which
the provisions of section 411(b)(1)(D) and paragraph (c) of this section
are applicable, for any plan year the accrued benefit of any participant
shall not be less than the accrued benefit otherwise determined under
this subparagraph, reduced by the excess of the accrued benefit
determined under this subparagraph as of the first day of the first plan
year to which section 411 applies over the accrued benefit determined
under section 411(b)(1)(D) and paragraph (c) of this section and
increased by the amount determined under paragraph (c)(2)(v) of this
section.
(iii) Examples. The application of this subparagraph is illustrated
by the following examples:
Example (1). The R Corporation's defined benefit plan provides an
annual retirement benefit commencing at age 65 of 30 percent of a
participant's average compensation for his highest 3 consecutive years
of participation. If a participant separates from service prior to
normal retirement age, the R Corporation's plan provides a benefit equal
to an amount which bears the same ratio to 30 percent of such average
compensation as the participant's actual number of years of
participation in the plan bears to the number of years the participant
would have participated in the plan had he separated from service at age
65. The plan further provides that normal retirement age is age 65. A,
age 55, is a participant in the R Corporation's plan for the current
year, and A has 15 years of participation in the R Corporation's plan.
As of the current year, A's average compensation for his highest 3 years
of compensation is $20,000. The R Corporation's plan satisfies the
requirements of this subparagraph because if A separates from the
service in the current year he will be entitled to an annual benefit of
$3,600 commencing at age 65 (0.3 $20,000 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:
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 ($17,000 + $18,000 + $20,000 +
$20,000 + $21,000 + $22,000 + $23,000 + $25,000 + $26,000 + $29,000 +
$32,000 + ($23,600 10)) 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 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 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 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 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 normal retirement benefit 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)
26 CFR 1.411(c)-1 Allocation of accrued benefits between employer and
employee contributions. requirements. (Reserved)
(a) Accrued benefit derived from employer contributions. For
purposes of section 411 and the regulations thereunder, under section
411(c)(1), an employee's accrued benefit derived from employer
contributions under a plan as of any applicable date is the excess, if
any, of --
(1) The total accrued benefit under the plan provided for the
employee as of such date, over
(2) The accrued benefit provided for the employee, derived from
contributions made by the employee under the plan as of such date.
For computation of accrued benefit derived from employee
contributions to a defined contribution plan or from voluntary employee
contributions to a defined benefit plan, see paragraph (b) of this
section. For computation of accrued benefit derived from mandatory
employee contributions to a defined benefit plan, see paragraph (c) of
this section.
(b) Accrued benefit derived from employee contribution to defined
contribution plan, etc. For purposes of section 411 and the regulations
thereunder, under section 411(c)(2)(A) the accrued benefit derived from
employee contributions to a defined contribution plan is determined
under paragraph (b) (1) or (2) of this section, whichever applies.
Under section 411(d)(5), the accrued benefit derived from voluntary
employee contributions to a defined benefit plan is determined under
paragraph (b)(1) of this section.
(1) Separate accounts maintained. If a separate account is
maintained with respect to an employee's contributions and all income,
expenses, gains, and losses attributable thereto, the accrued benefit
determined under this subparagraph as of any applicable date is the
balance of such account as of such date.
(2) Separate accounts not maintained. If a separate account is not
maintained with respect to an employee's contributions and the income,
expenses, gains, and losses attributable thereto, the accrued benefit
determined under this subparagraph is the employee's total accrued
benefit determined under the plan multiplied by a fraction --
(i) The numerator of which is the total amount of the employee's
contributions under the plan less withdrawals, and
(ii) The denominator of which is the sum of (A) the amount described
in paragraph (b)(2)(i) of this section, and (B) the total contributions
made under the plan by the employer on behalf of the employee less
withdrawals.
For purposes of this subparagraph, contributions include all amounts
which are contributed to the plan even if such amounts are used to
provide ancillary benefits, such as incidental life insurance, health
insurance, or death benefits, and withdrawals include only amounts
distributed to the employee and do not reflect the cost of any death
benefits under the plan.
(c) Accrued benefit derived from mandatory employee contributions to
a defined benefit plan -- (1) General rule. In the case of a defined
benefit plan (as defined in section 414(j)) the accrued benefit derived
from contributions made by an employee under the plan as of any
applicable date is an annual benefit, in the form of a single life
annuity (without ancillary benefits) commencing at normal retirement
age, equal to the amount of the employee's accumulated contributions
(determined under paragraph (c)(3) of this section) multiplied by the
appropriate conversion factor (determined under paragraph (c)(2) of this
section). Paragraph (e) of this section provides rules for actuarial
adjustments where the benefit is to be determined in a form other than
the form described in this paragraph.
(2) Appropriate conversion factor. For purposes of this paragraph,
the term ''appropriate conversion factor'' means the factor necessary to
convert an amount equal to the accumulated contributions to a single
life annuity (without ancillary benefits) commencing at normal
retirement age and shall be 10 percent for a normal retirement age of 65
years. For other normal retirement ages the appropriate conversion
factor shall be the factor as determined by the Commissioner.
(3) Accumulated contributions. For purposes of section 411(c) and
this section, the term ''accumulated contributions'' means the total of
--
(i) All mandatory contributions made by the employee (determined
under paragraph (c)(4) of this section),
(ii) Interest (if any) on such contributions, computed at the rate
provided by the plan to the end of the last plan year to which section
411(a)(2) does not apply (by reason of the applicable effective date),
and
(iii) Interest on the sum of the amounts determined under paragraphs
(c)(3)(i) and (ii) of this section compounded annually at the rate of 5
percent per annum from the beginning of the first plan year to which
section 411(a)(2) applies (by reason of the applicable effective date)
to the date on which the employee would attain normal retirement age.
For example, if under section 1017 of the Employee Retirement Income
Security Act of 1974, section 411(a)(2) of the Code applies for plan
years beginning after December 31, 1975, and for plan years beginning
before 1975, the plan provided for 3 percent interest on employee
contributions, an employee's accumulated contributions would be computed
by crediting interest at the rate provided by the plan (3 percent) for
plan years beginning before 1976 and by crediting interest at the rate
of 5 percent (or another rate prescribed under section 411(c)(2)(D))
thereafter. Section 1017 of the Employee Retirement Income Security Act
of 1974 and 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)
1.411(d)-1 Coordination of vesting and discrimination
26 CFR 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 1.411(a)-4.
(2) Required allocation. (i) A plan is not a qualified plan (and a
trust forming a part of such plan is not a qualified trust) unless the
plan provides for the allocation of any previously unallocated funds to
the employes covered by the plan upon the termination or partial
termination of the plan (or, in the case of a plan to which section 412
does not apply, upon the complete discontinuance of contributions under
the plan). Such provision may be incorporated in the plan at its
inception or by an amendment made prior to the termination or partial
termination of the plan for the discontinuance of contributions
thereunder. In the case of a defined contribution plan under which
unallocated forfeitures are held in a suspense account in order to
satisfy the requirements of section 415, this subdivision shall not
require such plan to provide for allocations from the suspense account
to the extent that such allocations would result in annual additions to
participants' accounts in excess of amounts permitted under section 415
for the year for which such allocations would be made.
(ii) Any provision for the allocation of unallocated funds which is
found by the Secretary of Labor or the Pension Benefit Guaranty
Corporation (whichever is appropriate) to satisfy the requirements of
section 4044 or section 403(d)(1) of the Employee Retirement Income
Security Act of 1974 is acceptable if it specifies the method to be used
and does not conflict with the provisions of section 401(a)(4) of the
Internal Revenue Code of 1954 and the regulations thereunder. Any
allocation of funds required by paragraph (1), (2), (3), or (4)(A) of
section 4044(a) of such Act shall be deemed not to result in
discrimination prohibited by section 401(a)(4) of the Code (see,
however, paragraph (e) of this section). Notwithstanding the preceding
sentence, in the case of a plan which establishes subclasses or
categories pursuant to section 4044(b)(6) of such Act, the allocation of
funds by the use of such subclasses or categories shall not be deemed
not to result in discrimination prohibited by the Code. The allocation
of unallocated funds may be in cash or in the form of other benefits
provided under the plan. However, the allocation of the funds
contributed by the employer among the employees need not necessarily
benefit all the employees covered by the plan.
(iii) Paragraphs (a)(2) (i) and (ii) of this section do not require
the allocation of amounts to the account of any employee if such amounts
are not required to be used to satisfy the liabilities with respect to
employees and their beneficiaries under the plan (see section
401(a)(2)).
(b) Partial termination -- (1) General rule. Whether or not a
partial termination of a qualified plan occurs (and the time of such
event) shall be determined by the Commissioner with regard to all the
facts and circumstances in a particular case. Such facts and
circumstances include: the exclusion, by reason of a plan amendment or
severance by the employer, of a group of employees who have previously
been covered by the plan; and plan amendments which adversely affect
the rights of employees to vest in benefits under the plan.
(2) Special rule. If a defined benefit plan ceases or decreases
future benefit accruals under the plan, a partial termination shall be
deemed to occur if, as a result of such cessation or decrease, a
potential reversion to the employer, or employers, maintaining the plan
(determined as of the date such cessation or decrease is adopted) is
created or increased. If no such reversion is created or increased, a
partial termination shall be deemed not to occur by reason of such
cessation or decrease. However, the Commissioner may determine that a
partial termination of such a plan occurs pursuant to subparagraph (1)
of this paragraph for reasons other than such cessation or decrease.
(3) Effect of partial termination. If a termination of a qualified
plan occurs, the provisions of section 411(d)(3) apply only to the part
of the plan that is terminated.
(c) Termination -- (1) Application. This paragraph applies to a plan
other than a plan described in section 411(e)(1) (relating to
governmental, certain church plans, etc.).
(2) Plans subject to termination insurance. For purposes of this
section, a plan to which title IV of the Employee Retirement Income
Security Act of 1974 applies is considered terminated on a particular
date if, as of that date --
(i) The plan is voluntarily terminated by the plan administrator
under section 4041 of the Employee Retirement Income Security Act of
1974, or
(ii) The Pension Benefit Guaranty Corporation terminates the plan
under section 4042 of the Employee Retirement Income Security Act of
1974.
For purposes of this subparagraph, the particular date of termination
shall be the date of termination determined under section 4048 of such
Act.
(3) Other plans. In the case of a plan not described in paragraph
(c)(2) of this section, a plan is considered terminated on a particular
date if, as of that date, the plan is voluntarily terminated by the
employer, or employers, maintaining the plan.
(d) Complete discontinuance -- (1) General rule. For purposes of
this section, a complete discontiuance of contributions under the plan
is contrasted with a suspension of contributions under the plan which is
merely a temporary cessation of contributions by the employer. A
complete discontinuance of contributions may occur although some amounts
are contributed by the employer under the plan if such amounts are not
substantial enough to reflect the intent on the part of the employer to
continue to maintain the plan. The determination of whether a complete
discontinuance of contributions under the plan has occurred will be made
with regard to all the facts and circumstances in the particular case,
and without regard to the amount of any contributions made under the
plan by employees. Among the factors to be considered in determining
whether a suspension constitutes a discontinuance are:
(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 1.401-4(c).
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
(T.D. 7501, 42 FR 42339, Aug. 23, 1977)
26 CFR 1.411(d)-3 Other special rules.
(a) Class year plans -- (1) General rule. Under section 411(d)(4),
the requirements of section 411(a)(2) for a class year plan shall be
deemed to be satisfied if such plan provides that each employee's rights
to or derived from employer contributions on his behalf for any plan
year are nonforfeitable no later than the end of the 5th plan year
following the plan year for which such contributions were made. For
purposes of section 411 and the regulations thereunder, the term ''class
year plan'' means a profit-sharing, stock bonus, or money purchase plan
which provides that the nonforfeitable rights of employees to or derived
from employer contributions are determined separately for each plan
year. ''See 1.411(d)-5 for rules that apply to class year plans for
contributions made for plan years beginning after October 22, 1986.''
(2) Other rules -- (i) Prohibited forfeiture on withdrawals. In the
case of a class year plan, section 401(a)(19) and the regulations
thereunder shall be applied separately to each plan year.
(ii) Distribution rules. The rules of 1.411(a)-7(d) apply to a
class year plan. For example, under the rule in
1.411(a)-7(d)(2)(ii)(D), a class year plan would be permitted to limit
the time of repayment to a 5-year period beginning on the date of
withdrawal, or under the rule in 1.411(a)-7(d)(2)(iii), a class year
plan would restore the amount of the forfeited account balance in the
event of repayment. For purposes of applying subparagraphs (2) and (3)
of 1.411(a)-7(d), relating to withdrawal of mandatory contributions, a
withdrawal of employee contributions shall be treated as a withdrawal of
such contributions on a plan year by plan year basis in succeeding order
of time. Any repayments shall be treated as being on account of plan
years in succeeding order of time. For purposes of applying any rule of
such paragraph (e.g., paragraph (d)(2)(ii)(C)) the term ''one-year break
in service'' means any plan year in which under subparagraph (1) of this
paragraph a class year plan may forfeit an employee's rights.
(iii) Computation of years for withdrawals. In applying the
requirement of paragraph (a)(1) of this section that rights must be
nonforfeitable no later than the end of the fifth plan year following
the plan year for which contributions are made, any plan year for which
there has been a withdrawal of contributions and no repayment of such
contributions (determined as of the last day of the plan year) is not
required to count toward the five years. For example, assume that
contributions are made for A in 1981 to a calendar year plan. Under the
general rule of paragraph (a)(1) of this section, the contributions must
be nonforfeitable on December 31, 1986. If in 1982, A withdraws the
contributions for 1981, and repays these contributions in 1984, 1982 and
1983 are not required to be counted toward the five years because at the
end of each year there is a withdrawal and no repayment of such
withdrawal. Accordingly, the plan must provide that A's interest in the
contribution for 1981 will be vested on December 31, 1988.
(b) Prohibition against accrued benefit decrease. Under section
411(d)(6) a plan is not a qualified plan (and a trust forming a part of
such plan is not a qualified trust) if a plan amendment decreases the
accrued benefit of any plan participant, unless the plan amendment
satisfies the requirements of section 412(c)(8) (relating to certain
retroactive amendments) and the regulations thereunder. For purposes of
determining whether or not any participant's accrued benefit is
decreased, all the provisions of a plan affecting directly or indirectly
the computation of accrued benefits which are amended with the same
adoption and effective dates shall be treated as one plan amendment.
Plan provisions indirectly affecting accrued benefits include, for
example, provisions relating to years of service and breaks in service
for determining benefit accrual, and to actuarial factors for
determining optional or early retirement benefits.
(c) Rules applicable to section 414(k) plan. For special rules
applicable to defined benefit plans which provide a benefit derived from
employer contributions which is based partly on a participant's separate
account, see section 414(k) and the regulations thereunder.
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
(T.D. 7501, 42 FR 42340, Aug. 23, 1977, as amended by T.D. 8038, 50
FR 29375, July 19,1985; T.D. 8219, 53 FR 31854, Aug. 22, 1988; 53 FR
48534, Dec. 1, 1988)
26 CFR 1.411(d)-4 Section 411(d)(6) protected benefits.
Q-1: What are ''section 411(d)(6) protected benefits''?
A-1: (a) In general. The term ''section 411(d)(6) protected
benefit'' includes any benefit that is described in one or more of the
following categories --
(1) Benefits described in section 411(d)(6)(A),
(2) Early retirement benefits and retirement-type subsidies described
in section 411(d)(6)(B)(i), including qualified social security
supplements as defined in 1.401(a)(4)-12, and
(3) Optional forms of benefit described in section 411(d)(6)(B)(ii).
Such benefits, to the extent they have accrued, are subject to the
protection of section 411(d)(6) and, where applicable, the definitely
determinable requirement of section 401(a) (including section
401(a)(25)) and cannot, therefore, be reduced, eliminated, or made
subject to employer discretion except to the extent permitted by
regulations.
(b) Optional forms of benefit -- (1) In general. An ''optional form
of benefit'' is a distribution form with respect to an employee's
benefit (described in paragraph (a)(1) and/or (a)(2) of this Q&A-1) that
is available under the plan and is identical with respect to all
features relating to the distribution form, including the payment
schedule, timing, commencement, medium of distribution (e.g., in cash or
in-kind), the portion of the benefit to which such distribution features
apply and the election rights with respect to such optional forms. To
the extent there are any differences in such features, the plan provides
separate optional forms of benefit. Differences in amounts of benefits,
methods of calculation, or values of distribution forms do not result in
optional forms of benefit for purposes of this rule. However, such
amounts, methods of calculation, or values may be protected benefits
within section 411(d)(6)(A) and/or section 411(d)(6)(B)(i). See
1.401(a)-4 for further discussion and examples relating to optional
forms of benefits. See 1.401(a)(4)-4(d) for the definition of an
optional form of benefit for plan years beginning on or after January 1,
1992.
(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 to receive his benefit
under the plan as a single life annuity commencing at termination from
employment; a joint and 50 percent survivor annuity commencing at
termination from employment; a single sum distribution that is
actuarially equivalent to the single life annuity determined by using a
specified interest rate (X percent) for the employees of division A;
and a single sum distributions that is actuarially equivalent to the
single life annuity determined by using an interst rate that is 80
percent of X percent for employees of Division B. This plan provides
three optional forms of benefit. While the interest rates used to
determine the single sum distributions available to the employees of
Divisions A and the employees of Division B respectively differ, this
difference does not result in two single sum optional forms of benefit.
Example 3. A plan permits each participant who is employed by
division A to receive his benefit in a single sum distribution payable
upon termination from employment and each participant who is employed by
division B in a single sum distribution payable upon termination from
employment on or after the attainment of age 50. This plan provides two
single sum optional forms of benefit.
Example 4. A plan permits each participant to receive his benefit in
a single life annuity that commences in the month after the
participant's termination from employment or in a single life annuity
that commences upon the completion of five consecutive one year breaks
in service. These are two optional forms of benefit.
Example 5. A profit-sharing plan permits each participant who is
employed by division A to receive an in-service distribution upon the
satisfaction of objective criteria set forth in the plan designed to
determine whether the participant has a heavy and immediate financial
need, and each participant who is employed by division B to receive an
in-service distribution upon the satisfaction of objective criteria set
forth in the plan designed to determine whether the participant has a
heavy and immediate financial need attributable to extraordinary medical
expenses. These in-service distribution options are two optional forms
of benefits.
Example 6. A profit-sharing plan permits each participant who is
employed by division A to receive an in-service distribution up to
$5,000 and each participant who is employed by division B to receive an
in-service distribution of up to his total benefit. These in-service
distribution options differ as to the portion of the accrued benefit
that may be distributed in a particular form and are, therefore, two
optional forms of benefit.
Example 7. A profit-sharing plan provides for a single sum
distribution on termination of employment. The plan is amended in 1991
to eliminate the single sum optional form of benefit with respect to
benefits accrued after the date of amendment. This single sum optional
form of benefit continues to be a single optional form of benefit
although, over time, the percentage of various employees' accrued
benefits that are potentially payable under this single sum may vary
because the form is only available with respect to benefits accrued up
to and including the date of the amendment.
Example 8. A profit-sharing plan permits each participant to receive
a single sum distribution of his benefit in cash or in the form of a
specified class of employer stock. This plan provides two single sum
distribution optinal forms of benefit.
Example 9. A stock bonus plan permits each participant to receive a
single sum distribution of his benefit in cash or in the form of the
property in which such participant's benefit was invested prior to the
distribution. This plan's single sum distribution option provides two
optional forms of benefit.
Example 10. A defined benefit plan provides for an early retirement
benefit payable upon termination of employment after attainment of age
55 and either after ten years of service or, if earlier, upon plan
termination to employees of Division A and provides for an identical
early retirement benefit payable on the same terms with the exception of
payment on plan termination to employees of Division B. The plan
provides for two optional forms of benefit.
Example 11. A profit-sharing plan provides for loans secured by an
employee's account balance. In the event of default on such a loan,
there is an execution on such account balances. Such execution is a
distribution of the employee's accrued benefits under the plan. A
distribution of an accrued benefit contingent on default under a plan
loan secured by such accrued benefits is an optional form of benefit
under the plan.
(c) Plan terms -- (1) General rule. Generally, benefits described in
section 411(d)(6)(A), early retirement benefits, retirement-type
subsidies, and optional forms of benefit are section 411(d)(6) protected
benefits only if they are provided under the terms of a plan. However,
if an employer establishes a pattern of repeated plan amendments
providing for similar benefits in similar situations for substantially
consecutive, limited periods of time, such benefits will be treated as
provided under the terms of the plan, without regard to the limited
periods of time, to the extent necessary to carry out the purposes of
section 411(d)(6) and, where applicable, the definitely determinable
requirement of section 401(a), including section 401(a)(25). A pattern
of repeated plan amendments providing that a particular optional form of
benefit is available to certain named employees for a limited period of
time is within the scope of this rule and may result in such optional
form of benefit being treated as provided under the terms of the plan to
all employees covered under the plan without regard to the limited
period of time and the limited group of named employees.
(2) Effective date. The provisions of paragraph (c)(1)of this Q&A-1
are effective as of July 11, 1988. Thus, patterns or repeated plan
amendments adopted and effective before July 11, 1988 will be
disregarded in determining whether such amendments have created an
ongoing optional form of benefit under the plan.
(d) Benefits that are not section 411(d)(6) protected benefits. The
following benefits are examples of items that are not section 411(d)(6)
protected benefits:
(1) Ancillary life insurance protection;
(2) Accident or health insurance benefits;
(3) Social security supplements described in section 411(a)(9),
except qualified social security supplements as defined in
1.401(a)(4)-12;
(4) The availability of loans (other than the distribution of an
employee's accrued benefit upon default under a loan);
(5) The right to make after-tax employee contributions or elective
deferrals described in section 402(g)(3);
(6) The right to direct investments;
(7) The right to a particular form of investment (e.g., investment in
employer stock or securities or investment in certain types of
securities, commercial paper, or other investment media);
(8) The allocation dates for contributions, forfeitures, and
earnings, the time for making contributions (but not the conditions for
receiving an allocation of contributions or forfeitures for a plan year
after such conditions have been satisfied), and the valuation dates for
account balances;
(9) Administrative procedures for distributing benefits, such as
provisions relating to the particular dates on which notices are given
and by which elections must be made; and
(10) Rights that derive from administrative and operational
provisions, such as mechanical procedures for allocating investment
experience among accounts in defined contribution plans.
Q-2: To what extent may section 411(d)(6) protected benefits under a
plan be reduced or eliminated?
A-2: (a) Reduction or elimination of section 411(d)(6) protected
benefits -- (1) In general. A plan may not be amended to eliminate or
reduce a section 411(d)(6) protected benefit that has already accrued,
except as provided in sections 412(c)(8) and 4281, and in paragraph (b)
of this Q&A-2. 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.
(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 protection provided
by section 411(d)(6) may not be avoided by the use of annuity contracts.
Thus, section 411(d)(6) protected benefits already accrued may not be
eliminated or reduced merely because a plan uses annuity contracts to
provide such benefits, without regard to whether the plan, a
participant, or a beneficiary of a participant holds the contract or
whether such annuity contracts are purchased as a result of the
termination of the plan. However, to the extent that an annuity
contract constitutes payment of benefits in a particular optional form
elected by the participant, the plan does not violate section 411(d)(6)
merely because it provides that other optional forms are no longer
available with respect to such participant. See paragraph (a)(2) of
this Q&A-2.
(B) Examples. The provisions of this paragraph (a)(3)(ii) can be
illustrated by the following examples:
Example 1. A profit-sharing plan that is being terminated satisfies
section 411(d)(6) only if the plan makes available to participants
annuity contracts that provide for all section 411(d)(6) protected
benefits under the plan that may not otherwise be reduced or eliminated
pursuant to this Q&A-2. Thus, if such a plan provided for a single sum
distribution upon attainment of early retirement age, and a provision
for payment in the form of 10 equal annual installments, the plan would
satisfy section 411(d)(6) only if the participants had the opportunity
to elect to have their benefits provided under an annuity contract that
provided for the same single sum distribution upon the attainment of the
participant's early retirement age and the same 10 year installment
optional form of benefit.
Example 2. A defined benefit plan permits each participant who
separates from service on or after age 62 to receive a qualified joint
and survivor annuity or a single life annuity commencing 45 days after
termination from employment. For a participant who separates from
service before age 62, payments under these optional forms of benefit
commence 45 days after the participant's 62nd birthday. Under the plan,
a participant is to elect among these optional forms of benefit during
the 90-day period preceding the annuity starting date. However, during
such period, a participant may defer both benefit commencement and the
election of a particular benefit form to any later date, subject to
section 401(a)(9). In January 1990, the employer decides to terminate
the plan as of July 1, 1990. The plan will fail to satisfy section
411(d)(6) unless the optional forms of benefit provided under the plan
are preserved under the annuity contract purchased on plan termination.
Thus, such annuity contract must provide a participant the same optional
benefit commencement rights that the plan provided. In addition, such
contract must provide the same election rights with respect to such
benefit options. This is the case even if, for example, in conjunction
with the termination, the employer amended 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) are effective January 30, 1986. These exceptions create no
inference with respect to whether any other applicable requirements are
satisfied (for example, requirements imposed by section 401(a)(9) and
section 401(a)(14)).
(i) Change in statutory requirement. A plan may be amended to
eliminate or reduce a section 411(d)(6) protected benefit if the
following three requirements are met: the amendment constitutes timely
compliance with a change in law affecting plan qualification; there is
an exercise of section 7805(b) relief by the Commissioner; and the
elimination or reduction is made only to the extent necessary to enable
the plan to continue to satisfy the requirements for qualified plans.
In general, the elimination or reduction of a section 411(d)(6)
protected benefit will not be treated as necessary if it is possible
through other modifications to the plan (e.g., by expanding the
availability of an optional form of benefit to additional employees) to
satisfy the applicable qualification requirement.
(ii) Joint and survivor annuity. A plan that provides a range of
three or more actuarially equivalent joint and survivor annuity options
may be amended to eliminate any of such options, other than the options
with the largest and smallest optional survivor payment percentages,
even if the effect of such amendment is to change which of the options
is the qualified joint and survivor annuity under section 417. Thus,
for example, if a money purchase pension plan provides three joint and
survivor annuity options with survivor payments of 50%, 75% and 100%,
respectively, that are uniform with respect to age and are actuarially
equivalent, then the employer may eliminate the option with the 75%
survivor payment, even if this option had been the qualified joint and
survivor annuity under the plan.
(iii) In-kind distributions after plan termination -- (A) In general.
If a plan includes an optional form of benefit under which benefits are
distributed in specified property (other than cash), such optional form
of benefit may be modified for distributions after plan termination by
substituting cash for the specified property to the extent that, on plan
termination, an employee has the opportunity to receive the optional
form of benefit in 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 in
the specified property.
(B) Example. This paragraph (b)(2)(iii) can be illustrated by the
following example:
Example. An employer maintains a stock bonus plan under which a
participant, upon termination from employment, may elect to receive his
benefits in a single sum distribution in employer stock. This is the
only plan maintained by the employer under which distributions in
employer stock are available. The employer decides to terminate the
stock bonus plan. If such plan is amended to make available a single
sum distribution in employer stock on plan termination, the plan will
not fail section 411(d)(6) solely because the optional form of benefit
providing a single sum distribution in employer stock on termination
from employment is modified to provide that such distribution is
available only in cash.
(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 $1,750, by
substituting $3,500 for $1,750, without violating section 411(d)(6). In
addition, for example, the employer may amend the plan to reduce the
involuntary distribution threshold from $3,500 to any lower amount and
to eliminate the involuntary single sum option for employees with
benefits between $3,500 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 $3,500.
(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 of the employer. A plan
may be amended to eliminate provisions permitting the transfer of
benefits between and among defined contribution plans and defined
benefit plans of the employer.
(ix) De minimis change in the timing of an optional form of benefit.
A plan may be amended to modify an optional form of benefit by changing
the timing of the availability of such optional form if, after the
change, the optional form is available at a time that is within two
months of the time such optional form was available before the
amendment. To the extent the optional form of benefit is available
prior to termination of employment, six months may be substituted for
two months in the prior sentence. Thus, for example, a plan that makes
in-service distributions available to employees once every month may be
amended to make such in-service distributions available only once every
six months. This exception to section 411(d)(6) relates only to the
timing of the availability of the optional form of benefit. Other
aspects of an optional form of benefit may not be modified and the value
of such optional form may not be reduced merely because of an amendment
permitted by this exception.
(x) Amendment of hardship distribution standards. A qualified cash
or deferred arrangement that permits hardship distributions under
1.401(k)-1(d)(2) may be amended to specify or modify nondiscriminatory
and objective standards for determining the existence of an immediate
and heavy financial need, the amount necessary to meet the need, or
other conditions relating to eligibility to receive a hardship
distribution. For example, a plan will not be treated as violating
section 411(d)(6) merely because it is amended to specify or modify the
resources an employee must exhaust to qualify for a hardship
distribution or to require employees to provide additional statements or
representations to establish the existence of a hardship. A qualified
cash or deferred arrangement may also be amended to eliminate hardship
distributions.
(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) 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).
(c) Serial amendments. A plan amendment that modifies an optional
form of benefit with respect to benefits already accrued will be
evaluated in light of previous amendments. Thus, for example,
amendments made at different times that, when taken together, constitute
the elimination or reduction of a valuable right, will be treated as the
impermissible elimination or reduction of an optional form of benefit
even though each amendment, considered alone, may otherwise be
permissible.
(d) ESOP and stock bonus plan exception -- (1) In general. Subject
to the limitations in paragraph (d)(2) of this Q&A-5, 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. The employer
eliminates, or retains the discretion to eliminate, with respect to all
participants, in cases in which the employer becomes substantially
employee-owned, 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). This exception is
available only if the employer otherwise meets the requirements of
section 409(h)(2) with respect to restrictions on the ownership of
outstanding employer stock.
(iii) Employer securities become readily tradable. The employer
eliminates, or retains the discretion to eliminate, with respect to all
participants, in cases in which the employer securities become readily
tradable, optional forms of benefit by substituting distributions in the
form of employer securities for distributions in cash with respect to
benefits that are subject to section 409(h).
(iv) Employer securities cease to be readily tradable or certain
sales. The employer eliminates, or retains the discretion to eliminate,
with respect to all participants, optional forms of benefit by
substituting cash distributions for distributions in the form of
employer stock with respect to benefits that are subject to section
409(h) in the following circumstances:
(A) The employer stock ceases to be readily tradable;
(B) The employer stock continues to be readily tradable but there is
a sale of substantially all of the stock of the employer or a sale of
substantially all of the assets of a trade or business of the employer
and, in either situation, the purchasing employer continues to maintain
the plan.
In the situation described in paragraph (d)(1)(iv)(B) of this Q&A-2,
the employer may also substitute distributions in the purchasing
employer's stock for distributions in the form of employer stock of the
predecessor employer.
(2) Limitations on ESOP and stock bonus plan exceptions -- (i)
Nondiscrimination requirement. Plan amendments and the retention and
exercise of discretion permitted under the exceptions in paragraph
(d)(1) must meet the nondiscrimination requirements of section
401(a)(4).
(ii) ESOP investment requirement. Except as provided in paragraph
(d)(2)(iii) of this Q&A-2, benefits provided by employee stock ownership
plans will not 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 the
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
employer 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.
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, an employee may not elect to
waive section 411(d)(6) protected benefits. Thus, for example, the
elimination of the defined benefit feature of an employee's benefit
under a defined plan by reason of a transfer of such benefits to a
defined contribution plan pursuant to an employee election, at a time
when the benefit is not distributable to the employee, violates section
411(d)(6).
(b) Elective transfers of benefits between plans -- (1) Elective
transfer. A transfer of a participant's benefits between qualified
plans that results in the elimination or reduction of section 411(d)(6)
protected benefits does not violate section 411(d)(6) if the transfer
meets the requirements of section 411(l) and the following requirements
are met:
(i) Voluntary election -- (A) Participant 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 such participant's benefit to another plan maintained by the
employer.
(B) Benefit retention alternative. In making the voluntary election
provided for in paragraph (b)(1)(i)(A) of this Q&A-3, the participant
must have an alternative that retains such employee's section 411(d)(6)
protected benefits (including all optional forms of benefit) under the
plan. Thus, either of the following two requirements must be met:
(1) If the plan from which the benefits are transferred is
terminating, the terminating plan must satisfy the requirements of
section 401(a)(2) and section 411(d)(6), or
(2) If the plan from which the benefits are transferred is not
terminating, the participant must be given the option of leaving his
benefit in the ongoing plan to the extent required by section 411(a)(11)
and section 417(e);
(C) Spousal election. If sections 401(a)(11) and 417 apply to the
plan from which the benefits are transferred, the spousal consent
requirements of such section must be met with respect to the transfer of
benefits.
(D) Notice requirement. The notice requirements under section 417,
requiring a written explanation with respect to an election not to
receive benefits in the form of a qualified joint and survivor annuity,
must be met with respect to the participant and spousal transfer
election.
(ii) Distributability of benefits. The participant whose benefits
are transferred must be eligible, under the terms of the plan from which
the benefits are transferred, to receive an immediate distribution from
such plan under provisions in the plan not inconsistent with section
401(a).
(iii) Amount of benefit transferred. The amount of the benefit
transferred must equal the entire nonforfeitable accrued benefit under
the 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 payable at normal
retirement age and calculated by using an interest rate subject to the
restrictions of section 417(e) and subject to the overall limitations
imposed by section 415.
(iv) Benefit under the transferee plan. The participant must be
fully vested in the transferred benefit in the transferee plan. In a
transfer from a defined contribution plan to a defined benefit plan, the
defined benefit plan must provide 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.
(2) Status of elective transfer as distribution. The transfer of
benefits pursuant to the elective transfer rules of this paragraph (b)
generally is to be treated as a distribution of a participant's accrued
benefit under a plan for purposes of section 401(a). For example, a
transfer option is an optional form of benefit under section 411(d)(6);
the availability of such optional form of benefit is subject to the
nondiscrimination requirements of section 401(a)(4); and the transfer
is treated as a distribution subject to the cash-out rules in section
411(a)(7), the early termination requirements of section 411(d)(2) and
the requirements of sections 401(a)(11) and 417. However, the transfer
is not treated as a distribution for purposes of the minimum
distribution requirements of section 401(a)(9).
(3) Effective date. The rules with respect to transfers are
generally effective January 30, 1986. However, with respect to
transfers from defined benefit plans to defined contribution plans and
from defined contribution plans to defined benefit plans, the rules of
this paragraph (b) are effective beginning August 10, 1988. On or after
January 30, 1986, and prior to August 10, 1988 the transitional rules
provided in paragraph (c) of this Q&A-3 are effective with respect to
such transfers.
