[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2019 Edition]
[From the U.S. Government Publishing Office]



[[Page i]]

          
          
          Title 26

Internal Revenue


________________________

Part 1 (Sec. Sec.  1.410 to 1.440)

                         Revised as of April 1, 2019

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2019
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as 
                    Special Edition of the Federal Register

[[Page ii]]

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[[Page iii]]




                            Table of Contents



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

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     663
      Alphabetical List of Agencies Appearing in the CFR......     683
      Table of OMB Control Numbers............................     693
      List of CFR Sections Affected...........................     711

[[Page iv]]





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

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

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

[[Page v]]



                               EXPLANATION

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

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

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

LEGAL STATUS

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

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
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    To determine whether a Code volume has been amended since its 
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Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

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OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

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

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alphabetical list of agencies publishing in the CFR are also included in 
this volume.

[[Page vii]]

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    Oliver A. Potts,
    Director,
    Office of the Federal Register
    April 1, 2019.







[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty-two volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2019. The first fifteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Sec. Sec.  1.0-1.60; 
Sec. Sec.  1.61-1.139; Sec. Sec.  1.140-1.169; Sec. Sec.  1.170-1.300; 
Sec. Sec.  1.301-1.400; Sec. Sec.  1.401-1.409; Sec. Sec.  1.410-1.440; 
Sec. Sec.  1.441-1.500; Sec. Sec.  1.501-1.640; Sec. Sec.  1.641-1.850; 
Sec. Sec.  1.851-1.907; Sec. Sec.  1.908-1.1000; Sec. Sec.  1.1001-
1.1400; Sec. Sec.  1.1401-1.1550; and Sec.  1.1551 to end of part 1. The 
sixteenth volume containing parts 2-29, includes the remainder of 
subchapter A and all of Subchapter B--Estate and Gift Taxes. The last 
six volumes contain parts 30-39 (Subchapter C--Employment Taxes and 
Collection of Income Tax at Source); parts 40-49; parts 50-299 
(Subchapter D--Miscellaneous Excise Taxes); parts 300-499 (Subchapter 
F--Procedure and Administration); parts 500-599 (Subchapter G--
Regulations under Tax Conventions); and part 600 to end (Subchapter H--
Internal Revenue Practice).

    The OMB control numbers for title 26 appear in Sec.  602.101 of this 
chapter. For the convenience of the user, Sec.  602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

    For this volume, Michele Bugenhagen was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of John 
Hyrum Martinez, assisted by Stephen J. Frattini.

[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




         (This book contains part 1, Sec. Sec.  1.410 to 1.440)

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

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

[[Page 3]]



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




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

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
1               Income taxes (Continued)....................           5

Supplementary Publications: Internal Revenue Service Looseleaf 
  Regulations System.

  Additional supplementary publications are issued covering Alcohol and 
Tobacco Tax Regulations, and Regulations Under Tax Conventions.

[[Page 5]]



                   SUBCHAPTER A_INCOME TAX (CONTINUED)





PART 1_INCOME TAXES (CONTINUED)--Table of Contents



                  Normal Taxes and Surtaxes (Continued)

                       DEFERRED COMPENSATION, ETC.

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

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

[[Page 6]]

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

                          Certain Stock Options

1.421-1 Effective dates and meaning and use of certain terms.
1.421-1 Meaning and use of certain terms.
1.421-2 General rules.
1.422-1 Incentive stock options; general rules.
1.422-2 Incentive stock options defined.
1.422-3 Stockholder approval of incentive stock option plans.
1.422-4 $100,000 limitation for incentive stock options.
1.423-1 Applicability of section 421(a).
1.423-2 Employee stock purchase plan defined.
1.424-1 Definitions and special rules applicable to statutory options.
1.426-1.429 [Reserved]
1.430(d)-1 Determination of target normal cost and funding target.
1.430(f)-1 Effect of prefunding balance and funding standard carryover 
          balance.
1.430(g)-1 Valuation date and valuation of plan assets.
1.430(h)(2)-1 Interest rates used to determine present value.
1.430(h)(3)-1 Mortality tables used to determine present value.
1.430(h)(3)-2 Plan-specific substitute mortality tables used to 
          determine present value.
1.430(i)-1 Special rules for plans in at-risk status.
1.431(c)(6)-1 Mortality tables used to determine current liability.
1.432 [Reserved]
1.432(e)(9)-1 Benefit suspensions for multiemployer plans in critical 
          and declining status.
1.433(h)(3)-1 Mortality tables used to determine current liability.
1.434-1.435 [Reserved]
1.436-0 Table of contents.
1.436-1 Limits on benefits and benefit accruals under single employer 
          defined benefit plans.
1.437-1.440 [Reserved]

    Authority: 26 U.S.C. 7805, unless otherwise noted.
    Section 1.410(b)-2 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-3 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-4 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-5 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-6 also issued under 26 U.S.C. 410(b)(6) and section 
664 of the Economic Growth and Tax Relief Reconciliation Act of 2001 
(Public Law 107-16, 115 Stat. 38).
    Section 1.410(b)-7 also issued under 26 U.S.C. 410(b)(6).
    Section 1.410(b)-8 also issued under 26 U.S.C. 410(b)(6).

[[Page 7]]

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

                       DEFERRED COMPENSATION, ETC.

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



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

    (a) In general. A plan is not a qualified plan (and a trust forming 
a part of such plan is not a qualified trust) unless the plan 
satisfies--
    (1) The minimum age and service requirements of section 410(a)(1) 
and Sec.  1.410(a)-3,
    (2) The maximum age requirements of section 410(a)(2) and Sec.  
1.410(a)-4, and
    (3) The minimum coverage requirements of section 410(b)(1) and 
Sec. Sec.  1.410(b)-2 through 1.410(b)-10.
    (b) Organization of regulations relating to minimum participation 
standards--(1) General rules. This section prescribes general rules 
relating to the minimum participation standards provided by Section 410.
    (2) Effective dates. Section 1.410(a)-2 provides rules under section 
1017 of the Employee Retirement Income Security Act of 1974 relating to 
effective dates under section 410.
    (3) Age and service conditions. Section 1.410(a)-3 provides rules 
under section 410(a)(1) relating to minimum age and service conditions.
    (4) Maximum age and time of participation. Section 1.410(a)-4 
provides rules under section 410(a) (2) and (4) relating to maximum age 
and time of participation.
    (5) Year of service; breaks in service. For rules relating to years 
of service and breaks in service, see 29 CFR Part 2530 (Department of 
Labor regulations relating to minimum standards for employee pension 
benefit plans). See Sec.  1.410(a)-5 for rules under section 
410(a)(3)(B) relating to seasonal industries and for certain rules under 
section 410(a)(5) relating to breaks in service.
    (6) Breaks in service. Section 1.410(a)-6 provides special rules 
under section 1017(f) of the Employee Retirement Income Security Act of 
1974 relating to amendment of break in service rules.
    (7) Elapsed time. Section 1.410 (a)-7 provides rules under sections 
410 and 411 relating to the elapsed time method of crediting years of 
service.
    (8) Coverage. Sections 1.410(b)-2 through 1.410(b)-10 provide 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),

[[Page 8]]

    (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. In applying the rules of that paragraph (d) 
to plans described in this paragraph (c) employees whose principal 
duties consist in supervising the work of other employees shall be 
treated as officers, shareholders, and highly compensated employees.
    (d) Supersession. Section 11.410(a)-1 through 11.410(d)-1 inclusive, 
of the Temporary Income Tax Regulation under the Employee Retirement 
Income Security Act of 1974 are superseded by this section and 
Sec. Sec.  1.410(a)-2 through 1.410(d)-1.

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

[T.D. 7508, 42 FR 47193, Sept. 20, 1977, as amended by T.D. 7703, 45 FR 
40980, June 17, 1980; T.D. 7735, 45 FR 74722, Nov. 12, 1980; T.D. 9849, 
84 FR 9234, Mar. 14, 2019]



Sec.  1.410(a)-2  Effective dates.

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

[[Page 9]]

through (27), 1021, and 1022(b) of the Employee Retirement Income 
Security Act of 1974.
    (2) Election is irrevocable. Any election made under this paragraph, 
once made shall be irrevocable.
    (3) Procedure and time for making election. An election under this 
paragraph shall be made by attaching a statement to either the annual 
return required under section 6058(a) (or an amended return) with 
respect to the plan which is filed for the first plan year for which the 
election is effective or to a written request for a determination letter 
relating to the qualification of the plan under section 401(a), 403(a), 
or 405(a) of the Code and, if trusteed, the exempt status under section 
501(a) of the Code of a trust consituting a part of the plan. If the 
election is made with a written request for a determination letter, the 
election may be conditioned upon issuance of a favorable determination 
letter and will become irrevocable upon issuance of such letter. The 
statement shall indicate that the election is made under section 1017(d) 
of the Employee Retirement Income Security Act of 1974 and the first 
plan year for which the election is effective.
    (e) Examples. The rules of this section are illustrated by the 
following examples:

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

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

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



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

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

[[Page 10]]

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

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

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

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



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

    (a) [Reserved]
    (b) Special rule for plan with 2-year 100 percent vesting. A plan 
which provides that after not more than 2 years of service each 
participant's right to his or her accrued benefit under the plan is 
completely nonforeitable (within the meaning of section 411 and the 
regulations thereunder) at the time such benefit accrues satisfies the 
requirements of paragraph (a) of this section if the period of service 
required by the plan

[[Page 11]]

as a condition of participation does not extend beyond the later of--
    (1) [Reserved]
    (2) Two years of service. The date on which the employee completes 2 
years of service. For employees not described in Sec.  1.411(a)-
3T(e)(1), which describes employees with one hour of service in any plan 
year beginning after December 31, 1988, or later in the case of certain 
collectively bargained plans, the preceding sentence shall be applied by 
substituting ``3 years of service'' for ``2 years of service''.

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



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

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

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

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

    (b) Time of participation--(1) General rule. A plan is not a 
qualified plan (and a trust forming a part of such plan is not a 
qualified trust) unless under the plan any employee who has satisfied 
the applicable minimum age and service requirements specified in Sec.  
1.410(a)-3, and who is otherwise entitled to participate in the plan, 
commences participation in the plan no later than the earlier of--

[[Page 12]]

    (i) The first day of the first plan year beginning after the date on 
which such employee first satisfied such requirements, or
    (ii) The date 6 months after the date on which he first satisfied 
such requirements,


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

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

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

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



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

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

[[Page 13]]

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

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

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


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

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

    (4) Nonvested participants--(i) General rule. In the case of a 
participant in a plan who does not have any nonforfeitable right under 
the plan to his employer-derived accrued benefit and who incurs a 1-year 
break in service, for purposes of section 410(a)(1) and Sec.  1.410.(a)-
3 the plan may disregard his years of service prior to such break if the 
number of his consecutive 1-year breaks in service equals or exceeds his 
aggregate number of years of service prior to such break. In the case of 
a plan using the elapsed time method described in Department of Labor 
regulations, the plan may disregard such years of service prior to such 
break if the period of severance is at least 1 year and the period of 
severance equals or exceeds the prior period of service, whether or not 
consecutive, completed before such period of severance. The plan may in 
computing such aggregate number of years of service prior to

[[Page 14]]

such break disregard any years of service which could have been 
disregarded under this subparagraph by reason of any prior break in 
service.
    (ii) Examples. The rules of this subparagraph are illustrated by the 
following example:

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

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

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

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



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

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

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

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



Sec.  1.410(a)-7  Elapsed time.

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

[[Page 15]]

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.

[[Page 16]]

    (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

[[Page 17]]

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

[[Page 18]]

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

[[Page 19]]

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

[[Page 20]]

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

[[Page 21]]

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

[[Page 22]]

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

[[Page 23]]

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]



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

    Sections 410(a)(5)(D) and 411(a)(6)(D), as amended by the Retirement 
Equity Act of 1984 (REA 1984), permit a plan to disregard years of 
service that were disregarded under the plan provisions satisfying those 
sections (as in effect on August 22, 1984) as of the day before the REA 
amendments apply to the plan. Under section 302(a) of REA 1984, the new 
break-in-service rules generally apply to plan years beginning

[[Page 24]]

after December 31, 1984. Thus, for example, assume a plan has a calendar 
plan year and disregarded years of service as permitted by sections 
410(a)(5)(D) and 411(a)(6)(D) as in effect on August 22, 1984. An 
employee completed two years of service in 1981 and 1982, and then 
incurred two consecutive 1-year breaks in service in 1983 and 1984. The 
plans may disregard the prior years of service even though the employee 
did not incur five consecutive 1-year breaks in service. On the other 
hand, assume the employee completed three consecutive years of service 
beginning in 1980, and incurred two 1-year breaks in service in 1983 and 
1984. Because, as of December 31, 1984, the years of service credited 
before 1983 could not be disregarded, whether the plan may subsequently 
disregard those years of service would be governed by the rules enacted 
by REA 1984.

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



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

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

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

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

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

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

    Example 1. Employee A completes a year of service under a plan 
computing service by the actual counting of hours for the 12-month 
period ending December 31, 1989, and incurs a 1-year break in service 
for the 12-month period ending December 31, 1990. The plan does not 
contain the provisions permitted by section 410(a)(5)(B) (relating to 2-
year 100 percent vesting) and section 410(a)(5)(D) (relating to 
nonvested participants). Thereafter, he does not complete a year of 
service. As of January 1, 1991, in computing his period of service under 
the plan his service prior to December 31, 1990, is not required to be 
taken into account for purposes of section 410(a)(1) and Sec.  1.410(a)-
3.

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



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

    (a) Elapsed time--(1) Rule. For purposes of applying the rules of 
Sec.  1.410(a)-7 (relating to the elapsed time method of crediting 
service) to absences described in sections 410(a)(5)(E) and 411(a)(6)(E) 
(relating to maternity or paternity absence), the severance from service 
date of an employee who is absent from service beyond the first 
anniversary of the first day of absence by reason of a maternity or 
paternity absence described in section 410(a)(5)(E)(i) or 
411(a)(6)(E)(i) is the second anniversary of the first day of such 
absence.

[[Page 25]]

The period between the first and second anniversaries of the first day 
of absence from work is neither a period of service nor a period of 
severance. This rule applies to maternity and paternity absences 
beginning on or after the first day of the first plan year in which the 
plan is required to credit service under sections 410(a)(5)(E) and 
411(a)(6)(E).

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

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

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

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



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

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

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



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

    This section contains a listing of the major headings of Sec. Sec.  
1.410(b)-2 through 1.410(b)-10.

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

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

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

    (a) Employees benefiting under a plan.
    (1) In general.

[[Page 26]]

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

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

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

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

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

                 Sec.  1.410(b)-6 Excludable employees.

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

[[Page 27]]

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

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

                   Sec.  1.410(b)-8 Additional rules.

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

                      Sec.  1.410(b)-9 Definitions.

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

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

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

[T.D. 8363, 56 FR 47641, Sept. 19, 1991; 57 FR 10954, Mar. 31, 1992, as 
amended by T.D. 8487, 58 FR 46838, Sept. 3, 1993; T.D. 8548, 59 FR 
32914, June 27, 1994; T.D. 9275, 71 FR 41359, July 21, 2006; T.D. 9849, 
84 FR 9234, Mar. 14, 2019]



Sec.  1.410(b)-1  [Reserved]



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

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

[[Page 28]]

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

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

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

[[Page 29]]

    (d) Nonelective contributions under section 403(b) plans. For plan 
years beginning on or after January 1, 1989, a plan subject to section 
403(b)(12)(A)(i) with respect to nonelective contributions (i.e., 
contributions not made pursuant to a salary reduction agreement) is 
treated as a plan subject to the requirements of this section. For this 
purpose, a plan described in the preceding sentence must satisfy the 
requirements of this section without regard to section 410(c) and 
paragraph (e) of this section. For plan years beginning before the 
effective date set forth in Sec.  1.410(b)-10(d), any plan described in 
section 410(c)(1)(A) (regarding governmental plans) satisfies the 
requirements of this section.
    (e) Certain governmental and church plans. The requirements of 
section 410(b) do not apply to a plan described in section 410(c)(1) 
(other than a plan subject to section 403(b)(12)(A)(i) or a plan with 
respect to which an election has been made under section 410(d)). Such a 
plan must satisfy section 401(a)(3) as in effect on September 1, 1974. 
For this purpose, a plan that satisfies section 410(b) (without regard 
to this paragraph (e)) is treated as satisfying section 401(a)(3) as in 
effect on September 1, 1974. For plan years beginning before the 
effective date set forth in Sec.  1.410(b)-10(d), any plan described in 
section 410(c)(1)(A) (regarding governmental plans) satisfies the 
requirements of this section and is thus treated as satisfying the 
requirements of section 401(a)(3) as in effect on September 1, 1974. See 
Sec.  1.410(b)-10(b)(2) for a special rule for plans of tax-exempt 
organizations.
    (f) Certain acquisitions or dispositions. Section 410(b)(6)(C) 
(relating to certain acquisitions or dispositions) provides a special 
rule whereby a plan may be treated as satisfying section 410(b) for a 
limited period of time after an acquisition or disposition if it 
satisfies section 410(b) (without regard to the special rule) 
immediately before the acquisition or disposition and there is no 
significant change in the plan or in the coverage of the plan other than 
the acquisition or disposition. For purposes of section 410(b)(6)(C) and 
this paragraph (f), the terms ``acquisition'' and ``disposition'' refer 
to an asset or stock acquisition, merger, or other similar transaction 
involving a change in employer of the employees of a trade or business.
    (g) Additional rules. The Commissioner may, in revenue rulings, 
notices, and other guidance of general applicability, provide any 
additional rules that may be necessary or appropriate in applying the 
minimum coverage requirements of section 410(b), including (without 
limitation) additional rules limiting or expanding the methods in Sec.  
1.410(b)-5(d) and (e) for determining employee benefit percentages.

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



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

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

[[Page 30]]

additional years of participation or service under section 415(b)(5), or 
changes in the defined contribution fraction under section 415(e) is 
also disregarded, but only if such provision applies uniformly to all 
employees in the plan.
    (B) Defined benefit plans taking section 415 limits into account 
under section 401(a)(4) testing. Paragraph (a)(2)(ii)(A) of this section 
does not apply in the case of a defined benefit plan that uses the 
option in Sec.  1.401(a)(4)-3(d)(2)(ii)(B) to take into account plan 
provisions implementing the provisions of section 415 in determining 
accrual rates under the section 401(a)(4) general test.
    (C) Defined contribution plans. A defined contribution plan is 
permitted to apply the rule in the first sentence of paragraph 
(a)(2)(ii)(A) of this section in determining whether an employee is 
treated as benefiting under the plan, provided it applies the rule on a 
consistent basis for all employees in the plan.
    (iii) Certain employees treated as benefiting--(A) In general. An 
employee is treated as benefiting under a plan for a plan year if the 
employee satisfies all of the applicable conditions for accruing a 
benefit or receiving an allocation for the plan year but fails to have 
an increase in accrued benefit or to receive an allocation solely 
because of one or more of the conditions set forth in paragraphs 
(a)(2)(iii) (B) through (F) of this section.
    (B) Certain plan limits. The employee's benefit would otherwise 
exceed a limit that is applicable on a uniform basis to all employees in 
the plan. Thus, for example, if the formula under a defined benefit plan 
takes into account only the first 30 years of service for accrual 
purposes, an employee who has completed more than 30 years of service is 
still treated as benefiting under the plan.
    (C) Benefits previously accrued. The benefit previously accrued by 
the employee is greater than the benefit that would be determined under 
the plan if the benefit previously accrued were disregarded. This could 
happen, for example, when the plan is applying the wear-away formula of 
Sec.  1.401(a)(4)-13(c)(4)(ii) and the employee's frozen accrued benefit 
exceeds the benefit determined under the current formula.
    (D) Benefit offset arrangements. The plan offsets the employee's 
current benefit accrual under an offset arrangement described in Sec.  
1.401(a)(4)-3(f)(9) (without regard to whether the offset is 
attributable to pre-participation service or past service).
    (E) Target benefit plans. In the case of a target benefit plan that 
satisfies the nondiscriminatory amount requirement of Sec.  1.401(a)(4)-
1(b)(2) by satisfying the safe harbor in Sec.  1.401(a)(4)-8(b)(3), the 
employee's theoretical reserve is greater than or equal to the actuarial 
present value of the fractional rule benefit.
    (F) Post-normal retirement age adjustments. The employee has 
attained normal retirement age under a defined benefit plan and fails to 
accrue a benefit because of the provisions of section 411(b)(1)(H)(iii) 
regarding adjustments for delayed retirement.
    (iv) Section 412(i) plans--(A) General rule. Notwithstanding 
paragraph (a)(1) of this section, an employee is treated as benefiting 
under an insurance contract plan within the meaning of section 412(i) 
for a plan year if and only if a premium is paid on behalf of the 
employee for the plan year.
    (B) Exceptions. Notwithstanding paragraph (a)(2)(iv)(A) of this 
section, an employee is treated as benefiting under an insurance 
contract plan within the meaning of section 412(i) for a plan year if 
the sole reason that a premium is not paid on behalf of the employee is 
one of the reasons described in paragraph (a)(2)(iii) of this section. 
In addition, an employee is treated as benefiting under an insurance 
contract plan, within the meaning of section 412(i), that is a defined 
benefit plan if a premium is not paid on behalf of the employee solely 
because the insurance contracts that have previously been purchased on 
behalf of the employee guarantee to provide for the employee's projected 
normal retirement benefit without regard to future premium payments.
    (3) Examples. The following examples illustrate the determination of 
whether an employee is benefiting under a plan for purposes of section 
410(b).


[[Page 31]]


    Example 1. An employer has 35 employees who are eligible under a 
defined benefit plan. The plan requires 1,000 hours of service to accrue 
a benefit. Only 30 employees satisfy the 1,000-hour requirement and 
accrue a benefit. The five employees who do not satisfy the 1,000-hour 
requirement during the plan year are taken into account in testing the 
plan under section 410(b) but are treated as not benefiting under the 
plan.
    Example 2. An employer maintains a section 401(k) plan. Only 
employees who are at least age 21 and who complete one year of service 
are eligible employees under the plan within the meaning of Sec.  
1.401(k)-6. Under the rule of paragraph (a)(2)(i) of this section, only 
employees who have satisfied these age and service conditions are 
treated as benefiting under the plan.
    Example 3. The facts are the same as in Example 2, except that the 
employer also maintains a section 401(m) plan that provides matching 
contributions contingent on elective contributions under the section 
401(k) plan. The matching contributions are contingent on employment on 
the last day of the plan year. Under Sec.  1.401(m)-5, because matching 
contributions are contingent on employment on the last day of the plan 
year, not all employees who are eligible employees under the section 
401(k) plan are eligible employees under the section 401(m) plan. Thus, 
employees who have satisfied the age and service conditions but who do 
not receive a matching contribution because they are not employed on the 
last day of the plan year are treated as not benefiting under the 
section 401(m) portion of the plan.

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

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

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

[[Page 32]]



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

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

[[Page 33]]

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

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

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

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

[[Page 34]]

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

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



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

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

[[Page 35]]

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

[[Page 36]]

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

[[Page 37]]

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

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

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

[[Page 38]]

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

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



Sec.  1.410(b)-6  Excludable employees.

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

[[Page 39]]

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

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

[[Page 40]]

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

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

[[Page 41]]

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

[[Page 42]]

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

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

[[Page 43]]



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

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

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

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

[[Page 44]]

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

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

[[Page 45]]

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

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



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

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

[[Page 46]]

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

[[Page 47]]

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

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

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

[[Page 48]]

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

[[Page 49]]

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

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


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

[[Page 50]]

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

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

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



Sec.  1.410(b)-8  Additional rules.

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

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


[[Page 51]]


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

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



Sec.  1.410(b)-9  Definitions.

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

[[Page 52]]

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

[T.D. 8363, 56 FR 47657, Sept. 19, 1991; 57 FR 10817, 10954, Mar. 31, 
1992, as amended by T.D. 8487, 58 FR 46843, Sept. 3, 1993; T.D. 9169, 69 
FR 78153, Dec. 29, 2004]



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

    (a) Statutory effective dates--(1) In general. Except as set forth 
in paragraph (a)(2) of this section, the minimum coverage rules of 
section 410(b) as amended by section 1112 of the Tax Reform Act of 1986 
apply to plan years beginning on or after January 1, 1989.
    (2) Special statutory effective date for collective bargaining 
agreements--(i) In

[[Page 53]]

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

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

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

[[Page 54]]

    (d) Effective date for governmental plans. In the case of 
governmental plans described in section 414(d), including plans subject 
to section 403(b)(12)(A)(i) (nonelective plans) Sec.  1.410(b)-2 through 
Sec.  1.410(b)-10 apply to plan years beginning on or after January 1, 
1996, or 90 days after the opening of the first legislative session 
beginning on or after January 1, 1996, of the governing body with 
authority to amend the plan, if that body does not meet continuously. 
Such plans are deemed to satisfy section 410(b) (and in the case of such 
plans that are not subject to section 403(b)(12)(A)(i), section 
401(a)(3) as in effect on September 1, 1974) for plan years before that 
effective date. For purposes of this section, the governing body with 
authority to amend the plan is the legislature, board, commission, 
council, or other governing body with authority to amend the plan. See 
Sec.  1.410(b)-2(d) and (e).
    (e) Effective date for provisions relating to exclusion of employees 
of certain tax-exempt entities. The provisions in Sec.  1.410(b)-6(g) 
apply to plan years beginning after December 31, 1996. For plan years to 
which Sec.  1.410(b)-6 applies that begin before January 1, 1997, Sec.  
1.410(b)-6(g) (as it appeared in the April 1, 2005 edition of 26 CFR 
part 1) applies.

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



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

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

[[Page 55]]

conditioned upon issuance of a favorable determination letter and will 
become irrevocable upon issuance of such letter.
    (5) Statement. The statement described in subparagraph (3) of this 
paragraph shall indicate (i) that the election is made under section 
410(d) of the Code and (ii) the first plan year for which it is 
effective.

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

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



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

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

[[Page 56]]

    (iv) A plan established and maintained by a society, order, or 
association described in section 501(c) (8) or (9), if no part of the 
contributions to or under such plan are made by employers of 
participants in such plan.
    (2) Vesting requirements. A plan described in subparagraph (1) of 
this paragraph shall, for purposes of section 401(a), be treated as 
meeting the requirements of section 411 if such plan meets the vesting 
requirements resulting from the application of section 401(a)(4) and 
section 401(a)(7) as in effect on September 1, 1974.
    (d) Supersession. Sections 11.411(a)-1 through 11.411(d)-3, 
inclusive, of the Temporary Income Tax Regulations under the Employee 
Retirement Income Security Act of 1974 are superseded by this section 
and Sec. Sec.  1.411(a)-2 through 1.411(d)-3.

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

[T.D. 7501, 42 FR 42324, Aug. 23, 1977, as amended by T.D. 9849, 84 FR 
9234, Mar. 14, 2019]



Sec.  1.411(a)-2  Effective dates.

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

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

[[Page 57]]



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

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

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

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

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


[[Page 58]]

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

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

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

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

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


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

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


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

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

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



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

    (a) In general--(1) [Reserved]
    (2) Composite arrangements. A plan will not be considered to satisfy 
the requirements of paragraph (b), (c), or (d) of this section unless it 
satisfies all requirements of a particular one of such paragraphs with 
respect to all of an employee's years of service. A plan which, for 
example, satisfies the requirements of paragraph (b) (but not (c) or 
(d)) for an employee's first 4

[[Page 59]]

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

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

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

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

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

[[Page 60]]

 
6.......................................................             75
7.......................................................            100
------------------------------------------------------------------------

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

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

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

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



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

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

[[Page 61]]

standards. Accordingly, such a right is subject to the limitations on 
forfeitability. Rights which are required to be prospectively 
nonforfeitable under the vesting standards are nonforfeitable and may 
not be forfeited until it is determined that such rights are, in fact, 
in excess of the vesting standards. Thus, employees have a right to vest 
in the accrued benefits if they continue in employment of employers 
maintaining the plan unless a forfeitable event recognized by section 
411 occurs. For example, if a plan covered employees in Division A of 
Corporation X under a plan utilizing a 10-year 100 percent vesting 
schedule, the plan could not forfeit employees' rights on account of 
their moving to service in Division B of Corporation X prior to 
completion of 10 years of service even though employees are not vested 
at that time.
    (b) Special rules. For purposes of paragraph (a) of this section a 
right is not treated as forfeitable--
    (1) Death--(i) General rule. In the case of a participant's right to 
his employer-derived accrued benefit, merely because such accrued 
benefit is forfeitable by the participant to the extent it has not been 
paid or distributed to him prior to his death. This subparagraph shall 
not apply to a benefit which must be paid to a survivor in order to 
satisfy the requirements of section 401(a)(11).
    (ii) Employee contributions. A participant's right in his accrued 
benefit derived from his own contributions must be nonforfeitable at all 
times. Such a right is not treated as forfeitable merely because, after 
commencement of annuity or pension payments in a benefit form provided 
under the plan, the participant dies without receiving payments equal in 
amount to his nonforfeitable accrued benefit derived from his 
contributions determined at the time of commencement.
    (2) Suspension of benefits upon reemployment of retiree. In the case 
of certain suspensions of benefits under section 411(a)(3)(B), see 
regulations prescribed by the Secretary of Labor under 29 CFR Part 2530 
(Department of Labor regulations relating to minimum standards for 
employee pension benefit plans).
    (3) Retroactive plan amendment. In the case of a participant's right 
to his employer-derived accrued benefit, merely because such benefit is 
subject to reduction to the extent provided by a plan amendment 
described in section 412(c)(8) and the regulations thereunder, which 
amendment is given retroactive effect in accordance with such section.
    (4) Other forfeiture rules--(i) Withdrawal of mandatory 
contributions. For rules allowing forfeitures on account of the 
withdrawal of mandatory contributions, see Sec.  1.411(a)-7(d) (2) and 
(3).
    (ii) Additional requirements. For additional requirements relating 
to nonforfeitability of benefits in the event of a withdrawal by the 
employee, see section 401(a)(19) and Sec.  1.401(a)-19.
    (5) Multiemployer plan. In the case of a multiemployer plan 
described in section 414(f), merely because an employee's accrued 
benefit which results from service with an employer before such employer 
was required to contribute to the plan is forfeitable on account of the 
cessation of contributions by the employer of the employee. This 
subparagraph shall not apply to an employee's accrued benefit with 
respect to an employer which accrued under a plan maintained by that 
employer prior to the adoption by that employer of the multiemployer 
plan.
    (6) Lost beneficiary; escheat. In the case of a benefit which is 
payable, merely because the benefit is forfeitable on account of the 
inability to find the participant or beneficiary to whom payment is due, 
provided that the plan provides for reinstatement of the benefit if a 
claim is made by the participant or beneficiary for the forfeited 
benefit. In addition, a benefit which is lost by reason of escheat under 
applicable state law is not treated as a forfeiture.
    (7) Certain matching contributions. A matching contribution (within 
the meaning of section 401(m)(4)(A) and Sec.  1.401(m)-1(a)(2)) is not 
treated as forfeitable even if under the plan it may be forfeited under 
Sec.  1.401(m)-2(b)(1) because the contribution to which it relates is 
treated as an excess contribution (within the meaning of Sec. Sec.  
1.401(k)-2(b)(2)(ii) and 1.401(k)-6), excess deferral (within the 
meaning of Sec.  1.402(g)-1(e)(1)(iii)), excess aggregate contribution 
(within the meaning of Sec.  1.401(m)-

[[Page 62]]

5), or a default elective contribution (within the meaning of Sec.  
1.414(w)-1(e)) that is withdrawn in accordance with the requirements of 
Sec.  1.414(w)-1(c).
    (c) Examples. The rules of this section are illustrated by the 
following examples:

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

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

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



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

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

[[Page 63]]

    (c) Examples. The rules of this section ae illustrated by the 
following examples:

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

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



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

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

[[Page 64]]

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,

[[Page 65]]

without regard to whether the employee has nonforfeitable rights under 
the predecessor plan, are determined under section 411(a) (5) and (6) 
except that years between the termination date of the predecessor plan 
and the date of establishment of the successor plan do not count as 
years of service.
    (B) Definition of predecessor plan. For purposes of this section, 
if--
    (1) An employer establishes a retirement plan (within the meaning of 
section 7476(d)) qualified under subchapter D of chapter 1 of the Code 
within the 5-year period immediately preceding or following the date 
another such plan terminates, and
    (2) The other plan is terminated during a plan year to which this 
section applies.

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

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

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

    Example 1. The A plan in 1971 provides for immediate participation 
and vesting at normal retirement age. Employees accrue a unit benefit 
based on their compensation in each year. The plan provides that if an 
employee is not employed on the last day of the calendar year, he loses 
all accrued benefits. The requirement of employment on the last day of 
the year is a break in service rule because employees can lose benefits 
by reason of 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

[[Page 66]]

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; T.D. 9849, 84 FR 9234, Mar. 14, 2019]



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

    (a) Year of service. Under section 411 (a)(5)(A), for purposes of 
the regulations thereunder, the term ``year of service'' is defined in 
regulations prescribed by the Secretary of Labor under section 
203(b)(2)(A) of the Employee Retirement Income Security Act of 1974. For 
special rules applicable to seasonal industries and maritime industries, 
see regulations prescribed by the Secretary of Labor under subparagraphs 
(C) and (D) of section 203(b)(2) of the Employee Retirement Income 
Security Act of 1974.
    (b) Hours of service. Under section 411(a)(5)(B), for purposes of 
the regulations thereunder, the term ``hours of service'' has the 
meaning provided by section 410(a)(3)(C). See regulations prescribed by 
the Secretary of Labor under 29 CFR Part 2530, relating to minimum 
standards for employee pension benefit plans.
    (c) Breaks in service. Under section 411(a)(6), for purposes of 
Sec.  1.411(a)-5(b)(4) and of this paragraph--
    (1) In general--(i) Year of service after 1-year break in service. 
In the case of any employee who has incurred a 1-year break in service, 
years of service completed before such break are not required to be 
taken into account until the employee has completed one year of service 
after his return to service.
    (ii) Defined contribution plan. In the case of a participant in a 
defined contribution plan or in an insured defined benefit plan (which 
plan satisfies the requirements of section 411 (b)(1)(F) and Sec.  
1.411(b)-1) who has incurred a 1-year break in service, years of service 
completed after such break are not required to be taken into account for 
purposes of determining the nonforfeitable percentage of the 
participant's right to employer-derived benefits which accrued before 
such break. This subdivision does not permit years of service completed 
before a 1-year break in service to be disregarded in determining the 
nonforfeitable percentage of a participant's right to employer-derived 
benefits which accrue after such break.
    (iii) Nonvested participants. In the case of an employee who is a 
nonvested participant in employer-derived benefits at the time he incurs 
a 1-year break in service, years of service completed by such 
participant before such break are not required to be taken into account 
for purposes of determining the nonforfeitable percentage of his right 
to employer-derived benefits if at such time the number of consecutive 
1-year breaks in service included in his most recent break in service 
equals or exceeds the aggregate number of his years of service, whether 
or not consecutive, completed before such break. In the case of a plan 
utilizing the elapsed time method described in Sec.  1.410(a)-7, the 
condition in the preceding sentence shall be satisfied if the period of 
severance is at least one year and the consecutive period of severance 
equals or exceeds his prior period of service, whether or not 
consecutive, completed before such period of severance. In computing the 
aggregate number of years of service prior to such break, years of 
service which could

[[Page 67]]

have been disregarded under this subdivision by reason of any prior 
break in service may be disregarded.
    (2) One-year break in service defined. The term ``1-year break in 
service'' means a calendar year, plan year, or other 12-consecutive 
month period designated by a plan (and not prohibited under regulations 
prescribed by the Secretary of Labor) during which the participant has 
not completed more than 500 hours of service. In the case of a plan 
utilizing the elapsed time method, the term ``1-year break in service'' 
means a 12-consecutive month period beginning on the severance from 
service date or any anniversary thereof and ending on the next 
succeeding anniversary of such date; provided, however, that the 
employee during such 12-consecutive-month period does not complete any 
hours of service within the meaning of 29 CFR Part 2530.200b-2(a) for 
the employer or employers maintaining the plan. See regulations 
prescribed by the Secretary of Labor under 29 CFR Part 2530, relating to 
minimum standards for employee pension benefit plans.
    (d) Examples. The rules provided by this section are illustrated by 
the following examples:

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

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


Employee A's status as a participant during this period is determined as 
follows:
    1978: Employee A was a plan participant on January 1, 1978, because 
he completed a year of service (1,000 hours) in 1977. He did not 
complete a year of service in 1978 because he completed fewer than 1,000 
hours in that year. Because he completed more than 500

[[Page 68]]

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

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

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



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

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

[[Page 69]]

    (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

[[Page 70]]

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:

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

[[Page 71]]

 
65...........................     33,000        35      1.00      11,550
Note. Col. (1) times col. (2) times col. (3) equals col. (4).


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

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

[[Page 72]]

in this subparagraph may provide that the employee must repay the full 
amount of the distribution in order to have the forfeited benefit 
restored. The plan provision may not require that such repayment be made 
sooner than the time described in paragraph (d)(2)(ii)(D) of this 
section.
    (D)(1) If a distribution is on account of separation from service, 
the time for repayment may not end before the earlier of--
    (i) 5 years after the first day the employee is subsequently 
employed, or
    (ii) The close of the first period of consecutive 1-year breaks in 
service commencing after the distribution.

If the distribution occurs for any other reason, the time for repayment 
may not end earlier than 5 years after the date of distribution. 
Nevertheless, a plan provision may provide for a longer period in which 
the employee may repay. For example, a plan could allow repayments to be 
made at any time before normal retirement age.
    (2) In the case of a plan utilizing the elapsed time method, 
described in Sec.  1.410(a)-7, the minimum time for repayment shall be 
determined as in paragraph (d)(2)(ii)(D)(1) of this section except as 
provided in this subdivision. The 5 consecutive 1-year break periods 
shall be determined by substituting the term ``1-year period of 
severance'' for the term ``1-year break in service''. Also, the 
repayment period both commences and closes in a manner determined by the 
Commissioner that is consistent with the rules in Sec.  1.410(a)-7 and 
the substitution in section 411(a)(6) (C) and (D) of a 5-year break-in-
service rule for the former 1-year break-in-service rule.
    (E) A defined benefit plan using the break-in-service rule described 
in section 410(a)(5)(D) or a defined contribution plan using the break-
in-service rule described in section 411(a)(6)(C) for determining 
employees' accrued benefits is not required to provide for repayment by 
an employee whose accrued benefit is disregarded by reason of a plan 
provision using these rules.
    (iii) Computation of benefit. In the case of a defined contribution 
plan, the employer-derived accrued benefit required to be restored by 
this subparagraph shall not be less than the amount in the account 
balance of the employee which was forfeited, unadjusted by any 
subsequent gains or losses.
    (iv) Delayed forfeiture. A defined contribution plan may, in lieu of 
the forfeiture and restoration described in this subparagraph, provide 
that the forfeiture does not occur until the expiration of the time for 
repayment described in subdivision (ii) of this subparagraph provided 
that the conditions of this subparagraph are satisfied.
    (3) Withdrawal of mandatory contributions; accruals before September 
2, 1974--(i) General rule. In the case of a participant's right to the 
portion of the employer-derived benefit which accrued prior to September 
2, 1974, a right is not treated as forfeitable merely because all or 
part of such portion may be forfeited on account of the withdrawal by 
the participant of an amount attributable to his benefit derived from 
mandatory contributions (within the meaning of section 411(c)(2)(C) and 
Sec.  1.411(c)-1(c)(4)) made by the participant before September 2, 
1974, if the amount so subject to forfeiture is no more than 
proportional to such amounts withdrawn. This subparagraph shall not 
apply to any plan to which any mandatory contribution (within the 
meaning of section 411(c)(2)(C) and Sec.  1.411(c)-1(c)(4)) is made 
after September 2, 1974.
    (ii) Defined contribution plan. In the case of a defined 
contribution plan, the portion of a participant's employer-derived 
benefit which accrued prior to September 2, 1974, shall be determined on 
the basis of a separate accounting between benefits accruing before and 
after such date. Gains, losses, withdrawals, forfeitures, and other 
credits or charges must be separately allocated to such benefits. Any 
allocation made on a reasonable and consistent basis prior to September 
1, 1977, shall satisfy the requirements of this subdivision.
    (iii) Defined benefit plan. In the case of a defined benefit plan, 
the portion of a participant's employer-derived benefit which accrued 
prior to September 2, 1974, shall be determined in a manner consistent 
with the determination of an accrued benefit under section 411(b)(1)(D) 
(see Sec.  1.411(b)-1(c)). Any

[[Page 73]]

method of determining such accrued benefit which the Commissioner finds 
to be reasonable shall satisfy the requirements of this subdivision.
    (4) Certain cash-outs of accrued benefits--(i) Involuntary cash-
outs. For purposes of determining an employee's right to an accrued 
benefit derived from employer contributions under a plan, the plan may 
disregard service performed by the employee with respect to which--
    (A) The employee receives a distribution of the present value of his 
entire nonforfeitable benefit at the time of the distribution;
    (B) The requirements of section 411(a)(11) are satisfied at the time 
of the distribution;
    (C) The distribution is made due to the termination of the 
employee's participation in the plan; and
    (D) The plan has a repayment provision which satisfies the 
requirements of paragraph (d)(4)(iv) of this section in effect at the 
time of the distribution.
    (ii) Voluntary cash-outs. For purposes of determining an employee's 
accrued benefit derived from employer contributions under a plan, the 
plan may disregard service performed by the employee with respect to 
which--
    (A) The employee receives a distribution of the present value of his 
nonforfeitable benefit attributable to such service at the time of such 
distribution,
    (B) The employee voluntarily elects to receive such distribution,
    (C) The distribution is made on termination of the employee's 
participation in the plan, and
    (D) The plan has a repayment provision in effect at the time of the 
distribution which satisfies the requirements of subdivision (iv) of 
this subparagraph.

A distribution shall be deemed to be made on termination of 
participation in the plan if it is made not later than the close of the 
second plan year following the plan year in which such termination 
occurs. For purposes of determining the nonforfeitable benefit, the plan 
may disregard service after the distribution as illustrated in 
subparagraph (2)(i) of this subparagraph.
    (iii) Disregard of service. Service of an employee permitted to be 
disregarded under subdivision (i) or (ii) of the subparagraph is not 
required to be taken into account in computing the employee's accrued 
benefit under the plan. In the case of a voluntary distribution 
described in subdivision (ii) of this subparagraph which is less than 
the present value of the employee's total nonforfeitable benefit 
immediately prior to the distribution, the accrued benefit not required 
to be taken into account is such total accrued benefit multiplied by a 
fraction, the numerator of which is the amount of the distribution and 
the denominator of which is the present value of his total 
nonforfeitable benefit immediately prior to such distribution. For 
example, A who is 50 percent vested in an account balance of $1,000 
receives a voluntary distribution of $250. The accrued benefit which can 
be disregarded equals $1,000 times $250/$500, or $500. However, such 
service may not by reason of this paragraph be disregarded for purposes 
of determining an employee's years of service under sections 410(a)(3) 
and 411(a)(4).
    (iv) Plan repayment provision. (A) A plan repayment provision 
satisfies the requirements of this subdivision if, under the provision, 
the accrued benefit of an employee that is disregarded by a plan under 
this subparagraph is restored upon repayment to the plan by the employee 
of the full amount of the distribution. An accrued benefit is not 
restored unless all of the optional forms of benefit and subsidies 
relating to such benefit are also restored. A plan is not required to 
provide for repayment of an accrued benefit unless the employee--
    (1) Received a distribution that is in a plan year to which section 
411 applies (see Sec.  1.411(a)-2), which distribution is less than the 
amount of his accrued benefit determined under the same optional form of 
benefit as the distribution was made, and
    (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

[[Page 74]]

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

[[Page 75]]

    (2) At any relevant time the employee's vested portion of the 
separate account is not less than an amount (``X'') determined by the 
formula: X = P(AB + (R x D))-(R x D). For purposes of applying the 
formula: P is the vested percentage at the relevant time; AB is the 
account balance at the relevant time; D is the amount of the 
distribution; R is the ratio of the account balance at the relevant time 
to the account balance after distribution; and the relevant time is the 
time at which, under the plan, the vested percentage in the account 
cannot increase.

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

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

    (6) Other rules--(i) Distributions on separation or other event. 
None of the rules of this paragraph preclude distributions to employees 
upon separation from service or any other event recognized by the plan 
for commencing distributions. Such a distribution must, of course, 
satisfy the applicable qualification requirements pertaining to such 
distributions. For example, a profitsharing plan could pay the vested 
portion of an account balance to an employee when he separated from 
service, but in order to satisfy section 411 the plan might not be able 
to forfeit the nonvested account balance until the employee has a 1-year 
break in service. Similarly, the fact that a plan cannot disregard an 
accrued benefit attributable to service for which an employee has 
received a distribution because the plan does not satisfy the cash-out 
requirements of subparagraph (4) of this paragraph does not mean that 
the employee's accrued benefit (computed by taking into account such 
service) cannot be offset by the accrued benefit attributable to the 
distribution.
    (ii) Joint and survivor requirements. See Sec.  1.401(a)-11(a)(2) 
(relating to joint and survivor annuities) for special rules applicable 
to certain distributions described in this paragraph.
    (iii) Plan repayments. (A) Under subparagraphs (2) and (4) of this 
paragraph, a plan may be required to restore accrued benefits in the 
event of repayment by an employee.
    (B) For purposes of applying the limitations of section 415 (c) and 
(e), in the case of a defined contribution plan, the repayment by the 
employee and the restoration by the employer shall not be treated as 
annual additions.
    (C) In the case of a defined contribution plan, the permissible 
sources for restoration of the accrued benefit are: income or gain to 
the plan, forfeitures, or employer contributions. Notwithstanding the 
provisions of Sec.  1.401-1(b)(1)(ii), contributions may be made for 
such an accrued benefit by a profit-

[[Page 76]]

sharing plan even though there are no profits. In order for such a plan 
to be qualified, account balances (accrued benefits) generally must 
correspond to assets in the plan. Accordingly, there cannot be an 
unfunded account balance. However, an account balance will not be deemed 
to be unfunded in the case of a restoration if assets for the restored 
benefit are provided by the end of the plan year following the plan year 
in which the repayment occurs.

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

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



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

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

The nonforfeitable percentage (determined as of such date) of such 
employee's right to his employer-derived accrued benefit is not less 
than his percentage computed under the plan without regard to such 
amendment.
    (b) Election of former schedule--(1) In general. Under section 411 
(a)(10)(B), for plan years for which section 411 applies, if the vesting 
schedule of a plan is amended, the plan will not be treated as meeting 
the minimum vesting standards of section 411 (a)(2) unless the plan as 
amended, provides that each participant whose nonforfeitable percentage 
of his accrued benefit derived from employer contributions is determined 
under such schedule, and who has completed at least 5 years of service 
with the employer, may elect, during the election period, to have the 
nonforfeitable percentage of his accrued benefit derived from employer 
contributions determined without regard to such amendment. 
Notwithstanding the preceding sentence, no election need be provided for 
any participant whose nonforfeitable percentage under the plan, as 
amended, at any time cannot be less than such percentage determined 
without regard to such amendment.
    (2) Election period. For purposes of subparagraph (1) of this 
paragraph, the election period under the plan must begin no later than 
the date the plan amendment is adopted and end no earlier than the 
latest of the following dates:
    (i) The date which is 60 days after the day the plan amendment is 
adopted,
    (ii) The date which is 60 days after the day the plan amendment 
becomes effective, or
    (iii) The date which is 60 days after the day the participant is 
issued written notice of the plan amendment by the employer or plan 
administrator.
    (3) Service requirement. For purposes of subparagraph (1) of this 
paragraph, a participant shall be considered to have completed 5 years 
of service if such participant has completed 5 years of service, whether 
or not consecutive, without regard to the exceptions of section 
411(a)(4) prior to the expiration of the election period described in 
subparagraph (2) of this paragraph. For the meaning of the term ``year 
of service'', see regulations prescribed by the Secretary of Labor under 
29 CFR Part 2530, relating to minimum standards for employee pension 
benefit plans.
    (4) Election only by participant. The election described in 
subparagraph (1) of this paragraph is available only to an individual 
who is a participant in the plan at the time such election is made.
    (5) Election may be irrevocable. A plan, as amended, shall not fail 
to meet the minimum vesting standards of section 411(a)(2) by reason of 
section 411(a)(10)(B) merely because such plan provides that the 
election described in subparagraph (1) of this paragraph is irrevocable.
    (6) Relationship with section 411(a)(2). The election described in 
subparagraph

[[Page 77]]

(1) of this paragraph is available for a vesting schedule which does not 
satisfy the requirements of section 411(a)(2) only if under such 
schedule all participants have a 50 percent nonforfeitable right after 
10 years of service, and a 100 percent nonforfeitable right after 15 
years of service, in their employer-derived accrued benefit. If the 
vesting schedule provides less vesting than the percentages required by 
the preceding sentence, the plan can be amended to provide for such 
vesting.
    (c) Special rules--(1) Amendment of vesting schedule. For purposes 
of this section, an amendment of a vesting schedule is each plan 
amendment which directly or indirectly affects the computation of the 
nonforfeitable percentage of employees' rights to employer-derived 
accrued benefits. Consequently, such an amendment, for example, includes 
each change in the plan which affects either the plan's computation of 
years of service or of vesting percentages for years of service.
    (2) Aggregation of amendments. All plan amendments which are: (i) 
amendments of a vesting schedule within the meaning of subparagraph (1) 
of this paragraph and (ii) adopted and effective at the same time, shall 
be deemed to be a single amendment for purposes of applying the rules in 
paragraphs (a) and (b) of this section.
    (3) Relationship with section 411(d)(6). For additional requirements 
relating to section 411(d)(6), see Sec.  1.411(d)-3(a)(3).

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

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



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

    (a) [Reserved]
    (b) Election of former schedule--(1) In general. Under section 
411(a)(10)(B), for plan years for which section 411 applies, if the 
vesting schedule of a plan is amended, the plan will not be treated as 
meeting the minimum vesting standards of section 411(a)(2) unless the 
plan as amended provides that each participant whose nonforfeitable 
percentage of his accrued benefit derived from employer contributions is 
determined under such schedule, and who has completed at least 3 years 
of service with the employer, may elect, during the election period, to 
have the nonforfeitable percentage of his accrued benefit derived from 
employer contributions determined without regard to such amendment. 
Notwithstanding the preceding sentence, no election need be provided for 
any participant whose nonforfeitable percentage under the plan, as 
amended, at any time cannot be less than such percentage determined 
without regard to such amendment. For employees not described in Sec.  
1.411(a)-3T(e)(1), this section shall be applied by substituting ``5 
years of service'' for ``3 years of service'' where such language 
appears.
    (2) Election period. For purposes of subparagraph (1) of this 
paragraph, the election period under the plan must begin no later than 
the date the plan amendment is adopted and end no earlier than the 
latest of the following dates:
    (i) The date which is 60 days after the day the plan amendment is 
adopted,
    (ii) The date which is 60 days after the day the plan amendment 
becomes effective, or
    (iii) The date which is 60 days after the day the participant is 
issued written notice of the plan amendment by the employer or plan 
administrator.
    (3) Service requirement. For purposes of subparagraph (1) of this 
paragraph, a participant shall be considered to have completed 3 years 
of service if such participant has completed 3 years of service, whether 
or not consecutive, without regard to the exceptions of section 
411(a)(4) prior to the expiration of the election period described in 
subparagraph (2) of this paragraph. For the meaning of the term ``year 
of service'', see regulations prescribed by the Secretary of Labor under 
29 CFR Part 2530, relating to minimum standards for employee pension 
benefit plans.

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



Sec.  1.411(a)-9  [Reserved]



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

    (a) Scope--(1) In general. Section 411(a)(11) restricts the ability 
of a plan

[[Page 78]]

to distribute any portion of a participant's accrued benefit without the 
participant's consent. Section 411(a)(11) also restricts the ability of 
defined benefit plans to distribute any portion of a participant's 
accrued benefit in optional forms of benefit without complying with 
specified valuation rules for determining the amount of the 
distribution. If the consent requirements or the valuation rules of this 
section are not satisfied, the plan fails to satisfy the requirements of 
section 411(a).
    (2) Accrued benefit. For purposes of this section, an accrued 
benefit is valued taking into consideration the particular optional form 
in which the benefit is to be distributed. The value of an accrued 
benefit is the present value of the benefit in the distribution form 
determined under the plan. For example, a plan that provides a 
subsidized early retirement annuity benefit may specify that the 
optional single sum distribution form of benefit available at early 
retirement age is the present value of the subsidized early retirement 
annuity benefit. In this case, the subsidized early retirement annuity 
benefit must be used to apply the valuation requirements of this section 
and the resulting amount of the single sum distribution. However, if a 
plan that provides a subsidized early retirement annuity benefit 
specifies that the single sum distribution benefit available at early 
retirement age is the present value of the normal retirement annuity 
benefit, then the normal retirement annuity benefit is used to apply the 
valuation requirements of this section and the resulting amount of the 
single sum distribution available at early retirement age.
    (b) General consent rules. A plan must satisfy the participant 
consent requirement with respect to the distribution of a participant's 
nonforfeitable accrued benefit with a present value in excess of the 
cash-out limit in effect under paragraph (c)(3)(ii) of this section. See 
paragraphs (c) (3) and (4) for situations where no consent is required.
    (c) Consent, etc. requirements--(1) General rule. If an accrued 
benefit is immediately distributable, section 411(a)(11) permits plans 
to provide for the distribution of any portion of a participant's 
nonforfeitable accrued benefits only if the applicable consent 
requirements are satisfied.
    (2) Consent. (i) No consent is valid unless the participant has 
received a general description of the material features of the optional 
forms of benefit available under the plan. In addition, so long as a 
benefit is immediately distributable, a participant must be informed of 
the right, if any, to defer receipt of the distribution. Furthermore, 
consent is not valid if a significant detriment is imposed under the 
plan on any participant who does not consent to a distribution. Whether 
or not a significant detriment is imposed shall be determined by the 
Commissioner by examining the particular facts and circumstances.
    (ii) Consent of the participant to the distribution must not be made 
before the participant receives the notice of his or her rights 
specified in this paragraph (c)(2) and must not be made more than 90 
days before the date the distribution commences.
    (iii) A plan must provide a participant with notice of the rights 
specified in this paragraph (c)(2) at a time that satisfies either 
paragraph (c)(2)(iii)(A) or (B) of this section:
    (A) This paragraph (c)(2)(iii)(A) is satisfied if the plan provides 
a participant with notice of the rights specified in this paragraph 
(c)(2) no less than 30 days and no more than 90 days before the date the 
distribution commences. However, if the participant, after having 
received this notice, affirmatively elects a distribution, a plan will 
not fail to satisfy the consent requirement of section 411(a)(11) merely 
because the distribution commences less than 30 days after the notice 
was provided to the participant, provided the plan administrator clearly 
indicates to the participant that the participant has a right to at 
least 30 days to consider whether to consent to the distribution.
    (B) This paragraph (c)(2)(iii)(B) is satisfied if the plan--
    (1) Provides the participant with notice of the rights specified in 
this paragraph (c)(2);
    (2) Provides the participant with a summary of the notice within the 
time period described in paragraph (c)(2)(iii)(A) of this section; and

[[Page 79]]

    (3) If the participant so requests after receiving the summary 
described in paragraph (c)(2)(iii)(B)(2) of this section, provides the 
notice to the participant without charge and no less than 30 days before 
the date the distribution commences, subject to the rules for the 
participant's waiver of that 30-day period. The summary described in 
paragraph (c)(2)(iii)(B)(2) of this section must advise the participant 
of the right, if any, to defer receipt of the distribution, must set 
forth a summary of the distribution options under the plan, must refer 
the participant to the most recent version of the notice (and, in the 
case of a notice provided in any document containing information in 
addition to the notice, must identify that document and must provide a 
reasonable indication of where the notice may be found in that document, 
such as by index reference or by section heading), and must advise the 
participant that, upon request, a copy of the notice will be provided 
without charge.
    (iv) For purposes of satisfying the requirements of this paragraph 
(c)(2), the plan administrator may substitute the annuity starting date, 
within the meaning of Sec.  1.401(a)-20, Q&A-10, for the date the 
distribution commences.
    (v) See Sec.  1.401(a)-20, Q&A-24 for a special rule applicable to 
consents to plan loans.
    (3) Cash-out limit. (i) Written consent of the participant is 
required before the commencement of the distribution of any portion of 
an accrued benefit if the present value of the nonforfeitable total 
accrued benefit is greater than the cash-out limit in effect under 
paragraph (c)(3)(ii) of this section on the date the distribution 
commences. The consent requirements are deemed satisfied if such value 
does not exceed the cash-out limit, and the plan may distribute such 
portion to the participant as a single sum. Present value for this 
purpose must be determined in the same manner as under section 417(e); 
see Sec.  1.417(e)-1(d).
    (ii) The cash-out limit in effect for a date is the amount described 
in section 411(a)(11)(A) for the plan year that includes that date. The 
cash-out limit in effect for dates in plan years beginning on or after 
August 6, 1997, is $5,000. The cash-out limit in effect for dates in 
plan years beginning before August 6, 1997, is $3,500.
    (iii) Effective date. Paragraphs (c)(3)(i) and (ii) of this section 
apply to distributions made on or after October 17, 2000. However, an 
employer is permitted to apply the $5,000 cash-out limit described in 
paragraph (c)(3)(ii) of this section to plan years beginning on or after 
August 6, 1997. Otherwise, for distributions prior to October 17, 2000, 
Sec. Sec.  1.411(a)-11 and 1.411(a)-11T in effect prior to October 17, 
2000 (as contained in 26 CFR Part 1 revised as of April 1, 2000) apply.
    (4) Immediately distributable. Participant consent is required for 
any distribution while it is immediately distributable, i.e., prior to 
the later of the time a participant has attained normal retirement age 
(as defined in section 411(a)(8)) or age 62. Once a distribution is no 
longer immediately distributable, a plan may distribute the benefit in 
the form of a QJSA in the case of a benefit subject to section 417 or in 
the normal form in other cases without consent.
    (5) Death of participant. The consent requirements of section 
411(a)(11) do not apply after the death of the participant.
    (6) QDROs. The consent requirements of section 411(a)(11) do not 
apply to payments to an alternate payee, defined in section 414(p)(8), 
except as provided in a qualified domestic relations order pursuant to 
section 414(p).
    (7) Section 401(a)(9), etc. The consent requirements of section 
411(a)(11) do not apply to the extent that a distribution is required to 
satisfy the requirements of section 401(a)(9) or 415. See section 
401(a)(9) and the regulations thereunder and Sec.  1.401(a)-20 Q&A 23 
for guidance on these requirements. Notwithstanding any provision to the 
contrary in section 401(a)(14) or Sec.  1.401(a)-14, a plan may not 
distribute a participant's nonforfeitable accrued benefit with a present 
value in excess of the cash-out limit in effect under paragraph 
(c)(3)(ii) of this section while the benefit is immediately 
distributable unless the participant consents to such distribution. The 
failure of a participant to consent is deemed to be an election to defer 
commencement of payment of the benefit for purposes of section 
401(a)(14) and Sec.  1.401(a)-14.