(c) Transitional rule. Prior to the effective date in paragraph
(b)(3) of this Q&A-3, the transfer of benefits from a defined
contribution plan to a defined benefit plan, or a defined benefit plan
to a defined contribution plan, does not violate section 411(d)(6)
solely by reason of the elimination of section 411(d)(6) protected
benefits, if the benefits transferred were distributable under the plan
or could have been distributable under section 401(a) and either of the
following requirements are met:
(1) Transfer exception. The transfer satisfies the rules in
paragraph (b) of this Q&A-3, or
(2) Direct transfer. The plan to which the benefits are to be
transferred provides, or is amended to provide, for all section
411(d)(6) protected benefits provided under the transferor plan with
respect to the benefits transferred (with the sole exception of the
defined benefit feature of the benefit under a defined benefit plan and
the defined contribution feature under a defined contribution plan);
the transferred benefits are treated as held under a transferee plan for
purposes of the requirements of sections 401(a)(11) and 417; the
transferred amounts meet the requirements of section 414(l) with respect
to the transfer of assets and liabilities, and the benefits transferred
do not exceed the limitations imposed by section 415. Amendments
required for purposes of satisfying this rule must be made by the date
for making any amendments required for purposes of conforming the plan
to the requirements of section 410(b) as amended by TRA '86. However,
plans covered by this rule must comply with these requirements in
operation and any required amendments must be retroactive to the date on
which the benefits were transferred.
(d) Examples. If a transfer complying with the elective transfer
rules of paragraph (b) of this Q&A-3 is made from a defined benefit plan
to a profit-sharing plan that does not provide for a life annuity
distribution form, the profit-sharing plan to which the benefits are
transferred would not be required to provide for a qualified joint and
survivor annuity with respect to the transferred benefits. If the same
transfer is made under the direct transfer transitional rule of
paragraph (c)(2) of this Q&A-3, the defined contribution plan is treated
as a transferee plan with respect to the transferred benefits for
purposes of the requirements of section 401(a)(11) and section 417.
Thus, for example, if such benefits are transferred without spousal
consent to a profit-sharing plan that did not previously provide for a
life annuity distribution form, such plan would be required to provide
for a qualified joint and survivor annuity for the participants whose
benefits were transferred with respect to the transferred benefits.
Q-4: May a plan provide that the employer may, through the exercise
of discretion, deny a participant a section 411(d)(6) protected benefit
for which the participant is otherwise eligible?
A-4: (a) In general. Except as provided in paragraph (d) of Q&A-2
of this section with respect to certain employee stock ownership plans,
a plan that permits the employer, either directly or indirectly, through
the exercise of discretion, to deny a participant a section 411(d)(6)
protected benefit provided under the plan for which the participant is
otherwise eligible (but for the employer's exercise of discretion)
violates the requirements of section 411(d)(6). A plan provision that
makes a section 411(d)(6) protected benefit available only to those
employees as the employer may designate is within the scope of this
prohibition. Thus, for example, a plan provision under which only
employees who are designated by the employer are eligible to receive a
subsidized early retirement benefit constitutes an impermissible
provision under section 411(d)(6). In addition, a pension plan that
permits employer discretion to deny the availability of a section
411(d)(6) protected benefit violates the definitely determinable
requirement of section 401(a), including section 401(a)(25). See
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 $3,500 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 1.401(a)-4 Q&A-4.)
(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
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
1.401(a)-4.
(2) Examples of permissible conditions. The following examples
illustrate of permissible objective conditions: a plan may deny a
single sum distribution form to employees for whom life insurance is not
available at standard rates as defined under the terms of the plan at
the time the single sum distribution would otherwise be payable; a plan
may provide that a single sum distribution is available only if the
employee is in extreme financial need as defined under the terms of the
plan at the time the single sum distribution would otherwise be payable;
a plan my condition the availability of a single sum distribution on
the execution of a covenant not to compete, provided that objective
conditions with respect to the terms of such covenant and the employees
and circumstances requiring execution of such covenant are set forth in
the plan.
(b) Conditions based on factors within employer's discretion
generally impermissible. A plan may not limit the availability of
section 411(d)(6) protected benefits permitted under the plan on
objective conditions that are within the employer's discretion. For
example, the availability of section 411(d)(6) protected benefits in a
plan may not be conditioned on a determination with respect to the level
of the plan's funded status, because the amount of plan funding is
within the employer's discretion. However, for example, although
conditions based on the plan's funded status are impermissible, a plan
may limit the availability of a section 411(d)(6) protected benefit
(e.g., a single sum distribution) in an objective manner, such as the
following:
(1) Single sum distributions of $25,000 and less are available
without limit; and
(2) Single sum distributions in excess of $25,000 are available for a
year only to the extent that the total amount of such single sum
distributions for the year is not greater than $5,000,000; and
(3) An objective and nondiscriminatory method for determining which
particular single sum distributions will not be available during a year
in order for the $5,000,000 limit to be satisfied is set forth in the
plan.
Q-7: May a plan be amended to add employer discretion or conditions
restricting the availability of a section 411(d)(6) protected benefit?
A-7: No. The addition of employer discretion or objective conditions
with respect to a section 411(d)(6) protected benefit that has already
accrued violates section 411(d)(6). Also, the addition of conditions
(whether or not objective) or any change to existing conditions with
respect to section 411(d)(6) protected benefits that results in any
further restriction violates section 411(d)(6). However, the addition
of objective conditions to a section 411(d)(6) protected benefit may be
made with respect to benefits accrued after the later of the adoption or
effective date of the amendment. In addition, objective conditions may
be imposed on section 411(d)(6) protected benefits accrued as of the
date of an amendment where permitted under the transitional rules of
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 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 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.
(e) Transitional rule effective date. The transitional rule provided
in Q&A-8 of this section is effective January 30, 1986.
(53 FR 26058, July 11, 1988, as amended by T.D. 8360, 56 FR 47602,
Sept. 19, 1991; T.D. 8357, 56 FR 40549, Aug. 15, 1991; 57 FR 4721,
Feb. 7, 1992)
26 CFR 1.411(d)-5 Class year plans; plan years beginning after October
22, 1986.
(a) Plan years beginning prior to 1989. (1) The requirements of
section 411(a)(2) shall be treated as satisfied in the case of a
class-year plan if such plan provides that 100 percent of each
employee's right to or derived from the contributions of the employer on
the employee's behalf with respect to any plan year is nonforfeitable
not later than when such participant was performing services for the
employer as of the close of each of 5 plan years (whether or not
consecutive) after the plan year for which the contributions were made.
(2) For purposes of paragraph (a)(1) of this section if --
(i) Any contributions are made on behalf of a participant with
respect to any plan year, and
(ii) Before such participant meets the requirements of paragraph
(a)(1) of this section, such participant was not performing services for
the employer as of the close of each of any 5 consecutive plan years
after such plan year, then the plan may provide that the participant
forfeits any right to or derived from the contributions made with
respect to such plan year.
(3) This paragraph (a) applies to contributions made for plan years
beginning after October 22, 1986.
(b) Plan years beginning after 1988. (1) The special class year
vesting rule in section 411(d)(4) was repealed by section 1113(b) of the
Tax Reform Act of 1986 (1986 Act). The repeal is generally effective
for plan years beginning after December 31, 1988. See section 1111(e)
of the 1986 Act for a special effective date rule applicable to certain
plans maintained pursuant to collective bargaining agreements.
(2)(i) This subparagraph (2) provides a special rule for class year
plans that were in compliance with section 411(d)(4) immediately before
the first plan year beginning after section 411(d)(4) is repealed.
These plans are not required to retroactively compute years of service
under the general section 411(a)(2) rules. Instead, a participant must
receive a year of service for each such prior plan year if the employee
was performing services on the last day of such year. Similarly, if the
participant was not performing services on the last day of such years,
the participant will be treated as if a one-year break- in-service
occurred for such plan year. This subdivision (i) applies to plan years
to which this section applies.
(ii) In the case of a plan year to which 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)
26 CFR 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)
26 CFR 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 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)
26 CFR 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 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)
26 CFR 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 $.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 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:
(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:
(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 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.
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.
26 CFR 1.412(c)(1)-2 (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.
(i) Election procedure -- (1) In general. To elect the shortfall
method, a collectively bargained plan must attach a statement to the
annual report required under section 6058 (a) for the first plan year to
which it is applied. The statement shall state that the shortfall
method is adopted, beginning with the plan year covered by such report.
Advance approval from the Internal Revenue Service is not required if
the shortfall method is first adopted on or before the later of --
(i) The first plan year to which section 412 applies or
(ii) The last plan year commencing before December 31, 1981.
However, approval must be received pursuant to section 412(c)(5)
prior to the adoption of the shortfall method at a later time, or the
discontinuance of such method, once adopted.
(2) Use of specific computation method. A specific method of
computation under the shortfall method is described in paragraph (b)(3)
of this section, regarding the treatment of more than one contract,
employer, or benefit level under the plan. This specific method may be
adopted with respect to any plan year to which the shortfall method
applies. Approval from the Commissioner must be received under section
412(c)(5) prior to the adoption of this specific computation method for
a plan year subsequent to the first plan year to which the shortfall
method applies, or prior to the discontinuance of a specific computation
method, once adopted.
(3) Reporting requirements. Each annual report required by section
6058(a) and periodic report of the actuary required by section 6059 must
include all additional information relevant to the use of the shortfall
method as may be required by the applicable forms and the instructions
for such forms.
(j) Transitional rule. In lieu of paragraphs (g)(2) and (h)(2) of
this section relating to the amortization period for shortfall and
experience gains and losses, for gains and losses arising in plan years
beginning before January 1, 1981, a plan may rely on the prior published
position of the Internal Revenue Service with respect to the
amortization period for shortfall and experience gains and losses.
(k) Supersession. This section and 1.412 (c) (1)-1 supersede
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)
26 CFR 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 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 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
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.
(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 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)
26 CFR 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 experience losses and gains over
15 or 20 years under section 412(b)(2 (B)(iv) and (3)(B)(ii).
(b) Asset valuation method requirements -- (1) Consistent basis. (i)
The actuarial asset valuation method must be applied on a consistent
basis. Any change in meeting the requirements of this paragraph (b) is
a change in funding method subject to section 412(c)(5).
(ii) A method may satisfy the consistency requirement even though
computations are based only on the period elapsed since the adoption of
the method or on asset values occurring during that period.
(2) Statement of plan's method. The method of determining the
actuarial value (but not fair market value) of the assets must be
specified in the plan's actuarial report (required under section 6059).
The method must be described in sufficient detail so that another
actuary employing the method described would arrive at a reasonably
similar result. Whether a deviation from the stated actuarial valuation
method is a change in funding method is to be determined in accordance
with section 412(c)(5) and the regulations thereunder. A deviation to
include a type of asset not previously held by the plan would not be a
change in funding method.
(3) Consistent valuation dates. The same day or days (such as the
first or the last day of a plan year) must be used for all purposes to
value the plan's assests for each plan year, or portion of plan year,
for which a valuation is made. For purposes of this section, each such
day is a valuation date. A change in the day or days used is a change
in funding method.
(4) Reflect fair market value. The valuation method must take into
account fair market value by making use of the --
(i) Fair market value (determined under paragraph (c) of this
section), or
(ii) Average value (determined under paragraph (b)(7) of this
section) of the plan's assets as of the applicable asset valuation date.
This is done either directly in the computation of their actuarial
value or indirectly in the computation of upper or lower limits placed
on that value.
(5) Results above and below fair market or average value. A method
will not satisfy the requirements of this paragraph (b) if it is
designed to produce a result which will be consistently above or below
the values described in paragraph (b)(4) (i) and (ii). However, a
method designed to produce a result which consistently falls between
fair market value and average value will satisfy this requirement. See
Example (5) in paragraph (b)(9) of this section for an illustration of a
method described in the preceding sentence.
(6) Corridor limits. (i) Regardless of how the method reflects fair
market value under paragraph (b)(4), the method must result in an
actuarial value of the plan's assets which is not less than a minimum
amount and not more than a maximum amount. The minimum amount is the
lesser of 80 percent of the current fair market value of plan assets as
of the applicable asset valuation date or 85 percent of the average
value (as described in subparagraph (7)) of plan assets as of that date.
The maximum amount is the greater of 120 percent of the current fair
market value of plan assets as of the applicable asset valuation date or
115 percent of the average value of plan assets as of that date.
(ii) Under a plan's method, a preliminary computation of the expected
actuarial value may fall outside the prescribed corridor. A method
meets the requirements of paragraph (b)(6)(i) of this section is such a
case only by adjusting the expected actuarial value to the nearest
corridor limit applicable under the method. A plan may use an actuarial
valuation method with a narrower corridor than the general corridor
required under paragraph (b)(6)(i). The adjustment to the nearest
corridor limit of such a method for purposes of this subdivision (ii)
would be determined by the narrower corridor stated in the description
of the plan's method.
(7) Average value. the average value of plan assets is computed by
--
(i) Determining the fair market value of plan assets at least
annually,
(ii) Adding the current fair market value of the assets (as of the
applicable valuation date) and their adjusted values (as described in
paragraph (b)(8) of this section) for a stated period not to exceed the
five most recent plan years (including the current year), and
(iii) Dividing this sum by the number of values (including the
current fair market value) considered in computing the sum described in
subdivision (ii).
(8) Adjusted value. (i) the adjusted value of plan assets for a
prior valuation date is their fair market value on that date with
certain positive and negative adjustments. These adjustments reflect
changes that occur between the prior asset valuation date and the
current valuation date. However, no adjustment is made for increases or
decreases in the total value of plan assets that result from the
purchase, sale, or exchange of plan assets or from the receipt of
payment on a debt obligation held by the plan.
(ii) In determining the adjusted value of plan assets for a prior
valuation date, there is added to the fair market value of the plan
assets of that date the sum of all additions to the plan assets since
that date, excluding appreciation in the fair market value of the
assets. The additions would include, for example, any contribution to
the plan; any interest or dividend paid to the plan; and any asset not
taken into account in a prior valuation of assets, but taken into
account for the current year, in computing the fair market value of plan
assets under paragraph (c) of this section.
(iii) In determining the adjusted value of plan assets for a prior
valuation date, there is subtracted from the fair market value of the
plan assets on that date the sum of all reductions in plan assets since
that date, excluding depreciation in the fair market value of the
assets. The reductions would include, for example, any benefit paid
from plan assets; any expense paid from plan assets; and any asset
taken into account in a prior valuation of assets but not taken into
account for the current year, in computing the fair market value of plan
assets under paragraph (c) of this section.
(9) Examples. This paragraph (b) may be illustrated by the following
examples. In each example, assume that the pension plan uses a
consistent actuarial method of valuing its assets within the meaning of
paragraph (b)(1), (2), and (3) of this section.
Example (1). Plan A considers the value of its assets to be initial
cost, increased by an assumed rate of growth of X percent annually.
Under the circumstances, the X-percent factor used by the plan is a
reasonable assumption. Thus, this method is not designed to produce
results consistently above or below fair market value as prohibited by
paragraph (b)(5) of this section. Also, the method requires that the
actuarial value be adjusted as required to fall within the corridor
under paragraph (b) (6) and (7) of this section. Therefore, the method
reflects fair market value as required by paragraph (b)(4) of this
section.
Example (2). Plan B computes the actuarial value of its assets as
follows: It determines the fair market value of the plan assets. Then
the fair market value is adjusted to the extent necessary to make the
actuarial value fall within a ''5 percent'' corridor. This corridor is
plus or minus 5 percent of the following amount: the fair market value
of the assets at the beginning of the valuation period plus an assumed
annual growth of 4 percent with adjustments for contributions and
benefit payments during the period. This method reflects fair market
value in a manner prescribed by paragraph (b)(4) of this section. If
the 4 percent factor used by the plan is a reasonable assumption, this
method is not designed to produce results consistently above or below
fair market value, and thus it satisfies paragraph (b)(5). However,
this method is unacceptable because in some instances it may result in
an actuarial value outside the corridor described in paragraph (b)(6) of
this section. This method would be permitted if a second corridor were
imposed which would adjust the value of the total plan assets to the
corridor limits as required by paragraph (b)(6).
Example (3). Plan C values its assets by multiplying their fair
market value by an index number. The use of the index results in the
hypothetical average value that plan assets present on the valuation
date would have had if they had been held during the current and four
preceding years, and had appreciated or depreciated at the actual yield
rates including appreciation and depreciation experienced by the plan
during that period. However, the method requires an adjustment to the
extent necessary to bring the resulting actuarial value of the assets
inside the corridor described in the statement of the plan's actuarial
valuation method. In this case, the stated corridor is 90 to 110
percent of fair market value, a corridor narrower than that described in
paragraph (b)(7) of this section. This method is permitted.
Example (4). Plan D values its assets by multiplying their fair
market value by 95 percent. Although the method reflects fair market
value and the results of this method will always be within the required
corridor, it is not acceptable because it will consistently result in a
value less than fair market value.
Example (5). Plan E values its assets by using a five-year average
method with appropriate adjustments for the period. Under the
particular method used by Plan E, assets are not valued below 80 percent
of fair market value or above 100 percent of fair market value. If the
average produces a value that exceeds 100 percent of fair market value,
the excess between 100 and 120 percent is recorded in a ''value reserve
account.'' In years after one in which the average exceeds 100 percent
of fair market value, amounts are subtracted from this account and
added, to the extent necessary, to raise the value produced by the
average for that year to 100 percent of fair market value. This method
is permitted because it reflects fair market value under paragraph
(b)(4) of this section by appropriately computing an average value, it
satisfies paragraph (b)(5) by producing a result that falls consistently
between fair market value and average value, and it properly reflects
the corridor described in paragraph (b)(7).
Example (6). All assets of Plan F are invested in a trust fund and
the plan year is the calendar year. The actuarial value is determined
by averaging fair market value over 4 years. An actuarial valuation is
performed as of December 31, 1988.
(i) The average value as of December 31, 1988, is computed as
follows:
(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 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 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)
26 CFR 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 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 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 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 1.412(c)(3)-1(d)(2) for rules
concerning anticipated future participants.
(ii) Limited exclusion for certain recent participants. Under a
reasonable funding method, certain individuals may be excluded from the
first class of individuals described in paragraph (c)(3)(i) of this
section unless otherwise provided by the Commissioner. The excludable
individuals are participants who would be excluded from participation by
the minimum age or service requirement of section 410 but who, under the
terms of the plan, participate immediately upon entering the service of
the employer.
(iii) Special exclusion for ''rule of parity'' cases. Under a
reasonable funding method, certain individuals may be excluded from the
second class of individuals described in paragraph (c)(3)(i) of this
section. The excludable individuals are those former participants who
have terminated service with the employer without vested benefits and
whose service might be taken into account in future years because the
''rule of parity'' of section 411(a)(6)(D) does not permit that service
to be disregarded. However if the plan's experience as to separated
employees' returning to service has been such that the exclusion
described in this subparagraph would be unreasonable, the exclusion
would no longer apply.
(4) Use of salary scale -- (i) General acceptability. The use of a
salary scale assumption is not inappropriate merely because of the
funding method with which it is used. Therefore, in determining whether
actuarial assumptions are reasonable, a salary scale will not be
considered to be prohibited merely because a particular funding method
is being used.
(ii) Projection to appropriate salary. Under a reasonable funding
method, salary scales reflected in projected benefits must be the
expected salary on which benefits would be based under the plan at the
age when the receipt of benefits is expected to begin.
(5) Treatment of allocable items. Under a reasonable funding method
that allocates assets to individual participants to determine costs, the
allocation of assets among participants must be reasonable. An initial
allocation of assets among participants will be considered reasonable
only if it is in proportion to related liabilities. However, the
Commissioner may determine, based on the facts and circumstances, that
it is unreasonable to continue to allocate assets on this basis beyond
the initial year. Under a reasonable funding method that allocates
liabilities among different elements of past and future service, the
allocation of liabilities must be reasonable.
(d) Prohibited considerations under a reasonable funding method --
(1) Anticipated benefit changes -- (i) In general. Except as otherwise
provided by the Commissioner, a reasonable funding method does not
anticipate changes in plan benefits that become effective, whether or
not retroactively, in a future plan year or that become effective after
the first day of, but during, a current plan year.
(ii) Exception for collectively bargained plans. A collectively
bargained plan described in section 413(a) may on a consistent basis
anticipate benefit increases scheduled to take effect during the term of
the collective-bargaining agreement applicable to the plan. A plan's
treatment of benefit increases scheduled in a collective bargaining
agreement is part of its funding method. Accordingly, a change in a
plan's treatment of such benefit increases (for example, ignoring
anticipated increases after taking them into account) is a change of
funding method.
(2) Anticipated future participants. A reasonable funding method
must not anticipate the affiliation with the plan of future participants
not employed in the service of the employer on the plan valuation date.
However, a reasonable funding method may anticipate the affiliation with
the plan of current employees who have not satisfied the participation
requirements of the plan.
(e) Special rules for certain funding methods -- (1) Applicability of
special rules. Paragraph (e) of this section applies to a funding
method that determines normal cost under paragraph (b)(2)(ii) of this
section.
(2) Use of salary scale. For rules relating to use of a salary scale
assumption, see paragraph (c)(4) of this section.
(3) Allocation of liabilities. In determining a plan's normal cost
and accrued liability for a particular plan year, the projected benefits
of the plan must be allocated between past years and future years.
Except in the case of a career average pay plan, this allocation must be
in proportion to the applicable rates of benefit accrual under the plan.
Thus, the allocation to past years is effected by multiplying the
projected benefit by a fraction. The numerator of the fraction is the
participant's credited years of service. The denominator is the
participant's total credited years of service at the anticipated benefit
commencement date. Adjustments are made to account for changes in the
rate of benefit accrual. An allocation based on compensation is not
permitted. In the case of a career average pay plan, an allocation
between past and future service benefits must be reasonable.
(f) Treatment of ancillary benefit costs -- (1) General rule. Under
a reasonable funding method, except as otherwise provided by this
paragraph (f), ancillary benefit costs must be computed by using the
same method used to compute retirement benefit costs under a plan.
(2) Ancillary benefit defined. For purposes of this paragraph an
ancillary benefit is a benefit that is paid as a result of a specified
event which --
(i) Occurs not later than a participant's separation from service,
and
(ii) Was detrimental to the participant's health.
Thus, for example, benefits payable if a participant dies or becomes
disabled prior to separation from service are ancillary benefits because
the events giving rise to the benefits are detrimental to the
participant's health. However, an early retirement benefit, a social
security supplement (as defined in 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 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:
(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:
The proposed allocation in proportion to the accrued liabilities
under the unit credit cost method satisfies the requirements of
paragraph (c)(5) of this section at the beginning of the first plan year
for which the new method is used.
Example (7). The facts are the same as in Example (6). However, the
actuary proposes to allocate all the assets to employee M, the older
employee. Method F, under these facts, is not an acceptable funding
method because the allocation is not in proportion to related
liabilities as required under paragraph (c)(5) of this section.
(T.D. 7746, 45 FR 86430, Dec. 31, 1980)
26 CFR 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
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, 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
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
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 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
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 1.412(c)(3)-2(d)(2) multiplied by a
fraction (not greater than 1), the numerator of which is the number of
participants in the year of the credit and the denominator of which is
the number of participants in the year of the change, or, at the option
of the plan,
(ii) The excess (if any) in the year of credit of --
(A) The net charge to the funding standard account based on the new
method, over
(B) The net charge to the funding standing account based on the prior
method.
(4) Computational rules. For purposes of the calculation described
in 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
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 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 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 1.412(c)(1)-2(d). The amounts described in
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)
26 CFR 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 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, 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)
26 CFR 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 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 1.413-2 do not apply
to the plan.
(ii) The qualification of a section 413(b) plan, at any relevant
time, under section 401(a), 403(a), or 405(a), as modified by sections
413(b) and this section, is determined with respect to all employers
maintaining the plan. Consequently, the failure by one employer
maintaining the plan (or by the plan itself) to satisfy an applicable
qualification requirement will result in the disqualification of the
plan for all employers maintaining the plan.
(iii) Except as otherwise provided, section 413 (a) and (b) and this
section apply to a plan for plan years beginning after December 31,
1953.
(b) Participation. Section 410 and the regulations thereunder shall
be applied as if all employees of each of the employers who are parties
to the collective-bargaining agreement and all such employees who are
subject to the same benefit computation formula under the plan were
employed by a single employer.
(c) Discrimination, etc. -- (1) General rule. Section 401(a)(4)
(relating to prohibited discrimination) and section 411(d)(3) (relating
to vesting required on termination, partial termination, or
discontinuance of contributions) shall be applied as if all the
participants in the plan, who are subject to the same benefit
computation formula and who are employed by employers who are parties to
the collective bargaining agreement, are employed by a single employer.
(2) Application of discrimination rules. Under section 401(a)(4) and
the regulations thereunder a plan is not qualified unless the
contributions or benefits provided under the plan do not discriminate in
favor of officers, shareholders or highly compensated employees
(hereinafter referred to collectively as ''the prohibited group''). The
presence or absence of such discrimination under a plan to which this
section applies at any time shall not be determined on an
employer-by-employer basis, but rather by testing separately each group
of employees who are subject to the same benefit computation formula to
determine if there is discrimination within such group. Consequently,
discrimination in contributions or benefits among two or more different
groups or among employees in different groups covered by the plan may be
present without causing the plan to be disqualified. However, the
presence of prohibited discrimination within one such group will result
in the disqualification of the plan for all groups. Section 401(a)(4)
and the regulations thereunder provide rules relating to the
determination of which employees are members of the prohibited group and
to the determination of discrimination in contributions or benefits
which are applicable to a plan to which this section applies. The
determination of whether or not an individual employee is a highly
compensated employee shall be based on the relationship of the
compensation of the employee to the compensation of all the other
employees of all employers who are maintaining the plan and have
employees covered under the same benefit computation formula, whether or
not such other employees are covered by the plan or are covered under
the same benefit computation formula, rather than to the compensation of
all the other employees of the employer of such individual employee.
(3) Application of termination, etc. rules. Section 411(d)(3) and
the regulations thereunder (relating to vesting required in the case of
a termination, partial termination, or complete discontinuance of
contributions) apply to a plan subject to the provisions of this
section. The requirements of section 411(d)(3) shall be applied as if
all participants in the plan who are subject to the same benefit
computation formula and who are employed by employers who are parties to
the collective bargaining agreement are employed by a single employer.
The determination of whether or not there is a termination, 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 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
1.401-6 for rules prescribed under section 401(a)(7) as in effect on
September 1, 1974. See 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:
Under the rules of subparagraph (2) of this paragraph, the
determination of whether contributions or benefits provided under the
plan discriminate in favor of the prohibited group is made by applying
the rules of section 401(a)(4) separately to participants who are
members of local union 1 and local union 2. Thus, plan A will satisfy
the qualification requirements of section 401(a)(4) if, within local
union 1 and local union 2, respectively, plan benefits do not
discriminate in favor of participants who are prohibited group employees
within local union 1 and local union 2. Under the rules of subparagraph
(2) of this paragraph, the determination under section 401(a)(4) of
whether or not any individual employee, included within the 300
participants in plan A, is a highly compensated employee is based on the
relationship of the compensation of such individual employee to the
compensation of all the employees of Employers X, Y, and Z, whether or
not such employees are participants in plan A. Thus, if there are 20
participants who are prohibited group employees within the 100
participants of local union 1, discrimination is determined by comparing
the benefits of the 20 prohibited group participants to the benefits of
the other 80 participants within local union 1. The same comparison
would have to be made for the local union 2 participants between the
prohibited group participants and the other participants in local union
2. Discrimination in benefits, if any, between the participants in
local union 1 and local union 2, or among the employees of X, Y, or Z,
would not affect the qualification of plan A under section 401(a)(4).
Example (2). Assume the same facts as in example (1). Employer X
withdraws from the plan. Under subparagraph (3) of this paragraph,
whether or not as a result of the withdrawal there is a partial
termination under section 411(d)(3) is to be determined by applying the
requirements of such section separately to the local union 1 and local
union 2 participants. See 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 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 1.401-3
for rules prescribed under section 401(a)(3) as in effect on September
1, 1974. See 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)
26 CFR 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 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 1.411(a)-5(b)(3) for
rules relating to the time when an employer maintains a plan. A master
or prototype plan is not a section 413(c) plan unless such a plan is
described in this subparagraph. Similarly, the mere fact that a plan,
or plans, utilizes a common trust fund or otherwise pools plan assets
for investment purposes does not, by itself, result in a particular plan
being treated as a section 413(c) plan.
(3) Additional rules. (i) If a plan is a collectively bargained plan
described in 1.413-1(a), the rules of section 413(c) and this section
do not apply, and the rules of section 413(b) and 1.413-1 do apply to
the plan.
(ii) The special rules of section 413(b)(1) and 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 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
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)
26 CFR 1.414(b)-1 Controlled group of corporations.
(a) Defintion of controlled group of corporations. For purposes of
this section, the term ''controlled group of corporations'' has the same
meaning as is assigned to the term in section 1563(a) and the
regulations thereunder, except that (1) the term ''controlled group of
corporations'' shall not include an ''insurance group'' described in
section 1563(a)(4), and (2) section 1563(e)(3)(C) (relating to stock
owned by certain employees' trusts) shall not apply. For purposes of
this section, the term ''members of a controlled group'' means two or
more corporations connected through stock ownership described in section
1563(a) (1), (2), or (3), whether or not such corporations are
''component members of a controlled group'' within the meaning of
section 1563(b). Two or more corporations are members of a controlled
group at any time such corporations meet the requirements of section
1563(a) (as modified by this paragraph). For purposes of this section,
if a corporation is a member of more than one controlled group of
corporations, such corporation shall be treated as a member of each
controlled group.
(b) Single plan adopted by two or more members. If two or more
members of a controlled group of corporations adopt a single plan for a
plan year, then the minimum funding standard provided in section 412,
the tax imposed by section 4971, and the applicable limitations provided
by section 404(a) shall be determined as if such members were a single
employer. In such a case, the amount of such items and the allocable
portion attributable to each member shall be determined in the manner
provided in regulations under sections 412, 4971, and 404(a).
(c) Cross reference. For rules relating to the application of
sections 401, 408(k), 410, 411, 415, and 416 with respect to two or more
trades or businesses which are under common control, see section 414(c)
and the regulations thereunder.
(T.D. 8179, 53 FR 6605, Mar. 2, 1988)
26 CFR 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 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 1.414(c)-5 for
effective date.
(T.D. 8179, 53 FR 6606, Mar. 2, 1988)
26 CFR 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
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 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 1.414(c)-4(b)(1), relating to options) a controlling
interest in at least one of the other organizations, excluding, in
computing such controlling interest, any direct ownership interest by
such other organizations.
(2) Controlling interest defined -- (i) Controlling interest. For
purposes of paragraphs (b) and (c) of this section, the phrase
''controlling interest'' means:
(A) In the case of an organization which is a corporation, ownership
of stock possessing at least 80 percent of total combined voting power
of all classes of stock entitled to vote of such corporation or at least
80 percent of the total value of shares of all classes of stock of such
corporation;
(B) In the case of an organization which is a trust or estate,
ownership of an actuarial interest of at least 80 percent of such trust
or estate;
(C) In the case of an organization which is a partnership, ownership
of at least 80 percent of the profits interest or capital interest of
such partnership; and
(D) In the case of an organization which is a sole proprietorship,
ownership of such sole proprietorship.
(ii) Actuarial interest. For purposes of this section, the actuarial
interest of each beneficiary of trust or estate shall be determined by
assuming the maximum exercise of discretion by the fiduciary in favor of
such beneficiary. The factors and methods prescribed in 20.2031-7 or
20.2031-10 (Estate Tax Regulations), whichever is appropriate, 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 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. 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:
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:
Any group of five of the shareholders will own more than 50 percent
of the stock in each corporation, in identical holdings. However, U and
V are not members of a brother-sister group of trades or businesses
under common control because at least 80 percent of the stock of each
corporation is not owned by the same five or fewer persons.
Example (6). A, an individual, owns a controlling interest in ABC
Partnership and DEF Partnership. ABC, in turn, owns a controlling
interest in X Corporation. Since ABC, DEF, and X are each members of
either a parent-subsidiary group or a brother-sister group of trades or
businesses under common control, and ABC is the common parent of a
parent-subsidiary group of trades or businesses under common control
consisting of ABC and X, and also a member of a brother-sister group of
trades or businesses under common control consisting of ABC and DEF, ABC
Partnership, DEF Partnership, and X Corporation are members of the same
combined group of trades or businesses under common control.
(T.D. 8179, 53 FR 6606, Mar. 2, 1988)
26 CFR 1.414(c)-3 Exclusion of certain interests or stock in
determining control.
(a) In general. For purposes of 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 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 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 1.414(c)-4, and
(ii) In the case of a parent organization which is a corporation,
with the application of 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 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
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 1.414(c)-4) by an organization
(other than the parent organization):
(i) To which section 501 (relating to certain educational and
charitable organizations which are exempt from tax) applies, and
(ii) Which is controlled directly or indirectly (within the meaning
of paragraph (d)(7) of this section) by the parent organization or
subsidiary organization, by an individual, estate, or trust that is a
principal owner of the parent organization, by an officer, partner, or
fiduciary of the parent organization, or by any combination thereof.
(c) Brother-sister group of trades or businesses under common control
-- (1) In general. If five or fewer persons (hereinafter in this
section referred to as ''common owners'') who are individuals, estates,
or trusts own (directly and with the application of 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 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 1.414(c)-4) by
an employee of such organization shall be excluded if such interest or
stock is subject to conditions which run in favor of a common owner of
such organization or in favor of such organization and which
substantially restrict or limit the employee's right (or if the employee
constructively owns such interest or stock, the direct or record owner's
right) to dispose of such interest or stock.
(4) Controlled exempt organization. An interest which is an interest
in or stock of such organization shall be excluded if owned (directly
and with the application of 1.414(c)-4) by an organization:
(i) To which section 501(c)(3) (relating to certain educational and
charitable organizations which are exempt from tax) applies, and
(ii) Which is controlled directly or indirectly (within the meaning
of paragraph (d)(7) of this section) by such organization, by an
individual, estate, or trust that is a principal owner of such
organization, by an officer, partner, or fiduciary of such organization,
or by any combination thereof.
(d) Definitions -- (1) Employee. For purposes of this section, the
term ''employee'' has the same meaning such term is given in section
3306(i) of the Code (relating to definitions for purposes of the Federal
Unemployment Tax Act).
(2) Principal owner. For purposes of this section, the term
''principal owner'' means a person who owns (directly and with the
application of 1.414(c)-4) --
(i) In the case of a corporation, 5 percent or more of the total
combined voting power of all classes of stock entitled to vote in such
corporation or 5 percent of more of the total value of shares of all
classes of stock of such corporation;
(ii) In the case of a trust or estate, an actuarial interest of 5
percent or more of such trust or estate; or
(iii) In the case of a partnership, 5 percent or more of the profits
or capital interest of such partnership.
(3) Officer. For purposes of this section, the term ''officer''
includes the president, vice-presidents, general manager, treasurer,
secretary, and comptroller of a corporation, and any other person who
performs duties corresponding to those normally performed by persons
occupying such positions.
(4) Partner. For purposes of this section, the term ''partner''
means any person defined in section 7701(a)(2) (relating to definitions
of partner).
(5) Fiduciary. For purposes of this section and 1.414(c)-4, the
term ''fiduciary'' has the same meaning as such term is given in section
7701(a)(6) and the regulations thereunder.
(6) Substantial conditions. (i) In general. For purposes of this
section, an interest in or stock of an organization is subject to
conditions which substantially restrict or limit the right to dispose of
such interest or stock and which run in favor of another person if the
condition extends directly or indirectly to such person preferential
rights with respect to the acquisition of the direct owner's (or the
record owner's) interest or stock. For a condition to be in favor of
another person it is not necessary that such person be extended a
discriminatory concession with respect to price. A right of first
refusal with respect to an interest or stock in favor of another person
is a condition which substantially restricts or limits the direct or
record owner's right of disposition which runs in favor of such person.
Further, any legally enforceable condition which prohibits the direct or
record owner from disposing of his or her interest or stock without the
consent of another person will be considered to be a substantial
limitation running in favor of such person.
(ii) Special rule. For purposes of paragraph (c)(3) of this section
only, if a condition which restricts or limits an employee's right (or
direct or record owner's right) to dispose of his or her interest or
stock also applies to the interest or stock in such organization held by
a common owner pursuant to a bonafide reciprocal purchase arrangement,
such condition shall not be treated as a substantial limitation or
restriction. An example of a reciprocal purchase arrangement is an
agreement whereby a common owner and the employee are given a right of
first refusal with respect to stock of the employer corporation owned by
the other party. If, however, the agreement also provides that the
common owner has the right to purchase the stock of the employer
corporation owned by the employee in the event the corporation should
discharge the employee for reasonable cause, the purchase arrangement
would not be reciprocal within the meaning of this subdivision.
(7) Control. For purposes of paragraphs (b)(6) and (c)(4) of this
section, the term ''control'' means control in fact. The determination
of whether there exists control in fact will depend upon all of the
facts and circumstances of each case, without regard to whether such
control is legally enforceable and irrespective of the method by which
such control is exercised or exercisable.
(e) Examples. The provisions of this section may be illustrated by
the following examples:
Example (1). ABC Partnership owns 70 percent of the capital interest
and of the profits interest in the DEF Partnership. The remaining
capital interest and profits interest in DEF is owned as follows: 4
percent by A (a general partner in ABC), and 26 percent by D (a limited
partner in ABC). ABC satisfies the 50-percent capital interest or
profits interest ownership requirement of paragraph (b)(1)(iii) of this
section with respect to DEF. Since A and D are partners of ABC, under
paragraph (b)(4) of this section the capital and profits interests in
DEF owned by A and D are treated as not outstanding for purposes of
determining whether ABC and DEF are members of a parent-subsidiary group
of trades or businesses under common control under 1.414 (c)-2(b).
Thus, ABC is considered to own 100 percent (70 70) of the capital
interest and profits interest in DEF. Accordingly, ABC and DEF are
members of a parent-subsidiary group of trades or businesses under
common control.
Example (2). Assume the same facts as in example (1) and assume
further that A owns 15 shares of the 100 shares of the only class of
stock of S Corporation and DEF Partner-ship owns 75 shares of such
stock. ABC satisfies the 50 percent stock requirement of paragraph
(b)(1)(i) of this section with respect to S since ABC is considered as
owning 52.5 percent (70 percent 75 percent) of the S stock with the
application of 1.414 (c)-4(b)(2). Since A is a partner of ABC, the S
stock owned by A is treated as not outstanding for purposes of
determining whether S is a member of a parent-subsidiary group of trades
or businesses under common control. Thus, DEF Partnership is considered
to own stock possessing 88.2 percent (75 85) of the voting power and
value of the S stock. Accordingly, ABC Partnership, DEF Partnership,
and S Corporation are members of a parent-subsidiary group of trades or
businesses under common control.
Example (3). ABC Partnership owns 60 percent of the only class of
stock of Corporation Y. D, the president of Y, owns the remaining 40
percent of the stock of Y. D has agreed that if she offers her stock in
Y for sale she will first offer the stock to ABC at a price equal to the
fair market value of the stock on the first date the stock is offered
for sale. Since D is an employee of Y within the meaning of section
3306(i) of the Code and her stock in Y is subject to a condition which
substantially restricts or limits her right to dispose of such stock and
runs in favor of ABC Partnership, under paragraph (b)(5) of this section
such stock is treated as not outstanding for purposes of determining
whether ABC and Y are members of a parent-subsidiary group of trades or
businesses under common control. Thus, ABC Partnership is considered to
own stock possessing 100 percent of the voting power and value of the
stock of Y. Accordingly, ABC Partnership and Y Corporation are members
of a parent-subsidiary group of trades or businesses under common
control. The result would be the same if D's husband, instead of D,
owned directly the 40 percent stock interest in Y and such stock was
subject to a right of first refusal running in favor of ABC Partnership.
(f) Exception -- (1) In general. If an interest in an organization
(including stock of a corporation) is owned by a person directly or with
the application of the rules of paragraph (b) of 1.414 (c)-4 and such
ownership results in the membership of that organization in a group of
two or more trades or businesses under common control for any period,
then the interest will not be treated as an excluded interest under
paragraph (b) or (c) of this section if the result of applying such
provisions is that the organization is not a member of a group of two or
more trades or businesses under common control for the period.
(2) Example. The provisions of this paragraph may be illustrated by
the following example:
Example. Corporation P owns directly 50 of the 100 shares of the only
class of stock of corporation S. A, an officer of P, owns directly 30
shares of S stock which P has an option to acquire. If, under paragraph
(b)(4) of this section, the 30 shares owned directly by A are treated as
not outstanding, P would be treated as owning stock possessing only 71
percent (50/70) of the total voting power and value of S stock, and S
should not be a member of a parent-subsidiary group of trades or
businesses under common control. However, because the 30 shares owned
by A that P has an option to purchase are considered as owned by P under
paragraph (b)(2) of this section, and that ownership plus P's direct
ownership of 50 shares result in S's membership in a parent-subsidiary
group of trades or businesses under common control for 1985, the
provisions of this paragraph apply. Therefore, A's stock is not treated
as an excluded interest and S is a member of a parent-subsidiary group
consisting of P and S.
(T.D. 8179, 53 FR 6607, Mar. 2, 1988; 53 FR 8302, Mar. 14, 1988)
26 CFR 1.414(c)-4 Rules for determining ownership.
(a) In general. In determining the ownership of an interest in an
organization for purposes of 1.414(c)-2 and 1.414(c)-3, the
constructive ownership rules of paragraph (b) of this section shall
apply, subject to the operating rules contained in paragraph (c). For
purposes of this section the term ''interest'' means: in the case of a
corporation, stock; in the case of a trust or estate, an actuarial
interest; in the case of a partnership, an interest in the profits or
capital; and in the case of a sole proprietorship, the proprietorship.
(b) Constructive ownership -- (1) Options. If a person has an option
to acquire any outstanding interest in an organization, such interest
shall be considered as owned by such person. For this purpose, an
option to acquire an option, and each one of a series of such options
shall be considered as an option to acquire such interest.
(2) Attribution from partnerships -- (i) General. An interest owned,
directly or indirectly, by or for a partnership shall be considered as
owned by any partner having an interest of 5 percent or more in either
the profits or capital of the partnership in proportion to such
partner's interest in the profits or capital, whichever such proportion
is greater.
(ii) Example. The provisions of paragraph (b)(2)(i) of this section
may be illustrated by the following example:
Example. A, B, and C, unrelated individuals, are partners in the ABC
Partnership. The partners' interest in the capital and profits of ABC
are as follows:
The ABC Partnership owns the entire outstanding stock (100 shares) of
X Corporation. Under paragraph (b)(2)(i) of this section, A is
considered to own the stock of X owned by the partnership in proportion
to his interest in capital (36 percent) or profits (25 percent),
whichever such proportion is greater. Therefore, A is considered to own
36 shares of X stock. Since B has a greater interest in the profits of
the partnership than in the capital, B is considered to own X stock in
proportion to his interest in such profits. Therefore, B is considered
to own 71 shares of X stock. Since C does not have an interest of 5
percent or more in either the capital or profits of ABC, he is not
considered to own any shares of X stock.
(3) Attribution from estates and trusts -- (i) In general. An
interest in an organization (hereinafter called an ''organization
interest'') owned, directly or indirectly, by or for an estate or trust
shall be considered as owned by any beneficiary of such estate or trust
who has an actuarial interest of 5 percent or more in such organization
interest, to the extent of such actuarial interest. For purposes of
this subparagraph, the actuarial interest of each beneficiary shall be
determined by assuming the maximum exercise of discretion by the
fiduciary in favor of such beneficiary and the maximum use of the
organization interest to satisfy the beneficiary's rights. A
beneficiary of an estate or trust who cannot under any circumstances
receive any part of an organization interest held by the estate or
trust, including the proceeds from the disposition thereof, or the
income therefrom, does not have an actuarial interest in such
organization interest. Thus, where stock owned by a decedent's estate
has been specifically bequeathed to certain beneficiaries and the
remainder of the estate has been specifically bequeathed to other
beneficiaries, the stock is attributable only to the beneficiaries to
whom it is specifically bequeathed. Similarly a remainderman of a trust
who cannot under any circumstances receive any interest in the stock of
a corporation which is a part of the corpus of the trust (including any
accumulated income therefrom or the proceeds from a disposition thereof)
does not have an actuarial interest in such stock. However, an income
beneficiary of a trust does have an actuarial interest in stock if he
has any right to the income from such stock even though under the terms
of the trust instrument such stock can never be distributed to him. The
factors and methods prescribed in 20.2031-7 or 20.2031-10 (Estate Tax
Regulations), whichever is appropriate for use in ascertaining the value
of an interest in property for estate tax purposes shall be used for
purposes of this subdivision in determining a beneficiary's actuarial
interest in an organization interest owned directly or indirectly by or
for an estate or trust.
(ii) Special rules for estates. (A) For purposes of this paragraph
(b)(3) with respect to an estate, property of a decedent shall be
considered as owned by his or her estate if such property is subject to
administration by the executor or administrator for the purposes of
paying claims against the estate and expenses of administration
notwithstanding that, under local law, legal title to such property
vests in the decedent's heirs, legatees or devisees immediately upon
death.
(B) For purposes of this paragraph (b)(3) with respect to an estate,
the term ''beneficiary'' includes any person entitled to receive
property of a decedent pursuant to a will or pursuant to laws of descent
and distribution.
(C) For purposes of this paragraph (b)(3) with respect to an estate,
a person shall no longer be considered a beneficiary of an estate when
all the property to which he or she is entitled has been received by him
or her, when he or she no longer has a claim against the estate arising
out of having been a beneficiary, and when there is only a remote
possibility that it will be necessary for the estate to seek the return
of property from him or her or to seek payment from him or her by
contribution or otherwise to satisfy claims against the estate or
expenses of administration.
(iii) Grantor trusts, etc. An interest owned, directly or
indirectly, by or for any portion of a trust of which a person is
considered the owner under subpart E, part I, subchapter J of the Code
(relating to grantors and others treated as substantial owners) is
considered as owned by such person.
(4) Attribution from corporations -- (i) General. An interest owned,
directly or indirectly, by or for a corporation shall be considered as
owned by any person who owns (directly and, in the case of a
parent-subsidiary group of trades or businesses under common control,
with the application of paragraph (b)(1) of this section, or in the case
of a brother-sister group of trades or business under common control,
with the application of this section), 5 percent or more in value of the
stock in that proportion which the value of the stock which such person
so owns bears to the total value of all the stock in such corporation.
(ii) Example. The provisions of paragraph (b)(4)(i) of this section
may be illustrated by the following example:
Example. B, an individual, owns 60 of the 100 shares of the only
class of outstanding stock of corporation P. C, an individual, owns 4
shares of the P stock, and corporation X owns 36 shares of the P stock.
Corporation P owns, directly and indirectly, 50 shares of the stock of
corporation S. Under this subparagraph, B is considered to own 30
shares of the S stock (60/100 50), and X is considered to own 18 shares
of S stock (36/100 50). Since C does not own 5 percent or more in the
value of P stock, he is not considered as owning any of the S stock
owned by P. If in this example, C's wife had owned directly 1 share of
the P stock, C and his wife would each be considered as owning 5 shares
of the P stock, and therefore C and his wife would be considered as
owning 2.5 shares of the S stock (5/100 50).
(5) Spouse -- (i) General rule. Except as provided in paragraph
(b)(5)(ii) of this section, an individual shall be considered to own an
interest owned, directly or indirectly, by or for his or her spouse,
other than a spouse who is legally separated from the individual under a
decree of divorce, whether interlocutory or final, or a decree of
separate maintenance.
(ii) Exception. An individual shall not be considered to own an
interest in an organization owned, directly or indirectly, by or for his
or her spouse on any day of a taxable year of such organization,
provided that each of the following conditions are satisfied with
respect to such taxable year:
(A) Such individual does not, at any time during such taxable year,
own directly any interest in such organization;
(B) Such individual is not a member of the board of directors, a
fiduciary, or an employee of such organization and does not participate
in the management of such organization at any time during such taxable
year;
(C) Not more than 50 percent of such organization's gross income for
such taxable year was derived from royalties, rents, dividends,
interest, and annuities; and
(D) Such interest in such organization is not, at any time during
such taxable year, subject to conditions which substantially restrict or
limit the spouse's right to dispose of such interest and which run in
favor of the individual or the individual's children who have not
attained the age of 21 years. The principles of 1.414(c)-3(d)(6)(i)
shall apply in determining whether a condition is a condition described
in the preceding sentence.
(iii) Definitions. For purposes of paragraph (b)(5)(ii)(C) of this
section, the gross income of an organization shall be determined under
section 61 and the regulations thereunder. The terms ''interest'',
''royalties'', ''rents'', ''dividends'', and ''annuities'' shall have
the same meaning such terms are given for purposes of section 1244(c)
and 1.1244(c)-1(e)(1).
(6) Children, grandchildren, parents, and grandparents -- (i)
Children and parents. An individual shall be considered to own an
interest owned, directly or indirectly, by or for the individual's
children who have not attained the age of 21 years, and if the
individual has not attained the age of 21 years, an interest owned,
directly or indirectly, by or for the individual's parents.
(ii) Children, grandchildren, parents, and grandparents. If an
individual is in effective control (within the meaning of
1.414(c)-2(c)(2)), directly and with the application of the rules of
this paragraph without regard to this subdivision, of an organization,
then such individual shall be considered to own an interest in such
organization owned, directly or indirectly, by or for the individual's
parents, grandparents, grandchildren, and children who have attained the
age of 21 years.
(iii) Adopted children. For purposes of this section, a legally
adopted child of an individual shall be treated as a child of such
individual.
(iv) Example. The provisions of this subparagraph (6) may be
illustrated by the following example:
Example -- (A) Facts. Individual F owns directly 40 percent of the
profits interest of the DEF Partnership. His son, M, 20 years of age,
owns directly 30 percent of the profits interest of DEF, and his son, A,
30 years of age, owns directly 20 percent of the profits interest of
DEF. The 10 percent remaining of the profits interest and 100 percent
of the capital interest of DEF is owned by an unrelated person.
(B) F's ownership. F owns 40 percent of the profits interest in DEF
directly and is considered to own the 30 percent profits interest owned
directly by M. Since, for purposes of the effective control test
contained in paragraph (b)(6)(ii) of this section, F is treated as
owning 70 percent of the profits interest of DEF, F is also considered
as owning the 20 percent profits interest of DEF owned by his adult son,
A. Accordingly, F is considered as owning a total of 90 percent of the
profits interest in DEF.
(C) M's ownership. Minor son, M. owns 30 percent of the profits
interest in DEF directly, and is considered to own the 40 percent
profits interest owned directly by his father, F. However, M is not
considered to own the 20 percent profits interest of DEF owned directly
by his brother, A, and constructively by F, because an interest
constructively owned by F by reason of family attribution is not
considered as owned by him for purposes of making another member of his
family the constructive owner of such interest. (See paragraph (c)(2)
of this section.) Accordingly, M is considered as owning a total of 70
percent of the profits interest of the DEF Partnership.
(D) A's ownership. Adult son, A, owns 20 percent of the profits
interest in DEF directly. Since, for purposes of determining whether A
effectively controls DEF under paragraph (b)(6)(ii) of this section, A
is treated as owning only the percentage of profits interest he owns
directly, he does not satisfy the condition precedent for the
attribution of the DEF profits interest from his father. Accordingly, A
is considered as owning only the 20 percent profits interest in DEF
which he owns directly.
(c) Operating rules -- (1) In general. Except as provided in
paragraph (c)(2) of this section, an interest constructively owned by a
person by reason of the application of paragraph (b) (1), (2), (3), (4),
(5), or (6) of this section shall, for the purposes of applying such
paragraph, be treated as actually owned by such person.
(2) Members of family. An interest constructively owned by an
individual by reason of the application of paragraph (b) (5) or (6) of
this section shall not be treated as owned by such individual for
purposes of again applying such subparagraphs in order to make another
the constructive owner of such interest.
(3) Precedence of option attribution. For purposes of this section,
if an interest may be considered as owned under paragraph (b)(1) of this
section (relating to option attribution) and under any other
subparagraph of paragraph (b) of this section, such interest shall be
considered as owned by such person under paragraph (b)(1) of this
section.
(4) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). A, 30 years of age, has a 90 percent interest in the
capital and profits of DEF Partnership. DEF owns all the outstanding
stock of corporation X and X owns 60 shares of the 100 outstanding
shares of corporation Y. Under paragraph (c)(1) of this section, the 60
shares of Y constructively owned by DEF by reason of paragraph (b)(4) of
this section are treated as actually owned by DEF for purposes of
applying paragraph (b)(2) of this section. Therefore, A is considered
as owning 54 shares of the Y stock (90 percent of 60 shares).
Example (2). Assume the same facts as in example (1). Assume
further that B, who is 20 years of age and the brother of A, directly
owns 40 shares of Y stock. Although the stock of Y owned by B is
considered as owned by C (the father of A and B) under paragraph
(b)(6)(i) of this section, under paragraph (c)(2) of this section such
stock may not be treated as owned by C for purposes of applying
paragraph (b)(6)(ii) of this section in order to make A the constructive
owner of such stock.
Example (3). Assume the same facts as in example (2), and further
assume that C has an option to acquire the 40 shares of Y stock owned by
his son, B. The rule contained in paragraph (c)(2) of this section does
not prevent the reattribution of such 40 shares to A because, under
paragraph (c)(3) of this section, C is considered as owning the 40
shares by reason of option attribution and not by reason of family
attribution. Therefore, since A is in effective control of Y under
paragraph (b)(6)(ii) of this section, the 40 shares of Y stock
constructively owned by C are reattributed to A. A is considered as
owning a total of 94 shares of Y stock.
(T.D. 8179, 53 FR 6609, Mar. 2, 1988; 53 FR 8302, Mar. 14, 1988)
26 CFR 1.414(c)-5 Effective date.
(a) General rule. Except as provided in paragraph (b), (c), (e), or
(f) of this section, the provisions of 1.414(b)-1 and 1.414(c)-1
through 1.414 (c)-4 shall apply for plan years beginning after September
2, 1974.
(b) Existing plans. In the case of a plan in existence on January 1,
1974, unless paragraph (c) of this section applies, the provisions of ''
1.414 (b)-1 and 1.414(c)-1 through 1.414(c)-4 shall apply for plan
years beginning after December 31, 1975. For definition of the term
''existing plan'', see 1.410(a)-2(c).
(c) Existing plans electing new provisions. In the case of a plan in
existence on January 1, 1974, for which the plan administrator makes an
election under 1.410 (a)-2 (d), the provisions of 1.414 (b)-1 and
1.414 (c)-1 through 1.414 (c)-4 shall apply to the plan years elected
under 1.410 (a)-2 (d).
(d) Application. For purposes of the Employee Retirement Income
Security Act of 1974, the provisions of 1.414 (b)-1 and 1.414 (c)-1
through 1.414 (c)-4 do not apply for any period of time before the plan
years described in paragraph (a), (b), or (c) of this section, whichever
is applicable.
(e) Special rule. Notwithstanding paragraph (a), (b), or (c) of this
section, 1.414 (c)-3 (f) is effective April 1, 1988.
(f) Transitional rule -- (1) In general. The amendments made by T.D.
8179 apply to the plan years or period described in paragraphs (a), (b),
or (c) of this section, whichever is applicable.
(2) Exception. In the case of a plan year or period beginning before
March 2, 1988, if an organization --
(i) Is a member of a brother-sister group of trades or businesses
under common control under 11.414 (c)-2 (c), as in effect before
removal by T.D. 8179 (''old group''), for such plan year or period, and
(ii) Is not such a member for such plan year or period because of the
amendments made by such Treasury decision,
such member (whether or not a corporation) nevertheless will be
treated as a member of such old group for purposes of section 414(c) for
that plan year or period to the extent provided in 1.1563-1 (d)(2).
Also, such member will be treated as a member of an old group for all
purposes of the Code for such plan year or period if all the
organizations (whether or not corporations) that are members of the old
group meet all the requirements of 1.1563-1 (d)(3) with respect to such
plan year or period.
(T.D. 8179, 53 FR 6611, Mar. 2, 1988)
26 CFR 1.414(e)-1 Definition of church plan.
(a) General rule. For the purposes of part I of subchapter D of
chapter 1 of the Code and the regulations thereunder, the term ''church
plan'' means a plan established and at all times maintained for its
employees by a church or by a convention or association of churches
(hereinafter included within the term ''church'') which is exempt from
tax under section 501(a), provided that such plan meets the requirements
of paragraphs (b) and (if applicable) (c) of this section. If at any
time during its existence a plan is not a church plan because of a
failure to meet the requirements set forth in this section, it cannot
thereafter become a church plan.
(b) Unrelated businesses -- (1) In general. A plan is not a church
plan unless it is established and maintained primarily for the benefit
of employees (or their beneficiaries) who are not employed in connection
with one or more unrelated trades or businesses (within the meaning of
section 513).
(2) Establishment or maintenance of a plan primarily for persons not
employed in connection with one or more unrelated trades or businesses.
(i) (A) A plan, other than a plan in existence on September 2, 1974, is
established primarily for the benefit of employees (or their
beneficiaries) who are not employed in connection with one or more
unrelated trades or businesses if on the date the plan is established
the number of employees employed in connection with the unrelated trades
or businesses eligible to participate in the plan is less than 50
percent of the total number of employees of the church eligible to
participate in the plan.
(B) A plan in existence on September 2, 1974, is to be considered
established as a plan primarily for the benefit of employees (or their
beneficiaries) who are not employed in connection with one or more
unrelated trades or businesses if it meets the requirements of both
paragraphs (b)(2)(ii) (A) and (B) (if applicable) in either of its first
2 plan years ending after September 2, 1974.
(ii) For plan years ending after September 2, 1974, a plan will be
considered maintained primarily for the benefit of employees of a church
who are not employed in connection with one or more unrelated trades or
businesses if in 4 out of 5 of its most recently completed plan years --
(A) Less than 50 percent of the persons participating in the plan (at
any time during the plan year) consist of and in the same year
(B) Less than 50 percent of the total compensation paid by the
employer during the plan year (if benefits or contributions are a
function of compensation) to employees participating in the plan is paid
to,
employees employed in connection with an unrelated trade or business.
The determination that the plan is not a church plan will apply to the
second year (within a 5 year period) for which the plan fails to meet
paragraph (b)(2)(ii) (A) or (B) (if applicable) and to all plan years
thereafter unless, taking into consideration all of the facts and
circumstances as described in paragraph (b)(2)(iii) of this section, the
plan is still considered to be a church plan. A plan that has not
completed 5 plan years ending after September 2, 1974, shall be
considered maintained primarily for the benefit of employees not
employed in connection with an unrelated trade or business unless it
fails to meet paragraphs (b)(2)(ii) (A) and (B) in at least 2 such plan
years.
(iii) Even though a plan does not meet the provisions of paragraph
(b)(2)(ii) of this section, it nonetheless will be considered maintained
primarily for the benefit of employees who are not employed in
connection with one or more unrelated trades or businesses if the church
maintaining the plan can demonstrate that based on all of the facts and
circumstances such is the case. Among the facts and circumstances to be
considered in evaluating each case are:
(A) The margin by which the plan fails to meet the provisions of
paragraph (b)(2)(ii) of this section, and
(B) Whether the failure to meet such provisions was due to a
reasonable mistake as to what constituted an unrelated trade or business
or whether a particular person or group of persons were employed in
connection with one or more unrelated trades or businesses.
(iv) For purposes of this section, an employee will be considered
eligible to participate in a plan if such employee is a participant in
the plan or could be a participant in the plan upon making mandatory
employee contributions to the plan.
(3) Employment in connection with one or more unrelated trades or
businesses. An employee is employed in connection with one or more
unrelated trades or businesses of a church if a majority of such
employee's duties and responsibilities in the employ of the church are
directly or indirectly related to the carrying on of such trades or
businesses. Although an employee's duties and responsibilities may be
insignificant with respect to any one unrelated trade or business, such
employee will nonetheless be considered as employed in connection with
one or more unrelated trades or businesses if such employee's duties and
responsibilities with respect to all of the unrelated trades or
businesses of the church represent a majority of the total of such
person's duties and responsibilities in the employ of the church.
(c) Plans of two or more employers. The term ''church plan'' does
not include a plan which, during the plan year, is maintained by two or
more employers unless --
(1) Each of the employers is a church that is exempt from tax under
section 501(a), and
(2) With respect to the employees of each employer, the plan meets
the provisions of paragraph (b)(2)(ii) of this section or would be
determined to be a church plan based on all the facts and circumstances
described in paragraph (b)(2)(iii) of this section.
Thus, if with respect to a single employer the plan fails to meet any
provision of this paragraph, the entire plan ceases to be a church plan
unless that employer ceases maintaining the plan for all plan years
beginning after the plan year in which it receives a final notification
from the Internal Revenue Service that it does not meet the provisions
of this paragraph. If the employer does cease maintaining the plan in
accordance with this paragraph, the fact that the employer formerly did
maintain the plan will not prevent the plan from being a church plan for
prior years.
(d) Special rule. (1) Notwithstanding paragraph (c)(1) of this
section, a plan maintained by a church and one or more agencies of such
church for the employees of such church and of such agency or agencies,
that is in existence on January 1, 1974, shall be treated as a church
plan for plan years ending after September 2, 1974, and beginning before
January 1, 1983, provided that the plan is described in paragraph (c) of
this section without regard to paragraph (c)(1) of this section, and the
plan is not maintained by an agency which did not maintain the plan on
January 1, 1974.
(2) For the purposes of section 414(e) and this section, an agency of
a church means an organization which is exempt from tax under section
501 and which is either controlled by, or associated with, a church.
For example, an organization, a majority of whose officers or directors
are appointed by a church's governing board or by officials of a church,
is controlled by a church within the meaning of this paragraph. An
organization is associated with a church if it shares common religious
bonds and convictions with that church.
(e) Religious orders and religious organizations. For the purpose of
this section the term ''church'' includes a religious order or a
religious organization if such order or organization (1) is an integral
part of a church, and (2) is engaged in carrying out the functions of a
church, whether as a civil law corporation or otherwise.
(f) Separately incorporated fiduciaries. A plan which otherwise
meets the provisions of this section shall not lose its status as a
church plan because of the fact that it is administered by a separately
incorporated fiduciary such as a pension board or a bank.
(g) Cross reference. (1) For rules relating to treatment of church
plans, see section 410(c), 411(e), 412(h), 4975(g), and the regulations
thereunder.
(2) For rules relating to church plan elections, see section 410(d)
and the regulations thereunder.
(T.D. 7688, 45 FR 20797, Mar. 31, 1980)
26 CFR 1.414(f)-1 Definition of multiemployer plan.
(a) General rule. For purposes of part I of subchapter D of chapter
1 of the Code and the regulations thereunder, a plan is a multiemployer
plan for a plan year if all of the following requirements are satisfied:
(1) Number of contributing employers. More than one employer is
required by the plan instrument or other agreement to contribute (or to
have contributions made on its behalf) to the plan for the plan year.
(2) Collective bargaining agreement. The plan is maintained for the
plan year pursuant to one or more collective bargaining agreements
between employee representatives and more than one employer.
(3) Amount of contributions. Except as provided by paragraph (c) of
this section (relating to the special rule for contributions exceeding
50 percent), the amount of contributions made under the plan for the
plan year by or on behalf of each employer is less than 50 percent of
the total amount of contributions made under the plan for such plan year
by or on behalf of all employers.
(4) Benefits. The plan provides that the amount of benefits payable
with respect to each employee participating in the plan is determined
without regard to whether or not his employer continues as a member of
the plan. If benefits accrued as a result of the participant's service
with his employer during a period before such employer was a member of
the plan, this requirement does not apply to the amount of those
benefits, except that this requirement does apply to the amount of those
benefits (i) which are accrued benefits derived from employee
contributions, or (ii) which are accrued under a plan maintained by an
employer prior to the time such employer became a member of the plan to
which the requirements of this paragraph (a) are applied.
(5) Other requirements. The plan satisfies such other requirements
as the Secretary of Labor by regulations prescribes under the authority
of section 414(f)(1)(E) of the Code and section 3(37) of the Employee
Retirement Income Security Act of 1974 (Pub. L. 93-406, 88 Stat. 839).
See 29 CFR 2510.3-37.
(b) Special rules -- (1) Amount of contributions. For purposes of
paragraphs (a)(3) and (c) of this section, the amount of contributions
made under the plan for the plan year by or on behalf of each employer
shall be the sum of such contributions made on or before the last day of
the plan year. For purposes of determining whether contributions are
made on or before the last day of the plan year, the rule of section
412(c)(10) and the regulations thereunder (relating to the treatment of
certain contributions made after the last day of the plan year as made
on such last day) shall apply.
(2) Benefits. (i) For purposes of paragraph (a)(4) of this section,
certain benefit amounts are treated as accrued as a result of the
participant's service with an employer during a period before such
employer was a member of the plan. The amount of such a benefit so
treated is the difference (if any) between two calculated amounts. The
first calculated amount is the participant's total accrued benefit
calculated under the plan as of the date the employer ceased to be a
member of the plan. The second calculated amount is the participant's
accrued benefit calculated without regard to his service with such
employer during the period before such employer was a member of the
plan. However, under a special limitation, this difference may not
exceed the benefit a participant accrued from service before his
employer became a member of the plan. For purposes of this limitation,
this benefit is the benefit accrued as of the date the employer ceases
to be a member of the plan. An employer shall be deemed to be a member
of the plan in a plan year if the employer is required by the plan
instrument or other agreement to contribute (or to have contributions
made on its behalf) to the plan for such plan year or if an employee of
the employer accrues a benefit, on account of service with the employer
during such plan year, under the plan for that plan year.
(ii) The provisions of paragraphs (a)(4) and (b)(2)(i) of this
section are illustrated by the following example:
Example. On January 1, 1976, employer W became a member of the
noncontributory XYZ pension plan which uses the calendar year as the
plan year. W did not maintain any plan prior to that date. The plan
provided for benefits of $4 per month per year of service (including
service with W before January 1, 1976). On January 1, 1980, following
adoption of a new collective bargaining agreement, the benefits were
increased to $12 per month per year of service for all years of service
(including service with W before January 1, 1976). On January 1, 1991,
W ceased to be a member of the plan.
A, an employee of W, had 15 years of service before January 1, 1976,
4 years of service between January 1, 1976, and December 31, 1979, and
11 years of service between January 1, 1980, and December 31, 1990. On
December 31, 1990, A's accrued benefit was $360 per month ($12 per month
x 30). On January 1, 1991, the portion of A's accrued benefit retained
and the portion forfeited under the terms of the XYZ pension plan were
determined as follows:
The XYZ plan does not satisfy the requirements of paragraphs (a)(4)
and (b)(2)(i) of this section because no benefit can be forfeited with
respect to service after W began participating in the plan. Thus, the
maximum accrued benefit that may be forfeited is $180 per month (the
accrued benefit with respect to A's service prior to January 1, 1976).
Therefore, in order for the plan to meet the requirements of paragraphs
(a)(4) and (b)(2)(i) of this section, the plan must provide for A's
accrued benefit after W ceased to be a member of the plan to be at least
$180 per month ($360 per month total accrued benefit less $180 per month
benefit accrued for service prior to W's membership in the plan).
(iii) For purposes of paragraphs (a)(4) and (b)(2) of this section,
if an employer for a period employs two or more individuals who, solely
by reason of their employment, are participants in the plan and who do
not belong to the same collective bargaining unit, the dates on which
the employer became and ceased to be a member of the plan shall be
determined separately on a class basis for individuals who belong to
separate collective bargaining units, as separate classes, and for
individuals who do not belong to a collective bargaining unit, as a
further single separate class. Thus, such dates shall be determined
with respect to individuals as a class who belong to the same collective
bargaining unit (or who do not belong to a collective bargaining unit)
without consideration of the employment by the employer of, or the
participation in the plan by, other individuals (who do not belong to
such collective bargaining unit and who may belong to another collective
bargaining unit) or whether the employer is a member of the plan with
respect to such other individuals. In no event, however, may service
not attributable to service with a particular collective bargaining unit
be disregarded under paragaphs (a)(4) and (b)(2) of this section merely
because the employer ceases to maintain the plan with respect to such
unit. Thus, for example, paragraphs (a)(4) and (b)(2) of this section
do not permit the disregard of a period of service of an individual
belonging to a collective bargaining unit prior to the time the employer
became a member of the plan with respect to such unit to the extent
that, during such period of service, the individual belonged to another
collective bargaining unit with respect to which the employer was a
member of the plan.
(3) Controlled groups. For purposes of section 414(f) and this
section, all corporations which are members of a controlled group of
corporations (within the meaning of section 1563(a) and the regulations
thereunder, but determined without regard to section 1563(e)(3)(C) and
the regulations thereunder) are deemed to be one employer.
(c) Contributions exceeding 50 percent. If a plan was a
multiemployer plan as defined in this section for any plan year
(including plan years ending prior to September 3, 1974), ''75 percent''
shall be substituted for ''50 percent'' in applying paragraph (a)(3) of
this section for subsequent plan years until the first plan year
following a plan year in which the amount contributed by or on behalf of
one employer is 75 percent or more of the total amount of contributions
made under the plan for that plan year by or on behalf of all of the
employers making contributions. In such case ''75 percent'' shall not
again be substituted for ''50 percent'' until the plan has met the
requirements of paragraph (a) of this section (determined without regard
to this paragraph) for one plan year.
(d) Examples. The application of this section is illustrated by the
following examples. For purposes of these examples, assume that the
plan meets the requirements of paragraphs (a) (1), (2), (4), and (5) of
this section for each plan year.
Example (1). On January 1, 1970, U, V, and W, three employers none
of which is a member of a controlled group of corporations with any of
the other two employers, establish a plan with a plan year corresponding
to the calendar year. U, V, and W each contribute less than one-half of
the total contributions made under the plan for each of the years 1970,
1971, and 1972. For the years 1973, 1974, and 1975, U contributes 70
percent and V and W each contribute 15 percent of the total
contributions made under the plan for each year. The plan is a
multiemployer plan under section 414(f) and this section for 1975
because no employer has contributed 75 percent or more of the total
amount contributed for each of the plan years subsequent to 1972.
Example (2). (i) First plan year. On January 1, 1975, X, Y, and Z,
three employers none of which is a member of a controlled group of
corporations with any of the other two employers, establish a plan with
a plan year corresponding to the calendar year. X, Y, and Z each
contribute less than one-half of the total contributions made under the
plan for 1975. The plan is a multiemployer plan for 1975 because it
meets the 50 percent contribution requirement of paragraph (a)(3) of
this section.