[[Page 80]]

    (8) Delegation to Commissioner. The Commissioner, in revenue 
rulings, notices, and other guidance published in the Internal Revenue 
Bulletin, may modify, or provide additional guidance with respect to, 
the notice and consent requirements of this section. See Sec.  
601.601(d)(2)(ii)(b) of this chapter.
    (d) Distribution valuation requirements. In determining the present 
value of any distribution of any accrued benefit from a defined benefit 
plan, the plan must take into account specified valuation rules. For 
this purpose, the valuation rules are the same valuation rules for 
valuing distributions as set forth in section 417(e); see Sec.  
1.417(e)-1(d). This paragraph (d) applies both before and after the 
participant's death regardless of whether the accrued benefit is 
immediately distributable. This paragraph also applies whether or not 
the participant's consent is required under paragraphs (b) and (c) of 
this section.
    (e) Special rules--(1) Plan termination. The requirements of this 
section apply before, on and after a plan termination. If a defined 
contribution plan terminates and the plan does not offer an annuity 
option (purchased from a commercial provider), then the plan may 
distribute a participant's accrued benefit without the participant's 
consent. The preceding sentence does not apply if the employer, or any 
entity within the same controlled group as the employer, maintains 
another defined contribution plan, other than an employee stock 
ownership plan (as defined in section 4975(e)(7)). In such a case, the 
participant's accrued benefit may be transferred without the 
participant's consent to the other plan if the participant does not 
consent to an immediate distribution from the terminating plan. See 
section 411(d)(6) and the regulations thereunder for other rules 
applicable to transferee plans and plan terminations.
    (2) ESOP dividends. The requirements of this section do not apply to 
any distribution of dividends to which section 404(k) applies.
    (3) Other rules. See Sec.  1.401(a)-20 Q&As 14, 17 and 24 for other 
rules that apply to the section 411(a)(11) requirements.
    (f) Medium for notice and consent--(1) Notice. The notice of a 
participant's rights described in paragraph (c)(2) of this section or 
the summary of that notice described in paragraph (c)(2)(iii)(B)(2) of 
this section must be provided on a written paper document. However, see 
Sec.  1.401(a)-21 of this chapter for rules permitting the use of 
electronic media to provide applicable notices to recipients with 
respect to retirement plans.
    (2) Consent. The consent described in paragraphs (c)(2) and (3) of 
this section must be given on a written paper document. However, see 
Sec.  1.401(a)-21 of this chapter for rules permitting the use of 
electronic media to make participant elections with respect to 
retirement plans.

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



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

    (a) In general. This section sets forth certain rules that apply to 
statutory hybrid plans under section 411(a)(13). Paragraph (b) of this 
section describes special rules for certain statutory hybrid plans that 
determine benefits under a lump sum-based benefit formula. Paragraph (c) 
of this section describes the vesting requirement for statutory hybrid 
plans. Paragraphs (d) and (e) of this section contain definitions and 
effective/applicability dates, respectively.
    (b) Calculation of benefit by reference to hypothetical account 
balance or accumulated percentage--(1) Payment of a current balance or 
current value under a lump sum-based benefit formula. Pursuant to 
section 411(a)(13)(A), a statutory hybrid plan that determines any 
portion of a participant's benefits under a lump sum-based benefit 
formula is not treated as failing to meet the following requirements 
solely because, with respect to benefits determined under that formula, 
the present value of those benefits is, under the terms of the plan, 
equal to the then-current balance of the hypothetical account maintained

[[Page 81]]

for the participant or to the then-current value of the accumulated 
percentage of the participant's final average compensation under that 
formula--
    (i) Section 411(a)(2); or
    (ii) With respect to the participant's accrued benefit derived from 
employer contributions, section 411(a)(11), 411(c), or 417(e).
    (2) General rules with respect to current account balance or current 
value--(i) Benefit after normal retirement age. The relief of section 
411(a)(13) does not override the requirement for a plan that, with 
respect to a participant with an annuity starting date after normal 
retirement age, the plan either provide an actuarial increase after 
normal retirement age or satisfy the requirements for suspension of 
benefits under section 411(a)(3)(B). Accordingly, with respect to such a 
participant, a plan with a lump sum based benefit formula violates the 
requirements of section 411(a) if the balance of the hypothetical 
account or the value of the accumulated percentage of the participant's 
final average compensation is not increased sufficiently to satisfy the 
requirements of section 411(a)(2) for distributions commencing after 
normal retirement age, unless the plan suspends benefits in accordance 
with section 411(a)(3)(B).
    (ii) Reductions limited. The relief of section 411(a)(13) does not 
permit the accumulated benefit under a lump sum-based benefit formula to 
be reduced in a manner that would be prohibited if that reduction were 
applied to the accrued benefit. Accordingly, the only reductions that 
can apply to the balance of the hypothetical account or accumulated 
percentage of the participant's final average compensation are 
reductions as a result of--
    (A) Benefit payments;
    (B) Qualified domestic relations orders under section 414(p);
    (C) Forfeitures that are permitted under section 411(a) (such as 
charges for providing a qualified preretirement survivor annuity);
    (D) Amendments that would reduce the accrued benefit but that are 
permitted under section 411(d)(6);
    (E) Adjustments resulting in a decrease in the balance of the 
hypothetical account due to the application of interest credits (as 
defined in Sec.  1.411(b)(5)-1(d)(1)(ii)(A)) that are negative for an 
interest crediting period;
    (F) In the case of a formula that expresses the accumulated benefit 
as an accumulated percentage of the participant's final average 
compensation, adjustments resulting in a decrease in the dollar amount 
of the accumulated percentage of the participant's final average 
compensation--
    (1) Due to a decrease in the dollar amount of the participant's 
final average compensation; or
    (2) Due to an increase in the integration level, under a formula 
that is integrated with Social Security (for example, as a result of an 
increase in the Social Security taxable wage base or in Social Security 
covered compensation); or
    (G) Other reductions to the extent provided by the Commissioner in 
revenue rulings, notices, or other guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b)).
    (3) Payment of benefits based on current account balance or current 
value--(i) Optional forms that are actuarially equivalent. With respect 
to the benefits under a lump sum-based benefit formula, the relief of 
paragraph (b)(1) of this section applies to an optional form of benefit 
that is determined as of the annuity starting date as the actuarial 
equivalent, using reasonable actuarial assumptions, of the then-current 
balance of a hypothetical account maintained for the participant or the 
then-current value of an accumulated percentage of the participant's 
final average compensation.
    (ii) Optional forms that are subsidized. With respect to the 
benefits under a lump sum-based benefit formula, if an optional form of 
benefit is payable in an amount that is greater than the actuarial 
equivalent, determined using reasonable actuarial assumptions, of the 
then-current balance of a hypothetical account maintained for the 
participant or the then-current value of an accumulated percentage of 
the participant's final average compensation, then the plan satisfies 
the requirements of sections 411(a)(2), 411(a)(11), 411(c) and 417(e) 
with respect to the amount of that optional form of

[[Page 82]]

benefit. However, see Sec.  1.411(b)(5)-1(b)(1)(iii) for rules relating 
to early retirement subsidies.
    (iii) Optional forms that are less valuable. Except as otherwise 
provided in paragraph (b)(4)(i) of this section, if an optional form of 
benefit is not at least the actuarial equivalent, using reasonable 
actuarial assumptions, of the then-current balance of a hypothetical 
account maintained for the participant or the then-current value of an 
accumulated percentage of the participant's final average compensation, 
then the relief under section 411(a)(13) (permitting a plan to treat the 
account balance or accumulated percentage as the actuarial equivalent of 
the portion of the accrued benefit determined under the lump sum-based 
benefit formula) does not apply in determining whether the optional form 
of benefit is the actuarial equivalent of the portion of the accrued 
benefit determined under the lump sum-based benefit formula. As a 
result, payment of that optional form of benefit must satisfy the rules 
applicable to payment of the accrued benefit generally under a defined 
benefit plan (without regard to the special rules of section 
411(a)(13)(A) and paragraph (b)(1) of this section), including the 
requirements of section 411(a)(2) and, for optional forms subject to the 
minimum present value requirements of section 417(e)(3), those minimum 
present value requirements.
    (4) Rules of application--(i) Relief applies on proportionate basis 
with respect to payment of only a portion of the benefit under a lump 
sum-based benefit formula. The relief of paragraph (b)(1) of this 
section applies on a proportionate basis to a payment of a portion of 
the benefit under a lump sum-based benefit formula, such as a payment of 
a specified dollar amount or percentage of the then-current balance of a 
hypothetical account maintained for the participant or then-current 
value of an accumulated percentage of the participant's final average 
compensation. Thus, for example, if a plan that expresses the 
participant's entire accumulated benefit as the balance of a 
hypothetical account distributes 40 percent of the participant's then-
current hypothetical account balance in a single payment, the plan is 
treated as satisfying the requirements of section 411(a) and the minimum 
present value rules of section 417(e) with respect to 40 percent of the 
participant's then-current accrued benefit.
    (ii) Relief applies only to portion of benefit determined under lump 
sum-based benefit formula. The relief of paragraph (b)(1) of this 
section generally applies only to the portion of the participant's 
benefit that is determined under a lump sum-based benefit formula and 
generally does not apply to any portion of the participant's benefit 
that is determined under a formula that is not a lump sum-based benefit 
formula. The following rules apply for purposes of satisfying section 
417(e):
    (A) ``Greater-of'' formulas. If the participant's accrued benefit 
equals the greater of the accrued benefit under a lump sum-based benefit 
formula and the accrued benefit under another formula that is not a 
lump-sum based benefit formula, a single-sum payment of the 
participant's entire benefit must be no less than the greater of the 
then-current accumulated benefit under the lump sum-based benefit 
formula and the present value, determined in accordance with section 
417(e), of the benefit under the other formula. For example, assume that 
the accrued benefit under a plan is determined as the greater of the 
accrued benefit attributable to the balance of a hypothetical account 
and the accrued benefit equal to a pro rata portion of a normal 
retirement benefit determined by projecting the hypothetical account 
balance (including future principal and interest credits) to normal 
retirement age. In such a case, a single-sum payment of the 
participant's entire benefit must be no less than the greater of the 
then-current balance of the hypothetical account and the present value, 
determined in accordance with section 417(e), of the pro rata benefit 
determined by projecting the hypothetical account balance to normal 
retirement age.
    (B) ``Sum-of'' formulas. If the participant's accrued benefit equals 
the sum of the accrued benefit under a lump sum-based benefit formula 
and the accrued benefit under another formula that is not a lump-sum 
based benefit formula, a single-sum payment of the

[[Page 83]]

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

    Example 1. Employer M sponsors Plan X, a defined benefit plan under 
which each participant's accrued benefit is equal to the sum of the 
benefit provided under two benefit formulas. The first benefit formula 
is a statutory hybrid benefit formula, and the second formula is not. 
Because a portion of each participant's accrued benefit provided under 
Plan X is determined under a statutory hybrid benefit formula, the 3-
year vesting requirement described in paragraph (c)(1) of

[[Page 84]]

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

    (d) Definitions--(1) In general. The definitions in this paragraph 
(d) apply for purposes of this section.
    (2) Accumulated benefit. A participant's accumulated benefit at any 
date means the participant's benefit, as expressed under the terms of 
the plan, accrued to that date. For this purpose, if a participant's 
benefit is expressed under the terms of the plan as the current balance 
of a hypothetical account or the current value of an accumulated 
percentage of the participant's final average compensation, the 
participant's accumulated benefit is expressed in that manner regardless 
of how the plan defines the participant's accrued benefit. Thus, for 
example, the accumulated benefit of a participant may be expressed under 
the terms of the plan as either the current balance of a hypothetical 
account or the current value of an accumulated percentage of the 
participant's final average compensation, even if the plan defines the 
participant's accrued benefit as an annuity beginning at normal 
retirement age that is actuarially equivalent to that balance or value.
    (3) Lump sum-based benefit formula-- (i) In general. A lump sum-
based benefit formula means a benefit formula used to determine all or 
any part of a participant's accumulated benefit under a defined benefit 
plan under which the accumulated benefit provided under the formula is 
expressed as the current balance of a hypothetical account maintained 
for the participant or as the current value of an accumulated percentage 
of the participant's final average compensation. A benefit formula is 
expressed as the current balance of a hypothetical account maintained 
for the participant if it is expressed as a current single-sum dollar 
amount equal to that balance. A benefit formula is expressed as the 
current value of an accumulated percentage of the participant's final 
average compensation if it is expressed as a current single-sum dollar 
amount equal to a percentage of the participant's final average 
compensation or, for plan years described in paragraph (e)(2)(ii)(A) or 
(e)(2)(ii)(B) of this section, as applicable (or any earlier date as 
elected by the taxpayer), a percentage of the participant's highest 
average compensation (regardless of whether the plan applies a 
limitation on the past period for which compensation is taken into 
account in determining highest average compensation). Whether a benefit 
formula is a lump sum-based benefit formula is determined based on how 
the accumulated benefit of a participant is expressed under the terms of 
the plan, and does not depend on whether the plan provides an optional 
form of benefit in the form of a single-sum payment. However, for plan 
years described in paragraph (e)(2)(ii)(A) or (e)(2)(ii)(B) of this 
section (as applicable), a benefit formula does not constitute a lump 
sum-based benefit formula unless a distribution of the benefits under 
that formula in the form of a single-sum payment equals the accumulated 
benefit under that formula (except to the extent the single-sum payment 
is greater to satisfy

[[Page 85]]

the requirements of section 411(d)(6)). In addition, for plan years 
described in paragraph (e)(2)(ii)(A) or (e)(2)(ii)(B) of this section 
(as applicable), a benefit formula does not constitute a lump sum-based 
benefit formula unless the portion of the participant's accrued benefit 
that is determined under that formula and the then-current balance of 
the hypothetical account or the then-current value of the accumulated 
percentage of the participant's final average compensation are 
actuarially equivalent (determined using reasonable actuarial 
assumptions) either--
    (A) Upon attainment of normal retirement age; or
    (B) At the annuity starting date for a distribution with respect to 
that portion.
    (ii) Exception for employee contributions. For purposes of the 
definition of a lump sum-based benefit formula in paragraph (d)(3)(i) of 
this section, the benefit properly attributable to after-tax employee 
contributions, rollover contributions from eligible retirement plans 
under section 402(c)(8), and other similar employee contributions (such 
as repayments of distributions pursuant to section 411(a)(7)(C) and 
employee contributions that are pickup contributions pursuant to section 
414(h)(2)) is disregarded. However, a benefit is not properly 
attributable to contributions described in this paragraph (d)(3)(ii) if 
the contributions are credited with interest at a rate that exceeds a 
reasonable rate of interest or if the conversion factors used to 
calculate such benefit are not actuarially reasonable. See section 
411(c) for an example of a calculation of a benefit that is properly 
attributable to employee contributions.
    (4) Statutory hybrid benefit formula--(i) In general. A statutory 
hybrid benefit formula means a benefit formula that is either a lump 
sum-based benefit formula or a formula that is not a lump sum-based 
benefit formula but that has an effect similar to a lump sum-based 
benefit formula.
    (ii) Effect similar to a lump sum-based benefit formula-- (A) In 
general. Except as provided in paragraphs (d)(4)(ii)(B) through (E) of 
this section, a benefit formula under a defined benefit plan that is not 
a lump sum-based benefit formula has an effect similar to a lump sum-
based benefit formula if the formula provides that a participant's 
accumulated benefit is expressed as a benefit that includes the right to 
adjustments (including a formula that provides for indexed benefits 
under Sec.  1.411(b)(5)-1(b)(2)) for a future period and the total 
dollar amount of those adjustments is reasonably expected to be smaller 
for the participant than for any similarly situated, younger individual 
(within the meaning of Sec.  1.411(b)(5)-1(b)(5)) who is or could be a 
participant in the plan. For this purpose, the right to adjustments for 
a future period means, for plan years described in paragraph 
(e)(2)(ii)(A) or (e)(2)(ii)(B) of this section (as applicable), the 
right to any changes in the dollar amount of benefits over time, 
regardless of whether those adjustments are denominated as interest 
credits. A benefit formula that does not include adjustments for any 
future period is treated as a formula with an effect similar to a lump 
sum-based benefit formula if the formula would be described in this 
paragraph (d)(4)(ii)(A) except for the fact that the adjustments are 
provided pursuant to a pattern of repeated plan amendments. See Sec.  
1.411(d)-4, A-1(c)(1).
    (B) Exception for post-retirement benefit adjustments. Post-annuity 
starting date adjustments in the amount payable to a participant (such 
as cost-of-living increases) are disregarded in determining whether a 
benefit formula under a defined benefit plan has an effect similar to a 
lump sum-based benefit formula.
    (C) Exception for certain variable annuity benefit formulas. If a 
variable annuity benefit formula adjusts benefits by reference to the 
difference between a rate of return on plan assets (or specified market 
indices) and a specified assumed interest rate of 5 percent or higher, 
then the variable annuity benefit formula is not treated as being 
reasonably expected to provide a smaller total dollar amount of future 
adjustments for the participant than for any similarly situated, younger 
individual who is or could be a participant in the plan, and thus such a 
variable annuity benefit formula does not have an effect similar to a 
lump sum-based benefit formula. For plan years described in

[[Page 86]]

paragraph (e)(2)(ii)(A) or (e)(2)(ii)(B) of this section (as applicable) 
(or any earlier date as elected by the taxpayer), the rate of return on 
plan assets (or specified market index) by reference to which the 
benefit formula adjusts must be a rate of return described in Sec.  
1.411(b)(5)-1(d)(5) (which includes, in the case of a benefit formula 
determined with reference to an annuity contract for an employee issued 
by an insurance company licensed under the laws of a State, the rate of 
return on the market index specified under that contract).
    (D) Exception for employee contributions. Benefits that are 
disregarded under paragraph (d)(3)(ii) of this section (benefits 
properly attributable to certain employee contributions) are also 
disregarded for purposes of determining whether a benefit formula has an 
effect similar to a lump sum-based benefit formula.
    (E) Exception for certain actuarial reductions for early 
commencement under traditional formula. A defined benefit formula is not 
treated as having an effect similar to a lump sum-based benefit formula 
with respect to a participant merely because the formula provides for a 
reduction in the benefit payable at early retirement due to early 
commencement (with the result that the benefit payable at normal 
retirement age is greater than the benefit payable at early retirement), 
provided that the benefit payable at normal retirement age to the 
participant cannot be less than the benefit payable at normal retirement 
age to any similarly situated, younger individual who is or could be a 
participant in the plan. Thus, for example, a plan that provides a 
benefit equal to 1 percent of final average pay per year of service, 
payable as a life annuity at normal retirement age, is not treated as 
having an effect similar to a lump sum-based benefit formula by reason 
of an actuarial reduction in the benefit payable under the plan for 
early commencement.
    (5) Statutory hybrid plan. A statutory hybrid plan means a defined 
benefit plan that contains a statutory hybrid benefit formula.
    (6) Variable annuity benefit formula. A variable annuity benefit 
formula means any benefit formula under a defined benefit plan which 
provides that the amount payable is periodically adjusted by reference 
to the difference between a rate of return and a specified assumed 
interest rate.
    (e) Effective/applicability date--(1) Statutory effective/
applicability date--(i) In general. Except as provided in paragraphs 
(e)(1)(ii) and (e)(1)(iii) of this section, section 411(a)(13) applies 
for periods beginning on or after June 29, 2005.
    (ii) Calculation of benefits. Section 411(a)(13)(A) applies to 
distributions made after August 17, 2006.
    (iii) Vesting--(A) Plans in existence on June 29, 2005--(1) General 
rule. In the case of a plan that is in existence on June 29, 2005 
(regardless of whether the plan is a statutory hybrid plan on that 
date), section 411(a)(13)(B) applies to plan years that begin on or 
after January 1, 2008.
    (2) Exception for plan sponsor election. See Sec.  1.411(b)(5)-
1(f)(1)(iii)(A)(2) for a special election for early application of 
section 411(a)(13)(B).
    (B) Plans not in existence on June 29, 2005. In the case of a plan 
not in existence on June 29, 2005, section 411(a)(13)(B) applies to plan 
years that end on or after June 29, 2005.
    (C) Collectively bargained plans. Notwithstanding paragraphs 
(e)(1)(iii)(A) and (B) of this section, in the case of a collectively 
bargained plan maintained pursuant to one or more collective bargaining 
agreements between employee representatives and one or more employers 
ratified on or before August 17, 2006, the requirements of section 
411(a)(13)(B) do not apply to plan years that begin before the earlier 
of--
    (1) The later of--
    (i) The date on which the last of those collective bargaining 
agreements terminates (determined without regard to any extension 
thereof on or after August 17, 2006); or
    (ii) January 1, 2008; or
    (2) January 1, 2010.
    (D) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to 
which a collective bargaining agreement applies to some, but not all, of 
the plan participants, the plan is considered a collectively bargained 
plan for purposes of paragraph

[[Page 87]]

(e)(1)(iii)(C) of this section if it is considered a collectively 
bargained plan under the rules of Sec.  1.436-1(a)(5)(ii)(B).
    (E) Hour of service required. Section 411(a)(13)(B) does not apply 
to a participant who does not have an hour of service after section 
411(a)(13)(B) would otherwise apply to the participant under the rules 
of paragraph (e)(1)(iii)(A), (B), or (C) of this section.
    (2) Effective/applicability date of regulations--(i) In general. 
Except as provided in paragraph (e)(2)(ii) of this section, this section 
applies to plan years that begin on or after January 1, 2011. For the 
periods after the statutory effective date set forth in paragraph (e)(1) 
of this section and before the regulatory effective date set forth in 
the preceding sentence, the relief of section 411(a)(13)(A) applies and 
the 3-year vesting requirement of section 411(a)(13)(B) must be 
satisfied. During these periods, a plan is permitted to rely on the 
provisions of this section for purposes of applying the relief of 
section 411(a)(13)(A) and satisfying the requirements of section 
411(a)(13)(B).
    (ii) Special effective date--(A) In general. Except as otherwise 
provided in this paragraph (e)(2)(ii), paragraphs (b)(2), (3), and (4) 
of this section apply to plan years that begin on or after January 1, 
2017.
    (B) Collectively bargained plans. In the case of a plan maintained 
pursuant to one or more collective bargaining agreements between 
employee representatives and one or more employers ratified on or before 
November 13, 2015, that constitutes a collectively bargained plan under 
the rules of Sec.  1.436-1(a)(5)(ii)(B), paragraphs (b)(2), (3), and (4) 
of this section apply to plan years that begin on or after the later 
of--
    (1) January 1, 2017; and
    (2) The earlier of--
    (i) January 1, 2019; and
    (ii) The date on which the last of those collective bargaining 
agreements terminates (determined without regard to any extension 
thereof on or after November 13, 2015).
    (iii) Hour of service required. A benefit formula is not treated as 
having an effect similar to a lump sum-based benefit formula under 
paragraph (d)(4)(ii) of this section with respect to a participant who 
does not have an hour of service after the regulatory effective date set 
forth in paragraph (e)(2)(i) of this section.

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



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

    (a) Accrued benefit requirements--(1) In general. Under section 
411(b), for plan years beginning after the applicable effective date of 
section 411, rules are provided for the determination of the accrued 
benefit to which a participant is entitled under a plan. Under a defined 
contribution plan, a participant's accrued benefit is the balance to the 
credit of the participant's account. Under a defined benefit plan, a 
participant's accrued benefit is his accrued benefit determined under 
the plan. A defined benefit plan is not a qualified plan unless the 
method provided by the plan for determining accrued benefits satisfies 
at least one of the alternative methods (described in paragraph (b) of 
this section) for determining accrued benefits with respect to all 
active participants under the plan. A defined benefit plan may provide 
that accrued benefits for participants are determined under more than 
one plan formula. In such a case, the accrued benefits under all such 
formulas must be aggregated in order to determine whether or not the 
accrued benefits under the plan for participants satisfy one of the 
alternative methods. A plan may satisfy different methods with respect 
to different classifications of employees, or separately satisfy one 
method with respect to the accrued benefits for each such 
classification, provided that such classifications are not so structured 
as to evade the accrued benefit requirements of section 411(b) and this 
section. (For example, if a plan provides that employees who commence 
participation at or before age 40 accrue benefits in a manner which 
satisfies the 133\1/3\ percent method of determining accrued benefits 
and employees who commence participation after age 40 accrue benefits in 
a manner which satisfies the 3 percent method of determining accrued 
benefits, the plan

[[Page 88]]

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

[[Page 89]]

the accrued benefit otherwise determined under this subparagraph, 
reduced by the excess of the accrued benefit determined under this 
subparagraph as of the first day of the first plan year to which section 
411 applies over the accrued benefit determined under section 
411(b)(1)(D) and paragraph (c) of this section and increased by the 
amount determined under paragraph (c)(2)(v) of this section.
    (iii) Examples. The application of this subparagraph is illustrated 
by the following examples.

    Example 1. The M Corporation's defined benefit benefit plan provides 
an annual retirement benefit commencing at age 65 or $4 per month for 
each year of participation. As a condition of participation, the plan 
requires that an employee have attained age 25. The normal retirement 
age specified under the plan is age 65. The plan provides for no limit 
on the number of years of credited service. A, age 40, is a participant 
in the M Corporation's plan.
    A has completed 12 years of participation in the plan of the M 
Corporation as of the close of the plan year. Under subdivision (i) of 
this subparagraph, the normal retirement benefit commencing at age 65 to 
which a participant would be entitled if he commenced participation at 
the earliest possible entry age (25) under the plan and served 
continuously until normal retirement age (65) is an annual benefit of 
$1,920 [40 x (12 x $4)]. Under paragraph (b)(1)(i) of this section, the 
plan does not satisfy the requirements of this subparagraph unless A has 
accrued an annual benefit of at least $691 [0.03 x ($1,920 x 12)] as of 
the close of the plan year. Under the M Corporation plan, A is entitled 
to an accrued benefit of $576 [(12 x 12) x $4] as of the close of the 
plan year. Thus, with respect to A, the accrued benefit provided under 
the M Corporation plan does not satisfy the requirements of this 
subparagraph.
    Example 2. Assume the same facts as in example (1) except that the M 
Corporation's plan provides that only the first 30 years of 
participation are taken into account. Under subdivision (i) of this 
subparagraph, the normal retirement benefit commencing at age 65 to 
which a participant would be entitled if he commenced participation at 
the earliest possible entry age under the plan (25) and served 
continuously until normal retirement age (65) is an annual benefit of 
$1.440 [30 x $48]. Under paragraph (b)(1)(i) of this section, the plan 
does not satisfy the requirements of this subparagraph unless A has 
accrued an annual benefit of at least $518 [0.03 x ($1,440 x 12)] as of 
the close of the plan year. Under the M Corporation plan, A is entitled 
to an accrued benefit of $576 [(12 x $48]. Thus, with respect to A, the 
accrued benefit provided under the M Corporation plan satisfies the 
requirements of this subparagraph.
    Example 3. The N Corporation's defined benefit plan provides an 
annual retirement benefit commencing at age 65 of 50 percent of average 
compensation for the highest 3 consecutive years of compensation for an 
employee with 25 years of participation. A participant who separates 
from service before age 65 is entitled to 2 percent of average 
compensation for the highest 3 consecutive years of compensation for 
each year of participation not in excess of 25. The plan has no minimum 
age or service requirement for participation. The normal retirement age 
specified under the plan is age 65. On December 31, 1990, B, age 40, is 
a participant in the N Corporation's plan. B began employment with the N 
Corporation and became a participant in the N Corporation's plan on 
January 1, 1980. Under this subparagraph, the normal retirement benefit 
to which a participant would be entitled if he commenced participation 
at the earliest possible entry age (0) under the plan and served 
continuously until normal retirement age (65) is 50 percent of average 
compensation for the highest 3 consecutive years of compensation per 
year commencing at age 65. Under this subparagraph, B must have accrued 
an annual benefit of at least 16.5 percent of his highest 3 consecutive 
years of compensation per year commencing at age 65 [0.03 x 50 percent 
of average compensation for the highest 3 consecutive years of 
compensation x 11] as of the close of the plan year. Under the N 
Corporation plan, B has accrued an annual benefit of 22 percent of 
average compensation for his highest 3 consecutive years of compensation 
per year commencing at age 65. Thus, with respect to B, the accrued 
benefit under the N Corporation plan satisfies the requirements of this 
subparagraph.
    Example 4. The P Corporation's defined benefit plan provides an 
annual retirement benefit commencing at age 65 of 50 percent of average 
compensation for the 3 consecutive years of compensation from the P 
Corporation next preceding normal retirement age. The plan has no 
minimum age or service requirement for participation. The normal 
retirement age under the plan is age 65. On December 31, 1990, C, age 
55, separates from service with the P Corporation. C began employment 
with the P Corporation and became a participant in the P Corporation's 
plan on January 1, 1980. As of December 31, 1990. C's average 
compensation for the 3 consecutive years preceding his separation from 
service is $15,000. Under this subparagraph, the normal retirement 
benefit to which a participant would be entitled if he commenced 
participation at the earliest possible entry age (0) under the plan and 
served continuously until normal retirement age (65) is an annual 
benefit of 50 percent of average

[[Page 90]]

compensation for the 3 consecutive years of compensation from the P 
Corporation next preceding normal retirement age commencing at age 65. C 
must have accrued an annual benefit of at least $2,475 commencing at age 
65 [0.03 x (0.050 x $15,000) x 11] as of his separation from the service 
with the P Corporation in order for the P Corporation's plan to satisfy 
the requirements of this subparagraph with respect to C.
    Example 5. On December 31, 1985, the R Corporation's defined benefit 
plan provided an annual retirement benefit commencing at age 65 of $100 
for each year of participation, not to exceed 30. As a condition of 
participation, the plan requires that an employee have attained age 25. 
The normal retirement age specified under the plan is age 65. The 
appropriate computation period is the calendar year. On January 1, 1986, 
the plan is amended to provide an annual retirement benefit commencing 
at age 65 of $200 for each year of participation (before and after the 
amendment), not to exceed 30. B, age 40, is a participant in the R 
Corporation's plan. B has completed 15 years of participation in the 
plan of the R Corporation as of December 31, 1990. Under paragraph 
(b)(1)(i) of this section, the normal retirement benefit commencing at 
age 65 to which a participant would be entitled if he commenced 
participation at the earliest possible entry age (25) under the plan and 
served continuously until normal retirement age (65) is an annual 
benefit of $6,000 [30 x 200]. Under subdivision (i) of this 
subparagraph, the plan does not satisfy the requirements of this 
subparagraph unless B has accrued an annual benefit of at least $2,700 
[0.03 x $6,000 x 15] as of December 31, 1990. Under the R Corporation 
plan, B is entitled to an accrued benefit of $3,000 [$200 x 15] as of 
December 31, 1990. Thus, with respect to B, the accrued benefit provided 
under the R Corporation plan satisfies the requirements of this 
subparagraph.
    Example 6. On December 31, 1995, the J Corporation's defined benefit 
plan provided an annual retirement benefit commencing at age 65 of 
$4,800 after 30 years of participation. The normal retirement age 
specified under the plan is age 65. The appropriate computation period 
is the calendar year. On January 1, 1996, the plan is amended to provide 
an annual retirement benefit commencing at age 65 of $6,000. A, age 40, 
is a participant in the J Corporation's plan since its adoption on 
January 1, 1986. Under paragraph (b)(1)(i) of this section, on December 
31, 1995, the normal retirement benefit commencing at age 5 to which a 
participant would be entitled if he commenced participation at the 
earliest possible entry age (0) under the plan and served continuously 
until normal retirement age (65) is an annual benefit of $4,800. Under 
paragraph (b)(1)(i) of this section, on January 1, 1996, the normal 
retirement benefit commencing at age 65 to which a participant would be 
entitled if he commenced participation at the earliest possible entry 
age (0) under the plan and served continuously until normal retirement 
age (65) is an annual benefit of $6,000. Under subdivision (i) of this 
subparagraph, the plan does not satisfy the requirements of this 
subparagraph unless A has an accrued benefit on December 31, 1995 of at 
least $1,440 [$4,800 x 0.02 x 10] and an accrued benefit on January 1, 
1996 of at least $1,800 [$6,000 x 0.03 x 10].
    Example 7. The X Company's defined benefit plan provides an annual 
retirement benefit commencing at age 65 of $4 per month for each year of 
participation (not to exceed 30). As a condition of participation, the 
plan requires that an employee have attained age 25. The normal 
retirement age specified under the plan is age 65. D, age 68, is a 
participant in the X Company's plan. D has completed 20 years of 
participation in the X Company plan as of the close of the plan year. 
Under paragraph (b)(1)(i) of this section, the normal retirement benefit 
commencing at age 65 to which a participant would be entitled if he 
commenced participation at the earliest possible entry age (25) under 
the plan and served continuously until normal retirement age (65) is an 
annual benefit, commencing at age 65, of $1,440 [30 x $48]. Under 
paragraph (b)(1)(i) of this section, the plan does not satisfy the 
requirements of this subparagraph unless D has accrued an annual 
benefit, commencing at age 65, of $864 [0.03 x $1,440 x 20] as of the 
close of the plan year. Under the X Company plan, D has accrued an 
annual benefit, commencing at age 65, of $960 [20 x $48]. Thus, with 
respect to D the accrued benefit provided under the X Company plan 
satisfies the requirements of this subparagraph.
    Example 8. Assume the same facts as in example (7) except that for 
purposes of determining accrued benefits under the plan the X Company's 
plan disregards all years of participation after normal retirement age. 
Under paragraph (b)(1)(i) of this section, the normal retirement benefit 
commencing at age 65 to which a participant would be entitled if he 
commenced participation at the earliest possible entry age (25) under 
the plan and served continuously until normal retirement age (65) is an 
annual benefit of $1,440 [30 x $48]. Under paragraph (b)(1)(i) of this 
section the plan does not satisfy the requirements of this subparagraph 
unless D has accrued an annual benefit, commencing at age 65, of $864 
[0.03 x $1,440 x 20] as of the close of the plan year. Under the X 
Company's plan D has accrued an annual benefit commencing at age 65, of 
$816 [17 x $48]. Thus, with respect to D, the accrued benefit provided 
under the X Company plan does not satisfy the requirements of this 
subparagraph.


[[Page 91]]


    (2) 133\1/3\ percent rule--(i) General rule. A defined benefit plan 
satisfies the requirements of this subparagraph for a particular plan 
year if--
    (A) Under the plan the accrued benefit payable at the normal 
retirement age (determined under the plan) is equal to the normal 
retirement benefit (determined under the plan), and
    (B) The annual rate at which any individual who is or could be a 
participant can accrue the retirement benefits payable at normal 
retirement age under the plan for any later plan year cannot be more 
than 133\1/3\ percent of the annual rate at which he can accrue benefits 
for any plan year beginning on or after such particular plan year and 
before such later plan year.
    (ii) Special rules. For purposes of this subparagraph--
    (A) Plan amendments. Any amendment to the plan which is in effect 
for the current plan year shall be treated as if it were in effect for 
all other plan years.
    (B) Change in accrual rate. Any change in an accrual rate which 
change does not apply to any individual who is of could be a participant 
in the plan year is disregarded. Thus, for example, if for its plan year 
beginning January 1, 1980, a defined benefit plan provides an accrued 
benefit in plan year 1980 of 2 percent of a participant's average 
compensation for his highest 3 years of compensation for each year of 
service and provides that in plan year 1981 the accrued benefit will be 
3 percent of such average compensation, the plan will not be treated as 
failing to satisfy the requirements of this subparagraph for plan year 
1980 because in plan year 1980 the change in the accrual rate does not 
apply to any individual who is or could be a participant in plan year 
1980. However, if, for example, a defined benefit plan provided for an 
accrued benefit of 1 percent of a participant's average compensation for 
his highest 3 years of compensation for each of the first 10 years of 
service and 1.5 percent of such average compensations for each year of 
service thereafter, the plan will be treated as failing to satisfy the 
requirements of this subparagraph for the plan year even though no 
participant is actually accruing at the 1.5 percent rate because an 
individual who could be a participant and who had over 10 years of 
service would accrue at the 1.5 percent rate, which rate exceeds 133\1/
3\ percent of the 1 percent rate.
    (C) Early retirement benefits. The fact that certain benefits under 
the plan may be payable to certain participants before normal retirement 
age is disregarded. Thus, the requirements of subdivision (i) of this 
subparagraph must be satisfied without regard to any benefit payable 
prior to the normal retirement benefit (such as an early retirement 
benefit which is not the normal retirement benefit (see Sec.  1.411(a)-
7(c).
    (D) Social security, etc. For purposes of this paragraph, for any 
plan year, social security benefits and all relevant factors used to 
compute benefits, e.g., consumer price index, are treated as remaining 
constant as of the beginning of the current plan year for all subsequent 
plan years.
    (E) Postponed retirement. A plan shall not be treated as failing to 
satisfy the requirements of this subparagraph for a plan year merely 
because no benefits under the plan accrue to a participant who continues 
service with the employer after such participant has attained normal 
retirement age.
    (F) Computation of benefit. A plan shall not satisfy the 
requirements of this subparagraph if the base for the computation of 
retirement benefits changes solely by reason of an increase in the 
number of years of participation. Thus, for example, a plan will not 
satisfy the requirements of this subparagraph if it provides a benefit, 
commencing at normal retirement age, of the sum of (1) 1 percent of 
average compensation for a participant's first 3 years of participation 
multiplied by his first 10 years of participation (or, if less than 10 
his total years of participation) and (2) 1 percent of average 
compensation for a participant's 3 highest years of participation 
multiplied by each year of participation subsequent to the 10th year.
    (G) Variable interest crediting rate under a statutory hybrid 
benefit formula. For plan years that begin on or after January 1, 2012 
(or an earlier date as elected by the taxpayer), a plan that determines 
any portion of the participant's accrued benefit pursuant to a

[[Page 92]]

statutory hybrid benefit formula (as defined in Sec.  1.411(a)(13)-
1(d)(4)) that utilizes an interest crediting rate described in Sec.  
1.411(b)(5)-1(d) that is a variable rate that was less than zero for the 
prior plan year is not treated as failing to satisfy the requirements of 
paragraph (b)(2) of this section for the current plan year merely 
because the plan assumes for purposes of paragraph (b)(2) of this 
section that the variable rate is zero for the current plan year and all 
future plan years.
    (H) Special rule for multiple formulas. [Reserved]
    (iii) Examples. The application of this subparagraph is illustrated 
by the following examples:

    Example 1. On January 1, 1980, the R Corporation's defined benefit 
plan provides for an annual benefit (commencing at age 65) of a 
percentage of a participant's average compensation for the period of 5 
consecutive years of participation for which his compensation is the 
highest. The percentage is 2 percent for each of the first 20 years of 
participation and 1 percent per year thereafter. The appropriate 
computation period is the calendar year. The R Corporation's plan 
satisfies the requirements of this subparagraph because the 133\1/3\ 
percent rule does not restrict subsequent accrual rate decreases.
    Example 2. On January 1, 1980, the J Corporation's defined benefit 
plan provides for an annual benefit (commencing at age 65) of a 
percentage of a participant's average compensation for the period of his 
final 5 consecutive years of participation. The percentage is 1 percent 
for each of the first 5 years of participation; 1\1/3\ percent for each 
of the next 5 years of participation; and 1\7/9\ percent for each year 
thereafter. The appropriate computation period is the calendar year. 
Even though no single accrual rate under the J Corporation's plan 
exceeds 133\1/3\ percent of the immediately preceding accrual rate, the 
J Corporation's plan does not satisfy the requirements of this 
subparagraph because the rate of accrual for all years of participation 
in excess of 10 (1\7/9\ percent) exceeds 133\1/3\ percent of the rate of 
accrual for any of the first 5 years of participation (1 percent).
    Example 3. On January 1, 1980, the C Corporation's defined benefit 
plan provides for an annual benefit (commencing at age 65) of a 
percentage of a participant's average compensation for the period of 3 
consecutive years of participation for which his compensation is the 
highest. The percentage is 2 percent for each of the first 5 years of 
participation; 1 percent for each of the next 5 years of participation; 
and 1\1/2\ percent for each year thereafter. The appropriate computation 
period is the calendar year. Even though the average rate of accrual 
under the C Corporation's plan is not less rapidly than ratably, the C 
Corporation's plan does not satisfy the requirements of this 
subparagraph because the rate of accrual for all years of participation 
in excess of 10 (1\1/2\ percent) for any employee who is actually 
accruing benefits or who could accrue benefits exceeds 133\1/3\ percent 
of the rate of accrual for the sixth through tenth years of 
participation, respectively (1 percent).

    (3) Fractional rule--(i) In general. A defined benefit plan 
satisfies the requirements of this paragraph if the accrued benefit to 
which any participant is entitled is not less than the fractional rule 
benefit multiplied by a fraction (not exceeding 1)--
    (A) The numerator of which is his total number of years of 
participation in the plan, and
    (B) The denominator of which is the total number of years he would 
have participated in the plan if he separated from the service at the 
normal retirement age under the plan.
    (ii) Special rules. For purposes of this subparagraph--
    (A) Fractional rule benefit. The ``fractional rule benefit'' is the 
annual benefit commencing at the normal retirement age under the plan to 
which a participant would be entitled if he continued to earn annually 
until such normal retirement age the same rate of compensation upon 
which his normal retirement benefit would be computed. Such rate of 
compensation shall be computed on the basis of compensation taken into 
account under the plan (but taking into account average compensation for 
no more than the 10 years of service immediately preceding the 
determination). For purposes of this subdivision (A), the normal 
retirement benefit shall be determined as if the participant had 
attained normal retirement age on the date any such determination is 
made.
    (B) Social security, etc. For purposes of this subparagraph, for any 
plan year, social security benefits and all relevant factors used to 
compute benefits, e.g., consumer price index, are treated as remaining 
constant as of the beginning of the current plan year for all subsequent 
plan years.
    (C) Postponed retirement. A plan shall not be treated as failing to 
satisfy the requirements of this subparagraph

[[Page 93]]

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 x $20,000 x 15/25].
    Example 2. The J Corporation's defined benefit plan provides a 
normal retirement benefit of 1 percent per year of a participant's 
average compensation from the employer. In the case of a participant who 
separates from service prior to normal retirement age (65), the plan 
provides that the annual benefit is an amount which is equal to 1 
percent of such compensation multiplied by the number of years of plan 
participation actually completed by the participant. The plan year of 
the J Corporation's plan is the calendar year. B, age 55, is a 
participant in the J Corporation's plan for the current year. B became a 
participant in the J Corporation's plan on January 1, 1980. As of 
December 31, 1990, B's compensation history is as follows:

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

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

    (c) Accruals for service before effective date--(1) General rule. 
For a plan year to which section 411 applies, a defined benefit plan 
does not satisfy the requirements of section 411(b)(1) and this section 
unless, under the plan, the accrued benefit of each participant for plan 
years beginning before section 411 applies is not less than the greater 
of--
    (i) Such participant's accrued benefit (as of the day before section 
411 applies) determined under the plan as in effect from time to time 
prior to September 2, 1974 (without regard to any amendment adopted 
after such date), or
    (ii) One-half of the accrued benefit that would be determined with 
respect to the participant as of the day before section 411 applies if 
the participant's accrued benefit were computed for such prior plan 
years under a method which satisfies the requirements of section 
411(b)(1) (A), (B), or (C) and paragraph

[[Page 94]]

(b) (1), (2), or (3) of this section. See 29 CFR Part 2530, Department 
of Labor regulations relating to minimum standards for employee pension 
benefit plans, for time participation deemed to begin.
    (2) Special rules--(i) A plan shall not be deemed to fail to satisfy 
the requirements of section 411(b) and this section merely because the 
method for computing the accrued benefit of a participant for years of 
participation prior to the first plan year for which section 411 is 
effective with respect to the plan is not the same method for computing 
the accrued benefit of a participant for years of participation 
subsequent to such plan year.
    (ii) For purposes of paragraph (c)(1)(ii) of this section, section 
411(b)(1)(A) and paragraph (b)(1) of this section shall be applied as if 
the participant separated from service with the employer on the day 
before the first day of the first plan year to which section 411 
applies.
    (iii) For purposes of paragraph (c)(1)(ii) of this section, section 
411(b)(1)(B) and paragraph (b)(2) of this section shall be applied in 
the following manner:
    (A) Except as provided in (c)(2)(iii)(B) of this section, section 
411(b)(1)(B) and paragraph (b)(2) of this section shall be applied as if 
the participant separated from service with the employer on the day 
before the first day of the first plan year to which section 411 
applies.
    (B) In the case that the plan does not satisfy the requirements of 
section 411(b)(1)(B) and paragraph (b)(2) of this section at any time 
prior to the day specified in (c)(2)(iii)(A) of this section, the plan 
shall be deemed revised to the extent necessary to satisfy the 
requirements of section 411(b)(1)(B) and paragraph (b)(2) of this 
section for all plan years beginning before the applicable effective 
date of section 411 and this section. For purposes of the preceding 
sentence, a plan shall not be deemed revised to the extent necessary to 
satisfy the requirements of section 411(b)(1)(B) and paragraph (b)(2) of 
this section for a plan year if the benefit a participant would receive 
if he were employed until normal retirement age is reduced by such 
revision or if the revised rate of accrual with respect to such accrued 
benefit does not otherwise satisfy the requirements of section 
411(b)(1)(B) and paragraph (b)(2) of this section.
    (iv) For purposes of paragraph (c)(1)(ii) of this section, section 
411(b)(1)(C) and paragraph (b)(3) of this section shall be applied as if 
the participant separated from service on the day before the first day 
of the first plan year to which section 411 applies.
    (v) The excess of the accrued benefit payable at normal retirement 
age of any participant determined under section 411(b)(1) (A), (B), or 
(C) (without regard to section 411(b)(1)(D)), and paragraph (b)(1), (2), 
or (3) of this section (without regard to this paragraph) as of the day 
before the first day of the first plan year to which section 411 and 
this section applies over the accrued benefit determined under paragraph 
(c)(1) of this section shall be accrued in accordance with the 
provisions of the plan as in effect after the applicable effective date 
of section 411, as if the plan had been initially adopted on such 
effective date.
    (d) Special rules--(1) First 2 years of service. Notwithstanding 
paragraphs (1), (2), and (3) of paragraph (b) of this section, under 
section 411(b)(1)(E) and this subparagraph, a plan shall not be treated 
as failing to satisfy the requirements of paragraph (b) of this section 
solely because the accrual of benefits under the plan does not become 
effective until the employee has completed 2 continuous years of 
service. For purposes of this subparagraph, continuous years of service 
are years of service (within the meaning of section 410(a)(3)(A)) which 
are not separated by a break in service (within the meaning of section 
410(a)(5)). For years of service beginning after such 2 years of 
service, the accrued benefit of an employee shall not be less than that 
to which the employee would be entitled if section 411(b)(1)(E) and this 
subparagraph did not apply. Thus, for example, a plan which otherwise 
satisfies the requirements of paragraph (b)(2) of this section provides 
for a rate of accrual of 1 percent of average compensation for the 
highest 3 years of compensation beginning with the third year of service 
of a participant shall not be treated as

[[Page 95]]

satisfying paragraph (b)(2) of this section because as of the time the 
employee completes 3 continuous years of service there is no accrual 
during the first 2 years of service. In addition, a plan which otherwise 
satisfies the requirements of paragraph (b)(1) of this section and which 
requires that an employee must attain age 25 and complete 1 year of 
service prior to becoming a participant will not satisfy the 
requirements of paragraph (b)(1) of this section if an employee who 
completes 2 years of service prior to attaining age 25 does not begin 
accruals immediately upon commencement of participation in the plan. For 
rules relating to years of service, see 29 CFR part 2530, Department of 
Labor regulations relating to minimum standards for employee pension 
benefit plans.
    (2) Certain insured defined benefit plans. Notwithstanding 
paragraphs (b) (1), (2), and (3) of this section, a defined benefit plan 
satisfies the requirements of paragraph (b) of this section if such plan 
is funded exclusively by the purchase of contracts from a life insurance 
company and such contracts satisfy the requirements of sections 412(i) 
(2) and (3) and the regulations thereunder. The preceding sentence is 
applicable only if an employee's accrued benefit as of any applicable 
date is not less than the cash surrender value such employee's insurance 
contracts would have on such applicable date if the requirements of 
section 412(i) (4), (5), and (6) and the regulations thereunder were 
satisfied.
    (3) Accrued benefit may not decrease on account of increasing age or 
service. Notwithstanding paragraphs (b) (1), (2), and (3) of this 
section and paragraphs (d) (1) and (2) of this section, a defined 
benefit plan shall be treated as not satisfying the requirements of 
paragraphs (b) and (d) of this section if the participant's accrued 
benefit is reduced on account of any increase in his age or years of 
service. The preceding sentence shall not apply to social security 
supplements described in Sec.  1.411(a)-7(c)(4).
    (e) Separate accounting. A plan satisfies the requirements of this 
paragraph if the requirements of paragraph (e) (1) or (2) of this 
paragraph are met.
    (1) Defined benefit plan. In the case of a defined benefit plan, the 
requirements of this paragraph are satisfied if the plan requires 
separate accounting for the portion of each employee's accrued benefit 
derived from any voluntary employee contributions permitted under the 
plan. For purposes of this subparagraph the term ``voluntary employee 
contributions'' means all employee contributions which are not mandatory 
contributions within the meaning of section 411(c)(2)(C) and the 
regulations thereunder. See Sec.  1.411(c)-1(b)(1) for rules requiring 
the determination of such an accrued benefit by the use of a separate 
account.
    (2) Defined contribution plan. In the case of a defined contribution 
plan, the requirements of this paragraph are not satisfied unless the 
plan requires separate accounting for each employee's accrued benefit. 
If a plan utilizes the break in service rule of section 411(a)(6)(C), an 
employee could have different percentages of vesting between pre-break 
and post-break accrued benefits. In such a case, the requirements of 
this paragraph are not satisfied unless the plan computes accrued 
benefits in a manner which takes into account different percentages. A 
plan which provides separate accounts for pre-break and post-break 
accrued benefits will be deemed to compute benefits in a reasonable 
manner.
    (f) Year of participation--(1) In general. This paragraph is 
inapplicable to a defined contribution plan. For purposes of determining 
an employee's accrued benefit, a ``year of participation'' is a period 
of service determined under regulations prescribed by the Secretary of 
Labor in 29 CFR Part 2530, relating to minimum standards for employee 
pension benefit plans.
    (2) Additional rule relating to year of participation. A trust shall 
not constitute a qualified trust if the plan of which such trust is a 
part provides for the crediting of a year of participation, or part 
thereof, and such credit results in the discrimination prohibited by 
section 401(a)(4).
    (g) Additional illustrations. The application of this section may be 
illustrated by the following example:

    Example. (i) The S Corporation established a defined benefit plan on 
January 1, 1980. The

[[Page 96]]

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

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

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



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

    (a) In general--(1) Organization of regulation. This section sets 
forth certain rules for determining whether a reduction occurs in the 
rate of benefit accrual under a defined benefit plan because of the 
attainment of any age for purposes of section 411(b)(1)(H)(i). Paragraph 
(b) of this section describes safe harbors for certain plan designs 
(including statutory hybrid plans) that are deemed to satisfy the age 
discrimination rules under section 411(b)(1)(H). Paragraph (c) of this 
section describes rules relating to statutory hybrid plan conversion 
amendments. Paragraph (d) of this section describes rules restricting 
interest credits (or equivalent amounts) under a statutory hybrid plan 
to a market rate of return. Paragraph (e) of this section contains 
additional rules related to market rates of return. Paragraph (f) of 
this section contains effective/applicability dates.
    (2) Definitions. The definitions of accumulated benefit, lump sum-
based benefit formula, statutory hybrid benefit formula, statutory 
hybrid plan, and variable annuity benefit formula in Sec.  1.411(a)(13)-
1(d) apply for purposes of this section.
    (b) Safe harbors for certain plan designs--(1) Accumulated benefit 
testing--(i) In general. Pursuant to section 411(b)(5)(A), and subject 
to paragraph (b)(1)(ii) of this section, a plan is not treated as 
failing to meet the requirements of section 411(b)(1)(H)(i) with respect 
to an individual who is or could be a participant if, as of any date, 
the accumulated benefit of the individual would not be less than the 
accumulated benefit of any similarly situated, younger individual who is 
or could be a participant. Thus, this test involves a comparison of the 
accumulated benefit of an individual who is or could be a participant in 
the plan with the accumulated benefit of each similarly situated, 
younger individual who is or could be a participant in the plan. See 
paragraph (b)(5) of this section for rules regarding whether a younger 
individual who is or could be a participant is similarly situated to a 
participant. The comparison described in this paragraph (b)(1)(i) is 
based on any one of the following benefit measures, each of which is 
referred to as a safe-harbor formula measure:
    (A) The annuity payable at normal retirement age (or current age, if 
later) if the accumulated benefit of the participant under the terms of 
the plan is an annuity payable at normal retirement age (or current age, 
if later).
    (B) The current balance of a hypothetical account maintained for the 
participant if the accumulated benefit of the participant is the current 
balance of a hypothetical account.
    (C) The current value of an accumulated percentage of the 
participant's final average compensation if the accumulated benefit of 
the participant is the current value of an accumulated percentage of the 
participant's final average compensation.
    (ii) Benefit formulas for comparison--(A) In general. Except as 
provided in paragraphs (b)(1)(ii)(B), (C), (D) and (E)

[[Page 97]]

of this section, the safe harbor provided by section 411(b)(5)(A) and 
paragraph (b)(1)(i) of this section is available only with respect to a 
participant if the participant's accumulated benefit under the plan is 
expressed in terms of only one safe-harbor formula measure and no 
similarly situated, younger individual who is or could be a participant 
has an accumulated benefit that is expressed in terms of any measure 
other than that same safe-harbor formula measure. Thus, for example, if 
a plan provides that the accumulated benefit of participants who are age 
55 or older is expressed under the terms of the plan as a life annuity 
payable at normal retirement age (or current age if later) as described 
in paragraph (b)(1)(i)(A) of this section and the plan provides that the 
accumulated benefit of participants who are younger than age 55 is 
expressed as the current balance of a hypothetical account as described 
in paragraph (b)(1)(i)(B) of this section, then the safe harbor 
described in section 411(b)(5)(A) and paragraph (b)(1)(i) of this 
section does not apply to individuals who are or could be participants 
and who are age 55 or older.
    (B) Sum-of benefit formulas. If a plan provides that a participant's 
accumulated benefit is expressed as the sum of benefits determined in 
terms of two or more benefit formulas, each of which is expressed in 
terms of a different safe-harbor formula measure, then the plan is 
deemed to satisfy paragraph (b)(1)(i) of this section with respect to 
the participant, provided that the plan satisfies the comparison 
described in paragraph (b)(1)(i) of this section separately for benefits 
determined in terms of each safe-harbor formula measure and no 
accumulated benefit of a similarly situated, younger individual who is 
or could be a participant is expressed other than as--
    (1) The sum of benefits under two or more benefit formulas, each of 
which is expressed in terms of one of those same safe-harbor formula 
measures as is used for the participant's ``sum-of'' benefit;
    (2) The greater of benefits under two or more benefit formulas, each 
of which is expressed in terms of any one of those same safe-harbor 
formula measures;
    (3) The choice of benefits under two or more benefit formulas, each 
of which is expressed in terms of any one of those same safe-harbor 
formula measures;
    (4) A benefit that is determined in terms of only one of those same 
safe-harbor formula measures; or
    (5) The lesser of benefits under two or more benefit formulas, at 
least one of which is expressed in terms of one of those same safe-
harbor formula measures.
    (C) Greater-of benefit formulas. If a plan provides that a 
participant's accumulated benefit is expressed as the greater of 
benefits under two or more benefit formulas, each of which is determined 
in terms of a different safe-harbor formula measure, then the plan is 
deemed to satisfy paragraph (b)(1)(i) of this section with respect to 
the participant, provided that the plan satisfies the comparison 
described in paragraph (b)(1)(i) of this section separately for benefits 
determined in terms of each safe-harbor formula measure and no 
accumulated benefit of a similarly situated, younger individual who is 
or could be a participant is expressed other than as--
    (1) The greater of benefits determined under two or more benefit 
formulas, each of which is expressed in terms of one of those same safe-
harbor formula measures as is used for the participant's ``greater-of'' 
benefit;
    (2) The choice of benefits determined under two or more benefit 
formulas, each of which is expressed in terms of one of those same safe-
harbor formula measures;
    (3) A benefit that is determined in terms of only one of those same 
safe-harbor formula measures; or
    (4) The lesser of benefits under two or more benefit formulas, at 
least one of which is expressed in terms of one of those same safe-
harbor formula measures.
    (D) Choice-of benefit formulas. If a plan provides that a 
participant's accumulated benefit is determined pursuant to a choice by 
the participant between benefits determined in terms of two or more 
different safe-harbor formula measures, then the plan is deemed to 
satisfy paragraph (b)(1)(i) of this section with respect to the 
participant,

[[Page 98]]

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

[[Page 99]]

be a participant merely because the reduction (based on actuarial 
equivalence, using reasonable actuarial assumptions) in the amount of an 
annuity to reflect a survivor benefit is smaller for the participant 
than for a similarly situated, older individual who is or could be a 
participant.
    (iv) Examples. The provisions of this paragraph (b)(1) are 
illustrated by the following examples:

    Example 1. (i) Facts relating to formulas described in paragraph 
(b)(1)(i)(A) of this section. Employer X maintains a defined benefit 
plan that provides a straight life annuity payable commencing at normal 
retirement age (which is age 65) equal to 1 percent of the participant's 
highest 3 consecutive years' compensation times years of service and 
provides for suspension of benefits as permitted under section 
411(a)(3)(B). In the case of a participant whose service continues after 
normal retirement age, the amount payable is the greater of (i) the 
benefit payable at normal retirement age, and for each year thereafter, 
actuarially increased to account for delayed commencement, and (ii) the 
retirement benefit determined under the formula at the date the 
employee's service ceases (calculated by including years of service and 
increases in compensation after normal retirement age).
    (ii) Conclusion. Under these facts, the plan formula is a formula 
described in paragraph (b)(1)(i)(A) of this section. The formula is not 
a statutory hybrid benefit formula merely because the plan formula 
includes a benefit that is based on the participant's benefit at normal 
retirement age (and each year thereafter) that is actuarially increased 
for commencement after attainment of normal retirement age. In addition, 
the plan formula would satisfy the comparison under paragraph (b)(1)(i) 
of this section for each individual who is or could be a participant 
because, as of any date (including any date after normal retirement 
age), the accumulated benefit of the individual would not be less than 
the accumulated benefit of any similarly situated, younger individual 
who is or could be a participant.
    Example 2. (i) Facts relating to formulas described in paragraph 
(b)(1)(i)(B) of this section. Employer Y maintains a defined benefit 
plan that expresses each participant's accumulated benefit as the 
balance of a hypothetical account. Under the formula, the hypothetical 
account balance of each participant is credited monthly with interest at 
a specified rate and the hypothetical account balance of each employee 
who is a participant is also credited with a pay credit under the plan 
equal to 7 percent of the participant's compensation for the month.
    (ii) Conclusion. The plan formula is a lump sum-based benefit 
formula described in paragraph (b)(1)(i)(B) of this section and the 
formula would satisfy the comparison under paragraph (b)(1)(i) of this 
section for each individual who is or could be a participant because, as 
of any date, the hypothetical account balance of the individual would 
not be less than the hypothetical account balance of any similarly 
situated, younger individual who is or could be a participant.
    Example 3. (i) Facts where plan suspends interest credits after 
normal retirement age. The facts are the same as in Example 2 except 
that the plan provides for suspension of benefits as permitted under 
section 411(a)(3)(B). Pursuant to the plan's suspension of benefits 
provision, the plan provides for interest credits to cease during 
service after normal retirement age or for the amount of the interest 
credits during this service to be reduced to reflect principal credits 
credited.
    (ii) Conclusion. The plan does not satisfy the safe harbor in 
paragraph (b)(1)(i) of this section. Applying the rule of paragraph 
(b)(1)(i) of this section, the plan formula would fail to satisfy the 
safe harbor comparison under paragraph (b)(1)(i) of this section with 
respect to an individual whose benefits have been suspended because, as 
of any date after attainment of normal retirement age, the hypothetical 
account balance of this individual would be less than the hypothetical 
account balance of one or more similarly situated individuals who have 
not attained normal retirement age.
    Example 4. (i) Facts providing greater-of benefits as described in 
paragraph (b)(1)(ii)(C) of this section. Employer Z sponsors a defined 
benefit plan that provides an accumulated benefit expressed as a 
straight life annuity commencing at the plan's normal retirement age 
(age 65), based on a percentage of average annual compensation times the 
participant's years of service. On November 2, 2011, the plan is amended 
effective as of January 1, 2012, to provide participants who have 
attained age 55 by January 1, 2012, with a benefit that is the greater 
of the benefit under the average annual compensation formula and a 
benefit that is based on the balance of a hypothetical account, which 
provides for annual pay credits of a specified percentage of the 
participant's compensation and annual interest credits based on the 
third segment rate.
    (ii) Conclusion where plan provides greater-of benefits to older 
participants. The plan satisfies the safe harbor of paragraph (b)(1)(i) 
of this section with respect to all individuals who are or could be 
participants. Pursuant to the rules of paragraph (b)(1)(ii)(C) of this 
section, the plan satisfies the safe harbor with respect to individuals 
who have attained age 55 by January 1, 2012, because (A) with respect to 
the benefit described in paragraph (b)(1)(i)(A) of this section (the 
benefit

[[Page 100]]

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

    (2) Indexed benefits-- (i) In general. Except as provided in 
paragraph (b)(2)(iii) of this section, pursuant to section 411(b)(5)(E) 
and this paragraph (b)(2)(i), a defined benefit plan is not treated as 
failing to meet the requirements of section 411(b)(1)(H) with respect to 
a participant solely because a benefit formula (other than a lump sum-
based benefit formula) under the plan provides for the periodic 
adjustment of the participant's accrued benefit under the plan by means 
of the application of a recognized index or methodology. An indexing 
rate that does not exceed a market rate of return, as defined in 
paragraph (d) of this

[[Page 101]]

section, is deemed to be a recognized index or methodology for purposes 
of the preceding sentence. In addition, for plan years described in 
paragraph (f)(2)(i)(B)(1) or (f)(2)(i)(B)(3) of this section, as 
applicable (or an earlier date as elected by the taxpayer), any 
subsidized portion of any early retirement benefit under such a plan 
that meets the requirements of paragraph (b)(1)(iii) is disregarded in 
determining whether the plan meets the requirements of section 
411(b)(1)(H). However, such a plan must satisfy the qualification 
requirements otherwise applicable to statutory hybrid plans, including 
the requirements of Sec.  1.411(a)(13)-1(c) (relating to minimum vesting 
standards) and paragraph (c) of this section (relating to plan 
conversion amendments) if the plan has an effect similar to a lump sum-
based benefit formula, pursuant to the rules of Sec.  1.411(a)(13)-
1(d)(4)(ii).
    (ii) Similarly situated participant test. Paragraph (b)(2)(i) of 
this section does not apply unless the aggregate adjustments made to a 
participant's accrued benefit under the plan (determined as a percentage 
of the unadjusted accrued benefit) in a period would not be less than 
the aggregate adjustments for any similarly situated, younger 
participant. This test requires a comparison, for each period, of the 
aggregate adjustments for each individual who is or could be a 
participant in the plan for the period with the aggregate adjustments of 
each other similarly situated, younger individual who is or could be a 
participant in the plan for that period. See paragraph (b)(5) of this 
section for rules regarding whether each younger individual who is or 
could be a participant is similarly situated to a participant.
    (iii) Protection against loss--(A) In general. Paragraph (b)(2)(i) 
of this section does not apply unless the plan satisfies section 
411(b)(5)(E)(ii) and paragraph (d)(2) of this section (relating to 
preservation of capital).
    (B) Exception for variable annuity benefit formulas. The requirement 
to satisfy section 411(b)(5)(B)(i)(II), as set forth in paragraph (d)(2) 
of this section, as well as section 411(b)(5)(E)(ii), as set forth in 
this paragraph (b)(2)(iii), does not apply in the case of a benefit 
provided under a variable annuity benefit formula as defined in Sec.  
1.411(a)(13)-1(d)(6).
    (3) Certain offsets permitted. A plan is not treated as failing to 
meet the requirements of section 411(b)(1)(H) solely because the plan 
provides offsets against benefits under the plan to the extent the 
offsets are allowable in applying the requirements of section 401(a) and 
the applicable requirements of the Employee Retirement Income Security 
Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), and the Age 
Discrimination in Employment Act of 1967, Public Law 90-202 (81 Stat. 
602 (1967)).
    (4) Permitted disparities in plan contributions or benefits. A plan 
is not treated as failing to meet the requirements of section 
411(b)(1)(H) solely because the plan provides a disparity in 
contributions or benefits with respect to which the requirements of 
section 401(l) are met.
    (5) Definition of similarly situated. For purposes of paragraphs 
(b)(1) and (b)(2) of this section, an individual is similarly situated 
to another individual if the individual is identical to that other 
individual in every respect that is relevant in determining a 
participant's benefit under the plan (including period of service, 
compensation, position, date of hire, work history, and any other 
respect) except for age. In determining whether an individual is 
similarly situated to another individual, any characteristic that is 
relevant for determining benefits under the plan and that is based 
directly or indirectly on age is disregarded. For example, if a 
particular benefit formula applies to a participant on account of the 
participant's age, an individual to whom the benefit formula does not 
apply and who is identical to the participant in all other respects is 
similarly situated to the participant. By contrast, an individual is not 
similarly situated to a participant if a different benefit formula 
applies to the individual and the application of the different formula 
is not based directly or indirectly on age.
    (c) Special rules for plan conversion amendments--(1) In general. 
Pursuant to section 411(b)(5)(B)(ii), (iii), and (iv), if there is a 
conversion amendment within the meaning of paragraph (c)(4) of

[[Page 102]]

this section with respect to a defined benefit plan, then the plan is 
treated as failing to meet the requirements of section 411(b)(1)(H) 
unless the plan, after the amendment, satisfies the requirements of 
paragraph (c)(2) of this section.
    (2) Separate calculation of post-conversion benefit--(i) In general. 
A statutory hybrid plan satisfies the requirements of this paragraph 
(c)(2) if the plan provides that, in the case of an individual who was a 
participant in the plan immediately before the date of adoption of the 
conversion amendment, the participant's benefit at any subsequent 
annuity starting date is not less than the sum of--
    (A) The participant's section 411(d)(6) protected benefit (as 
defined in Sec.  1.411(d)-3(g)(14)) with respect to service before the 
effective date of the conversion amendment, determined under the terms 
of the plan as in effect immediately before the effective date of the 
conversion amendment; and
    (B) The participant's section 411(d)(6) protected benefit with 
respect to service on and after the effective date of the conversion 
amendment, determined under the terms of the plan as in effect after the 
effective date of the conversion amendment.
    (ii) Rules of application. For purposes of this paragraph (c)(2), 
except as provided in paragraph (c)(3) of this section, the benefits 
under paragraphs (c)(2)(i)(A) and (c)(2)(i)(B) of this section must each 
be determined in the same manner as if they were provided under separate 
plans that are independent of each other (for example, without any 
benefit offsets), and, except to the extent permitted under Sec.  
1.411(d)-3 or Sec.  1.411(d)-4 (or other applicable law), each optional 
form of payment provided under the terms of the plan with respect to a 
participant's section 411(d)(6) protected benefit as in effect before 
the conversion amendment must be available thereafter to the extent of 
the plan's benefits for service prior to the effective date of the 
conversion amendment.
    (3) Establishment of opening hypothetical account balance or opening 
accumulated percentage--(i) Provided that the requirements of paragraph 
(c)(3)(ii) of this section are satisfied, a statutory hybrid plan under 
which an opening hypothetical account balance or opening accumulated 
percentage of the participant's final average compensation is 
established as of the effective date of the conversion amendment does 
not fail to satisfy the requirements of paragraph (c)(2) of this section 
merely because benefits attributable to that opening hypothetical 
account balance or opening accumulated percentage (that is, benefits 
that are not described in paragraph (c)(2)(i)(B) of this section) are 
substituted for benefits described in paragraph (c)(2)(i)(A) of this 
section.
    (ii) Comparison of benefits at annuity starting date--(A) Testing 
requirement. The requirements of this paragraph (c)(3)(ii) are satisfied 
with respect to an optional form of benefit payable at an annuity 
starting date only if the plan provides that the amount of the benefit 
payable in that optional form under the lump sum-based benefit formula 
that is attributable to the opening hypothetical account balance or 
opening accumulated percentage as described in paragraph (c)(3)(i) of 
this section is not less than the benefit under the comparable optional 
form of benefit under paragraph (c)(2)(i)(A) of this section. To satisfy 
this requirement, if the benefit under the optional form attributable to 
the opening hypothetical account balance or opening accumulated 
percentage is less than the benefit under the comparable optional form 
of benefit described in paragraph (c)(2)(i)(A) of this section, then the 
benefit attributable to the opening hypothetical account balance or 
opening accumulated percentage must be increased to the extent necessary 
to provide the minimum benefit described in this paragraph (c)(3)(ii). 
Thus, if a plan is using the option under this paragraph (c)(3)(ii) to 
satisfy paragraph (c)(2) of this section with respect to a participant, 
the participant must receive a benefit equal to not less than the sum 
of--
    (1) The benefit described in paragraph (c)(2)(i)(B) of this section; 
and
    (2) The greater of--
    (i) The benefit attributable to the opening hypothetical account 
balance or attributable to the opening accumulated percentage of the 
participant's

[[Page 103]]

final average compensation as described in this paragraph (c)(3)(ii); or
    (ii) The benefit described in paragraph (c)(2)(i)(A) of this 
section.
    (B) Comparable optional form of benefit. If there was an optional 
form of benefit within the same generalized optional form of benefit 
(within the meaning of Sec.  1.411(d)-3(g)(8)) that would have been 
available to the participant at that annuity starting date under the 
terms of the plan as in effect immediately before the effective date of 
the conversion amendment, then that optional form of benefit is the 
comparable optional form of benefit.
    (C) Special rule for new post-conversion optional forms of benefit. 
If an optional form of benefit is available on the annuity starting date 
with respect to the benefit attributable to the opening hypothetical 
account balance or opening accumulated percentage, but no optional form 
within the same generalized optional form of benefit (within the meaning 
of Sec.  1.411(d)-3(g)(8)) was available at that annuity starting date 
under the terms of the plan as in effect immediately prior to the 
effective date of the conversion amendment, then, for purposes of this 
paragraph (c)(3)(ii), the plan is treated as if such an optional form of 
benefit were available immediately prior to the effective date of the 
conversion amendment for purposes of this paragraph (c)(3)(ii). Thus, 
for example, if a single-sum optional form of payment is not available 
under the plan terms applicable to the accrued benefit described in 
paragraph (c)(2)(i)(A) of this section, but a single-sum optional form 
of payment is available with respect to the benefit attributable to the 
opening hypothetical account balance or opening accumulated percentage 
as of the annuity starting date, then, for purposes of this paragraph 
(c)(3)(ii), the plan is treated as if a single sum (which satisfies the 
requirements of section 417(e)(3)) were available under the terms of the 
plan as in effect immediately prior to the effective date of the 
conversion amendment.
    (4) Conversion amendment--(i) In general. An amendment is a 
conversion amendment that is subject to the requirements of this 
paragraph (c) with respect to a participant if--
    (A) The amendment reduces or eliminates the benefits that, but for 
the amendment, the participant would have accrued after the effective 
date of the amendment under a benefit formula that is not a statutory 
hybrid benefit formula (and under which the participant was accruing 
benefits prior to the amendment); and
    (B) After the effective date of the amendment, all or a portion of 
the participant's benefit accruals under the plan are determined under a 
statutory hybrid benefit formula.
    (ii) Rules of application--(A) In general. Paragraphs (c)(4)(iii), 
(iv), and (v) of this section describe special rules that treat certain 
arrangements as conversion amendments. The rules described in those 
paragraphs apply both separately and in combination. Thus, for example, 
in an acquisition described in Sec.  1.410(b)-2(f), if the buyer adopts 
an amendment under which a participant's benefits under the seller's 
plan that is not a statutory hybrid plan are coordinated with a separate 
plan of the buyer that is a statutory hybrid plan, such as through an 
offset of the participant's benefit under the buyer's plan by the 
participant's benefit under the seller's plan, the seller and buyer are 
treated as a single employer under paragraph (c)(4)(iv) of this section 
and they are treated as having adopted a conversion amendment under 
paragraph (c)(4)(iii) of this section. However, pursuant to paragraph 
(c)(4)(iii) of this section, if there is no coordination between the two 
plans, there is no conversion amendment.
    (B) Covered amendments. Only amendments that eliminate or reduce 
accrued benefits described in section 411(a)(7), or a retirement-type 
subsidy described in section 411(d)(6)(B)(i), that would otherwise 
accrue as a result of future service are treated as amendments described 
in paragraph (c)(4)(i)(A) of this section.
    (C) Operation of plan terms treated as covered amendment. If, under 
the terms of a plan, a change in the conditions of a participant's 
employment results in a reduction of the participant's benefits that 
would have accrued in the future under a benefit formula that is not a 
statutory hybrid benefit formula, the plan is treated for purposes of 
this

[[Page 104]]

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

    Example 1. (i) Facts where plan does not establish opening 
hypothetical account balance for participants and participant elects 
life annuity at normal retirement age. Employer N sponsors Plan E, a 
defined benefit plan that provides an accumulated benefit, payable as a 
straight life annuity commencing at age 65 (which is Plan E's normal 
retirement age), based on a percentage of highest average

[[Page 105]]

compensation times the participant's years of service. Plan E permits 
any participant who has had a severance from employment to elect payment 
in the following optional forms of benefit (with spousal consent if 
applicable), with any payment not made in a straight life annuity 
converted to an equivalent form based on reasonable actuarial 
assumptions: A straight life annuity; and a 50 percent, 75 percent, or 
100 percent joint and survivor annuity. The payment of benefits may 
commence at any time after attainment of age 55, with an actuarial 
reduction if the commencement is before normal retirement age. In 
addition, the plan offers a single-sum payment after attainment of age 
55 equal to the present value of the normal retirement benefit using the 
applicable interest rate and mortality table under section 417(e)(3) in 
effect under the terms of the plan on the annuity starting date.
    (ii) Facts relating to the conversion amendment. On January 1, 2012, 
Plan E is amended to eliminate future accruals under the highest average 
compensation benefit formula and to base future benefit accruals under a 
hypothetical account balance formula. For service on or after January 1, 
2012, each participant's hypothetical account balance is credited 
monthly with a pay credit equal to a specified percentage of the 
participant's compensation during the month and also with interest based 
on the third segment rate described in section 430(h)(2)(C)(iii). With 
respect to benefits under the hypothetical account balance attributable 
to service on and after January 1, 2012, a participant is permitted to 
elect (with spousal consent if applicable) payment in the same 
generalized optional forms of benefit (even though different actuarial 
factors apply) as under the terms of the plan in effect before January 
1, 2012, and also as a single-sum distribution. The plan provides for 
the benefit attributable to service before January 1, 2012, to be 
determined under the terms of the plan as in effect immediately before 
the effective date of the amendment, and the benefit attributable to 
service on and after January 1, 2012, to be determined separately, under 
the terms of the plan as in effect after the effective date of the 
amendment, with neither benefit offsetting the other in any manner. 
Thus, each participant's benefit is equal to the sum of the benefit 
attributable to service before January 1, 2012 (to be determined under 
the terms of the plan as in effect immediately before the effective date 
of the amendment), plus the benefit attributable to the participant's 
hypothetical account balance.
    (iii) Facts relating to an affected participant. Participant A is 
age 62 on January 1, 2012. On December 31, 2011, A's benefit for years 
of service before January 1, 2012, payable as a straight life annuity 
commencing at A's normal retirement age (age 65), which is January 1, 
2015, is $1,000 per month. On January 1, 2015, when Participant A has a 
severance from employment, the then-current hypothetical account 
balance, with pay credits and interest from January 1, 2012, to January 
1, 2015, is $11,000. Using the conversion factors applicable under the 
plan on January 1, 2015, that balance is equivalent to a straight life 
annuity of $100 per month commencing on January 1, 2015. This benefit is 
in addition to the benefit attributable to service before January 1, 
2012. Participant A elects (with spousal consent) a straight life 
annuity of $1,100 per month commencing January 1, 2015.
    (iv) Conclusion. Participant A's benefit satisfies the requirements 
of paragraph (c) of this section because Participant A's benefit is not 
less than the sum of Participant A's section 411(d)(6) protected benefit 
(as defined in Sec.  1.411(d)-3(g)(14)) with respect to service before 
the effective date of the conversion amendment, determined under the 
terms of the plan as in effect immediately before the effective date of 
the amendment, and Participant A's section 411(d)(6) protected benefit 
with respect to service on and after the effective date of the 
conversion amendment, determined under the terms of the plan as in 
effect after the effective date of the amendment.
    Example 2. (i) Facts involving plan's establishment of opening 
hypothetical account balance and payment of pre-conversion accumulated 
benefit in life annuity at normal retirement age. Except as indicated in 
this Example 2, the facts are the same as the facts under paragraph (i) 
of Example 1.
    (ii) Facts relating to the conversion amendment. On January 1, 2012, 
Plan E is amended to eliminate future accruals under the highest average 
compensation benefit formula and to provide future benefit accruals 
under a hypothetical account balance formula. An opening hypothetical 
account balance is established for each participant, and, under the 
plan's terms, that balance is equal to the present value of the 
participant's accumulated benefit on December 31, 2011 (payable as a 
straight life annuity at normal retirement age or immediately, if 
later), using the applicable interest rate and applicable mortality 
table under section 417(e)(3) on January 1, 2012. Under Plan E, the 
account based on this opening hypothetical account balance is maintained 
as a separate account from the account for accruals on or after January 
1, 2012. The hypothetical account balance maintained for each 
participant for accruals on or after January 1, 2012, is credited 
monthly with a pay credit equal to a specified percentage of the 
participant's compensation during the month. A participant's 
hypothetical account balance (including both of the separate accounts) 
is credited monthly with interest based on the third

[[Page 106]]

segment rate described in section 430(h)(2)(C)(iii).
    (iii) Facts relating to optional forms of benefit. Following 
severance from employment and attainment of age 55, a participant is 
permitted to elect (with spousal consent, if applicable) payment in the 
same generalized optional forms of benefit as under the plan in effect 
prior to January 1, 2012, with the amount payable calculated based on 
the hypothetical account balance on the annuity starting date and the 
applicable interest rate and applicable mortality table on the annuity 
starting date. The single-sum distribution is equal to the hypothetical 
account balance.
    (iv) Facts relating to conversion protection. The plan provides 
that, as of a participant's annuity starting date, the plan will 
determine whether the benefit attributable to the opening hypothetical 
account balance payable in the particular optional form of benefit 
selected is equal to or greater than the benefit accrued under the plan 
through the date of conversion and payable in the same generalized 
optional form of benefit with the same annuity starting date. If the 
benefit attributable to the opening hypothetical account balance is 
equal to or greater than the pre-conversion benefit, the plan provides 
that such benefit is paid in lieu of the pre-conversion benefit, 
together with the benefit attributable to post-conversion pay-based 
principal credits. If the benefit attributable to the opening 
hypothetical account balance is less than the pre-conversion benefit, 
the plan provides that such benefit is increased sufficiently to provide 
the pre-conversion benefit, together with the benefit attributable to 
post-conversion pay-based principal credits.
    (v) Facts relating to an affected participant. On January 1, 2012, 
the opening hypothetical account balance established for Participant A 
is $80,000, which is the present value of Participant A's straight life 
annuity of $1,000 per month commencing at January 1, 2015, using the 
applicable interest rate and applicable mortality table under section 
417(e)(3) in effect on January 1, 2012. On January 1, 2012, the 
applicable interest rate for Participant A is equivalent to a level rate 
of 5.5 percent. Thereafter, Participant A's hypothetical account balance 
for subsequent accruals is credited monthly with a pay credit equal to a 
specified percentage of the participant's compensation during the month. 
In addition, Participant A's hypothetical account balance (including 
both of the separate accounts) is credited monthly with interest based 
on the third segment rate described in section 430(h)(2)(C)(iii).
    (vi) Facts relating to calculation of the participant's benefit. 
Participant A has a severance from employment on January 1, 2015 at age 
65, and elects (with spousal consent) a straight life annuity commencing 
January 1, 2015. On January 1, 2015, the opening hypothetical account 
balance, with interest credits from January 1, 2012, to January 1, 2015, 
has become $95,000, which, using the conversion factors under the plan 
on January 1, 2015, is equivalent to a straight life annuity of $1,005 
per month commencing on January 1, 2015 (which is greater than the 
$1,000 a month payable at age 65 under the terms of the plan in effect 
before January 1, 2012). This benefit is in addition to the benefit 
determined using the hypothetical account balance for service after 
January 1, 2012.
    (vii) Conclusion. The benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant A 
because A's benefit is not less than the sum of (A) the greater of 
Participant A's benefits attributable to the opening hypothetical 
account balance and A's section 411(d)(6) protected benefit (as defined 
in Sec.  1.411(d)-3(g)(14)) with respect to service before the effective 
date of the conversion amendment, determined under the terms of the plan 
as in effect immediately before the effective date of the amendment, and 
(B) Participant A's section 411(d)(6) protected benefit with respect to 
service on and after the effective date of the conversion amendment, 
determined under the terms of the plan as in effect after the effective 
date of the amendment.
    Example 3. (i) Facts involving a subsequent decrease in interest 
rates. The facts are the same as in Example 2, except that, because of a 
decrease in bond rates after January 1, 2012, and before January 1, 
2015, the rate of interest credited in that period averages less than 
5.5 percent, and, on January 1, 2015, the effective applicable interest 
rate under section 417(e)(3) under the plan's terms is 4.7 percent. As a 
result, Participant A's opening hypothetical account balance plus 
attributable interest credits has increased to only $87,000 on January 
1, 2015, and, using the conversion factors under the plan on January 1, 
2015, is equivalent to a straight life annuity commencing on January 1, 
2015, of $775 per month. Under the terms of Plan E, the benefit 
attributable to A's opening hypothetical account balance is increased so 
that A's straight life annuity commencing on January 1, 2015, is $1,000 
per month. This benefit is in addition to the benefit attributable to 
the hypothetical account balance for service after January 1, 2012.
    (ii) Conclusion. The benefit satisfies the requirements of paragraph 
(c)(3)(ii)(A) of this section with respect to Participant A because A's 
benefit is not less than the sum of--
    (A) The greater of A's benefits attributable to the opening 
hypothetical account balance and A's section 411(d)(6) protected benefit 
(as defined in Sec.  1.411(d)-3(g)(14)) with respect to service before 
the effective date of the conversion amendment, determined under the 
terms of the plan as in effect immediately

[[Page 107]]

before the effective date of the amendment; and
    (B) A's section 411(d)(6) protected benefit with respect to service 
on and after the effective date of the conversion amendment, determined 
under the terms of the plan as in effect after the effective date of the 
amendment.
    Example 4. (i) Facts involving payment of a subsidized early 
retirement benefit. The facts are the same as in Example 2, except that 
under the terms of Plan E on December 31, 2011, a participant who 
retires before age 65 and after age 55 with 30 years of service has only 
a 3 percent per year actuarial reduction. Participant A has a severance 
from employment on January 1, 2013, when A is age 63 and has 30 years of 
service. On January 1, 2013, A's opening hypothetical account balance, 
with interest from January 1, 2012, to January 1, 2013, has become 
$86,000, which, using the conversion factors under the plan (as amended) 
on January 1, 2013, is equivalent to a straight life annuity commencing 
on January 1, 2013, of $850 per month.
    (ii) Facts relating to calculation of the participant's benefit. 
Under the terms of Plan E on December 31, 2011, Participant A is 
entitled to a straight life annuity commencing on January 1, 2013, equal 
to at least $940 per month ($1,000 reduced by 3 percent for each of the 
2 years that A's benefits commence before normal retirement age). Under 
the terms of Plan E, the benefit attributable to A's opening account 
balance is increased so that A is entitled to a straight life annuity of 
$940 per month commencing on January 1, 2015. This benefit is in 
addition to the benefit determined using the hypothetical account 
balance for service after January 1, 2012.
    (iii) Conclusion. The benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant A 
because A's benefit is not less than the sum of--
    (A) The greater of Participant A's benefits attributable to the 
opening hypothetical account balance (increased by attributable interest 
credits) and A's section 411(d)(6) protected benefit (as defined in 
Sec.  1.411(d)-3(g)(14)) with respect to service before the effective 
date of the conversion amendment, determined under the terms of the plan 
as in effect immediately before the effective date of the amendment; and
    (B) Participant A's section 411(d)(6) protected benefit with respect 
to service on and after the effective date of the conversion amendment, 
determined under the terms of the plan as in effect after the effective 
date of the amendment.
    Example 5. (i) Facts involving addition of a single-sum payment 
option. The facts are the same as in Example 2, except that, before 
January 1, 2012, Plan E did not offer payment in a single-sum 
distribution for amounts in excess of $5,000. Plan E, as amended on 
January 1, 2012, offers payment in any of the available annuity 
distribution forms commencing at any time following severance from 
employment as were provided under Plan E before January 1, 2012. In 
addition, Plan E, as amended on January 1, 2012, offers payment in the 
form of a single sum attributable to service before January 1, 2012, 
which is the greater of the opening hypothetical account balance 
(increased by attributable interest credits) or a single-sum 
distribution of the straight life annuity payable at age 65 using the 
same actuarial factors as are used for mandatory cashouts for amounts 
equal to $5,000 or less under the terms of the plan on December 31, 
2011. Participant B is age 40 on January 1, 2012, and B's opening 
hypothetical account balance (increased by attributable interest 
credits) is $33,000 (which is the present value, using the conversion 
factors under the plan (as amended) on January 1, 2012, of Participant 
B's straight life annuity of $1,000 per month commencing at January 1, 
2037, which is when B will be age 65). Participant B has a severance 
from employment on January 1, 2015, and elects (with spousal consent) an 
immediate single-sum distribution. Participant B's opening hypothetical 
account balance (increased by attributable interest) on January 1, 2015, 
is $45,000. The present value, on January 1, 2015, of Participant B's 
benefit of $1,000 per month, commencing immediately using the actuarial 
factors for mandatory cashouts under the terms of the plan on December 
31, 2011, would result in a single-sum payment of $44,750. Participant B 
is paid a single-sum distribution equal to the sum of $45,000 plus an 
amount equal to B's January 1, 2015, hypothetical account balance for 
benefit accruals for service after January 1, 2012.
    (ii) Conclusion. Because, under Plan E, Participant B is entitled to 
the sum of--
    (A) The greater of the $45,000 opening hypothetical account balance 
(increased by attributable interest credits) and $44,750 (present value 
of the benefit with respect to service prior to January 1, 2012, using 
the actuarial factors for mandatory cashout distributions under the 
terms of the plan on December 31, 2011); and
    (B) An amount equal to B's hypothetical account balance for benefit 
accruals for service after January 1, 2012, the benefit satisfies the 
requirements of paragraph (c)(3)(ii)(A) of this section with respect to 
Participant B. If Participant B's hypothetical account balance under 
Plan E was instead less than $44,750 on January 1, 2015, Participant B 
would be entitled to a single-sum payment equal to the sum of $44,750 
and an amount equal to B's hypothetical account balance for benefit 
accruals for service after January 1, 2012.
    Example 6. (i) Facts involving addition of new annuity optional form 
of benefit. The facts are the same as in Example 2, except that, after

[[Page 108]]

December 31, 2011, and before January 1, 2015, Plan E is amended to 
offer payment in a 5-, 10-, or 15-year term certain and life annuity, 
using the same actuarial assumptions that apply for other optional forms 
of distribution. When Participant A has a severance from employment on 
January 1, 2015, A elects (with spousal consent) a 5-year term certain 
and life annuity commencing immediately equal to $935 per month. 
Application of the same actuarial assumptions to Participant A's benefit 
of $1,000 per month (under Plan E as in effect on December 31, 2011), 
commencing immediately on January 1, 2015, would result in a 5-year term 
certain and life annuity commencing immediately equal to $955 per month. 
Under the terms of Plan E, the benefit attributable to A's opening 
account balance is increased so that, using the conversion factors under 
the plan (as amended) on January 1, 2015, A's opening hypothetical 
account balance (increased by attributable interest credits) produces a 
5-year term certain and life annuity commencing immediately equal to 
$955 per month commencing on January 1, 2015. This benefit is in 
addition to the benefit determined using the January 1, 2015, 
hypothetical account balance for service after January 1, 2012.
    (ii) Conclusion. This benefit satisfies the requirements of 
paragraph (c)(3)(ii)(A) of this section with respect to Participant A.
    Example 7. (i) Facts involving addition of distribution option 
before age 55. The facts are the same as in Example 5, except that 
Participant B (age 43) elects (with spousal consent) a straight life 
annuity commencing immediately on January 1, 2015. Under Plan E, the 
straight life annuity attributable to Participant B's opening 
hypothetical account balance at age 43 is $221 per month. Application of 
the same actuarial assumptions to Participant B's benefit of $1,000 per 
month commencing at age 65 (under Plan E as in effect on December 31, 
2011) would result in a straight life annuity commencing immediately on 
January 1, 2015, equal to $219 per month.
    (ii) Conclusion. Because, under its terms, Plan E provides that 
Participant B is entitled to an amount not less than the present value 
(using the same actuarial assumptions as apply on January 1, 2015, in 
converting the $45,000 hypothetical account balance attributable to the 
opening hypothetical account balance to the $221 straight life annuity) 
of Participant B's straight life annuity of $1,000 per month commencing 
at age 65, and the $221 straight life annuity is in addition to the 
benefit accruals for service after January 1, 2012, payment of the $221 
monthly annuity would satisfy the requirements of paragraph 
(c)(3)(ii)(A) of this section with respect to Participant B.
    Example 8. (i) Facts involving establishment of opening hypothetical 
account balance. A defined benefit plan provides an accrued benefit 
expressed as a straight life annuity commencing at the plan's normal 
retirement age (age 65), based on a percentage of average annual 
compensation multiplied by the participant's years of service. On 
January 1, 2009, a conversion amendment is adopted that converts the 
plan to a statutory hybrid plan. Participant A, age 55, had an accrued 
benefit under the pre-conversion formula of $1,500 per month payable at 
normal retirement age. In conjunction with this conversion, the plan 
provides each participant with an opening hypothetical account balance 
equal to the present value, determined in accordance with section 
417(e)(3) of the participant's pre-conversion benefit. Participant A's 
opening hypothetical account balance was calculated as $121,146. The 
opening account balance (along with any subsequent amounts credited to 
the hypothetical account) is credited annually with interest credits at 
the rate of 5.0 percent up to the annuity starting date of each 
participant.
    (ii) Facts relating to changes between establishment of opening 
hypothetical account balance and age 65. Upon attainment of age 65, 
Participant A elects to receive Participant A's entire benefit under the 
plan as a single sum distribution. At the annuity starting date, 
Participant A's hypothetical account balance attributable to Participant 
A's opening account balance has increased to $197,334. However, under 
the terms of the plan and in accordance with section 417(e)(3), the 
present value at the annuity starting date of Participant A's pre-
conversion benefit of $1,500 per month is $221,383.
    (iii) Conclusion. Pursuant to paragraph (c)(3)(ii)(A) of this 
section, Participant A must receive the benefit attributable to post-
conversion service, plus the greater of the benefit attributable to the 
opening hypothetical account balance and the pre-conversion benefit 
(with the determination as to which is greater made at the annuity 
starting date). Accordingly the single-sum distribution must equal the 
benefit attributable to post-conversion service plus $221,383.

    (d) Market rate of return--(1) In general--(i) Basic test. Subject 
to the rules of paragraph (e) of this section, a statutory hybrid plan 
satisfies the requirements of section 411(b)(1)(H) and this paragraph 
(d) only if, for any plan year, the interest crediting rate with respect 
to benefits determined under a statutory hybrid benefit formula is not 
greater than a market rate of return.
    (ii) Definitions relating to market rate of return--(A) Interest 
credit. Subject to other rules in this paragraph (d), an interest credit 
for purposes of this paragraph (d) and section 411(b)(5)(B) means

[[Page 109]]

the following adjustments to a participant's accumulated benefit under a 
statutory hybrid benefit formula, to the extent not conditioned on 
current service and not made on account of imputed service (as defined 
in Sec.  1.401(a)(4)-11(d)(3)(ii)(B))--
    (1) Any increase or decrease for a period, under the terms of the 
plan at the beginning of the period, that is calculated by applying a 
rate of interest or rate of return (including a rate of increase or 
decrease under an index) to the participant's accumulated benefit (or a 
portion thereof) as of the beginning of the period; and
    (2) Any other increase for a period, under the terms of the plan at 
the beginning of the period.
    (B) Treatment of plan amendments. An increase to a participant's 
accumulated benefit is not treated as an interest credit to the extent 
the increase is made as a result of a plan amendment providing for a 
one-time adjustment to the participant's accumulated benefit. However, a 
pattern of repeated plan amendments each of which provides for a one-
time adjustment to a participant's accumulated benefit will cause such 
adjustments to be treated as provided on a permanent basis under the 
terms of the plan. See Sec.  1.411(d)-4, A-1(c)(1).
    (C) Interest crediting rate. Except as otherwise provided in this 
paragraph (d), the interest crediting rate, or effective rate of return, 
for a period with respect to a participant equals the total amount of 
interest credits for the period divided by the participant's accumulated 
benefit at the beginning of the period.
    (D) Principal credit. For purposes of this paragraph (d), a 
principal credit means any increase to a participant's accumulated 
benefit under a statutory hybrid benefit formula that is not an interest 
credit. Thus, for example, a principal credit includes an increase to a 
participant's accumulated benefit to the extent the increase is 
conditioned on current service or made on account of imputed service. As 
a result, a principal credit includes an increase to the value of an 
accumulated percentage of the participant's final average compensation. 
For indexed benefits described in paragraph (b)(2) of this section, a 
principal credit includes an increase to the participant's accrued 
benefit other than an increase provided by indexing. In addition, 
pursuant to the rule in paragraph (d)(1)(ii)(B) of this section, a 
principal credit generally includes an increase to a participant's 
accumulated benefit to the extent the increase is made as a result of a 
plan amendment providing for a one-time adjustment to the participant's 
accumulated benefit. As a result, a principal credit includes an opening 
hypothetical account balance or opening accumulated percentage of the 
participant's final average compensation, as described in paragraph 
(c)(3) of this section.
    (iii) Market rate of return for single rates. Except as otherwise 
provided in this paragraph (d)(1), an interest crediting rate is not in 
excess of a market rate of return only if the plan terms provide that 
the interest credit for each plan year is determined using one of the 
following specified interest crediting rates:
    (A) The interest rate on long-term investment grade corporate bonds 
(as described in paragraph (d)(3) of this section).
    (B) An interest rate that, under paragraph (d)(4) of this section, 
is deemed to be not in excess of the interest rate described in 
paragraph (d)(3) of this section.
    (C) A rate of return that, under paragraph (d)(5) of this section, 
is not in excess of a market rate of return.
    (iv) Timing and other rules related to interest crediting rate--(A) 
In general. A plan that provides interest credits must specify how the 
plan determines interest credits and must specify how and when interest 
credits are credited. The plan must specify the method for determining 
interest credits in accordance with the requirements of paragraph 
(d)(1)(iv)(B) of this section, the frequency of interest crediting in 
accordance with the requirements of paragraph (d)(1)(iv)(C) of this 
section, and the treatment of interest credits on distributed amounts, 
as well as other debits and credits during the period, in accordance 
with the rules of paragraph (d)(1)(iv)(D) of this section. In addition, 
a plan is permitted to round the calculated interest rate or

[[Page 110]]

rate of return in accordance with paragraph (d)(1)(iv)(E) of this 
section. See paragraph (e) of this section for additional rules that 
apply to changes in the interest crediting rate.
    (B) Methods to determine interest credits. A plan that is using any 
specified interest crediting rate can determine interest credits for 
each current interest crediting period based on the effective periodic 
interest crediting rate that applies over the period. Alternatively, a 
plan that is using one of the interest crediting rates described in 
paragraph (d)(3) or (d)(4) of this section can determine interest 
credits for a stability period based on the interest crediting rate for 
a specified lookback month with respect to that stability period. For 
purposes of the preceding sentence, the stability period and lookback 
month must satisfy the rules for selecting the stability period and 
lookback month under Sec.  1.417(e)-1(d)(4), although the interest 
crediting rate can be any one of the rates in paragraph (d)(3) or (d)(4) 
of this section and the stability period and lookback month need not be 
the same as those used under the plan for purposes of section 417(e)(3).
    (C) Frequency of interest crediting. Interest credits under a plan 
must be provided on an annual or more frequent periodic basis and 
interest credits for each interest crediting period must be credited as 
of the end of the period. If a plan provides for the crediting of 
interest more frequently than annually (for example, daily, monthly or 
quarterly) based on one of the annual interest rates described in 
paragraph (d)(3) or (d)(4) of this section, then the plan generally 
provides an above market rate of return unless each periodic interest 
credit is determined using an interest crediting rate that is no greater 
than a pro rata portion of the applicable annual interest crediting 
rate. However, a plan that credits interest daily based on one of the 
annual interest rates described in paragraph (d)(3) or (d)(4) of this 
section is not treated as providing an above market rate of return 
merely because the plan determines each daily interest credit using a 
daily interest crediting rate that is \1/360\ of the applicable annual 
interest crediting rate. In addition, interest credits determined, under 
the terms of a plan, based on one of the annual interest rates described 
in paragraph (d)(3) or (d)(4) of this section are not treated as 
creating an effective rate of return that is in excess of a market rate 
of return merely because an otherwise permissible interest crediting 
rate for a plan year is compounded more frequently than annually. Thus, 
for example, if a plan's terms provide for interest to be credited 
monthly and for the interest crediting rate to be equal to the interest 
rate on long-term investment grade corporate bonds (as described in 
paragraph (d)(3) of this section) and the applicable annual rate on 
these bonds for the plan year is 6 percent, then the accumulated benefit 
at the beginning of each month could be increased as a result of 
interest credits by as much as 0.5 percent per month during the plan 
year without resulting in an interest crediting rate that is in excess 
of a market rate of return.
    (D) Debits and credits during the interest crediting period. A plan 
is not treated as failing to meet the requirements of this paragraph (d) 
merely because the plan does not provide for interest credits on amounts 
distributed prior to the end of the interest crediting period. 
Furthermore, a plan is not treated as failing to meet the requirements 
of this paragraph (d) merely because the plan calculates increases or 
decreases to the participant's accumulated benefit by applying a rate of 
interest or rate of return (including a rate of increase or decrease 
under an index) to the participant's adjusted accumulated benefit (or 
portion thereof) for the period. For this purpose, the participant's 
adjusted accumulated benefit equals the participant's accumulated 
benefit as of the beginning of the period, adjusted for debits and 
credits (other than interest credits) made to the accumulated benefit 
prior to the end of the interest crediting period, with appropriate 
weighting for those debits and credits based on their timing within the 
period. For plans that calculate increases or decreases to the 
participant's accumulated benefit by applying a rate of interest or rate 
of return to the participant's adjusted accumulated benefit (or portion 
thereof) for the period, interest credits include

[[Page 111]]

these increases and decreases, to the extent provided under the terms of 
the plan at the beginning of the period and to the extent not 
conditioned on current service and not made on account of imputed 
service (as defined in Sec.  1.401(a)(4)-11(d)(3)(ii)(B)), and the 
interest crediting rate with respect to a participant equals the total 
amount of interest credits for the period divided by the participant's 
adjusted accumulated benefit for the period.
    (E) Rounding of interest crediting rate. A plan is not treated as 
failing to meet the requirements of this paragraph (d) merely because 
the plan determines interest credits for an interest crediting period by 
rounding the calculated interest rate or rate of return in accordance 
with this paragraph (d)(1)(iv)(E). An annual rate may be rounded to the 
nearest multiple of 25 basis points (or a smaller rounding interval). If 
a plan provides for the crediting of interest more frequently than 
annually, then the rounding interval must not exceed a pro-rata portion 
of 25 basis points. Notwithstanding the preceding sentence, a plan is 
permitted to round to the nearest basis point regardless of the length 
of the interest crediting period.
    (v) Lesser rates. An interest crediting rate is not in excess of a 
market rate of return if the rate can never be in excess of a particular 
rate that is described in paragraph (d)(1)(iii) of this section. Thus, 
for example, an interest crediting rate that always equals the rate 
described in paragraph (d)(3) of this section minus 200 basis points is 
not in excess of a market rate of return because it can never be in 
excess of the rate described in paragraph (d)(3) of this section. 
Similarly, an interest crediting rate that always equals the lesser of 
the yield on 30-year Treasury Constant Maturities and a fixed 7 percent 
interest rate is not in excess of a market rate of return because it can 
never be in excess of the yield on 30-year Treasury Constant Maturities.
    (vi) Greater-of rates. If a statutory hybrid plan determines an 
interest credit by applying the greater of 2 or more different rates to 
the accumulated benefit, the effective interest crediting rate is not in 
excess of a market rate of return only if each of the different rates 
would separately satisfy the requirements of this paragraph (d) and the 
requirements of paragraph (d)(6) of this section are also satisfied.
    (vii) Blended rates. A statutory hybrid plan does not provide an 
effective interest crediting rate that is in excess of a market rate of 
return merely because the plan determines an interest credit by applying 
different rates to different predetermined portions of the accumulated 
benefit, provided each rate would separately satisfy the requirements of 
this paragraph (d) if the rate applied to the entire accumulated 
benefit.
    (viii) Increases to existing rates and addition of other rates--(A) 
Increases to existing rates. The Commissioner may, in guidance published 
in the Internal Revenue Bulletin, see Sec.  601.601(d)(2)(ii)(b) of this 
chapter, increase an interest crediting rate set forth in this paragraph 
(d), so that the increased rate is treated as satisfying the requirement 
that the rate not exceed a market rate of return for purposes of this 
paragraph (d) and section 411(b)(5)(B). For this purpose, these 
increases can include increases to the maximum permitted margin that can 
be added to one or more of the safe harbor rates set forth in paragraph 
(d)(4) of this section, increases to the maximum permitted fixed rate 
set forth in paragraph (d)(4)(v) of this section, or increases to a 
maximum permitted annual floor set forth in paragraph (d)(6) of this 
section.
    (B) Additional rates. The Commissioner may, in guidance published in 
the Internal Revenue Bulletin, see Sec.  601.601(d)(2)(ii)(b) of this 
chapter, provide for additional interest crediting rates that satisfy 
the requirement that they not exceed a market rate of return for 
purposes of this paragraph (d) and section 411(b)(5)(B) (including 
providing for additional combinations of rates, such as annual minimums 
in conjunction with rates that are based on rates described in paragraph 
(d)(5) of this section but that are reduced in order to ensure that the 
effective rate of return does not exceed a market rate of return).
    (2) Preservation of capital requirement--(i) General rule. A 
statutory hybrid plan satisfies the requirements of section 411(b)(1)(H) 
only if the plan provides that the participant's benefit

[[Page 112]]

under the statutory hybrid benefit formula determined as of the 
participant's annuity starting date is no less than the benefit 
determined as if the accumulated benefit were equal to the sum of all 
principal credits (as described in paragraph (d)(1)(ii)(D) of this 
section) credited under the plan to the participant as of that date 
(including principal credits that were credited before the applicable 
statutory effective date of paragraph (f)(1) of this section). This 
paragraph (d)(2) applies only as of an annuity starting date, within the 
meaning of Sec.  1.401(a)-20, A-10(b), with respect to which a 
distribution of the participant's entire vested benefit under the plan's 
statutory hybrid benefit formula as of that date commences. For a 
participant who has more than one annuity starting date, paragraph 
(d)(2)(ii) of this section provides rules to account for prior annuity 
starting dates when applying this paragraph (d)(2)(i).
    (ii) Application to multiple annuity starting dates--(A) In general. 
If the comparison under paragraph (d)(2)(ii)(B) of this section results 
in the sum of all principal credits credited to the participant (as of 
the current annuity starting date) exceeding the sum of the amounts 
described in paragraphs (d)(2)(ii)(B)(1) through (d)(2)(ii)(B)(3) of 
this section, then the participant's benefit to be distributed at the 
current annuity starting date must be no less than would be provided if 
that excess were included in the current accumulated benefit.
    (B) Comparison to reflect prior distributions. For a participant who 
has more than one annuity starting date, the sum of all principal 
credits credited to the participant under the plan, as of the current 
annuity starting date, is compared to the sum of--
    (1) The remaining balance of the participant's accumulated benefit 
as of the current annuity starting date;
    (2) The amount of the reduction to the participant's accumulated 
benefit under the statutory hybrid benefit formula that is attributable 
to any prior distribution of the participant's benefit under that 
formula; and
    (3) Any amount that was treated as included in the accumulated 
benefit under the rules of this paragraph (d)(2) as of any prior annuity 
starting date.
    (C) Special rule for participants with 5 or more breaks in service. 
A plan is permitted to provide that, in the case of a participant who 
receives a distribution of the entire vested benefit under the plan and 
thereafter completes 5 consecutive 1-year breaks in service, as defined 
in section 411(a)(6)(A), the rules of this paragraph (d)(2) are applied 
without regard to the prior period of service. Thus, in the case of such 
a participant, the plan is permitted to provide that the rules of this 
paragraph (d)(2) are applied disregarding the principal credits and 
distributions that occurred before the breaks in service.
    (iii) Exception for variable annuity benefit formulas. See paragraph 
(b)(2)(iii)(B) of this section for an exception to this paragraph 
(d)(2).
    (3) Long-term investment grade corporate bonds. For purposes of this 
paragraph (d), the rate of interest on long-term investment grade 
corporate bonds means the third segment rate described in section 
417(e)(3)(D) or 430(h)(2)(C)(iii) (determined with or without regard to 
section 430(h)(2)(C)(iv) and with or without regard to the transition 
rules of section 417(e)(3)(D)(ii) or 430(h)(2)(G)). However, for plan 
years beginning prior to January 1, 2008, the rate of interest on long-
term investment grade corporate bonds means the rate described in 
section 412(b)(5)(B)(ii)(II) prior to amendment by the Pension 
Protection Act of 2006, Public Law 109-280 (120 Stat. 780 (2006)) (PPA 
'06).
    (4) Safe harbor rates of interest--(i) In general. This paragraph 
(d)(4) identifies interest rates that are deemed to be not in excess of 
the interest rate described in paragraph (d)(3) of this section. The 
Commissioner may, in guidance of general applicability, specify 
additional interest crediting rates that are deemed to be not in excess 
of the rate described in paragraph (d)(3) of this section. See Sec.  
601.601(d)(2)(ii)(b).
    (ii) Rates based on government bonds with margins. An interest 
crediting rate is deemed to be not in excess of the interest rate 
described in paragraph (d)(3) of this section if the rate is equal to 
the sum of any of the following rates of

[[Page 113]]

interest for bonds and the associated margin for that interest rate:

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

    (iii) Eligible cost-of-living indices. An interest crediting rate is 
deemed to be not in excess of the interest rate described in paragraph 
(d)(3) of this section if the rate is adjusted no less frequently than 
annually and is equal to the rate of increase with respect to an 
eligible cost-of-living index described in Sec.  1.401(a)(9)-6, A-14(b), 
except that, for purposes of this paragraph (d)(4)(iii), the eligible 
cost-of-living index described in Sec.  1.401(a)(9)-6, A-14(b)(2) is 
increased by 300 basis points.
    (iv) Short and mid-term investment grade corporate bonds. An 
interest crediting rate equal to the first segment rate is deemed to be 
not in excess of the interest rate described in paragraph (d)(3) of this 
section. Similarly, an interest crediting rate equal to the second 
segment rate is deemed to be not in excess of the interest rate 
described in paragraph (d)(3) of this section. For this purpose, the 
first and second segment rates mean the first and second segment rates 
described in section 417(e)(3)(D) or 430(h)(2)(C), determined with or 
without regard to section 430(h)(2)(C)(iv) and with or without regard to 
the transition rules of section 417(e)(3)(D)(ii) or 430(h)(2)(G).
    (v) Fixed rate of interest. An annual interest crediting rate equal 
to a fixed 6 percent is deemed to be not in excess of the interest rate 
described in paragraph (d)(3) of this section.
    (5) Other rates of return--(i) General rule. This paragraph (d)(5) 
sets forth additional methods for determining an interest crediting rate 
that is not in excess of a market rate of return.
    (ii) Actual rate of return on plan assets--(A) In general. An 
interest crediting rate equal to the actual rate of return on the 
aggregate assets of the plan, including both positive returns and 
negative returns, is not in excess of a market rate of return if the 
plan's assets are diversified so as to minimize the volatility of 
returns. This requirement that plan assets be diversified so as to 
minimize the volatility of returns does not require greater 
diversification than is required under section 404(a)(1)(C) of Title I 
of the Employee Retirement Income Security Act of 1974, Public Law 93-
406 (88 Stat. 829 (1974)), as amended (ERISA), with respect to defined 
benefit pension plans.
    (B) Subset of plan assets. An interest crediting rate equal to the 
actual rate of return on the assets within a specified subset of plan 
assets, including both positive and negative returns, is not in excess 
of a market rate of return if--
    (1) The subset of plan assets is diversified so as to minimize the 
volatility of returns, within the meaning of paragraph (d)(5)(ii)(A) of 
this section (thus, this requirement is satisfied if the subset of plan 
assets is diversified such that it would meet the requirements of 
paragraph (d)(5)(ii)(A) of this section if the subset were aggregate 
plan assets);
    (2) The aggregate fair market value of qualifying employer 
securities and qualifying employer real property (within the meaning of 
section 407 of ERISA) held in the subset of plan assets does not exceed 
10 percent of the fair market value of the aggregate assets in the 
subset; and
    (3) The fair market value of the assets within the subset of plan 
assets approximates the liabilities for benefits that are adjusted by 
reference to the rate of return on the assets within the subset, 
determined using reasonable actuarial assumptions.
    (C) Examples. The following examples illustrate the application of 
paragraph (d)(5)(ii)(B) of this section:

    Example 1. (i) Facts. (a) Employer A sponsors a defined benefit plan 
under which benefit accruals are determined under a formula

[[Page 114]]

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

[[Page 115]]

the specified subset is diversified so as to minimize the volatility of 
returns, within the meaning of paragraph (d)(5)(ii)(A) of this section, 
and no qualifying employer securities or qualifying employer real 
property (within the meaning of section 407 of ERISA) are held in the 
subset. The plan provides that, at the time of a participant's 
retirement, an amount equal to the present value of the liability for 
benefits payable to that participant is transferred to a separate subset 
of plan assets (the retiree pool). The retiree pool is invested in high-
quality bonds in an attempt to achieve cash-flow matching of the retiree 
liabilities. Benefits are paid from the retiree pool. However, if assets 
of the retiree pool are insufficient to pay benefits, the plan provides 
that assets of the specified subset are available to pay benefits in 
accordance with the requirement that all assets of the plan be available 
to pay all plan benefits. Except as described in this paragraph, no 
other amounts are added to or subtracted from the specified subset of 
plan assets.
    (ii) Conclusion. The specified subset is diversified so as to 
minimize the volatility of returns (within the meaning of paragraph 
(d)(5)(ii)(A) of this section). The aggregate fair market value of 
qualifying employer securities and qualifying employer real property 
(within the meaning of section 407 of ERISA) held in the specified 
subset do not exceed 10 percent of the fair market value of the 
aggregate assets in the subset. The fair market value of the assets 
within the specified subset of plan assets approximates the liabilities 
for benefits that are adjusted by reference to the rate of return on the 
assets within the subset, determined using reasonable actuarial 
assumptions, within the meaning of paragraph (d)(5)(ii)(B)(3) of this 
section. Therefore, the methodology used to adjust participant benefits 
under the plan's variable annuity benefit formula, which is a statutory 
hybrid benefit formula under Sec.  1.411(a)(13)-1(d)(4), is not in 
excess of a market rate of return.