(ii) Second plan year. For the second plan year, 1976, X contributes
70 percent and Y and Z each contribute 15 percent of the total
contributions made under the plan. The plan is a multiemployer plan for
1976 because it was a multiemployer plan for the preceding plan year and
satisfies the 75 percent contribution requirement of paragraph (c) of
this section.
(iii) Third plan year. For the third plan year, 1977, X contributes
80 percent and Y and Z each contribute 10 percent of the total
contributions made under the plan. The plan is not a multiemployer plan
for 1977 because it fails to satisfy the 75 percent contribution
requirement of paragraph (c) of this section.
(iv) Fourth plan year. For the fourth plan year, 1978, Y contributes
60 percent and X and Z each contribute 20 percent of the total
contributions made under the plan. The 75 percent contribution
requirement of paragraph (c) of this section does not apply. The plan
is not a multiemployer plan for 1978 because it fails to satisfy the 50
percent contribution requirement of paragraph (a)(3) of this section.
(v) Fifth plan year. For the fifth plan year, 1979, X, Y, and Z each
contribute less than one-half of the total contributions made under the
plan. The 75 percent contribution requirement of paragraph (c) of this
section does not apply. The plan is a multiemployer plan for 1979
because it again meets the 50 percent contribution requirement of
paragraph (a)(3) of this section.
(vi) Sixth plan year. For the sixth plan year, 1980, the plan will
continue to be a multiemployer plan, provided that no employer
contributes 75 percent or more of the total amount of contributions made
under the plan for the plan year.
(e) Retention of records. (1) For plan years ending prior to
September 3, 1974, a plan may be required to furnish proof that it met
the requirements of section 414(f) and this section for each plan year
ending prior to that date to the extent necessary to show the
applicability of the 75 percent test provided in paragraph (c) of this
section.
(2) For plan years ending after September 2, 1974, a plan may be
required to furnish proof that it met the requirements of section 414(f)
and this section for 6 immediately preceding plan years.
(Secs. 414(f) and 7805 of the Internal Revenue Code of 1954 (88 Stat.
927, 26 U.S.C. 414(f); 68A Stat. 917; 26 U.S.C. 7805))
(T.D. 7552, 43 FR 29940, July 12, 1978)
26 CFR 1.414(g)-1 Definition of plan administrator.
(a) In general. For purposes of part I of subchapter D of chapter 1
of the Code and the regulations thereunder, if the instrument under
which the plan is operated for a plan year specifically designates a
person or a group of persons as plan administrator, the person or group
of persons collectively is the plan administrator for the plan year.
The instrument may specifically designate a plan administrator --
(1) By name,
(2) By reference to the person or group of persons holding a named
position or positions,
(3) By reference to a procedure established under the terms of the
instrument pursuant to which a plan administrator is designated, or
(4) By reference to the person or group of persons charged with
specific responsibilities of plan administrator. Consistent with the
provisions of section 405 (c) (1) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1105 (c) (1)), a plan may provide for
the allocation of specific responsibilities of plan administrator among
named persons and for named persons to designate others to carry out
such responsibilities. A person or group of persons may be designated
as plan administrator in accordance with the rules of this paragraph
even though the person or group of persons does not carry the specific
title ''plan administrator''. In the absence of a person or group of
persons designated as the plan administrator (individually,
collectively, or by designation of different specific administrative
responsibilities), the plan administrator for the plan year is the
person or group of persons specified in paragraph (b) of this section.
(b) Plan administrator not specifically designated. If no person or
group of persons is specifically designated as the plan administrator
for a plan year by the instrument under which the plan is operated, the
plan administrator for such year is the person or group of persons
determined under the following rules:
(1) Single employer. In the case of a plan maintained by a single
employer, the employer is the plan administrator. If the employer is a
corporation, the corporation is the plan administrator. However, the
corporation's board of directors may authorize a person or group of
persons to fulfill responsibilities of the corporation as plan
administrator. In the absence of such authorization, any corporate
officer authorized under law, corporate by-laws, or resolution of the
board of directors to act on behalf of the corporation with respect to
contracts of a value equivalent to the fair market value of the assets
of the plan shall be presumed to have authority to fulfill
responsibilities of the corporation as plan administrator. For purposes
of this paragraph (b) (1), ''employer'' means the ''employer'' as
defined in section 3 (5) of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1003 (5)).
(2) Employee organization. In the case of a plan maintained by an
employee organization, the employee organization is the plan
administrator.
(3) Group representing the parties. In the case of a plan maintained
by two or more employers, or jointly by one or more employers and one or
more employee organizations, the association, committee, joint board of
trustees, or other similar group of representatives of the parties who
maintain the plan, as the case may be, is the plan administrator. For
purposes of this subparagraph (3), a plan shall be considered maintained
by two or more employers or jointly by one or more employers and one or
more employee organizations only if none of the parties has the express
power, under the terms of the instrument under which the plan is
operated, to terminate the plan unilaterally.
(4) Person in control of assets. In any case where a plan
administrator may not be determined by application of paragraphs (a) and
(b), (1), (2), and (3) of this section, the plan administrator is the
person or persons actually responsible, whether or not under the terms
of the plan, for the control, disposition, or management of the cash or
property received by or contributed to the plan, irrespective of whether
such control, disposition, or management is exercised directly by such
person or persons or indirectly through an agent or trustee designated
by such person or persons.
(Secs. 414(g) and 7805 of the Internal Revenue Code of 1954 (88 Stat.
927, 68A Stat 917; 26 U.S.C. 414(g), 7805))
(T.D. 7618, 44 FR 27657, May 11, 1979)
26 CFR 1.414(l)-1 Mergers and consolidations of plans or transfers of
plan assets.
(a) In general -- (1) Scope of the regulations. Sections 401(a)(12)
and 414(l) apply only to plans to which section 411 applies without
regard to section 411(e)(2). Thus, for example, these sections do not
apply to a governmental plan within the meaning of section 414(d); a
church plan, within the meaning of section 414(e), for which there has
not been made the election under section 410(d) to have the
participation, vesting, funding, etc. requirements apply; or a plan
which at no time after September 2, 1974, provided for employer
contributions.
(2) General rule. Under section 414(l),
(i) A trust which forms a part of a plan will not constitute a
qualified trust under section 401, and
(ii) A plan will not be treated as being qualified under section 403
(a) and 405 (a), unless, in the case of a merger or consolidation (as
defined in paragraph (b)(2) of this section), or a transfer of assets or
liabilities (as defined in paragraph (b)(3) of this section), the
following condition is satisfied. This condition requires that each
participant receive benefits on a termination basis (as defined in
paragraph (b)(5) of this section) from the plan immediately after the
merger, consolidation or transfer which are equal to or greater than the
benefits the participant would receive on a termination basis
immediately before the merger, consolidation, or transfer.
(b) Definitions. For purposes of this section:
(1) Single plan. A plan is a ''single plan'' if and only if, on an
ongoing basis, all of the plan assets are available to pay benefits to
employees who are covered by the plan and their beneficiaries. * * *
For purposes of the preceding sentence, all the assets of a plan will
not fail to be available to provide all the benefits of a plan merely
because the plan is funded in part or in whole with allocated insurance
instruments. A plan will not fail to be a single plan merely because of
the following:
(i) The plan has several distinct benefit structures which apply
either to the same or different participants,
(ii) The plan has several plan documents,
(iii) Several employers, whether or not affiliated, contribute to the
plan,
(iv) The assets of the plan are invested in several trusts or annuity
contracts, or
(v) Separate accounting is maintained for purposes of cost allocation
but not for purposes of providing benefits under the plan.
However, more than one plan will exist if a portion of the plan
assets is not available to pay some of the benefits. This will be so
even if each plan has the same benefit structure or plan document, or if
all or part of the assets are invested in one trust with separate
accounting with respect to each plan.
(2) Merger or consolidation. The terms ''merger'' or
''consolidation'' means the combining of two or more plans into a single
plan. A merger or consolidation will not occur merely because one or
more corporations undergo a reorganization (whether or not taxable).
Furthermore, a merger or consolidation will not occur if two plans are
not combined into a single plan, such as by using one trust which limits
the availability of assets of one plan to provide benefits to
participants and beneficiaries of only that plan.
(3) Transfer of assets or liabilities. A ''transfer of assets or
liabilities'' occurs when there is a diminution of assets or liabilities
with respect to one plan and the acquisition of these assets or the
assumption of these liabilities by another plan. For example, the
shifting of assets or liabilities pursuant to a reciprocity agreement
between two plans in which one plan assumes liabilities of another plan
is a transfer of assets or liabilities. However, the shifting of assets
between several funding media used for a single plan (such as between
trusts, between annuity contracts, or between trusts and annuity
contracts) is not a transfer of assets or liabilities.
(4) Spinoff. The term ''spinoff'' means the splitting of a single
plan into two or more plans.
(5) Benefits on a termination basis. (i) The term ''benefits on a
termination basis'' means the benefits that would be provided
exclusively by the plan assets pursuant to section 4044 of the Employee
Retirement Income Security Act of 1974 (''ERISA'') and the regulations
thereunder if the plan terminated. Thus, the term does not include
benefits that are guaranteed by the Pension Benefit Guaranty
Corporation, but not provided by the plan assets.
(ii) For purposes of determining the benefits on a termination basis,
the allocation of assets to various priority categories under section
4044 of ERISA must be made on the basis of reasonable actuarial
assumptions. The assumptions used by the Pension Benefit Guaranty
Corporation as of the date of the merger or spinoff are deemed
reasonable for this purpose.
(iii) If a change in the benefit structure of a plan in conjunction
with a merger, consolidation, or transfer of assets or liabilities
alters the benefits on a termination basis, the change should be
designated, at the time the merger, consolidation, or transfer occurs,
to be effective either immediately before or immediately after that
occurrence. In the event that no designation is made, the change in the
benefit structure will be deemed to occur immediately after the merger,
consolidation, or transfer of assets or liabilities.
(6) Lower funded plan. (i) The term ''lower funded plan'' generally
means the plan which, immediately prior to the merger, would have its
assets exhausted in a higher priority category than the other plan.
(ii) Where two plans, immediately prior to the merger, would have
their assets exhausted in the same priority category of section 4044 of
ERISA in the event of termination, the lower funded plan is the one in
which the assets would satisfy a lesser proportion of the liability
allocated to that priority category.
(7) Priority category. The term ''priority category'' means the
category of benefits described in each paragraph of section 4044(a) of
ERISA. References to higher or highest priority categories refer to
those priority categories which receive the first allocation of asserts,
i.e. the lowest paragraph numbers in section 4044(a).
(8) Separate accounting of assets. The term ''separate accounting of
assets'' means the maintenance of an asset account with respect to a
given group of participants which is:
(i) Credited with contributions made to the plan on behalf of the
participants and with its allocable share of investment income, if any,
and
(ii) Charged with benefits paid to the participants, and with its
allocable share of investment losses or expenses.
(9) Present value of accrued benefit. For purposes of this section,
the present value of an accrued benefit must be determined on the basis
of reasonable actuarial assumptions. For this purpose, the assumptions
used by the Pension Benefit Guaranty Corporation as of the date of the
merger or spinoff are deemed reasonable.
(10) Valuation of plan assets. In determining the value of a plan's
assets, the standards set forth in regulations prescribed by the Pension
Benefit Guaranty Corporation (29 CFR Part 2611) shall be applied.
(11) Date of merger or spinoff. The actual date of a merger or
spinoff shall be determined on the basis of the facts and circumstances
of the particular situation. For purposes of this determination, the
following factors, none of which is necessarily controlling, are
relevant:
(i) The date on which the affected employees stop accruing benefits
under one plan and begin coverage and benefit accruals under another
plan.
(ii) The date as of which the amount of assets to be eventually
transferred is calculated.
(iii) If the merger or spinoff agreement provides that interest is to
accrue from a certain date to the date of actual transfer, the date from
which such interest will accrue.
(c) Application of section 414(l) -- (1) Two or more plans. (i)
Section 414(l) does not apply unless more than a single plan is
involved. It also does not apply unless at least a single plan assumes
liabilities from another plan or obtains assets from another plan (as in
a merger or spinoff). For purposes of section 414(l), a transfer of
assets or liabilities will not be deemed to occur merely because a
defined contribution plan is amended to become a defined benefit plan.
This rule will apply even if, under the facts and circumstances of a
particular case, a termination of the defined contribution plan will be
considered to have occurred for purposes of other provisions of the
Code.
(ii) The requirements of this subparagraph may be illustrated as
follows:
Example. After acquiring Corporation B, Corporation A amends
Corporation B's defined benefit plan (Plan B) to provide the same
benefits as Corporation A's defined benefit plan (Plan A). The assets
of Plan B are transferred to the trust containing the assets of Plan A
in such a manner that the assets of each plan: (1) are separately
accounted for, and (2) are not available to pay benefits of the other
plan. Because of condition (2) there are still two plans and,
therefore, a merger did not occur. As a result, section 414(l) does not
apply. If at some later date Corporation A were to sell Corporation B
and transfer the assets of Plan B that were separately accounted for to
another trust or to an annuity contract solely for the purpose of
providing Plan B's benefits, this transfer would also not involve
section 414(l). This is so because Plan B was a separate plan before
the entire transaction and because no plan assumed liabilities or
obtained assets from another plan. If, on the other hand, Corporation A
merged Plan A and Plan B at the time of the acquisition of Corporation B
by deleting condition (2) above, then section 414(l) would apply both to
the merger of Plan A and Plan B and to the spinoff of Plan B from the
merged plan. The spinoff would have to satisfy the requirements of
paragraph (n) of this section, even if the assets attributable to Plan A
and Plan B were separately accounted for in order to allocate funding
costs.
(2) Multiemployer plans. Except to the extent provided by
regulations of the Pension Benefit Guaranty Corporation, section 114(l)
does not apply to any transaction to the extent that participants either
before or after that transaction are covered under a multiemployer plan
within the meaning of section 414(f). Until these regulations are
issued, section 414(l) does not apply to any of the following
situations:
(i) A multiemployer plan is split into two or more plans, one or more
of which are not multiemployer plans, or (ii) A single employer plan is
merged into a multiemployer plan.
Therefore, if some (but not all) of the participants in a single
employer plan become participants in a multiemployer plan under an
agreement in which the multiemployer plan assumes all the liabilities of
the single employer plan with respect to these participants and in which
some or all of the assets of the single employer plan are transferred to
the multiemployer plan, section 414(l) applies, but only with respect to
the participants in the single employer plan who did not transfer to the
multiemployer plan.
(d) Merger of defined contribution plans. In the case of a merger of
two or more defined contribution plans, the requirements of section
414(l) will be satisfied if all of the following conditions are met:
(1) The sum of the account balances in each plan equals the fair
market value (determined as of the date of the merger) of the entire
plan assets.
(2) The assets of each plan are combined to form the assets of the
plan as merged.
(3) Immediately after the merger, each participant in the plan as
merged has an account balance equal to the sum of the account balances
the participant had in the plans immediately prior to merger.
(e) Merger of defined benefit plans -- (1) General rule. Section
414(l) compares the benefits on a termination basis before and after the
merger. If the sum of the assets of all plans is not less than the sum
of the present values of the accrued benefit (whether or not vested) of
all plans, the requirements of section 414(l) will be satisfied merely
by combining the assets and preserving each participant's accrued
benefits. This is so because all the accrued benefits of the plan as
merged are provided on a termination basis by the plan as merged.
However, if the sum of the assets of all plans is less than the sum of
the present values of the accrued benefits (whether or not vested) in
all plans, the accrued benefits in the plan as merged are not provided
on a termination basis.
(2) Special schedule of benefits. Generally, for some participants,
the benefits provided on a termination basis for the plan as merged
would be different from the benefits provided on a termination basis in
the plans prior to merger if the assets were merely combined and if each
participant retained his accrued benefit. Some participants would,
therefore, receive greater benefits on a termination basis as a result
of the merger and some other participants would receive smaller
benefits. Accordingly, the requirements of section 414(l) would not be
satisfied unless the distribution on termination were modified in some
manner to prevent any participant from receiving smaller benefits on a
termination basis as a result of the merger. This is accomplished
through modifying the application of section 4044 of ERISA by inserting
a special schedule of benefits.
(f) Operational rules for the special schedule. The application of
section 4044 of ERISA as modified by the schedule of benefits is
accomplished by the following steps:
(1) Section 4044 is applied in the plan as merged through the
priority categories fully satisfied by the assets of the lower funded
plan immediately prior to the merger.
(2) The assets in the plan as merged are then allocated to the next
priority category as a percentage of the value of the benefits that
would otherwise be allocated to that priority category. That percentage
is the ratio of (i) the assets allocated to the first priority category
not fully satisfied by the lower funded plan immediately prior to the
merger to (ii) the assets that would have been allocated had that
priority category been fully satisfied.
(3) A schedule of benefits is formed listing participants and
scheduled accrued benefits. The scheduled accrued benefit is the excess
of the benefits provided on a termination basis with respect to any
participant from the plans immediately prior to the merger, over the
benefits provided on a termination basis in subparagraphs (1) and (2) of
this paragraph immediately after the merger. After allocating the
assets in accordance with subparagraph (2) of this paragraph, the assets
are allocated to the schedule of benefits as follows:
(i) First the assets are allocated to the scheduled benefits to the
extent that the participant would have benefits provided in subparagraph
(4) of this paragraph if there were no scheduled benefits.
(ii) Then the assets are allocated to the scheduled benefits to the
extent that the participant would have benefits provided pursuant to
subparagraph (5) of this paragraph if there were no scheduled benefits.
These assets should be allocated first to those scheduled benefits
that are in the highest priority category under section 4044.
(4) The assets are then allocated to those benefits in the priority
category described in subparagraph (2) of this paragraph with respect to
which assets were not allocated. This allocation is made to the extent
that these benefits are not associated with benefits in the schedule.
(5) Finally, the assets are allocated in accordance with section 4044
with respect to priority categories lower than the priority category
described in subparagraph (4) of this paragraph. This allocation is
made to the extent that these benefits are not associated with benefits
in the schedule.
(g) Successive mergers -- (1) In general. In the case of a current
merger of a defined benefit plan with another defined benefit plan which
as a result of a previous merger has a special schedule, the rules of
paragraphs (e) and (f) of this section apply as if the schedule were
considered a category described in section 4044 of ERISA. Thus, a
second schedule may be formed as a result of the current merger. The
second schedule will be inserted in the priority category of section
4044 described in paragraph (f)(2) of this section as of the date of the
current merger. This priority category may be higher, lower, or within
the schedule of benefits existing on account of a previous merger. If
this priority schedule is inserted within a schedule of benefits, a new
single schedule of benefits replacing the old schedule of benefits would
in effect be created.
(2) Allocation of assets. Assets in the new schedule of benefits are
allocated as follows:
(i) First to the benefits remaining in the old schedule to the extent
that there are assets immediately prior to the second merger to satisfy
the original benefits,
(ii) Then to the benefits provided on a termination basis from the
plans immediately prior to the second merger to the extent that they are
not provided before the schedule after the second merger or in
subdivision (i) of this subparagraph,
(iii) Then to benefits remaining in the original schedule not
included in subdivision (i) of this subparagraph.
(h) De minimis rule for merger of defined benefit plan -- (1) In
general. In the case of a merger of a defined benefit plan (''smaller
plan'') whose liabilities (i.e., the present value of accrued benefits,
whether or not vested) are less than 3 percent of the assets of another
defined benefit plan (''larger plan'') as of at least one day in the
larger plan's plan year in which the merger of the two plans occurs,
section 414(l) will be deemed to be satisfied if the following condition
is met. The condition requires that a special schedule of benefits
(consisting of all the benefits that would be provided by the smaller
plan on a termination basis just prior to the merger) be payable in a
priority category higher than the highest priority category in section
4044 of ERISA. Assets will be allocated to that schedule in accordance
with the allocation of assets to scheduled benefits in paragraph (f)(3)
of this section.
(2) Application to a series of mergers. In the case of a series of
such mergers in a given plan year of the larger plan, the rule described
in subparagraph (1) of this paragraph will apply only if the sum of the
liabilities (whether or not vested) assumed by the larger plan are less
than 3 percent of the assets of the larger plan as of at least one day
in the plan year of the larger plan in which the mergers occurred.
(3) Application to a merger occurring over more than one plan year.
In the case of a merger of a smaller plan or a portion thereof with a
larger plan designed to occur in steps over more than one plan year of
the larger plan, the entire transaction will be deemed to occur in the
plan year of the larger plan which contains the first of these steps.
(4) Liabilities of the smaller plan. For purposes of subparagraphs
(2) and (3) of this paragraph, mergers satisfying paragraphs (e), (f) or
(g) of this section will be ignored in determining the sum of the
liabilities assumed by the larger plan.
(i) Data maintenance -- (1) Alternative to the special schedule. In
the case of a merger which would require the creation of a special
schedule in order to satisfy section 414(l), the schedule need not be
created at the time of the merger if data sufficient to create the
schedule is maintained. The schedule would only have to be created in
the event of a subsequent plan termination or a subsequent spinoff. In
that case the schedule must be determined as of the date of the merger.
(2) Required data. The data that must be maintained depends on the
plan, and care should be taken to ensure that all necessary data is
maintained. Furthermore, in order to take advantage of the data
maintenance alternative provided in this paragraph, an enrolled actuary
must certify to the plan administrator that each element of data
necessary to determine the schedule as of the date of the merger is
maintained. This certification must be based either upon the enrolled
actuary's independent examination of the data, or upon his reliance,
which under the circumstances of the particular situation must be
reasonable, upon a written statement of the plan administrator
concerning what data is actually being maintained.
(j) Five year rule -- (1) Limitation on the required use of the
special schedule. A plan will not fail to satisfy the requirements of
section 414(l) merely because the effects of the special schedule
created pursuant to paragraphs (e)(2) or (h) of this section are ignored
5 years after the date of a merger. Furthermore, the date maintained
pursuant to paragraph (i) of this section need not be maintained for
more than 5 years after the merger, if the plan does not have a spinoff
or a termination within 5 years.
(2) Illustration. If Plans A and B merge to form Plan AB and if Plan
AB merges with Plan C 3 years later to form Plan ABC and if Plan ABC
terminates 4 years later, the data relating to the merger of Plans A and
B need not be maintained for more than 5 years after the merger of Plans
A and B. In addition, after 5 years have elapsed after the merger of
Plans A and B, the effect of any special schedule created by the merger
of Plans A and B on the schedule created by the merger of Plans AB and C
may be ignored in determining the later schedule.
(k) Examples. The provisions of paragraphs (e) through (j) of this
section may be illustrated by the following examples:
Example (1). Plan A, whose assets are $220,000, is to be merged with
Plan B, whose assets are $200,000. Plan A has three employees. Plan B
has two employees. If Plans A and B were to terminate just prior to the
merger, the benefits provided on a termination basis would be as
follows:
Because Plan B's assets are exhausted in a higher priority category
than Plan A's assets, Plan B is the lower funded plan. A schedule will,
therefore, be inserted in Priority Category 4 of the plan as merged
after providing 10% of the benefits provided in category 4, i.e. the
ratio of $5,000 assets in Plan B allocated to category 4 to the $50,000
liability in category 4. The schedule would be constructed as follows:
Example (2). The facts are the same as in Example (1). The plan,
however, terminates one year later. Furthermore, no employee has
accrued additional benefits during the year except that the $2,000
benefit for EE1, that was originally in category 4 is now in category 3.
The assets would be allocated to the priority categories to the extent
that there are assets to cover the following benefits.
(l) Merger of defined benefit and defined contribution plan. In the
case of a merger of a defined benefit plan with a defined contribution
plan, one of the plans before the merger should be converted into the
other type of plan (i.e., the defined benefit converted into a defined
contribution or the defined contribution converted into a defined
benefit) and either paragraph (d) or paragraphs (e) through (j) of this
section, whichever is appropriate, should be applied.
(m) Spinoff of a defined contribution plan. In the case of a spinoff
of a defined contribution plan, the requirements of section 414(l) will
be satisfied if after the spinoff --
(1) The sum of the account balances for each of the participants in
the resulting plans equals the account balance of the participant in the
plan before the spinoff, and
(2) The assets in each of the plans immediately after the spinoff
equals the sum of the account balances for all participants in that
plan.
(n) Spinoff of a defined benefit plan -- (1) General rule. In the
case of a spinoff of a defined benefit plan, the requirements of section
414(l) will be satisfied if --
(i) All of the accrued benefits of each participant are allocated to
only one of the spun off plans, and
(ii) The value of the assets allocated to each of the spun off plans
is not less than the sum of the present value of the benefits on a
termination basis in the plan before the spin off for all participants
in that spun off plan.
(2) De minimis rule. In the case of a spin off the requirements of
section 414(l) will be deemed to be satisfied if the value of the assets
spun off --
(i) Equals the present value of the accrued benefits spun off
(whether or not vested), and
(ii) In conjunction with other assets spun off during the plan year
in which the spinoff occurs in accordance with this subparagraph, is
less than 3 percent of the assets as of at least one day in that year.
Spinoffs occurring in previous or subsequent plan years are ignored
if they are not part of a single spinoff designed to occur in steps over
more than one plan year.
(3) Special temporary rule. In the case of a defined benefit plan
maintained for different groups of employees, which is a single plan (as
defined in paragraph (b)(l) of this section) and under which there has
been separate accounting of assets for each group, a spinoff of the plan
on or before July 1, 1978, into a separate plan for each group will be
deemed to satisfy section 414 (l) if --
(i) All the liabilities with respect to each group of employees are
allocated to a separate plan for that group of employees, and
(ii) The assets that are separately accounted for with respect to
each group of employees are allocated to the separate plan for that
group of employees.
For purposes of this subparagraph, a separate accounting of assets
will not be considered to have occurred to the extent that the assets
allocated to each single plan are determined by an historical
re-creation of benefits, contributions, investment gains, etc.
(o) Transfers of assets or liabilities. Any transfer of assets or
liabilities will for purposes of section 414 (l) be considered as a
combination of separate mergers and spinoffs using the rules of
paragraphs (d), (e) through (j), (l), (m), or (n) of this section,
whichever is appropriate. Thus, for example, if in accordance with the
transfer of one or more employees, a block of assets and liabilities are
transferred from Plan A to Plan B, each of which is a defined benefit
plan, the transaction will be considered as a spinoff from Plan A and a
merger of one of the spinoff plans with Plan B. The spinoff and merger
described in the previous sentence would be subject to the requirements
of paragraphs (n) and (e) through (j) of this section respectively.
(T.D. 7638, 44 FR 48195, Aug. 17, 1979)
26 CFR 1.414(q)-1T Highly compensated employee (temporary).
The following questions and answers relate to the definition of
''highly compensated employee'' provided in section 414(q). The
definitions and rules provided in these questions and answers are
provided solely for purposes of determining the group of highly
compensated employees.
Q&A-1 General applicability of section 414(q).
Q&A-2 Definition of highly compensated employees.
Q&A-3 Definition of highly compensated active employees.
Q&A-4 Definition of highly compensated former employees.
Q&A-5 Definition of separation year.
Q&A-6 Definition of employer.
Q&A-7 Definition of employee.
Q&A-8 Definition of 5-percent owner.
Q&A-9 Definition of top-paid group.
Q&A-10 Definition of officer and rules on inclusion of officers in
highly compensated group.
Q&A-11 Rules with respect to family aggregation.
Q&A-12 Definition of family member.
Q&A-13 Definition of compensation.
Q&A-14 Rules with respect to the relevant determination periods.
Q&A-15 Transition rule applicable to plan years beginning in 1987 and
1988 for certain employers that have plans that must comply with the
provisions of section 401(k)(3) or 401(m)(2).
Q-1: To what employee benefit plans and statutory provisions is the
definition of highly compensated employee contained in section 414(q)
applicable?
A-1: (a) In general. This definition is applicable to statutory
provisions that incorporate the definition by reference.
(b) Qualified retirement plans -- (1) In general. Generally, this
definition is incorporated in many of the nondiscrimination requirements
applicable to pension, profit-sharing, and stock bonus plans qualified
under section 401(a). See, e.g., the nondiscrimination provisions of
sections 401(a) (4) and (5), 401(k)(3), 401(l), 401(m), 406(b), 407(b),
408(k), 410(b) and 411(d)(1). The definition is also incorporated by
certain other provisions with respect to such plans, including the
aggregation rules of section 414(m) and section 4975 (tax on prohibited
transactions).
(2) Not applicable where not incorporated by reference. This
definition is not applicable to qualified plan provisions that do not
incorporate it. See, e.g., section 415 (limitations on contributions
and benefits), with the exception of section 415(c)(3)(C) and 415(c)(6)
(special rules for permanent and total disability and employee stock
ownership plans respectively).
(c) Other employee benefit plans or arrangements. This definition is
incorporated by various sections relating to employee benefit
provisions. See, e.g., section 89 (certain other employee benefit
plans), section 106 (accident and health plans), 117(d) (qualified
tuition reduction), section 125 (cafeteria plans), section 129
(dependent care assistance programs), section 132 (certain fringe
benefits), section 274 (certain entertainment, etc. expenses), section
423(b) (employee stock purchase plan provisions), section 501(c) (17)
and (18) (certain exempt trusts providing benefits to employees), and
section 505 (certain exempt organizations or trusts providing benefits
to individuals). See the respective sections for the applicable
effective dates.
(d) ERISA. This definition is not determinative with respect to any
provisions of Title I of the Employee Retirement Income Security Act of
1974 (ERISA), unless it is explicitly incorporated by reference (e.g.,
section 408(b)(1)(B)).
Q-2: Who is a highly compensated employee?
A-2: The group of employees (including former employees) who are
highly compensated employees consists of both highly compensated active
employees (see A-3 of this 1.414(q)-1T) and highly compensated former
employees (see A-4 of this 1.414(q)-1T). In many circumstances, highly
compensated active employees and highly compensated former employees are
considered separately in applying the provisions for which the
definition of highly compensated employees in section 414(q) is
applicable. Specific rules with respect to the treatment of highly
compensated active employees and highly compensated former employees
will be provided in the regulations with respect to the sections to
which the definition of highly compensated employees is applicable.
Q-3: Who is a highly compensated active employee?
A-3: (a) General rule. For purposes of the year for which the
determination is being made (the determination year), a highly
compensated active employee is any employee who, with respect to the
employer, performs services during the determination year and is
described in any one or more of the following groups applicable with
respect to the look-back year calculation and/or determination year
calculation for such determination year. See A-14 for rules relating to
the periods for which the look-back year calculation and determination
year calculation are to be made.
(1) Look-back year calculation.
(i) 5-percent owner. The employee is a 5-percent owner at any time
during the look-back year (i.e., generally, the 12-month period
immediately preceding the determination year; see A-14. (See A-8 of
this 1.414(q)-1T.)
(ii) Compensation above $75,000. The employee receives compensation
in excess of $75,000 during the look-back year.
(iii) Compensation above $50,000 and top-paid group. The employee
receives compensation in excess of $50,000 during the look-back year and
is a member of the top-paid group for the look-back year. (See A-9 of
this 1.414(q)-1T.)
(iv) Officer. The employee is an ''includible officer'' during the
look-back year. (See A-10 of this 1.414(q)-1T.)
(2) Determination year calculation.
(i) 5-percent owner. The employee is a 5-percent owner at any time
during the determination year. (See A-8 of this 1.414(q)-1T.)
(ii) Top-100 employees. The employee is both (A) described in
paragraph (a)(1)(i), (ii) and/or (iv) of this A-3, when such paragraphs
are modified to substitute the determination year for the look-back
year, and (B) one of the 100 employees who receive the most compensation
from the employer during the determination year.
(b) Rounding and tie-breaking rules. In making the look-back year
and determination year calculations for a determination year, it may be
necessary for an employer to adopt a rule for rounding calculations
(e.g., in determining the number of employees in the top-paid group).
In addition, it may be necessary to adopt a rule breaking ties among two
or more employees (e.g., in identifying those particular employees who
are in the top-paid group or who are among the 100 most highly
compensated employees). In such cases, the employer may adopt any
rounding or tie-breaking rules it desires, so long as such rules are
reasonable, nondiscriminatory, and uniformly and consistently applied.
(c) Adjustments to dollar thresholds -- (1) Indexing of dollar
thresholds. The dollar amounts in paragraph (a)(1) (i) and (ii) of this
A-3 are indexed at the same time and in the same manner as the section
415(b)(1)(A) dollar limitation for defined benefit plans.
(2) Applicable dollar threshold. The applicable dollar amount for a
particular determination year or look-back year is the dollar amount for
the calendar year in which such determination year or look-back year
begins. Thus, the dollar amount for purposes of determining the highly
compensated active employees for a particular look-back year is based on
the calendar year in which such look-back year begins, not the calendar
year in which such look-back year ends or in which the determination
year with respect to such look-back year begins.
(d) Employees described in more than one group. An individual who is
a highly compensated active employee for a determination year, by reason
of being described in one group in paragraph (a) of this A-3, under
either the look-back year calculation or the determination year
calculation, is not disregarded in determining whether another
individual is a highly compensated active employee by reason of being
described in another group under paragraph (a). For example, an
individual who is a highly compensated active employee for a
determination year, by reason of being a 5-percent owner during such
year, who receives compensation in excess of $50,000 during both the
look-back year and the determination year, is taken into account in
determining the group of employees who are highly compensated active
employees for such determination year by reason of receiving more than
$50,000, and being in the top-paid group under either or both the
look-back year calculation or determination year calculation for such
determination year.
(e) Examples. The following examples, in which the determination
year and look-back year are the calendar year, are illustrative of the
rules in paragraph (a) of this A-3. For purposes of these examples, the
threshold dollar amounts in paragraph (a)(1) (ii) and (iii) of this A-3
are not increased pursuant to paragraph (c) of this A-3.
Example (1). Employee A, who is not at any time a 5-percent owner,
an officer, or a member of the top-100 within the meaning of paragraph
(a)(1) (i), or (iv), or (a)(2) (i) or (ii), but who was a member of the
top-paid group for each year, is included in or excluded from the highly
compensated groups as specified below for the following years:
Example (2). Assuming the same facts as those given in Example (1),
except that A is a member of the top-100 employees within the meaning of
paragraph (a)(2)(ii) of this A-3 for the 1987 year and 1990 year, the
results are as follows:
A-4: Who is a highly compensated former employee?
Q-4: (a) General rule. Except to the extent provided in paragraph
(d) of this A-4, a highly compensated former employee for a
determination year is any former employee who, with respect to the
employer, had a separation year (as defined in A-5 of this 1.414(q)-1T)
prior to the determination year and was a highly compensated active
employee as defined in A-3 of this 1.414(q)-1T for either such
employee's separation year or any determination year ending on or after
the employee's 55th birthday. Thus, for example, an employee who is a
highly compensated active employee for such employee's separation year,
by reason of receiving over $75,000 during the look-back year, is a
highly compensated former employee for determination years after such
employee's separation year.