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

[[Page 116]]

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

[[Page 117]]

date to the current annuity starting date; and
    (3) Any amount that was treated as included in the accumulated 
benefit under the rules of this paragraph (d)(6)(iii) as of any prior 
annuity starting date, together with interest annually at the minimum 
guaranteed rate that applied to the prior distribution from the prior 
annuity starting date to the current annuity starting date.
    (E) Application to portion of participant's benefit. A cumulative 
floor described in this paragraph (d)(6)(iii) may be applied to a 
portion of a participant's benefit, provided the requirements of this 
paragraph (d)(6)(iii) are satisfied with respect to that portion of the 
benefit. If a cumulative floor described in this paragraph (d)(6)(iii) 
applies to a portion of a participant's benefit, only the principal 
credits that are attributable to that portion of the participant's 
benefit are taken into account in determining the amount of the 
guarantee described in paragraph (d)(6)(iii)(A)(2) of this section.
    (e) Other rules regarding market rates of return--(1) In general. 
This paragraph (e) sets forth additional rules regarding the application 
of the market rate of return requirement with respect to benefits 
determined under a statutory hybrid benefit formula.
    (2) Plan termination--(i) In general. This paragraph (e)(2) provides 
special rules that apply for purposes of determining certain plan 
factors under a statutory hybrid benefit formula after the plan 
termination date of a statutory hybrid plan. The terms of a statutory 
hybrid plan must reflect the requirements of this paragraph (e)(2). 
Paragraph (e)(2)(ii) of this section sets forth rules relating to the 
interest crediting rate for interest crediting periods that end after 
the plan termination date. Paragraph (e)(2)(iii) of this section sets 
forth rules for converting a participant's accumulated benefit to an 
annuity after the plan termination date. Paragraph (e)(2)(iv) of this 
section sets forth rules of application. Paragraph (e)(2)(v) of this 
section contains examples. The Commissioner may, in revenue rulings, 
notices, or other guidance published in the Internal Revenue Bulletin, 
provide for additional rules that apply for purposes of this paragraph 
(e)(2) and the plan termination provisions of section 411(b)(5)(B)(vi). 
See Sec.  601.601(d)(2)(ii)(b) of this chapter. See also regulations of 
the Pension Benefit Guaranty Corporation for additional rules that apply 
when a pension plan subject to Title IV of ERISA is terminated.
    (ii) Interest crediting rates used to determine accumulated 
benefits--(A) General rule. The interest crediting rate used under the 
plan to determine a participant's accumulated benefit for interest 
crediting periods that end after the plan termination date must be equal 
to the average of the interest rates used under the plan during the 5-
year period ending on the plan termination date. Except as otherwise 
provided in this paragraph (e)(2)(ii), the actual annual interest rate 
(taking into account minimums, maximums, and other adjustments) used to 
determine interest credits under the plan for each of the interest 
crediting periods is used for purposes of determining the average of the 
interest rates.
    (B) Special rule for variable interest crediting rates that are 
other rates of return--(1) Application to interest crediting periods. 
This paragraph (e)(2)(ii)(B) applies for an interest crediting period if 
the interest crediting rate that was used for that interest crediting 
period was a rate of return described in paragraph (d)(5) of this 
section. This paragraph (e)(2)(ii)(B) also applies for an interest 
crediting period that begins before the first plan year described in 
paragraph (f)(2)(i)(B)(1) or (f)(2)(i)(B)(3) of this section (as 
applicable), if the interest crediting rate that was used for that 
interest crediting period had the potential to be negative. For this 
purpose, a rate is not treated as having the potential to be negative if 
it is a rate described in paragraph (d)(3) or (d)(4) of this section or 
is any other rate that is based solely on current bond yields.
    (2) Use of substitution rate. For any interest crediting period to 
which this paragraph (e)(2)(ii)(B) applies, for purposes of determining 
the average of the interest rates under this paragraph (e)(2)(ii), the 
interest rate used under

[[Page 118]]

the plan for the interest crediting period is deemed to be equal to the 
substitution rate (as described in paragraph (e)(2)(ii)(C) of this 
section) for the period.
    (C) Definition of substitution rate. The substitution rate for any 
interest crediting period equals the second segment rate under section 
430(h)(2)(C)(ii) (determined without regard to section 430(h)(2)(C)(iv)) 
for the last calendar month ending before the beginning of the interest 
crediting period, as adjusted to account for any minimums or maximums 
that applied in the period (other than cumulative floors under paragraph 
(d)(6)(iii) of this section), but without regard to other reductions 
that applied in the period. Thus, for example, if the actual interest 
crediting rate in an interest crediting period is equal to the rate of 
return on plan assets, but not greater than 5 percent, then the 
substitution rate for that interest crediting period is equal to the 
lesser of the applicable second segment rate for the period and 5 
percent. However, if the actual interest crediting rate for an interest 
crediting period is equal to the rate of return on plan assets minus 200 
basis points, then the substitution rate for that interest crediting 
period is equal to the applicable second segment rate for the period.
    (D) Cumulative floors. Cumulative floors under paragraph (d)(6)(iii) 
of this section that applied during the 5-year period ending on the plan 
termination date are not taken into account for purposes of determining 
the average of the interest rates under this paragraph (e)(2)(ii). 
However, the rules of paragraph (d)(6)(iii) of this section continue to 
apply to determine benefits as of annuity starting dates on or after the 
plan termination date. Thus, if, as of an annuity starting date on or 
after the plan termination date, the benefit provided by applying an 
applicable cumulative minimum rate under paragraph (d)(6)(iii)(A)(2) of 
this section exceeds the benefit determined by applying interest credits 
to the participant's accumulated benefit (with interest credits for 
interest crediting periods that end after the plan termination date 
determined under this paragraph (e)(2)), then that cumulative minimum 
rate is used to determine benefits as of that annuity starting date.
    (iii) Annuity conversion rates and factors--(A) Conversion factors 
where a separate mortality table was used prior to plan termination--(1) 
Use of a separate mortality table. This paragraph (e)(2)(iii)(A) applies 
for purposes of converting a participant's accumulated benefit to an 
annuity after the plan termination date if, for the entire 5-year period 
ending on the plan termination date, the plan provides for a mortality 
table in conjunction with an interest rate to be used to convert a 
participant's accumulated benefit (or a portion thereof) to an annuity. 
If this paragraph (e)(2)(iii)(A) applies, then the plan is treated as 
meeting the requirements of section 411(b)(5)(B)(i) and paragraph (d)(1) 
of this section only if, for purposes of converting a participant's 
accumulated benefit (or portion thereof) to an annuity for annuity 
starting dates after the plan termination date, the mortality table used 
is the table described in paragraph (e)(2)(iii)(A)(2) of this section 
and the interest rate is the rate described in paragraph 
(e)(2)(iii)(A)(3) of this section.
    (2) Specific mortality table. The mortality table used is the 
mortality table specified under the plan for purposes of converting a 
participant's accumulated benefit to an annuity as of the termination 
date. This mortality table is used regardless of whether it was used 
during the entire 5-year period ending on the plan termination date. For 
purposes of applying this paragraph (e)(2)(iii)(A)(2), if the mortality 
table specified in the plan, as of the plan termination date, is a 
mortality table that is updated to reflect expected improvements in 
mortality experience (such as occurs with the applicable mortality table 
under section 417(e)(3)), then the table used for an annuity starting 
date after the plan termination date takes into account updates through 
the annuity starting date.
    (3) Specific interest rate. The interest rate used is the interest 
rate specified under the plan for purposes of converting a participant's 
accumulated benefit to an annuity for annuity starting dates after the 
plan termination date. However, if the interest rate used

[[Page 119]]

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

[[Page 120]]

of determining the annuity conversion factor that applies after plan 
termination for that particular qualified joint and survivor annuity.
    (iv) Rules of application--(A) Average of interest rates for 
crediting interest--(1) In general. For purposes of determining the 
average of the interest rates under paragraph (e)(2)(ii) of this 
section, an interest crediting period is taken into account if the 
interest crediting date for the interest crediting period is within the 
5-year period ending on the plan termination date. The average of the 
interest rates is determined as the arithmetic average of the annual 
interest rates used for those interest crediting periods. If the 
interest crediting periods taken into account are not all the same 
length, then each rate is weighted to reflect the length of the interest 
crediting period in which it applied. If the plan provides for the 
crediting of interest more frequently than annually, then interest 
credits after the plan termination date must be prorated in accordance 
with the rules of paragraph (d)(1)(iv)(C) of this section.
    (2) Section 411(d)(6) protected accumulated benefit. In general, the 
interest rate that was used for each interest crediting period is the 
ongoing interest crediting rate that was specified under the plan for 
that period, without regard to any interest rate that was used prior to 
an amendment changing the interest crediting rate with respect to a 
section 411(d)(6) protected benefit. However, if, as of the end of the 
last interest crediting period that ends on or before the plan 
termination date, the participant's accumulated benefit is based on a 
section 411(d)(6) protected benefit that results from a prior amendment 
to change the rate of interest crediting applicable under the plan, then 
the pre-amendment interest rate is treated as having been used for each 
interest crediting period after the date of the interest crediting rate 
change (so that the amendment is disregarded).
    (B) Average annuity conversion rates and factors--(1) In general. 
For purposes of determining average annuity conversion interest rates 
and average tabular annuity conversion factors under paragraph 
(e)(2)(iii) of this section, an interest rate or tabular annuity 
conversion factor is taken into account if the rate or conversion factor 
applied under the terms of the plan to convert a participant's 
accumulated benefit (or a portion thereof) to a benefit payable in the 
form of an annuity during the 5-year period ending on the plan 
termination date. The average is determined as the arithmetic average of 
the interest rates or tabular factors used during that period. If the 
periods in which the rates or factors that are averaged are not all the 
same length, then each rate or factor is weighted to reflect the length 
of the period in which it applied.
    (2) Section 411(d)(6) protected annuity conversion factors. In 
general, the annuity conversion interest rate or tabular annuity 
conversion factor that was used for each period is the ongoing interest 
rate or tabular factor that was specified under the plan for that 
period, without regard to any rate or factor that was used under the 
plan prior to an amendment changing the rate or factor with respect to a 
section 411(d)(6) protected benefit. However, if, as of the plan 
termination date, the participant's annuity benefit for an annuity 
commencing at that date would be based on a section 411(d)(6) protected 
benefit that results from a prior amendment to change the rate or factor 
under the plan, then the pre-amendment rate or factor is treated as 
having been used after the date of the amendment (so that the amendment 
is disregarded).
    (C) Blended rates. If, as of the plan termination date, the plan 
determines interest credits by applying different rates to two or more 
different predetermined portions of the accumulated benefit, then the 
interest crediting rate that applies after the plan termination date is 
determined separately with respect to each portion under the rules of 
paragraph (e)(2)(ii) of this section.
    (D) Participants with less than 5 years of interest credits upon 
plan termination. If the plan provided for interest credits for any 
interest crediting period in which, pursuant to the terms of the plan, 
an individual was not eligible to receive interest credits (including 
because the individual was not a participant or beneficiary in the 
relevant interest crediting period), then, for purposes of determining 
the individual's

[[Page 121]]

average interest crediting rate under paragraph (e)(2)(ii) of this 
section, the individual is treated as though the individual received 
interest credits in that period using the interest crediting rate that 
applied in that period under the terms of the plan to a similarly 
situated participant or beneficiary who was eligible to receive interest 
credits.
    (E) Plan termination date--(1) Plans subject to Title IV of ERISA. 
In the case of a plan that is subject to Title IV of ERISA, the plan 
termination date for purposes of this paragraph (e)(2) means the plan's 
termination date established under section 4048(a) of ERISA.
    (2) Other plans. In the case of a plan that is not subject to Title 
IV of ERISA, the plan termination date for purposes of this paragraph 
(e)(2) means the plan's termination date established by the plan 
administrator, provided that the plan termination date may be no earlier 
than the date on which the actions necessary to effect the plan 
termination--other than the distribution of plan benefits--are taken. 
However, a plan is not treated as terminated on the plan's termination 
date if the assets are not distributed as soon as administratively 
feasible after that date. See Rev. Rul. 89-87 (1989-2 CB 2), (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    (v) Examples. The following examples illustrate the rules of this 
paragraph (e)(2). In each case, it is assumed that the plan is 
terminated in a standard termination.

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

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plan during the 5-year period preceding the date of plan termination).
    Example 4. (i) Facts. (A) Plan B is a defined benefit plan with a 
calendar plan year that expresses each participant's accumulated benefit 
in the form of a hypothetical account balance to which principal credits 
are made at the end of each calendar year and to which interest is 
credited at the end of each calendar year based on the balance at the 
end of the preceding year. The plan is terminated on January 27, 2018.
    (B) The plan's interest crediting rate for each calendar year during 
the entire 5-year period ending on the plan termination date is equal to 
(A) 50 percent of the greater of the rate of interest on 3-month 
Treasury Bills for the preceding December and an annual rate of 4 
percent, plus (B) 50 percent of the rate of return on plan assets. The 
rate of interest on 3-month Treasury Bills credited under Plan B is 
assumed to be: 3.4 Percent for 2017; 4 percent for 2016; 4.5 percent for 
2015; 3.5 percent for 2014; and 4.2 percent for 2013. Each of these 
rates applied under Plan B for purposes of determining the interest 
credits described in clause (A) of this paragraph (i), except that the 4 
percent minimum rate applied for 2017 and 2014. The second segment rate 
is assumed to be: 6 percent for December 2016; 6 percent for December 
2015; 6.5 percent for December 2014; 6 percent for December 2013; and 
5.5 percent for December 2012.
    (ii) Conclusion. Pursuant to paragraph (e)(2)(ii) of this section, 
the interest crediting rate used to determine accrued benefits under the 
plan on and after the date of plan termination is 5.07 percent. This 
number is equal to the sum of 50 percent of 4.14 percent (which is the 
sum of 4 percent, 4 percent, 4.5 percent, 4 percent, and 4.2 percent, 
divided by 5), and 50 percent of 6 percent (which is the average second 
segment rate applicable for the 5 interest crediting periods ending 
within the 5-year period, as applied pursuant to the substitution rule 
described in paragraphs (e)(2)(ii)(B) and (C) of this section).
    Example 5. (i) Facts. The facts are the same as in Example 4, except 
that the plan had credited interest before January 1, 2016, using the 
rate of return on a specified RIC and had been amended effective January 
1, 2016, to base interest credits for all plan years after 2015 on the 
interest rate formula described in paragraph (i) of Example 4. In order 
to comply with section 411(d)(6), the plan provides that, for each 
participant or beneficiary who was a participant on December 31, 2015, 
benefits at any date are based on either the ongoing hypothetical 
account balance on that date (which is based on the December 31, 2015 
balance, with interest credited thereafter at the rate described in the 
first sentence of paragraph (i) of Example 4 and taking principal 
credits after 2015 into account) or a special hypothetical account 
balance (the pre-2016 balance) on that date, whichever balance is 
greater. For each participant, the pre-2016 balance is a hypothetical 
account balance equal to the participant's December 31, 2015 balance, 
with interest credited thereafter at the RIC rate of return, but with no 
principal credits after 2015. There are 10 participants for whom the 
pre-2016 balance exceeds the ongoing hypothetical account balance at the 
end of 2017 (which is the end of the last interest crediting period that 
ends on or before the January 27, 2018, plan termination date).
    (ii) Conclusion. Because Plan B credited interest prior to 2016 
using the rate of return on a RIC (a rate described in paragraph (d)(5) 
of this section), for purposes of determining the average interest 
crediting rate upon plan termination, the interest crediting rate used 
to determine accrued benefits under Plan B for all participants during 
those periods (for the calendar years 2013, 2014, and 2015) is equal to 
the second segment rate for December of the calendar year preceding each 
interest crediting period. In addition, because the pre-2016 balances 
exceeded the ongoing hypothetical account balance for 10 participants in 
the last interest crediting period prior to plan termination, for 
purposes of determining the average interest crediting rate upon plan 
termination, the interest crediting rate used to determine accrued 
benefits under Plan B for 2016 and 2017 for those participants is equal 
to the second segment rate for December 2015 and December 2016, 
respectively. For all other participants, for purposes of determining 
the average interest crediting rate upon plan termination, the interest 
crediting rate used to determine accrued benefits under Plan B for 2016 
and 2017 is based on the ongoing interest crediting rate (as described 
in Example 4).

    (3) Rules relating to section 411(d)(6)--(i) General rule. The right 
to future interest credits determined in the manner specified under the 
plan and not conditioned on future service is a factor that is used to 
determine the participant's accrued benefit, for purposes of section 
411(d)(6). Thus, to the extent that benefits have accrued under the 
terms of a statutory hybrid plan that entitle the participant to future 
interest credits, an amendment to the plan to change the interest 
crediting rate must satisfy section 411(d)(6) if the revised rate under 
any circumstances could result in interest credits that are smaller as 
of any date after the applicable amendment date (within the meaning of 
Sec.  1.411(d)-3(g)(4)) than the interest credits that would be provided 
without regard to the amendment. For

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additional rules, see Sec.  1.411(d)-3(b). Paragraphs (e)(3)(ii) through 
(e)(3)(vi) of this section set forth special rules that apply regarding 
the interaction of section 411(d)(6) and changes to a plan's interest 
crediting rate. The Commissioner may, in guidance of general 
applicability, prescribe additional rules regarding the interaction of 
section 411(d)(6) and section 411(b)(5), including changes to a plan's 
interest crediting rate. See Sec.  601.601(d)(2)(ii)(b).
    (ii) Adoption of long-term investment grade corporate bond rate. For 
purposes of applying section 411(d)(6) and this paragraph (e) to an 
amendment to change to the interest crediting rate described in 
paragraph (d)(3) of this section, a plan is not treated as providing 
interest credits that are smaller as of any date after the applicable 
amendment date than the interest credits that would be provided using an 
interest crediting rate described in paragraph (d)(4) of this section 
merely because the plan credits interest after the applicable amendment 
date using the interest crediting rate described in paragraph (d)(3) of 
this section, provided--
    (A) The amendment only applies to interest credits to be credited 
after the effective date of the amendment;
    (B) The effective date of the amendment is at least 30 days after 
adoption of the amendment;
    (C) On the effective date of the amendment, the new interest 
crediting rate is not lower than the interest crediting rate that would 
have applied in the absence of the amendment; and
    (D) For plan years described in paragraph (f)(2)(i)(B)(1) or 
(f)(2)(i)(B)(3) of this section (as applicable), if prior to the 
amendment the plan used a fixed annual floor in connection with a rate 
described in paragraph (d)(4)(ii), (iii) or (iv) of this section (as 
permitted under paragraph (d)(6)(ii) of this section), the floor is 
retained after the amendment to the maximum extent permissible under 
paragraph (d)(6)(ii)(A) of this section.
    (iii) Coordination of section 411(d)(6) and market rate of return 
limitation--(A) In general. An amendment to a statutory hybrid plan that 
preserves a section 411(d)(6) protected benefit is subject to the rules 
under paragraph (d) of this section relating to market rate of return. 
However, in the case of an amendment to change a plan's interest 
crediting rate for periods after the applicable amendment date from one 
interest crediting rate (the old rate) that satisfies the requirements 
of paragraph (d) of this section to another interest crediting rate (the 
new rate) that satisfies the requirements of paragraph (d) of this 
section, the plan's effective interest crediting rate is not in excess 
of a market rate of return for purposes of paragraph (d) of this section 
merely because the plan provides for the benefit of any participant who 
is benefiting under the plan (within the meaning of Sec.  1.410(b)-3(a)) 
on the applicable amendment date to never be less than what it would be 
if the old rate had continued but without taking into account any 
principal credits (as defined in paragraph (d)(1)(ii)(D) of this 
section) after the applicable amendment date.
    (B) Multiple amendments. A pattern of repeated plan amendments each 
of which provides for a prospective change in the plan's interest 
crediting rate with respect to the benefit as of the applicable 
amendment date will be treated as resulting in the ongoing plan terms 
providing for an effective interest crediting rate that is in excess of 
a market rate of return. See Sec.  1.411(d)-4, A-1(c)(1).
    (iv) Change in lookback month or stability period used to determine 
interest credits--(A) Section 411(d)(6) anti-cutback relief. With 
respect to a plan using an interest crediting rate described in 
paragraph (d)(3) or (d)(4) of this section, notwithstanding the general 
rule of paragraph (e)(3)(i) of this section, if a plan amendment changes 
the lookback month or stability period used to determine interest 
credits, the amendment is not treated as reducing accrued benefits in 
violation of section 411(d)(6) merely on account of this change if the 
conditions of this paragraph (e)(3)(iv)(A) are satisfied. If the plan 
amendment is effective on or after the adoption date, any interest 
credits credited for the one-year period commencing on the date the 
amendment is effective must be determined using the lookback month and 
stability period provided under the plan before the amendment or the 
lookback month and

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stability period after the amendment, whichever results in the larger 
interest credits. If the plan amendment is adopted retroactively (that 
is, the amendment is effective prior to the adoption date), the plan 
must use the lookback month and stability period resulting in the larger 
interest credits for the period beginning with the effective date and 
ending one year after the adoption date.
    (B) Section 411(b)(5)(B)(i)(I) market rate of return relief. The 
plan's effective interest crediting rate is not in excess of a market 
rate of return for purposes of paragraph (d) of this section merely 
because a plan amendment complies with the requirements of paragraph 
(e)(3)(iv)(A) of this section. However, a pattern of repeated plan 
amendments each of which provides for a change in the lookback month or 
stability period used to determine interest credits will be treated as 
resulting in the ongoing plan terms providing for an effective interest 
crediting rate that is in excess of a market rate of return. See Sec.  
1.411(d)-4, A-1(c)(1).
    (v) RIC ceasing to exist. This paragraph (e)(3)(v) applies in the 
case of a statutory hybrid plan that credits interest using an interest 
crediting rate equal to the rate of return on a RIC (pursuant to 
paragraph (d)(5)(iv) of this section) that ceases to exist, whether as a 
result of a name change, liquidation, or otherwise. In such a case, the 
plan is not treated as violating section 411(d)(6) provided that the 
rate of return on the successor RIC is substituted for the rate of 
return on the RIC that no longer exists, for purposes of crediting 
interest for periods after the date the RIC ceased to exist. In the case 
of a name change or merger of RICs, the successor RIC means the RIC that 
results from the name change or merger involving the RIC that no longer 
exists. In all other cases, the successor RIC is a RIC selected by the 
plan sponsor that has reasonably similar characteristics, including 
characteristics related to risk and rate of return, as the RIC that no 
longer exists.
    (vi) Transitional amendments needed to satisfy the market rate of 
return rules--(A) In general. Notwithstanding the requirements of 
section 411(d)(6), if the requirements set forth in this paragraph 
(e)(3)(vi) are satisfied, a plan may be amended to change its interest 
crediting rate with respect to benefits that have already accrued in 
order to comply with the requirements of section 411(b)(5)(B)(i) and 
paragraph (d) of this section. A plan amendment is eligible for the 
treatment provided under this paragraph (e)(3)(vi)(A) to the extent that 
the amendment modifies an interest crediting rate that does not satisfy 
the requirements of section 411(b)(5)(B)(i) and paragraph (d) of this 
section in the manner specified in paragraph (e)(3)(vi)(C) of this 
section.
    (B) Rules of application--(1) Multiple noncompliant features. If a 
plan's interest crediting rate has more than one noncompliant feature as 
described in paragraph (e)(3)(vi)(C) of this section, then each 
noncompliant feature must be addressed separately in the manner 
specified in paragraph (e)(3)(vi)(C) of this section.
    (2) Definition of investment-based rate. The application of the 
rules of paragraph (e)(3)(vi)(C) of this section to an interest 
crediting rate depends on whether the interest crediting rate is an 
investment-based rate. For purposes of this paragraph (e)(3)(vi), an 
investment-based rate is a rate based on either a rate of return 
provided by actual investments (taking into account the return 
attributable to any change in the value of the underlying investments) 
or a rate of return for an index that measures the change in the value 
of investments. A rate is an investment-based rate even if it is based 
only in part on a rate described in the preceding sentence.
    (3) Timing rules for permitted amendments. The rules under this 
paragraph (e)(3)(vi) apply only to a plan amendment that is adopted 
prior to and effective no later than the first day of the first plan 
year described in paragraph (f)(2)(i)(B)(1) or (f)(2)(i)(B)(3) of this 
section, as applicable. In addition, the rules under this paragraph 
(e)(3)(vi) apply to a plan amendment only with respect to interest 
credits that are credited for interest crediting periods that begin on 
or after the applicable amendment date (within the meaning of Sec.  
1.411(d)-3(g)(4)).
    (4) Amendments that provide for greater interest crediting rates. If 
a plan is

[[Page 125]]

amended in accordance with paragraphs (e)(3)(vi)(C)(1) through (10) of 
this section to switch from a noncompliant rate to a compliant rate and 
is subsequently amended to switch to a second compliant rate that can 
never be less than the first compliant rate, then the second amendment 
does not violate section 411(d)(6). If, instead, the plan is amended to 
switch from the noncompliant rate to the second compliant rate in a 
single amendment, that amendment also does not violate section 
411(d)(6). For example, if it is permitted under paragraph (e)(3)(vi)(C) 
of this section to first amend the plan to credit interest using the 
lesser of the current rate and a rate described in paragraph (d)(3) of 
this section, it is then permissible to amend the plan to credit 
interest using that rate described in paragraph (d)(3) of this section. 
In such a case, it is also permissible to amend the plan to switch from 
the current rate to a rate described in paragraph (d)(3) of this section 
in a single amendment.
    (5) Cumulative floors, including floors resulting from a prior 
change in rates with section 411(d)(6) protection. This paragraph 
(e)(3)(vi)(B)(5) applies to a plan that takes into account a minimum 
rate of return that applies less frequently than annually. This 
paragraph (e)(3)(vi)(B)(5) also applies to a plan that determines the 
participant's benefit as of the annuity starting date as the benefit 
provided by the greatest of two or more account balances (for example, 
in order to comply with section 411(d)(6) in connection with a prior 
amendment to change the plan's interest crediting rate). In either case, 
this paragraph (e)(3)(vi)(B)(5) applies with respect to a participant 
only if the requirements of paragraph (d)(6) of this section are not 
satisfied with respect to that participant. If this paragraph 
(e)(3)(vi)(B)(5) applies with respect to a participant, the plan must be 
amended to provide that the benefit for the participant is based solely 
on the benefit (and the associated interest crediting rate with respect 
to that benefit) that is greatest for that participant as of the 
applicable amendment date for the amendment made pursuant to this 
paragraph (e)(3)(vi). In addition, the plan must be further amended 
pursuant to the other rules in this paragraph (e)(3)(vi) if the 
remaining interest crediting rate does not satisfy the requirements of 
paragraph (d) of this section.
    (6) Plans that permit participant direction of interest crediting 
rates. This paragraph (e)(3)(vi)(B)(6) applies in the case in which a 
plan permits a participant to choose an interest crediting rate from 
among a menu of hypothetical investment options and at least one of 
those hypothetical investment options provides for an interest crediting 
rate that is not permitted under paragraph (d) of this section (so that 
the plan fails to satisfy the requirements of paragraph (d) of this 
section). In such a case, the rules of this paragraph (e)(3)(vi) may be 
applied separately to correct each impermissible investment option. 
Alternatively, with respect to such a plan that permitted a participant 
to choose an interest crediting rate from among a menu of hypothetical 
investment options on September 18, 2014, pursuant to plan provisions 
that were adopted on or before September 18, 2014, the entire menu of 
investment options may be treated as an impermissible investment-based 
rate for which there is no permitted investment-based rate with similar 
risk and return characteristics (so that the rule of paragraph 
(e)(3)(vi)(C)(7) of this section does not apply). As a result, plans 
described in the preceding sentence may be amended to eliminate a 
participant's ability to choose an interest crediting rate from among a 
menu of hypothetical investment options in accordance with paragraph 
(e)(3)(vi)(C)(9) of this section.
    (C) Noncompliant feature and amendment to bring plan into 
compliance--(1) Timing or other rules related to determining interest 
credits not satisfied. If a plan has an underlying interest rate that 
generally satisfies the rules of paragraph (d) of this section but that 
does not satisfy the rules relating to how interest credits are 
determined and credited as set forth in paragraph (d)(1)(iv) of this 
section, then the plan must be amended either--
    (i) To correct the aspect of the plan's interest crediting rate that 
fails to comply with the rules of paragraph (d)(1)(iv) of this section 
with respect to

[[Page 126]]

its underlying interest crediting rate; or
    (ii) If the plan's interest crediting rate is a variable rate that 
is not an investment-based rate of return, to provide that the plan's 
interest crediting rate is the lesser of that variable rate and a rate 
described in paragraph (d)(3) of this section that satisfies the rules 
of paragraph (d)(1)(iv) of this section.
    (2) Fixed rate in excess of 6 percent. If a plan's interest 
crediting rate is a fixed rate in excess of the rate described in 
paragraph (d)(4)(v) of this section, then the plan must be amended to 
reduce the interest crediting rate to an annual interest crediting rate 
of 6 percent.
    (3) Bond-based rate with margin exceeding maximum permitted margin. 
If a plan's interest crediting rate is a noncompliant rate that consists 
of an underlying rate described in paragraph (d)(3) or (d)(4) of this 
section except that the plan applies a margin that exceeds the maximum 
permitted margin under paragraph (d)(3) or (d)(4) of this section to the 
underlying rate, then the plan must be amended either--
    (i) To reduce the margin to the maximum permitted margin for the 
underlying rate used by the plan; or
    (ii) To provide that the plan's interest crediting rate is the 
lesser of the plan's noncompliant rate and a rate described in paragraph 
(d)(3) of this section (together with any fixed minimum rate that was 
part of the noncompliant rate, reduced to the extent necessary to comply 
with paragraph (d)(6)(ii) of this section).
    (4) Bond-based rate with fixed minimum rate applied on an annual or 
more frequent basis in excess of the highest permitted fixed minimum 
rate. If a plan's interest crediting rate is a composite rate that 
consists of a variable rate described in paragraph (d)(3) or (d)(4) of 
this section in combination with a fixed minimum rate in excess of the 
highest permitted fixed minimum rate under paragraph (d)(6)(ii)(A)(2) or 
(B)(2) of this section (as applicable), then the plan must be amended in 
one of the following manners:
    (i) To reduce the fixed minimum rate to the highest permitted fixed 
minimum rate that may be used in combination with the plan's variable 
rate;
    (ii) To credit interest using an annual interest crediting rate of 6 
percent; or
    (iii) To provide that the plan's interest crediting rate is the 
lesser of the plan's noncompliant composite rate and a rate described in 
paragraph (d)(3) of this section (together with a fixed minimum rate of 
4 percent).
    (5) Greatest of two or more variable bond-based rates. If a plan's 
interest crediting rate is a composite rate that is the greatest of two 
or more variable rates described in paragraph (d)(3) or (d)(4) of this 
section, then the plan must be amended to provide for an interest 
crediting rate that is the lesser of the composite rate and a rate 
described in paragraph (d)(3) of this section.
    (6) Other impermissible bond-based rates. If, after application of 
the rules of paragraphs (e)(3)(vi)(C)(1) through (5) of this section, a 
plan's interest crediting rate is a variable rate that is not an 
investment-based rate of return and is not described in paragraph (d)(3) 
or (d)(4) of this section, then the plan must be amended either--
    (i) To provide for an interest crediting rate based on a variable 
rate described in paragraph (d)(3) or (d)(4) of this section that has 
similar duration and quality characteristics as the plan's variable 
rate, if such a rate can be selected; or
    (ii) To provide for an interest crediting rate that is the lesser of 
the plan's variable rate and a rate described in paragraph (d)(3) of 
this section.
    (7) Impermissible investment-based rate that can be replaced with a 
permissible rate that has similar risk and return characteristics. If a 
plan's interest crediting rate is an investment-based rate of return 
that is not described in paragraph (d)(5) of this section and a 
permitted investment-based rate described in paragraph (d)(5)(ii)(A), 
(d)(5)(ii)(B), or (d)(5)(iv) of this section that has similar risk and 
return characteristics as the plan's impermissible investment-based rate 
can be selected, then the plan must be amended to provide for an 
interest crediting rate based on such a permitted investment-based rate.
    (8) Investment-based rate with an annual or more frequent minimum 
rate that is either a fixed rate or a non-investment

[[Page 127]]

based variable rate. If a plan's interest crediting rate is an 
investment-based rate of return that would be described in paragraph 
(d)(5) of this section except that the plan uses an annual or more 
frequent minimum rate that is either a fixed rate or a non-investment 
based variable rate in conjunction with the investment-based rate, then 
the plan must be amended either--
    (i) To credit interest using that investment-based rate of return 
described in paragraph (d)(5) of this section without the minimum rate 
and eliminating any reduction (or other adjustment) to the investment-
based rate; or
    (ii) To provide that the plan's interest crediting rate is a rate 
described in paragraph (d)(3) of this section (together with any fixed 
minimum rate, reduced to the extent necessary to comply with paragraph 
(d)(6)(ii) of this section).
    (9) Other impermissible investment-based rates. If, after 
application of the rules of paragraphs (e)(3)(vi)(C)(1), (7), and (8) of 
this section, a plan's interest crediting rate is an investment-based 
rate that is not described in paragraph (d)(5) of this section, then the 
plan must be amended either--
    (i) To provide for an interest crediting rate that is an investment-
based rate that is described in paragraph (d)(5) of this section and 
that is otherwise similar to the plan's impermissible investment-based 
rate but without the risk and return characteristics of the 
impermissible investment-based rate that caused it to be impermissible 
(generally requiring the use of a rate that is less volatile than the 
plan's impermissible investment-based rate but is otherwise similar to 
that rate); or
    (ii) To provide that the plan's interest crediting rate is a rate 
described in paragraph (d)(3) of this section with a fixed minimum rate 
of 4 percent.
    (D) Examples. The following examples illustrate the application of 
the rules of this paragraph (e)(3)(vi). Each plan has a plan year that 
is the calendar year, and all amendments are adopted on October 1, 2016, 
and become effective for interest crediting periods beginning on or 
after January 1, 2017. Except as otherwise provided, the interest 
crediting rate under the plan satisfies the timing and other rules 
related to crediting interest under paragraph (d)(1)(iv) of this 
section.

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

[[Page 128]]

December of the preceding plan year with a minimum rate of 5 percent per 
year. Alternatively, the new interest crediting rate under the plan may 
be an annual interest crediting rate of 6 percent. As another 
alternative, the existing noncompliant composite rate may be capped so 
that it cannot exceed a third segment rate described in paragraph (d)(3) 
of this section, with a minimum rate of 4 percent as a floor on the 
entire resulting rate.
    Example 5. (i) Facts. A plan credits interest using the greater of 
the unadjusted yield on 30-year Treasury Constant Maturities and the 
yield on 1-year Treasury Constant Maturities plus 100 basis points.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(5) of this 
section, the plan must be amended to cap the existing composite 
``greater-of'' rate so that the composite rate cannot exceed a third 
segment rate described in paragraph (d)(3) of this section.
    Example 6. (i) Facts. A plan credits interest using a broad-based 
index that measures the yield to maturity on a group of intermediate-
term investment grade corporate bonds.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(6) of this 
section, the plan must be amended in one of two manners. The plan may be 
amended to credit interest using a second segment rate described in 
paragraph (d)(4)(iv) of this section. Alternatively, the plan may be 
amended to cap the existing rate so that it cannot exceed a third 
segment rate described in paragraph (d)(3) of this section.
    Example 7. (i) Facts. A plan credits interest using the rate of 
return for a broad-based index that measures the yield to maturity on a 
group of short-term non-investment grade corporate bonds.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(6)(ii) of this 
section, the plan must be amended to cap the existing rate so that it 
cannot exceed a third segment rate described in paragraph (d)(3) of this 
section.
    Example 8. (i) Facts. A plan credits interest using the rate of 
return for the S&P 500 index. To bring the plan into compliance with the 
market rate of return rules, the plan sponsor amends the plan to credit 
interest based on the rate of return on a RIC that is designed to track 
the rate of return on the S&P 500 index.
    (ii) Conclusion. The amendment satisfies the rule of paragraph 
(e)(3)(vi)(C)(7) of this section.
    Example 9. (i) Facts. A plan credits interest based on the rate of 
return on a collective trust that holds a portfolio of equity 
investments, which provides a rate of return that is reasonably expected 
to be not significantly more volatile than the broad U.S. equities 
market or a similarly broad international equities market. To bring the 
plan into compliance with the market rate of return rules, the plan 
sponsor amends the plan to credit interest based on the actual rate of 
return on the assets within a specified subset of the plan's assets that 
is invested in the collective trust and that satisfies the requirements 
of paragraph (d)(5)(ii)(B) of this section.
    (ii) Conclusion. The amendment satisfies the rule of paragraph 
(e)(3)(vi)(C)(7) of this section.
    Example 10. (i) Facts. A plan credits interest for a plan year using 
the rate of return on a RIC that has most of its investments 
concentrated in the semiconductor industry.
    (ii) Conclusion. Pursuant to paragraph (e)(3)(vi)(C)(9) of this 
section, the plan must be amended in one of two manners. The plan may be 
amended to provide for an interest crediting rate that is an investment-
based rate that is described in paragraph (d)(5) of this section and 
that is similar to the plan's impermissible investment-based rate except 
to the extent that the risk and return characteristics of the 
impermissible investment-based rate caused it to be impermissible. Thus, 
the plan may be amended to provide for an interest crediting rate based 
on the rate of return on a RIC that is invested in a broader sector of 
the market than the semiconductor industry (such as the overall 
technology sector of the market), provided that the sector in which the 
RIC is invested is broad enough that the volatility requirements of 
paragraph (d)(5)(iv) of this section are satisfied. Alternatively, the 
plan may be amended to provide that the plan's interest crediting rate 
is a third segment rate described in paragraph (d)(3) of this section 
with a fixed minimum rate of 4 percent.
    Example 11. (i) Facts. A plan was amended in 2014 to change its 
interest crediting rate for all interest crediting periods after the 
applicable amendment date of the amendment. The amendment changed the 
rate from the yield on 30-year Treasury Constant Maturities to the rate 
of return on aggregate plan assets under paragraph (d)(5)(ii)(A) of this 
section. The amendment also provided for section 411(d)(6) protection 
with respect to the account balance as of the applicable amendment date 
(by providing that the account balance after the applicable amendment 
date will never be smaller than the account balance as of the applicable 
amendment date credited with interest using the yield on 30-year 
Treasury Constant Maturities).
    (ii) Conclusions. (A) Participants benefiting under the plan. With 
respect to those participants who were benefiting under the plan as of 
the applicable amendment date of the amendment described in paragraph 
(i) of this Example 11, the requirements of paragraph (e)(3)(iii) of 
this section (which provides a special market rate of return rule to 
permit

[[Page 129]]

certain changes in rates for participants benefiting under the plan) are 
satisfied. Accordingly, no amendment is required under this paragraph 
(e)(3)(vi) with respect to those participants.
    (B) Participants not benefiting under the plan. With respect to 
those participants who were not benefiting under the plan as of the 
applicable amendment date of the amendment described in paragraph (i) of 
this Example 11, the requirements of paragraph (e)(3)(iii) of this 
section are not satisfied and, accordingly, the ``greater-of'' rate 
resulting from the section 411(d)(6) protection does not satisfy the 
requirements of paragraph (d)(6) of this section. As a result, pursuant 
to paragraph (e)(3)(vi)(B)(5) of this section, it must be determined on 
a participant-by-participant basis which account balance provides the 
benefit that is greater as of the applicable amendment date for the 
amendment made pursuant to this paragraph (e)(3)(iv) (the transitional 
amendment). If, as of the applicable amendment date for the transitional 
amendment, the account balance credited with interest after the change 
in rates using the yield on 30-year Treasury Constant Maturities is 
greater, then the plan must be amended to provide that the participant's 
benefit is based solely on that account balance credited with interest 
using the yield on 30-year Treasury Constant Maturities. On the other 
hand, if, as of the applicable amendment date for the transitional 
amendment, the account balance using the rate of return on aggregate 
plan assets is greater, then the plan must be amended to provide that 
the participant's benefit is based solely on that account balance 
credited with interest at the rate of return on aggregate plan assets.

    (vii) Plan termination amendments. A plan amendment with an 
applicable amendment date on or before the first day of the first plan 
year described in paragraph (f)(2)(i)(B)(1) or (3) of this section (as 
applicable) is not treated as reducing accrued benefits in violation of 
section 411(d)(6) merely because the amendment changes the rules that 
apply upon plan termination in order to satisfy the requirements of 
paragraph (e)(2) of this section.
    (4) Actuarial increases after normal retirement age. A statutory 
hybrid plan is not treated as providing an effective interest crediting 
rate that is in excess of a market rate of return for purposes of 
paragraph (d) of this section merely because the plan provides that the 
participant's benefit, as of each annuity starting date after normal 
retirement age, is equal to the greater of--
    (i) The benefit based on the accumulated benefit determined using an 
interest crediting rate that is not in excess of a market rate of return 
under paragraph (d) of this section; and
    (ii) The benefit that satisfies the requirements of section 
411(a)(2).
    (5) Plans that permit participant direction of interest crediting 
rates. [Reserved]
    (f) Effective/applicability date--(1) Statutory effective/
applicability dates--(i) In general. Except as provided in paragraph 
(f)(1)(iii) of this section, section 411(b)(5) applies for periods 
beginning on or after June 29, 2005.
    (ii) Conversion amendments. The requirements of section 
411(b)(5)(B)(ii), 411(b)(5)(B)(iii), and 411(b)(5)(B)(iv) apply to a 
conversion amendment (as defined in paragraph (c)(4) of this section) 
that both is adopted on or after June 29, 2005, and takes effect on or 
after June 29, 2005.
    (iii) Market rate of return--(A) Plans in existence on June 29, 
2005--(1) In general. In the case of a plan that was in existence on 
June 29, 2005 (regardless of whether the plan was a statutory hybrid 
plan on that date), section 411(b)(5)(B)(i) applies to plan years that 
begin on or after January 1, 2008.
    (2) Exception for plan sponsor election. Notwithstanding paragraph 
(f)(1)(iii)(A)(1) of this section, a plan sponsor of a plan that was in 
existence on June 29, 2005 (regardless of whether the plan was a 
statutory hybrid plan on that date) may elect to have the requirements 
of section 411(a)(13)(B) and section 411(b)(5)(B)(i) apply for any 
period on or after June 29, 2005, and before the first plan year 
beginning after December 31, 2007. In accordance with section 1107 of 
the PPA '06, an employer is permitted to adopt an amendment to make this 
election as late as the last day of the first plan year that begins on 
or after January 1, 2009 (January 1, 2011, in the case of a governmental 
plan as defined in section 414(d)) if the plan operates in accordance 
with the election.
    (B) Plans not in existence on June 29, 2005. In the case of a plan 
not in existence on June 29, 2005, section 411(b)(5)(B)(i) applies to 
the plan on and after the later of June 29, 2005, and the date the plan 
becomes a statutory hybrid plan.

[[Page 130]]

    (iv) Collectively bargained plans--(A) In general. Notwithstanding 
paragraph (f)(1)(iii) of this section, in the case of a collectively 
bargained plan maintained pursuant to one or more collective bargaining 
agreements between employee representatives and one or more employers 
ratified on or before August 17, 2006, the requirements of section 
411(b)(5)(B)(i) do not apply to plan years that begin before the earlier 
of--
    (1) The later of--
    (i) The date on which the last of those collective bargaining 
agreements terminates (determined without regard to any extension 
thereof on or after August 17, 2006); or
    (ii) January 1, 2008; or
    (2) January 1, 2010.
    (B) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to 
which a collective bargaining agreement applies to some, but not all, of 
the plan participants, the plan is considered a collectively bargained 
plan for purposes of this paragraph (f)(1)(iv) if it is considered a 
collectively bargained plan under the rules of Sec.  1.436-
1(a)(5)(ii)(B).
    (2) Effective/applicability date of regulations--(i) In general--(A) 
General effective date. Except as provided in paragraph (f)(2)(i)(B) of 
this section, this section applies to plan years that begin on or after 
January 1, 2011.
    (B) Special effective date--(1) In general. Except as otherwise 
provided in this paragraph (f)(2)(i)(B), paragraphs (d)(1)(iii), 
(d)(1)(iv)(D) and (E), (d)(1)(vi), (d)(2)(ii) and (v), (d)(5)(ii)(B), 
(d)(5)(iv), (d)(6), (e)(2), (e)(3)(iii), (iv) and (v), and (e)(4) of 
this section apply to plan years that begin on or after January 1, 2017 
(or an earlier date as elected by the taxpayer).
    (2) Transitional amendments. Paragraphs (e)(3)(vi) and (vii) of this 
section apply to plan amendments made on or after September 18, 2014 (or 
an earlier date as elected by the taxpayer).
    (3) Collectively bargained plans. In the case of a plan maintained 
pursuant to one or more collective bargaining agreements between 
employee representatives and one or more employers ratified on or before 
November 13, 2015, that constitutes a collectively bargained plan under 
the rules of Sec.  1.436-1(a)(5)(ii)(B), the paragraphs referenced in 
paragraph (f)(2)(i)(B)(1) of this section apply to plan years that begin 
on or after the later of--
    (i) January 1, 2017; and
    (ii) The earlier of January 1, 2019; and the date on which the last 
of those collective bargaining agreements terminates (determined without 
regard to any extension thereof on or after November 13, 2015).
    (ii) Conversion amendments. With respect to a conversion amendment 
(within the meaning of paragraph (c)(4) of this section), where the 
effective date of the conversion amendment (as defined in paragraph 
(c)(4)(vi) of this section) is on or after the statutory effective date 
set forth in paragraph (f)(1)(ii) of this section, the requirements of 
paragraph (c)(2) of this section apply only to a participant who has an 
hour of service on or after the regulatory effective date set forth in 
paragraph (f)(2)(i) of this section.
    (iii) Reliance before regulatory effective date. For the periods 
after the statutory effective date set forth in paragraph (f)(1) of this 
section and before the regulatory effective date set forth in paragraph 
(f)(2)(i) of this section, the safe harbor and other relief of section 
411(b)(5) apply and the market rate of return and other requirements of 
section 411(b)(5) must be satisfied. During these periods, a plan is 
permitted to rely on the provisions of this section for purposes of 
applying the relief and satisfying the requirements of section 
411(b)(5).

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



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

    (a) Accrued benefit derived from employer contributions. For 
purposes of section 411 and the regulations thereunder, under section 
411(c)(1), an employee's accrued benefit derived from employer 
contributions under a plan as of any applicable date is the excess, if 
any, of--

[[Page 131]]

    (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

[[Page 132]]

    (iii) Interest on the sum of the amounts determined under paragraphs 
(c)(3)(i) and (ii) of this section compounded annually at the rate of 5 
percent per annum from the beginning of the first plan year to which 
section 411(a)(2) applies (by reason of the applicable effective date) 
to the date on which the employee would attain normal retirement age.

For example, if under section 1017 of the Employee Retirement Income 
Security Act of 1974, section 411(a)(2) of the Code applies for plan 
years beginning after December 31, 1975, and for plan years beginning 
before 1975, the plan provided for 3 percent interest on employee 
contributions, an employee's accumulated contributions would be computed 
by crediting interest at the rate provided by the plan (3 percent) for 
plan years beginning before 1976 and by crediting interest at the rate 
of 5 percent (or another rate prescribed under section 411(c)(2)(D)) 
thereafter. Section 1017 of the Employee Retirement Income Security Act 
of 1974 and Sec.  1.411(a)-2 provide the effective dates for the 
application of section 411(a)(2).
    (4) Mandatory contributions. For purposes of section 411(c) and this 
section the term ``mandatory contributions'' means amounts contributed 
to the plan by the employee which are required as a condition of his 
employment, as a condition of his participation in the plan, or as a 
condition of obtaining benefits (or additional benefits) under the plan 
attributable to employer contributions. For example, if the benefit 
derived from employer contributions depends upon a specified level of 
employee contributions, employee contributions up to that level would be 
treated as mandatory contributions. Mandatory contributions, otherwise 
satisfying the requirements of this subparagraph, include amounts 
contributed to the plan which are used to provide ancillary benefits 
such as incidental life insurance, health insurance, or death benefits.
    (d) Limitation on accrued benefit. The accrued benefit derived from 
mandatory employee contributions under a defined benefit plan 
(determined under paragraph (c) of this section) shall not exceed the 
greater of--
    (1) The accrued benefit of the employee under the plan, or
    (2) The accrued benefit derived from employee contributions 
determined without regard to any interest under section 411(c)(2)(C) 
(ii) and (iii) and under paragraphs (c)(3) (ii) and (iii) of this 
section.
    (e) Actuarial adjustments for defined benefit plans--(1) Accrued 
benefit. In the case of a defined benefit plan (as defined in section 
414(j)) if an employee's accrued benefit is to be determined as an 
amount other than an annual benefit commencing at normal retirement age, 
such benefit (determined under section 411(c)(1) and paragraph (a) of 
this section) shall be the actuarial 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]

[[Page 133]]



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



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

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

the rights of each affected employee to benefits accrued to the date of 
such termination or partial termination (or, in the case of a plan to 
which section 412 does not apply, discontinuance), to the extent funded, 
or the rights of each employee to the amounts credited to his account at 
such time, are nonforfeitable (within the meaning of Sec.  1.411(a)-4.
    (2) Required allocation. (i) A plan is not a qualified plan (and a 
trust forming a part of such plan is not a qualified trust) unless the 
plan provides for the allocation of any previously unallocated funds to 
the employes covered by the plan upon the termination or partial 
termination of the plan (or, in the case of a plan to which section 412 
does not apply, upon the complete discontinuance of contributions under 
the plan). Such provision may be incorporated in the plan at its 
inception or by an amendment made prior to the termination or partial 
termination of the plan for the discontinuance of contributions 
thereunder. In the case of a defined contribution plan under which 
unallocated forfeitures are held in a suspense account in order to 
satisfy the requirements of section 415, this subdivision shall not 
require such plan to provide for allocations from the suspense account 
to the extent that such allocations would result in annual additions to 
participants' accounts in excess of amounts permitted under section 415 
for the year for which such allocations would be made.
    (ii) Any provision for the allocation of unallocated funds which is 
found by the Secretary of Labor or the Pension Benefit Guaranty 
Corporation (whichever is appropriate) to satisfy the requirements of 
section 4044 or section 403(d)(1) of the Employee Retirement Income 
Security Act of 1974 is acceptable if it specifies the method to be used 
and does not conflict with the provisions of section 401(a)(4) of the 
Internal Revenue Code of 1954 and the regulations thereunder. Any 
allocation of funds required by paragraph (1), (2), (3), or (4)(A) of 
section 4044(a) of such Act shall be deemed not to result in 
discrimination prohibited by section 401(a)(4) of the Code (see, 
however, paragraph (e) of this section). Notwithstanding the preceding 
sentence, in the 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

[[Page 134]]

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

[[Page 135]]

be required to be reallocated without regard to this section.

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

[T.D. 7501, 42 FR 42339, Aug. 23, 1977; T.D. 9849, 84 FR 9234, Mar. 14, 
2019]



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

    (a) Protection of accrued benefits--(1) General rule. Under section 
411(d)(6)(A), a plan is not a qualified plan (and a trust forming a part 
of such plan is not a qualified trust) if a plan amendment decreases the 
accrued benefit of any plan participant, except as provided in section 
412(d)(2) (section 412(c)(8) for plan years beginning before January 1, 
2008), section 4281 of the Employee Retirement Income Security Act of 
1974 as amended (ERISA), or other applicable law (see, for example, 
sections 418D and 418E of the Internal Revenue Code, and section 1107 of 
the Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780, 
1063)). For purposes of this section, a plan amendment includes any 
changes to the terms of a plan, including changes resulting from a 
merger, consolidation, or transfer (as defined in section 414(l)) or a 
plan termination. The protection of section 411(d)(6) applies to a 
participant's entire accrued benefit under the plan as of the applicable 
amendment date, without regard to whether the entire accrued benefit was 
accrued before a participant's severance from employment or whether any 
portion was the result of an increase in the accrued benefit of the 
participant pursuant to a plan amendment adopted after the participant's 
severance from employment.
    (2) Plan provisions taken into account--(i) Direct or indirect 
reduction in accrued benefit. For purposes of determining whether a 
participant's accrued benefit is decreased, all of the amendments to the 
provisions of a plan affecting, directly or indirectly, the computation 
of accrued benefits are taken into account. Plan provisions indirectly 
affecting the computation of accrued benefits include, for example, 
provisions relating to years of service and compensation.
    (ii) Amendments effective with the same applicable amendment date. 
In determining whether a reduction in a participant's accrued benefit 
has occurred, all plan amendments with the same applicable amendment 
date are treated as one amendment. Thus, if two amendments have the same 
applicable amendment date and one amendment, standing alone, increases 
participants' accrued benefits and the other amendment, standing alone, 
decreases participants' accrued benefits, the amendments are treated as 
one amendment and will only violate section 411(d)(6) if, for any 
participant, the net effect is to decrease participants' accrued benefit 
as of that applicable amendment date.
    (iii) Multiple amendments--(A) General rule. A plan amendment 
violates the requirements of section 411(d)(6) if it is one of a series 
of plan amendments that, when taken together, have the effect of 
reducing or eliminating a section 411(d)(6) protected benefit in a 
manner that would be prohibited by section 411(d)(6) if accomplished 
through a single amendment.
    (B) Determination of the time period for combining plan amendments. 
For purposes of applying the rule in paragraph (a)(2)(iii)(A) of this 
section, generally only plan amendments adopted within a 3-year period 
are taken into account.
    (3) Application of section 411(a) nonforfeitability provisions with 
respect to section 411(d)(6) protected benefits--(i) In general. The 
rules of this paragraph (a) apply to a plan amendment that decreases a 
participant's accrued benefits, or otherwise places greater restrictions 
or conditions on a participant's rights to section 411(d)(6) protected 
benefits, even if the amendment merely adds a restriction or condition 
that is permitted under the vesting rules in section 411(a)(3) through 
(11). However, such an amendment does not violate section 411(d)(6) to 
the extent it applies with respect to benefits that accrue after the 
applicable amendment date. See section 411(a)(10) and Sec.  1.411(a)-8 
for additional rules relating to changes in a plan's vesting schedule.
    (ii) Exception for changes in a plan's vesting computation period. 
Notwithstanding paragraph (a)(3)(i) of this section, a plan amendment 
that satisfies the applicable requirements under 29 CFR 2530.203-2(c) 
(rules relating to vesting computation periods) does not

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fail to satisfy the requirements of section 411(d)(6) merely because the 
plan amendment changes the plan's vesting computation period.
    (4) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example 1. (i) Facts. Plan A provides an annual benefit of 2% of 
career average pay times years of service commencing at normal 
retirement age (age 65). Plan A is amended on November 1, 2006, 
effective as of January 1, 2007, to provide for an annual benefit of 
1.3% of final pay times years of service, with final pay computed as the 
average of a participant's highest 3 consecutive years of compensation. 
As of January 1, 2007, Participant M has 16 years of service, M's career 
average pay is $37,500, and the average of M's highest 3 consecutive 
years of compensation is $67,308. Thus, Participant M's accrued benefit 
as of the applicable amendment date is increased from $12,000 per year 
at normal retirement age (2% times $37,500 times 16 years of service) to 
$14,000 per year at normal retirement age (1.3% times $67,308 times 16 
years of service). As of January 1, 2007, Participant N has 6 years of 
service, N's career average pay is $50,000, and the average of N's 
highest 3 consecutive years of compensation is $51,282. Participant N's 
accrued benefit as of the applicable amendment date is decreased from 
$6,000 per year at normal retirement age (2% times $50,000 times 6 years 
of service) to $4,000 per year at normal retirement age (1.3% times 
$51,282 times 6 years of service).
    (ii) Conclusion. While the plan amendment increases the accrued 
benefit of Participant M, the plan amendment fails to satisfy the 
requirements of section 411(d)(6)(A) because the amendment decreases the 
accrued benefit of Participant N below the level of the accrued benefit 
of Participant N immediately before the applicable amendment date.
    Example 2. (i) Facts. The facts are the same as Example 1, except 
that Plan A includes a provision under which Participant N's accrued 
benefit cannot be less than what it was immediately before the 
applicable amendment date (so that Participant N's accrued benefit could 
not be less than $6,000 per year at normal retirement age).
    (ii) Conclusion. The amendment does not violate the requirements of 
section 411(d)(6)(A) with respect to Participant M (whose accrued 
benefit has been increased) or with respect to Participant N (although 
Participant N would not accrue any benefits until the point in time at 
which the new formula amount would exceed the amount payable under the 
minimum provision, approximately 3 years after the amendment becomes 
effective).
    Example 3. (i) Facts. Employer N maintains Plan C, a qualified 
defined benefit plan under which an employee becomes a participant upon 
completion of 1 year of service and is vested in 100% of the employer-
derived accrued benefit upon completion of 5 years of service. Plan C 
provides that a former employee's years of service prior to a break in 
service will be reinstated upon completion of 1 year of service after 
being rehired. Plan C has participants who have fewer than 5 years of 
service and who are accordingly 0% vested in their employer-derived 
accrued benefits. On December 31, 2007, effective January 1, 2008, Plan 
C is amended, in accordance with section 411(a)(6)(D), to provide that 
any nonvested participant who has at least 5 consecutive 1-year breaks 
in service and whose number of consecutive 1-year breaks in service 
exceeds his or her number of years of service before the breaks will 
have his or her pre-break service disregarded in determining vesting 
under the plan.
    (ii) Conclusion. Under paragraph (a)(3) of this section, the plan 
amendment does not satisfy the requirements of this paragraph (a), and 
thus violates section 411(d)(6), because the amendment places greater 
restrictions or conditions on the rights to section 411(d)(6) protected 
benefits, as of January 1, 2008, for participants who have fewer than 5 
years of service, by restricting the ability of those participants to 
receive further vesting protections on benefits accrued as of that date.
    Example 4. (i) Facts. (A) Employer O sponsors Plan D, a qualified 
profit sharing plan under which each employee has a nonforfeitable right 
to a percentage of his or her employer-derived accrued benefit based on 
the following table:

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

    (B) In January 2006, Employer O acquires Company X, which maintains 
Plan E, a qualified profit sharing plan under which each employee who 
has completed 5 years of service has a nonforfeitable right to 100% of 
the employer-derived accrued benefit. In 2007, Plan E is merged into 
Plan D. On the effective date for the merger, Plan D is amended to 
provide that the vesting schedule for participants of Plan E is the 7-
year graded vesting schedule of Plan D. In accordance with section 
411(a)(10)(A), the plan amendment provides that any participant of Plan 
E who had completed 5 years of service prior to the amendment is fully 
vested. In addition, as required under section 411(a)(10)(B), the

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amendment provides that any participant in Plan E who has at least 3 
years of service prior to the amendment is permitted to make an 
irrevocable election to have the vesting of his or her nonforfeitable 
right to the employer-derived accrued benefit determined under either 
the 5-year cliff vesting schedule or the 7-year graded vesting schedule. 
Participant G, who has an account balance of $10,000 on the applicable 
amendment date, is a participant in Plan E with 2 years of service as of 
the applicable amendment date. As of the date of the merger, Participant 
G's nonforfeitable right to G's employer-derived accrued benefit is 0% 
under both the 7-year graded vesting schedule of Plan D and the 5-year 
cliff vesting schedule of Plan E.
    (ii) Conclusion. Under paragraph (a)(3) of this section, the plan 
amendment does not satisfy the requirements of this paragraph (a) and 
violates section 411(d)(6), because the amendment places greater 
restrictions or conditions on the rights to section 411(d)(6) protected 
benefits with respect to G and any participant who has fewer than 5 
years of service and who elected (or was made subject to) the new 
vesting schedule. A method of avoiding a section 411 (d)(6) violation 
with respect to account balances attributable to benefits accrued as of 
the applicable amendment date and earnings thereon would be for Plan D 
to provide for the vested percentage of G and each other participant in 
Plan E to be no less than the greater of the vesting percentages under 
the two vesting schedules (for example, for G and each other participant 
in Plan E to be 20% vested upon completion of 3 years of service, 40% 
vested upon completion of 4 years of service, and fully vested upon 
completion of 5 years of service) for those account balances and 
earnings.

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

[[Page 138]]

eliminating or reducing an early retirement benefit or retirement-type 
subsidy under the plan, if, effective after the plan amendment, there is 
another optional form of benefit available to the participant under the 
plan that is of inherently equal or greater value (within the meaning of 
Sec.  1.401(a)(4)-4(d)(4)(i)(A)). Thus, for example, a change in the 
method of calculating a joint and survivor annuity from using a 90% 
adjustment factor on account of the survivorship payment at particular 
ages for a participant and a spouse to using a 91% adjustment factor at 
the same ages is not treated as an elimination of an optional form of 
benefit. Similarly, a plan that offers a subsidized qualified joint and 
survivor annuity option for married participants under which the amount 
payable during the participant's lifetime is not less than the amount 
payable under the plan's straight life annuity is permitted to be 
amended to eliminate the straight life annuity option for married 
participants.
    (3) Permissible elimination of benefits that are not section 
411(d)(6) protected benefits--(i) In general. Section 411(d)(6) does not 
provide protection for benefits that are ancillary benefits, other 
rights and features, or any other benefits that are not described in 
section 411(d)(6). See Sec.  1.411(d)-4, Q&A-1(d). However, a plan may 
not be amended to recharacterize a retirement-type benefit as an 
ancillary benefit. Thus, for example, a plan amendment to recharacterize 
any portion of an early retirement subsidy as a social security 
supplement that is an ancillary benefit violates section 411(d)(6).
    (ii) No protection for future benefit accruals. Section 411(d)(6) 
only protects benefits that accrue before the applicable amendment date. 
Thus, a plan is permitted to be amended to eliminate or reduce an early 
retirement benefit, a retirement-type subsidy, or an optional form of 
benefit with respect to benefits that accrue after the applicable 
amendment date without violating section 411(d)(6). However, section 
4980F(e) of the Internal Revenue Code and section 204(h) of ERISA 
require notice of an amendment to an applicable pension plan that either 
provides for a significant reduction in the rate of future benefit 
accrual or that eliminates or significantly reduces an early retirement 
benefit or a retirement-type subsidy. See Sec.  54.4980F-1 of this 
chapter generally, and see Sec.  54.4980F-1, Q&A-7(b) and Q&A-8(c) of 
this chapter, with respect to the circumstances under which such notice 
is required for a reduction in an early retirement benefit or 
retirement-type subsidy.
    (4) Examples. The following examples illustrate the application of 
this paragraph (b):

    Example 1. (i) Facts involving amendments to an early retirement 
subsidy. Plan A provides an annual benefit of 2% of career average pay 
times years of service commencing at normal retirement age (age 65). 
Plan A is amended on November 1, 2006, effective as of January 1, 2007, 
to provide for an annual benefit of 1.3% of final pay times years of 
service, with final pay computed as the average of a participant's 
highest 3 consecutive years of compensation. Participant M is age 50, M 
has 16 years of service, M's career average pay is $37,500, and the 
average of M's highest 3 consecutive years of compensation is $67,308. 
Thus, M's accrued benefit as of the effective date of the amendment is 
increased from $12,000 per year at normal retirement age (2% times 
$37,500 times 16 years of service) to $14,000 per year at normal 
retirement age (1.3% times $67,308 times 16 years of service). (These 
facts are similar to the facts in Example 1 in paragraph (a)(4) of this 
section.) Before the amendment, Plan A permitted a former employee to 
commence distribution of benefits as early as age 55 and, for a 
participant with at least 15 years of service, actuarially reduced the 
amount payable in the form of a straight life annuity commencing before 
normal retirement age by 3% per year from age 60 to age 65 and by 7% per 
year from age 55 through age 59. Thus, before the amendment, the amount 
of M's early retirement benefit that would be payable for commencement 
at age 55 was $6,000 per year ($12,000 per year minus 3% for 5 years and 
minus 7% for 5 more years). The amendment also alters the actuarial 
reduction factor so that, for a participant with at least 15 years of 
service, the amount payable in a straight life annuity commencing before 
normal retirement age is reduced by 6% per year. As a result, the amount 
of M's early retirement benefit at age 55 becomes $5,600 per year after 
the amendment ($14,000 minus 6% for 10 years).
    (ii) Conclusion. The straight life annuity payable under Plan A at 
age 55 is an optional form of benefit that includes an early retirement 
subsidy. The plan amendment fails to satisfy the requirements of section

[[Page 139]]

411(d)(6)(B) because the amendment decreases the optional form of 
benefit payable to Participant M below the level that Participant M was 
entitled to receive immediately before the effective date of the 
amendment. If instead Plan A had included a provision under which M's 
straight life annuity payable at any age could be not be less than what 
it was immediately before the amendment (so that M's straight life 
annuity payable at age 55 could not be less than $6,000 per year), then 
the amendment would not fail to satisfy the requirements of section 
411(d)(6)(B) with respect to M's straight life annuity payable at age 55 
(although the straight life annuity payable to M at age 55 would not 
increase until the point in time at which the new formula amount with 
the new actuarial reduction factors exceeds the amount payable under the 
minimum provision, approximately 14 months after the amendment becomes 
effective).
    Example 2. (i) Facts involving plant shutdown benefits. Plan B 
permits participants who have a severance from employment before normal 
retirement age (age 65) to commence distributions at any time after age 
55 with the amount payable to be actuarially reduced using reasonable 
actuarial assumptions regarding interest and mortality specified in the 
plan, but provides that the annual reduction for any participant who has 
at least 20 years of service and who has a severance from employment 
after age 55 is only 3% per year (which is a smaller reduction than 
would apply under reasonable actuarial reductions). Plan B also provides 
2 plant shutdown benefits to participants who have a severance of 
employment as a result of a plant shutdown. First, the favorable 3% per 
year actuarial reduction applies for commencement of benefits after age 
55 and before age 65 for any participant who has at least 10 years of 
service and who has a severance from employment as a result of a plant 
shutdown. Second, all participants who have at least 20 years of service 
and who have a severance from employment after age 55 (and before normal 
retirement age at age 65) as a result of a plant shutdown will receive 
supplemental payments. Under the supplemental payments, an additional 
amount equal to the participant's estimated old-age insurance benefit 
under the Social Security Act is payable until age 65. The supplemental 
payments are not a QSUPP, as defined in Sec.  1.401(a)(4)-12, because 
the plan's terms do not state that the supplement is treated as an early 
retirement benefit that is protected under section 411(d)(6).
    (ii) Conclusion with respect to plant shutdown benefits. The 
benefits payable with the 3% annual reduction are retirement-type 
benefits. The excess of the actuarial present value of the early 
retirement benefit using the 3% annual reduction over the actuarial 
present value of the normal retirement benefit is a retirement-type 
subsidy and the right to receive payments of the benefit at age 55 is an 
early retirement benefit. These conclusions apply not only with respect 
to the rights that apply to participants who have at least 20 years of 
service, but also to participants with at least 10 years of service who 
have a severance from employment as a result of a plant shutdown. Thus, 
the right to receive benefits based on a 3% annual reduction for 
participants with at least 10 years of service at the time of a plant 
shutdown is an early retirement benefit that provides a retirement-type 
subsidy and is a section 411(d)(6)(B) protected benefit (even though no 
plant shutdown has occurred). Therefore, a plan amendment cannot 
eliminate this benefit with respect to benefits accrued before the 
applicable amendment date, even before the occurrence of the plant 
shutdown. Because the plan provides that the supplemental payments 
cannot exceed the OASDI benefit under the Social Security Act, the 
supplemental payments constitute a social security supplement (but not a 
QSUPP as defined in Sec.  1.401(a)(4)-12), which is an ancillary benefit 
that is not a section 411(d)(6)(B) protected benefit and accordingly is 
not taken into account in determining whether a prohibited reduction has 
occurred.
    Example 3. (i) Facts. Plan C, a multiemployer defined benefit plan 
in which participation is limited to electricians in the construction 
industry, provides that a participant may elect to commence 
distributions only if the participant is not currently employed by a 
participating employer and provides that, if the participant has a 
specified number of years of service and attains a specified age, the 
distribution is without any actuarial reduction for commencement before 
normal retirement age. Since the plan's inception, Plan C has provided 
for suspension of pension benefits during periods of disqualifying 
employment (ERISA section 203(a)(3)(B) service). Before 2007, the plan 
defined disqualifying employment to include any job as an electrician in 
the particular industry and geographic location to which Plan C applies. 
This definition of disqualifying employment did not cover a job as an 
electrician supervisor. In 2005, Participant E, having rendered the 
specified number of years of service and attained the specified age to 
retire with a fully subsidized early retirement benefit, retires from 
E's job as an electrician with Employer Y and starts a position with 
Employer Z as an electrician supervisor. Employer Z is not a 
participating employer in Plan C but is an employer in the same industry 
and geographic location as Employer Y. When E left service with Employer 
Y, E's position as an electrician supervisor was not disqualifying 
employment

[[Page 140]]

for purposes of Plan C's suspension of pension benefit provision, and E 
elected to commence benefit payments in 2005. In 2006, effective January 
1, 2007, Plan C is amended to expand the definition of disqualifying 
employment to include any job (including supervisory positions) as an 
electrician in the same industry and geographic location to which Plan C 
applies. The plan's definition of disqualifying employment satisfies the 
requirements of section 411(a)(3)(B). On January 1, 2007, E's pension 
benefits are suspended because of E's disqualifying employment as an 
electrician supervisor.
    (ii) Conclusion. Under paragraphs (a)(3) and (b)(1) of this section, 
the 2007 plan amendment violates section 411(d)(6), because the 
amendment places greater restrictions or conditions on a participant's 
rights to section 411(d)(6) protected benefits to the extent it applies 
with respect to benefits that accrued before January 1, 2007. The result 
would be the same even if the amendment did not apply to former 
employees and instead applied only to participants who were actively 
employed at the time of the applicable amendment.

    (c) Permissible elimination of optional forms of benefit that are 
redundant--(1) General rule. Except as otherwise provided in paragraph 
(c)(5) of this section, a plan is permitted to be amended to eliminate 
an optional form of benefit for a participant with respect to benefits 
accrued before the applicable amendment date if--
    (i) The optional form of benefit is redundant with respect to a 
retained optional form of benefit, within the meaning of paragraph 
(c)(2) of this section;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity commencement date that is 
earlier than the number of days in the maximum QJSA explanation period 
(as defined in paragraph (g)(9) of this section) after the date the 
amendment is adopted; and
    (iii) The requirements of paragraph (e) of this section are 
satisfied in any case in which either:
    (A) The retained optional form of benefit for the participant does 
not commence on the same annuity commencement date as the optional form 
of benefit that is being eliminated; or
    (B) As of the date the amendment is adopted, the actuarial present 
value of the retained optional form of benefit for the participant is 
less than the actuarial present value of the optional form of benefit 
that is being eliminated.
    (2) Similar types of optional forms of benefit are redundant--(i) 
General rule. An optional form of benefit is redundant with respect to a 
retained optional form of benefit if, after the amendment becomes 
applicable--
    (A) There is a retained optional form of benefit available to the 
participant that is in the same family of optional forms of benefit, 
within the meaning of paragraphs (c)(3) and (4) of this section, as the 
optional form of benefit being eliminated; and
    (B) The participant's rights with respect to the retained optional 
form of benefit are not subject to materially greater restrictions (such 
as conditions relating to eligibility, restrictions on a participant's 
ability to designate the person who is entitled to benefits following 
the participant's death, or restrictions on a participant's right to 
receive an in-kind distribution) than applied to the optional form of 
benefit being eliminated.
    (ii) Special rule for core options. An optional form of benefit that 
is a core option as defined in paragraph (g)(5) of this section may not 
be eliminated as a redundant benefit under the rules of this paragraph 
(c) unless the retained optional form of benefit and the eliminated core 
option are identical except for differences described in paragraph 
(c)(3)(ii) of this section. Thus, for example, a particular 10-year term 
certain and life annuity may not be eliminated by plan amendment unless 
the retained optional form of benefit is another 10-year term certain 
and life annuity.
    (3) Family of optional forms of benefit--(i) In general. Paragraph 
(c)(4) of this section describes certain families of optional forms of 
benefits. Not every optional form of benefit that is offered under a 
plan necessarily fits within a family of optional forms of benefit as 
described in paragraph (c)(4) of this section. Each optional form of 
benefit that is not included in any particular family of optional forms 
of benefit listed in paragraph (c)(4) of this section is in a separate 
family of optional forms of benefit with other optional forms of benefit 
that would be identical to that

[[Page 141]]

optional form of benefit but for differences that are disregarded under 
paragraph (c)(3)(ii) of this section.
    (ii) Certain differences among optional forms of benefit--(A) 
Differences in actuarial factors and annuity starting dates. The 
determination of whether two optional forms of benefit are within a 
family of optional forms of benefit is made without regard to actuarial 
factors or annuity starting dates. Thus, any optional forms of benefit 
that are part of the same generalized optional form (within the meaning 
of paragraph (g)(8) of this section) are in the same family of optional 
forms of benefit. For example, if a plan has a single-sum distribution 
option for some participants that is calculated using a 5% interest rate 
and a specific mortality table (but no less than the minimum present 
value as determined under section 417(e)) and another single-sum 
distribution option for other participants that is calculated using the 
applicable interest rate as defined in section 417(e)(3)(A)(ii)(II) and 
the applicable mortality table as defined in section 
417(e)(3)(A)(ii)(I), both single-sum distribution options are part of 
the same generalized optional form and thus in the same family of 
optional forms of benefit under the rules of paragraph (c)(3)(i) of this 
section. However, differences in actuarial factors and annuity starting 
dates are taken into account for purposes of the requirements in 
paragraph (e)(3) of this section.
    (B) Differences in pop-up provisions and cash refund features for 
joint and contingent options. The determination of whether two optional 
forms of benefit are within a family of optional forms of benefit 
relating to joint and contingent families (as described in paragraph 
(c)(4)(i) and (ii) of this section) is made without regard to the 
following features--
    (1) Pop-up provisions (under which payments increase upon the death 
of the beneficiary or another event that causes the beneficiary not to 
be entitled to a survivor annuity);
    (2) Cash refund features (under which payment is provided upon the 
death of the last annuitant in an amount that is not greater than the 
excess of the present value of the annuity at the annuity starting date 
over the total of payments before the death of the last annuitant); or
    (3) Term-certain provisions for optional forms of benefit within a 
joint and contingent family.
    (C) Differences in social security leveling features, refund of 
employee contributions features, and retroactive annuity starting date 
features. The determination of whether 2 optional forms of benefit are 
within a family of optional forms of benefit is made without regard to 
social security leveling features, refund of employee contributions 
features, or retroactive annuity starting date features. But see 
paragraph (c)(5) of this section for special rules relating to social 
security leveling, refund of employee contributions, and retroactive 
annuity starting date features in optional forms of benefit.
    (4) List of families. The following are families of optional forms 
of benefit for purposes of this paragraph (c):
    (i) Joint and contingent options with continuation percentages of 
50% to 100%. An optional form of benefit is within the 50% or more joint 
and contingent family if it provides a life annuity to the participant 
and a survivor annuity to an individual that is at least 50% and no more 
than 100% of the annuity payable during the joint lives of the 
participant and the participant's survivor.
    (ii) Joint and contingent options with continuation percentages less 
than 50%. An optional form of benefit is within the less than 50% joint 
and contingent family if it provides a life annuity to the participant 
and a survivor annuity to an individual that is less than 50% of the 
annuity payable during the joint lives of the participant and the 
participant's survivor.
    (iii) Term certain and life annuity options with a term of 10 years 
or less. An optional form of benefit is within the 10 years or less term 
certain and life family if it is a life annuity with a guarantee that 
payments will continue to the participant's beneficiary for the 
remainder of a fixed period that is 10 years or less if the participant 
dies before the end of the fixed period.
    (iv) Term certain and life annuity options with a term longer than 
10 years. An optional form of benefit is within the longer than 10 years 
term certain and

[[Page 142]]

life family if it is a life annuity with a guarantee that payments will 
continue to the participant's beneficiary for the remainder of a fixed 
period that is in excess of 10 years if the participant dies before the 
end of the fixed period.
    (v) Level installment payment options over a period of 10 years or 
less. An optional form of benefit is within the 10 years or less 
installment family if it provides for substantially level payments to 
the participant for a fixed period of at least 2 years and not in excess 
of 10 years with a guarantee that payments will continue to the 
participant's beneficiary for the remainder of the fixed period if the 
participant dies before the end of the fixed period.
    (vi) Level installment payment options over a period of more than 10 
years. An optional form of benefit is within the more than 10 years 
installment family if it provides for substantially level payments to 
the participant for a fixed period that is in excess of 10 years with a 
guarantee that payments will continue to the participant's beneficiary 
for the remainder of the fixed period if the participant dies before the 
end of the fixed period.
    (5) Special rules for certain features included in optional forms of 
benefit. For purposes of applying this paragraph (c), to the extent an 
optional form of benefit that is being eliminated includes either a 
social security leveling feature or a refund of employee contributions 
feature, the retained optional form of benefit must also include that 
feature, and, to the extent that the optional form of benefit that is 
being eliminated does not include a social security leveling feature or 
a refund of employee contributions feature, the retained optional form 
of benefit must not include that feature. For purposes of applying this 
paragraph (c), to the extent an optional form of benefit that is being 
eliminated does not include a retroactive annuity starting date feature, 
the retained optional form of benefit must not include the feature.
    (6) Separate application of redundancy rules for bifurcated 
benefits. If a plan permits the participant to make different 
distribution elections with respect to two or more separate portions of 
the participant's benefit, the rules of this paragraph (c) are permitted 
to be applied separately to each such portion of the participant's 
benefit as if that portion were the participant's entire benefit. Thus, 
for example, if one set of distribution elections applies to a portion 
of the participant's accrued benefit and another set of distribution 
elections applies to the other portion of the participant's accrued 
benefit, then with respect to one portion of the participant's benefit, 
the determination of whether any optional form of benefit is within a 
family of optional forms of benefit is permitted to be made disregarding 
elections that apply to the other portion of the participant's benefit. 
Similarly, if a participant can elect to receive any portion of the 
accrued benefit in a single sum and the remainder pursuant to a set of 
distribution elections, the rules of this paragraph (c) are permitted to 
be applied separately to the set of distribution elections that apply to 
the portion of the participant's accrued benefit that is not payable in 
a single sum (for example, for the portion of a participant's benefit 
that is not paid in a single sum, the determination of whether any 
optional form of benefit is within a family of optional forms of benefit 
is permitted to be made disregarding the fact that the other portion of 
the participant's benefit is paid in a single sum).
    (d) Permissible elimination of noncore optional forms of benefit 
where core options are offered--(1) General rule. Except as otherwise 
provided in paragraph (d)(2) of this section, a plan is permitted to be 
amended to eliminate an optional form of benefit for a participant with 
respect to benefits accrued before the applicable amendment date if--
    (i) After the amendment becomes applicable, each of the core options 
described in paragraph (g)(5) of this section is available to the 
participant with respect to benefits accrued before and after the 
amendment;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity commencement date that is 
earlier than 4 years after the date the amendment is adopted; and

[[Page 143]]

    (iii) The requirements of paragraph (e) of this section are 
satisfied in any case in which either:
    (A) One or more of the core options are not available commencing on 
the same annuity commencement date as the optional form of benefit that 
is being eliminated; or
    (B) As of the date the amendment is adopted, the actuarial present 
value of the benefit payable under any core option with the same annuity 
commencement date is less than the actuarial present value of benefits 
payable under the optional form of benefit that is being eliminated.
    (2) Special rules--(i) Treatment of certain features included in 
optional forms of benefit. For purposes of applying this paragraph (d), 
to the extent an optional form of benefit that is being eliminated 
includes either a social security leveling feature or a refund of 
employee contributions feature, at least one of the core options must 
also be available with that feature, and, to the extent that the 
optional form of benefit that is being eliminated does not include a 
social security leveling feature or a refund of employee contributions 
feature, each of the core options must be available without that 
feature. For purposes of applying this paragraph (d), to the extent an 
optional form of benefit that is being eliminated does not include a 
retroactive annuity starting date feature, each of the core options must 
be available without that feature.
    (ii) Eliminating the most valuable option for a participant with a 
short life expectancy. For purposes of applying this paragraph (d), if 
the most valuable option for a participant with a short life expectancy 
(as defined in paragraph (g)(5)(iii) of this section) is eliminated, 
then, after the plan amendment, an optional form of benefit that is 
identical, except for differences described in paragraph (c)(3)(ii) of 
this section, must be available to the participant. However, such a plan 
amendment cannot eliminate a refund of employee contributions feature 
from the most valuable option for a participant with a short life 
expectancy.
    (iii) Single-sum distributions. A plan amendment is not treated as 
satisfying this paragraph (d) if it eliminates an optional form of 
benefit that includes a single-sum distribution that applies with 
respect to at least 25% of the participant's accrued benefit as of the 
date the optional form of benefit is eliminated. But see Sec.  1.411(d)-
4, Q&A-2(b)(2)(v), relating to involuntary single-sum distributions for 
benefits with a present value not in excess of the maximum dollar amount 
in section 411(a)(11).
    (iv) Application of multiple amendment rule to core option rule. 
Notwithstanding paragraph (a)(2)(iii)(B) of this section, if a plan is 
amended to eliminate an optional form of benefit using the core options 
rule in this paragraph (d), then the employer must wait 3 years after 
the first annuity commencement date for which the optional form of 
benefit is no longer available before making any changes to the core 
options offered under the plan (other than a change that is not treated 
as an elimination under paragraph (b)(2)(ii) of this section). Thus, for 
example, if a plan amendment eliminates an optional form of benefit for 
a participant using the core options rule under this paragraph (d), with 
an adoption date of January 1, 2006 and an effective date of January 1, 
2010, the plan would not be permitted to be amended to make changes to 
the core options offered under the plan (and the core options would 
continue to apply with respect to the participant's accrued benefit) 
until January 1, 2013.
    (v) Special rule for joint and contingent annuity core option. If a 
plan offers joint and contingent annuities under which a participant is 
entitled to a life annuity with a survivor annuity for the individual 
designated by the participant (including a non-spousal contingent 
annuitant) with continuation percentage options of both 50% and 100% 
(after adjustments permitted under paragraph (g)(5)(ii) of this section 
to comply with applicable law), the plan is permitted to treat both of 
these options as core options for purposes of this paragraph (d), in 
lieu of a 75% joint and contingent annuity. Thus, such a plan is 
permitted to use the rules of this paragraph (d) if the plan satisfies 
all of the requirements of this paragraph (d) (taking into account the 
modification rule in paragraph (g)(5)(ii)

[[Page 144]]

of this section) other than the requirement of offering a 75% joint and 
contingent annuity as described in paragraph (g)(5)(i)(B) of this 
section.
    (e) Permissible plan amendments under paragraphs (c) and (d) 
eliminating or reducing section 411(d)(6)(B) protected benefits that are 
burdensome and of de minimis value--(1) In general. A plan amendment 
that, pursuant to paragraph (c)(1)(iii) or (d)(1)(iii) of this section, 
is required to satisfy this paragraph (e) satisfies this paragraph (e) 
if--
    (i) The amendment eliminates section 411(d)(6)(B) protected benefits 
that create significant burdens or complexities for the plan and its 
participants as described in paragraph (e)(2) of this section; and
    (ii) The amendment does not adversely affect the rights of any 
participant in a more than de minimis manner as described in paragraph 
(e)(3) of this section.
    (2) Plan amendments eliminating section 411(d)(6)(B) protected 
benefits that create significant burdens and complexities--(i) Facts and 
circumstances analysis--(A) In general. The determination of whether a 
plan amendment eliminates section 411(d)(6)(B) protected benefits that 
create significant burdens or complexities for the plan and its 
participants is based on facts and circumstances.
    (B) Early retirement benefits. In the case of an amendment that 
eliminates an early retirement benefit, relevant factors include whether 
the annuity starting dates under the plan considered in the aggregate 
are burdensome or complex (e.g., the number of categories of early 
retirement benefits, whether the terms and conditions applicable to the 
plan's early retirement benefits are difficult to summarize in a manner 
that is concise and readily understandable to the average plan 
participant, and whether those different early retirement benefits were 
added to the plan as a result of a plan merger, transfer, or 
consolidation), and whether the effect of the plan amendment is to 
reduce the number of categories of early retirement benefits.
    (C) Retirement-type subsidies and actuarial factors. In the case of 
a plan amendment eliminating a retirement-type subsidy or changing the 
actuarial factors used to determine optional forms of benefit, relevant 
factors include whether the actuarial factors used for determining 
optional forms of benefit available under the plan considered in the 
aggregate are burdensome or complex (e.g., the number of different 
retirement-type subsidies and other actuarial factors available under 
the plan, whether the terms and conditions applicable to the plan's 
retirement-type subsidies are difficult to summarize in a manner that is 
concise and readily understandable to the average plan participant, 
whether the plan is eliminating one or more generalized optional forms, 
whether the plan is replacing a complex optional form of benefit that 
contains a retirement-type subsidy with a simpler form, and whether the 
different retirement-type subsidies and other actuarial factors were 
added to the plan as a result of a plan merger, transfer, or 
consolidation), and whether the effect of the plan amendment is to 
reduce the number of categories of retirement-type subsidies or other 
actuarial factors.
    (D) Example. The following example illustrates the application of 
this paragraph (e)(2)(i):

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

[[Page 145]]

short life expectancy (as defined in paragraph (g)(5)(iii) of this 
section) and the plan amendment must not adversely affect the rights of 
any participant in a more than de minimis manner, taking into account 
the actuarial factors for the joint and survivor annuity with the pop-up 
provision and the joint and survivor annuity without the pop-up 
provision, as described in paragraph (e)(3) of this section.

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

[[Page 146]]

same annuity commencement date as the optional form of benefit that is 
being eliminated, as described in paragraph (e)(4) of this section; and
    (B) Either the actuarial present value of the benefit payable in the 
optional form of benefit that is being eliminated does not exceed the 
actuarial present value of the benefit payable under the core option by 
more than a de minimis amount, as described in paragraph (e)(5) of this 
section, or the amendment satisfies the requirements of paragraph (e)(6) 
of this section.
    (4) Definition of substantially the same annuity starting dates. For 
purposes of applying paragraphs (e)(3)(i)(A) and (ii)(A) of this 
section, annuity starting dates are considered substantially the same if 
they are within 6 months of each other.
    (5) Definition of de minimis difference in actuarial present value. 
For purposes of applying paragraph (e)(3)(i)(B) and (ii)(B) of this 
section, a difference in actuarial present value between the optional 
form of benefit being eliminated and the retained optional form of 
benefit or core option is not more than a de minimis amount if, as of 
the date the amendment is adopted, the difference between the actuarial 
present value of the eliminated optional form of benefit and the 
actuarial present value of the retained optional form of benefit or core 
option is not more than the greater of--
    (i) 2% of the present value of the retirement-type subsidy (if any) 
under the eliminated optional form of benefit prior to the amendment; or
    (ii) 1% of the greater of the participant's compensation (as defined 
in section 415(c)(3)) for the prior plan year or the participant's 
average compensation for his or her high 3 years (within the meaning of 
section 415(b)(1)(B) and (b)(3)).
    (6) Delayed effective date--(i) General rule. For purposes of 
applying paragraph (e)(3)(i)(B) and (ii)(B) of this section, an 
amendment that eliminates an optional form of benefit satisfies the 
requirements of this paragraph (e)(6) if the elimination of the optional 
form of benefit is not applicable to any annuity commencement date 
before the end of the expected transition period for that optional form 
of benefit.
    (ii) Determination of expected transition period--(A) General rule. 
The expected transition period for a plan amendment eliminating an 
optional form of benefit is the period that begins when the amendment is 
adopted and ends when it is reasonable to expect, with respect to a 
section 411(d)(6)(B) protected benefit (i.e., not taking into account 
benefits that accrue in the future), that the form being eliminated 
would be subsumed by another optional form of benefit after taking into 
account expected future benefit accruals.
    (B) Determination of expected transition period using conservative 
actuarial assumptions. The expected transition period for a plan 
amendment eliminating an optional form of benefit must be determined in 
accordance with actuarial assumptions that are reasonable at the time of 
the amendment and that are conservative (i.e., reasonable actuarial 
assumptions that are likely to result in the longest period of time 
until the eliminated optional form of benefit would be subsumed). For 
this purpose, actuarial assumptions are not treated as conservative 
unless they include assumptions that a participant's compensation will 
not increase and that future benefit accruals will not exceed accruals 
in recent periods.
    (C) Effect of subsequent amendments reducing future benefit accruals 
on the expected transition period. If, during the expected transition 
period for a plan amendment eliminating an optional form of benefit, the 
plan is subsequently amended to reduce the rate of future benefit 
accrual (or otherwise to lengthen the expected transition period), thus 
that subsequent plan amendment must provide that the elimination of the 
optional form of benefit is void or must provide for the effective date 
for elimination of the optional form of benefit to be further extended 
to a new expected transition period that satisfies this paragraph (e)(6) 
taking into account the subsequent amendment.
    (iii) Applicability of the delayed effective date rule limited to 
employees who continue to accrue benefits through the end of expected 
transition period. An amendment eliminating an optional form of benefit 
under this paragraph (e)(6) must be limited to participants

[[Page 147]]

who continue to accrue benefits under the plan through the end of the 
expected transition period. Thus, for example, the plan amendment may 
not apply to any participant who has a severance from employment during 
the expected transition period.
    (iv) Special rule for section 204(h) notice. See Sec.  54.4980F-
1(b), Q&A-8(c) of this chapter for a special rule relating to this 
paragraph (e)(6).
    (f) Utilization test--(1) General rule. A plan is permitted to be 
amended to eliminate all of the optional forms of benefit that comprise 
a generalized optional form (as defined in paragraph (g)(8) of this 
section) for a participant with respect to benefits accrued before the 
applicable amendment date if--
    (i) None of the optional forms of benefit being eliminated is a core 
option, within the meaning of paragraph (g)(5) of this section;
    (ii) The plan amendment is not applicable with respect to an 
optional form of benefit with an annuity commencement date that is 
earlier than the number of days in the maximum Qualified Joint and 
Survivor Annuity explanation period (as defined in paragraph (g)(9) of 
this section) after the date the amendment is adopted;
    (iii) During the look-back period--
    (A) The generalized optional form has been available to at least the 
applicable number of participants who are taken into account under 
paragraph (f)(3) and (4) of this section; and
    (B) No participant has elected any optional form of benefit that is 
part of the generalized optional form with an annuity commencement date 
that is within the look-back period.
    (2) Look-back period--(i) In general. For purposes of this paragraph 
(f), the look-back period is the period that includes--
    (A) The portion of the plan year in which such plan amendment is 
adopted that precedes the date of adoption (the pre-adoption period); 
and
    (B) The 2 plan years immediately preceding the pre-adoption period.
    (ii) Special look-back period rules--(A) 12-month plan year. In the 
look-back period, at least 1 of the plan years must be a 12-month plan 
year.
    (B) Permitted 3-month exclusion in the pre-adoption period. A plan 
is permitted to exclude from the look-back period the calendar month in 
which the amendment is adopted and the preceding 1 or 2 calendar months 
to the extent those preceding months are contained within the pre-
adoption period.
    (C) Permission to extend the look-back period. In order to have a 
look-back period that satisfies the minimum applicable number of 
participants requirement in paragraph (f)(1)(iii)(A) of this section, 
the look-back period described in paragraph (f)(2)(i)(B) of this section 
is permitted to be expanded, so as to include the 3, 4, or 5 plan years 
immediately preceding the plan year in which the amendment is adopted. 
Thus, in determining the look-back period, a plan is permitted to 
substitute the 3, 4, or 5 plan years immediately preceding the pre-
adoption period for the 2 plan years described in paragraph (f)(2)(i)(B) 
of this section. However, if a plan does not satisfy the minimum 
applicable number of participants requirement of paragraph 
(f)(1)(iii)(A) of this section using the pre-adoption period and the 
immediately preceding 5 plan years, the plan is not permitted to be 
amended in accordance with the utilization test in this paragraph (f).
    (3) Participants taken into account. A participant is taken into 
account for purposes of this paragraph (f) only if the participant was 
eligible to elect to commence payment of an optional form of benefit 
that is part of the generalized optional form being eliminated with an 
annuity commencement date that is within the look-back period. However, 
a participant is not taken into account if the participant--
    (i) Did not elect any optional form of benefit with an annuity 
commencement date that was within the look-back period;
    (ii) Elected an optional form of benefit that included a single-sum 
distribution that applied with respect to at least 25% of the 
participant's accrued benefit;
    (iii) Elected an optional form of benefit that was only available 
during a limited period of time and that contained a retirement-type 
subsidy where the subsidy that is part of the generalized optional form 
being eliminated was not extended to any optional form

[[Page 148]]

of benefit with the same annuity commencement date; or
    (iv) Elected an optional form of benefit with an annuity 
commencement date that was more than 10 years before normal retirement 
age.
    (4) Determining the applicable number of participants. For purposes 
of applying the rules in this paragraph (f), the applicable number of 
participants is 50 participants. However, notwithstanding paragraph 
(f)(3)(ii) of this section, a plan is permitted to take into account any 
participant who elected an optional form of benefit that included a 
single-sum distribution that applied with respect to at least 25% of the 
participant's accrued benefit, but only if the applicable number of 
participants is increased to 1,000 participants.
    (5) Default elections. For purposes of this paragraph (f), an 
election includes the payment of an optional form of benefit that 
applies in the absence of an affirmative election.
    (g) Definitions and use of terms. The definitions in this paragraph 
(g) apply for purposes of this section.
    (1) Actuarial present value. The term actuarial present value means 
actuarial present value (within the meaning of Sec.  1.401(a)(4)-12) 
determined using reasonable actuarial assumptions.
    (2) Ancillary benefit. The term ancillary benefit means--
    (i) A social security supplement under a defined benefit plan (other 
than a QSUPP as defined in Sec.  1.401(a)(4)-12);
    (ii) A benefit payable under a defined benefit plan in the event of 
disability (to the extent that the benefit exceeds the benefit otherwise 
payable), but only if the total benefit payable in the event of 
disability does not exceed the maximum qualified disability benefit, as 
defined in section 411(a)(9);
    (iii) A life insurance benefit;
    (iv) A medical benefit described in section 401(h);
    (v) A death benefit under a defined benefit plan other than a death 
benefit which is a part of an optional form of benefit; or
    (vi) A plant shutdown benefit or other similar benefit in a defined 
benefit plan that does not continue past retirement age and does not 
affect the payment of the accrued benefit, but only to the extent that 
such plant shutdown benefit, or other similar benefit (if any), is 
permitted in a qualified pension plan (see Sec.  1.401-1(b)(1)(i)).
    (3) Annuity commencement date. The term annuity commencement date 
generally means the annuity starting date, except that, in the case of a 
retroactive annuity starting date under section 417(a)(7), annuity 
commencement date means the date of the first payment of benefits 
pursuant to a participant election of a retroactive annuity starting 
date, as defined in Sec.  1.417(e)-1(b)(3)(iv).
    (4) Applicable amendment date. The term applicable amendment date, 
with respect to a plan amendment, means the later of the effective date 
of the amendment or the date the amendment is adopted.
    (5) Core options--(i) General rule. With respect to a plan, the term 
core options means--
    (A) A straight life annuity generalized optional form under which 
the participant is entitled to a level life annuity with no benefit 
payable after the participant's death;
    (B) A 75% joint and contingent annuity generalized optional form 
under which the participant is entitled to a life annuity with a 
survivor annuity for any individual designated by the participant 
(including a non-spousal contingent annuitant) that is 75% of the amount 
payable during the participant's life (but see paragraph (d)(2)(v) of 
this section for a special rule relating to the joint and contingent 
annuity core option);
    (C) A 10-year term certain and life annuity generalized optional 
form under which the participant is entitled to a life annuity with a 
guarantee that payments will continue to any person designated by the 
participant for the remainder of a fixed period of 10 years if the 
participant dies before the end of the 10-year period; and
    (D) The most valuable option for a participant with a short life 
expectancy (as defined in paragraph (g)(5)(iii) of this section).
    (ii) Modification of core options to satisfy other requirements. An 
annuity does not fail to be a core option (e.g., a joint and contingent 
annuity described in paragraph (g)(5)(i)(B) of this section or a 10-year 
term certain and life annuity

[[Page 149]]

described in paragraph (g)(5)(i)(C) of this section) as a result of 
differences to comply with applicable law, such as limitations on death 
benefits to comply with the incidental benefit requirement of Sec.  
1.401-1(b)(1)(i) or on account of the spousal consent rules of section 
417.
    (iii) Most valuable option for a participant with a short life 
expectancy--(A) General definition. Except as provided in paragraph 
(g)(5)(iii)(B) of this section, most valuable option for a participant 
with a short life expectancy means, for an annuity starting date, the 
optional form of benefit that is reasonably expected to result in 
payments that have the largest actuarial present value in the case of a 
participant who dies shortly after the annuity starting date, taking 
into account both payments due to the participant prior to the 
participant's death and any payments due after the participant's death. 
For this purpose, a plan is permitted to assume that the spouse of the 
participant is the same age as the participant. In addition, a plan is 
permitted to assume that the optional form of benefit that is the most 
valuable option for a participant with a short life expectancy when the 
participant is age 70\1/2\ also is the most valuable option for a 
participant with a short life expectancy at all older ages, and that the 
most valuable option for a participant with a short life expectancy at 
age 55 is the most valuable option for a participant with a short life 
expectancy at all younger ages.
    (B) Safe harbor hierarchy--(1) A plan is permitted to treat a 
single-sum distribution option with an actuarial present value that is 
not less than the actuarial present value of any optional form of 
benefit eliminated by the plan amendment as the most valuable option for 
a participant with a short life expectancy for all of a participant's 
annuity starting dates if such single-sum distribution option is 
available at all such dates, without regard to whether the option was 
available before the plan amendment.
    (2) If the plan before the amendment does not offer a single-sum 
distribution option as described in paragraph (g)(5)(iii)(B)(1) of this 
section, a plan is permitted to treat a joint and contingent annuity 
with a continuation percentage that is at least 75% and that is at least 
as great as the highest continuation percentage available before the 
amendment as the most valuable option for a participant with a short 
life expectancy for all of a participant's annuity starting dates if 
such joint and contingent annuity is available at all such dates, 
without regard to whether the option was available before the plan 
amendment.
    (3) If the plan before the amendment offers neither a single-sum 
distribution option as described in paragraph (g)(5)(iii)(B)(1) of this 
section nor a joint and contingent annuity with a continuation 
percentage as described in paragraph (g)(5)(iii)(B)(2) of this section, 
a plan is permitted to treat a term certain and life annuity with a term 
certain period no less than 15 years as the most valuable option for a 
participant with a short life expectancy for each annuity starting date 
if such 15-year term certain and life annuity is available at all 
annuity starting dates, without regard to whether the option was 
available before the plan amendment.
    (6) Definitions of types of section 411(d)(6)(B) protected 
benefits--(i) Early retirement benefit. The term early retirement 
benefit means the right, under the terms of a plan, to commence 
distribution of a retirement-type benefit at a particular date after 
severance from employment with the employer and before normal retirement 
age. Different early retirement benefits result from differences in 
terms relating to timing.
    (ii) Optional form of benefit--(A) In general. The term optional 
form of benefit means a distribution alternative (including the normal 
form of benefit) that is available under the plan with respect to an 
accrued benefit or a distribution alternative with respect to a 
retirement-type benefit. Different optional forms of benefit exist if a 
distribution alternative is not payable on substantially the same terms 
as another distribution alternative. The relevant terms include all 
terms affecting the value of the optional form, such as the method of 
benefit calculation and the actuarial factors or assumptions

[[Page 150]]

used to determine the amount distributed. Thus, for example, different 
optional forms of benefit may result from differences in terms relating 
to the payment schedule, timing, commencement, medium of distribution 
(e.g., in cash or in kind), election rights, differences in eligibility 
requirements, or the portion of the benefit to which the distribution 
alternative applies. Likewise, differences in the normal retirement ages 
of employees or in the form in which the accrued benefit of employees is 
payable at normal retirement age under a plan are taken into account in 
determining whether a distribution alternative constitutes one or more 
optional forms of benefit.
    (B) Death benefits. If a death benefit is payable after the annuity 
starting date for a specific optional form of benefit and the same death 
benefit would not be provided if another optional form of benefit were 
elected by a participant, then that death benefit is part of the 
specific optional form of benefit and is thus protected under section 
411(d)(6). A death benefit is not treated as part of a specific optional 
form of benefit merely because the same benefit is not provided to a 
participant who has received his or her entire accrued benefit prior to 
death. For example, a $5,000 death benefit that is payable to all 
participants except any participant who has received his or her accrued 
benefit in a single-sum distribution is not part of a specific optional 
form of benefit.
    (iii) Retirement-type benefit. The term retirement-type benefit 
means--
    (A) The payment of a distribution alternative with respect to an 
accrued benefit; or
    (B) The payment of any other benefit under a defined benefit plan 
(including a QSUPP as defined in Sec.  1.401(a)(4)-12) that is permitted 
to be in a qualified pension plan, continues after retirement, and is 
not an ancillary benefit.
    (iv) Retirement-type subsidy. The term retirement-type subsidy means 
the excess, if any, of the actuarial present value of a retirement-type 
benefit over the actuarial present value of the accrued benefit 
commencing at normal retirement age or at actual commencement date, if 
later, with both such actuarial present values determined as of the date 
the retirement-type benefit commences. Examples of retirement-type 
subsidies include a subsidized early retirement benefit and a subsidized 
qualified joint and survivor annuity.
    (v) Subsidized early retirement benefit or early retirement subsidy. 
The terms subsidized early retirement benefit or early retirement 
subsidy mean the right, under the terms of a plan, to commence 
distribution of a retirement-type benefit at a particular date after 
severance from employment with the employer and before normal retirement 
age where the actuarial present value of the optional forms of benefit 
available to the participant under the plan at that annuity starting 
date exceeds the actuarial present value of the accrued benefit 
commencing at normal retirement age (with such actuarial present values 
determined as of the annuity starting date). Thus, an early retirement 
subsidy is an early retirement benefit that provides a retirement-type 
subsidy.
    (7) Eliminate; elimination; reduce; reduction. The terms eliminate 
or elimination when used in connection with a section 411(d)(6)(B) 
protected benefit mean to eliminate or the elimination of an optional 
form of benefit or an early retirement benefit and to reduce or a 
reduction in a retirement-type subsidy. The terms reduce or reduction 
when used in connection with a retirement-type subsidy mean to reduce or 
a reduction in the amount of the subsidy. For purposes of this section, 
an elimination includes a reduction and a reduction includes an 
elimination.
    (8) Generalized optional form. The term generalized optional form 
means a group of optional forms of benefit that are identical except for 
differences due to the actuarial factors that are used to determine the 
amount of the distributions under those optional forms of benefit and 
the annuity starting dates.
    (9) Maximum QJSA explanation period. The term maximum QJSA 
explanation period means the maximum number of days before an annuity 
starting date for a qualified joint and survivor annuity for which a 
written explanation relating to the qualified joint and survivor annuity 
would satisfy the timing

[[Page 151]]

requirements of section 417(a)(3) and Sec.  1.417(e)-1(b)(3)(ii).
    (10) Other right and feature. The term other right or feature has 
the meaning set forth at Sec.  1.401(a)(4)-4(e)(3)(ii).
    (11) Refund of employee contributions feature. The term refund of 
employee contributions features means a feature with respect to an 
optional form of benefit that provides for employee contributions and 
interest thereon to be paid in a single sum at the annuity starting date 
with the remainder to be paid in another form beginning on that date.
    (12) Retirement; retirement age. For purposes of this section, the 
date of retirement means the annuity starting date. Thus, retirement age 
means a participant's age at the annuity starting date.
    (13) Retroactive annuity starting date feature. The term retroactive 
annuity starting date feature means a feature with respect to an 
optional form of benefit under which the annuity starting date for the 
distribution occurs on or before the date the written explanation 
required by section 417(a)(3) is provided to the participant.
    (14) Section 411(d)(6) protected benefit. The term section 411(d)(6) 
protected benefit means the accrued benefit of a participant as of the 
applicable amendment date described in section 411(d)(6)(A) and any 
section 411(d)(6)(B) protected benefit.
    (15) Section 411(d)(6)(B) protected benefit. The term section 
411(d)(6)(B) protected benefit means the portion of an early retirement 
benefit, a retirement-type subsidy, or an optional form of benefit 
attributable to benefits accrued before the applicable amendment date.
    (16) Social security leveling feature. The term social security 
leveling feature means a feature with respect to an optional form of 
benefit commencing prior to a participant's expected commencement of 
social security benefits that provides for a temporary period of higher 
payments which is designed to result in an approximately level amount of 
income when the participant's estimated old age benefits from Social 
Security are taken into account.
    (h) Examples. The following examples illustrate the application of 
paragraphs (c) through (g) of this section:

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

[[Page 152]]

plan amendment does not eliminate any available core option, including 
the most valuable option for a participant with a short life expectancy, 
treating a joint and contingent annuity with a 100% continuation 
percentage as this optional form of benefit pursuant to paragraph 
(g)(5)(iii)(B)(2) of this section. Finally, the amendment need not 
satisfy the requirements of paragraph (e) of this section because the 
retained optional forms of benefit are available on the same annuity 
commencement dates and have the same actuarial present value as the 
optional forms of benefit that are being eliminated.
    Example 2. (i) Facts involving elimination of optional forms of 
benefit as redundant if additional restrictions are imposed. The facts 
are the same as Example 1, except that the plan amendment also restricts 
the class of beneficiaries that may be elected under the 4 retained 
joint and contingent annuities to the employee's spouse.
    (ii) Conclusion. The amendment fails to satisfy the requirements of 
paragraph (c)(2)(i)(B) of this section because the retained joint and 
contingent annuities have materially greater restrictions on the 
beneficiary designation than did the eliminated joint and contingent 
annuities. Thus, the joint and contingent annuities being eliminated are 
not redundant with respect to the retained joint and contingent 
annuities. In addition, the amendment fails to satisfy the requirements 
of the core option rules in paragraph (d) of this section because the 
amendment fails to be limited to annuity commencement dates that are at 
least 4 years after the date the amendment is adopted, the amendment 
fails to include the core option in paragraph (g)(5)(i)(B) of this 
section because the participant does not have the right to designate any 
beneficiary, and the amendment fails to include the core option 
described in paragraph (g)(5)(i)(C) of this section because the plan 
does not provide a 10-year term certain and life annuity.
    Example 3. (i) Facts involving elimination of a social security 
leveling feature and a period certain annuity as redundant. Plan D is a 
defined benefit plan under which participants may elect to commence 
distributions in the following actuarially equivalent forms, with 
spousal consent if applicable: a straight life annuity; a 50%, 75%, or 
100% joint and contingent annuity; a 5-year, 10-year, or a 15-year term 
certain and life annuity; and an installment refund annuity (i.e., an 
optional form of benefit that provides a period certain, the duration of 
which is based on the participant's age), with the participant having 
the right to select any beneficiary. In addition, each annuity offered 
under the plan, if payable to a participant who is less than age 65, is 
available both with and without a social security leveling feature. The 
social security leveling feature provides for an assumed commencement of 
social security benefits at any age selected by the participant between 
age 62 and 65. Plan D is amended on June 2, 2006, effective as of 
January 1, 2007, to eliminate the installment refund form of benefit and 
to restrict the social security leveling feature to an assumed social 
security commencement age of 65.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (c) of this section. First, the installment refund annuity 
option is redundant with respect to the 15-year certain and life annuity 
(except for advanced ages where, because of shorter life expectancies, 
the installment refund annuity option is redundant with respect to the 
5-year certain and life annuity and also redundant with respect to the 
10-year certain and life annuity). Second, with respect to restricting 
the social security leveling feature to an assumed social security 
commencement age of 65, under paragraph (c)(3)(ii)(C) of this section, 
straight life annuities with social security leveling features that have 
different social security commencement ages are treated as members of 
the same family as straight life annuities without social security 
leveling features. To the extent an optional form of benefit that is 
being eliminated includes a social security leveling feature, the 
retained optional form of benefit must also include that feature, but it 
is permitted to have a different assumed age for commencement of social 
security benefits. Third, to the extent that the optional form of 
benefit that is being eliminated does not include a social security 
leveling feature, a return of employee contribution feature, or 
retroactive annuity starting date feature, the retained optional form of 
benefit must not include that feature. Fourth, the plan amendment does 
not eliminate any available core option, including the most valuable 
option for a participant with a short life expectancy, treating a joint 
and contingent annuity with a 100% continuation percentage as this 
optional form of benefit pursuant to paragraph (g)(5)(iii)(B)(2) of this 
section. Fifth, the amendment is not effective with respect to annuity 
commencement dates before September 1, 2006, as required under paragraph 
(c)(1)(ii) of this section. The amendment need not satisfy the 
requirements of paragraph (e) of this section because the retained 
optional forms of benefit are available on the same annuity commencement 
dates and have the same actuarial present value as the optional forms of 
benefit that are being eliminated.
    Example 4. (i) Facts involving elimination of noncore options. 
Employer N sponsors Plan E, a defined benefit plan that permits every 
participant to elect payment in the following actuarially equivalent 
optional forms of benefit (Plan E's uniformly available options), with 
spousal consent if applicable: a straight life annuity; a 50%, 75%, or 
100%

[[Page 153]]

joint and contingent annuity with no restrictions on designation of 
beneficiaries; and a 5-, 10-, or 15-year term certain and life annuity. 
In addition, each can be elected in conjunction with a social security 
leveling feature, with the participant permitted to select a social 
security commencement age from age 62 to age 67. None of Plan E's 
uniformly available options include a single-sum distribution. The plan 
has been in existence for over 30 years, during which time Employer N 
has acquired a large number of other businesses, including merging over 
20 defined benefit plans of acquired entities into Plan E. Many of the 
merged plans offered optional forms of benefit that were not among Plan 
E's uniformly available options, including some plans funded through 
insurance products, often offering all of the insurance annuities that 
the insurance carrier offers, and with some of the merged plans offering 
single-sum distributions. In particular, under the XYZ acquisition that 
occurred in 1990, the XYZ acquired plan offered a single-sum 
distribution option that was frozen at the time of the acquisition. On 
April 1, 2006, each single-sum distribution option applies to less than 
25% of the XYZ participants' accrued benefits. Employer N has generally, 
but not uniformly, followed the practice of limiting the optional forms 
of benefit for an acquired unit to an employee's service before the date 
of the merger, and has uniformly followed this practice with respect to 
each of the early retirement subsidies in the acquired unit's plan. As a 
result, as of April 1, 2007, Plan E includes a large number of 
generalized optional forms which are not members of families of optional 
forms of benefit identified in paragraph (c)(4) of this section, but 
there are no participants who are entitled to any early retirement 
subsidies because any subsidies have been subsumed by the actuarially 
reduced accrued benefit. Plan E is amended in April of 2007 to eliminate 
all of the optional forms of benefit that Plan E offers other than Plan 
E's uniformly available options, except that the amendment does not 
eliminate any single-sum distribution option except with respect to XYZ 
participants and permits any commencement date that was permitted under 
Plan E before the amendment. Plan E also eliminates the single-sum 
distribution option for XYZ participants. Further, each of Plan E's 
uniformly available options has an actuarial present value that is not 
less than the actuarial present value of any optional form of benefit 
offered before the amendment. The amendment is effective with respect to 
annuity commencement dates that are on or after May 1, 2011.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (d) of this section. First, Plan E, as amended, does not 
eliminate any single-sum distribution option as provided in paragraph 
(d)(2)(iii) of this section except for single-sum distribution options 
that apply to less than 25% of a plan participant's accrued benefit as 
of the date the option is eliminated (May 1, 2011). Second, Plan E, as 
amended, includes each of the core options as defined in paragraph 
(g)(5) of this section, including offering the most valuable option for 
a participant with a short life expectancy (treating the 100% joint and 
contingent annuity as this benefit, under paragraph (g)(5)(iii)(B)(2) of 
this section). The 100% joint and contingent annuity option (and not the 
grandfathered single-sum distribution option) is the most valuable 
option for a participant with a short life expectancy because the 
grandfathered single-sum distribution option is not available with 
respect to a participant's entire accrued benefit. In addition, as 
required under paragraph (d)(2) of this section, to the extent an 
optional form of benefit that is being eliminated includes either a 
social security leveling feature or a refund of employee contributions 
feature, at least one of the core options is available with that feature 
and, to the extent that the optional form of benefit that is being 
eliminated does not include a social security leveling feature or a 
refund of employee contributions feature, each of the core options is 
available without that feature. Third, the amendment is not effective 
with respect to annuity commencement dates that are less than 4 years 
after the date the amendment is adopted. Finally, the amendment need not 
satisfy the requirements of paragraph (e) of this section because the 
retained optional forms of benefit are available on the same annuity 
commencement date and have the same actuarial present value as the 
optional forms of benefit that are being eliminated. The conclusion that 
the amendment satisfies the requirements of paragraph (d) of this 
section assumes that no amendments are made to change the core options 
before May 1, 2014.
    Example 5. (i) Facts involving reductions in actuarial present 
value. (A) Plan F is a defined benefit plan providing an accrued benefit 
of 1% of the average of a participant's highest 3 consecutive years' pay 
times years of service, payable as a straight life annuity beginning at 
the normal retirement age at age 65. Plan F permits employees to elect 
to commence actuarially reduced distributions at any time after the 
later of termination of employment or attainment of age 55. At each 
potential annuity commencement date, Plan F permits employees to select, 
with spousal consent, either a straight life annuity, a joint and 
contingent annuity with the participant having the right to select any 
beneficiary and a continuation percentage of 50%, 66 2/3%, 75%, or 100%, 
or a 10-year certain and life annuity with the participant having the 
right to select any beneficiary, subject to

[[Page 154]]

modification to the extent necessary to satisfy the requirements of the 
incidental benefit requirement of Sec.  1.401-1(b)(1)(i). The amount of 
any joint and contingent annuity and the 10-year certain and life 
annuity is determined as the actuarial equivalent of the straight life 
annuity payable at the same age using reasonable actuarial assumptions. 
The plan covers employees at 4 divisions, one of which, Division X, was 
acquired on January 1, 1999. The plan provides for distributions before 
normal retirement age to be actuarially reduced, but, if a participant 
retires after attainment of age 55 and completion of 10 years of 
service, the applicable early retirement reduction factor is 3% per year 
for the years between age 65 and 62 and 6% per year for the ages from 62 
to 55 for all employees at any division, except for employees who were 
in Division X on January 1, 1999, for whom the early retirement 
reduction factor for retirement after age 55 and 10 years of service is 
5% for each year before age 65. On June 2, 2006, effective January 1, 
2007, Plan F is amended to change the early retirement reduction factors 
for all employees of Division X to be the same as for other employees, 
effective with respect to annuity commencement dates that are on or 
after January 1, 2008, but only with respect to participants who are 
employees on or after January 1, 2008 and only if Plan F continues 
accruals at the current rate through January 1, 2008 (or the effective 
date of the change in reduction factors is delayed to reflect the change 
in the accrual rate). For purposes of this Example 5, it is assumed that 
an actuarially equivalent early retirement factor would have a reduction 
shown in column 4 of the following table, which compares the reduction 
factors for Division X before and after the amendment:

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

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

[[Page 155]]

plan amendment eliminates the most valuable option for a participant 
with a short life expectancy, the retained optional form of benefit is 
identical except for differences in actuarial factors.
    (iv) Conclusion concerning application of the requirements under 
paragraph (e) of this section. The plan amendment must satisfy the 
requirements of paragraph (e) of this section because, as of the 
December 2, 2006 adoption date, the actuarial present value of the early 
retirement subsidy is less than the actuarial present value of the early 
retirement subsidy being eliminated. The plan amendment satisfies the 
requirements under paragraph (e)(1)(i) and (2) of this section because 
the amendment eliminates optional forms of benefit that create 
significant burdens or complexities for the plan and its participants. 
See below for the de minimis requirement under paragraph (e)(1)(ii) and 
(3) of this section.
    (v) Conclusion concerning application of de minimis rules under 
paragraph (e)(5) of this section. In order to satisfy the requirements 
under paragraph (e)(1)(ii) and (3) of this section, the amendment must 
satisfy the requirements of either paragraph (e)(5) or paragraph (e)(6) 
of this section. The amendment does not satisfy the requirements of 
paragraph (e)(5) of this section because the reduction in the actuarial 
present value is more than a de minimis amount under paragraph (e)(5) of 
this section. For example, for Employee E, the amount of the joint and 
contingent annuity payable at age 55 is reduced from $7,500 (50% of 
$15,000) to $7,350 (49% of $15,000) and the reduction in present value 
as a result of the amendment is $1,828 ($91,397--$89,569). In this case, 
the retirement-type subsidy at age 55 is the excess of the present value 
of the 50% early retirement benefit over the present value of the 
deferred payment of the accrued benefit, or $13,921 ($97,269--$83,348) 
and the present value at age 54 of the retirement-type subsidy is 
$13,081. The reduction in present value is more than the greater of 2% 
of the present value of the retirement-type subsidy and 1% of E's 
compensation because the reduction in present value exceeds $800 (the 
greater of $262, which is 2% of the present value of the retirement-type 
subsidy for the benefit being eliminated, and $800, which is 1% of E's 
compensation of $80,000).
    (vi) Conclusion involving application of de minimis rules under 
paragraph (e)(6) of this section relating to expected transition period. 
The amendment satisfies the requirements of paragraph (e)(6) of this 
section and, thus, satisfies the requirements of paragraph (c) of this 
section, including the requirement in paragraph (c)(1)(iii) of this 
section that paragraph (e) of this section be satisfied. First, as 
assumed under the facts above, the amendment reduces optional forms of 
benefit that are burdensome or complex. Second, the plan amendment is 
not effective for annuity commencement dates before January 1, 2008, and 
that date is not earlier than the longest expected transition period for 
any participant in Plan F on the date of the amendment. Third, the 
amendment does not apply to any participant who has a severance from 
employment during the transition period. If, however, a later plan 
amendment reduces accruals under Plan F, the initial plan amendment will 
no longer satisfy the requirements of paragraph (e)(6) of this section 
(and must be voided) unless, as part of the later amendment, the 
expected transition period is extended to reflect the reduction in 
accruals under Plan F.
    Example 6. (i) Facts involving elimination of noncore options using 
utilization test--(A) In general. Plan G is a calendar year defined 
benefit plan under which participants may elect to commence 
distributions after termination of employment in the following 
actuarially equivalent forms, with spousal consent, if applicable: a 
straight life annuity; a 50%, 75%, or 100% joint and contingent annuity; 
or a 5-year, 10-year, or a 15-year term certain and life annuity. A 
participant is permitted to elect a single-sum distribution if the 
present value of the participant's nonforfeitable accrued benefit is not 
greater than $5,000. The annuities offered under the plan are generally 
available both with and without a social security leveling feature. The 
social security leveling feature provides for an assumed commencement of 
social security benefits at any age selected by the participant between 
the ages of 62 and 67. Under Plan G, the normal retirement age is 
defined as age 65.
    (B) Utilization test. In 2007, the plan sponsor of Plan G, after 
reviewing participants' benefit elections, determines that, during the 
period from January 1, 2005, through June 30, 2007, no participant has 
elected a 5-year term certain and life annuity with a social security 
leveling option. During that period, Plan G has made the 5-year term 
certain and life annuity with a social security leveling option 
available to 142 participants who were at least age 55 and who elected 
optional forms of benefit with an annuity commencement dates during that 
period. In addition, during that period, 20 of the 142 participants 
elected a single-sum distribution and there was no retirement-type 
subsidy available for a limited period of time. Plan G, in accordance 
with paragraph (f)(1) of this section, is amended on September 15, 2007, 
effective as of January 1, 2008, to eliminate all 5-year term certain 
and life annuities with a social security leveling option for all 
annuity commencement dates on or after January 1, 2008.
    (ii) Conclusion. The amendment satisfies the requirements of 
paragraph (f) of this section. First, the 5-year term certain and life

[[Page 156]]

annuity with a social security leveling option is not a core option as 
defined in paragraph (g)(5) of this section. Second, the plan amendment 
is not applicable with respect to an optional form of benefit with an 
annuity commencement date that is earlier than the number of days in the 
maximum QJSA explanation period after the date the amendment is adopted. 
Third, the 5-year term certain and life annuity with a social security 
leveling option has been available to at least 50 participants who are 
taken into account for purposes of paragraph (f) of this section during 
the look-back period. Fourth, during the look-back period, no 
participant elected any optional form that is part of the generalized 
optional form being eliminated (for example, the 5-year term and life 
annuity with a social security leveling option).