(b) Special rule for employees who perform no services for the
employer in the determination year. For purposes of this rule,
employees who perform no services for an employer during a determination
year are treated as former employees. Thus, for example, an employee
who performed no services for the employer during a determination year,
by reason of a leave of absence during such year, is treated as a former
employee for such year.
(c) Dollar amounts for pre-1987 determination years. For
determination years beginning before January 1, 1987, the dollar amounts
in paragraph (a)(1)(B) and (C) of A-2 of this 1.414(q)-1T are $75,000
and $50,000 respectively.
(d) Special rule for employees who separated from service before
January 1, 1987 -- (1) Election of special rule. Employers may elect to
apply paragraph (d)(2) of this A-4 in lieu of paragraph (a) of this A-4
in determining whether former employees who separated from service prior
to January 1, 1987, are highly compensated former employees. If this
election is made with respect to any qualified plan, it must be provided
for in the plan. If the employer makes this election with respect to
any employee benefit plan, such election must be used uniformly for all
purposes for which the section 414(q) definition is applicable. The
election, once made, cannot be changed without the consent of the
Commissioner.
(2) Special definition of highly compensated former employee. A
highly compensated former employee includes any former employee who
separated from service with the employer prior to January 1, 1987, and
was described in any one or more of the following groups during either
the employee's separation year (or the year preceding such separation
year) or any year ending on or after such individual's 55th birthday (or
the last year ending before such employee's 55th birthday):
(i) 5-percent owner. The employee was a 5-percent owner of the
employer at any time during the year.
(ii) Compensation amount. The employee received compensation is
excess of $50,000 during the year.
The determinations provided for in this paragraph (b)(2) may be made
on the basis of the calendar year, the plan year, or any other twelve
month period selected by the employer and applied on a reasonable and
consistent basis.
(e) Rules with respect to former employees -- (1) In general. For
specific provisions with respect to the treatment of former employees
and of highly compensated former employees, refer to the rules with
respect to which the section 414(q) definition of highly compensated
employee is applicable.
(2) Former employees excluded in determining top-paid group, top-100
employees and includible officers. Former employees are not included in
the top-paid group, the group of the top-100 employees, or the group of
includible officers for purposes of applying section 414(q) to active
employees. In addition, former employees are not counted as employees
for purposes of determining the number of employees in the top-paid
group.
Q-5: What is a separation year for purposes of section 414(q)?
A-5: (a) Separation year -- (1) In general. The separation year
generally is the determination year during which the employee separates
from service with the employer. For purposes of this rule, an employee
who performs no services for the employer during a determination year
will be treated as having separated from service with the employer in
the year in which such employee last performed services for the
employer. Thus, for example, an employee who performs no services for
the employer by reason of being on a leave of absence throughout the
determination year is considered to have separated from service with the
employer in the year in which such employee last performed services
prior to beginning the leave of absence.
(2) Deemed separation. An employee who performs services for the
employer during a determination year may be deemed to have separated
from service with the employer during such year pursuant to the rules in
paragraph (a)(3) of this A-5. Such deemed separation year is relevant
for purposes of determining whether such employee is a highly
compensated former employee after such employee actually separates from
service, not for purposes of identifying such employee as either an
active or former employee. Because employees to whom the provisions of
paragraph (a)(2) of this A-5 apply are still performing services for the
employer during the determination year, they are treated as active
employees. Thus, for example, an employee who has a deemed separation
year in 1989, a year during which he was a highly compensated employee,
who continues to work for the employer until he retires from employment
in 1995, is an active employee of the employer until 1995 and is either
highly compensated or not highly compensated for any determination year
during such period based on the rules with respect to highly compensated
active employees. For determination years after the year of such
employee's retirement, such employee is a highly compensated former
employee because such employee was a highly compensated active employee
for the deemed separation year.
(3) Deemed separation year. An employee will be deemed to have a
separation year if, in a determination year prior to attainment of age
55, the employee receives compensation in an amount less than 50% of the
employee's average annual compensation for the three consecutive
calendar years preceding such determination year during which the
employee received the greatest amount of compensation from the employer
(or the total period of the employee's service with the employer, if
less).
(4) Leave of absence. The deemed separation rules contained in
paragraph (a)(2) and (3) of this A-5 apply without regard to whether the
reduction in compensation occurs on account of a leave of absence.
(b) Deemed resumption of employment. An employee who is treated as
having a deemed separation year by reason of the provisions of paragraph
(a) of this A-5 will not be treated as a highly compensated former
employee (by reason of such deemed separation year) after such employee
actually separates from service with the employer if, after such deemed
separation year, and before the year of actual separation, such
employee's services for and compensation from the employer for a
determination year increase significantly so that such employee is
treated as having a deemed resumption of employment. The determination
of whether an employee who has incurred a deemed separation year has an
increase in services and compensation sufficient to result in a deemed
resumption of employment will be made on the basis of all the
surrounding facts and circumstances pertaining to each individual case.
At a minimum, there must be an increase in compensation from the
employer to the extent that such compensation would not result in a
deemed separation year under the tests in paragraph (a)(2) of this A-5
using the same three-year period taken into account in such paragraph.
(c) Examples. Paragraphs (a) and (b) of this A-5 are illustrated by
the following examples based on calendar years. For purposes of these
examples the threshold dollar amounts in A-5(a) of this 1.414(q)-1T
have not been increased pursuant to A-5(b) of this 1.414(q)-1T.
Example (1). Assume that in 1990 A is a highly compensated employee
of X by reason of having earned more than $75,000 during the 1989
look-back year. In 1987, 1988 and 1989, A's years of greatest
compensation received from X, A received $76,000, $80,000 and $79,000
respectively. In February of 1990, A received $30,000 in compensation.
Because A's compensation during the 1990 determination year is less than
50% of A's average annual compensation from X during A's high three
prior determination years, A is deemed to have a separation year during
the 1990 determination year pursuant to the provisions of paragraph (a)
of this A-5. Since A is a highly compensated employee for X in 1990,
A's deemed separation year, A will be treated as a highly compensated
former employee after A actually separates from service with the
employer unless A experiences a deemed resumption of employment within
the meaning of paragraph (b) of this A-5.
Example (2). Assume that in 1990 A is a highly compensated employee
by reason of having been an officer (with annual compensation in excess
of the section 415(c)(1)(A) dollar limitation) during the 1989 look-back
year. A's compensation from X during 1990 is $37,000. A's average
compensation from X for the three-year period ending with or within
January, 1990, was $60,000. A's compensation during the 1990
determination year is not less than 50% of the compensation earned
during the test period. Therefore, A is not deemed to have a separation
year under paragraph (a)(2)(i) of this A-5.
Example (3). Assume that in 1990 C is 35 and a highly compensated
employee of Z for the reasons given in Example (1) with the same
compensation set forth in that example. During 1990, C leaves C's 40
hour a week position as director of the actuarial division of Z and
starts working as an actuary for the same division, producing actuarial
reports approximately 15 to 20 hours a week, approximately half of these
hours at home. C contemplates returning to full-time employment with Z
when C's child enters school. During the 1990 determination year, C's
compensation is less than 50% of C's compensation during her high three
preceding determination years. Therefore, C has a deemed separation
year during the 1990 determination year. In 1991 C commences working 32
hours a week for X at X's place of business and receives compensation in
an amount equal to 80 percent of her average annual compensation during
her high three prior determination years. The C's increased
compensation, considered in conjunction with the reasons for the
reduction in service, the nature and extent of the services performed
before and after the reduction in services, and the lack of proximity of
C's age to age 55 at the time of the reduction are sufficient to
establish that C has a deemed resumption of employment within the
meaning of paragraph (b) of this A-5. Therefore, when C separates from
service with the employer, C will not be treated as a highly compensated
former employee by reason of C's deemed separation year in 1990.
Q-6: Who is the employer?
A-6: (a) Aggregation of certain entities. The employer is the
entity employing the employees and includes all other entities
aggregated with such employing entity under the aggregation requirements
of section 414(b), (c), (m) and (o). Thus, the following entities must
be taken into account as a single employer for purposes of determining
the employees who are ''highly compensated employees'' within the
meaning of section 414(q):
(1) All corporations that are members of a controlled group of
corporations (as defined in section 414(b)) that includes the employing
entity.
(2) All trades or businesses (whether or not incorporated) that are
under common control (as defined in section 414(c)) which group includes
the employing entity.
(3) All organizations (whether or not incorporated) that are members
of an affiliated service group (as defined in section 414(m)) that
includes the employing entity.
(4) Any other entities required to be aggregated with the employing
entity pursuant to section 414(o) and the regulations thereunder.
(b) Priority of aggregation provisions. The aggregation requirements
of paragraph (a) of this A-6 and of A-7(b) of this section with respect
to leased employees are applied before the application of any of the
other provisions of section 414(q) and this section.
(c) Line of business rules. The section 414(r) rules with respect to
separate lines of business are not applicable in determining the group
of highly compensated employees.
Q-7: Who is an employee for purposes of section 414(q)?
A-7: (a) General rule. Except as provided in paragraph (b) of this
A-7, the term ''employee'' for purposes of section 414(q) refers to
individuals who perform services for the employer and are either
common-law employees of the employer or self-employed individuals who
are treated as employees pursuant to section 401(c)(1). This rule with
respect to the inclusion of certain self-employed individuals in the
group of highly compensated employees is applicable whether or not such
individuals are eligible to participate in the plan or benefit
arrangement being tested.
(b) Leased employees -- (1) In general. The term ''employee''
includes a leased employee who is treated as an employee of the
recipient pursuant to the provisions of section 414(n)(2) or 414(o)(2).
Employees that an employer treats as leased employees under section
414(n), pursuant to the requirements of section 414(o), are considered
to be leased employees for purposes of this rule.
(2) Safe-harbor exception. For purposes of qualified retirement
plans, if an employee who would be a leased employee within the meaning
of section 414(n)(2) is covered in a safe-harbor plan described in
section 414(n)(5) (a qualified money purchase pension plan maintained by
the leasing organization), and not otherwise covered under a qualified
retirement plan of the employer, then such employee is excluded from the
term ''employee'' unless the employer elects to include such employee
pursuant to the provisions of paragraph (4) of this paragraph (b).
(3) Other employee benefit plans. The exception in paragraph (b)(2)
of this A-7 is not applicable to the determination of the highly
compensated employee group for purposes of the sections enumerated in
section 414(n)(3)(C). Thus, for example, a leased employee covered by a
safe-harbor plan is considered to be an employee in applying the
nondiscrimination provisions of section 89 to statutory benefit plans.
Consequently, an employer with leased employees covered in a safe-harbor
plan may have 2 groups of highly compensated employees, one with respect
to its retirement plans and another with respect to its statutory
benefit plans.
(4) Election with respect to leased employee exclusion. An employer
may elect to include the employees excepted under the provisions of
paragraph (b)(2) of this A-7 in determining the highly compensated group
with respect to an employer's retirement plans. Thus, for example, by
electing to forego the exception in paragraph (b)(2) of this A-7, an
employer may achieve more uniform highly compensated employee groups for
purposes of its retirement plans and welfare benefit plans. The
election to include such employees must be made on a reasonable and
consistent basis and must be provided for in the plan.
Q-8: Who is a 5-percent owner of the employer?
A-8: An employee is a 5-percent owner of the employer for a
particular year if, at any time during such year, such employee is a
5-percent owner as defined in section 416(i)(B)(i) and 1.416-1 A
T-17&18. Thus, if the employer is a corporation, a 5-percent owner is
any employee who owns (or is considered as owning within the meaning of
section 318) more than 5 percent of the value of the outstanding stock
of the corporation or stock possessing more than 5 percent of the total
combined voting power of all stock of the corporation. If the employer
is not a corporation, a 5-percent owner is any employee who owns more
than 5 percent of the capital or profits interest in the employer. The
rules of subsections (b), (c), and (m) of section 414 do not apply for
purposes of determining who is a 5-percent owner. Thus, for example, an
individual who is a 5-percent owner of a subsidiary corporation that is
part of a controlled group of corporations within the meaning of section
414(b) is treated as a 5-percent owner for purposes of these rules.
Q-9: How is the ''top-paid group'' determined?
A-9: (a) General rule. An employee is in the top-paid group of
employees for a particular year if such employee is in the group
consisting of the top 20 percent of the employer's employees when ranked
on the basis of compensation received from the employer during such
year. The identification of the particular employees who are in the
top-paid group for a year involves a two-step procedure:
(1) The determination of the number of employees that corresponds to
20 percent of the employer's employees, and
(2) The identification of the particular employees who are among the
number of employees who receive the most compensation during this year.
Employees who perform no services for the employer during a year are
not included in making either of these determinations for such year.
(b) Number of employees in the top-paid group -- (1) Exclusions. The
number of employees who are in the top-paid group for a year is equal to
20 percent of the total number of active employees of the employer for
such year. However, solely for purposes of determining the total number
of active employees in the top-paid group for a year, the employees
described in paragraph (b)(1) (i), (ii), and (iii) of this A-9 are
disregarded. Paragraph (g) of this A-9 provides rules for determining
those employees who are excluded for purposes of applying section
414(r)(2)(A), relating to the 50-employee requirement applicable to a
qualified separate line of business.
(i) Age and service exclusion. The following employees are excluded
on the basis of age or service absent an election by the employer
pursuant to the rules in paragraph (b)(2) of this A-9:
(A) Employees who have not completed 6 months of service by the end
of such year. For purposes of this paragraph (A), an employee's service
in the immediately preceding year is added to service in the current
year in determining whether the exclusion is applicable with respect to
a particular employee in the current year. For example, given a plan
with a calendar determination year, if employee A commences work August
1, 1989, and terminates employment May 31, 1990, A may be excluded under
this paragraph (b)(1)(i)(A) in 1989 because A completed only 5 months of
service by December 31, 1989. However, A cannot be excluded pursuant to
this rule in 1990 because A has completed 10 months of service, for
purposes of this rule, by the end of 1990.
(B) Employees who normally work less than 17 1/2 hours per week as
defined in paragraph (d) of this A-9 for such year.
(C) Employees who normally work during less than 6 months during any
year as defined in paragraph (e) of this A-9 for such year.
(D) Employees who have not had their 21st birthdays by the end of
such year.
(ii) Nonresident alien exclusion. Employees who are nonresident
aliens and who receive no earned income (within the meaning of section
911(d)(2)) from the employer that constitutes income from sources within
the United States (within the meaning of section 861(a)(3)) are
excluded.
(iii) Collective bargaining exclusion -- (A) In general. Except as
provided in paragraph (B) of this paragraph (b)(1)(iii), employees who
are included in a unit of employees covered by an agreement that the
Secretary of Labor finds to be a collective bargaining agreement between
employee representatives and the employer, which agreement satisfies
section 7701(a)(46) and 301.7701-17T (Temporary), are included in
determining the number of employees in the top-paid group.
(B) Percentage exclusion provision. If 90 percent or more of the
employees of the employer are covered under collective bargaining
agreements that the Secretary of Labor finds to be collective bargaining
agreements between employee representatives and the employer, which
agreements satisfy section 7701(a)(46) and 301.7701-17T (Temporary),
and the plan being tested covers only employees who are not covered
under such agreements, then the employees who are covered under such
collective bargaining agreements are not counted in determining the
number of noncollective bargaining employees who will be included in the
top-paid group for purposes of testing such plan. In addition, such
employees are not included in the top-paid group for such purposes.
Thus, if the conditions of this paragraph (b)(1)(iii)(B) are satisfied,
a separate calculation is required to determine the number and identity
of noncollective bargaining employees who will be highly compensated
employees by reason of receiving over $50,000 and being in the top-paid
group of employees for purposes of testing those plans that cover only
noncollective bargaining employees.
(2) Alternative exclusion provisions -- (i) Age and service exclusion
election. An employer may elect, on a consistent and uniform basis, to
modify the permissible exclusions set forth in paragraph (b)(1)(i) (A),
(B), (C), and (D) of this A-9 by substituting any shorter period of
service or lower age than that specified in such paragraph. These
exclusions may be modified to substitute a zero service or age
requirement.
(ii) Election not to apply percentage exclusion provision. An
employer may elect not to exclude employees under the rules in paragraph
(b)(1)(iii)(B) of this A-9.
(iii) Method of election. The elections in this paragraph (b)(2)
must be provided for in all plans of the employer and must be uniform
and consistent with respect to all situations in which the section
414(q) definition is applicable to the employer. Thus, with respect to
all plan years beginning in the same calendar year, the employer must
apply the test uniformly for purposes of determining its top-paid group
with respect to all its qualified plans and employee benefit plans. If
either election is changed during the determination year, no
recalculation of the look-back year based on the new election is
required, provided the change in election does not result in
discrimination in operation.
(c) Identification of top-paid group members. With the exception of
the paragraph (b)(1)(iii) of this A-9 exclusion for certain employees
covered by collective bargaining agreements, the exclusions in paragraph
(b)(1) of this A-9 are not applicable for purposes of identifying the
particular employees in the top-paid group. Thus, for example, even if
an employee who normally works for less than 17 1/2 hours is excluded in
determining the number of employees in the top-paid group such employee
may be a member of the top-paid group. Similarly, if during a
determination year, employee A receives over $75,000 and is one of the
top-100 employees ranked by compensation, then employee A is a highly
compensated active employee for such determination year. This is true
even though employee A has worked less than six months and thus may be
excluded in determining the number of persons in the top-paid group for
the determination year.
(d) Example. Paragraphs (b) and (c) of this A-9 are illustrated by
the following example:
Example. Employer X has 200 active employees during the 1989
determination year, 100 of whom normally work less than 17 1/2 hours per
week during such year and 80 of whom normally work less than 15 hours
per week during such year. X elects to exclude all employees who
normally work less than 15 hours per week in determining the number of
employees in the top-paid group. Thus, X excludes 80 employees in
determining the number of employees in the top-paid group. X's top-paid
group for the 1989 determination year consists of 20% of 120 or 24
employees. All 200 of X's employees must then be ranked in order by
compensation received during the year, and the 24 employees X paid the
greatest amount of compensation during the year are top-paid employees
with respect to X for the 1989 determination year.
(e) 17 1/2 hour rule -- (1) In general. The determination of whether
an employee normally works less than 17 1/2 hours per week is made
independently for each year based on the rules in paragraph (e)(2) and
(3) of this A-9. In making this determination, weeks during which the
employee did not work for the employer are not considered. Thus, for
example, if an employee normally works twenty hours a week for
twenty-five weeks during the fall and winter school quarters, 10 hours a
week for the 12 week spring quarter, and does not work for the employer
during the three-month summer quarter, such employee is treated as
normally working more than 17 1/2 hours per week under the rule of this
paragraph (e).
(2) Deemed above 17 1/2. An employee who works 17 1/2 hours a week
or more, for more than fifty percent of the total weeks worked by such
employee during the year, is deemed to normally work more than 17 1/2
hours a week for purposes of this rule.
(3) Deemed below 17 1/2. An employee who works less than 17 1/2
hours a week for fifty percent or more of the total weeks worked by such
employee during the year is deemed to normally work less than 17 1/2
hours a week for purposes of this rule.
(4) Application. The determination provided for in paragraph (e)(1),
(2), and (3) of this A-9 may be made separately with respect to each
employee, or on the basis of groups of employees who fall within
particular job categories as established by the employer on a reasonable
basis. For example, under the rule of this paragraph (e)(4) an employer
may exclude all office cleaning personnel if, for the year in question,
the employees performing this function normally work less than 17 1/2
hours a week. This is true even though one or more employees within
this group normally work in excess of 17 1/2 hours. The election to
make this determination on the basis of individuals or groups is
operational and does not require a plan provision.
(5) Application based on groups. (i) Groups of employees who perform
the same job are not required to be considered as one category for
purposes of the rule in paragraph (e)(4) of this A-9. Thus, for
example, an employer supermarket may determine its highly compensated
employees by excluding part-time grocery checkers if such personnel
normally work less than 17 1/2 hours a week while continuing to include
full-time personnel performing this function. In general, 80 percent of
the positions within a particular job category must be filled by
employees who normally work less than 17 1/2 hours a week before any
employees may be excluded under this rule on the basis of their
membership in that job category.
(ii) Alternatively, an employer may exclude employees who are members
of a particular job category if the median number of hours of service
credited to employees in that category during a determination or
look-back year is 500 or less.
(f) 6-month rule -- (1) In general. The determination of whether
employees normally work during not more than 6 months in any year is
made on the basis of the facts and circumstances of the particular
employer as evidenced by the employer's customary experience in the
years preceding the determination year. An employee who works on one
day during a month is deemed to have worked during that month.
(2) Application of prior year experience. In making the
determination under this paragraph (f), the experience for years
immediately preceding the determination year will generally be weighed
more heavily than that of earlier years. However, this emphasis on more
recent years is not appropriate if the data for a particular year
reflects unusual circumstances. For example, if fishermen working for
employer X worked 9 months in 1987 and 1988, 8 months in 1989, and then,
because of abnormal ice conditions, worked only 5 months in 1990, such
fishermen could not be excluded under this rule in 1990. Furthermore,
the data with respect to 1990 would not be weighed more heavily in
making a determination with respect to subsequent years.
(3) Individual or group basis. This determination may be made
separately with respect to each employee or on the basis of groups of
employees who fall within particular job categories in the manner set
forth in paragraph (e)(4) of this A-8.
(g) Excluded employees under section 414(r)(2)(A) -- (1) In general.
This paragraph (g) provides the rules for determining which employees
are excluded employees for purposes of applying section 414(r)(2)(A),
relating to the 50-employee requirement applicable to a qualified
separate line of business.
(2) Excluded employees -- (i) Age and service exclusion. All
employees are excluded who are described in paragraph (b)(1)(i) of this
A-9 (relating to exclusions based on age or service). For this purpose,
the rules in paragraphs (e) and (f) of this A-9 (relating respectively
to the 17 1/2 hour rule and the 6-month rule) apply. However, the
election in paragraph (b)(2)(i) of this A-9 (permitting the employer to
elect reduced minimum age or service requirements) does not apply.
(ii) Nonresident alien exclusion. All employees are excluded who are
described in paragraph (b)(1)(ii) of this A-9 (relating to the exclusion
of nonresident aliens with no U.S.-source income from the employer).
(iii) Inclusion of employees covered under a collective bargaining
agreement. All employees are included who are described in paragraph
(b)(1)(iii)(A) of this A-9 (relating to employees covered under a
collective bargaining agreement), and who are not otherwise described in
paragraph (g)(2) (i) or (ii) of this A-9. For this purpose, the
exclusion in paragraph (b)(1)(iii)(B) of this A-9 and the related
election in paragraph (b)(2)(ii) of this A-9 do not apply.
(3) Applicable period. The determination of which employees are
excluded employees is made on the basis of the testing year specified in
the regulations under section 414(r) and not on the basis of the
determination year or the look-back year under section 414(q).
Q-10. For purposes of determining the group of highly compensated
employees, which employees are officers and which officers must be
included in the highly compensated group?
A-10: (a) In general. Subject to the limitations set forth in
paragraph (b) of this A-10 and the top-100 employee rule set forth in
A-2, an employee is an includible officer for purposes of this section
and is a member of the group of highly compensated employees if such
employee is an officer of the employer (within the meaning of section
416(i) and 1.416-1 A-T 13 & A-T 15) at any time during the
determination year or look-back year and receives compensation during
such year that is greater than 150 percent of the dollar limitation in
effect under section 415(c)(1)(A) for the calendar year in which the
determination or look-back year begins. In addition, an officer who
does not meet the 415(c)(1)(A) dollar limitation requirement may be an
includible officer based on the minimum inclusion rules set forth in
paragraph (c) of this A-10.
(b) Maximum limitation -- (1) In general. Nor more than 50 employees
(or, if lesser, the greater of 3 employees or 10 percent of the
employees without regard to any exclusions) shall be treated as officers
for purposes of this provision in determining the group of highly
compensated employees for any determination year or look-back year.
(2) Total number of employees. The total number of employees for
purposes of the limitation in this paragraph (b) is the number of
employees the employer has during the particular determination year or
look-back year. For purposes of this A-10, employees include only those
individuals who perform services for the employer during the
determination or look-back year. The exclusions applicable for purposes
of determining the number of employees in the top-paid group are not
applicable for purposes of the limitations in this paragraph (b).
(3) Inclusion ranking. If the number of the employer's officers who
satisfy paragraph (a) of this A-10 during either the determination year
or the look-back year exceeds the limitation under this paragraph (b),
then the officers who will be considered as includible officers for
purposes of this rule are those who receive the greatest compensation
from the employer during such determination or look-back year. The
definition of compensation in A-13 is to be used for this purpose.
(c) Minimum inclusion rule. This paragraph (c) is applicable when no
officer of the employer satisfies the compensation requirements of
paragraph (a) of this A-10 during either a determination year or
look-back year. In such case, the highest paid officer of the employer
for such year is treated as a highly compensated employee by reason of
being an officer, without regard to the amount of compensation paid to
such officer in relation to the section 415(c)(1)(A) dollar amount for
the year. This is true whether or not such employee is also a highly
compensated employee on any other basis. Thus, for example, if no
officer of employer X meets the compensation requirements of paragraph
(a) of this A-10 during the 1989 look-back year, and employee A is both
the highest paid officer during such year and a 5-percent owner,
employee A is treated as an includible officer satisfying the minimum
inclusion rules of this paragraph.
(d) Separate application. The maximum and minimum officer inclusion
rules of paragraphs (b) and (c) of this A-10 apply separately with
respect to the determination year calculation and the look-back year
calculation. Thus, for example, if no officer of employer X receives
compensation above the threshold amount in paragraph (a) of this A-10
during either the determination year or look-back year, application of
the minimum inclusion rule would result in the officer of employer X who
received the greatest compensation during the look-back year being
treated as a highly compensated employee and, in addition, the officer
of employer X who receives the most compensation during the
determination year would be included in the highly compensated group if
such officer is also in the top-100 employees of employer X for such
year. Thus, two officers may be treated as highly compensated active
employees for a determination year by reason of the provisions of the
minimum inclusion rule.
Q-11: To what extent must family members who are employed by the
same employer be aggregated for purposes of section 414(q)?
A-11: (a) Family aggregation -- (1) In general. Aggregation is
required with respect to an employee who is, during a particular
determination year or look-back year, a family member (as defined in
A-12) of either (i) a 5-percent owner who is an active or former
employee or (ii) a highly compensated employee who is one of the ten
most highly compensated employees ranked on the basis of compensation
paid by the employer during such year.
(2) Aggregation of contributions or benefits. As prescribed in
regulations under the provisions to which section 414(q) is applicable,
a family member and a 5-percent owner or top-10 highly compensated
employee aggregated under this rule are generally treated as a single
employee receiving an amount of compensation and a plan contribution or
benefit that is based on the compensation, contributions, and benefits
of such family member and 5-percent owner or top-10 highly compensated
employee.
(b) Exclusion status irrelevant. Family members are subject to this
aggregation rule whether or not they fall within the categories of
employees that may be excluded for purposes of determining the number of
employees in the top-paid group and whether or not they are highly
compensated employees when considered separately.
(c) Order of determination -- (1) Determination of highly compensated
employees. The determination of which employees are highly compensated
employees and which highly compensated employees are among the ten most
highly compensated employees in making the look-back year calculation or
the determination year calculation for a determination year will be made
prior to the application of the rules in paragraph (a) of this A-11.
(2) Determination of top-paid group and top-100 employees. The
determination of the number and identity of employees in the top-paid
group under the look-back year calculation or the determination year
calculation for a determination year and the identity of individuals in
the top-100 employees under the determination year calculation for a
determination year is made prior to application of the rules in
paragraph (a) of this A-11.
(d) Determination period. The rules under paragraph (a) of this A-11
apply separately to the determination year and the look-back year.
Thus, assuming there are no 5-percent owners, if employees A, B, C, D,
E, F, G, H, I and J are the top 10 highly compensated employees in the
1988 look-back year, and employees F, G, H, I, J, K, L, M, N and O are
the top 10 highly compensated employees in the 1989 determination year,
then family aggregation would be required with respect to all fifteen of
such employees (i.e. employees A, B, C, D, E, F, G, H, I, J, K, L, M, N,
and O).
Q-12: Which individuals are family members for purposes of the
aggregation rules in section 414(a)(6)(A) and A-11?
A-12: (a) Definition of family member. Individuals who are family
members for purposes of these provisions include, with respect to any
employee or former employee, such employee's or former employee's spouse
and lineal ascendants or descendants and the spouses of such lineal
ascendants and descendants. In determining whether an individual is a
family member with respect to an employee or former employee, legal
adoptions shall be taken into account.
(b) Test period. If an individual is a family member with respect to
an employee or former employee on any day during the year, such
individual is treated as a family member for the entire year. Thus, for
example, if an individual is a family member with respect to an employee
on the first day of a year, such individual continues to be a family
member with respect to such employee throughout the year even though
their relationship changes as a result of death or divorce.
Q-13: How is ''compensation'' determined for purposes of determining
the group of ''highly compensated employees.''
A-13: (a) In general. For purposes of section 414(q), the term
''compensation'' means compensation within the meaning of section
415(c)(3) without regard to sections 125, 402(a)(8), and 402(h)(1)(B)
and, in the case of employer contributions made pursuant to a salary
reduction agreement, without regard to section 403(b). Thus,
compensation includes elective or salary reduction contributions to a
cafeteria plan, cash or deferred arrangement or tax-sheltered annuity.
(b) Determination period. For purposes of determining the group of
highly compensated employees, compensation must be calculated on the
basis of the applicable period for the determination year and look-back
year respectively.
(c) Compensation taken into account. Only compensation received by
an employee during the determination year or during the look-back year
is considered in determining whether such employee is a highly
compensated active employee under either the look-back year calculation
or determination year calculation for such determination year. Thus,
compensation is not annualized for purposes of determining an employee'
compensation in the determination year or the look-back year in applying
the rules of paragraph (a) of this A-13.
Q-14: What periods must be used for determining who is a highly
compensated employee for a determination year?
A-14: (a) Determination year and look-back year -- (1) In general.
For purposes of determining the group of highly compensated employees
for a determination year, the determination year calculation is made on
the basis of the applicable year of the plan or other entity for which a
determination is being made and the look-back year calculation is made
on the basis of the twelve month period immediately preceding such year.
Thus, in testing plans X and Y of an employer, if plan X has a calendar
year plan year and plan Y has a July 1 to June 30 plan year, the
determination year calculation and look-back year calculation for plan X
must be made on the basis of the calendar year. Similarly, the
determination year calculation and look-back year calculation for plan Y
must be made on the basis of the July 1 to June 30 year.
(2) Applicable year. For purposes of this A-14, the applicable year
is the plan year of the qualified plan or other employee benefit
arrangement to which the definition of highly compensated employees is
applicable as defined in the written plan document or otherwise
identified in regulations pursuant to sections to which the definition
of highly compensated employees is applicable. To the extent that the
definition of highly compensated employees is applicable to entities of
other arrangements that do not have an otherwise identified plan year,
then either the calendar year of the employer's fiscal year may be
treated as the plan year.
(3) Look-back year. The look-back year is never less than a twelve
month period.
(b) Calendar year calculation election -- (1) In general. An
employer may elect to make the look-back year calculation for a
determination year on the basis of the calendar year ending with or
within the applicable determination year (or, in the case of a
determination year that is shorter than twelve months, the calendar year
ending with or within the twelve-month period ending with the end of the
applicable determination year). In such case, the employer must make
the determination year calculation for the determination year on the
basis of the period (if any) by which the applicable determination year
extends beyond such calendar year (i.e., the lag period). If the
applicable year for which the determination is being made is the
calendar year, the employer still may elect to make the calendar year
calculation election under this A-14(b). In such case, the look-back
year calculation is made on the basis of the calendar year determination
year and, because there is no lag period, a separate determination year
calculation under A-3(a)(2) of this 1.414(q)-1 is not required.
(2) Lag period calculation. In making the determination year
calculation under A-3(a)(2) of this 1.414(q)-1 on the basis of the lag
period, the dollar amounts applicable under A-3(a)(1) (B) and (C) of
this 1.414(q)-1 are to be adjusted by multiplying such dollar amounts
by a fraction, the numerator of which is the number of calendar months
that are included in the lag period and the denominator of which is
twelve.
(3) Determination of active employees. An employee will be
considered an active employee for purposes of a determination year for
which the calendar year calculation election is in effect so long as
such employee performs services for the employer during the applicable
year for which the determination is being made. This is the case even
if such employee does not perform services for the employer during the
lag-period for such determination year.
(4) Election requirement. If the employer elects to make the
calendar year calculation election with respect to one plan, entity, or
arrangement, such election must apply with respect to all plans,
entities, and arrangements of the employer. In addition, such election
must be provided for in the plan.
(c) Change in applicable years. Where there is a change in the
applicable year for which a determination is being made with respect to
a plan entity, or other arrangement that is not subject to the calendar
year calculation election, the look-back year calculation for the short
applicable year is to be made on the basis of the twelve month period
preceding the short applicable year (i.e., generally, the old applicable
year) and the determination year calculation for the short applicable
year is to be made on the basis of the short applicable year. In
addition, the dollar amounts under A-3(a)(1) (B) and (C) are to be
adjusted for such determination year calculation as if the short
applicable year were a lag period under paragraph (b)(2) of this A-14.
(d) Example. The following examples illustrates the rules of this
A-14:
Example 1. Employer X has a single plan (Plan A) with an April 1 to
March 31 plan year. Employer X makes no election to use the calendar
year for the determination period. Therefore, in determining the group
of highly compensated employees for the April 1, 1989 to March 31, 1990
plan year, the determination year is the plan year ending March 31, 1990
and the look-back year is the plan year ending March 31, 1989.
Example 2. Assume the same facts given above. With respect to the
plan year beginning in 1990, employer X elects to use the calendar year
for the determination period. Therefore, in determining the group of
highly compensated employees for the April 1, 1990 to March 31, 1991
plan year, the lag-period determination year is the period from January
1, 1991, through March 31, 1991, and the applicable look-back year is
the 1990 calendar year.
Example 3. Employer Y has a single plan (Plan B) with a calendar
plan year. With respect to the plan year beginning in 1990, employer Y
elects to make the look-back year calculation for the 1990 determination
year on the basis of the calendar year ending with or within the 1990
determination year. Because employer Y's determination year is the 1990
calendar year there is no lag period and employer Y determines the group
of highly compensated employees for purposes of the 1990 calendar plan
year on the basis of such plan year alone.
Q-15: Is there any transition rule in determining the group of
highly compensated employees for 1987 and 1988?
A-15: (a) In general. Solely for purposes of section 401(k)(3) and
(m)(2) and solely for twelve-month plan years beginning in 1987 and
1988, an eligible employer may elect to define the group of highly
compensated employees as the group consisting of 5-percent owners of the
employer at any time during the plan year and employees who receive
compensation in excess of $50,000 during the plan year. This rule would
apply in lieu of the look-back year calculation and determination year
calculation otherwise applicable under A-3(a) of this 1.44(q)-1. In
addition, an eligible employer may elect to make the determinations
permitted under this transition rule on the basis of the calendar year
ending in the plan year and the period by which such plan year extends
beyond such calendar year, in accordance with the rules of A-14(b), in
lieu of making the determinations under this transition rule on the
basis of the plan year for which the determinations are being made.