    (i) [Reserved]
    (j) Effective dates--(1) General effective date. Except as otherwise 
provided in this paragraph (j), the rules of this section apply to 
amendments adopted on or after August 12, 2005.
    (2) Effective date for rules relating to contingent event benefits. 
Paragraph (b)(1)(ii) of this section applies to amendments adopted after 
December 31, 2005.
    (3) Effective dates for rules relating to section 411(a) 
nonforfeitability provisions--(i) Application of suspension of benefit 
rules to section 411(d)(6) protected benefits. With respect to a plan 
amendment that places greater restrictions or conditions on a 
participant's rights to section 411(d)(6) protected benefits by adding 
or modifying a plan provision relating to suspension of benefit payments 
during a period of employment or reemployment, the rules provided in 
paragraph (a)(3) of this section apply to periods beginning on or after 
June 7, 2004.
    (ii) Application of section 411(a) nonforfeitability provisions to 
section 411(d)(6) protected benefits. With respect to a plan amendment 
that places greater restrictions or conditions on a participant's rights 
to section 411(d)(6) protected benefits other than a plan amendment 
described in paragraph (j)(3)(i) of this section, the rules provided in 
paragraph (a)(3) of this section apply to plan amendments adopted after 
August 9, 2006.
    (4) Effective date for change to redundancy rule regarding 
bifurcation of benefits. The rules provided in paragraph (c)(6) of this 
section are applicable for amendments adopted after August 9, 2006.
    (5) Effective date for rules relating to utilization test. The rules 
provided in paragraph (f) of this section are applicable for amendments 
adopted after December 31, 2006.

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



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

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

Such benefits, to the extent they have accrued, are subject to the 
protection of section 411(d)(6) and, where applicable, the definitely 
determinable requirement of section 401(a) (including section 
401(a)(25)) and cannot, therefore, be reduced, eliminated, or made 
subject to employer discretion except to the extent permitted by 
regulations.
    (b) Optional forms of benefit--(1) In general. The term optional 
form of benefit has the same meaning as in Sec.  1.411(d)-3(g)(6)(ii). 
Under this definition, different optional forms of benefit exist if a 
distribution alternative is not payable on substantially the same terms 
as another distribution alternative. Thus, for example, different 
optional forms of benefit may result from differences in terms relating 
to the payment schedule, timing, commencement, medium of distribution 
(e.g., in cash or in kind), election rights, differences in eligibility 
requirements, or the portion of the benefit to which the distribution 
alternative applies.
    (2) Examples. The following examples illustrate the meaning of the 
term ``optional form of benefit.'' Other issues, such as the requirement 
that the optional forms satisfy section

[[Page 157]]

401(a)(4), are not addressed in these examples and no inferences are 
intended with respect to such requirements. Assume that the distribution 
forms, including those not described in these examples, provided under 
the plan in each of the following examples are identical in all respects 
not described.

    Example 1. A plan permits each participant to receive his benefit 
under the plan as a single sum distribution; a level monthly 
distribution schedule over 15 years; a single life annuity; a joint and 
50 percent survivor annuity; a joint and 75 percent survivor annuity; a 
joint and 50 percent survivor annuity with a benefit increase for the 
participant if the beneficiary dies before a specified date; and joint 
and 50 percent survivor annuity with a 10 year certain feature. Each of 
these benefit distribution options is an optional form of benefit 
(without regard to whether the values of these options are actuarially 
equivalent).
    Example 2. A plan permits each participant who is employed by 
division A to receive his benefit in a single sum distribution payable 
upon termination from employment and each participant who is employed by 
division B in a single sum distribution payable upon termination from 
employment on or after the attainment of age 50. This plan provides two 
single sum optional forms of benefit.
    Example 3. A plan permits each participant to receive his benefit in 
a single life annuity that commences in the month after the 
participant's termination from employment or in a single life annuity 
that commences upon the completion of five consecutive one year breaks 
in service. These are two optional forms of benefit.
    Example 4. A profit-sharing plan permits each participant who is 
employed by division A to receive an in-service distribution upon the 
satisfaction of objective criteria set forth in the plan designed to 
determine whether the participant has a heavy and immediate financial 
need, and each participant who is employed by division B to receive an 
in-service distribution upon the satisfaction of objective criteria set 
forth in the plan designed to determine whether the participant has a 
heavy and immediate financial need attributable to extraordinary medical 
expenses. These in-service distribution options are two optional forms 
of benefits.
    Example 5. A profit-sharing plan permits each participant who is 
employed by division A to receive an in-service distribution up to 
$5,000 and each participant who is employed by division B to receive an 
in-service distribution of up to his total benefit. These in-service 
distribution options differ as to the portion of the accrued benefit 
that may be distributed in a particular form and are, therefore, two 
optional forms of benefit.
    Example 6. A profit-sharing plan provides for a single sum 
distribution on termination of employment. The plan is amended in 1991 
to eliminate the single sum optional form of benefit with respect to 
benefits accrued after the date of amendment. This single sum optional 
form of benefit continues to be a single optional form of benefit 
although, over time, the percentage of various employees' accrued 
benefits that are potentially payable under this single sum may vary 
because the form is only available with respect to benefits accrued up 
to and including the date of the amendment.
    Example 7. A profit-sharing plan permits each participant to receive 
a single sum distribution of his benefit in cash or in the form of a 
specified class of employer stock. This plan provides two single sum 
distribution optinal forms of benefit.
    Example 8. A stock bonus plan permits each participant to receive a 
single sum distribution of his benefit in cash or in the form of the 
property in which such participant's benefit was invested prior to the 
distribution. This plan's single sum distribution option provides two 
optional forms of benefit.
    Example 9. A defined benefit plan provides for an early retirement 
benefit payable upon termination of employment after attainment of age 
55 and either after ten years of service or, if earlier, upon plan 
termination to employees of Division A and provides for an identical 
early retirement benefit payable on the same terms with the exception of 
payment on plan termination to employees of Division B. The plan 
provides for two optional forms of benefit.
    Example 10. A profit-sharing plan provides for loans secured by an 
employee's account balance. In the event of default on such a loan, 
there is an execution on such account balances. Such execution is a 
distribution of the employee's accrued benefits under the plan. A 
distribution of an accrued benefit contingent on default under a plan 
loan secured by such accrued benefits is an optional form of benefit 
under the plan.

    (c) Plan terms--(1) General rule. Generally, benefits described in 
section 411(d)(6)(A), early retirement benefits, retirement-type 
subsidies, and optional forms of benefit are section 411(d)(6) protected 
benefits only if they are provided under the terms of a plan. However, 
if an employer establishes a pattern of repeated plan amendments 
providing for similar benefits in similar situations for substantially 
consecutive, limited periods of time, such benefits will be treated as 
provided under the terms of the plan, without regard to the limited 
periods of time, to the

[[Page 158]]

extent necessary to carry out the purposes of section 411(d)(6) and, 
where applicable, the definitely determinable requirement of section 
401(a), including section 401(a)(25). A pattern of repeated plan 
amendments providing that a particular optional form of benefit is 
available to certain named employees for a limited period of time is 
within the scope of this rule and may result in such optional form of 
benefit being treated as provided under the terms of the plan to all 
employees covered under the plan without regard to the limited period of 
time and the limited group of named employees.
    (2) Effective date. The provisions of paragraph (c)(1)of this Q&A-1 
are effective as of July 11, 1988. Thus, patterns or repeated plan 
amendments adopted and effective before July 11, 1988 will be 
disregarded in determining whether such amendments have created an 
ongoing optional form of benefit under the plan.
    (d) Benefits that are not section 411(d)(6) protected benefits. The 
following benefits are examples of items that are not section 411(d)(6) 
protected benefits:
    (1) Ancillary life insurance protection;
    (2) Accident or health insurance benefits;
    (3) Social security supplements described in section 411(a)(9), 
except qualified social security supplements as defined in Sec.  
1.401(a)(4)-12;
    (4) The availability of loans (other than the distribution of an 
employee's accrued benefit upon default under a loan);
    (5) The right to make after-tax employee contributions or elective 
deferrals described in section 402(g)(3);
    (6) The right to direct investments;
    (7) The right to a particular form of investment (e.g., investment 
in employer stock or securities or investment in certain types of 
securities, commercial paper, or other investment media);
    (8) The allocation dates for contributions, forfeitures, and 
earnings, the time for making contributions (but not the conditions for 
receiving an allocation of contributions or forfeitures for a plan year 
after such conditions have been satisfied), and the valuation dates for 
account balances;
    (9) Administrative procedures for distributing benefits, such as 
provisions relating to the particular dates on which notices are given 
and by which elections must be made; and
    (10) Rights that derive from administrative and operational 
provisions, such as mechanical procedures for allocating investment 
experience among accounts in defined contribution plans.
    Q-2: To what extent may section 411(d)(6) protected benefits under a 
plan be reduced or eliminated?
    A-2:
    (a) Reduction or elimination of section 411(d)(6) protected 
benefits--(1) In general. A plan is not permitted to be amended to 
eliminate or reduce a section 411(d)(6) protected benefit that has 
already accrued, except as provided in Sec.  1.411(d)-3 or this section. 
This is generally the case even if such elimination or reduction is 
contingent upon the employee's consent. However, a plan may be amended 
to eliminate or reduce section 411(d)(6) protected benefits with respect 
to benefits not yet accrued as of the later of the amendment's adoption 
date or effective date without violating section 411(d)(6).
    (2) Selection of optional forms of benefit--(i) General rule. A plan 
may treat a participant as receiving his entire nonforfeitable accrued 
benefit under the plan if the participant receives his benefit in an 
optional form of benefit in an amount determined under the plan that is 
at least the actuarial equivalent of the employee's nonforfeitable 
accrued benefit payable at normal retirement age under the plan. This is 
true even though the participant could have elected to receive an 
optional form of benefit with a greater actuarial value than the value 
of the optional form received, such as an optional form including 
retirement-type subsidies, and without regard to whether such other, 
more valuable optional form could have commenced immediately or could 
have become available only upon the employee's future satisfaction of 
specified eligibility conditions.
    (ii) Election of an optional form. Except as provided in paragraph 
(a)(2)(iii) of this Q&A-2, a plan does not violate

[[Page 159]]

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

[[Page 160]]

not be eliminated or reduced except as otherwise permitted under this 
regulation. See Q&A-3 of this section with respect to the transfer of 
benefits between and among defined benefit and defined contribution 
plans.
    (ii) Annuity contracts--(A) General rule. The right of a participant 
to receive a benefit in the form of cash payments from the plan and the 
right of a participant to receive that benefit in the form of the 
distribution of an annuity contract that provides for cash payments that 
are identical in all respects to the cash payments from the plan except 
with respect to the source of the payments are not separate optional 
forms of benefit. Therefore, for example, if a plan includes an optional 
form of benefit under which benefits are distributed in the medium of an 
annuity contract that provides for cash payments, that optional form of 
benefit may be modified by a plan amendment that substitutes cash 
payments from the plan for the annuity contract, where those cash 
payments from the plan are identical to the cash payments payable from 
the annuity contract in all respects except with respect to the source 
of the payments. The protection provided by section 411(d)(6) may not be 
avoided by the use of annuity contracts. Thus, section 411(d)(6) 
protected benefits already accrued may not be eliminated or reduced 
merely because a plan uses annuity contracts to provide such benefits, 
without regard to whether the plan, a participant, or a beneficiary of a 
participant holds the contract or whether such annuity contracts are 
purchased as a result of the termination of the plan. However, to the 
extent that an annuity contract constitutes payment of benefits in a 
particular optional form elected by the participant, the plan does not 
violate section 411(d)(6) merely because it provides that other optional 
forms are no longer available with respect to such participant. See 
paragraph (a)(2) of this Q&A-2.
    (B) Examples. The provisions of this paragraph (a)(3)(ii) can be 
illustrated by the following examples:

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

[[Page 161]]

plan participants of either a valuable right or an employer-subsidized 
optional form of benefit where a similar optional form of benefit with a 
comparable subsidy is not provided or to the extent such elimination or 
reduction is necessary to permit compliance with other requirements of 
section 401(a) (e.g., sections 401(a)(4), 401(a)(9) and 415). The 
Commissioner may exercise this authority only through the publication of 
revenue rulings, notices, and other documents of general applicability.
    (2) Section 411(d)(6) protected benefits that may be eliminated or 
reduced. The elimination or reduction of certain section 411(d)(6) 
protected benefits that have already accrued in the following situations 
does not violate section 411(d)(6). The rules with respect to 
permissible eliminations and reductions provided in this paragraph 
(b)(2) generally are effective January 30, 1986; however, the rules of 
paragraphs (b)(2)(iii) (A) and (B) and (b)(2)(viii) of this Q&A-2 are 
effective for plan amendments that are adopted and effective on or after 
September 6, 2000. These exceptions create no inference with respect to 
whether any other applicable requirements are satisfied (for example, 
requirements imposed by section 401(a)(9) and section 401(a)(14)).
    (i) Change in statutory requirement. A plan may be amended to 
eliminate or reduce a section 411(d)(6) protected benefit if the 
following three requirements are met: the amendment constitutes timely 
compliance with a change in law affecting plan qualification; there is 
an exercise of section 7805(b) relief by the Commissioner; and the 
elimination or reduction is made only to the extent necessary to enable 
the plan to continue to satisfy the requirements for qualified plans. In 
general, the elimination or reduction of a section 411(d)(6) protected 
benefit will not be treated as necessary if it is possible through other 
modifications to the plan (e.g., by expanding the availability of an 
optional form of benefit to additional employees) to satisfy the 
applicable qualification requirement.
    (ii) Joint and survivor annuity. A plan that provides a range of 
three or more actuarially equivalent joint and survivor annuity options 
may be amended to eliminate any of such options, other than the options 
with the largest and smallest optional survivor payment percentages, 
even if the effect of such amendment is to change which of the options 
is the qualified joint and survivor annuity under section 417. Thus, for 
example, if a money purchase pension plan provides three joint and 
survivor annuity options with survivor payments of 50%, 75% and 100%, 
respectively, that are uniform with respect to age and are actuarially 
equivalent, then the employer may eliminate the option with the 75% 
survivor payment, even if this option had been the qualified joint and 
survivor annuity under the plan.
    (iii) In-kind distributions--(A) In-kind distributions payable under 
defined contribution plans in the form of marketable securities other 
than employer securities. If a defined contribution plan includes an 
optional form of benefit under which benefits are distributed in the 
form of marketable securities, other than securities of the employer, 
that optional form of benefit may be modified by a plan amendment that 
substitutes cash for the marketable securities as the medium of 
distribution. For purposes of this paragraph (b)(2)(iii)(A) and 
paragraph (b)(2)(iii)(B) of this Q&A-2, the term marketable securities 
means marketable securities as defined in section 731(c)(2), and the 
term securities of the employer means securities of the employer as 
defined in section 402(e)(4)(E)(ii).
    (B) Amendments to defined contribution plans to specify medium of 
distribution. If a defined contribution plan includes an optional form 
of benefit under which benefits are distributable to a participant in a 
medium other than cash, the plan may be amended to limit the types of 
property in which distributions may be made to the participant to the 
types of property specified in the amendment. For this purpose, the 
types of property specified in the amendment must include all types of 
property (other than marketable securities that are not securities of 
the employer) that are allocated to the participant's account on the 
effective date of the amendment and in which the participant would be 
able to receive a

[[Page 162]]

distribution immediately before the effective date of the amendment if a 
distributable event occurred. In addition, a plan amendment may provide 
that the participant's right to receive a distribution in the form of 
specified types of property is limited to the property allocated to the 
participant's account at the time of distribution that consists of 
property of those specified types.
    (C) In-kind distributions after plan termination. If a plan includes 
an optional form of benefit under which benefits are distributed in 
specified property, that optional form of benefit may be modified for 
distributions after plan termination by substituting cash for the 
specified property as the medium of distribution to the extent that, on 
plan termination, an employee has the opportunity to receive the 
optional form of benefit in the form of the specified property. This 
exception is not available, however, if the employer that maintains the 
terminating plan also maintains another plan that provides an optional 
form of benefit under which benefits are distributed in the specified 
property.
    (D) Examples. The following examples illustrate the application of 
this paragraph (b)(2)(iii):

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

[[Page 163]]

the distribution. See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
    (D) A plan amendment that limits non-cash distributions to a 
participant on termination of employment to a distribution of employer 
stock and shares of PQR limited partnership, and that provides that only 
participants with employer stock allocated to their accounts as of the 
effective date of the amendment have the right to distributions in the 
form of employer stock, and that only participants with shares of PQR 
limited partnership allocated to their accounts as of the effective date 
of the amendment have the right to distributions in the form of shares 
of PQR limited partnership, and that further provides that the 
distribution of that stock or those shares is available only to the 
extent that those assets are allocated to those participants' accounts 
at the time of the distribution. To comply with the plan amendment, the 
plan administrator retains a list of participants with employer stock 
allocated to their accounts as of the effective date of the amendment, 
and a list of participants with shares of PQR limited partnership 
allocated to their accounts as of the effective date of the amendment. 
See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
    Example 3. (i) An employer maintains a stock bonus plan under which 
a participant, upon termination of employment, may elect to receive 
benefits in a single-sum distribution in employer stock. This is the 
only plan maintained by the employer under which distributions in 
employer stock are available. The employer decides to terminate the 
stock bonus plan.
    (ii) If the plan makes available a single-sum distribution in 
employer stock on plan termination, the plan will not fail to satisfy 
section 411(d)(6) solely because the optional form of benefit providing 
a single-sum distribution in employer stock on termination of employment 
is modified to provide that such distribution is available only in cash. 
See paragraph (b)(2)(iii)(C) of this Q&A-2.

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

[[Page 164]]

    Example 2. Corporations X and Y are members of controlled group 
employer XY. Both X and Y maintain defined contribution plans. X's plan, 
which is not subject to section 412, covers only employees working for 
X. Y's plan, which is subject to section 412, covers only employees 
working for Y. X terminates its defined contribution plan. Because 
employer XY maintains another defined contribution plan, plan X may not 
provide for the distribution of participants' accrued benefits upon 
termination without a participants' consent.

    (vii) Distribution of benefits on default of loans. Notwithstanding 
that the distribution of benefits arising from an execution on an 
account balance used to secure a loan on which there has been a default 
is an optional form of benefit, a plan may be amended to eliminate or 
change a provision for loans, even if such loans would be secured by an 
employee's account balance.
    (viii) Provisions for transfer of benefits between and among defined 
contribution plans and defined benefit plans. A plan may be amended to 
eliminate provisions permitting the transfer of benefits between and 
among defined contribution plans and defined benefit plans.
    (ix) De minimis change in the timing of an optional form of benefit. 
A plan may be amended to modify an optional form of benefit by changing 
the timing of the availability of such optional form if, after the 
change, the optional form is available at a time that is within two 
months of the time such optional form was available before the 
amendment. To the extent the optional form of benefit is available prior 
to termination of employment, six months may be substituted for two 
months in the prior sentence. Thus, for example, a plan that makes in-
service distributions available to employees once every month may be 
amended to make such in-service distributions available only once every 
six months. This exception to section 411(d)(6) relates only to the 
timing of the availability of the optional form of benefit. Other 
aspects of an optional form of benefit may not be modified and the value 
of such optional form may not be reduced merely because of an amendment 
permitted by this exception.
    (x) Amendment of hardship distribution standards. A qualified cash 
or deferred arrangement that permits hardship distributions under Sec.  
1.401(k)-1(d)(3) may be amended to specify or modify nondiscriminatory 
and objective standards for determining the existence of an immediate 
and heavy financial need, the amount necessary to meet the need, or 
other conditions relating to eligibility to receive a hardship 
distribution. For example, a plan will not be treated as violating 
section 411(d)(6) merely because it is amended to specify or modify the 
resources an employee must exhaust to qualify for a hardship 
distribution or to require employees to provide additional statements or 
representations to establish the existence of a hardship. A qualified 
cash or deferred arrangement may also be amended to eliminate hardship 
distributions. The provisions of this paragraph also apply to profit-
sharing or stock bonus plans that permit hardship distributions, whether 
or not the hardship distributions are limited to those described in 
Sec.  1.401(k)-1(d)(3).
    (xi) Section 415 benefit limitations. Accrued benefits under a plan 
as of the first day of the first limitation year beginning after 
December 31, 1986, that exceed the benefit limitations under section 415 
(b) or (e), effective on the first day of the plan's first limitation 
year beginning after December 31, 1986, because of a change in the terms 
and conditions of the plan made after May 5, 1986, or the establishment 
of a plan after that date, may be reduced to the level permitted under 
section 415 (b) or (e).
    (xii) Prohibited payment option under single-employer defined 
benefit plan of plan sponsor in bankruptcy. A single-employer plan that 
is covered under section 4021 of the Employee Retirement Income Security 
Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), as amended 
(ERISA), may be amended, effective for a plan amendment that is both 
adopted and effective after November 8, 2012, to eliminate an optional 
form of benefit that includes a prohibited payment described in section 
436(d)(5), provided that the following conditions are satisfied on the 
applicable amendment date (as defined in Sec.  1.411(d)-3(g)(4)):

[[Page 165]]

    (A) The enrolled actuary of the plan has certified that the plan's 
adjusted funding target attainment percentage (as defined in section 
436(j)(2)) for the plan year that contains the applicable amendment date 
is less than 100 percent.
    (B) The plan is not permitted to pay any prohibited payment, due to 
application of the requirements of section 436(d)(2) of the Internal 
Revenue Code and section 206(g)(3)(B) of ERISA, because the plan sponsor 
is a debtor in a bankruptcy case (that is, a case under title 11, United 
States Code, or under similar Federal or State law).
    (C) The court overseeing the bankruptcy case has issued an order, 
after notice to the affected parties (as defined in section 4001(a)(21) 
of ERISA) and a hearing, within the meaning of 11 U.S.C. 102(1), finding 
that the adoption of the amendment eliminating that optional form of 
benefit is necessary to avoid a distress termination of the plan 
pursuant to section 4041(c) of ERISA or an involuntary termination of 
the plan pursuant to section 4042 of ERISA before the plan sponsor 
emerges from bankruptcy (or before the bankruptcy case is otherwise 
completed).
    (D) The Pension Benefit Guaranty Corporation has issued a 
determination that--
    (1) The adoption of the amendment eliminating that optional form of 
benefit is necessary to avoid a distress or involuntary termination of 
the plan before the plan sponsor emerges from bankruptcy (or before the 
bankruptcy case is otherwise completed); and
    (2) The plan is not sufficient for guaranteed benefits within the 
meaning of section 4041(d)(2) of ERISA.
    (c) Multiple amendments--(1) General rule. A plan amendment violates 
the requirements of section 411(d)(6) if it is one of a series of plan 
amendments that, when taken together, have the effect of reducing or 
eliminating a section 411(d)(6) protected benefit in a manner that would 
be prohibited by section 411(d)(6) if accomplished through a single 
amendment.
    (2) Determination of time period for combining plan amendments. For 
purposes of paragraph (c)(1) of this Q&A-2, generally only plan 
amendments adopted within a 3-year period are taken into account. But 
see Q&A-1(c)(1) of this section for rules relating to repeated plan 
amendments.
    (d) ESOP and stock bonus plan exception--(1) In general. Subject to 
the limitations in paragraph (d)(2) of this Q&A-2, a tax credit employee 
stock ownership plan (as defined in section 409(a)) or an employee stock 
ownership plan (as defined in section 4975(e)(7)) will not be treated as 
violating the requirements of section 411(d)(6) merely because of any of 
the circumstances described in paragraphs (d)(1)(i) through (d)(1)(iv) 
of this Q&A-2. In addition, a stock bonus plan that is not an employee 
stock ownership plan will not be treated as violating the requirements 
of section 411(d)(6) merely because of any of the circumstances 
described in paragraphs (d)(1)(ii) and (d)(1)(iv) of this Q&A-2.
    (i) Single sum or installment optional forms of benefit. The 
employer eliminates, or retains the discretion to eliminate, with 
respect to all participants, a single sum optional form or installment 
optional form with respect to benefits that are subject to section 
409(h)(1)(B), provided such elimination or retention of discretion is 
consistent with the distribution and payment requirements otherwise 
applicable to such plans (e.g., those required by section 409).
    (ii) Employer becomes substantially employee-owned or is an S 
corporation. The employer eliminates, or retains the discretion to 
eliminate, with respect to all participants, optional forms of benefit 
by substituting cash distributions for distributions in the form of 
employer stock with respect to benefits subject to section 409(h) in the 
circumstances described in paragraph (d)(1)(ii)(A) or (B) of this Q&A-2, 
but only if the employer otherwise meets the requirements of section 
409(h)(2)--
    (A) The employer becomes substantially employee-owned; or
    (B) For taxable years of the employer beginning after December 31, 
1997, the employer is an S corporation as defined in section 1361.
    (iii) Employer securities become readily tradable. The employer 
eliminates, or retains the discretion to eliminate, with respect to all 
participants, in cases in which the employer securities

[[Page 166]]

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 transfer, then the consecutive periods under the 
transferor and transferee employee stock ownership plans may be 
aggregated for purposes of meeting the five-year requirement. If the 
benefits are held in an employee stock ownership plan throughout the 
entire period of their existence, and such total period of existence is 
less than five years, then such lesser period may be substituted for the 
five year requirement.
    (3) Effective date. The provisions of this paragraph (d) are 
effective beginning with the first day of the first plan year commencing 
on or after January 1, 1989. Prior to this effective date the reduction 
or elimination of a section 411(d)(6) protected benefit by a tax credit 
employee stock ownership plan (as defined in section 409(a)) or an 
employee stock ownership plan (as defined in section 4975(e)(7)) will 
not be treated as violating the requirements of section 411(d)(6) if 
such reduction or elimination reflects a reasonable interpretation of 
the statutory language of section 411(d)(6)(C).
    (4) Additional exceptions and requirements. The Commissioner may, in 
revenue rulings, notices or other documents of general applicability, 
prescribe such additional rules and exceptions, consistent with the 
purposes of this section, as may be necessary or appropriate.
    (e) Permitted plan amendments affecting alternative forms of payment 
under defined contribution plans--(1) General rule. A defined 
contribution plan does not violate the requirements of section 411(d)(6) 
merely because the plan is amended to eliminate or restrict the ability 
of a participant to receive payment of accrued benefits under a 
particular optional form of benefit for distributions with annuity 
starting dates after the date the amendment is adopted if, after the 
plan amendment is effective with respect to the participant, the 
alternative forms of payment available to the participant include 
payment in a single-sum distribution form that is otherwise identical to 
the optional form of benefit that is being eliminated or restricted.

[[Page 167]]

    (2) Otherwise identical single-sum distribution. For purposes of 
this paragraph (e), a single-sum distribution form is otherwise 
identical to an optional form of benefit that is eliminated or 
restricted pursuant to paragraph (e)(1) of this Q&A-2 only if the 
single-sum distribution form is identical in all respects to the 
eliminated or restricted optional form of benefit (or would be identical 
except that it provides greater rights to the participant) except with 
respect to the timing of payments after commencement. For example, a 
single-sum distribution form is not otherwise identical to a specified 
installment form of benefit if the single-sum distribution form is not 
available for distribution on the date on which the installment form 
would have been available for commencement, is not available in the same 
medium of distribution as the installment form, or imposes any condition 
of eligibility that did not apply to the installment form. However, an 
otherwise identical distribution form need not retain rights or features 
of the optional form of benefit that is eliminated or restricted to the 
extent that those rights or features would not be protected from 
elimination or restriction under section 411(d)(6) or this section.
    (3) Example. The following example illustrates the application of 
this paragraph (e):

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

    (4) Effective date. This paragraph (e) is applicable on January 25, 
2005.
    Q-3 Does the transfer of benefits between and among defined benefit 
plans and defined contribution plans (or similar transactions) violate 
the requirements of section 411(d)(6)?
    A-3 (a) Transfers and similar transactions--(1) General rule. 
Section 411(d)(6) protected benefits may not be eliminated by reason of 
transfer or any transaction amending or having the effect of amending a 
plan or plans to transfer benefits. Thus, for example, except as 
otherwise provided in this section, an employer who maintains a money 
purchase pension plan that provides for a single sum optional form of 
benefit may not establish another plan that does not provide for this 
optional form of benefit and transfer participants' account balances to 
such new plan.
    (2) Defined benefit feature and separate account feature. The 
defined benefit feature of an employee's benefit under a defined benefit 
plan and the separate account feature of an employee's benefit under a 
defined contribution plan are section 411(d)(6) protected benefits. 
Thus, for example, the elimination of the defined benefit feature of an 
employee's benefit under a defined benefit plan, through transfer of 
benefits from a defined benefit plan to a defined contribution plan or 
plans, will violate section 411(d)(6).
    (3) Waiver prohibition. In general, except as provided in paragraph 
(b) of this Q&A-3, a participant may not elect to waive section 
411(d)(6) protected benefits. Thus, for example, the elimination of the 
defined benefit feature of a participant's benefit under a defined 
benefit plan by reason of a

[[Page 168]]

transfer of such benefits to a defined contribution plan pursuant to a 
participant election, at a time when the benefit is not distributable to 
the participant, violates section 411(d)(6).
    (4) Direct rollovers. A direct rollover described in Q&A-3 of Sec.  
1.401(a)(31)-1 that is paid to a qualified plan is not a transfer of 
assets and liabilities that must satisfy the requirements of section 
414(l), and is not a transfer of benefits for purposes of applying the 
requirements under section 411(d)(6) and paragraph (a)(1) of this Q&A-3. 
Therefore, for example, if such a direct rollover is made to another 
qualified plan, the receiving plan is not required to provide, with 
respect to amounts paid to it in a direct rollover, the same optional 
forms of benefit that were provided under the plan that made the direct 
rollover. See Sec.  1.401(a)(31)-1, Q&A-14.
    (b) Elective transfers of benefits between defined contribution 
plans--(1) General rule. A transfer of a participant's entire benefit 
between qualified defined contribution plans (other than any direct 
rollover described in Q&A-3 of Sec.  1.401(a)(31)-1) that results in the 
elimination or reduction of section 411(d)(6) protected benefits does 
not violate section 411(d)(6) if the following requirements are met--
    (i) Voluntary election. The plan from which the benefits are 
transferred must provide that the transfer is conditioned upon a 
voluntary, fully-informed election by the participant to transfer the 
participant's entire benefit to the other qualified defined contribution 
plan. As an alternative to the transfer, the participant must be offered 
the opportunity to retain the participant's section 411(d)(6) protected 
benefits under the plan (or, if the plan is terminating, to receive any 
optional form of benefit for which the participant is eligible under the 
plan as required by section 411(d)(6)).
    (ii) Types of plans to which transfers may be made. To the extent 
the benefits are transferred from a money purchase pension plan, the 
transferee plan must be a money purchase pension plan. To the extent the 
benefits being transferred are part of a qualified cash or deferred 
arrangement under section 401(k), the benefits must be transferred to a 
qualified cash or deferred arrangement under section 401(k). To the 
extent the benefits being transferred are part of an employee stock 
ownership plan as defined in section 4975(e)(7), the benefits must be 
transferred to another employee stock ownership plan. Benefits 
transferred from a profit-sharing plan other than from a qualified cash 
or deferred arrangement, or from a stock bonus plan other than an 
employee stock ownership plan, may be transferred to any type of defined 
contribution plan.
    (iii) Circumstances under which transfers may be made. The transfer 
must be made either in connection with an asset or stock acquisition, 
merger, or other similar transaction involving a change in employer of 
the employees of a trade or business (i.e., an acquisition or 
disposition within the meaning of Sec.  1.410(b)-2(f)) or in connection 
with the participant's change in employment status to an employment 
status with respect to which the participant is not entitled to 
additional allocations under the transferor plan.
    (2) Applicable qualification requirements. A transfer described in 
this paragraph (b) is a transfer of assets or liabilities within the 
meaning of section 414(l)(1) and, thus, must satisfy the requirements of 
section 414(l). In addition, this paragraph (b) only provides relief 
under section 411(d)(6); a transfer described in this paragraph must 
satisfy all other applicable qualification requirements. Thus, for 
example, if the survivor annuity requirements of sections 401(a)(11) and 
417 apply to the plan from which the benefits are transferred, as 
described in this paragraph (b), but do not otherwise apply to the 
receiving plan, the requirements of sections 401(a)(11) and 417 must be 
met with respect to the transferred benefits under the receiving plan. 
In addition, the vesting provisions under the receiving plan must 
satisfy the requirements of section 411(a)(10) with respect to the 
amounts transferred.
    (3) Status of elective transfer as other right or feature. A right 
to a transfer of benefits from a plan pursuant to the elective transfer 
rules of this paragraph (b) is an other right or feature within the 
meaning of Sec.  1.401(a)(4)-

[[Page 169]]

4(e)(3), the availability of which is subject to the nondiscrimination 
requirements of section 401(a)(4) and Sec.  1.401(a)(4)-4. However, for 
purposes of applying the rules of Sec.  1.401(a)(4)-4, the following 
conditions are to be disregarded in determining the employees to whom 
the other right or feature is available--
    (i) A condition restricting the availability of the transfer to 
benefits of participants who are transferred to a different employer in 
connection with a specified asset or stock disposition, merger, or other 
similar transaction involving a change in employer of the employees of a 
trade or business (i.e., a disposition within the meaning of Sec.  
1.410(b)-2(f)), or in connection with any such disposition, merger, or 
other similar transaction.
    (ii) A condition restricting the availability of the transfer to 
benefits of participants who have a change in employment status to an 
employment status with respect to which the participant is not entitled 
to additional allocations under the transferor plan.
    (c) Elective transfers of certain distributable benefits between 
qualified plans--(1) In general. A transfer of a participant's benefits 
between qualified plans that results in the elimination or reduction of 
section 411(d)(6) protected benefits does not violate section 411(d)(6) 
if--
    (i) The transfer occurs at a time at which the participant's 
benefits are distributable (within the meaning of paragraph (c)(3) of 
this Q&A-3);
    (ii) For a transfer that occurs on or after January 1, 2002, the 
transfer occurs at a time at which the participant is not eligible to 
receive an immediate distribution of the participant's entire 
nonforfeitable accrued benefit in a single-sum distribution that would 
consist entirely of an eligible rollover distribution within the meaning 
of section 401(a)(31)(C);
    (iii) The voluntary election requirements of paragraph (b)(1)(i) of 
this Q&A-3 are met;
    (iv) The participant is fully vested in the transferred benefit in 
the transferee plan;
    (v) In the case of a transfer from a defined contribution plan to a 
defined benefit plan, the defined benefit plan provides a minimum 
benefit, for each participant whose benefits are transferred, equal to 
the benefit, expressed as an annuity payable at normal retirement age, 
that is derived solely on the basis of the amount transferred with 
respect to such participant; and
    (vi) The amount of the benefit transferred, together with the amount 
of any contemporaneous section 401(a)(31) direct rollover to the 
transferee plan, equals the entire nonforfeitable accrued benefit under 
the transferor plan of the participant whose benefit is being 
transferred, calculated to be at least the greater of the single-sum 
distribution provided for under the plan for which the participant is 
eligible (if any) or the present value of the participant's accrued 
benefit payable at normal retirement age (calculated by using interest 
and mortality assumptions that satisfy the requirements of section 
417(e) and subject to the limitations imposed by section 415).
    (2) Treatment of transfer--(i) In general. A transfer of benefits 
pursuant to this paragraph (c) generally is treated as a distribution 
for purposes of section 401(a). For example, the transfer is subject to 
the cash-out rules of section 411(a)(7), the early termination 
requirements of section 411(d)(2), and the survivor annuity requirements 
of sections 401(a)(11) and 417. A transfer pursuant to the elective 
transfer rules of this paragraph (c) is not treated as a distribution 
for purposes of the minimum distribution requirements of section 
401(a)(9).
    (ii) Status of elective transfer as optional form of benefit. A 
right to a transfer of benefits from a plan pursuant to the elective 
transfer rules of this paragraph (c) is an optional form of benefit 
under section 411(d)(6), the availability of which is subject to the 
nondiscrimination requirements of section 401(a)(4) and Sec.  
1.401(a)(4)-4.
    (3) Distributable benefits. For purposes of paragraph (c)(1)(i) of 
this Q&A-3, a participant's benefits are distributable on a particular 
date if, on that date, the participant is eligible, under the terms of 
the plan from which the benefits are transferred, to receive an 
immediate distribution of these benefits (e.g., in the form of an 
immediately commencing annuity) from that plan

[[Page 170]]

under provisions of the plan not inconsistent with section 401(a).
    (d) Effective date. This Q&A-3 is applicable for transfers made on 
or after September 6, 2000.
    Q-4: May a plan provide that the employer may, through the exercise 
of discretion, deny a participant a section 411(d)(6) protected benefit 
for which the participant is otherwise eligible?
    A-4: (a) In general. Except as provided in paragraph (d) of Q&A-2 of 
this section with respect to certain employee stock ownership plans, a 
plan that permits the employer, either directly or indirectly, through 
the exercise of discretion, to deny a participant a section 411(d)(6) 
protected benefit provided under the plan for which the participant is 
otherwise eligible (but for the employer's exercise of discretion) 
violates the requirements of section 411(d)(6). A plan provision that 
makes a section 411(d)(6) protected benefit available only to those 
employees as the employer may designate is within the scope of this 
prohibition. Thus, for example, a plan provision under which only 
employees who are designated by the employer are eligible to receive a 
subsidized early retirement benefit constitutes an impermissible 
provision under section 411(d)(6). In addition, a pension plan that 
permits employer discretion to deny the availability of a section 
411(d)(6) protected benefit violates the definitely determinable 
requirement of section 401(a), including section 401(a)(25). See Sec.  
1.401-1(b)(1)(i). This is the result even if the plan specifically 
limits the employer's discretion to choosing among section 411(d)(6) 
protected benefits, including optional forms of benefit, that are 
actuarially equivalent. In addition, the provisions of sections 
411(a)(11) and 417(e) that allow a plan to make involuntary 
distributions of certain amounts are not excepted from this limitation 
on employer discretion. Thus, for example, a plan may not permit 
employer discretion with respect to whether benefits will be distributed 
involuntarily in the event that the present value of the employee's 
benefit is not more than the cash-out limit in effect under Sec.  
1.411(a)-11(c)(3)(ii) within the meaning of sections 411(a)(11) and 
417(e). (An exception is provided for such provisions with respect to 
the nondiscrimination requirements of section 401(a)(4). See Sec.  
1.401(a)(4)-4(b)(2)(ii)(C).)
    (b) Exception for administrative discretion. A plan may permit 
limited discretion with respect to the ministerial or mechanical 
administration of the plan, including the application of objective plan 
criteria specifically set forth in the plan. Such plan provisions do not 
violate the requirements of section 411(d)(6) or the definitely 
determinable requirement of section 401(a), including section 
401(a)(25). For example, these requirements are not violated by the 
following provisions that permit limited administrative discretion:
    (1) Commencement of benefit payments as soon as administratively 
feasible after a stated date or event;
    (2) Employer authority to determine whether objective criteria 
specified in the plan (e.g., objective criteria designed to identify 
those employees with a heavy and immediate financial need or objective 
criteria designed to determine whether an employee has a permanent and 
total disability) have been satisfied; and
    (3) Employer authority to determine, pursuant to specific guidelines 
set forth in the plan, whether the participant or spouse is dead or 
cannot be located.
    Q-5: When will the exercise of discretion by some person or persons, 
other than the employer, be treated as employer discretion?
    A-5: For purposes of applying the rules of this section and Sec.  
1.401(a)-4, the term ``employer'' includes plan administrator, 
fiduciary, trustee, actuary, 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).

[[Page 171]]

    Q-6: May a plan condition the availability of a section 411(d)(6) 
protected benefit on the satisfaction of objective conditions that are 
specifically set forth in the plan?
    A-6: (a) Certain objective conditions permissible--(1) In general. 
The availability of a section 411(d)(6) protected benefit may be limited 
to employees who satisfy certain objective conditions provided the 
conditions are ascertainable, clearly set forth in the plan and not 
subject to the employer's discretion except to the extent reasonably 
necessary to determine whether the objective conditions have been met. 
Also, the availability of the section 411(d)(6) protected benefit must 
meet the nondiscrimination requirements of section 401(a)(4). See Sec.  
1.401(a)-4.
    (2) Examples of permissible conditions. The following examples 
illustrate of permissible objective conditions: a plan may deny a single 
sum distribution form to employees for whom life insurance is not 
available at standard rates as defined under the terms of the plan at 
the time the single sum distribution would otherwise be payable; a plan 
may provide that a single sum distribution is available only if the 
employee is in extreme financial need as defined under the terms of the 
plan at the time the single sum distribution would otherwise be payable; 
a plan my condition the availability of a single sum distribution on the 
execution of a covenant not to compete, provided that objective 
conditions with respect to the terms of such covenant and the employees 
and circumstances requiring execution of such covenant are set forth in 
the plan.
    (b) Conditions based on factors within employer's discretion 
generally impermissible. A plan may not limit the availability of 
section 411(d)(6) protected benefits permitted under the plan on 
objective conditions that are within the employer's discretion. For 
example, the availability of section 411(d)(6) protected benefits in a 
plan may not be conditioned on a determination with respect to the level 
of the plan's funded status, because the amount of plan funding is 
within the employer's discretion. However, for example, although 
conditions based on the plan's funded status are impermissible, a plan 
may limit the availability of a section 411(d)(6) protected benefit 
(e.g., a single sum distribution) in an objective manner, such as the 
following:
    (1) Single sum distributions of $25,000 and less are available 
without limit; and
    (2) Single sum distributions in excess of $25,000 are available for 
a year only to the extent that the total amount of such single sum 
distributions for the year is not greater than $5,000,000; and
    (3) An objective and nondiscriminatory method for determining which 
particular single sum distributions will not be available during a year 
in order for the $5,000,000 limit to be satisfied is set forth in the 
plan.
    Q-7: May a plan be amended to add employer discretion or conditions 
restricting the availability of a section 411(d)(6) protected benefit?
    A-7: No. The addition of employer discretion or objective conditions 
with respect to a section 411(d)(6) protected benefit that has already 
accrued violates section 411(d)(6). Also, the addition of conditions 
(whether or not objective) or any change to existing conditions with 
respect to section 411(d)(6) protected benefits that results in any 
further restriction violates section 411(d)(6). However, the addition of 
objective conditions to a section 411(d)(6) protected benefit may be 
made with respect to benefits accrued after the later of the adoption or 
effective date of the amendment. In addition, objective conditions may 
be imposed on section 411(d)(6) protected benefits accrued as of the 
date of an amendment where permitted under the transitional rules of 
Sec.  1.401(a)-4 Q&A-5 and Q&A-8 of this 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

[[Page 172]]

(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

[[Page 173]]

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

[[Page 174]]

benefit as if the plan were a new plan. A limited exception is provided 
with respect to existing plans that provided a particular section 
411(d)(6) protected benefit prior to January 30, 1986, and then amended 
the plan after January 30, 1986, and before August 1, 1986, to add a 
provision for employer discretion with respect to the availability of 
such benefit. Such plans are required to have been amended retroactively 
by December 31, 1987, to remove such provision for employer discretion, 
and, if the benefit made subject to such discretion was subsequently 
eliminated, the plan is required to have been further amended, by the 
same date, to retroactively reinstate the benefit.
    (3) Exception for certain amendments covered by a favorable 
determination letter. If an amendment adding a section 411(d)(6) 
protected benefit subject to employer discretion was adopted or made 
effective after August 1, 1986, and the plan receives a favorable 
determination letter covering such provision with respect to an 
application for such letter made prior to July 11, 1988, then the 
effective date for purposes of amending such provision under the 
transitional rules is the applicable effective date determined under the 
rules with respect to existing plans.
    (e) Transitional rule effective date. The transitional rule provided 
in Q&A-8 of this section is effective January 30, 1986.
    Q-10: If a plan provides for an age 70\1/2\ distribution option that 
commences prior to retirement from employment with the employer 
maintaining the plan, to what extent may the plan be amended to 
eliminate this distribution option?
    A-10: (a) In general. The right to commence benefit distributions in 
a particular form and at a particular time prior to retirement from 
employment with the employer maintaining the plan is a separate optional 
form of benefit within the meaning of section 411(d)(6)(B) and Q&A-1 of 
this section, even if the plan provision creating this right was 
included in the plan solely to comply with section 401(a)(9), as in 
effect for years before January 1, 1997. Therefore, except as otherwise 
provided in paragraph (b) of this Q&A-10 or any other Q&A in this 
section, a plan amendment violates section 411(d)(6) if it eliminates an 
age 70\1/2\ distribution option (within the meaning of paragraph (c) of 
this Q&A-10) to the extent that it applies to benefits accrued as of the 
later of the adoption date or effective date of the amendment.
    (b) Permitted elimination of age 70\1/2\ distribution option. An 
amendment of a plan will not violate the requirements of section 
411(d)(6) merely because the amendment eliminates an age 70\1/2\ 
distribution option to the extent that the option provides for 
distribution to an employee prior to retirement from employment with the 
employer maintaining the plan, provided that--
    (1) The amendment eliminating this optional form of benefit applies 
only to benefits with respect to employees who attain age 70\1/2\ in or 
after a calendar year, specified in the amendment, that begins after the 
later of--
    (i) December 31, 1998; or
    (ii) The adoption date of the amendment;
    (2) The plan does not, except to the extent required by section 
401(a)(9), preclude an employee who retires after the calendar year in 
which the employee attains age 70\1/2\ from receiving benefits in any of 
the same optional forms of benefit (except for the difference in the 
timing of the commencement of payments) that would have been available 
had the employee retired in the calendar year in which the employee 
attained age 70\1/2\; and
    (3) The amendment is adopted no later than--
    (i) The last day of the remedial amendment period that applies to 
the plan for changes under the Small Business Job Protection Act of 1996 
(110 Stat. 1755); or
    (ii) Solely in the case of a plan maintained pursuant to one or more 
collective bargaining agreements between employee representatives and 
one or more employers ratified before September 3, 1998, the last day of 
the twelfth month beginning after the date on which the last of such 
collective bargaining agreements terminates (determined without regard 
to any extension thereof on or after September 3, 1998), if later than 
the date described in paragraph (b)(3)(i) of this Q&A-10. For purposes 
of this paragraph (b)(3)(ii), the

[[Page 175]]

rules of Sec.  1.410(b)-10(a)(2) apply for purposes of determining 
whether a plan is maintained pursuant to one or more collective 
bargaining agreements, except that September 3, 1998 is substituted for 
March 1, 1986, as the date before which the collective bargaining 
agreements must be ratified.
    (c) Age 70\1/2\ distribution option. For purposes of this Q&A-10, an 
age 70\1/2\ distribution option is an optional form of benefit under 
which benefits payable in a particular distribution form (including any 
modifications that may be elected after benefit commencement) commence 
at a time during the period that begins on or after January 1 of the 
calendar year in which an employee attains age 70\1/2\ and ends April 1 
of the immediately following calendar year.
    (d) Examples. The provisions of this Q&A-10 are illustrated by the 
following examples:

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

    (e) Effective date. This Q&A-10 applies to amendments adopted and 
effective after June 5, 1998.
    Q-11: To what extent may a plan amendment that is made pursuant to 
the Taxpayer Relief Act of 1997 (TRA '97) (Public Law 105-34, 111 Stat. 
788), reduce or eliminate section 411(d)(6) protected benefits?
    A-11: A plan amendment does not violate the requirements of section 
411(d)(6) merely because the plan amendment reduces or eliminates 
section 411(d)(6) protected benefits as of

[[Page 176]]

the effective date of the plan amendment, provided that--
    (a) The plan amendment is made pursuant to an amendment made by 
title XV, or subtitle H of title X, of TRA '97; and
    (b) The plan amendment is adopted no later than the last day of any 
remedial amendment period that applies to the plan pursuant to 
Sec. Sec.  1.401(b)-1 and 1.401(b)-1T for changes under TRA '97.
    Q-12. Is there a transition period during which a plan is permitted 
to eliminate a right to in-service distributions in connection with an 
amendment to ensure that the plan's normal retirement age satisfies the 
requirements of Sec.  1.401(a)-1(b)(2)?
    A-12. (a) In general. A plan amendment that changes the normal 
retirement age under the plan to a later normal retirement age pursuant 
to Sec.  1.401(a)-1(b)(2) does not violate section 411(d)(6) merely 
because it eliminates a right to an in-service distribution prior to the 
amended normal retirement age. However, this paragraph does not provide 
relief from any other applicable requirements; for example, this relief 
does not permit the amendment to violate section 411(a)(9) (requiring 
that the normal retirement benefit not be less than the greater of any 
early retirement benefit payable under the plan or the benefit under the 
plan commencing at normal retirement age), section 411(a)(10) (if the 
amendment changes the plan's vesting rules), section 411(d)(6) (other 
than elimination of the right to an in-service distribution prior to the 
amended normal retirement age), or section 4980F (relating to an 
amendment that reduces the rate of future benefit accrual). This 
paragraph only applies to a plan amendment that is adopted after May 22, 
2007 and on or before the last day of the applicable remedial amendment 
period under Sec.  1.401(b)-1 with respect to the requirements of Sec.  
1.401(a)-1(b)(2) and (3).
    (b) Example. The following example illustrates the application of 
this section:

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

[[Page 177]]

the amendment does not result in a reduction in any benefit for service 
after May 22, 2007.
    Thus, the amendment does not result in a reduction in any benefit 
for future service, and advance notice of a significant reduction in the 
rate of future benefit accrual is not required under section 4980F.

[53 FR 26058, July 11, 1988]

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



Sec.  1.411(d)-5  [Reserved]



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

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

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



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

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

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



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

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

[[Page 178]]

    (i) The plan is a collectively bargained plan described in section 
413(a), and
    (ii) Contributions to the plan are made at a rate specified under 
the terms of a legally binding agreement applicable to the plan.

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

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

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

[[Page 179]]

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:

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


[[Page 180]]

    (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.

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

[[Page 181]]

 
7. Net shortfall charge for year       120,000      135,000      165,000
 (line 5 x line 6)...............
8. Shortfall (gain) or loss (line       30,000       15,000    ($15,000)
 3-line 7).......................
------------------------------------------------------------------------


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


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

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

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


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


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

                   (D) Reconciliation of computations

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

    (h) Amortization of experience gain or loss--(1) General rule. In 
the case of a plan using an immediate gain type of funding method, an 
experience gain or loss shall be amortized pursuant to section 412 
(b)(2)(B)(iv) or (b)(3)(B)(ii). (Examples of the immediate gain type of 
funding method are the unit credit method, the entry age normal cost 
method, and the individual level premium cost method.) For purposes of 
this section, a shortfall gain or loss is not an experience gain or 
loss. The amount of the experience gain or loss must be adjusted for 
interest at the rate used for determining the plan's normal cost.
    (2) Experience amortization period under shortfall method--(i) First 
year. The plan year in which the amortization of an experience gain or 
loss must begin in the case of a plan using the

[[Page 182]]

shortfall method is the earlier of two years: the fifth plan year 
following the plan year in which the experience gain or loss arose, or 
the first plan year beginning after the last scheduled expiration date 
of a contract in effect during the plan year in which the experience 
gain or loss arose. For purposes of this subparagraph a contract 
expiring on the last day of the plan year shall be deemed to be renewed 
on such last day for the same period of years as the contract that 
succeeds the expiring contract.
    (ii) Last year. The plan year in which the amortization of an 
experience gain or loss must end in the case of a plan using the 
shortfall method is the 15th plan year following the plan year in which 
the experience gain or loss arose. For a multi-employer plan described 
in section 414 (f), the amortization must end with the 20th plan year 
instead of the 15th.
    (3) Use of annual computation charge in determining experience gain 
or loss. In the case of a plan using an immediate gain type of funding 
method, an experience gain or loss is the difference between the 
expected unfunded liability and the actual unfunded liability under the 
plan. The expected unfunded liability as of the end of a plan year 
equals the actual unfunded liability as of the beginning of the year 
plus normal cost, minus contributions, all adjusted for interest. If the 
plan adopts the shortfall method, the expected unfunded liability is 
computed by using the normal cost applicable for the plan year in 
determining the annual computation charge under paragraph (d) of this 
section. The same normal cost is used in computing the unfunded 
liability under the frozen initial liability funding method.
    (4) Example. This paragraph is illustrated by the following example:

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

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


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


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

[[Page 183]]

required by the applicable forms and the instructions for such forms.
    (j) Transitional rule. In lieu of paragraphs (g)(2) and (h)(2) of 
this section relating to the amortization period for shortfall and 
experience gains and losses, for gains and losses arising in plan years 
beginning before January 1, 1981, a plan may rely on the prior published 
position of the Internal Revenue Service with respect to the 
amortization period for shortfall and experience gains and losses.
    (k) Supersession. This section and Sec.  1.412 (c) (1)-1 supersede 
Sec. Sec.  11.412 (c) (1)-1 and (c) (1)-2 of the Temporary Income Tax 
Regulations Under the Employee Retirement Income Security Act of 1974.

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

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



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

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

    Example. A pension plan uses the calendar year as its plan year, 
makes its annual periodic valuation as of January 1, and uses the

[[Page 184]]

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

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

[[Page 185]]

satisfies the requirements of paragraph (c)(2) of this section.
    (4) Deferral of minimum scheduled annual payment amounts--(i) 
Authority to grant deferral. Not later than 2\1/2\ months following the 
end of the plan year, the PBGC may grant a deferral of the charges 
required in the restoration payment schedule for that plan year if the 
requirements in paragraph (c)(4)(ii) of this section are satisfied. The 
PBGC may require the plan sponsor and its controlled group members to 
provide security to the plan as a condition to granting a deferral.
    (ii) Determination of business hardship. Before granting a deferral 
under this paragraph (c)(4), the PBGC must make a determination that the 
granting of the deferral is in the best interests of plan participants 
and the plan termination insurance system, and that the plan sponsor and 
its controlled group members are unable to make the scheduled 
restoration payments without experiencing temporary substantial business 
hardship. In making these determinations, the factors the PBGC shall 
consider, include, but are not limited to, the following--
    (A) Whether the plan sponsor and its controlled group members are 
operating at an economic loss;
    (B) Whether there is substantial unemployment or underemployment in 
the trades or businesses of the plan sponsor and its controlled group 
members;
    (C) Whether the sales and profits of the industry or industries are 
depressed or declining; and
    (D) Whether it is reasonable to expect that the plan termination 
insurance system will suffer a greater loss if the plan is terminated 
than if it is continued as a restored plan.
    (iii) Amount of deferral. The amount of the deferral for any 
particular plan year may not exceed the lesser of the amount that would 
have been required to be contributed under the restoration payment 
schedule for that year or interest at the valuation rate on the 
outstanding balance of the initial restoration amortization base for 
that year. An amortization payment for a deferral granted for a prior 
plan year may not be deferred. No deferral may extend the overall 
restoration payment period beyond 30 years.
    (iv) Modification of payment schedule. The restoration payment 
schedule must be adjusted to reflect any deferral granted for a plan 
year in the manner prescribed in this paragraph (c). The charge 
otherwise specified in the schedule is reduced by the amount of any 
deferral. The charges under the restoration payment schedule for the 
subsequent plan years are increased by the amounts in paragraph 
(c)(4)(v) of this section.
    (v) Amortization of deferred amount. The amount of any deferral 
granted by the PBGC for any plan year must be amortized in level amounts 
over five years or such shorter period as may be prescribed by the PBGC, 
at the valuation rate, beginning with the plan year following the year 
of the deferral.
    (vi) Number of deferrals permitted. The PBGC may not grant more than 
five deferrals of the minimum scheduled payments as required by this 
section during the restoration payment period and no more than three of 
these deferrals may be granted during the first ten years of that 
period.
    (vii) Deferrals override minimum annual charges and interim 
amortization requirements. In determining the minimum annual charge 
under paragraph (c)(2)(ii) of this section and in applying the interim 
amortization requirements of paragraph (c)(2)(iii) of this section, the 
unamortized balances of any deferrals granted by the PBGC under this 
paragraph shall be added to the outstanding balance of the initial 
restoration amortization base otherwise allowable.
    (d) Charging the scheduled restoration payments to the funding 
standard account. In addition to any other charges and credits 
prescribed in the normal operation of the funding standard account under 
section 412, the amount of each payment specified in the restoration 
payment schedule shall be charged against the funding standard account 
of the plan for the plan year to which that payment is attributed in the 
restoration payment schedule. To the extent that the restoration payment 
schedule provides for payments before the end of the plan year, the 
annual charge to the funding standard account

[[Page 186]]

attributable to the restoration payment schedule is equal to the sum of 
the periodic payments for the plan year accumulated with interest at the 
valuation rate to the last day of the plan year.
    (e) Changes in actuarial assumptions or methods. The plan 
administrator must notify the PBGC of any changes in the actuarial 
assumptions or methods used by the plan. Upon notification of any such 
change, the PBGC may make any changes to the restoration payment 
schedule that it deems appropriate.
    (f) Change to restoration method. A plan that has been restored must 
use the restoration method until the initial restoration amortization 
base has been fully amortized. The use of this method does not require 
prior approval from the Commissioner. A plan using the restoration 
method must compute the charges to the funding standard account to 
amortize the initial restoration amortization base in accordance with 
the order of the PBGC and in accordance with this section.
    (g) Deficit reduction contribution--(1) Calculation of deficit 
reduction contribution. For any plan using the restoration method, the 
deficit reduction contribution under section 412(l)(2) is equal to the 
sum of--
    (i) The unfunded section 412(l) restoration liability amount; plus
    (ii) The unfunded new liability amount.
    (2) Unfunded section 412(l) restoration liability amount. The 
unfunded section 412(l) restoration liability amount is the amount 
necessary to amortize fully the unfunded section 412(l) restoration 
liability in installments, as prescribed by the PBGC, over not more than 
30 years. The annual amount need not be level, but at all times the 
present value of the future amortization charges prescribed under the 
restoration payment schedule, at the current liability interest rate, 
must equal the outstanding balance of the unfunded section 412(l) 
restoration liability and the schedule must provide that at the end of 
no more than 30 years the entire amount of the unfunded section 412(l) 
restoration liability base will have been fully amortized. The schedule 
prescribed for amortization of the unfunded section 412(l) restoration 
liability must comply with the requirements imposed in paragraph (c) of 
this section on the restoration payment schedule, except as provided in 
paragraph (g)(7) of this section and except that the maximum permitted 
outstanding balance of the unfunded section 412(l) restoration liability 
at the end of the tenth plan year must not be greater than the 
outstanding balance of the section 412(l) restoration liability that 
would have remained at the end of the tenth plan year if the unfunded 
section 412(l) restoration liability had been amortized in level amounts 
over the restoration payment period at the actual current liability 
interest rate for each year, increased by the current liability interest 
rate differential as defined under paragraph (g)(7) of this section. The 
unfunded section 412(l) restoration liability amount for the tenth plan 
year otherwise prescribed under the restoration payment schedule is 
increased by any outstanding current liability interest rate 
differential. By issuing an appropriate order, the PBGC may permit the 
outstanding current liability interest rate differential to be amortized 
over the tenth through the fourteenth plan years. If the PBGC permits 
the amortization of the outstanding current liability interest rate 
differential, then the unfunded section 412(l) restoration liability 
amount for each year to which an amortization payment is attributed 
under the order shall be increased by such payment. The outstanding 
balance otherwise required by paragraph (g)(2) of this section is 
increased by the outstanding balance, if any, of the base resulting from 
the amortization of the current liability interest rate differential. 
The PBGC may amend the amortization schedule for the unfunded section 
412(l) restoration liability subject to the limits on amendments to the 
amortization schedule prescribed for the initial restoration 
amortization base.
    (3) Establishment of unfunded section 412(l) restoration liability. 
In the plan year in which the initial post-restoration valuation date 
falls, the unfunded section 412(l) restoration liability is equal to the 
unfunded current liability of the plan.
    (4) Unfunded new liability amount. In the case of a plan using the 
restoration

[[Page 187]]

method, the unfunded new liability amount is the applicable percentage, 
as defined in section 412(l)(4)(C), of the unfunded new liability 
determined under paragraph (g)(5) of this section.
    (5) Unfunded new liability. The unfunded new liability of a plan 
using the restoration method is the excess, if any, of the unfunded 
current liability of the plan, within the meaning of section 
412(l)(8)(A) for the plan year (determined without taking into account 
any unpredictable contingent event benefits, even if the event has 
occurred) over the outstanding balance of the unfunded section 412(l) 
restoration liability determined under paragraph (g)(3) of this section.
    (6) Offset of amortization charges. The amounts charged to the 
funding standard account pursuant to the restoration payment schedule in 
order to amortize the initial restoration base, as described in 
paragraph (d) of this section, must be offset against the deficit 
reduction contribution in paragraph (g)(1) of this section along with 
any other applicable amounts provided in section 412(l)(1)(A)(ii).
    (7) Interest rate differential. During the first 10 plan years after 
the initial post-restoration valuation date, the restoration payment 
schedule must prescribe an unfunded section 412(l) restoration liability 
amount for each plan year that is sufficient to prevent the outstanding 
balance of the unfunded section 412(l) restoration liability from 
exceeding the initial amount of the unfunded section 412(l) restoration 
liability increased by the current liability interest rate differential. 
The current liability interest rate differential at any point during the 
first ten years of the restoration payment period is the excess, if any, 
of the outstanding balance of the unfunded section 412(l) restoration 
liability determined using the actual current liability interest rate 
for each year, taking into account the charges described in paragraph 
(d) of this section, over the outstanding balance of the unfunded 
section 412(l) restoration liability determined using the lowest, for 
each year, of the initial current liability interest rate, the current 
liability interest rate for the computation year, and the valuation 
interest rate, taking into account the charges described in paragraph 
(d) of this section.
    (h) Election of the alternative minimum funding standard. A plan 
using the restoration method may not elect the alternative minimum 
funding standard under section 412(g).
    (i) Funding review by the PBGC. The PBGC must review the funding of 
any plan using the restoration method at least once in each plan year. 
As a result of a funding review, the PBGC may amend the restoration 
payment schedule as provided in paragraph (c)(3) of this section. As 
part of the funding review, the Executive Director of the PBGC must 
certify to the PBGC's Board of Directors, and to the Internal Revenue 
Service, that the PBGC has reviewed the funding of the plan, the 
financial condition of the plan sponsor and its controlled group 
members, the payments required under the restoration payment schedule 
(taking into account the availability of deferrals authorized under 
paragraph (c)(4) of this section), and any other factor that the PBGC 
deems relevant, and, based on that review, determines that it is in the 
best interests of participants and beneficiaries of the plan and the 
pension insurance program that the restored plan not be reterminated.

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



Sec.  1.412(c)(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

[[Page 188]]

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 assets for each plan year, or portion of plan year, for 
which a valuation is made. For purposes of this section, each such day 
is a valuation date. A change in the day or days used is a change in 
funding method.
    (4) Reflect fair market value. The valuation method must take into 
account fair market value by making use of the--
    (i) Fair market value (determined under paragraph (c) of this 
section), or
    (ii) Average value (determined under paragraph (b)(7) of this 
section) of the plan's assets as of the applicable asset valuation date. 
This is done either directly in the computation of their actuarial value 
or indirectly in the computation of upper or lower limits placed on that 
value.
    (5) Results above and below fair market or average value. A method 
will not satisfy the requirements of this paragraph (b) if it is 
designed to produce a result which will be consistently above or below 
the values described in paragraph (b)(4) (i) and (ii). However, a method 
designed to produce a result which consistently falls between fair 
market value and average value will satisfy this requirement. See 
Example 5 in paragraph (b)(9) of this section for an illustration of a 
method described in the preceding sentence.

[[Page 189]]

    (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.

[[Page 190]]

    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:

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


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


[[Page 191]]

    (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.

[[Page 192]]

    (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]



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

    (a) Introduction--(1) In general. This section prescribes rules for 
determining whether or not, in the case of an ongoing plan, a funding 
method is reasonable for purposes of section 412(c)(3). A method is 
unreasonable only if it is found to be inconsistent with a rule 
prescribed in this section. The term ``reasonable funding method'' under 
this section has the same meaning as the term ``acceptable actuarial 
cost method'' under section 3(31) of the Employee Retirement Income 
Security Act of 1974 (ERISA).
    (2) Computations included in method. See Sec.  1.412(c)(1)-1(b) for 
a discussion of matters that are, and are not, included in the funding 
method of a plan.
    (3) Plans using shortfall. The shortfall method is a method of 
determining charges to the funding standard account by adapting the 
underlying funding method of certain collectively bargained plans in the 
manner described in Sec.  1.412(c)(1)-2. As such, the shortfall method 
is a funding method. The underlying method of a plan that uses the 
shortfall method must be a reasonable funding method under this section. 
The rules contained in this section, relating to cost under a reasonable 
funding method, apply in the shortfall method to the annual computation 
charge under Sec.  1.412(c)(1)-2(d).
    (4) Scope of funding method. Except for the shortfall method, a 
reasonable funding method is applied to the computation of--
    (i) The normal cost of a plan for a plan year; and, if applicable,
    (ii) The bases established under section 412(b)(2)(B), (C), and (D), 
and (3) (B) (``amortizable bases'').
    (b) General rules for reasonable funding methods--(1) Basic funding 
formula. At any time, except as provided by the Commissioner, the 
present value of future benefits under a reasonable funding method must 
equal the sum of the following amounts:
    (i) The present value of normal costs (taking into account future 
mandatory employee contributions, within the meaning of section 
411(c)(2)(C), in the case of a contributory plan) over the future 
working lifetime of participants;

[[Page 193]]

    (ii) The sum of the unamortized portions of amortizable bases, if 
any, treating credit bases under section 412(b)(3)(B) as negative 
numbers; and
    (iii) The plan assets, decreased by a credit balance (and increased 
by a debit balance) in the funding standard account under section 
412(b).
    (2) Normal cost. Normal cost under a reasonable funding method must 
be expressed as--
    (i) A level dollar amount, or a level percentage of pay, that is 
computed from year to year on either an individual basis or an aggregate 
basis; or
    (ii) An amount equal to the present value of benefits accruing under 
the method for a particular plan year.
    (3) Application to shortfall. Paragraph (b)(2) will not fail to be 
satisfied merely because an amount described in (i) or (ii) is expressed 
as permitted under the shortfall method.
    (c) Additional requirements--(1) Inclusion of all liabilities. Under 
a reasonable funding method, all liabilities of the plan for benefits, 
whether vested or not, must be taken into account.
    (2) Production of experience gains and losses. If each actuarial 
assumption is exactly realized under a reasonable funding method, no 
experience gains or losses are produced.
    (3) Plan population--(i) In general. Under a reasonable funding 
method, the plan population must include three classes of individuals: 
participants currently employed in the service of the employer; former 
participants who either terminated service with the employer, or 
retired, under the plan; and all other individuals currently entitled to 
benefits under the plan. See Sec.  1.412(c)(3)-1(d)(2) for rules 
concerning anticipated future participants.
    (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.

[[Page 194]]

    (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 Sec.  1.411(a)-7(c)(4)(ii)), and the 
vesting of plan benefits (even if more rapid than is required by section 
411) are not ancillary benefits because those benefits do not result 
from an event which is detrimental to the participant's health.
    (3) Exception for certain insurance contracts. Under a reasonable 
funding method, regardless of the method used to compute retirement 
benefit costs, the cost of an ancillary benefit may equal the premium 
paid for that benefit under an insurance contract if--
    (i) The ancillary benefit is provided under the contract, and
    (ii) The benefit is guaranteed under the contract.
    (4) Exception for 1-year term funding and other approved methods. 
[Reserved]
    (5) Section 401(h) benefits. Section 412 does not apply to benefits 
that are described in section 401(h) and for which a separate account is 
maintained.

[[Page 195]]

    (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:

[[Page 196]]

[GRAPHIC] [TIFF OMITTED] TC14NO91.161


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

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

    The proposed allocation in proportion to the accrued liabilities 
under the unit credit cost method satisfies the requirements of 
paragraph (c)(5) of this section at the beginning of the first plan year 
for which the new method is used.
    Example 7. The facts are the same as in Example 6. However, the 
actuary proposes to allocate all the assets to employee M, the older 
employee. Method F, under these facts, is not an acceptable funding 
method because the allocation is not in proportion to related 
liabilities as required under paragraph (c)(5) of this section.

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



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

    (a) Introduction. This section prescribes effective dates for rules 
relating to reasonable funding methods, under section 412(c)(3) and 
Sec.  1.412(c)(3)-1. Also, this section sets forth rules concerning 
adjustments to a plan's funding standard account that are necessitated 
by a change in funding method, and a provision setting forth procedural 
requirements for use of an optional phase-in of required changes.
    (b) Effective date--(1) General rule. Except as otherwise provided 
by subparagraph (2) of this paragraph, Sec.  1.412(c)(3)-1 applies to 
any valuation of a plan's liabilities (within the meaning of section 
412(c)(9)) as of a date after April 30, 1981.
    (2) Exception. If a collective bargaining agreement which determines 
contributions to a plan is in effect on April 30, 1981, then Sec.  
1.412(c)(3)-1 applies to any valuation of that plan's liabilities as of 
a date after the earlier of the date on which the last such collective 
bargaining agreement expires or April 30, 1984.
    (3) Transitional rule. The reasonableness of a funding method used 
in making a valuation of a plan's liability as of a date before the 
effective date determined under subparagraph (1) or (2) of this 
paragraph is determined on the basis of such published guidance as was 
available on the date as of which the valuation was made.
    (c) Change of funding method without approval--(1) In general. A 
plan that is required to change its funding method to comply with Sec.  
1.412(c)(3)-1 is not required to submit the change of funding method for 
approval as otherwise required by section 412(c)(5). However, this 
change must be described on Form 5500, Schedule B for the plan year with 
respect to which the change is first effective.
    (2) Amortization base. An amortization base must be established in 
the plan year of the change in method equal to the change in the 
unfunded liability

[[Page 197]]

due to the change (where both unfunded liabilities are based on the same 
actuarial assumptions). Such a base must be amortized over 30 years in 
determining the charges or credits to the funding standard account, 
unless the Commissioner upon application permits amortization over a 
shorter period.
    (d) Phase-in of additional funding required by new method--(1) In 
general. A plan that is required to change its funding method to comply 
with Sec.  1.412(c)(3)-1 may elect to charge and credit the funding 
standard account as provided in this paragraph. An election under this 
paragraph shall be irrevocable.
    (2) Credit in year of change. In the plan year of the change in 
method the funding standard account may be credited with an amount not 
in excess of 0.8 multiplied by the excess (if any) of--
    (i) The normal cost under the new method plus the amortization 
charge (or minus the amortization credit) computed as described in Sec.  
1.412(c)(3)-2(c)(2), over
    (ii) The normal cost under the prior method, for the plan year of 
the change in method.
    (3) Credits in the next three years. In the three years following 
the year of the change the funding standard account may be credited with 
an amount not in excess of 0.6, 0.4, and 0.2 respectively in the first, 
second, and third years, multiplied by either of the following amounts, 
computed as of the last day of the year of credit--
    (i) The excess described in Sec.  1.412(c)(3)-2(d)(2) multiplied by 
a fraction (not greater than 1), the numerator of which is the number of 
participants in the year of the credit and the denominator of which is 
the number of participants in the year of the change, or, at the option 
of the plan,
    (ii) The excess (if any) in the year of credit of--
    (A) The net charge to the funding standard account based on the new 
method, over
    (B) The net charge to the funding standing account based on the 
prior method.
    (4) Computational rules. For purposes of the calculation described 
in Sec.  1.412(c)(3)-2(d)(3)(ii), the net charge is the excess of 
charges under section 412(b)(2) (A) and (B) over the credits under 
section 412(b)(3)(B) (including the charge or credit described in Sec.  
1.412(c)(3)-2(c)) which would be required using the actuarial 
assumptions and plan benefit structure in effect on the last day of the 
plan year of change.
    (5) Fifteen-year amortization of credits. The funding standard 
account shall be charged with 15-year amortization of each credit 
described in Sec.  1.412(c)(3)-2(d) (2) and (3) beginning in the year 
following each such credit.
    (6) Manner of election. An election under this paragraph shall be 
made by the claiming of the credits described in Sec.  1.412(c)(3)-2(d) 
(2) and (3) on Schedule B to Form 5500 and by filing such other 
information as may be required by the Commissioner.
    (e) Effect on shortfall method. The charges and credits described in 
this section apply in the shortfall method to the annual computation 
charge described in Sec.  1.412(c)(1)-2(d). The amounts described in 
Sec.  1.412(c)(3)-2(d) shall be determined before the application of the 
shortfall method.

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

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



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

    (a) In general. Under section 412(h)(2) of the Internal Revenue Code 
of 1954, as added by section 1013(a) of the Employee Retirement Income 
Security Act of 1974 (88 Stat. 914) (hereinafter referred to as ``the 
Act''), an insurance contract plan described in section 412(i) for a 
plan year is not subject to the minimum funding requirements of section 
412 for that plan year. Consequently, if an individual or group 
insurance contract plan satisfies all of the requirements of paragraph 
(b)(2) or (c)(2) of this section, whichever are applicable, for the plan 
year, the plan is not subject to the requirements of section 412 for 
that plan year. The effective date for section 412 of the Code is 
determined under section 1017 of the Act. In general, in the case of a 
plan which was not in existence on January

[[Page 198]]

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

[[Page 199]]

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]

[[Page 200]]



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

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

[[Page 201]]

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

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

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


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

[[Page 202]]

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

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

[[Page 203]]

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

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

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

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



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

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

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

[[Page 204]]

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

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

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



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

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

[[Page 205]]

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

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



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

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

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



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

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

[[Page 206]]

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

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

[[Page 207]]

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

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

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

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


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

[[Page 208]]

ABC Partnership, DEF Partnership, and X Corporation are members of the 
same combined group of trades or businesses under common control.

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



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

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

[[Page 209]]

    (ii) Which is controlled directly or indirectly (within the meaning 
of paragraph (d)(7) of this section) by the parent organization or 
subsidiary organization, by an individual, estate, or trust that is a 
principal owner of the parent organization, by an officer, partner, or 
fiduciary of the parent organization, or by any combination thereof.
    (c) Brother-sister group of trades or businesses under common 
control--(1) In general. If five or fewer persons (hereinafter in this 
section referred to as ``common owners'') who are individuals, estates, 
or trusts own (directly and with the application of Sec.  1.414(c)-4)--
    (i) In the case of a corporation, 50 percent or more of the total 
combined voting power of all classes of stock entitled to vote or 50 
percent or more of the total value of shares of all classes of stock or 
such corporation,
    (ii) In the case of a trust or an estate, an actuarial interest 
(within the meaning of Sec.  1.414(c)-2(b)(2)(ii)) of 50 percent or more 
of such trust or estate, and
    (iii) In the case of a partnership, 50 percent or more of the 
profits or capital interest of such partnership, then for purposes of 
determining whether such organization is a member of a brother-sister 
group of trades or businesses under common control, an interest in such 
organization excluded under paragraph (c) (2), (3), or (4) of this 
section shall be treated as not outstanding.
    (2) Exempt employees' trust. An interest which is an interest in or 
stock of such organization held by an employees' trust described in 
section 401(a) which is exempt from tax under section 501(a) shall be 
excluded if such trust is for the benefit of the employees of such 
organization.
    (3) Employees. An interest which is an interest in or stock of such 
organization owned (directly and with the application of Sec.  1.414(c)-
4) by an employee of such organization shall be excluded if such 
interest or stock is subject to conditions which run in favor of a 
common owner of such organization or in favor of such organization and 
which substantially restrict or limit the employee's right (or if the 
employee constructively owns such interest or stock, the direct or 
record owner's right) to dispose of such interest or stock.
    (4) Controlled exempt organization. An interest which is an interest 
in or stock of such organization shall be excluded if owned (directly 
and with the application of Sec.  1.414(c)-4) by an organization:
    (i) To which section 501(c)(3) (relating to certain educational and 
charitable organizations which are exempt from tax) applies, and
    (ii) Which is controlled directly or indirectly (within the meaning 
of paragraph (d)(7) of this section) by such organization, by an 
individual, estate, or trust that is a principal owner of such 
organization, by an officer, partner, or fiduciary of such organization, 
or by any combination thereof.
    (d) Definitions--(1) Employee. For purposes of this section, the 
term ``employee'' has the same meaning such term is given in section 
3306(i) of the Code (relating to definitions for purposes of the Federal 
Unemployment Tax Act).
    (2) Principal owner. For purposes of this section, the term 
``principal owner'' means a person who owns (directly and with the 
application of Sec.  1.414(c)-4)--
    (i) In the case of a corporation, 5 percent or more of the total 
combined voting power of all classes of stock entitled to vote in such 
corporation or 5 percent of more of the total value of shares of all 
classes of stock of such corporation;
    (ii) In the case of a trust or estate, an actuarial interest of 5 
percent or more of such trust or estate; or
    (iii) In the case of a partnership, 5 percent or more of the profits 
or capital interest of such partnership.
    (3) Officer. For purposes of this section, the term ``officer'' 
includes the president, vice-presidents, general manager, treasurer, 
secretary, and comptroller of a corporation, and any other person who 
performs duties corresponding to those normally performed by persons 
occupying such positions.
    (4) Partner. For purposes of this section, the term ``partner'' 
means any person defined in section 7701(a)(2) (relating to definitions 
of partner).

[[Page 210]]

    (5) Fiduciary. For purposes of this section and Sec.  1.414(c)-4, 
the term ``fiduciary'' has the same meaning as such term is given in 
section 7701(a)(6) and the regulations thereunder.
    (6) Substantial conditions. (i) In general. For purposes of this 
section, an interest in or stock of an organization is subject to 
conditions which substantially restrict or limit the right to dispose of 
such interest or stock and which run in favor of another person if the 
condition extends directly or indirectly to such person preferential 
rights with respect to the acquisition of the direct owner's (or the 
record owner's) interest or stock. For a condition to be in favor of 
another person it is not necessary that such person be extended a 
discriminatory concession with respect to price. A right of first 
refusal with respect to an interest or stock in favor of another person 
is a condition which substantially restricts or limits the direct or 
record owner's right of disposition which runs in favor of such person. 
Further, any legally enforceable condition which prohibits the direct or 
record owner from disposing of his or her interest or stock without the 
consent of another person will be considered to be a substantial 
limitation running in favor of such person.
    (ii) Special rule. For purposes of paragraph (c)(3) of this section 
only, if a condition which restricts or limits an employee's right (or 
direct or record owner's right) to dispose of his or her interest or 
stock also applies to the interest or stock in such organization held by 
a common owner pursuant to a bonafide reciprocal purchase arrangement, 
such condition shall not be treated as a substantial limitation or 
restriction. An example of a reciprocal purchase arrangement is an 
agreement whereby a common owner and the employee are given a right of 
first refusal with respect to stock of the employer corporation owned by 
the other party. If, however, the agreement also provides that the 
common owner has the right to purchase the stock of the employer 
corporation owned by the employee in the event the corporation should 
discharge the employee for reasonable cause, the purchase arrangement 
would not be reciprocal within the meaning of this subdivision.
    (7) Control. For purposes of paragraphs (b)(6) and (c)(4) of this 
section, the term ``control'' means control in fact. The determination 
of whether there exists control in fact will depend upon all of the 
facts and circumstances of each case, without regard to whether such 
control is legally enforceable and irrespective of the method by which 
such control is exercised or exercisable.
    (e) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. ABC Partnership owns 70 percent of the capital interest 
and of the profits interest in the DEF Partnership. The remaining 
capital interest and profits interest in DEF is owned as follows: 4 
percent by A (a general partner in ABC), and 26 percent by D (a limited 
partner in ABC). ABC satisfies the 50-percent capital interest or 
profits interest ownership requirement of paragraph (b)(1)(iii) of this 
section with respect to DEF. Since A and D are partners of ABC, under 
paragraph (b)(4) of this section the capital and profits interests in 
DEF owned by A and D are treated as not outstanding for purposes of 
determining whether ABC and DEF are members of a parent-subsidiary group 
of trades or businesses under common control under Sec.  1.414 (c)-2(b). 
Thus, ABC is considered to own 100 percent (70 / 70) of the capital 
interest and profits interest in DEF. Accordingly, ABC and DEF are 
members of a parent-subsidiary group of trades or businesses under 
common control.
    Example 2. Assume the same facts as in example (1) and assume 
further that A owns 15 shares of the 100 shares of the only class of 
stock of S Corporation and DEF Partner-ship owns 75 shares of such 
stock. ABC satisfies the 50 percent stock requirement of paragraph 
(b)(1)(i) of this section with respect to S since ABC is considered as 
owning 52.5 percent (70 percent x 75 percent) of the S stock with the 
application of Sec.  1.414 (c)-4(b)(2). Since A is a partner of ABC, the 
S stock owned by A is treated as not outstanding for purposes of 
determining whether S is a member of a parent-subsidiary group of trades 
or businesses under common control. Thus, DEF Partnership is considered 
to own stock possessing 88.2 percent (75 / 85) of the voting power and 
value of the S stock. Accordingly, ABC Partnership, DEF Partnership, and 
S Corporation are members of a parent-subsidiary group of trades or 
businesses under common control.
    Example 3. ABC Partnership owns 60 percent of the only class of 
stock of Corporation Y. D, the president of Y, owns the remaining 40 
percent of the stock of Y. D has agreed that if she offers her stock in 
Y for sale she

[[Page 211]]

will first offer the stock to ABC at a price equal to the fair market 
value of the stock on the first date the stock is offered for sale. 
Since D is an employee of Y within the meaning of section 3306(i) of the 
Code and her stock in Y is subject to a condition which substantially 
restricts or limits her right to dispose of such stock and runs in favor 
of ABC Partnership, under paragraph (b)(5) of this section such stock is 
treated as not outstanding for purposes of determining whether ABC and Y 
are members of a parent-subsidiary group of trades or businesses under 
common control. Thus, ABC Partnership is considered to own stock 
possessing 100 percent of the voting power and value of the stock of Y. 
Accordingly, ABC Partnership and Y Corporation are members of a parent-
subsidiary group of trades or businesses under common control. The 
result would be the same if D's husband, instead of D, owned directly 
the 40 percent stock interest in Y and such stock was subject to a right 
of first refusal running in favor of ABC Partnership.

    (f) Exception--(1) In general. If an interest in an organization 
(including stock of a corporation) is owned by a person directly or with 
the application of the rules of paragraph (b) of Sec.  1.414 (c)-4 and 
such ownership results in the membership of that organization in a group 
of two or more trades or businesses under common control for any period, 
then the interest will not be treated as an excluded interest under 
paragraph (b) or (c) of this section if the result of applying such 
provisions is that the organization is not a member of a group of two or 
more trades or businesses under common control for the period.
    (2) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. Corporation P owns directly 50 of the 100 shares of the 
only class of stock of corporation S. A, an officer of P, owns directly 
30 shares of S stock which P has an option to acquire. If, under 
paragraph (b)(4) of this section, the 30 shares owned directly by A are 
treated as not outstanding, P would be treated as owning stock 
possessing only 71 percent (50/70) of the total voting power and value 
of S stock, and S should not be a member of a parent-subsidiary group of 
trades or businesses under common control. However, because the 30 
shares owned by A that P has an option to purchase are considered as 
owned by P under paragraph (b)(2) of this section, and that ownership 
plus P's direct ownership of 50 shares result in S's membership in a 
parent-subsidiary group of trades or businesses under common control for 
1985, the provisions of this paragraph apply. Therefore, A's stock is 
not treated as an excluded interest and S is a member of a parent-
subsidiary group consisting of P and S.

[T.D. 8179, 53 FR 6607, Mar. 2, 1988; 53 FR 8302, Mar. 14, 1988]



Sec.  1.414(c)-4  Rules for determining ownership.

    (a) In general. In determining the ownership of an interest in an 
organization for purposes of Sec.  1.414(c)-2 and Sec.  1.414(c)-3, the 
constructive ownership rules of paragraph (b) of this section shall 
apply, subject to the operating rules contained in paragraph (c). For 
purposes of this section the term ``interest'' means: in the case of a 
corporation, stock; in the case of a trust or estate, an actuarial 
interest; in the case of a partnership, an interest in the profits or 
capital; and in the case of a sole proprietorship, the proprietorship.
    (b) Constructive ownership--(1) Options. If a person has an option 
to acquire any outstanding interest in an organization, such interest 
shall be considered as owned by such person. For this purpose, an option 
to acquire an option, and each one of a series of such options shall be 
considered as an option to acquire such interest.
    (2) Attribution from partnerships--(i) General. An interest owned, 
directly or indirectly, by or for a partnership shall be considered as 
owned by any partner having an interest of 5 percent or more in either 
the profits or capital of the partnership in proportion to such 
partner's interest in the profits or capital, whichever such proportion 
is greater.
    (ii) Example. The provisions of paragraph (b)(2)(i) of this section 
may be illustrated by the following example:

    Example. A, B, and C, unrelated individuals, are partners in the ABC 
Partnership. The partners' interest in the capital and profits of ABC 
are as follows:

                              (In percent)
------------------------------------------------------------------------
                  Partner                      Capital        Profits
------------------------------------------------------------------------
A.........................................       36             25
B.........................................       60             71
C.........................................        4              4
------------------------------------------------------------------------

    The ABC Partnership owns the entire outstanding stock (100 shares) 
of X Corporation. Under paragraph (b)(2)(i) of this section, A is 
considered to own the stock of X owned by

[[Page 212]]

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 Sec.  20.2031-7 or, for certain prior periods, 
Sec.  20.2031-7A (Estate Tax Regulations) for use in ascertaining the 
value of an interest in property for estate tax purposes shall be used 
for purposes of this subdivision in determining a beneficiary's 
actuarial interest in an organization interest owned directly or 
indirectly by or for an estate or trust.
    (ii) Special rules for estates. (A) For purposes of this paragraph 
(b)(3) with respect to an estate, property of a decedent shall be 
considered as owned by his or her estate if such property is subject to 
administration by the executor or administrator for the purposes of 
paying claims against the estate and expenses of administration 
notwithstanding that, under local law, legal title to such property 
vests in the decedent's heirs, legatees or devisees immediately upon 
death.
    (B) For purposes of this paragraph (b)(3) with respect to an estate, 
the term ``beneficiary'' includes any person entitled to receive 
property of a decedent pursuant to a will or pursuant to laws of descent 
and distribution.
    (C) For purposes of this paragraph (b)(3) with respect to an estate, 
a person shall no longer be considered a beneficiary of an estate when 
all the property to which he or she is entitled has been received by him 
or her, when he or she no longer has a claim against the estate arising 
out of having been a beneficiary, and when there is only a remote 
possibility that it will be necessary for the estate to seek the return 
of property from him or her or to seek payment from him or her by 
contribution or otherwise to satisfy claims against the estate or 
expenses of administration.
    (iii) Grantor trusts, etc. An interest owned, directly or 
indirectly, by or for any portion of a trust of which a person is 
considered the owner under subpart E, part I, subchapter J of the Code 
(relating to grantors and others treated as substantial owners) is 
considered as owned by such person.
    (4) Attribution from corporations--(i) General. An interest owned, 
directly or indirectly, by or for a corporation shall be considered as 
owned by any person who owns (directly and, in the case of a parent-
subsidiary group of trades or

[[Page 213]]

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 x 50), and X is considered to own 18 shares of S 
stock (36/100 x 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 x 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 Sec.  1.414(c)-
3(d)(6)(i) shall apply in determining whether a condition is a condition 
described in the preceding sentence.
    (iii) Definitions. For purposes of paragraph (b)(5)(ii)(C) of this 
section, the gross income of an organization shall be determined under 
section 61 and the regulations thereunder. The terms ``interest'', 
``royalties'', ``rents'', ``dividends'', and ``annuities'' shall have 
the same meaning such terms are given for purposes of section 1244(c) 
and Sec.  1.1244(c)-1(e)(1).
    (6) Children, grandchildren, parents, and grandparents--(i) Children 
and parents. An individual shall be considered to own an interest owned, 
directly or indirectly, by or for the individual's children who have not 
attained the age of 21 years, and if the individual has not attained the 
age of 21 years, an interest owned, directly or indirectly, by or for 
the individual's parents.
    (ii) Children, grandchildren, parents, and grandparents. If an 
individual is in effective control (within the meaning of Sec.  
1.414(c)-2(c)(2)), directly and with the application of the rules of 
this paragraph without regard to this subdivision, of an organization, 
then such individual shall be considered to own an interest in such 
organization owned, directly or indirectly, by or for the individual's 
parents, grandparents, grandchildren, and children who have attained the 
age of 21 years.
    (iii) Adopted children. For purposes of this section, a legally 
adopted child of an individual shall be treated as a child of such 
individual.
    (iv) Example. The provisions of this subparagraph (6) may be 
illustrated by the following example:


[[Page 214]]


    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, as 
amended by T.D. 8540, 59 FR 30102, June 10, 1994]

[[Page 215]]



Sec.  1.414(c)-5  Certain tax-exempt organizations.

    (a) Application. This section applies to an organization that is 
exempt from tax under section 501(a). The rules of this section only 
apply for purposes of determining when entities are treated as the same 
employer for purposes of section 414(b), (c), (m), and (o) (including 
the sections referred to in section 414(b), (c), (m), (o), and (t)), and 
are in addition to the rules otherwise applicable under section 414(b), 
(c), (m), and (o) for determining when entities are treated as the same 
employer. Except to the extent set forth in paragraphs (d), (e), and (f) 
of this section, this section does not apply to any church, as defined 
in section 3121(w)(3)(A), or any qualified church-controlled 
organization, as defined in section 3121(w)(3)(B).
    (b) General rule. In the case of an organization that is exempt from 
tax under section 501(a) (an exempt organization) whose employees 
participate in a plan, the employer with respect to that plan includes 
the exempt organization whose employees participate in the plan and any 
other organization that is under common control with that exempt 
organization. For this purpose, common control exists between an exempt 
organization and another organization if at least 80 percent of the 
directors or trustees of one organization are either representatives of, 
or directly or indirectly controlled by, the other organization. A 
trustee or director is treated as a representative of another exempt 
organization if he or she also is a trustee, director, agent, or 
employee of the other exempt organization. A trustee or director is 
controlled by another organization if the other organization has the 
general power to remove such trustee or director and designate a new 
trustee or director. Whether a person has the power to remove or 
designate a trustee or director is based on facts and circumstances. To 
illustrate the rules of this paragraph (b), if exempt organization A has 
the power to appoint at least 80 percent of the trustees of exempt 
organization B (which is the owner of the outstanding shares of 
corporation C, which is not an exempt organization) and to control at 
least 80 percent of the directors of exempt organization D, then, under 
this paragraph (b) and Sec.  1.414(b)-1, entities A, B, C, and D are 
treated as the same employer with respect to any plan maintained by A, 
B, C, or D for purposes of the sections referenced in section 414(b), 
(c), (m), (o), and (t).
    (c) Permissive aggregation with entities having a common exempt 
purpose--(1) General rule. For purposes of this section, exempt 
organizations that maintain a plan to which section 414(c) applies that 
covers one or more employees from each organization may treat themselves 
as under common control for purposes of section 414(c) (and, thus, as a 
single employer for all purposes for which section 414(c) applies) if 
each of the organizations regularly coordinates their day-to-day exempt 
activities. For example, an entity that provides a type of emergency 
relief within one geographic region and another exempt organization that 
provides that type of emergency relief within another geographic region 
may treat themselves as under common control if they have a single plan 
covering employees of both entities and regularly coordinate their day-
to-day exempt activities. Similarly, a hospital that is an exempt 
organization and another exempt organization with which it coordinates 
the delivery of medical services or medical research may treat 
themselves as under common control if there is a single plan covering 
employees of the hospital and employees of the other exempt organization 
and the coordination is a regular part of their day-to-day exempt 
activities.
    (2) Authority to permit aggregation. (i) For determining when 
entities are treated as the same employer under section 414(b), (c), 
(m), and (o), the Commissioner may issue rules of general applicability, 
in revenue rulings, notices, or other guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter), 
permitting other types of combinations of entities that include exempt 
organizations to elect to be treated as under common control for one or 
more specified purposes if:
    (A) There are substantial business reasons for maintaining each 
entity in a separate trust, corporation, or other form; and

[[Page 216]]

    (B) Such treatment would be consistent with the anti-abuse standards 
in paragraph (f) of this section.
    (ii) For example, this authority might be exercised in any situation 
in which the organizations are so integrated in their operations as to 
effectively constitute a single coordinated employer for purposes of 
section 414(b), (c), (m), and (o), including common employee benefit 
plans.
    (d) Permissive disaggregation between qualified church controlled 
organizations and other entities. In the case of a church plan (as 
defined in section 414(e)) to which contributions are made by more than 
one common law entity, any employer may apply paragraphs (b) and (c) of 
this section to those entities that are not a church (as defined in 
section 403(b)(12)(B) and Sec.  1.403(b)-2) separately from those 
entities that are churches. For example, in the case of a group of 
entities consisting of a church (as defined in section 3121(w)(3)(A)), a 
secondary school (that is treated as a church under Sec.  1.403(b)-2), 
and several nursing homes each of which receives more than 25 percent of 
its support from fees paid by residents (so that none of them is a 
qualified church-controlled organization under Sec.  1.403(b)-2 and 
section 3121(w)(3)(B)), the nursing homes may treat themselves as being 
under common control with each other, but not as being under common 
control with the church and the school, even though the nursing homes 
would be under common control with the school and the church under 
paragraph (b) of this section.
    (e) Application to certain church entities under section 3121(w)(3). 
[Reserved]
    (f) Anti-abuse rule. In any case in which the Commissioner 
determines that the structure of one or more exempt organizations (which 
may include an exempt organization and an entity that is not exempt from 
income tax) or the positions taken by those organizations has the effect 
of avoiding or evading any requirements imposed under section 401(a), 
403(b), or 457(b), or any applicable section (as defined in section 
414(t)), or any other provision for which section 414(c) applies, the 
Commissioner may treat an entity as under common control with the exempt 
organization.
    (g) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. (i) Facts. Organization A is a tax-exempt organization 
under section 501(c)(3) which owns 80% or more of the total value of all 
classes of stock of corporation B, which is a for profit organization.
    (ii) Conclusion. Under paragraph (a) of this section, this section 
does not alter the rules of section 414(b) and (c), so that organization 
A and corporation B are under common control under Sec.  1.414(c)-2(b).
    Example 2. (i) Facts. Organization M is a hospital which is a tax-
exempt organization under section 501(c)(3) and organization N is a 
medical clinic which is also a tax-exempt organization under section 
501(c)(3). N is located in a city and M is located in a nearby suburb. 
There is a history of regular coordination of day-to-day activities 
between M and N, including periodic transfers of staff, coordination of 
staff training, common sources of income, and coordination of budget and 
operational goals. A single section 403(b) plan covers professional and 
staff employees of both the hospital and the medical clinic. While a 
number of members of the board of directors of M are also on the board 
of directors of N, there is less than 80% overlap in board membership. 
Both organizations have approximately the same percentage of employees 
who are highly compensated and have appropriate business reasons for 
being maintained in separate entities.
    (ii) Conclusion. M and N are not under common control under this 
section, but, under paragraph (c) of this section, may chose to treat 
themselves as under common control, assuming both of them act in a 
manner that is consistent with that choice for purposes of Sec.  
1.403(b)-5(a), sections 401(a), 403(b), and 457(b), and any other 
applicable section (as defined in section 414(t)), or any other 
provision for which section 414(c) applies.
    Example 3. (i) Facts. Organizations O and P are each tax-exempt 
organizations under section 501(c)(3). Each organization maintains a 
qualified plan for its employees, but one of the plans would not satisfy 
section 410(b) (or section 401(a)(4)) if the organizations were under 
common control. The two organizations are closely related and, while the 
organizations have several trustees in common, the common trustees 
constitute fewer than 80 percent of the trustees of either organization. 
Organization O has the power to remove any of the trustees of P and to 
select the slate of replacement nominees.
    (ii) Conclusion. Under these facts, pursuant to paragraphs (b) and 
(f) of this section, the Commissioner treats the entities as under 
common control.


[[Page 217]]


    (h) Applicable date. This section applies for plan years beginning 
after December 31, 2008.

[T.D. 9340, 72 FR 41158, July 26, 2007; 72 FR 54352, Sept. 25, 2007]



Sec.  1.414(c)-6  Effective date.

    (a) General rule. Except as provided in paragraph (b), (c), (e), or 
(f) of this section, the provisions of Sec.  1.414(b)-1 and Sec. Sec.  
1.414(c)-1 through 1.414 (c)-4 shall apply for plan years beginning 
after September 2, 1974.
    (b) Existing plans. In the case of a plan in existence on January 1, 
1974, unless paragraph (c) of this section applies, the provisions of 
``Sec.  1.414 (b)-1 and Sec. Sec.  1.414(c)-1 through 1.414(c)-4 shall 
apply for plan years beginning after December 31, 1975. For definition 
of the term ``existing plan'', see Sec.  1.410(a)-2(c).
    (c) Existing plans electing new provisions. In the case of a plan in 
existence on January 1, 1974, for which the plan administrator makes an 
election under Sec.  1.410 (a)-2(d), the provisions of Sec.  1.414(b)-1 
and Sec. Sec.  1.414 (c)-1 through 1.414(c)-4 shall apply to the plan 
years elected under Sec.  1.410 (a)-2 (d).
    (d) Application. For purposes of the Employee Retirement Income 
Security Act of 1974, the provisions of Sec.  1.414(b)-1 and Sec. Sec.  
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, Sec.  1.414(c)-3 (f) is effective April 1, 1988.
    (f) Transitional rule--(1) In general. The amendments made by T.D. 
8179 apply to the plan years or period described in paragraphs (a), (b), 
or (c) of this section, whichever is applicable.
    (2) Exception. In the case of a plan year or period beginning before 
March 2, 1988, if an organization--
    (i) Is a member of a brother-sister group of trades or businesses 
under common control under Sec.  11.414(c)-2(c), as in effect before 
removal by T.D. 8179 (``old group''), for such plan year or period, and
    (ii) Is not such a member for such plan year or period because of 
the amendments made by such Treasury decision,

such member (whether or not a corporation) nevertheless will be treated 
as a member of such old group for purposes of section 414(c) for that 
plan year or period to the extent provided in Sec.  1.1563-1 (d)(2). 
Also, such member will be treated as a member of an old group for all 
purposes of the Code for such plan year or period if all the 
organizations (whether or not corporations) that are members of the old 
group meet all the requirements of Sec.  1.1563-1(d)(3) with respect to 
such plan year or period.

[T.D. 8179, 53 FR 6611, Mar. 2, 1988. Redesignated by T.D. 9340, 72 FR 
41158, July 26, 2007]



Sec.  1.414(e)-1  Definition of church plan.

    (a) General rule. For the purposes of part I of subchapter D of 
chapter 1 of the Code and the regulations thereunder, the term ``church 
plan'' means a plan established and at all times maintained for its 
employees by a church or by a convention or association of churches 
(hereinafter included within the term ``church'') which is exempt from 
tax under section 501(a), provided that such plan meets the requirements 
of paragraphs (b) and (if applicable) (c) of this section. If at any 
time during its existence a plan is not a church plan because of a 
failure to meet the requirements set forth in this section, it cannot 
thereafter become a church plan.
    (b) Unrelated businesses--(1) In general. A plan is not a church 
plan unless it is established and maintained primarily for the benefit 
of employees (or their beneficiaries) who are not employed in connection 
with one or more unrelated trades or businesses (within the meaning of 
section 513).
    (2) Establishment or maintenance of a plan primarily for persons not 
employed in connection with one or more unrelated trades or businesses. 
(i) (A) A plan, other than a plan in existence on September 2, 1974, is 
established primarily for the benefit of employees (or their 
beneficiaries) who are not employed in connection with one or more 
unrelated trades or businesses if on the date the plan is established 
the number of employees employed in connection with the unrelated trades 
or businesses eligible to participate in the plan is less than 50 
percent of the total number of

[[Page 218]]

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.

[[Page 219]]


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]



Sec.  1.414(f)-1  Definition of multiemployer plan.

    (a) General rule. For purposes of part I of subchapter D of chapter 
1 of the Code and the regulations thereunder, a plan is a multiemployer 
plan for a plan year if all of the following requirements are satisfied:
    (1) Number of contributing employers. More than one employer is 
required by the plan instrument or other agreement to contribute (or to 
have contributions made on its behalf) to the plan for the plan year.
    (2) Collective bargaining agreement. The plan is maintained for the 
plan year pursuant to one or more collective bargaining agreements 
between employee representatives and more than one employer.
    (3) Amount of contributions. Except as provided by paragraph (c) of 
this section (relating to the special rule for contributions exceeding 
50 percent), the amount of contributions made under the plan for the 
plan year by or on behalf of each employer is less than 50 percent of 
the total amount of contributions made under the plan for such plan year 
by or on behalf of all employers.
    (4) Benefits. The plan provides that the amount of benefits payable 
with respect to each employee participating in the plan is determined 
without regard to whether or not his employer continues as a member of 
the plan. If benefits accrued as a result of the participant's service 
with his employer during a period before such employer was a member of 
the plan, this requirement does not apply to the amount of those 
benefits, except that this requirement does apply to the amount of those 
benefits (i) which are accrued benefits derived from employee 
contributions, or

[[Page 220]]

(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:

----------------------------------------------------------------------------------------------------------------
                                                               Monthly accrued benefit   Monthly accrued benefit
                            Years                                     retained                  forfeited
----------------------------------------------------------------------------------------------------------------
Before Jan. 1, 1976.........................................  ........................     $12 x 15 years = $180
Jan. 1, 1976 to Dec. 31, 1979...............................        $4 x 4 years = $16        $8 x 4 years = $32
Jan. 1, 1980 to Dec. 31, 1990...............................     $12 x 11 years = $132
                                                             ---------------------------------------------------
  Total.....................................................                      $148                      $212
----------------------------------------------------------------------------------------------------------------

    The XYZ plan does not satisfy the requirements of paragraphs (a)(4) 
and (b)(2)(i) of this section because no benefit can be forfeited with 
respect to service after W began participating in the plan. Thus, the 
maximum accrued benefit that may be forfeited is $180 per month (the 
accrued benefit with respect to A's service prior to January 1, 1976).

[[Page 221]]

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 paragraphs (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.

[[Page 222]]

    (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]



Sec.  1.414(g)-1  Definition of plan administrator.

    (a) In general. For purposes of part I of subchapter D of chapter 1 
of the Code and the regulations thereunder, if the instrument under 
which the plan is operated for a plan year specifically designates a 
person or a group of persons as plan administrator, the person or group 
of persons collectively is the plan administrator for the plan year. The 
instrument may specifically designate a plan administrator--
    (1) By name,
    (2) By reference to the person or group of persons holding a named 
position or positions,
    (3) By reference to a procedure established under the terms of the 
instrument pursuant to which a plan administrator is designated, or
    (4) By reference to the person or group of persons charged with 
specific responsibilities of plan administrator. Consistent with the 
provisions of section 405 (c) (1) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1105 (c) (1)), a plan may provide for 
the allocation of specific responsibilities of plan administrator among 
named persons and for named persons to designate others to carry out 
such responsibilities. A person or group of persons may be designated as 
plan administrator in accordance with the rules of this paragraph even 
though the person or group of persons does not carry the specific title 
``plan administrator''. In the absence of a person or group of persons 
designated as the plan administrator (individually, collectively, or by 
designation of different specific administrative responsibilities), the 
plan administrator for the plan year is the person or group of persons 
specified in paragraph (b) of this section.
    (b) Plan administrator not specifically designated. If no person or 
group of persons is specifically designated as the plan administrator 
for a plan year by the instrument under which the plan is operated, the 
plan administrator for such year is the person or group of persons 
determined under the following rules:
    (1) Single employer. In the case of a plan maintained by a single 
employer, the employer is the plan administrator.

[[Page 223]]

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]



Sec.  1.414(l)-1  Mergers and consolidations of plans 
or transfers of plan assets.

    (a) In general--(1) Scope of the regulations. Sections 401(a)(12) 
and 414(l) apply only to plans to which section 411 applies without 
regard to section 411(e)(2). Thus, for example, these sections do not 
apply to a governmental plan within the meaning of section 414(d); a 
church plan, within the meaning of section 414(e), for which there has 
not been made the election under section 410(d) to have the 
participation, vesting, funding, etc. requirements apply; or a plan 
which at no time after September 2, 1974, provided for employer 
contributions.
    (2) General rule. Under section 414(l),
    (i) A trust which forms a part of a plan will not constitute a 
qualified trust under section 401, and
    (ii) A plan will not be treated as being qualified under section 403 
(a) and 405 (a), unless, in the case of a merger or consolidation (as 
defined in paragraph (b)(2) of this section), or a transfer of assets or 
liabilities (as defined in paragraph (b)(3) of this section), the 
following condition is satisfied. This condition requires that each 
participant receive benefits on a termination basis (as defined in 
paragraph (b)(5) of this section) from the plan immediately after the 
merger, consolidation or transfer which are equal to or greater than the 
benefits the participant would receive on a termination basis 
immediately before the merger, consolidation, or transfer.
    (b) Definitions. For purposes of this section:
    (1) Single plan. A plan is a ``single plan'' if and only if, on an 
ongoing basis, all of the plan assets are available to pay benefits to 
employees who are covered by the plan and their beneficiaries. For 
purposes of the preceding sentence, all the assets of a plan will not 
fail to be available to provide all the benefits of a plan merely 
because the plan is funded in part or in whole with allocated insurance 
instruments.

[[Page 224]]

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,

[[Page 225]]

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

[[Page 226]]

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.

[[Page 227]]

    (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.

[[Page 228]]

    (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:

[[Page 229]]



                                                                                             Plan A
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     (1)--Annual accrued benefits       (2)--Present value of accrued         (3)--Fair     (4)--Benefits on a termination basis
                                                                  ---------------------------------                benefits                 market value  --------------------------------------
                                                                                                   ---------------------------------------    of assets
            Priority category of section 4044 of ERISA                                                                                      allocated to
                                                                      EE1        EE2        EE3         EE1          EE2          EE3         priority         EE1          EE2          EE3
                                                                                                                                              category
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
3................................................................    $10,000  .........  .........     $120,000  ...........  ...........        $120,000      $10,000
4................................................................      2,000     $4,000  .........       24,000      $44,000  ...........          68,000        2,000       $4,000
5................................................................  .........      3,000     $4,000  ...........       33,000      $40,000          32,000  ...........    \1\ 1,315   \2\ $1,753
6................................................................  .........  .........      1,000  ...........  ...........       10,000
                                                                  ------------------------------------------------------------------------------------------------------------------------------
   Total.........................................................  .........  .........  .........  ...........  ...........  ...........         220,000       12,000        5,315       1,753
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ $3,000 x $32,000 / $73,000 i.e. accrued benefit x assets available for priority category 5--Total present value of accrued benefits in category 5.
\2\ $4,000 x $32,000 / $73,000.


                                                                                             Plan B
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  (1)--Annual accrued benefits        (2)--Present value of accrued benefits     (3)--Fair      (4)--Benefits on a termination
                                                            -----------------------------------------------------------------------------------    market                   basis
                                                                                                                                                  value of  ------------------------------------
         Priority category of section 4044 of ERISA                                                                                                assets
                                                             EE1  EE2  EE3      EE4         EE5     EE1  EE2  EE3      EE4            EE5        allocated
                                                                                                                                                to priority  EE1  EE2  EE3      EE4        EE5
                                                                                                                                                  category
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
3..........................................................  ...  ...  ...      $15,000  .........  ...  ...  ...     $195,000  ..............     $195,000  ...  ...  ...      $15,000
4..........................................................  ...  ...  ...  ...........     $5,000  ...  ...  ...  ...........         $50,000        5,000  ...  ...  ...  ...........      \1\
                                                                                                                                                                                            $500
5..........................................................  ...  ...  ...  ...........      8,000  ...  ...  ...  ...........          80,000
                                                            ------------------------------------------------------------------------------------------------------------------------------------
Total......................................................  ...  ...  ...  ...........  .........  ...  ...  ...  ...........  ..............      200,000  ...  ...  ...       15,000     500
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ $5,000 / $5,000 x $50,000.


[[Page 230]]

    Because Plan B's assets are exhausted in a higher priority category 
than Plan A's assets, Plan B is the lower funded plan. A schedule will, 
therefore, be inserted in Priority Category 4 of the plan as merged 
after providing 10% of the benefits provided in category 4, i.e. the 
ratio of $5,000 assets in Plan B allocated to category 4 to the $50,000 
liability in category 4. The schedule would be constructed as follows:

----------------------------------------------------------------------------------------------------------------
                                                   (2)--Benefits
                                   (1)--Benefits   provided from    (3)--10% of    (4)--Benefits
                                       on a          priority        benefits        provided      (5)--Schedule
               EE                   termination     categories      provided in       before        of benefits
                                   basis before     higher than      priority     schedule (2) +     (1) - (4)
                                      merger        Category 4      Category 4          (3)
----------------------------------------------------------------------------------------------------------------
1...............................         $12,000         $10,000            $200         $10,200          $1,800
2...............................           5,315  ..............             400             400           4,915
3...............................           1,753  ..............  ..............  ..............           1,753
4...............................          15,000          15,000  ..............          15,000
5...............................             500  ..............             500             500
----------------------------------------------------------------------------------------------------------------

    Example 2. The facts are the same as in Example 1. The plan, 
however, terminates one year later. Furthermore, no employee has accrued 
additional benefits during the year except that the $2,000 benefit for 
EE 1, that was originally in category 4 is now in category 3. 
The assets would be allocated to the priority categories to the extent 
that there are assets to cover the following benefits.

----------------------------------------------------------------------------------------------------------------
                 Priority termination category                     EE1       EE2       EE3       EE4       EE5
----------------------------------------------------------------------------------------------------------------
3.............................................................   $12,000  ........  ........   $15,000
10% of 4......................................................  ........      $400  ........  ........      $500
Schedule of benefits included in balance of Category 4........  ........     3,600
Schedule of benefits included in Category 5...................  ........     1,315    $1,753
Schedule of benefits included in Category 6...................
Balance of Category 4 not included in schedule................  ........  ........  ........  ........     4,500
Balance of Category 5 not included in schedule................  ........     1,685     2,247  ........     8,000
Balance of Category 6 not included in schedule................  ........  ........     1,000
----------------------------------------------------------------------------------------------------------------

    (l) Merger of defined benefit and defined contribution plan. In the 
case of a merger of a defined benefit plan with a defined contribution 
plan, one of the plans before the merger should be converted into the 
other type of plan (i.e., the defined benefit converted into a defined 
contribution or the defined contribution converted into a defined 
benefit) and either paragraph (d) or paragraphs (e) through (j) of this 
section, whichever is appropriate, should be applied.
    (m) Spinoff of a defined contribution plan. In the case of a spinoff 
of a defined contribution plan, the requirements of section 414(l) will 
be satisfied if after the spinoff--
    (1) The sum of the account balances for each of the participants in 
the resulting plans equals the account balance of the participant in the 
plan before the spinoff, and
    (2) The assets in each of the plans immediately after the spinoff 
equals the sum of the account balances for all participants in that 
plan.
    (n) Spinoff of a defined benefit plan--(1) General rule. In the case 
of a spinoff of a defined benefit plan, the requirements of section 
414(l) will be satisfied if--
    (i) All of the accrued benefits of each participant are allocated to 
only one of the spun off plans, and
    (ii) The value of the assets allocated to each of the spun off plans 
is not less than the sum of the present value of the benefits on a 
termination basis in the plan before the spin off for all participants 
in that spun off plan.
    (2) De minimis rule. In the case of a spin off the requirements of 
section 414(l) will be deemed to be satisfied if the value of the assets 
spun off--
    (i) Equals the present value of the accrued benefits spun off 
(whether or not vested), and
    (ii) In conjunction with other assets spun off during the plan year 
in which the spinoff occurs in accordance with this subparagraph, is 
less than 3 percent of the assets as of at least one day in that year.


[[Page 231]]



Spinoffs occurring in previous or subsequent plan years are ignored if 
they are not part of a single spinoff designed to occur in steps over 
more than one plan year.
    (3) Special temporary rule. In the case of a defined benefit plan 
maintained for different groups of employees, which is a single plan (as 
defined in paragraph (b)(l) of this section) and under which there has 
been separate accounting of assets for each group, a spinoff of the plan 
on or before July 1, 1978, into a separate plan for each group will be 
deemed to satisfy section 414 (l) if--
    (i) All the liabilities with respect to each group of employees are 
allocated to a separate plan for that group of employees, and
    (ii) The assets that are separately accounted for with respect to 
each group of employees are allocated to the separate plan for that 
group of employees.

For purposes of this subparagraph, a separate accounting of assets will 
not be considered to have occurred to the extent that the assets 
allocated to each single plan are determined by an historical re-
creation of benefits, contributions, investment gains, etc.
    (o) Transfers of assets or liabilities. Any transfer of assets or 
liabilities will for purposes of section 414 (l) be considered as a 
combination of separate mergers and spinoffs using the rules of 
paragraphs (d), (e) through (j), (l), (m), or (n) of this section, 
whichever is appropriate. Thus, for example, if in accordance with the 
transfer of one or more employees, a block of assets and liabilities are 
transferred from Plan A to Plan B, each of which is a defined benefit 
plan, the transaction will be considered as a spinoff from Plan A and a 
merger of one of the spinoff plans with Plan B. The spinoff and merger 
described in the previous sentence would be subject to the requirements 
of paragraphs (n) and (e) through (j) of this section respectively.

[T.D. 7638, 44 FR 48195, Aug. 17, 1979]



Sec.  1.414(q)-1  Highly compensated employee.

    Q&A-1--Q&A-8: [Reserved]. See Sec.  1.414(q)-1T, Q&A-1 through Q&A-8 
for further guidance.
    Q-9: How is the top-paid group determined?
    A-9: (a) [Reserved]. See Sec.  1.414(q)-1T, Q&A-9(a) for further 
guidance.
    (b) Number of employees in the top-paid group--(1) Exclusions. The 
number of employees who are in the top-paid group for a year is equal to 
20 percent of the total number of active employees of the employer for 
such year. However, solely for purposes of determining the total number 
of active employees in the top-paid group for a year, the employees 
described in Sec.  1.414(q)-1T, A-9(b)(1) (i), (ii) and (iii)(B) are 
disregarded. Paragraph (g) of this A-9 provides rules for determining 
those employees who are excluded for purposes of applying section 
414(r)(2)(A), relating to the 50-employee requirement applicable to a 
qualified separate line of business.
    (i)-(iii) [Reserved]. See Sec.  1.414(q)-1T, Q&A-9(b)(1) (i) through 
(iii) for further guidance.
    (2) Alternative exclusion provisions--(i)-(ii) [Reserved]. See Sec.  
1.414(q)-1T, Q&A-9(b)(2) (i) and (ii) for further guidance.
    (iii) Method of election. The elections in this paragraph (b)(2) 
must be provided for in all plans of the employer and must be uniform 
and consistent with respect to all situations in which the section 
414(q) definition is applicable to the employer. Thus, with respect to 
all plan years beginning in the same calendar year, the employer must 
apply the test uniformly for purposes of determining its top-paid group 
with respect to all its qualified plans and employee benefit plans. If 
either election is changed during the determination year, no 
recalculation of the look-back year based on the new election is 
required, provided the change in election does not result in 
discrimination in operation.
    (c)-(f) [Reserved]. See Sec.  1.414(q)-1T, Q&A-9 (c) through (f) for 
further guidance.
    (g) Excluded employees under section 414(r)(2)(A)--(1) In general. 
This paragraph (g) provides the rules for determining which employees 
are excluded employees for purposes of applying section 414(r)(2)(A), 
relating to the 50-employee requirement applicable to a qualified 
separate line of business.