(b) Eligible employers. An employer is an eligible employer under
this A-15 if such employer satisfies both of the following requirements:
(1) The employer does not maintain any top-heavy plan within the
meaning of section 416 at any time during 1987 and 1988; and
(2) Under each plan of the employer to which section 401(k)(3) or
401(m)(2) is applicable, the group of eligible employees that comprises
the highest 25% of eligible employees ranked on the basis of
compensation includes at least one employee whose compensation is
$50,000 or below. This requirement must be met separately with respect
to each such plan of the employer.
(c) Uniformity requirement. An eligible employer may not make the
election under paragraph (a) of this A-15 unless the election applies to
all of the plans maintained by the employer to which section 401(k)(3)
or 401(m)(2) applies.
(d) Election requirements. This election is operational and does not
require a plan provision.
(T.D. 8173, 53 FR 4967, Feb. 19, 1988, as amended at T.D. 8334, 56 FR
3977, Feb. 1, 1991)
26 CFR 1.414(r)-0 Table of contents.
(a) In general. Sections 1.414(r)-1 through 1.414(r)-11 provide
rules for determining whether an employer is treated as operating
qualified separate lines of business under section 414(r) of the
Internal Revenue Code of 1986 as added to the Code by section 1115(a) of
the Tax Reform Act of 1986 (Pub. L. No. 99-514), as well as rules for
applying the requirements of sections 410(b), 401(a)(26), and 129(d)(8)
separately with respect to the employees of each qualified separate line
of business of an employer. Paragraph (b) of this section contains a
listing of the headings of 1.414(r)-1 through 1.414(r)-11. Paragraph
(c) of this section provides a flowchart showing how the major
provisions of 1.414(r)-1 through 1.414(r)-6 are applied.
(b) Table of contents. The following is a listing of the headings of
1.414(r)-1 through 1.414(r)-11.
lines of business.
(a) In general.
(b) Conditions under which an employer is treated as operating
qualified separate lines of business.
(1) In general.
(2) Qualified separate line of business.
(i) In general.
(ii) Line of business.
(iii) Separate line of business.
(iv) Qualified separate line of business.
(A) In general.
(B) Fifty-employee requirement.
(C) Notice requirement.
(D) Requirement of administrative scrutiny.
(3) Determining the employees of a qualified separate line of
business.
(c) Separate application of certain Code requirements to employees of
a qualified separate line of business.
(1) In general.
(2) Separate application of section 410(b).
(i) General rule.
(ii) Special rule for employer-wide plans.
(3) Separate application of section 401(a)(26).
(i) General rule.
(ii) Special rule for employer-wide plans.
(4) Separate application of section 129(d)(8) (Reserved).
(5) Separate application of other Code requirements.
(d) Application of requirements.
(1) In general.
(2) Interpretation.
(3) Separate operating units.
(4) Certain mergers and acquisitions.
(5) Governmental and tax-exempt employers.
(i) General rule.
(ii) Additional rules (Reserved).
(6) Testing year basis of application.
(i) Section 414(r).
(ii) Sections 410(b), 401(a)(26), and 129(d)(8).
(7) Averaging rules.
(8) Definitions.
(9) Effective dates.
(i) General rule.
(ii) Reasonable compliance.
(A) In general.
(B) Determination of reasonable compliance.
(C) Effect on other plans.
(e) Additional rules.
(a) General rule.
(b) Employer determination of its lines of business.
(1) In general.
(2) Property and services provided to customers.
(3) Employer designation.
(i) In general.
(ii) Ability to combine unrelated types of property or services in a
single line of business.
(iii) Ability to separate related types of property or services into
two or more lines of business.
(iv) Affiliated service groups.
(c) Examples.
(1) In general.
(2) Examples illustrating employer designation.
(3) Examples illustrating property and services provided to
customers.
(a) General rule.
(b) Separate organization and operation.
(1) In general.
(2) Separate organizational unit.
(3) Separate financial accountability.
(4) Separate employee workforce.
(5) Separate management.
(c) Supplementary rules.
(1) In general.
(2) Determination of separate employee workforce.
(3) Determination of separate management.
(4) Employees taken into account.
(i) General rule.
(ii) Exclusion of certain nonresident aliens.
(5) Services taken into account.
(i) Provision of services to a separate line of business.
(ii) Period for which services are provided.
(iii) Determination of services.
(6) Examples of the separate employee workforce requirement.
(7) Examples of the separate management requirement.
(d) Optional rule for vertically integrated lines of business.
(1) In general.
(2) Requirements.
(3) Optional rule.
(i) Treatment of employees.
(ii) Purposes for which optional rule applies.
(4) Examples.
(a) In general.
(b) Fifty-employee requirement.
(c) Notice requirement.
(1) General rule.
(2) Effect of notice.
(a) In general.
(b) Statutory safe harbor.
(1) General rule.
(2) Highly compensated employee percentage ratio.
(3) Employees taken into account.
(4) Ten-percent exception.
(5) Determination based on preceding testing year.
(6) Examples.
(c) Safe harbor for separate lines of business in different
industries.
(1) In general.
(2) Optional rule for foreign operations.
(3) Establishment of industry categories.
(4) Examples.
(d) Safe harbor for separate lines of business that are acquired
through certain mergers and acquisitions.
(1) General rule.
(2) Employees taken into account.
(3) Transition period.
(4) Examples.
(e) Safe harbor for separate lines of business reported as industry
segments.
(1) In general.
(2) Reported as an industry segment in conformity with Form 10-K or
Form 20-F.
(3) Timely filing of Form 10-K or 20-F.
(4) Examples.
(f) Safe harbor for separate lines of business that provide same
average benefits as other separate lines of business.
(1) General rule.
(2) Separate lines of business benefiting disproportionate number of
nonhighly compensated employees.
(i) Applicability of safe harbor.
(ii) Requirement.
(3) Separate lines of business benefiting disproportionate number of
highly compensated employees.
(i) Applicability of safe harbor.
(ii) Requirement.
(4) Employees taken into account.
(5) Example.
(g) Safe harbor for separate lines of business that provide minimum
or maximum benefits.
(1) In general.
(2) Minimum benefit required.
(i) Applicability.
(ii) Requirement.
(iii) Defined benefit minimum.
(A) In general.
(B) Normal form and equivalent benefits.
(C) Compensation definition.
(D) Average compensation requirement.
(E) Special rules.
(iv) Defined contribution minimum.
(A) In general.
(B) Modified allocation definition for averaging.
(3) Maximum benefit permitted.
(i) Applicability.
(ii) Requirement.
(iii) Defined benefit maximum.
(A) In general.
(B) Determination of defined benefit maximum.
(C) Adjustment for different compensation definitions.
(D) Adjustment for certain subsidies.
(iv) Defined contribution maximum.
(4) Duplication of benefits or contributions.
(i) Plans of the same type.
(ii) Plans of different types.
(iii) Special rule for floor-offset arrangements.
(5) Certain contingency provisions ignored.
(6) Employees taken into account.
(a) In general.
(b) Conditions under which an employer is permitted to request an
individual determination.
(c) Factors taken into account in determining whether to grant an
individual determination.
(1) In general.
(2) Differences in property or services.
(3) Separateness of organization and operation.
(4) Nature of business competition.
(5) Historical factors.
(6) Geographic factors.
(7) Safe harbors.
(8) Size.
(9) Allocation method.
(10) Other lines of business.
(11) Regulated industries.
(12) Other relevant factors.
(a) Introduction.
(1) In general.
(2) Purposes for which this section applies.
(b) Assignment procedure.
(1) In general.
(2) Assignment for the first testing day.
(3) Assignment of new employees for subsequent testing days.
(4) Special rule for employers using annual option under section
410(b).
(c) Assignment and allocation of residual shared employees.
(1) In general.
(2) Option for assigning certain residual shared employees.
(3) Dominant line of business method of allocation.
(i) In general.
(ii) Dominant line of business.
(iii) Employee assignment percentage.
(A) Determination of percentage.
(B) Employees taken into account.
(iv) Option to apply reduced percentage.
(v) Examples.
(4) Pro-rata method of allocation.
(i) In general.
(ii) Allocation procedure.
(iii) Examples.
(5) HCE percentage ratio method of allocation.
(i) In general.
(ii) Highly compensated employee percentage assignment ratio.
(iii) Allocation procedure.
(d) Optional rule for assigning certain transferred employees.
(1) In general.
(2) Requirements.
(3) Optional rule.
(a) General rule.
(b) Rules of separate application.
(1) In general.
(2) Satisfaction of section 410(b)(5)(B) on an employer-wide basis.
(i) General rule.
(ii) Application of facts and circumstances requirements under
nondiscriminatory classification test.
(iii) Application of unsafe harbor percentage to plans satisfying
ratio-percentage test at 90 percent level.
(3) Satisfaction of section 410(b) on a
qualified-separate-line-of-business basis.
(4) Examples.
(c) Coordination of section 401(a)(4) with section 410(b).
(1) General rule.
(2) Examples.
(d) Supplementary rules.
(1) In general.
(2) Definition of plan.
(3) Employees of a qualified separate line of business.
(4) Contributions and benefits attributable to a qualified separate
line of business.
(5) Consequences of failure.
(a) General rule.
(b) Requirements applicable to a plan.
(c) Supplementary rules.
(1) In general.
(2) Definition of plan.
(3) Employees of a qualified separate line of business.
(4) Consequences of failure.
(Reserved).
(a) In general.
(b) Definitions.
(1) In general.
(2) Substantial-service employee.
(3) Top-paid employee.
(4) Residual shared employee.
(5) Testing year.
(6) Testing day.
(7) First testing day.
(8) Section 401(a)(26) testing day.
(c) Averaging rules.
(1) In general.
(2) Specified provisions.
(3) Averaging of large fluctuations not permitted.
(4) Consistency requirements.
(c) Flowchart. The following is a flowchart showing how the major
provisions of 1.414(r)-1 through 1.414(r)-6 are applied.
Insert illustration 0 222
(T.D. 8376, 56 FR 63434, Dec. 4, 1991)
26 CFR 1.414(r)-1 Requirements applicable to qualified separate lines
of business.
(a) In general. Section 414(r) prescribes the conditions under which
an employer is treated as operating qualified separate lines of
business. If an employer is treated as operating qualified separate
lines of business under section 414(r), certain requirements under the
Code may be applied separately with respect to the employees of each
qualified separate line of business. These requirements are limited to
the minimum coverage requirements of section 410(b) (including the
nondiscrimination requirements of section 401(a)(4)), the minimum
participation requirements of section 401(a)(26), and the 55-percent
average benefits test of section 129(d)(8). This section provides the
exclusive rules for determining whether an employer is treated as
operating qualified separate lines of business under section 414(r), as
well as rules for applying the requirements of sections 410(b),
401(a)(26), and 129(d)(8) separately with respect to the employees of a
qualified separate line of business.
(b) Conditions under which an employer is treated as operating
qualified separate lines of business -- (1) In general. An employer is
treated as operating qualified separate lines of business under section
414(r) only if all property and services provided by the employer to its
customers are provided exclusively by qualified separate lines of
business. Thus, once an employer has determined its qualified separate
lines of business under paragraph (b)(2) of this section, no portion of
the employer may remain that is not included in a qualified separate
line of business. In addition, once the employer has determined the
employees of its qualified separate lines of business under paragraph
(b)(3) of this section, every employee must be treated as an employee of
a qualified separate line of business, and no employee may be treated as
an employee of more than one qualified separate line of business.
(2) Qualified separate line of business -- (i) In general. A
qualified separate line of business is a portion of the employer that is
a line of business within the meaning of paragraph (b)(2)(ii) of this
section, that is also a separate line of business within the meaning of
paragraph (b)(2)(iii) of this section, and, finally, that satisfies the
requirements of section 414(r)(2) in accordance with paragraph
(b)(2)(iv) of this section.
(ii) Line of business. A line of business is a portion of an
employer that is identified by the property or services it provides to
customers of the employer. For this purpose, the employer is permitted
to determine the lines of business it operates by designating the
property and services that each of its lines of business provides to
customers of the employer. Rules for determining an employer's lines of
business are provided in 1.414(r)-2.
(iii) Separate line of business. A separate line of business is a
line of business that is organized and operated separately from the
remainder of the employer. The determination of whether a line of
business is organized and operated separately from the remainder of the
employer is made on the basis of objective criteria. These criteria
generally require that the line of business be organized into one or
more separate organizational units (e.g., corporations, partnerships, or
divisions), that the line of business constitute one or more distinct
profit centers within the employer, and that no more than a moderate
overlap exist between the employee workforce and management employed by
the line of business and those employed by the remainder of the
employer. Rules for determining whether a line of business is organized
and operated separately from the remainder of the employer and thus
constitutes a separate line of business are provided in 1.414(r)-3.
These rules include an optional rule for vertically integrated lines of
business.
(iv) Qualified separate line of business -- (A) In general. A
qualified separate line of business must satisfy the three statutory
requirements in section 414(r)(2). A separate line of business that
satisfies these three statutory requirements in accordance with
paragraphs (b)(2)(iv)(B) through (b)(2)(iv)(D) of this section
constitutes a qualified separate line of business.
(B) Fifty-employee requirement. Under section 414(r)(2)(A), a
separate line of business must have at least 50 employees. Rules for
determining whether this requirement is satisfied are provided in
1.414(r)-4(b).
(C) Notice requirement. Under section 414(r)(2)(B), the employer
must notify the Secretary that it treats itself as operating qualified
separate lines of business under section 414(r) for purposes of applying
the requirements of section 410(b), 401(a)(26), or 129(d)(8) separately
with respect to the employees of the separate line of business. Rules
and procedures for complying with this requirement are provided in
1.414(r)-4(c).
(D) Requirement of administrative scrutiny. Under section
414(r)(2)(C), a separate line of business must pass administrative
scrutiny. A separate line of business may satisfy this requirement in
one of two ways. First, a separate line of business that satisfies any
of the safe harbors in 1.414(r)-5 satisfies the requirement of
administrative scrutiny. These safe harbors implement the statutory
safe harbor of section 414(r)(3) as well as the guidelines prescribed
under section 414(r)(2)(C). Second, a separate line of business that
does not satisfy any of the safe harbors in 1.414(r)-5 nonetheless
satisfies the requirement of administrative scrutiny if the employer
requests and receives an individual determination from the Commissioner
that the separate line of business satisfies the requirement of
administrative scrutiny. Rules and procedures applicable to requesting
and receiving an individual determination are provided in 1.414(r)-6. A
separate line of business is permitted to satisfy the requirement of
administrative scrutiny in any manner permitted under this paragraph
(b)(2)(iv)(D), regardless of how any other separate line of business of
the employer satisfies the requirement.
(3) Determining the employees of a qualified separate line of
business. In order to apply certain provisions under these regulations,
it is necessary to determine the employees of a qualified separate line
of business. For these purposes, the employees of a qualified separate
line of business consist of all employees who are substantial-service
employees with respect to the qualified separate line of business, and
all other employees who are assigned to the qualified separate line of
business. Rules for making these determinations are provided in
1.414(r)-7. These rules apply solely for the purposes specified in these
regulations (see 1.414(r)-7(a)(2) for a comprehensive listing of these
purposes). These rules do not apply for any other purpose (e.g., the
determination under 1.414(r)-3 of whether a line of business is
organized and operated separately from the remainder of the employer).
(c) Separate application of certain Code requirements to employees of
a qualified separate line of business -- (1) In general. If an employer
is treated as operating qualified separate lines of business under
section 414(r) in accordance with paragraph (b) of this section, the
requirements of sections 410(b), 401(a)(26), and 129(d)(8) may be
applied separately with respect to the employees of each qualified
separate line of business. Paragraphs (c)(2) through (c)(4) of this
section provide for the separate application of these requirements. In
general, the requirements of a Code section are applied separately with
respect to the employees of a qualified separate line of business by
treating those employees as if they were the only employees of the
employer. Paragraph (c)(5) of this section prescribes the limited
conditions under which other Code requirements may be applied separately
with respect to the employees of a qualified separate line of business.
(2) Separate application of section 410(b) -- (i) General rule.
Except as provided in paragraph (c)(2)(ii) of this section, an employer
is permitted to apply the requirements of section 410(b) separately with
respect to the employees of each qualified separate line of business
operated by the employer only if the employer does so with respect to
all its plans, all its employees, and all its qualified separate lines
of business. For this purpose, the requirements of section 410(b)
encompass the requirements of section 401(a)(4) (including, but not
limited to, the permitted disparity rules of section 401(l), the actual
deferral percentage test of section 401(k)(3) and the actual
contribution percentage test of section 401(m)(2)). Rules for applying
section 410(b) separately with respect to the employees of a qualified
separate line of business are provided in 1.414(r)-8. An employer may
apply the rules of section 414(r) for purposes of section 410(b) even if
it does not apply the rules of section 414(r) for purposes of section
401(a)(26).
(ii) Special rule for employer-wide plans. Notwithstanding paragraph
(c)(2)(i) of this section, an employer that is treated as operating
qualified separate lines of business for purposes of section 410(b) in
accordance with paragraph (b) of this section may apply the requirements
of section 410(b) on an employer-wide rather than a
qualified-separate-line-of-business basis with respect to any plan
(within the meaning of 1.414(r)-8(d)(2), but without regard to the
mandatory disaggregation rule of 1.410(b)-7(c)(4) for portions of a
plan that benefit employees of different qualified separate lines of
business) that benefits a group of employees that satisfies the
percentage test of section 410(b)(1)(A) (i.e., benefits at least 70
percent of the employer's nonexcludable nonhighly compensated
employees). If section 401(a)(4) requires that a group of employees
under the plan described in the preceding sentence satisfy section
410(b) for purposes of satisfying section 401(a)(4), the percentage test
of section 410(b)(1)(A) must be satisfied by each such group of
employees. See 1.414(r)-8(c). The rules of this paragraph (c)(2)(ii)
are illustrated by the following example.
Example. Employer A maintains a single profit-sharing plan, Plan W,
and three pension plans, Plans X, Y and Z, each benefiting employees of
a different one of Employer A's three qualified separate lines of
business. Contributions to the profit-sharing plan are made pursuant to
a cash or deferred arrangement in which all employees of Employer A are
eligible to participate. Assume that, as a result, Plan W satisfies the
requirements to be tested under this paragraph (c)(2)(ii). None of the
pension plans benefits more than 70 percent of the nonexcludable
employees of Employer A. Employer A is treated as operating qualified
separate lines of business for purposes of applying section 410(b) to
its qualified plans. The requirements of sections 410(b) and 401(a)(4)
must therefore be applied to Plans X, Y and Z separately with respect to
the employees of each of the three qualified separate line of business
operated by Employer A. Since Plan W benefits at least 70 percent of
the nonexcludable employees of Employer A, however, the requirements of
sections 410(b) and 401(a)(4) (including section 401(k)) may be applied
to Plan W on an employer-wide basis.
(3) Separate application of section 401(a)(26) -- (i) General rule.
Except as provided in paragraph (c)(3)(ii) of this section, an employer
is permitted to apply the requirements of section 401(a)(26) separately
with respect to the employees of each qualified separate line of
business operated by the employer only if the employer does so with
respect to all its plans, all its employees, and all its qualified
separate lines of business. Rules for applying the requirements of
section 401(a)(26) separately with respect to the employees of a
qualified separate line of business are provided in 1.414(r)-9. An
employer may apply the rules of section 414(r) for purposes of section
401(a)(26) even if it does not apply the rules of section 414(r) for
purposes of section 410(b).
(ii) Special rule for employer-wide plans. Notwithstanding paragraph
(c)(3)(i) of this section, an employer that is treated as operating
qualified separate lines of business for purposes of section 410(b) in
accordance with paragraph (b) of this section may apply the requremens
of section 401(a)(26) on an employer-wide rather than a
qualified-separate-line-of-business basis with respect to any plan
(within the meaning of 1.414(r)-9(c)(2), but without regard to the
mandatory disaggregation rule of 1.401(a)(26)-2(d)(6) for portions of a
plan that benefit employees of different qualified separate lines of
business), but only if the special rule for employer-wide plans in
paragraph (c)(2)(ii) of this section is applied to the same plan for the
same plan year.
(4) Separate application of section 129(d)(8). (Reserved)
(5) Separate application of other Code requirements. Under no
circumstance may the requirements of any section of the Code (other than
a section described in paragraphs (c)(2) through (c)(4) of this section)
be applied separately with respect to the employees of a qualified
separate line of business unless the section specifically
cross-references, or is specifically cross-referenced by, section
414(r). The Code sections whose requirements may not be applied
separately with respect to the employees of a qualified separate line of
business include, but are not limited to, sections 79(d)(3), 105(h),
117(d)(3), 120(c)(2), 125(g)(3), 127(b)(2), 129(d)(3), 132, 195,
401(a)(3) (as in effect on September 1, 1974), 414(q)(4),
501(c)(17)(A)(ii), 501(c)(17)(B)(iii), 501(c)(18)(B), and 505(b)(1)(A).
(d) Application of requirements -- (1) In general. The requirements
of paragraphs (b) and (c) of this section must be applied in accordance
with the rules in this paragraph (d).
(2) Interpretation. The provisions of this section and of
1.414(r)-2 through 1.414(r)-11 are to be interpreted in a reasonable
manner consistent with the purpose of section 414(r) to recognize an
employer's operation of qualified separate lines of business for bona
fide business reasons and not for reasons of evading the requirements of
any section of the Code, including sections 410(b), 401(a)(26), and
129(d)(8). See section 414(r)(1) and (r)(7). Thus, for example, an
employer is not permitted to apply these regulations in a manner that
may literally comply with the other provisions of this section and of
1.414(r)-2 through 1.414(r)-11, but that does not reflect the employer's
operation of qualified separate lines of business for bona fide business
reasons.
(3) Separate operating units. No additional requirements beyond
those provided in these regulations apply to a separate operating unit.
Thus, a separate operating unit that satisfies the requirements of
paragraph (b)(2) of this section is deemed to satisfy the geographic
separation requirement of section 414(r)(7) and accordingly is treated
as a qualified separate line of business for all purposes under this
section, including the separate application of section 401(a)(26).
(4) Certain mergers and acquisitions. A portion of an employer that
is acquired in a transaction described in section 410(b)(6)(C) and
1.410(b)-2(f) (i.e., an asset or stock acquisition, merger, or other
similar transaction involving a change in the employer of the employees
of a trade or business) is deemed to satisfy the requirements to be a
qualified separate line of business, other than the 50-employee
requirement and the notice requirement of pararaphs (b)(2)(iv)(R) and
(b)(2)(iv)(C) of this section, respectively. In addition, the acquired
employees are not taken into account, and the property and services
provided by the acquired portion to customers of the employer are
disregarded, for purposes of determining whether the employer's
remaining lines of business satisfy the requirements of 1.414(r)-3
through 1.414(r)-6. The rules in this paragraph (d)(4) apply only for
those testing years with first testing days that fall within the
transition period described in section 410(b)(6)(C). For this purpose,
the transition period described in section 410(b)(6)(C) lasts only for
so long as the conditions in that section are satisfied. For the
definition of ''first testing day,'' see 1.414(r)-11(b)(7). See
1.414(r)-5(d)(4), Example 1, for an example of the application of the
rule in this paragraph (d)(4). See also 1.414(r)-5(d) for an
administrative safe harbor applicable to certain separate lines of
business acquired in a transaction described in this section.
(5) Governmental and tax-exempt employers -- (i) General rule.
Except as provided in paragraph (d)(5)(ii) of this section, the rules of
this section are applicable in determining whether section 401(a)(26) is
satisfied by a plan maintained by an employer that is exempt from tax
under Subtitle A of the Internal Revenue Code (including a governmental
plan within the meaning of section 414(d)). Similarly, except as
provided in paragraph (d)(5)(ii) of this section, the rules of this
section are applicable in determining whether section 410(b) is
satisfied by a plan that is subject to section 410(b) (including by
virtue of 1410(b)-2(e)) and is maintained by an employer that is exempt
from tax under Subtitle A of the Internal Revenue Code (including a
governmental plan within the meaning of section 414(d)).
(ii) Additional rules. (Reserved)
(6) Testing year basis of application -- (i) Section 414(r). Whether
an employer is treated as operating qualified separate lines of business
under section 414(r) in accordance with paragraph (b) of this section is
determined on a year-by-year basis with respect to the testing year. It
is therefore possible for an employer to satisfy paragraph (b) of this
section for one testing year and to fail to satisfy it for another
testing year. It is also possible for an employer to satisfy paragraph
(b) of this section for two testing years but to have designated its
lines of business differently in each of those two testing years. In
determining whether an employer satisfies paragraph (b) of this section
for a testing year, the requirements of that paragraph are applied
solely with respect to the testing year. Thus, all property and
services provided by the employer to its customers during the testing
year must be provided exclusively by portions of the employer that for
the testing year constitute qualified separate lines of business.
Furthermore, each employee of the employer must respectively be treated
as an employee of one and only one of those qualified separate lines of
business for all purposes with respect to the testing year.
(ii) Sections 410(b), 401(a)(26), and 129(d)(8). For purposes of
paragraph (c) of this section, relating to the separate application of
sections 410(b), 401(a)(26), and 129(d)(8) to the employees of a
qualified separate line of business, the determination whether an
employer operates qualified separate lines of business in accordance
with paragraph (b) of this section for a testing year generally applies
for all plan years beginning in the testing year. Rules for the
separate application of sections 410(b), 401(a)(26), and 129(d)(8) are
respectively provided in 1.414(r)-8, 1.414(r)-9, and 1.414(r)-10.
(7) Averaging rules. The employer is permitted to apply certain
provisions of these regulations on the basis of a consecutive-year
average (not to exceed five consecutive years) under the averaging rules
of 1.414(r)-11(c).
(8) Definitions. In applying the provisions of this section and of
1.414(r)-2 through 1.414(r)-11, the definitions in 1.414(r)-11(b) and
1.410(b)-9 govern, unless otherwise provided.
(9) Effective -- (i) General rule. The provisions of this section
and of 1.414(r)-2 through 1.414(r)-11 apply to plan years and testing
years beginning on or after January 1, 1992.
(ii) Reasonable compliance -- (A) In general. With respect to plan
years beginning before the date on which the Commissioner begins issuing
determinations under section 414(r)(2)(C), and on or after the first day
of the first plan year to which section 414(r) applies under section
1112(a) of the Tax Reform Act of 1986, an employer is treated as
operating qualified separate lines of business if the employer
reasonably determines that it meets the requirements of section 414(r)
(other than the requirement of administrative scrutiny under section
414(r)(2)(C)).
(B) Determination of reasonable compliance. Whether an employer
reasonably determines that it meets the requirements of section 414(r)
generally will be determined on the basis of all relevant facts and
circumstances, including the extent to which the employer has resolved
unclear issues in its favor. For the period described in paragraph
(d)(9)(ii)(A) of this section, the Internal Revenue Service will
consider the employer's compliance with the terms of these final
regulations (other than the requirement of administrative scrutiny under
paragraph (b)(2)(iv)(D) of this section) to constitute a reasonable
determination that the employer neets tge reqyurements of section 414(r)
(other than the requirement of administrative scrutiny under section
414(r)(2)(C)).
(C) Effect on other plans. If an employer sponsors a plan that has a
plan year beginning within the period decribed in paragraph
(d)(9)(ii)(A) of this section, the employer's reasonable determination
of its qualified separate lines of business for the testing year in
which that plan year begins, and the allocation of employees to those
qualified separate lines of business, must also be used for purposes of
applying 1.414(r)-8 and 1.414(r)-9 for plan years that begin in that
testing year but after the end of the period described in paragraph
(d)(9)(ii)(A) of this section.
(e) Additional rules. The Commissioner may, in revenue rulings,
notices, and other guidance of general applicability, provide any
additional rules that may be necessary or appropriate in applying the
qualified separate line of business requirements of section 414(r).
These additional rules may include, for example, new safe harbors in
1.414(r)-5 and new conditions under which an individual determination
may be requested under 1.414(r)-6.
(T.D. 8376, 56 FR 63437, Dec. 4, 1991)
26 CFR 1.414(r)-2 Line of business.
(a) General rule. A line of business is a portion of an employer
that is identified by the property or services it provides to customers
of the employer. For this purpose, an employer is permitted to
determine its lines of business by designating the property or services
that each of its lines of business provides to customers of the
employer. Paragraph (b) of this section explains how an employer
determines its lines of business for a testing year. Paragraph (c) of
this section provides examples illustrating the application of this
section.
(b) Employer determination of its lines of business -- (1) In
general. An employer determines its lines of business for a testing
year first by identifying all the property and services it provides to
its customers during the testing year, and then by designating which
portion of the property and services is provided by each of its lines of
business.
(2) Property and services provided to customers. Property, whether
real or personal, tangible or intangible, is provided by an employer to
a customer during a testing year if the employer provides the property
to or on behalf of the customer during the testing year for
consideration. Similarly, services are provided by an employer to a
customer during a testing year if the employer renders the services to
or on behalf of the customer during the testing year for consideration.
An individual item of property or service is taken into account under
this paragraph (b)(2) only if the employer provides the item during the
testing year to a person other than the employer in the ordinary course
of a trade or business conducted by the employer during the testing
year, and the person to whom the employer provides the item is acting in
the capacity as a customer of the employer. It is not necessary that
both property or services actually be provided, and consideration for
the property or services actually be paid, during the current testing
year. For an employer to be considered to provide property and services
to customers for consideration during a testing year under this
paragraph (b)(2), it is sufficient that: The property or services
actually be provided to customers during the testing year; the
consideration actually be paid by customers during the testing year; or
the employer actually incur significant costs during the testing year
associated with the provision of the property or services to a specified
customer or specified customers.
(3) Employer designation -- (i) In general. Once the employer has
identified all the property and services it provides to its customers
during the testing year under paragraph (b)(2) of this section, the
employer determines its lines of business for the testing year by
designating which portion of those property and services is provided by
each of its lines of business. For this purpose, the employer must
apportion all the property and services identified under paragraph
(b)(2) of this section among its lines of business. An employer
generally is not required to designate its lines of business for the
testing year in the same manner as it designates its lines of business
for any other testing year.
(ii) Ability to combine unrelated types of property or services in a
single line of business. For purposes of this paragraph (b)(3), there
is no requirement that a line of business provide only one type of
property or service, or only related types of property or services. Nor
is there any requirement that a line of business provide solely property
or solely services. Thus, the employer is permitted to combine in a
single line of business dissimilar types of property or services that
are otherwise unrelated to one another.
(iii) Ability to separate related types of property or services into
two or more lines of business. For purposes of this paragraph (b)(3),
there is no requirement that all property or services of related types
or the same type be provided by a single line of business. Thus, the
employer is permitted to designate two or more lines of business that
provide related types of property or services, or the same type of
property or service. An employer might designate two or more lines of
business that provide property or services of related types or the same
type, for example, where the lines of business manufacture, prepare, or
provide the property or services in different geographic areas (e.g., in
different regions of the country or the world), or at different levels
in the chain of commercial distribution (e.g., wholesale versus retail),
or in different types of transactions (e.g, sale versus lease), or for
different types of customers (e. g., governmental versus private), or
subject to different legal constraints (e. g., regulated versus
unregulated), or if the lines of business have developed differently
(e.g., one line of business was acquired while another line of business
developed internally). Notwithstanding the foregoing, an employer is
not permitted to designate two or more lines of business that provide
property or services of related types or the same type, if the
employer's designation is unreasonable. An employer's designation would
be unreasonable, for example, if the designation separated two types of
property or services in different lines of business, but the employer
did not provide those types of property or services separately from one
another to its customers. Similarly, an employer's designation would be
unreasonable if it separated two types of property or services in
different lines of business, but the provision of one type of property
or service was merely ancillary or incidental to, or regularly
associated with, the provision of the other type of property or service.
See generally 1.414(r)-1(d)(2) (requiring an employer's operation of
qualified separate lines of business to be for bona fide business
reasons).
(iv) Affiliated service groups. An employer is not permitted to
designate its lines of business in a manner that results in separating
employees of an affiliated service group (within the meaning of section
414(m)) from other employees of the employer. See section 414(r)(8).
(c) Examples -- (1) In general. Paragraphs (c)(2) and (c)(3) of this
section provide examples that illustrate the application of this
section.
(2) Examples illustrating employer designation. The following
examples illustrate the application of paragraph (b)(3) of this section
relating to an employer's designation of the property or services
provided to customers by each of its lines of business.
Example 1. Employer A is a domestic conglomerate engaged in the
manufacture and sale of consumer food and beverage products and the
provision of data processing services to private industry. Employer A
provides no other property or services to its customers. Pursuant to
paragraph (b)(3) of this section, Employer A apportions all the property
and services it provides to its customers among three lines of business,
one providing all its consumer food products, a second providing all its
consumer beverage products, and a third providing all its data
processing services. Employer A has three lines of business for
purposes of this section.
Example 2. The facts are the same as in Example 1, except that
Employer A determines that neither the consumer food products line of
business nor the consumer beverage products line of business would
satisfy the separateness criteria of 1.414(r)-3 for recognition as a
separate line of business. Accordingly, pursuant to paragraph (b)(3) of
this section, Employer A apportions all the property and services it
provides to its customers between only two lines of business, one
providing all its consumer food and beverage products, and a second
providing all its data processing services. Employer A has two lines of
business for purposes of this section.
Example 3. The facts are the same as in Example 2, except that
Employer A also owns and operates a regional commuter airline, a
professional basketball team, a pharmaceutical manufacturer, and a
leather tanning company. Pursuant to paragraph (b)(3) of this section,
Employer A apportions all the property and services it provides to its
customers among three lines of business, one providing all its consumer
food and beverage products, a second providing all its data processing
services, and a third providing all the other property and services
provided to customers through Employer A's regional commuter airline,
professional basketball team, pharmaceutical manufacturer, and leather
tanning company. Even though the third line of business includes
dissimilar types of property and services that are otherwise unrelated
to one another, paragraph (b)(3)(ii) of this section permits Employer A
to combine these property and services in a single line of business.
Employer A has three lines of business for purposes of this section.
Example 4. The facts are the same as in Example 2, except that
Employer A has recently acquired Corporation L, whose only product is a
well-known brand of gourmet ice cream. Although Employer A manufactures
and sells other ice cream products, it does not manufacture or market
the newly acquired brand of gourmet ice cream except through Corporation
L. Pursuant to paragraph (b)(3) of this section, Employer A apportions
all the property and services it provides to its customers among three
lines of business, one providing only the newly acquired brand of
gourmet ice cream, a second providing all its other consumer food and
beverage products (including the other ice cream products manufactured
and sold by Employer A) and a third providing all its data processing
services. Even though the gourmet ice cream line of business provides
the same type of property as the consumer food and beverage line of
business (i.e., ice cream), paragraph (b)(3)(iii) of this section
permits Employer A to separate its ice cream products between two
different lines of business. Employer A has three lines of business for
purposes of this section.
Example 5. The facts are the same as in Example 2, except that
Employer A operates the data processing services portion of its business
in two separate subsidiaries, one serving customers in the eastern half
of the United States and the other serving customers in the western half
of the United States. Pursuant to paragraph (b)(3) of this section,
Employer A apportions all the property and services it provides to its
customers among three lines of business, one providing all its consumer
food and beverage products, a second providing data processing services
to customers in the eastern half of the United States, and a third
providing data processing services to customers in the western half of
the United States. Even though the second and third lines of business
provide the same type of service (i.e., data processing services),
paragraph (b)(3)(iii) of this section permits Employer A to separate its
data processing services into two lines of business. Employer A has
three lines of business for purposes of this section.
Example 6. Employer B is a diversified engineering firm offering
civil, chemical, and aeronautical engineering services to government and
private industry. Employer B provides no other property or services to
its customers. Employer B operates the aeronautical engineering
services portion of its business as two separate divisions, one serving
federal government customers and the other serving customers in private
industry. Pursuant to paragraph (b)(3) of this section, Employer B
apportions all the property and services it provides to its customers
among four lines of business, one providing all its civil engineering
services, a second providing all its chemical engineering services, a
third providing aeronautical engineering services to federal government
customers, and a fourth providing aeronautical engineering services to
customers in private industry. Even though the third and fourth lines
of business include the same type of service (i.e., aeronautical
engineering services), paragraph (b)(3)(iii) of this section permits
Employer B to separate its aeronautical engineering services into two
lines of business. Employer B has four lines of business for purposes
of this section.
Example 7. Among its other business activities, Employer C
manufacturers industrial diesel generators. At no additional cost to
its buyers, Employer C warrants the proper functioning of its diesel
generators for a one-year period following sale. Pursuant to its
warranty, Employer C provides labor and parts to repair or replace any
components that malfunction within the one-year warranty period.
Because Employer C does not provide the industrial diesel generators, on
the one hand, and the warranty repair services and replacement parts, on
the other hand, separately from one another to its customers, under
paragraph (b)(3)(iii) of this section it would be unreasonable for
Employer C to separate these property and services in different lines of
business.
Example 8. Among its other business activities, Employer D leases
office photocopying equipment. Employer D also provides photo-copying
supplies and repair services to its lessees for a separate charge.
Employer D generally does not provide such supplies and repair services
to persons other than its lessees. Lessees of Employer D's equipment
are permitted to use photo-copying supplies and repair services from
suppliers other than Employer D. Because the provision of the
photo-copying supplies and repair services are merely ancillary or
incidental to the provision of the leased photo-copiers, under paragraph
(b)(3)(iii) of this section it would be unreasonable for Employer D to
separate these property and services in different lines of business.
Example 9. Employer E operates a medical clinic. The employees of
the clinic include physicians, nurses, and laboratory technicians, all
of whom participate in providing medical and related services to
patients of the clinic. Under paragraph (b)(3)(iii) of this section, it
would be unreasonable for Employer E to separate the services of the
physicians, nurses, and laboratory technicians in different lines of
business.
Example 10. Employer F is a law firm. The employees of the firm
include lawyers, paralegals, and secretaries, all of whom participate in
renderlng legal and related services to clients of the firm. Under
paragraph (b)(3)(iii) of this section, it would be unreasonable for
Employer F to separate the services of the lawyers, paralegals, and
secretaries in different lines of business.
Example 11. Employer G is a management consulting firm. The
employees of the firm include management consultants, secretaries, and
other support staff personnel, all of whom participate in rendering
management consulting and related services to clients of the firm.
Under paragraph (b)(3)(iii) of this section, it would be unreasonable
for Employer G to separate the services of the management consultants,
secretaries, and other support staff personnel in different lines of
business.
(3) Examples illustrating property and services provided to
customers. The following examples illustrate the application of
paragraph (b)(2) of this section relating to property and services
provided to customers of the employer.
Example 1. Employer H operates several dairy farms and dairy product
processing plants. The dairy farms provide their entire output of milk
and milk by-products to Employer H's dairy product processing plants.
Under paragraph (b)(2) of this section, the dairy farms' provision of
milk and milk by-products to the dairy product processing plants does
not constitute the provision of property or services to customers of
Employer H, because the milk and milk by-products are not provided to a
person other than Employer H.
Example 2. The facts are the same as in Example 1, except that the
dairy farms also sell milk and milk by-products to retail distributors
unrelated to Employer H. Although the dairy farms' provision of milk
and milk by-products to Employer H's dairy product processing plants
does not constitute the provision of property or services to customers
of Employer H, the dairy farms' provision of milk and, milk by-products
to independent retail distributors does constitute the provision of
property or services to customers of Employer H under paragraph (b)(2)
of this section.
Example 3. Among its other business activities, Employer J
manufactures automobiles. Employer J operates a cafeteria at one of its
automobile manufacturing facilities. The cafeteria is intended
primarily for use by employees of Employer J, but nonemployees are not
prohibited from using the cafeteria. The cafeteria charges the same
prices to employees and non-employees. Under paragraph (b)(2) of this
section, the provision of cafeteria services to employees of Employer J
does not constitute the provision of property or services to customers
of Employer J, because the cafeteria services are provided to the
employees in their capacity as employees of Employer J and not as
customers of Employer J.
Example 4. Employer K sells books and periodicals to members of the
public and provides telecommunications services to private industry.
Employer K periodically acquires and disposes of businesses in both
asset and stock transactions. In addition, for its own investment
purposes, Employer K acquires and disposes of corporate and other
securities. Under paragraph (b)(2) of this section, the sale by
Employer K of businesses and investment securities does not constitute
the provision of property or services to customers of Employer K,
because the sales are not made in the ordinary course of a trade or
business conducted by Employer K. However, the sale of published
materials and the provision of telecommunications services to persons
unrelated to Employer K does constitute the provision of property or
services to customers of Employer K.
Example 5. Employer L is active in the financial services industry.
Subsidiary 1 of Employer L is a brokerage firm that is regulated as a
broker-dealer under applicable federal and state law. In its capacity
as a dealer, Subsidiary 1 holds in its own inventory securities of
unrelated corporations and regularly sells these securities to unrelated
persons. Under paragraph (b)(2) of this section, the sale by Subsidiary
1 of the securities to unrelated persons constitutes the provision of
property or services to customers of Employer L, because the sales are
made in the ordinary course of Subsidiary 1's trade or business as a
broker-dealer.
Example 6. The facts are the same as in Example 5. Subsidiary 2 of
Employer L is an insurance company that is regulated under applicable
state insurance laws. In managing its investments, Subsidiary 2
regularly makes use of the brokerage services of Subsidiary 1 (which
Subsidiary 1 regularly provides to unrelated persons as well). Under
paragraph (b)(2) of this section, Subsidiary 1's provision of brokerage
services to Subsidiary 2 does not constitute the provision of property
or services to customers of Employer L, because the brokerage services
are not provided to a person other than Employer L. However, Subsidiary
1's provision of brokerage services to unrelated persons does constitute
the provision of property or services to customers of Employer L.
Example 7. Employer M is a shipbuilder. In a testing year, Employer
M enters into a contract with a customer to construct a new cargo ship
for delivery two years later. Employer M incurs significant costs
designing and planning for the production of the new ship during the
testing year, but receives no payments from the customer during that
year. Under paragraph (b)(2) of this section, Employer M is treated as
providing the cargo ship to the customer during the testing year.
Example 8. The facts are the same as in Example 7, except that,
pursuant to a request from the customer, Employer M also incurred
significant costs developing a prototype and submitting a bid on the new
cargo ship in the prior testing year, and that these costs were not
reimbursed by the customer. Under paragraph (b)(2) of this section,
Employer M is also treated as providing the cargo ship to the customer
in the prior testing year.
(T.D. 8376, 56 FR 63439, Dec. 4, 1991)
26 CFR 1.414(r)-3 Separate line of business.
(a) General rule. A separate line of business is a line of business
(as determined under 1.414(r)-2) that is organized and operated
separately from the remainder of the employer. Paragraph (b) of this
section sets forth the rules for determining whether a line of business
is organized and operated separately from the remainder of the employer.
Paragraph (c) of this section provides certain supplementary rules
necessary to apply the requirements of paragraph (b) of this section, as
well as examples illustrating the application of those requirements.
Paragraph (d) of this section provides an optional rule for lines of
business that are vertically integrated.
(b) Separate organization and operation -- (1) In general. A line of
business is organized and operated separately from the remainder of the
employer for a testing year only if it satisfies all the requirements of
paragraphs (b)(2) through (b)(5) of this section for the testing year.
(2) Separate organizational unit. The line of business must be
formally organized as a separate organizational unit or group of
separate organizational units within the employer. For this purpose, an
organizational unit is a corporation, partnership, division, or other
unit having a similar degree of organizational formality. This
requirement must be satisfied on every day of the testing year.
(3) Separate financial accountability. The line of business must be
a separate profit center or group of separate profit centers within the
employer. This requirement must be satisfied on every day of the
testing year. In addition, the employer must maintain books and records
that provide separate revenue and expense information that is used for
internal planning and control with respect to each profit center
comprising the line of business.
(4) Separate employee workforce. The line of business must have its
own separate employee workforce. A line of business has its own
separate employee workforce only if at least 90 percent of the employees
who provide services to the line of business are substantial service
employees with respect to the line of business. See paragraph (c)(2) of
this section to determine how the percentage in the preceding sentence
is calculated for the testing year.
(5) Separate management. The line of business must have its own
separate management. A line of business has its own separate management
only if at least 80 percent of the employees who are top-paid employees
with respect to the line of business are substantial-service employees
with respect to the line of business. See paragraph (c)(3) of this
section to determine how the percentage in the preceding sentence is
calculated for the testing year.
(c) Supplementary rules -- (1) In general. This paragraph (c)
provides certain supplementary rules necessary to apply the requirements
of paragraph (b) of this section, as well as examples illustrating the
application of those requirements.
(2) Determination of separate employee workforce. The percentage in
paragraph (b)(4) of this section is the fraction (expressed as a
percentage) --
(i) The numerator of which is the number of substantial-service
employees with respect to the line of business within the meaning of
1.414(r)-11(b)(2); and
(ii) The denominator of which is the total number of employees who
provide services to the line of business within the meaning of paragraph
(c)(5) of this section.
(3) Determination of separate management. The percentage in
paragraph (b)(5) of this section is the fraction (expressed as a
percentage) --
(i) The numerator of which is the number of employees who are both
top-paid employees and substantial-service employees with respect to the
line of business within the meaning of 1.414(r)-11(b)(3) and (2),
respectively; and
(ii) The denominator of which is the total number of top-paid
employees with respect to the line of business within the meaning of
1.414(r)-11(b)(3).
(4) Employees taken into account -- (i) General rule. For purposes
of applying this paragraph (c), only employees who are employees of the
employer on the first testing day are taken into account. For this
purpose, there are no excludable employees (except as provided in
paragraph (c)(4)(ii) of this section). Consequently, all employees who
are employees on the first testing day are taken into account, including
collectively bargained employees. For the definition of ''first testing
day,'' see 1.414(r)-11(b)(7).
(ii) Exclusion of certain nonresident aliens. For purposes of
determining the fractions in paragraphs (c)(2) and (c)(3) of this
section with respect to a line of business, an employer is permitted to
exclude all employees who are described in section 410(b)(3)(C) (i.e.,
nonresident aliens who receive no earned income within the meaning of
section 911(d)(2) from the employer that constitutes income from sources
within the United States within the meaning of section 861(a)(3)) who
are substantial-service employees with respect to that line of business
within the meaning of 1.414(r)-11(b)(2). Thus, for example, if a
nonresident alien employee described in the preceding sentence provides
75 percent of the employee's services to one line of business, and 25
percent to another line of business, the employer is permitted to
disregard the employee in determining the separate workforce and
separate management fractions in paragraphs (c)(2) and (c)(3) of this
section with respect to the first line of business, but not the second
line of business.
(5) Services taken into account -- (i) Provision of services to a
line of business. An employee provides services to a line of business
if more than a negligible portion of the employee's services contributes
to providing the property or services provided by the line of business
to customers of the employer. All of the services of each employee who
provides services to the employer contribute, whether directly or
indirectly, to the provision of property or services to customers of the
employer, and therefore each employee who provides services to the
employer must be treated as providing more than a negligible portion of
the employee's services to one or more lines of business operated by the
employer.
(ii) Period for which services are provided. Only services performed
by an employee during the testing year that contribute to providing the
property or services provided by a line of business to customers are
taken into account. An employee's services during the testing year are
considered to contribute to providing the property or services provided
by a line of business to customers of the employer if --
(A) The employee's services during the testing year contribute to
providing such property or services to customers of the employer during
the testing year; or
(B) It is reasonably anticipated that the employee's services during
the testing year will contribute to providing such property and services
to customers of the employer after the close of the testing year.
(iii) Determination of services. The determination of whether an
employee provides services to a line of business, and the determination
of the percentage of an employee's services provided to a line of
business, must be made in a manner that is reasonably reliable with
respect to all employees and uniform with respect to similarly-situated
employees.
(6) Examples of the separate employee workforce requirement. The
following examples illustrate the application of the separate employee
workforce requirement in paragraph (b)(4) of this section and the
supplementary rules of this paragraph (c). Unless otherwise specified,
it is assumed that the employees and their services described in these
examples are taken into account under paragraphs (c) (4) and (5) of this
section for the testing year.
Example 1. Employer A operates three lines of business as determined
under 1.414(r)-2. One of Employer A's lines of business manufactures
and sells tires and other automotive products. Employee M is a tire
press operator in Employer A's tire factory. Employee N is the manager
of the tire factory. Under these facts, the services of Employees M and
N contribute to providing tires to customers of Employer A. Both
employees therefore provide services to Employer A's tire and automotive
products line of business within the meaning of paragraph (c)(5) of this
section.
Example 2. The facts are the same as in Example 1. In addition,
none of the services of Employees M and N that contribute to providing
property or services to customers contribute to providing any property
or service other than tires to customers of Employer A. Under these
facts, Employees M and N provide at least 75 percent of their respective
services to Employer A's tire and automotive products line of business.
Therefore Employees M and N are substantial-service employees with
respect to Employer A's tire and automotive products line of business
within the meaning of 1.414(r)-11(b)(2), and do not provide any
services within the meaning of paragraph (c)(5) of this section to any
of Employer A's other lines of business.
Example 3. The facts are the same as in Example 2. Employer A's
second line of business manufactures and sells construction machinery,
and Employer A's third line of business manufactures and sells
agricultural equipment. As part of these lines of business, Employer A
operates a construction machinery factory and an agricultural equipment
factory on the same site as the tire factory described in Example 2.
Employer A's facilities at the site include a health clinic and a
fitness center that serve the employees of the construction machinery
factory, the agricultural equipment factory, and the tire factory.
Employee O is a nurse in the health clinic, and Employee P is a fitness
instructor in the fitness center. Both employees therefore provide
services within the meaning of paragraph (c)(5) of this section to
Employer A's tire and automotive products line of business, construction
machinery line of business, and agricultural equipment line of business.
In addition, under these facts, Employer A determines (in accordance
with paragraph (c)(5)(iii) of this section) that approximately 33
percent of the services of Employees O and P are provided to each of
Employer A's three lines of business. As a result, neither Employee O
or P provide at least 75 percent of their respective services to any of
Employer A's lines of business. Therefore, Employees O and P are not
substantial-service employees with respect to any of Employer A's three
lines of business within the meaning of 1.414(r)-11(b)(2).
Example 4. The facts are the same as in Example 3. Employee Q is
the president and chief executive officer of Employer A and is
responsible for reviewing the performance of all Employer A's lines of
business. Under these facts, the services of Employee Q contributes to
providing property and services to customers of each of Employer A's
three lines of business. Employee Q therefore provides services to each
of these three lines of business. Employer A determines (in accordance
with paragraph (c)(5)(iii) of this section) that Employee Q provides the
following percentages of his services to Employer A's three lines of
business: tire and automotive products -- 40 percent; construction
machinery -- 40 percent, and agricultural equipment -- 20 percent.
Employee Q does not provide at least 75 percent of his services to any
of Employer A's lines of business. Therefore, Employee Q is not a
substantial-service employee with respect to any of Employer A's three
lines of business within the meaning of 1.414(r)-11(b)(2).
Example 5. The facts are the same as in Example 4, except that
Employer A also owns 75 percent of Corporation X. Corporation X is not
treated as part of Employer A within the meaning of 1.410(b)-9.
Employee R is an accountant in the accounting department of Employer A.
Employee R devotes all of his time to maintaining the accounting books
and records of the tire and automotive products line of business of
Employer A and the accounting books and records of Corporation X.
Employer A determines (in accordance with paragraph (c)(5)(iii) of this
section) that Employee R provides 40 percent of his services directly to
the tire and automotive products line of business. Employer A also
determines (in accordance with paragraph (c)(5)(iii) of this section)
that Employee R provides the following percentages of the remainder of
Employee R's services (i.e., his provision of services of maintaining
the accounting books and records of Corporation X) indirectly to
Employer A's three lines of business by virtue of the services he
provides to Corporation X: tire and automotive products -- 25 percent;
construction machinery -- 20 percent, and agricultural equipment -- 15
percent. Therefore, Employee R provides 65 percent of his services to
the tire and automotive products line of business of Employer A (i.e.,
40 percent directly and 25 percent indirectly).
Example 6. The facts are the same as in Example 5. Employee S is a
lawyer in the legal department located at the headquarters who devotes
all her time to product liability suits filed against the construction
machinery line of business. Under these facts, the services of Employee
S contribute to providing property and services to customers of Employer
A in the construction machinery line of business, and therefore Employee
S provides services to that line of business. Because Employee S's
services do not contribute to providing property or services in any
other of Employer A's lines of business within the meaning of paragraph
(c)(5) of this section, Employee S provides more than 75 percent of her
services to the construction machinery line of business and therefore is
a substantial-service employee with respect to Employer A's construction
machinery line of business within the meaning of 1.414(r)-11(b)(2).
Example 7. The facts are the same as in Example 6. Employer A also
maintains a separate facility that houses a centralized procurement,
marketing, and billing operation for all of its lines of business. None
of the procurement, marketing, or billing employees specializes in any
particular line of business. Under these facts, the services of the
procurement, marketing, and billing employees contribute to providing
property and services to customers of Employer A in each of Employer A's
three lines of business. Employer A determines (in accordance with
paragraph (c)(5)(iii) of this section) that each of the procurement,
marketing, and billing employees provides approximately an equal
proportion of their services to each of Employer A's three lines of
business. These employees therefore provide services to all of Employer
A's lines of business within the meaning of paragraph (c)(5) of this
section. However, none of them provides at least 75 percent of his
services to any line of business. Therefore, these employees are not
substantial-service employees with respect to any of Employer A's three
lines of business within the meaning of 1.414(r)-11(b)(2).
Example 8. The facts are the same as in Example 7. Employee T works
for the construction machinery line of business. During the testing
year, he is temporarily detailed to the agricultural equipment line of
business. His temporary detail lasts for one week, after which he
returns to his regular duties with the construction machinery line of
business. Under these facts, Employee T does not provide more than a
negligible portion of his services during the testing year to the
agricultural equipment line of business. Accordingly, Employee T does
not provide services to the agricultural equipment line of business
within the meaning of paragraph (c)(5) of this section. In addition,
because Employee T provides at least 75 percent of his services to the
construction machinery line of business, Employee T is a
substantial-service employee with respect to Employer A's agricultural
equipment line of business within the meaning of 1.414(r)-11(b)(2).
Example 9. The facts are the same as in Example 8, except that,
during the testing year but before the first testing day, Employee T
retires from employment with Employer A. Under paragraph (c)(5)(ii) of
this section, Employee T is not taken into account in determining
whether Employer A's construction machinery line of business has its own
separate employee workforce within the meaning of paragraph (b)(4) of
this section.
Example 10. Employer B is a multinational controlled group of
corporations that engages in the exploration, production, refining, and
marketing of petrochemical products. Employer B operates two lines of
business as determined under 1.414(r)-2. The first line of business
(the ''exploration, production, and refining line of business'')
provides lubricating oil, gasoline, and other petrochemical products to
wholesale customers of Employer B as well as to the second line of
business. The wholesale customers of Employer B include independent
jobbers, independent franchisees that operate retail filling stations
under Employer B's trademark and tradename, as well as chemical and
plastics manufacturers. The second line of business (the ''retail
marketing line of business'') provides lubricating oil and gasoline
products to retail customers of Employer B through filling stations
owned and operated by Employer B. Employee U is an attendant at a
filling station owned and operated by Employer B. Employee U performs
no other services for Employer B, Under these facts, Employee U provides
at least 75 percent of his services to Employer B's retail marketing
line of business and therefore is a substantial-service employee with
respect to that line of business within the meaning of
1.414(r)-11(b)(2), and does not provide any services within the meaning
of paragraph (c)(5) of this section to any of Employer B's other lines
of business.
Example 11. The facts are the same as in Example 10. Employer B
operates a refinery that produces lubricating oil, gasoline, and other
petrochemical products. Employee V is an operating engineer at the
refinery who is involved at a stage in the refining process before
lubricating oil and gasoline products have been separated from other
types of petrochemical products. Employee V performs no other services
for Employer B. Under these facts, Employee V's services contribute to
providing property and services to customers of Employer B in both the
exploration, production, and refining line of business and the retail
marketing line of business. Employee V therefore provides services to
both lines of business within the meaning of paragraph (c)(5) of this
section. See paragraph (d) of this section, however, for an optional
rule for vertically integrated lines of business.
Example 12. The facts are the same as in Example 11. Employee W is
a petroleum engineer who conducts geological studies of potential future
drilling sites. Although Employee W's services during the testing year
will not contribute to providing lubricating oil, gasoline, and other
petrochemical products to customers of Employer B during the testing
year, it is reasonably anticipated (in accordance with paragraph
(c)(5)(ii)(B) of this section) that her services during the testing year
will contribute to providing such products to customers of Employer B
after the close of the testing year. Under these facts, Employee W
provides her services to both of Employer B's lines of business within
the meaning of paragraph (c)(5) of this section.
(7) Examples of the separate management requirement. The following
examples illustrate the application of the separate management
requirement in paragraph (b)(5) of this section and the supplementary
rules of this paragraph (c).
Example 1. Employer C operates three lines of business as determined
under 1.414(r)-2. One of its lines of business is the operation of a
chain of athletic equipment and apparel stores. Of Employer C's total
workforce, 10,500 employees provide more than a negligible amount of the
services they provide to Employer C to the athletic equipment and
apparel stores line of business, and 10,000 of these employees provide
at least 25 percent of their services to the athletic equipment and
apparel stores line of business, within the meaning of paragraph (c)(5)
of this section. Of the 1,000 employees who constitute the top 10
percent by compensation of these 10,000 employees, 930 are
substantial-service employees with respect to that line of business.
Because 930 is 93 percent of 1,000, at least 80 percent of the top-paid
employees who provide services to the line of business are
substantial-service employees with respect to that line of business.
Employer C's athletic equipment and apparel stores line of business
therefore has its own separate management and thus satisfies the
requirement of paragraph (b)(5) of this section.
Example 2. The facts are the same as in Example 1. Employee X is a
vice president of the accounting department located at the headquarters,
who devotes all of his time supervising the staff of Employer C's
accounting department. Employer C determines (in accordance with
paragraph (c)(5)(iii) of this section) that 10 percent of Employee X's
services contribute to providing property and services to customers of
Employer C's athletic equipment and apparel stores line of business and
45 percent of Employee X's services contribute to providing property and
services to customers to each of Employer C's other two lines of
business. Because Employee X does not provide at least 25 percent of
his services to Employer C's athletic equipment and apparel stores line
of business, Employee X is not one of the 10,000 employees described in
Example 1 and therefore cannot be a top-paid employee within the meaning
of 1.414(r)-11(b)(3) with respect to the athletic equipment and apparel
stores line of business. Therefore, Employee X is not taken into
account in determining whether the athletic equipment and apparel stores
line of business satisfies the separate management requirement of
paragraph (b)(5) of this section.
Example 3. Employer D operates four lines of business as determined
under 1.414(r)-2. One of its lines of business is a machine tool shop.
Sixty of Employer D's employees provide at least 25 percent of their
services to the machine tool shop line of business. Of the six
employees who constitute the top 10 percent by compensation of those 60
employees, four are substantial-service employees with respect to the
line of business. Because four is 67 percent of six, 80 percent of the
top-paid employees with respect to the machine tool shop line of
business are not substantial-service employees with respect to that line
of business. Therefore the machine tool shop line of business does not
satisfy the separate management requirement of paragraph (b)(5) of this
section.
Example 4. The facts are the same as in Example 3, except that, in
addition, another of Employer D's lines of business is an automotive
repair shop, and 80 of Employer D's employees provide at least 25
percent of their services to that line of business. Employer D combines
the machine shop line of business with the automotive repair shop line
of business and treats them as a single line of business. As a result,
Employer D has three lines of business as determined under 1.414(r)-2.
Assume that 150 of Employer D's employees provide more than 25 percent
of their services to the machine tool shop/automotive repair shop line
of business within the meaning of paragraph (c)(5) of this section. Of
the 15 employees who constitute the top 10 percent by compensation of
these 150 employees, 12 are substantial-service employees with respect
to that line of business. Because 12 is 80 percent of 15, at least 80
percent of the top-paid employees with respect to the machine tool
shop/automotive repair shop line of business are substantial-service
employees with respect to that line of business. Therefore, the machine
tool shop/automotive repair shop line of business satisfies the separate
management requirement of paragraph (b)(5) of this section.
(d) Optional rule for vertically integrated lines of business -- (1)
In general. If two lines of business satisfy the requirements of this
paragraph (d) with respect to a type of property or service for a
testing year, the employer is permitted to apply the optional rule in
this paragraph (d) for the testing year.
(2) Requirements. Two lines of business satisfy the requirements of
this paragraph (d) with respect to a type of property or service only if
--
(i) One of the lines of business (the ''upstream line of business'')
provides property or services to the other line of business (the
''downstream line of business'');
(ii) The upstream line of business provides the same type of property
or service to customers of the employer (in accordance with the
employer's designation for the testing year under 1.414(r)-2);
(iii) The number of units of the property or service provided to
customers of the employer by the upstream line of business equals at
least 25 percent of the total number of units of the same type of
property or service provided by the upstream line of business to all
persons (including customers of the employer, the downstream line of
business, and all other lines of business of the employer), when
measured on a uniform basis; and
(iv) The downstream line of business uses, consumes, or substantially
modifies the property or service in the course of itself providing
property or services to customers of the employer or, alternatively,
provides the property or service to customers of the employer at a
different level in the chain of commercial distribution than the
upstream line of business (e.g., retail versus wholesale).
(3) Optional rule -- (i) Treatment of employees. For purposes of
determining the lines of business to which an employee provides services
under paragraph (c)(5) of this section, an employee is not treated as
providing services to the downstream line of business if --
(A) The employee is considered to provide services to the downstream
line of business under paragraph (c)(5) of this section (applied without
regard to the optional rule in this paragraph (d)); and
(B) The employee is so considered solely because the employee's
services contribute to providing the property or service from the
upstream line of business to the downstream line of business.
(ii) Purposes for which optional rule applies. If an employee
applies the optional rule in this paragraph (d), the treatment specified
in paragraphs (d)(3)(i) (A) and (B) of this section applies for all the
following purposes and only for the following purposes --
(A) The separate employee workforce and separate management
requirements of paragraphs (b)(4) and (b)(5) of this section;
(B) The 50-employee requirement of 1.414(r)-4(b); and
(C) The determination of the employees of a qualified separate line
of business under 1.414(r)-7.
(4) Examples. The following examples illustrate the application of
the optional rule in this paragraph (d).
Example 1. Employer E operates two lines of business as determined
under 1.414(r)-2, one engaged in upholstery textile manufacturing and
the other in furniture manufacturing. During the testing year, the
upholstery textile line of business provides 300,000 yards of upholstery
textiles to customers of Employer E and 100,000 yards of upholstery
textiles to Employer E's furniture line of business. The furniture line
of business uses the upholstery textiles provided to it by the
upholstery textile line of business in the manufacture of upholstered
furniture for sale to customers of Employee E. Thus, the upholstery
textile line of business provides 75 percent of its total output of
upholstery textiles during the testing year to customers of Employer E.
In addition, the furniture line of business substantially modifies the
upholstery textiles provided to it by the upholstery textile line of
business in providing upholstered furniture products to customers of
Employee E. Under these facts, Employer E's two lines of business
satisfy the requirements of this paragraph (d) with respect to
upholstery textiles for the testing year.
Example 2. Employer B is a multinational controlled group of
corporations that engages in the exploration, production, refining, and
marketing of petrochemical products. See Example 10 under paragraph
(c)(7) of this section. Employer B operates two lines of business as
determined under 1.414(r)-(2). The first line of business (''the
exploration, production, and refining line of business'') provides
lubricating oil, gasoline, and other petrochemical products to wholesale
customers of Employee B as well as the second line of business. The
wholesale customers of Employee B include independent jobbers,
independent franchisees that operate retail filling stations under
Employee B's trademark and tradename, as well as chemical and plastics
manufacturers. The second line of business (the ''retail marketing line
of business'') provides lubricating oil and gasoline products to retail
customers of Employee B through filing stations owned and operated by
Employee B. During the testing year, the exploration, production and
refining line of business provides 25,000 gallons of lubricating oil,
100,000 gallons of unleaded and 150,000 gallons of leaded gasoline to
the retail marketing line of business, and 75,000 gallons of lubricating
oil, 500,000 gallons of unleaded gasoline and 15,000 gallons of leaded
gasoline to wholesale customers of Employer B. Thus, the exploration,
production, and refining line of business provides 75 percent of its
output of lubricating oil during the testing year to wholesale customers
of Employer B. In addition, because unleaded and leaded gasoline is the
same type of property (i.e., gasoline), the exploration, production, and
refining line of business provides 67 percent of its output of gasoline
products during the testing year to wholesale customers of Employer B.
Furthermore, the retail line of business provides lubricating oil and
gasoline products to customers of Employer B at different levels in the
chain of commercial distribution than the exploration, production, and
refining line of business. Under these facts, Employer B's two lines of
business satisfy the requirements of this paragraph (d) with respect to
both lubricating oil and gasoline products for the testing year.
Example 3. The facts are the same as in Example 2. Employer B
operates a refinery that produces lubricating oil, gasoline, and other
petrochemical products. Employee V is an operating engineer at the
refinery who is involved at a stage in the refining process before
lubricating oil and gasoline products have been separated from other
types of petrochemical products. Employee V performs no other services
for Employer B. Absent application of the optional rule in this
paragraph (d), Employee V would be considered to provide services to
both of Employer B's lines of business. See Example 11 under paragraph
(c)(7) of this section. However, because Employee V's services to the
retail marketing line of business contribute solely to providing
lubricating oil and gasoline products from the exploration, production,
and refining line of business to the retail marketing line of business,
under the optional rule in paragraph (d)(3)(i) of this section Employee
V is not treated as providing services to the retail marketing line of
business.
Example 4. The facts are the same as in Example 3. Employee W is a
petroleum engineer who conducts geological studies of potential future
drilling sites. Employee W performs no other services for Employer B.
Absent application of the optional rule in this paragraph (d), Employee
W would be considered to provide services to both of Employer B's lines
of business. See Example 12 under paragraph (c)(7) of this Section.
However, because Employee W's services to the retail marketing line of
business contribute solely to providing lubricating oil and gasoline
products from the exploration, production, and refining line of business
to the retail marketing line of business, under the optional rule in
paragraph (d)(3)(i) of this section Employee W is not treated as
providing services to the retail marketing line of business.
Example 5. The facts are the same as in Example 4. Employee Y is a
vice president in Employer B's home office. As part of his senior
management responsibilities, Employee Y helps to set the rate of
production at Employer B's refineries in the United States and also
helps to set the price charged at the pump at the retail filling
stations owned and operated by Employer B in this country. Absent
application of the optional rule in this paragraph (d), Employee X would
be considered to provide services to both of Employer B's lines of
business within the meaning of paragraph (c)(5) of this section for
purposes of satisfying the separate workforce requirement of paragraph
(b)(4) of this section. Because Employee X helps to set the price
charged at the pump by Employer B's retail marketing line of business,
Employee X's services to the retail marketing line of business are not
limited to contributing solely to providing lubricating oil and gasoline
products from the exploration, production, and refining line of business
to the retail marketing line of business, as required under paragraph
(d)(3)(i)(B) of this section. Accordingly, even though Employer B's two
lines of business satisfy the requirements of this paragraph (d) with
respect to both lubricating oil and gasoline products for the testing
year, and even though Employer B applies the optional rule in this
paragraph (d), Employee X is still considered to provide services to
both of Employer B's lines of business.
(T.D. 8376, 56 FR 63442, Dec. 4, 1991)
26 CFR 1.414(r)-4 Qualified separate line of business -- fifty employee
and notice requirements.
(a) In general. This section sets forth the rules for determining
whether a separate line of business (as determined under 1.414(r)-3)
satisfies the 50-employee and notice requirements of
1.414(r-1(b)(2)(iv) (B) and (C), respectively.
(b) Fifty-employee requirement. A separate line of business
satisfies the 50-employee requirement of 1.414(r)-1(b)(2)(iv)(B) for a
testing year only if on each day of the testing year there are at least
50 employees who provide services to the separate line of business for
the testing year and do not provide services to any other separate line
of business of the employer for the testing year within the meaning of
1.414(r)-3(c)(5). For this purpose, all employees of the employer are
taken into account (including collectively bargained employees), except
employees described in 1.414(q)-1T, Q&A-9(g)(i.e., the same employees,
subject to certain modifications, who are excluded in determining the
number of employees in the top-paid group under section 414(q)(4)).
(c) Notice requirement -- (1) General rule. A separate line of
business satisfies the notice requirement of 1.414(r)-1(b)(2)(iv)(C)
for a testing year only if the employer notifies the Secretary that it
treats itself as operating qualified separate lines of business for the
testing year in accordance with 1.414(r)-1(b). The employer's notice
for the testing year must specify each of the qualified separate lines
of business operated by the employer and the section or sections of the
Code to be applied on a qualified-separate-line-of-business basis. See
1.414(r)-1(c). The employer's notice must take the form, must be filed
at the time and the place, and must contain any additional information
prescribed by the Commissioner in revenue procedures, notices, or other
guidance of general applicability. No other notice, whether actual or
constructive, satisfies the requirement of this paragraph (c).
(2) Effect of notice. Once an employer has provided the notice
prescribed in this paragraph (c) for a testing year, and the time for
filing the notice for the testing year has expired without its being
modified, withdrawn, or revoked, the employer is deemed to have
irrevocably elected to apply the requirements of the section or sections
of the Code specified in the notice separately with respect to the
employees of each qualified separate line of business specified in the
notice for all plan years that begin in the testing year. The
Commissioner may, in revenue procedures, notices, or other guidance of
general applicability, provide for exceptions to the rule in this
paragraph (c)(2) as well as for the effect that will be given to the
employer's notice for purposes of any future testing year.
(T.D. 8376, 56 FR 63446, Dec. 4, 1991)
26 CFR 1.414(r)-5 Qualified separate line of business -- administrative
scrutiny requirement -- safe harbors.
(a) In general. A separate line of business (as determined under
1.414(r)-3 satisfies the administrative scrutiny requirement of
1.414(r)-1(b)(2)(iv)(D) for a testing year if the separate line of
business satisfies any of the safe harbors in paragraphs (b) through (g)
of this section for the testing year. The safe harbor in paragraph (b)
of this section implements the statutory safe harbor of section
414(r)(3). The safe harbors in paragraphs (c) through (g) of this
section constitute the guidelines provided for under section
414(r)(2)(C). A separate line of business that does not satisfy any of
the safe harbors in this section nonetheless satisfies the requirement
of administrative scrutiny if the employer requests and receives an
individual determination from the Commissioner under 1.414(r)-6 that
the separate line of business satisfies the requirement of
administrative scrutiny.
(b) Statutory safe harbor -- (1) General rule. A separate line of
business satisfies the safe harbor in this paragraph (b) for the testing
year only if the highly compensated employee percentage ratio of the
separate line of business is --
(i) At least 50 percent; and
(ii) Non more than 200 percent.
(2) Highly compensated employee percentage ratio. For purposes of
this paragraph (b), the highly compensated employee percentage ratio of
a separate line of business is the fraction (expressed as a percentage),
the numerator of which is the percentage of the employees of the
separate line of business who are highly compensated employees, and the
denominator of which is the percentage of all employees of the employer
who are highly compensated employees.
(3) Employees taken into account. For purposes of this paragraph
(b), the employees taken into account are the same employees who are
taken into account for purposes of applying section 410(b) with respect
to the first testing day. For this purpose, employees described in
section 410 (b)(3) and (b)(4) are excluded. However, section 410(b)(4)
is applied with reference to the lowest minimum age requirement
applicable under any plan of the employer, and with reference to the
lowest service requirement applicable under any plan of the employer, as
if all the plans were a single plan under 1.410(b)-6(b)(2). The
employees of the separate line of business are determined by applying
1.414(r)-7 to the employees taken into account under this paragraph
(b)(3). An employee is treated as a highly compensated employee for
purposes of this paragraph (b) if the employee is treated as a highly
compensated employee for purposes of applying section 410(b) with
respect to the first testing day. For the definition of ''first testing
day,'' see 1.414(r)-11(b)(7).
(4) Ten-percent exception. A separate line of business is deemed to
satisfy paragraph (b)(1)(i) of this section for the testing year if at
least 10 percent of all highly compensated employees of the employer
provide services to the separate line of business during the testing
year and do not provide services to any other separate line of business
of the employer during the testing year within the meaning of
1.414(r)-3(c)(5).
(5) Determination based on preceding testing year. A separate line
of business that satisfied this safe harbor for the immediately
preceding testing year (without taking into account the special rule in
this paragraph (b)(5)) is deemed to satisfy the safe harbor for the
current testing year. The preceding sentence applies to a separate line
of business only if the employer designated the same line of business in
the immediately preceding testing year as in the current testing year
and either --
(i) The highly compensated employee percentage ratio of the separate
line of business for the current testing year does not deviate by more
than 10 percent (not 10 percentage points) from the highly compensated
employee percentage ratio of the separate line of business for the
immediately preceding testing year; or
(ii) At least 95 percent of the employees of the separate line of
business for the current testing year were also employees of the
separate line of business for the immediately preceding testing year,
and no more than five percent of the employees of the separate line of
business for the immediately preceding testing year are not employees of
the separate line of business for the current testing year.
(6) Examples. The following examples illustrate the application of
the safe harbor in this paragraph (b).
Example 1. (i) Employer A operates three separate lines of business
as determined under 1.414(r)-3, that respectively consist of a
railroad, an insurance company, and a newspaper. Employer A employs a
total of 400 employees, 100 of whom are highly compensated employees.
Thus, the percentage of all employees of Employer A who are highly
compensated employees in 25 percent. After applying 1.414(r)-7, the
distribution of highly and nonhighly compensated employees among
Employer A's separate lines of business is as follows:
(ii) Because the highly compensated employee percentage ratio of each
separate line of business is at least 50 percent and no more than 200
percent, each of Employer A's separate lines of business satisfies the
requirements of the safe harbor in this paragraph (b).
Example 2. (i) Employer B operates three separate lines of business
as determined under 1.414(r)-3, that respectively consist of a dairy
products manufacturer, a candy manufacturer, and a chain of housewares
stores. Employer B employs a total of 1,000 employees, 100 of whom are
highly compensated employees. Thus, the percentage of all employees of
Employer B who are highly compensated employees is 10 percent. After
applying 1.414(r)-7, the distribution of highly and nonhighly
compensated employees among Employer B's separate lines of business is
as follows:
(ii) Because the highly compensated employee percentage ratio for the
dairy products line of business is less than 50 percent, it does not
satisfy the requirements of the statutory safe harbor in this paragraph
(b). However, because Employer B's other two separate lines of business
(candy manufacturing and housewares stores) each has a highly
compensated employee percentage ratio that is no less than 50 percent
and no greater than 200 percent, they each satisfy the statutory safe
harbor in this paragraph (b).
Example 3. (i) The facts are the same as in Example 2, except that
Employer B operates only two separate lines of business as determined
under 1.414(r)-3, one consisting of the dairy products manufacturer and
the candy manufacturer, and the other consisting of the chain of
housewares stores. After applying 1.414(r)-7, the distribution of
highly and nonhighly compensated employees among Employer B's separate
lines of business is as follows:
(ii) Because the highly compensated employee percentage ratio for
both of Employer B's separate lines of business is at least 50 percent
and no more than 200 percent, they each satisfy the requirements of the
statutory safe harbor in this paragraph (b).
(c) Safe harbor for separate lines of business in different
industries -- (1) In general. A separate line of business satisfies the
safe harbor in this paragraph (c) for the testing year if it is in a
different industry or industries from every other separate line of
business of the employer. For this purpose, a separate line of business
is in a different industry or industries from every other separate line
of business of the employer only if --
(i) The property or services provided to customers of the employer by
the separate line of business (as designated by the employer for the
testing year under 1.414(r)-2) fall exclusively within one or more
industry categories established by the Commissioner for purposes of this
paragraph (c); and
(ii) None of the property or services provided to customers of the
employer by any of the employer's other separate lines of business (as
designated by the employer for the testing year under 1.414(r)-2) falls
within the same industry category or categories.
(2) Optional rule for foreign operations. For purposes of satisfying
this paragraph (c), an employer is permitted to disregard any property
or services provided to customers of the employer during the testing
year by a foreign corporation or foreign partnership (as defined in
section 7701(a)(5)), to the extent that income from the provision of the
property or services is not effectively connected with the conduct of
the trade or business within the United States within the meaning of
section 864(c). Thus, for example, an employer is permitted to take
into account only property and services provided to customers of the
employer by its domestic subsidiaries and property and services provided
by its foreign subsidiaries that generate income effectively connected
with the conduct of a trade or business within the United States in
determining whether the property or services provided to customers of
the employer by a separate line of business fall exclusively within one
or more industry categories and also whether the property or services
provided by any other separate line of business fall within the same
industry category or categories.
(3) Establishment of industry categories. The Commissioner shall, by
revenue procedure or other guidance of general applicability, establish
industry categories for purposes of this paragraph (c).
(4) Examples. The following examples illustrate the application of
the safe harbor in this paragraph (c). For purposes of these examples,
it is assumed that, pursuant to paragraph (c)(3) of this section, the
Commissioner has established the following industry categories (among
others): transportation equipment and services; banking, insurance,
and finance; machinery and electronics; and entertainment, sports, and
hotels.
Example 1. Among its other business activities, Employer C operates
a commercial airline that constitutes a separate line of business under
1.414(r)-3. In addition, no other separate line of business of Employer
C provides to customers of Employer C any property or services in the
transportation equipment and services industry category. Under these
facts, the separate line of business described in this example satisfies
the safe harbor in this paragraph (c).
Example 2. The facts are the same as in Example 1, except that
Employer C also operates a trucking company that constitutes another
separate line of business of Employer C under 1.414(r)-3. Because the
commercial airline and the trucking company both provide to customers of
Employer C services in the transportation equipment and services
industry category, neither separate line of business satisfies the safe
harbor in this paragraph (c).
Example 3. Among its other business activities, Employer D operates
a commercial bank and luxury hotel that together constitute a single
separate line of business under 1.414(r)-3. No other separate line of
business of employer D provides to customers of Employer D property or
services in either the banking, insurance, or financial industry
category, or the entertainment, sports, or hotel industry category.
Under these facts, the separate line of business described in this
example satisfies the safe harbor in this paragraph (c).
Example 4.. The facts are the same as in Example 3, except that
Employer D also manufactures computers in the United States and abroad.
Employer D apportions its computer operations by designating these
operations between two separate lines of business, one consisting of its
domestic operations located in the United States and the second
consisting of its foreign operations by a foreign subsidiary. Because
both lines of business provide property and services in the machinery
and electronics industry category to customers of Employer D, neither
separate line of business would satisfy the safe harbor in this
paragraph (c). However, pursuant to the optional rule in paragraph
(c)(2) of his section, Employer D disregards the property and services
provided by its foreign computer subsidiary. As a result, no other
separate line of business of Employer D provides to customers of
Employer D any property or services in the machinery and electronics
industry category. Under these facts, Employer D's domestic computer
operations separate line of business satisfies the safe harbor in this
paragraph (c).
(d) Safe harbor for separate lines of business that are acquired
through certain mergers and acquisitions -- (1) General rule. A portion
of the employer that is acquired through a transaction described in
section 410(b)(6)(C) and 1.410(b)-2(f) (i.e., an asset or stock
acquisition, merger, or other similar transaction involving a change in
the employer of the employees of a trade or business) (the ''acquired
line of business'') satisfies the safe harbor in this paragraph (d) for
each testing year in the transition period provided in paragraph (d)(3)
of this section if each of the following requirements is satisfied --
(i) For each testing year within the transition period the employer
designates the acquired line of business as a line of business within
the meaning of 1.414(r)-2;
(ii) On the first testing day in each testing year in the transition
period:
(A) The acquired line of business constitutes a separate line of
business within the meaning of 1.414(r)-3 (taking into account
1.414(r)-1(d)(4));
(B) At least 90 percent of the employees who are substantial-service
employees with respect to the acquired line of business were also
substantial-service employees with respect to the acquired line of
business for the immediately preceding testing year; and
(C) No more than 10 percent of the employees who were
substantial-service employees with respect to the acquired line of
business for the immediately preceding testing year are not
substantial-service employees with respect to the acquired line of
business in the respective testing year.
See 1.414(r)-11(b)(2) for the definition of substantial-service
employee. If the transaction described in paragraph (d)(1)(i) of this
section occurs after the first testing day in a testing year, the
determinations required by paragraphs (d)(1)(iii) (B) and (C) of this
section with respect to that testing year must be made on the date of
the transaction.
(2) Employees taken into account. For purposes of this paragraph
(d), the employees taken into account are the same employees who are
taken into account for purposes of applying section 410(b) with respect
to the first testing day. For this purpose, employees described in
section 410(b)(3) and (b)(4) are excluded. However, section 410(b)(4)
is applied with reference to the lowest minimum age requirement, and
with reference to the lowest service requirement applicable under any
plan of the employer that benefits employees of the separate line of
business, as if all the plans were a single plan under
1.410(b)-6(b)(2). The employees of the separate line of business are
determined by applying 1.414(r)-7 to the employees taken into account
under this paragraph (d)(2).
(3) Transition period. The transition period for purposes of this
safe harbor is the period that begins with the first testing year
beginning after the date that the transaction described in paragraph
(d)(1) of this section occurs. The employer is permitted, but not
required, to extend the transition period to include one, two, or three
of the testing years immediately succeeding that first testing year.
(4) Examples. The following examples illustrate the application of
the safe harbor in this paragraph (d).
Example 1. Employer E is treated as operating three qualified
separate lines of business pursuant to 1.414(r)-1(b). In 1996, Employer
E acquires a company that employs 4,000 employees who manufacture and
sell pharmaceutical supplies, and designates that portion as a line of
business under 1.414(r)-2. Under 1.414(r)-1(d)(4), the pharmaceutical
supplies line of business is deemed to satisfy the requirements to be a
qualified separate line of business (other than the 50-employee and
notice requirements) for testing year 1996. In addition, the
determination of whether Employer E's remaining three lines of business
constitute qualified separate lines of business for testing year 1996 is
made without taking into account the acquired employees and by
disregarding the property and services provided to customers of Employer
E by the pharmaceutical supplies line of business.
Example 2. The facts are the same as in Example 1, except that by
the first testing day in 1997 (''Transition Year 1''), Employer E
employs an additional 300 employees who provide services solely for the
pharmaceutical supplies line of business and no terminations of
employment have occurred, increasing the line's number of employees who
are substantial-service employees with respect to the pharmaceutical
supplies line of business from 4,000 to 4,300. Assume that, on that
first testing day in Transition Year 1, the pharmaceutical supplies line
of business satisfies the requirements of 1.414(r)-3, and therefore
constitutes a separate line of business. Because 4,000 is 93 percent of
4,300, at least 90 percent of the employees who are substantial-service
employees with respect to the pharmaceutical supplies line of business
for Transition Year 1 were also substantial-service employees with
respect to the pharmaceutical supplies line of business for testing year
1996 (the immediately preceding testing year). Under these facts, the
pharmaceutical supplies separate line of business satisfies the safe
habor in this paragraph (d) for Transition Year 1.
Example 3. The facts are the same as in Example 2, except that,
before the first day of the next testing year (''Transition Year 2''),
Employer E permanently transfers 200 of the 4,300 employees who were
substantial-service employees with respect to the pharmaceutical line of
business on the first testing day in Transition Year 1 to a different
line of business and does not hire any additional employees for the
pharmaceutical supplies line of business. Therefore, by the first
testing day in Transition Year 2, the number of employees who are
substantial-service employees with respect to the pharmaceutical line of
business of Employer E has decreased from 4,300 to 4,100. Assume that,
on that first testing day in Transition Year 2, the pharmaceutical
supplies line of business constitutes a separate line of business within
the meaning of 1.414(r)-3. Because 200 is approximately 5 percent of
4,300, no more than 10 percent of the employees who were
substantial-service employees of the pharmaceutical line of business for
Transition Year 1 are not substantial-service employees of the
pharmaceutical line of business in Transition Year 2. Under these
facts, the pharmaceutical supplies separate line of business continues
to satisfy the safe harbor in this paragraph (d) for Transition Year 2.
(e) Safe harbor for separate lines of business reported as industry
segments -- (1) In general. A separate line of business satisfies the
safe harbor in this paragraph (e) for the testing year if, for the
employer's fiscal year ending latest in the testing year, the separate
line of business is reported as one or more industry segments on its
annual report required to be filed in conformity with either --
(i) Form 10-K, annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (''Form 10-K''); or
(ii) Form 20-F, Annual Report Pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 with Item 18 financials (''Form
20-F''), and the employer timely files either the Form 10-K or Form 20-F
with the Securities and Exchange Commission (''SEC'').
(2) Reported as an industry segment in conformity with Form 10-K or
Form 20-F. For purposes of this paragraph (e), a separate line of
business is reported as one or more industry segments in conformity with
either Form 10-K or Form 20-F only if --
(i) The separate line of business consists of one or more industry
segments within the meaning of paragraphs 10(a), 11(b), and 12 through
14 of the Statement of Financial Accounting Standards No. 14, Financial
Reporting for Segments of a Business Enterprise (''FAS 14''); and
(ii) The property or services provided to customers of the employer
by the separate line of business (as designated by the employer for the
testing year under 1.414(r)-2) is identical to the property or services
provided to customers of the employer by the industry segment or
segments (as determined under paragraphs 10(a), 11(b), and 12 through 14
of FAS 14).
(3) Timely filing of Form 10-K or Form 20-F. For purposes of this
paragraph (e), a Form 10-K of Form 20-F is timely filed with the SEC if
it is filed within the required period as provided under 17 CFR
240.12b-25(b)(2)(ii). Therefore, the required period for timely filing
of the Form 10-K is the 90-day period after the end of the fiscal year
covered by the annual report (including the 15-day extension), and the
required period for timely filing of the Form 20-F is the 6-month period
after the end of the fiscal year covered by the annual report (including
the 15-day extension).
(4) Examples. The following examples illustrate the application of
the safe harbor in this paragraph (e).
Example 1. Among its other business activities, Employer F operates
a bearing manufacturing firm that constitutes a separate line of
business under 1.414(r)-3. Employer F is required to file an annual
Form 10-K with the SEC. On its timely filed Form 10-K, Employer F
reports its bearing manufacturing operations as an industry segment in
accordance of FAS 14 (as determined under paragraphs 10(a), 11(b), and
12 through 14 of FAS 14). The group of bearing products provided by the
separate line of business (as designated by Employer F under
1.414(r)-2) is identical to the group of bearing products provided by
the industry segment (as determined under paragraphs 10(a), 11(b), and
12 through 14 of FAS 14). Under these facts, the separate line of
business described in this example satisfies the safe harbor in this
paragraph (e).
Example 2. The facts are the same as in Example 1, except that
Employer F has apportioned its bearing manufacturing operations between
two separate lines of business as determined under 1.414(r)-3, one
engaged in the manufacture of bearings for use in the automotive
industry, and a second engaged in the manufacture of bearings for use in
the aerospace industry. Because neither separate line of business
provides a group of property or services to customers of Employer F that
is identical to the group of bearing products provided by the industry
segment reported on Employer F's annual Form 10-K, neither separate line
of business described in this example satisfies the safe harbor in this
paragraph (e).
(f) Safe harbor for separate lines of business that provide the same
average benefits as other separate lines of business -- (1) General
rule. A separate line of business satisfies the safe harbor in this
paragraph (f) for the testing year only if the level of benefits
provided to employees of the separate line of business satisfies
paragraph (f)(2) or (f)(3) of this section, whichever is applicable.
(2) Separate lines of business with a disproportionate number of
nonhighly compensated employees -- (i) Applicability of safe harbor.
This paragraph (f)(2) applies to a separate line of business that for
the testing year has a highly compensated employee percentage ratio of
less than 50 percent (as determined under paragraph (b)(2) of this
section).
(ii) Requirement. A separate line of business satisfies this
paragraph (f)(2) only if the actual benefit percentage of the group of
nonhighly compensated employees of the separate line of business for the
testing period that ends with or within the testing year is at least as
great as the actual benefit percentage of the group of all other
nonhighly compensated employees of the employer for the same testing
period. See 1.410 (b)-5(c) and (d)(3)(ii) for the definitions of
actual benefit percentage and testing period, respectively. In
determining actual benefit percentages for purposes of this paragraph
(f)(2)(ii), the special rule in 1.410(b)-5(e)(3) (permitting an
employer to determine employee benefit percentages separately for
defined contribution and defined benefit plans) may not be used.
(3) Separate lines of business with a disproportionate number of
highly compensated employees -- (i) Applicability of safe harbor. This
paragraph (f)(3) applies to a separate line of business that for the
testing year has a highly compensated employee percentage ratio of more
than 200 percent (as determined under paragraph (b)(2) of this section).
(ii) Requirement. A separate line of business satisfies this
paragraph (f)(3) only if the actual benefit percentage of the group of
highly compensated employees of the separate line of business for the
testing period that ends with or within the testing year is no greater
than the actual benefit percentage of the group of all other highly
compensated employees of the employer for the same testing period. See
1.410 (b)-5(c) and (d)(3)(ii) for the definitions of actual benefit
percentage and testing period, respectively. In determining actual
benefit percentages for purposes of this paragraph (f)(3)(ii), the
special rule in 1.410(b)-5(e)(3) (permitting an employer to determine
employee benefit percentages separately for defined contribution and
defined benefit plans) may not be used.
(4) Employees taken into account. An employee of a separate line of
business (as determined under 1.414(r)-7 is taken into account for a
testing period for purposes of this paragraph (f) only if the employee
is an employee of the separate line of business on the first testing
day, and would not be an excludable employee for purposes of applying
the average benefit percentage test of 1.410(b)-5 to a plan for a plan
year included in that testing period. In determining whether an employee
is an excludable employee for purposes of the average benefit percentage
test, the employer is assumed not to be operating qualified separate
lines of business under 1.414(r)-1(b). An employee is treated as a
highly compensated employee for purposes of this paragraph (f) if the
employee is treated as a highly compensated employee for purposes of
applying section 410(b) on the first testing day. See 1.414(r)-11(b)(7)
for the definition of ''first testing day''.
(5) Example. The rules of this paragraph (f) are illustrated by the
following example.
Example. (i) Employer G is treated as operating two separate lines of
business, Line 1 and Line 2, in accordance with 1.414(r)-1(b).
Employer G maintains three qualified plans. Plan A is a calendar-year
profit-sharing plan that benefits all employees of Employer G. Plan B
is a defined benefit plan with a plan year ending March 31 that benefits
all employees of Line 1. Plan C is a defined benefit plan with a plan
year ending November 30 that benefits all employees of Line 2.
(ii) In 1995, Line 1 has a highly compensated employee percentage
ratio of 25 percent. Employer G's first testing day is March 31. After
applying the rules of 1.414(r)-7, the nonhighly compensated employees
of Line 1 and Line 2 on March 31, 1995, are N1-N80 and N81-N100,
respectively. N1 is an excludable employee under 1.410(b)-6 for
purposes of the average benefit percentage test during the testing
period that includes the plan years of Plans A, B, and C that end in
1995 (the ''1995 testing period''), and would therefore not be taken
into account in determining whether any of those plans satisfied the
average benefit percentage test of 1.410(b)-5 for plan years included
in that testing period, because N1 does not satisfy the minimum age and
service conditions under any plan of the employer. All other employees
of Line 1 and Line 2 on March 31, 1995 are nonexcludable employees for
purposes of the average benefit percentage test during the 1995 testing
period.
(iii) In order for Line 1 to satisfy the requirements of this
paragraph (f) for 1995, the actual benefit percentage of N2-N80 for the
1995 testing period under Plans A, B and C must be at least as great as
the actual benefit percentage of N81-N100 for the same testing period
under the same plans. N1 is not taken into account because N1 is an
excludable employees for purposes of the average benefit percentage test
for the 1995 testing period. Any other employees who were taken into
account for purposes of the average benefit percentage test for the 1995
testing period are excluded because they are not employees of Line 1 or
Line 2 on March 31, 1995.
(g) Safe harbor for separate lines of business that provide minimum
or maximum benefits. -- (1) In general. A separate line of business
satisfied the safe harbor in this paragraph (g) for the testing only if
the level of benefits provided to employees of the separate line of
business satisfies paragraph (g)(2) or (g)(3) of this section, whichever
is applicable. For this purpose, the level of benefits is determined
with respect to all qualified plans of the employer that benefit
employees of the separate line of business for plan years that begin in
the testing year.
(2) Minimum benefit required -- . (i) Applicability. This paragraph
(g)(2) applies to a separate line of business that for the test year has
a highly compensated employee percentage ratio of less than 50 percent
(as determined under paragraph (b)(2) of this section).
(ii) Requirement. A separate line of business satisfies this
paragraph (g)(2) only if one of the following requirements is satisfied
--
(A) At least 80 percent of all nonhighly compensated employees of the
separate line of business either accrue a benefit for the plan year that
equals or exceeds the defined benefit minimum in paragraph (g)(2)(iii)
of this section, receive all allocation for the plan year that equal or
exceeds the defined contribution minimum in paragraph (g)(2)(iv) of this
section, or accrue a benefit and receive an allocation that together
equal or exceed the combined plan minimum in paragraph (g)(4) of this
section. The defined benefit minimum must be provided in a defined
plan, and the defined contribution minimum must be provided in a defined
contribution plan.
(B) The separate line of business would satisfy the requirements of
paragraph (g)(2)(ii)(A) of this section if the 80 percent threshold were
reduced to 60 percent, and the average of the accrual rates or
allocation rates of all nonhighly compensated employees in the separate
line of business equals or exceeds the minimum amount described for each
individual employee in paragraph (g)(2)(ii)(A) of this section.
(iii) Defined benefit minimum -- (A) In general. The defined benefit
minimum for a plan year is the employer-derived accrual that would
result in a normal accrual rate for the plan year equal to 0.75 percent
of compensation. For purposes of this paragraph (g)(2)(iii), the normal
accrual rate is the percentage (not less than 0) determining by
subtracting the employee's normalized accrued benefit as of the end of
the plan year (expressed as a percentage of average annual compensation
as of the end of the plan year) from the employee's normalized accrued
benefit as of the end of the prior plan year (expressed as a percentage
of average annual compensation as of the end of the prior plan year).
(B) Normal form and equivalent benefits. The benefit that is tested
for purposes of this paragraph (g)(2)(iii) is the accrued retirement
benefit commencing at normal retirement age. If the normal form of
benefit for a plan being tested is other than a straight life annuity
beginning at a normal retirement age of 65, the benefit must be
normalized (within the meaning of 1.401(a)(4)-12) to a straight life
annuity commencing at age 65. No adjustment is permitted for early
retirement benefits or for any ancillary benefit, including disability
benefits.
(C) Compensation definition. The underlying definition of
compensation used for purposes of determining accrual rates under this
paragraph (g)(2)(iii) must be a definition of compensation that
automatically satisfies section 414(s) without a test for
nondiscrimination (see 1.414(s)-1(c)).
(D) Average compensation requirement. For purposes of determining
accrual rates, compensation must be average annual compensation within
the meaning of 1.401(a)(4)-3(e)(2) determined using a five-year
averaging period. The compensation history to be taken into account are
all years beginning with the first year in which the employee benefits
under the plan, and ending with the last plan year in which the employee
participates in the plan. However, a plan may disregard in a reasonable
and consistent manner: years before 1992, years more than 10 years
preceding the current plan year, years in which an employee has less
than 1,000 hours of service (see 1.401(a)(4)-3(b)(8)(x)(A)(2) and years
for which the employer does not use this paragraph (g)(2) to satisfy
this safe harbor with respect to the separate line of business. If a
plan provides a defined benefit minimum that uses three consecutive
years (in lieu of five) for calculating average annual compensation, the
0.75 percent annual accrual in paragraph (g)(2)(iii)(A) of this section
is multiplied by 93.3 percent, resulting in a normal accrual rate equal
to 0.70 percent.
(E) Special rules. The special rules of 1.401(a)(4)-3(f) apply for
purposes of determining whether a benefit accrual satisfies the minimum
benefit requirement. For example, benefits may be determined on other
than a plan year basis as permitted by 1.401(a)(4)-3(f)(6). A plan
described in section 412(i) may be used to provide the defined benefit
minimum described in this paragraph (g)(2). In such case, the rules in
1.416-1, M-17, apply to such a plan. For purposes of this paragraph
(g)(2)(iii) an employee is treated as accruing a benefit equal to the
minimum benefit in paragraph (g)(2)(iii)(A) of this section if the
reason that the employee does not accrue such a benefit is either --
(1) The application of a plan provision that applies uniformly to all
employees in the plan and limits the service used for purposes of
benefit accrual to a specified maximum no less than 25 years, or
(2) The employee has attained normal retirement age and fails to
accrue a benefit solely because of the provisions of section
411(b)(1)(H)(iii) regarding adjustments for delayed retirement.
(iv) Defined contribution minimum -- (A) In general. The defined
contribution minimum for a plan year is an allocation that results in an
allocation rate for the plan year (within the meaning of
1.401(a)(4)-2(c)) equal to three percent of an employee's plan year
compensation. Plan year compensation must be based on a definition of
compensation that automatically satisfies section 414(s) without a test
for nondiscrimination (see 1.414(s)-1(c)). For this purpose,
allocations that are taken into account to do not include matching
contributions described in 1.401(m)-1(f)(12), elective contributions
described in 1.401(k)-1(g)(3), any adjustment in allocation rates
permitted under section 401(l) or imputed disparity under
1.401(a)(4)-7.
(B) Modified allocation definition for averaging. For purposes of
determining whether the average allocation rates for all nonhighly
compensated employees of the separate line of business satisfy the
minimum benefit requirement in paragraph (g)(2)(ii)(B) of this section,
matching contributions described in 1.401(m)-1(f)(12) are treated as
employer allocations.
(3) Maximum benefit permitted -- (i) Applicability. This paragraph
(g)(3) applies to a separate line of business that for the testing year
has a highly compensated employee percentage ratio that exceeds 200
percent (as determined under paragraph (b)(2) of this section).
(ii) Requirement. A separate line of business satisfies this
paragraph (g)(3) only if one of the following requirements is satisfied
--
(A) No highly compensated employee of the separate line of business
accrues a benefit for the plan year that results in an accrual rate that
exceeds the defined benefit maximum in paragraph (g)(3)(iii) of this
section, receives an allocation that exceeds the defined contribution
maximum in paragraph (g)(3)(iv) of this section, or accrues a benefit
and receives an allocation that together exceed the combined plan
maximum in paragraph (g)(4) of this section. All benefits provided by
qualified defined benefit plans are subject to the defined benefit
maximum, and all benefits provided by qualified defined contribution
plans are subject to the defined contribution maximum.
(B) The average of the accrual rates or allocation rates of all
highly compensated employees of the separate line of business is no more
than 80 percent of the maximum amount for any individual employee
described in paragraph (g)(3)(ii)(A) of this section.
(iii) Defined benefit maximum -- (A) In general. The defined benefit
maximum is the employer-derived accrued benefit that would result from
calculating a normal accrual rate equal to 2.5 percent of compensation.
(B) Determination of defined benefit maximum. The accrual rate used
for the defined benefit maximum is determined in the same manner as the
normal accrual rate used for the defined benefit minimum is determined
under paragraph (g)(2)(iii) of this section, except as provided below.
Thus, a defined benefit plan may provide, in addition to the defined
benefit maximum, any benefit the value of which is not taken into
account under paragraph (g)(2)(iii) of this section. For example, a
plan may provide disability benefits described in
1.401(a)(4)-3(d)(6)(vi) or ancillary benefits described in
1.401(a)(4)-4(e)(2).
(C) Adjustment for different compensation definitions. If a plan
subject to the defined benefit maximum determines accrual rates by using
three consecutive years (in lieu of five) for purposes of determining
average annual compensation, the 2.5 percent annual accrual rate in
paragraph (g)(3)(iii)(B) of this section is multiplied by 93.3 percent,
resulting in a maximum accrual rate equal to 2.33 percent. Compensation
may be less inclusive than the compensation described in paragraph
(g)(2)(iii)(C) of this section. However, no adjustment is made to the
maximum normal accrual rate because of the use of a definition of
compensation that is less inclusive than the compensation described in
paragraph (g)(2)(iii)(C) of this section.
(D) Adjustment for certain subsidies. If the plan provides
subsidized optional forms of benefit, the accrual rate for purposes of
this paragraph (g)(3) must be determined by taking those subsidies into
account. An optional form of benefit is considered subsidized if the
normalized optional form of benefit is larger than the normalized normal
retirement benefit under the plan. In the case of a plan with
subsidized optional forms, the determination of accrual rate for the
plan year under paragraph (g)(2)(iii)(A) of this section is modified by
substituting the largest of the sums of the normalized QJSAs and QSUPPs
determined for each age in 1.401(a)(4)-3(d)(2)(ii)(C) for the
normalized accrued benefit as of the end of the current plan year, and
the largest of the sums of the normalized QSSAs and QSUPPs determined
for each age in 1.401(a)(4)-3(d)(2)(ii)(D) for the normalized accrued
benefit as of the end of the prior plan year.
(iv) Defined contribution maximum. The defined contribution maximum
is an allocation that results in an allocation rate for the plan year
(within the meaning of 1.401(a)(4)-2(c)) equal to 10 percent of an
employee's plan year compensation. Compensation may be less inclusive
than the compensation described in paragraph (g)(2)(iv)(A) of this
section. However, no adjustment is made to the defined contribution
maximum because of the use of a definition of compensation that is less
inclusive than the compensation described in paragraph (g)(2)(iv)(A) of
this section. For this purpose, allocations that are taken into account
do not include elective contributions described in 1.401(K)-1(g)(3),
any adjustment in allocation rates permitted under section 401(l) or
imputed disparity under 1.401(a)(4)-7 but do include employer matching
contributions under 1.401(m)-1(f)(12).
(4) Duplication of benefits or contributions -- (i) Plans of the same
type. In the case of an employee who benefits under more than one
defined benefit plan, the defined benefit minimum required or the
defined benefit maximum permitted under this paragraph (g) is determined
by reference to the employee's aggregate employer-provided benefit under
all qualified defined benefit plans of the employer. In the case of an
employee who benefits under more than one defined contribution plan, the
defined contribution minimum required or the defined contribution
maximum permitted under this paragraph (g) is determined by reference to
the employee's aggregate employer-provided allocations under all
qualified defined contribution plans of the employer.
(ii) Plans of different types. In the case of an employee who
benefits under both a defined benefit plan and a defined contribution
plan, a percentage of the minimum benefit required or the maximum
benefit permitted under this paragraph (g) may be provided in each type
of plan as long as the combined percentage equals at least 100 percent
in the case of the minimum benefit required and does not exceed 100
percent in the case of the maximum benefit permitted. Thus, for
example, if a highly compensated employee benefits under both types of
plans and accrues an aggregate adjusted normal accrual rate equal to
1.25 percent of average annual compensation under all defined benefit
plans of the employer (i.e, 50 percent of the defined benefit maximum
described in paragraph (g)(3)(iii) of this section), in order to comply
with the maximum benefit safe harbor, the employee may not receive an
aggregate allocation under all defined contribution plans of the
employer in excess of five percent of plan year compensation (i.e., 50
percent of the defined contribution maximum described in paragraph
(g)(3)(iv) of this section).
(iii) Special rule for floor-offset arrangements. In the case of a
floor-offset arrangement (as described in 1.401(a)(4)-8(d)), the
minimum or maximum benefit rules are applied to each plan as if the
other plan did not exist. Thus, the defined benefit plan must provide
at least 100 percent of the defined benefit minimum (or no more than 100
percent of the defined benefit maximum) based on the gross benefit prior
to offset, and the defined contribution plan must provide at least 100
percent of the defined contribution minimum (or no more than 100 percent
of the defined contribution maximum).
(5) Certain contingency provisions ignored. For purposes of this
paragraph (g), an employee's accrual or allocation rate under a plan is
determined without regard to any plan provision the effect of which is
to make the operation of the minimum or maximum benefit formula
contingent on the failure of the separate line of business otherwise to
satisfy the requirement of administrative scrutiny.
(6) Employees taken into account. For purposes of this paragraph
(g), an employee is taken into account if the employee is taken into
account for purposes of applying section 410(b) with respect to any
testing day for the testing year. For this purpose, employees described
in section 410 (b)(3) and (b)(4) are excluded. However, section
410(b)(4) is applied with reference to the lowest minimum age
requirement applicable, and with reference to the lowest service
requirement applicable under any plan of the employer that benefits
employees of the separate line of business, as if all the plans were a
single plan under 1.410(b)-6(b)(2). The employees of the separate line
of business are determined by applying 1.414(r)-7 to the employees
taken into account under this paragraph (g)(6). An employee is treated
as a highly compensated employee for purposes of this paragraph (g) if
the employee is treated as a highly compensated employee for purposes of
applying section 410(b) on any testing day for the testing year. For
the definition of ''testing day,'' see 1.414(r)-11(b)(6).
(T.D. 8376, 56 FR 63446, Dec. 4, 1991)