[[Page 232]]

    (2) Excluded employees--(i) Age and service exclusion. All employees 
are excluded who are described in Sec.  1.414(q)-1T, A-9(b)(1)(i) 
(relating to exclusions based on age or service). For this purpose, the 
rules in Sec.  1.414(q)-1T, A-9 (e) and (f) (relating respectively to 
the 17\1/2\-hour rule and the 6-month rule) apply. However, the election 
in Sec.  1.414(q)-1T, A-9(b)(2)(i) (permitting the employer to elect 
reduced minimum age or service requirements) does not apply.
    (ii) Nonresident alien exclusion. All employees are excluded who are 
described in Sec.  1.414(q)-1T, A-9(b)(1)(ii) (relating to the exclusion 
of nonresident aliens with no U.S.- source income from the employer).
    (iii) Inclusion of employees covered under a collective bargaining 
agreement. All employees are included who are described in Sec.  
1.414(q)-1T, A-9(b)(1)(iii)(A) (relating to employees covered under a 
collective bargaining agreement) and who are not otherwise described in 
paragraph (g)(2) (i) or (ii) of this A-9. For this purpose, the 
exclusion in Sec.  1.414(q)-1T, A-9(b)(1)(iii)(B) and the related 
election in Sec.  1.414(q)-1T, A-9(b)(2)(ii) do not apply.
    (3) Applicable period. The determination of which employees are 
excluded employees is made on the basis of the testing year specified in 
the regulations under section 414(r) and not on the basis of the 
determination year or the look-back year under section 414(q).
    (h) Effective date. The provisions of this A-9 apply to plan years 
and testing years beginning on or after January 1, 1994.
    Q&A-10 through Q&A-15: [Reserved]. See Sec.  1.414(q)-1T, Q&A-10 
through Q&A-15 for further guidance.

[T.D. 8548, 59 FR 32915, June 27, 1994]



Sec.  1.414(q)-1T  Highly compensated employee (temporary).

    The following questions and answers relate to the definition of 
``highly compensated employee'' provided in section 414(q). The 
definitions and rules provided in these questions and answers are 
provided solely for purposes of determining the group of highly 
compensated employees.

                           Table of contents.

Q&A-1 General applicability of section 414(q).
Q&A-2 Definition of highly compensated employees.
Q&A-3 Definition of highly compensated active employees.
Q&A-4 Definition of highly compensated former employees.
Q&A-5 Definition of separation year.
Q&A-6 Definition of employer.
Q&A-7 Definition of employee.
Q&A-8 Definition of 5-percent owner.
Q&A-9 Definition of top-paid group.
Q&A-10 Definition of officer and rules on inclusion of officers in 
          highly compensated group.
Q&A-11 Rules with respect to family aggregation.
Q&A-12 Definition of family member.
Q&A-13 Definition of compensation.
Q&A-14 Rules with respect to the relevant determination periods.
Q&A-15 Transition rule applicable to plan years beginning in 1987 and 
          1988 for certain employers that have plans that must comply 
          with the provisions of section 401(k)(3) or 401(m)(2).

    Q-1: To what employee benefit plans and statutory provisions is the 
definition of highly compensated employee contained in section 414(q) 
applicable?
    A-1: (a) In general. This definition is applicable to statutory 
provisions that incorporate the definition by reference.
    (b) Qualified retirement plans--(1) In general. Generally, this 
definition is incorporated in many of the nondiscrimination requirements 
applicable to pension, profit-sharing, and stock bonus plans qualified 
under section 401(a). See, e.g., the nondiscrimination provisions of 
sections 401(a) (4) and (5), 401(k)(3), 401(l), 401(m), 406(b), 407(b), 
408(k), 410(b) and 411(d)(1). The definition is also incorporated by 
certain other provisions with respect to such plans, including the 
aggregation rules of section 414(m) and section 4975 (tax on prohibited 
transactions).
    (2) Not applicable where not incorporated by reference. This 
definition is not applicable to qualified plan provisions that do not 
incorporate it. See, e.g., section 415 (limitations on contributions and 
benefits), with the exception of section 415(c)(3)(C) and 415(c)(6) 
(special rules for permanent and total disability and employee stock 
ownership plans respectively).

[[Page 233]]

    (c) Other employee benefit plans or arrangements. This definition is 
incorporated by various sections relating to employee benefit 
provisions. See, e.g., section 89 (certain other employee benefit 
plans), section 106 (accident and health plans), 117(d) (qualified 
tuition reduction), section 125 (cafeteria plans), section 129 
(dependent care assistance programs), section 132 (certain fringe 
benefits), section 274 (certain entertainment, etc. expenses), section 
423(b) (employee stock purchase plan provisions), section 501(c) (17) 
and (18) (certain exempt trusts providing benefits to employees), and 
section 505 (certain exempt organizations or trusts providing benefits 
to individuals). See the respective sections for the applicable 
effective dates.
    (d) ERISA. This definition is not determinative with respect to any 
provisions of title I of the Employee Retirement Income Security Act of 
1974 (ERISA), unless it is explicitly incorporated by reference (e.g., 
section 408(b)(1)(B)).
    Q-2: Who is a highly compensated employee?
    A-2: The group of employees (including former employees) who are 
highly compensated employees consists of both highly compensated active 
employees (see A-3 of this Sec.  1.414(q)-1T) and highly compensated 
former employees (see A-4 of this Sec.  1.414(q)-1T). In many 
circumstances, highly compensated active employees and highly 
compensated former employees are considered separately in applying the 
provisions for which the definition of highly compensated employees in 
section 414(q) is applicable. Specific rules with respect to the 
treatment of highly compensated active employees and highly compensated 
former employees will be provided in the regulations with respect to the 
sections to which the definition of highly compensated employees is 
applicable.
    Q-3: Who is a highly compensated active employee?
    A-3: (a) General rule. For purposes of the year for which the 
determination is being made (the determination year), a highly 
compensated active employee is any employee who, with respect to the 
employer, performs services during the determination year and is 
described in any one or more of the following groups applicable with 
respect to the look-back year calculation and/or determination year 
calculation for such determination year. See A-14 for rules relating to 
the periods for which the look-back year calculation and determination 
year calculation are to be made.
    (1) Look-back year calculation.
    (i) 5-percent owner. The employee is a 5-percent owner at any time 
during the look-back year (i.e., generally, the 12-month period 
immediately preceding the determination year; see A-14. (See A-8 of this 
Sec.  1.414(q)-1T.)
    (ii) Compensation above $75,000. The employee receives compensation 
in excess of $75,000 during the look-back year.
    (iii) Compensation above $50,000 and top-paid group. The employee 
receives compensation in excess of $50,000 during the look-back year and 
is a member of the top-paid group for the look-back year. (See A-9 of 
this Sec.  1.414(q)-1T.)
    (iv) Officer. The employee is an ``includible officer'' during the 
look-back year. (See A-10 of this Sec.  1.414(q)-1T.)
    (2) Determination year calculation.
    (i) 5-percent owner. The employee is a 5-percent owner at any time 
during the determination year. (See A-8 of this Sec.  1.414(q)-1T.)
    (ii) Top-100 employees. The employee is both (A) described in 
paragraph (a)(1)(i), (ii) and/or (iv) of this A-3, when such paragraphs 
are modified to substitute the determination year for the look-back 
year, and (B) one of the 100 employees who receive the most compensation 
from the employer during the determination year.
    (b) Rounding and tie-breaking rules. In making the look-back year 
and determination year calculations for a determination year, it may be 
necessary for an employer to adopt a rule for rounding calculations 
(e.g., in determining the number of employees in the top-paid group). In 
addition, it may be necessary to adopt a rule breaking ties among two or 
more employees (e.g., in identifying those particular employees who are 
in the top-paid group or who are among the 100 most highly compensated 
employees). In such cases, the employer may adopt any rounding or tie-
breaking rules it desires, so long as

[[Page 234]]

such rules are reasonable, nondiscriminatory, and uniformly and 
consistently applied.
    (c) Adjustments to dollar thresholds--(1) Indexing of dollar 
thresholds. The dollar amounts in paragraph (a)(1) (i) and (ii) of this 
A-3 are indexed at the same time and in the same manner as the section 
415(b)(1)(A) dollar limitation for defined benefit plans.
    (2) Applicable dollar threshold. The applicable dollar amount for a 
particular determination year or look-back year is the dollar amount for 
the calendar year in which such determination year or look-back year 
begins. Thus, the dollar amount for purposes of determining the highly 
compensated active employees for a particular look-back year is based on 
the calendar year in which such look-back year begins, not the calendar 
year in which such look-back year ends or in which the determination 
year with respect to such look-back year begins.
    (d) Employees described in more than one group. An individual who is 
a highly compensated active employee for a determination year, by reason 
of being described in one group in paragraph (a) of this A-3, under 
either the look-back year calculation or the determination year 
calculation, is not disregarded in determining whether another 
individual is a highly compensated active employee by reason of being 
described in another group under paragraph (a). For example, an 
individual who is a highly compensated active employee for a 
determination year, by reason of being a 5-percent owner during such 
year, who receives compensation in excess of $50,000 during both the 
look-back year and the determination year, is taken into account in 
determining the group of employees who are highly compensated active 
employees for such determination year by reason of receiving more than 
$50,000, and being in the top-paid group under either or both the look-
back year calculation or determination year calculation for such 
determination year.
    (e) Examples. The following examples, in which the determination 
year and look-back year are the calendar year, are illustrative of the 
rules in paragraph (a) of this A-3. For purposes of these examples, the 
threshold dollar amounts in paragraph (a)(1) (ii) and (iii) of this A-3 
are not increased pursuant to paragraph (c) of this A-3.

    Example 1. Employee A, who is not at any time a 5-percent owner, an 
officer, or a member of the top-100 within the meaning of paragraph 
(a)(1) (i), or (iv), or (a)(2) (i) or (ii), but who was a member of the 
top-paid group for each year, is included in or excluded from the highly 
compensated groups as specified below for the following years:

------------------------------------------------------------------------
     Year         Compensation       Status              Comments
------------------------------------------------------------------------
1986..........   $45,000         N/A...........  Although prior to
                                                  414(q) effective date,
                                                  1986 constitutes the
                                                  look-back year for
                                                  purposes of
                                                  determining the highly
                                                  compensated group for
                                                  the 1987 determination
                                                  year.
1987..........    80,000         Excl..........  Excluded because A was
                                                  not an employee
                                                  described in paragraph
                                                  (a)(1) (ii) or (iii)
                                                  of this A-3 for the
                                                  look-back year (1986).
1988..........    80,000         Incl..........  Included because A was
                                                  an employee described
                                                  in paragraph (a)(1)
                                                  (ii) or (iii) of this
                                                  A-3 for the look-back
                                                  year (1987).
1989..........    45,000         Incl..........  Included because A was
                                                  an employee described
                                                  in paragraph (a)(1)
                                                  (ii) or (iii) of this
                                                  A-3 for the look-back
                                                  year (1988).
1990..........    45,000         Excl..........  Excluded because A was
                                                  not an employee
                                                  described in paragraph
                                                  (a)(1) (ii) or (iii)
                                                  of this A-3 for the
                                                  look-back year (1989).
------------------------------------------------------------------------

    Example 2. Assuming the same facts as those given in Example 1, 
except that A is a member of the top-100 employees within the meaning of 
paragraph (a)(2)(ii) of this A-3 for the 1987 year and 1990 year, the 
results are as follows:

------------------------------------------------------------------------
     Year         Compensation       Status              Comments
------------------------------------------------------------------------
1986..........   $45,000         N/A...........  Although prior to
                                                  414(q) effective date,
                                                  1986 constitutes the
                                                  look-back year for
                                                  purposes of
                                                  determining the highly
                                                  compensated group for
                                                  the 1987 determination
                                                  year.
1987..........    80,000         Incl..........  Included because A was
                                                  an employee described
                                                  in paragraph
                                                  (a)(1)(ii) or (iii) of
                                                  this A-3 for the
                                                  determination year
                                                  (1987) and was
                                                  described in paragraph
                                                  (a)(2)(ii) of this A-3
                                                  in that year.

[[Page 235]]

 
1988..........    80,000         Incl..........  Included because A was
                                                  an employee described
                                                  in paragraph
                                                  (a)(1)(ii) or (iii) of
                                                  this A-3 for the look-
                                                  back year (1987).
1989..........    45,000         Incl..........  Included because A was
                                                  an employee described
                                                  in paragraph
                                                  (a)(1)(ii) or (iii) of
                                                  this A-3 for the look-
                                                  back year (1988).
1990..........    45,000         Excl..........  Excluded even though in
                                                  top-100 employees
                                                  during 1990
                                                  determination year
                                                  because A was not an
                                                  employee described in
                                                  paragraph (a)(1)(ii)
                                                  or (iii) of this A-3
                                                  for the look-back year
                                                  (1989) or for the
                                                  determination year
                                                  (1990).
------------------------------------------------------------------------

    A-4: Who is a highly compensated former employee?
    Q-4: (a) General rule. Except to the extent provided in paragraph 
(d) of this A-4, a highly compensated former employee for a 
determination year is any former employee who, with respect to the 
employer, had a separation year (as defined in A-5 of this Sec.  
1.414(q)-1T) prior to the determination year and was a highly 
compensated active employee as defined in A-3 of this Sec.  1.414(q)-1T 
for either such employee's separation year or any determination year 
ending on or after the employee's 55th birthday. Thus, for example, an 
employee who is a highly compensated active employee for such employee's 
separation year, by reason of receiving over $75,000 during the look-
back year, is a highly compensated former employee for determination 
years after such employee's separation year.
    (b) Special rule for employees who perform no services for the 
employer in the determination year. For purposes of this rule, employees 
who perform no services for an employer during a determination year are 
treated as former employees. Thus, for example, an employee who 
performed no services for the employer during a determination year, by 
reason of a leave of absence during such year, is treated as a former 
employee for such year.
    (c) Dollar amounts for pre-1987 determination years. For 
determination years beginning before January 1, 1987, the dollar amounts 
in paragraph (a)(1)(B) and (C) of A-2 of this Sec.  1.414(q)-1T are 
$75,000 and $50,000 respectively.
    (d) Special rule for employees who separated from service before 
January 1, 1987--(1) Election of special rule. Employers may elect to 
apply paragraph (d)(2) of this A-4 in lieu of paragraph (a) of this A-4 
in determining whether former employees who separated from service prior 
to January 1, 1987, are highly compensated former employees. If this 
election is made with respect to any qualified plan, it must be provided 
for in the plan. If the employer makes this election with respect to any 
employee benefit plan, such election must be used uniformly for all 
purposes for which the section 414(q) definition is applicable. The 
election, once made, cannot be changed without the consent of the 
Commissioner.
    (2) Special definition of highly compensated former employee. A 
highly compensated former employee includes any former employee who 
separated from service with the employer prior to January 1, 1987, and 
was described in any one or more of the following groups during either 
the employee's separation year (or the year preceding such separation 
year) or any year ending on or after such individual's 55th birthday (or 
the last year ending before such employee's 55th birthday):
    (i) 5-percent owner. The employee was a 5-percent owner of the 
employer at any time during the year.
    (ii) Compensation amount. The employee received compensation is 
excess of $50,000 during the year.
    The determinations provided for in this paragraph (b)(2) may be made 
on the basis of the calendar year, the plan year, or any other twelve 
month period selected by the employer and applied on a reasonable and 
consistent basis.
    (e) Rules with respect to former employees--(1) In general. For 
specific provisions with respect to the treatment of former employees 
and of highly compensated former employees, refer to the rules with 
respect to which the section 414(q) definition of highly compensated 
employee is applicable.
    (2) Former employees excluded in determining top-paid group, top-100 
employees and includible officers. Former employees are not included in 
the top-paid group, the group of the top-100 employees, or the group of 
includible officers for purposes of applying section 414(q)

[[Page 236]]

to active employees. In addition, former employees are not counted as 
employees for purposes of determining the number of employees in the 
top-paid group.
    Q-5: What is a separation year for purposes of section 414(q)?
    A-5: (a) Separation year--(1) In general. The separation year 
generally is the determination year during which the employee separates 
from service with the employer. For purposes of this rule, an employee 
who performs no services for the employer during a determination year 
will be treated as having separated from service with the employer in 
the year in which such employee last performed services for the 
employer. Thus, for example, an employee who performs no services for 
the employer by reason of being on a leave of absence throughout the 
determination year is considered to have separated from service with the 
employer in the year in which such employee last performed services 
prior to beginning the leave of absence.
    (2) Deemed separation. An employee who performs services for the 
employer during a determination year may be deemed to have separated 
from service with the employer during such year pursuant to the rules in 
paragraph (a)(3) of this A-5. Such deemed separation year is relevant 
for purposes of determining whether such employee is a highly 
compensated former employee after such employee actually separates from 
service, not for purposes of identifying such employee as either an 
active or former employee. Because employees to whom the provisions of 
paragraph (a)(2) of this A-5 apply are still performing services for the 
employer during the determination year, they are treated as active 
employees. Thus, for example, an employee who has a deemed separation 
year in 1989, a year during which he was a highly compensated employee, 
who continues to work for the employer until he retires from employment 
in 1995, is an active employee of the employer until 1995 and is either 
highly compensated or not highly compensated for any determination year 
during such period based on the rules with respect to highly compensated 
active employees. For determination years after the year of such 
employee's retirement, such employee is a highly compensated former 
employee because such employee was a highly compensated active employee 
for the deemed separation year.
    (3) Deemed separation year. An employee will be deemed to have a 
separation year if, in a determination year prior to attainment of age 
55, the employee receives compensation in an amount less than 50% of the 
employee's average annual compensation for the three consecutive 
calendar years preceding such determination year during which the 
employee received the greatest amount of compensation from the employer 
(or the total period of the employee's service with the employer, if 
less).
    (4) Leave of absence. The deemed separation rules contained in 
paragraph (a)(2) and (3) of this A-5 apply without regard to whether the 
reduction in compensation occurs on account of a leave of absence.
    (b) Deemed resumption of employment. An employee who is treated as 
having a deemed separation year by reason of the provisions of paragraph 
(a) of this A-5 will not be treated as a highly compensated former 
employee (by reason of such deemed separation year) after such employee 
actually separates from service with the employer if, after such deemed 
separation year, and before the year of actual separation, such 
employee's services for and compensation from the employer for a 
determination year increase significantly so that such employee is 
treated as having a deemed resumption of employment. The determination 
of whether an employee who has incurred a deemed separation year has an 
increase in services and compensation sufficient to result in a deemed 
resumption of employment will be made on the basis of all the 
surrounding facts and circumstances pertaining to each individual case. 
At a minimum, there must be an increase in compensation from the 
employer to the extent that such compensation would not result in a 
deemed separation year under the tests in paragraph (a)(2) of this A-5 
using the same three-year period taken into account in such paragraph.

[[Page 237]]

    (c) Examples. Paragraphs (a) and (b) of this A-5 are illustrated by 
the following examples based on calendar years. For purposes of these 
examples the threshold dollar amounts in A-5(a) of this Sec.  1.414(q)-
1T have not been increased pursuant to A-5(b) of this Sec.  1.414(q)-1T.

    Example 1. Assume that in 1990 A is a highly compensated employee of 
X by reason of having earned more than $75,000 during the 1989 look-back 
year. In 1987, 1988 and 1989, A's years of greatest compensation 
received from X, A received $76,000, $80,000 and $79,000 respectively. 
In February of 1990, A received $30,000 in compensation. Because A's 
compensation during the 1990 determination year is less than 50% of A's 
average annual compensation from X during A's high three prior 
determination years, A is deemed to have a separation year during the 
1990 determination year pursuant to the provisions of paragraph (a) of 
this A-5. Since A is a highly compensated employee for X in 1990, A's 
deemed separation year, A will be treated as a highly compensated former 
employee after A actually separates from service with the employer 
unless A experiences a deemed resumption of employment within the 
meaning of paragraph (b) of this A-5.
    Example 2. Assume that in 1990 A is a highly compensated employee by 
reason of having been an officer (with annual compensation in excess of 
the section 415(c)(1)(A) dollar limitation) during the 1989 look-back 
year. A's compensation from X during 1990 is $37,000. A's average 
compensation from X for the three-year period ending with or within 
January, 1990, was $60,000. A's compensation during the 1990 
determination year is not less than 50% of the compensation earned 
during the test period. Therefore, A is not deemed to have a separation 
year under paragraph (a)(2)(i) of this A-5.
    Example 3. Assume that in 1990 C is 35 and a highly compensated 
employee of Z for the reasons given in Example 1 with the same 
compensation set forth in that example. During 1990, C leaves C's 40 
hour a week position as director of the actuarial division of Z and 
starts working as an actuary for the same division, producing actuarial 
reports approximately 15 to 20 hours a week, approximately half of these 
hours at home. C contemplates returning to full-time employment with Z 
when C's child enters school. During the 1990 determination year, C's 
compensation is less than 50% of C's compensation during her high three 
preceding determination years. Therefore, C has a deemed separation year 
during the 1990 determination year. In 1991 C commences working 32 hours 
a week for X at X's place of business and receives compensation in an 
amount equal to 80 percent of her average annual compensation during her 
high three prior determination years. The C's increased compensation, 
considered in conjunction with the reasons for the reduction in service, 
the nature and extent of the services performed before and after the 
reduction in services, and the lack of proximity of C's age to age 55 at 
the time of the reduction are sufficient to establish that C has a 
deemed resumption of employment within the meaning of paragraph (b) of 
this A-5. Therefore, when C separates from service with the employer, C 
will not be treated as a highly compensated former employee by reason of 
C's deemed separation year in 1990.

    Q-6: Who is the employer?
    A-6: (a) Aggregation of certain entities. The employer is the entity 
employing the employees and includes all other entities aggregated with 
such employing entity under the aggregation requirements of section 
414(b), (c), (m) and (o). Thus, the following entities must be taken 
into account as a single employer for purposes of determining the 
employees who are ``highly compensated employees'' within the meaning of 
section 414(q):
    (1) All corporations that are members of a controlled group of 
corporations (as defined in section 414(b)) that includes the employing 
entity.
    (2) All trades or businesses (whether or not incorporated) that are 
under common control (as defined in section 414(c)) which group includes 
the employing entity.
    (3) All organizations (whether or not incorporated) that are members 
of an affiliated service group (as defined in section 414(m)) that 
includes the employing entity.
    (4) Any other entities required to be aggregated with the employing 
entity pursuant to section 414(o) and the regulations thereunder.
    (b) Priority of aggregation provisions. The aggregation requirements 
of paragraph (a) of this A-6 and of A-7(b) of this section with respect 
to leased employees are applied before the application of any of the 
other provisions of section 414(q) and this section.
    (c) Line of business rules. The section 414(r) rules with respect to 
separate lines of business are not applicable in determining the group 
of highly compensated employees.
    Q-7: Who is an employee for purposes of section 414(q)?

[[Page 238]]

    A-7: (a) General rule. Except as provided in paragraph (b) of this 
A-7, the term ``employee'' for purposes of section 414(q) refers to 
individuals who perform services for the employer and are either common-
law employees of the employer or self-employed individuals who are 
treated as employees pursuant to section 401(c)(1). This rule with 
respect to the inclusion of certain self-employed individuals in the 
group of highly compensated employees is applicable whether or not such 
individuals are eligible to participate in the plan or benefit 
arrangement being tested.
    (b) Leased employees--(1) In general. The term ``employee'' includes 
a leased employee who is treated as an employee of the recipient 
pursuant to the provisions of section 414(n)(2) or 414(o)(2). Employees 
that an employer treats as leased employees under section 414(n), 
pursuant to the requirements of section 414(o), are considered to be 
leased employees for purposes of this rule.
    (2) Safe-harbor exception. For purposes of qualified retirement 
plans, if an employee who would be a leased employee within the meaning 
of section 414(n)(2) is covered in a safe-harbor plan described in 
section 414(n)(5) (a qualified money purchase pension plan maintained by 
the leasing organization), and not otherwise covered under a qualified 
retirement plan of the employer, then such employee is excluded from the 
term ``employee'' unless the employer elects to include such employee 
pursuant to the provisions of paragraph (4) of this paragraph (b).
    (3) Other employee benefit plans. The exception in paragraph (b)(2) 
of this A-7 is not applicable to the determination of the highly 
compensated employee group for purposes of the sections enumerated in 
section 414(n)(3)(C). Thus, for example, a leased employee covered by a 
safe-harbor plan is considered to be an employee in applying the 
nondiscrimination provisions of section 89 to statutory benefit plans. 
Consequently, an employer with leased employees covered in a safe-harbor 
plan may have 2 groups of highly compensated employees, one with respect 
to its retirement plans and another with respect to its statutory 
benefit plans.
    (4) Election with respect to leased employee exclusion. An employer 
may elect to include the employees excepted under the provisions of 
paragraph (b)(2) of this A-7 in determining the highly compensated group 
with respect to an employer's retirement plans. Thus, for example, by 
electing to forego the exception in paragraph (b)(2) of this A-7, an 
employer may achieve more uniform highly compensated employee groups for 
purposes of its retirement plans and welfare benefit plans. The election 
to include such employees must be made on a reasonable and consistent 
basis and must be provided for in the plan.
    Q-8: Who is a 5-percent owner of the employer?
    A-8: An employee is a 5-percent owner of the employer for a 
particular year if, at any time during such year, such employee is a 5-
percent owner as defined in section 416(i)(B)(i) and Sec.  1.416-1 A T-
17&18. Thus, if the employer is a corporation, a 5-percent owner is any 
employee who owns (or is considered as owning within the meaning of 
section 318) more than 5 percent of the value of the outstanding stock 
of the corporation or stock possessing more than 5 percent of the total 
combined voting power of all stock of the corporation. If the employer 
is not a corporation, a 5-percent owner is any employee who owns more 
than 5 percent of the capital or profits interest in the employer. The 
rules of subsections (b), (c), and (m) of section 414 do not apply for 
purposes of determining who is a 5-percent owner. Thus, for example, an 
individual who is a 5-percent owner of a subsidiary corporation that is 
part of a controlled group of corporations within the meaning of section 
414(b) is treated as a 5-percent owner for purposes of these rules.
    Q-9: How is the ``top-paid group'' determined?
    A-9: (a) General rule. An employee is in the top-paid group of 
employees for a particular year if such employee is in the group 
consisting of the top 20 percent of the employer's employees when ranked 
on the basis of compensation received from the employer during such 
year. The identification of the

[[Page 239]]

particular employees who are in the top-paid group for a year involves a 
two-step procedure:
    (1) The determination of the number of employees that corresponds to 
20 percent of the employer's employees, and
    (2) The identification of the particular employees who are among the 
number of employees who receive the most compensation during this year.

Employees who perform no services for the employer during a year are not 
included in making either of these determinations for such year.
    (b) Number of employees in the top-paid group--(1) Exclusions. 
[Reserved]. See Sec.  1.414(q)-1, Q&A-9(b)(1) for further information.
    (i) Age and service exclusion. The following employees are excluded 
on the basis of age or service absent an election by the employer 
pursuant to the rules in paragraph (b)(2) of this A-9:
    (A) Employees who have not completed 6 months of service by the end 
of such year. For purposes of this paragraph (A), an employee's service 
in the immediately preceding year is added to service in the current 
year in determining whether the exclusion is applicable with respect to 
a particular employee in the current year. For example, given a plan 
with a calendar determination year, if employee A commences work August 
1, 1989, and terminates employment May 31, 1990, A may be excluded under 
this paragraph (b)(1)(i)(A) in 1989 because A completed only 5 months of 
service by December 31, 1989. However, A cannot be excluded pursuant to 
this rule in 1990 because A has completed 10 months of service, for 
purposes of this rule, by the end of 1990.
    (B) Employees who normally work less than 17\1/2\ hours per week as 
defined in paragraph (d) of this A-9 for such year.
    (C) Employees who normally work during less than 6 months during any 
year as defined in paragraph (e) of this A-9 for such year.
    (D) Employees who have not had their 21st birthdays by the end of 
such year.
    (ii) Nonresident alien exclusion. Employees who are nonresident 
aliens and who receive no earned income (within the meaning of section 
911(d)(2)) from the employer that constitutes income from sources within 
the United States (within the meaning of section 861(a)(3)) are 
excluded.
    (iii) Collective bargaining exclusion--(A) In general. Except as 
provided in paragraph (B) of this paragraph (b)(1)(iii), employees who 
are included in a unit of employees covered by an agreement that the 
Secretary of Labor finds to be a collective bargaining agreement between 
employee representatives and the employer, which agreement satisfies 
section 7701(a)(46) and Sec.  301.7701-17T (Temporary), are included in 
determining the number of employees in the top-paid group.
    (B) Percentage exclusion provision. If 90 percent or more of the 
employees of the employer are covered under collective bargaining 
agreements that the Secretary of Labor finds to be collective bargaining 
agreements between employee representatives and the employer, which 
agreements satisfy section 7701(a)(46) and Sec.  301.7701-17T 
(Temporary), and the plan being tested covers only employees who are not 
covered under such agreements, then the employees who are covered under 
such collective bargaining agreements are not counted in determining the 
number of noncollective bargaining employees who will be included in the 
top-paid group for purposes of testing such plan. In addition, such 
employees are not included in the top-paid group for such purposes. 
Thus, if the conditions of this paragraph (b)(1)(iii)(B) are satisfied, 
a separate calculation is required to determine the number and identity 
of noncollective bargaining employees who will be highly compensated 
employees by reason of receiving over $50,000 and being in the top-paid 
group of employees for purposes of testing those plans that cover only 
noncollective bargaining employees.
    (2) Alternative exclusion provisions--(i) Age and service exclusion 
election. An employer may elect, on a consistent and uniform basis, to 
modify the permissible exclusions set forth in paragraph (b)(1)(i) (A), 
(B), (C), and (D) of this A-9 by substituting any shorter period of 
service or lower age than that specified in such paragraph. These 
exclusions may be modified to substitute a zero service or age 
requirement.

[[Page 240]]

    (ii) Election not to apply percentage exclusion provision. An 
employer may elect not to exclude employees under the rules in paragraph 
(b)(1)(iii)(B) of this A-9.
    (iii) Method of election. [Reserved]. See Sec.  1.414(q)-1, Q&A-
9(b)(2)(iii) for further information.
    (c) Identification of top-paid group members. With the exception of 
the paragraph (b)(1)(iii) of this A-9 exclusion for certain employees 
covered by collective bargaining agreements, the exclusions in paragraph 
(b)(1) of this A-9 are not applicable for purposes of identifying the 
particular employees in the top-paid group. Thus, for example, even if 
an employee who normally works for less than 17\1/2\ hours is excluded 
in determining the number of employees in the top-paid group such 
employee may be a member of the top-paid group. Similarly, if during a 
determination year, employee A receives over $75,000 and is one of the 
top-100 employees ranked by compensation, then employee A is a highly 
compensated active employee for such determination year. This is true 
even though employee A has worked less than six months and thus may be 
excluded in determining the number of persons in the top-paid group for 
the determination year.
    (d) Example. Paragraphs (b) and (c) of this A-9 are illustrated by 
the following example:

    Example. Employer X has 200 active employees during the 1989 
determination year, 100 of whom normally work less than 17\1/2\ hours 
per week during such year and 80 of whom normally work less than 15 
hours per week during such year. X elects to exclude all employees who 
normally work less than 15 hours per week in determining the number of 
employees in the top-paid group. Thus, X excludes 80 employees in 
determining the number of employees in the top-paid group. X's top-paid 
group for the 1989 determination year consists of 20% of 120 or 24 
employees. All 200 of X's employees must then be ranked in order by 
compensation received during the year, and the 24 employees X paid the 
greatest amount of compensation during the year are top-paid employees 
with respect to X for the 1989 determination year.

    (e) 17\1/2\ hour rule--(1) In general. The determination of whether 
an employee normally works less than 17\1/2\ hours per week is made 
independently for each year based on the rules in paragraph (e)(2) and 
(3) of this A-9. In making this determination, weeks during which the 
employee did not work for the employer are not considered. Thus, for 
example, if an employee normally works twenty hours a week for twenty-
five weeks during the fall and winter school quarters, 10 hours a week 
for the 12 week spring quarter, and does not work for the employer 
during the three-month summer quarter, such employee is treated as 
normally working more than 17\1/2\ hours per week under the rule of this 
paragraph (e).
    (2) Deemed above 17\1/2\. An employee who works 17\1/2\ hours a week 
or more, for more than fifty percent of the total weeks worked by such 
employee during the year, is deemed to normally work more than 17\1/2\ 
hours a week for purposes of this rule.
    (3) Deemed below 17\1/2\. An employee who works less than 17\1/2\ 
hours a week for fifty percent or more of the total weeks worked by such 
employee during the year is deemed to normally work less than 17\1/2\ 
hours a week for purposes of this rule.
    (4) Application. The determination provided for in paragraph (e)(1), 
(2), and (3) of this A-9 may be made separately with respect to each 
employee, or on the basis of groups of employees who fall within 
particular job categories as established by the employer on a reasonable 
basis. For example, under the rule of this paragraph (e)(4) an employer 
may exclude all office cleaning personnel if, for the year in question, 
the employees performing this function normally work less than 17\1/2\ 
hours a week. This is true even though one or more employees within this 
group normally work in excess of 17\1/2\ hours. The election to make 
this determination on the basis of individuals or groups is operational 
and does not require a plan provision.
    (5) Application based on groups. (i) Groups of employees who perform 
the same job are not required to be considered as one category for 
purposes of the rule in paragraph (e)(4) of this A-9. Thus, for example, 
an employer supermarket may determine its highly compensated employees 
by excluding part-time grocery checkers if such personnel normally work 
less than 17\1/2\

[[Page 241]]

hours a week while continuing to include full-time personnel performing 
this function. In general, 80 percent of the positions within a 
particular job category must be filled by employees who normally work 
less than 17\1/2\ hours a week before any employees may be excluded 
under this rule on the basis of their membership in that job category.
    (ii) Alternatively, an employer may exclude employees who are 
members of a particular job category if the median number of hours of 
service credited to employees in that category during a determination or 
look-back year is 500 or less.
    (f) 6-month rule--(1) In general. The determination of whether 
employees normally work during not more than 6 months in any year is 
made on the basis of the facts and circumstances of the particular 
employer as evidenced by the employer's customary experience in the 
years preceding the determination year. An employee who works on one day 
during a month is deemed to have worked during that month.
    (2) Application of prior year experience. In making the 
determination under this paragraph (f), the experience for years 
immediately preceding the determination year will generally be weighed 
more heavily than that of earlier years. However, this emphasis on more 
recent years is not appropriate if the data for a particular year 
reflects unusual circumstances. For example, if fishermen working for 
employer X worked 9 months in 1987 and 1988, 8 months in 1989, and then, 
because of abnormal ice conditions, worked only 5 months in 1990, such 
fishermen could not be excluded under this rule in 1990. Furthermore, 
the data with respect to 1990 would not be weighed more heavily in 
making a determination with respect to subsequent years.
    (3) Individual or group basis. This determination may be made 
separately with respect to each employee or on the basis of groups of 
employees who fall within particular job categories in the manner set 
forth in paragraph (e)(4) of this A-8.
    Q-10. For purposes of determining the group of highly compensated 
employees, which employees are officers and which officers must be 
included in the highly compensated group?
    A-10: (a) In general. Subject to the limitations set forth in 
paragraph (b) of this A-10 and the top-100 employee rule set forth in A-
2, an employee is an includible officer for purposes of this section and 
is a member of the group of highly compensated employees if such 
employee is an officer of the employer (within the meaning of section 
416(i) and Sec.  1.416-1 A-T 13 & A-T 15) at any time during the 
determination year or look-back year and receives compensation during 
such year that is greater than 150 percent of the dollar limitation in 
effect under section 415(c)(1)(A) for the calendar year in which the 
determination or look-back year begins. In addition, an officer who does 
not meet the 415(c)(1)(A) dollar limitation requirement may be an 
includible officer based on the minimum inclusion rules set forth in 
paragraph (c) of this A-10.
    (b) Maximum limitation--(1) In general. Nor more than 50 employees 
(or, if lesser, the greater of 3 employees or 10 percent of the 
employees without regard to any exclusions) shall be treated as officers 
for purposes of this provision in determining the group of highly 
compensated employees for any determination year or look-back year.
    (2) Total number of employees. The total number of employees for 
purposes of the limitation in this paragraph (b) is the number of 
employees the employer has during the particular determination year or 
look-back year. For purposes of this A-10, employees include only those 
individuals who perform services for the employer during the 
determination or look-back year. The exclusions applicable for purposes 
of determining the number of employees in the top-paid group are not 
applicable for purposes of the limitations in this paragraph (b).
    (3) Inclusion ranking. If the number of the employer's officers who 
satisfy paragraph (a) of this A-10 during either the determination year 
or the look-back year exceeds the limitation under this paragraph (b), 
then the officers who will be considered as includible officers for 
purposes of this rule are those who receive the greatest compensation 
from the employer during such determination or look-back year.

[[Page 242]]

The definition of compensation in A-13 is to be used for this purpose.
    (c) Minimum inclusion rule. This paragraph (c) is applicable when no 
officer of the employer satisfies the compensation requirements of 
paragraph (a) of this A-10 during either a determination year or look-
back year. In such case, the highest paid officer of the employer for 
such year is treated as a highly compensated employee by reason of being 
an officer, without regard to the amount of compensation paid to such 
officer in relation to the section 415(c)(1)(A) dollar amount for the 
year. This is true whether or not such employee is also a highly 
compensated employee on any other basis. Thus, for example, if no 
officer of employer X meets the compensation requirements of paragraph 
(a) of this A-10 during the 1989 look-back year, and employee A is both 
the highest paid officer during such year and a 5-percent owner, 
employee A is treated as an includible officer satisfying the minimum 
inclusion rules of this paragraph.
    (d) Separate application. The maximum and minimum officer inclusion 
rules of paragraphs (b) and (c) of this A-10 apply separately with 
respect to the determination year calculation and the look-back year 
calculation. Thus, for example, if no officer of employer X receives 
compensation above the threshold amount in paragraph (a) of this A-10 
during either the determination year or look-back year, application of 
the minimum inclusion rule would result in the officer of employer X who 
received the greatest compensation during the look-back year being 
treated as a highly compensated employee and, in addition, the officer 
of employer X who receives the most compensation during the 
determination year would be included in the highly compensated group if 
such officer is also in the top-100 employees of employer X for such 
year. Thus, two officers may be treated as highly compensated active 
employees for a determination year by reason of the provisions of the 
minimum inclusion rule.
    Q-11: To what extent must family members who are employed by the 
same employer be aggregated for purposes of section 414(q)?
    A-11: (a) Family aggregation--(1) In general. Aggregation is 
required with respect to an employee who is, during a particular 
determination year or look-back year, a family member (as defined in A-
12) of either (i) a 5-percent owner who is an active or former employee 
or (ii) a highly compensated employee who is one of the ten most highly 
compensated employees ranked on the basis of compensation paid by the 
employer during such year.
    (2) Aggregation of contributions or benefits. As prescribed in 
regulations under the provisions to which section 414(q) is applicable, 
a family member and a 5-percent owner or top-10 highly compensated 
employee aggregated under this rule are generally treated as a single 
employee receiving an amount of compensation and a plan contribution or 
benefit that is based on the compensation, contributions, and benefits 
of such family member and 5-percent owner or top-10 highly compensated 
employee.
    (b) Exclusion status irrelevant. Family members are subject to this 
aggregation rule whether or not they fall within the categories of 
employees that may be excluded for purposes of determining the number of 
employees in the top-paid group and whether or not they are highly 
compensated employees when considered separately.
    (c) Order of determination--(1) Determination of highly compensated 
employees. The determination of which employees are highly compensated 
employees and which highly compensated employees are among the ten most 
highly compensated employees in making the look-back year calculation or 
the determination year calculation for a determination year will be made 
prior to the application of the rules in paragraph (a) of this A-11.
    (2) Determination of top-paid group and top-100 employees. The 
determination of the number and identity of employees in the top-paid 
group under the look-back year calculation or the determination year 
calculation for a determination year and the identity of individuals in 
the top-100 employees under the determination year calculation for a 
determination year is made prior to application of the rules in 
paragraph (a) of this A-11.

[[Page 243]]

    (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's 
compensation in the determination year or the look-back year in applying 
the rules of paragraph (a) of this A-13.
    Q-14: What periods must be used for determining who is a highly 
compensated employee for a determination year?
    A-14: (a) Determination year and look-back year--(1) In general. For 
purposes of determining the group of highly compensated employees for a 
determination year, the determination year calculation is made on the 
basis of the applicable year of the plan or other entity for which a 
determination is being made and the look-back year calculation is made 
on the basis of the twelve month period immediately preceding such year. 
Thus, in testing plans X and Y of an employer, if plan X has a calendar 
year plan year and plan Y has a July 1 to June 30 plan year, the 
determination year calculation and look-back year calculation for plan X 
must be made on the basis of the calendar year. Similarly, the 
determination year calculation and look-back year calculation for plan Y 
must be made on the basis of the July 1 to June 30 year.
    (2) Applicable year. For purposes of this A-14, the applicable year 
is the plan year of the qualified plan or other employee benefit 
arrangement to which the definition of highly compensated employees is 
applicable as defined in the written plan document or

[[Page 244]]

otherwise identified in regulations pursuant to sections to which the 
definition of highly compensated employees is applicable. To the extent 
that the definition of highly compensated employees is applicable to 
entities of other arrangements that do not have an otherwise identified 
plan year, then either the calendar year of the employer's fiscal year 
may be treated as the plan year.
    (3) Look-back year. The look-back year is never less than a twelve 
month period.
    (b) Calendar year calculation election--(1) In general. An employer 
may elect to make the look-back year calculation for a determination 
year on the basis of the calendar year ending with or within the 
applicable determination year (or, in the case of a determination year 
that is shorter than twelve months, the calendar year ending with or 
within the twelve-month period ending with the end of the applicable 
determination year). In such case, the employer must make the 
determination year calculation for the determination year on the basis 
of the period (if any) by which the applicable determination year 
extends beyond such calendar year (i.e., the lag period). If the 
applicable year for which the determination is being made is the 
calendar year, the employer still may elect to make the calendar year 
calculation election under this A-14(b). In such case, the look-back 
year calculation is made on the basis of the calendar year determination 
year and, because there is no lag period, a separate determination year 
calculation under A-3(a)(2) of this Sec.  1.414(q)-1 is not required.
    (2) Lag period calculation. In making the determination year 
calculation under A-3(a)(2) of this Sec.  1.414(q)-1 on the basis of the 
lag period, the dollar amounts applicable under A-3(a)(1) (B) and (C) of 
this Sec.  1.414(q)-1 are to be adjusted by multiplying such dollar 
amounts by a fraction, the numerator of which is the number of calendar 
months that are included in the lag period and the denominator of which 
is twelve.
    (3) Determination of active employees. An employee will be 
considered an active employee for purposes of a determination year for 
which the calendar year calculation election is in effect so long as 
such employee performs services for the employer during the applicable 
year for which the determination is being made. This is the case even if 
such employee does not perform services for the employer during the lag-
period for such determination year.
    (4) Election requirement. If the employer elects to make the 
calendar year calculation election with respect to one plan, entity, or 
arrangement, such election must apply with respect to all plans, 
entities, and arrangements of the employer. In addition, such election 
must be provided for in the plan.
    (c) Change in applicable years. Where there is a change in the 
applicable year for which a determination is being made with respect to 
a plan entity, or other arrangement that is not subject to the calendar 
year calculation election, the look-back year calculation for the short 
applicable year is to be made on the basis of the twelve month period 
preceding the short applicable year (i.e., generally, the old applicable 
year) and the determination year calculation for the short applicable 
year is to be made on the basis of the short applicable year. In 
addition, the dollar amounts under A-3(a)(1) (B) and (C) are to be 
adjusted for such determination year calculation as if the short 
applicable year were a lag period under paragraph (b)(2) of this A-14.
    (d) Example. The following examples illustrates the rules of this A-
14:

    Example 1. Employer X has a single plan (Plan A) with an April 1 to 
March 31 plan year. Employer X makes no election to use the calendar 
year for the determination period. Therefore, in determining the group 
of highly compensated employees for the April 1, 1989 to March 31, 1990 
plan year, the determination year is the plan year ending March 31, 1990 
and the look-back year is the plan year ending March 31, 1989.
    Example 2. Assume the same facts given above. With respect to the 
plan year beginning in 1990, employer X elects to use the calendar year 
for the determination period. Therefore, in determining the group of 
highly compensated employees for the April 1, 1990 to March 31, 1991 
plan year, the lag-period determination year is the period from January 
1, 1991, through March 31, 1991, and the applicable look-back year is 
the 1990 calendar year.

[[Page 245]]

    Example 3. Employer Y has a single plan (Plan B) with a calendar 
plan year. With respect to the plan year beginning in 1990, employer Y 
elects to make the look-back year calculation for the 1990 determination 
year on the basis of the calendar year ending with or within the 1990 
determination year. Because employer Y's determination year is the 1990 
calendar year there is no lag period and employer Y determines the group 
of highly compensated employees for purposes of the 1990 calendar plan 
year on the basis of such plan year alone.

    Q-15: Is there any transition rule in determining the group of 
highly compensated employees for 1987 and 1988?
    A-15: (a) In general. Solely for purposes of section 401(k)(3) and 
(m)(2) and solely for twelve-month plan years beginning in 1987 and 
1988, an eligible employer may elect to define the group of highly 
compensated employees as the group consisting of 5-percent owners of the 
employer at any time during the plan year and employees who receive 
compensation in excess of $50,000 during the plan year. This rule would 
apply in lieu of the look-back year calculation and determination year 
calculation otherwise applicable under A-3(a) of this Sec.  1.44(q)-1. 
In addition, an eligible employer may elect to make the determinations 
permitted under this transition rule on the basis of the calendar year 
ending in the plan year and the period by which such plan year extends 
beyond such calendar year, in accordance with the rules of A-14(b), in 
lieu of making the determinations under this transition rule on the 
basis of the plan year for which the determinations are being made.
    (b) Eligible employers. An employer is an eligible employer under 
this A-15 if such employer satisfies both of the following requirements:
    (1) The employer does not maintain any top-heavy plan within the 
meaning of section 416 at any time during 1987 and 1988; and
    (2) Under each plan of the employer to which section 401(k)(3) or 
401(m)(2) is applicable, the group of eligible employees that comprises 
the highest 25% of eligible employees ranked on the basis of 
compensation includes at least one employee whose compensation is 
$50,000 or below. This requirement must be met separately with respect 
to each such plan of the employer.
    (c) Uniformity requirement. An eligible employer may not make the 
election under paragraph (a) of this A-15 unless the election applies to 
all of the plans maintained by the employer to which section 401(k)(3) 
or 401(m)(2) applies.
    (d) Election requirements. This election is operational and does not 
require a plan provision.

[T.D. 8173, 53 FR 4967, Feb. 19, 1988, as amended by T.D. 8334, 56 FR 
3977, Feb. 1, 1991; T.D. 8548, 59 FR 32916, June 27, 1994]



Sec.  1.414(r)-0  Table of contents.

    (a) In general. Sections 1.414(r)-1 through 1.414(r)-11 provide 
rules for determining whether an employer is treated as operating 
qualified separate lines of business under section 414(r) of the 
Internal Revenue Code of 1986 as added to the Code by section 1115(a) of 
the Tax Reform Act of 1986 (Pub. L. No. 99-514), as well as rules for 
applying the requirements of sections 410(b), 401(a)(26), and 129(d)(8) 
separately with respect to the employees of each qualified separate line 
of business of an employer. Paragraph (b) of this section contains a 
listing of the headings of Sec. Sec.  1.414(r)-1 through 1.414(r)-11. 
Paragraph (c) of this section provides a flowchart showing how the major 
provisions of Sec. Sec.  1.414(r)-1 through 1.414(r)-6 are applied.
    (b) Table of contents. The following is a listing of the headings of 
Sec. Sec.  1.414(r)-1 through 1.414(r)-11.

Sec.  1.414(r)-1 Requirements applicable to qualified separate lines of 
                                business.

    (a) In general.
    (b) Conditions under which an employer is treated as operating 
qualified separate lines of business.
    (1) In general.
    (2) Qualified separate line of business.
    (i) In general.
    (ii) Line of business.
    (iii) Separate line of business.
    (iv) Qualified separate line of business.
    (A) In general.
    (B) Fifty-employee requirement.
    (C) Notice requirement.
    (D) Requirement of administrative scrutiny.
    (3) Determining the employees of a qualified separate line of 
business.
    (c) Separate application of certain Code requirements to employees 
of a qualified separate line of business.
    (1) In general.
    (2) Separate application of section 410(b).

[[Page 246]]

    (i) General rule.
    (ii) Special rule for employer-wide plans.
    (3) Separate application of section 401(a)(26).
    (i) General rule.
    (ii) Special rule for employer-wide plans.
    (4) Separate application of section 129(d)(8). [Reserved]
    (5) Separate application of other Code requirements.
    (d) Application of requirements.
    (1) In general.
    (2) Interpretation.
    (3) Separate operating units.
    (4) Certain mergers and acquisitions.
    (5) Governmental and tax-exempt employers.
    (i) General rule.
    (ii) Additional rules. [Reserved]
    (6) Testing year basis of application.
    (i) Section 414(r).
    (ii) Sections 410(b), 401(a)(26), and 129(d)(8).
    (7) Averaging rules.
    (8) Definitions.
    (9) Effective dates.
    (i) General rule.
    (ii) Reasonable compliance.
    (A) In general.
    (B) Determination of reasonable compliance.
    (C) Effect on other plans.
    (e) Additional rules.

                   Sec.  1.414(r)-2 Line of business.

    (a) General rule.
    (b) Employer determination of its lines of business.
    (1) In general.
    (2) Property and services provided to customers.
    (i) In general.
    (ii) Timing of provision of property or services.
    (3) Employer designation.
    (i) In general.
    (ii) Ability to combine unrelated types of property or services in a 
single line of business.
    (iii) Ability to separate related types of property or services into 
two or more lines of business.
    (iv) Affiliated service groups.
    (c) Examples.
    (1) In general.
    (2) Examples illustrating employer designation.
    (3) Examples illustrating property and services provided to 
customers.

               Sec.  1.414(r)-3 Separate line of business.

    (a) General rule.
    (b) Separate organization and operation.
    (1) In general.
    (2) Separate organizational unit.
    (3) Separate financial accountability.
    (4) Separate employee workforce.
    (5) Separate management.
    (c) Supplementary rules.
    (1) In general.
    (2) Determination of separate employee workforce.
    (3) Determination of separate management.
    (4) Employees taken into account.
    (5) Services taken into account.
    (i) Provision of services to a separate line of business.
    (ii) Period for which services are provided.
    (iii) Optional rule for employees who change status.
    (A) In general.
    (B) Change in employee's status.
    (6) Examples of the separate employee workforce requirement.
    (7) Examples of the separate management requirement.
    (d) Optional rule for vertically integrated lines of business.
    (1) In general.
    (2) Requirements.
    (3) Optional rule.
    (i) Treatment of employees.
    (ii) Purposes for which optional rule applies.
    (4) Examples.

Sec.  1.414(r)-4 Qualified separate line of business--fifty-employee and 
                          notice requirements.

    (a) In general.
    (b) Fifty-employee requirement.
    (c) Notice requirement.
    (1) General rule.
    (2) Effect of notice.

  Sec.  1.414(r)-5 Qualified separate line of business--administrative 
                   scrutiny requirement--safe harbors.

    (a) In general.
    (b) Statutory safe harbor.
    (1) General rule.
    (2) Highly compensated employee percentage ratio.
    (3) Employees taken into account.
    (4) Ten-percent exception.
    (5) Determination based on preceding testing year.
    (6) Examples.
    (c) Safe harbor for separate lines of business in different 
industries.
    (1) In general.
    (2) Optional rule for foreign operations.
    (3) Establishment of industry categories.
    (4) Examples.
    (d) Safe harbor for separate lines of business that are acquired 
through certain mergers and acquisitions.
    (1) General rule.
    (2) Employees taken into account.
    (3) Transition period.
    (4) Examples.
    (e) Safe harbor for separate lines of business reported as industry 
segments.

[[Page 247]]

    (1) In general.
    (2) Reported as an industry segment in conformity with Form 10-K or 
Form 20-F.
    (3) Timely filing of Form 10-K or 20-F.
    (4) Examples.
    (f) Safe harbor for separate lines of business that provide same 
average benefits as other separate lines of business.
    (1) General rule.
    (2) Separate lines of business benefiting disproportionate number of 
nonhighly compensated employees.
    (i) Applicability of safe harbor.
    (ii) Requirement.
    (3) Separate lines of business benefiting disproportionate number of 
highly compensated employees.
    (i) Applicability of safe harbor.
    (ii) Requirement.
    (4) Employees taken into account.
    (5) Example.
    (g) Safe harbor for separate lines of business that provide minimum 
or maximum benefits.
    (1) In general.
    (2) Minimum benefit required.
    (i) Applicability.
    (ii) Requirement.
    (iii) Defined benefit minimum.
    (A) In general.
    (B) Normal form and equivalent benefits.
    (C) Compensation definition.
    (D) Average compensation requirement.
    (E) Special rules.
    (iv) Defined contribution minimum.
    (A) In general.
    (B) Modified allocation definition for averaging.
    (3) Maximum benefit permitted.
    (i) Applicability.
    (ii) Requirement.
    (iii) Defined benefit maximum.
    (A) In general.
    (B) Determination of defined benefit maximum.
    (C) Adjustment for different compensation definitions.
    (D) Adjustment for certain subsidies.
    (iv) Defined contribution maximum.
    (4) Duplication of benefits or contributions.
    (i) Plans of the same type.
    (ii) Plans of different types.
    (iii) Special rule for floor-offset arrangements.
    (5) Certain contingency provisions ignored.
    (6) Employees taken into account.

  Sec.  1.414(r)-6 Qualified separate line of business--administrative 
            scrutiny requirement--individual determinations.

    (a) In general.
    (b) Authority to establish procedures.

    Sec.  1.414(r)-7 Determination of the employees of an employer's 
                  qualified separate lines of business.

    (a) Introduction.
    (1) In general.
    (2) Purposes for which this section applies.
    (b) Assignment procedure.
    (1) In general.
    (2) Assignment for the first testing day.
    (3) Assignment of new employees for subsequent testing days.
    (4) Special rule for employers using annual option under section 
410(b).
    (c) Assignment and allocation of residual shared employees.
    (1) In general.
    (2) Dominant line of business method of allocation.
    (i) In general.
    (ii) Dominant line of business.
    (iii) Employee assignment percentage.
    (A) Determination of percentage.
    (B) Employees taken into account.
    (iv) Option to apply reduced percentage.
    (v) Examples.
    (3) Pro-rata method of allocation.
    (i) In general.
    (ii) Allocation procedure.
    (iii) Examples.
    (4) HCE percentage ratio method of allocation.
    (i) In general.
    (ii) Highly compensated employee percentage assignment ratio.
    (iii) Allocation procedure.
    (5) Small group method.
    (i) In general.
    (ii) Size of group.
    (iii) Composition of qualified separate line of business.
    (iv) Reasonable allocation.

        Sec.  1.414(r)-8 Separate application of section 410(b).

    (a) General rule.
    (b) Rules of separate application.
    (1) In general.
    (2) Satisfaction of section 410(b)(5)(B) on an employer-wide basis.
    (i) General rule.
    (ii) Application of facts and circumstances requirements under 
nondiscriminatory classification test.
    (iii) Modification of unsafe harbor percentage for plans satisfying 
ratio percentage test at 90 percent level.
    (A) General Rule.
    (B) Facts and circumstances alternative.
    (3) Satisfaction of section 410(b) on a qualified-separate-line-of-
business basis.
    (4) Examples.
    (c) Coordination of section 401(a)(4) with section 410(b).
    (1) General rule.
    (2) Examples.
    (d) Supplementary rules.

[[Page 248]]

    (1) In general.
    (2) Definition of plan.
    (3) Employees of a qualified separate line of business.
    (4) Consequences of failure.

      Sec.  1.414(r)-9 Separate application of section 401(a)(26).

    (a) General rule.
    (b) Requirements applicable to a plan.
    (c) Supplementary rules.
    (1) In general.
    (2) Definition of plan.
    (3) Employees of a qualified separate line of business.
    (4) Consequences of failure.

 Sec.  1.414(r)-10 Separate application of section 129(d)(8). [Reserved]

            Sec.  1.414(r)-11 Definitions and special rules.

    (a) In general.
    (b) Definitions.
    (1) In general.
    (2) Substantial-service employee.
    (3) Top-paid employee.
    (4) Residual shared employee.
    (5) Testing year.
    (6) Testing day.
    (7) First testing day.
    (8) Section 401(a)(26) testing day.
    (c) Averaging rules.
    (1) In general.
    (2) Specified provisions.
    (3) Averaging of large fluctuations not permitted.
    (4) Consistency requirements.

    (c) Flowchart. The following is a flowchart showing how the major 
provisions of Sec. Sec.  1.414(r)-1 through 1.414(r)-6 are applied.

[[Page 249]]

[GRAPHIC] [TIFF OMITTED] TC05OC91.015


[T.D. 8376, 56 FR 63434, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32916, June 27, 1994]



Sec.  1.414(r)-1  Requirements applicable to qualified 
separate lines of business.

    (a) In general. Section 414(r) prescribes the conditions under which 
an employer is treated as operating qualified separate lines of 
business. If an employer is treated as operating qualified separate 
lines of business under section 414(r), certain requirements

[[Page 250]]

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 Sec.  1.414(r)-2.
    (iii) Separate line of business. A separate line of business is a 
line of business that is organized and operated separately from the 
remainder of the employer. The determination of whether a line of 
business is organized and operated separately from the remainder of the 
employer is made on the basis of objective criteria. These criteria 
generally require that the line of business be organized into one or 
more separate organizational units (e.g., corporations, partnerships, or 
divisions), that the line of business constitute one or more distinct 
profit centers within the employer, and that no more than a moderate 
overlap exist between the employee workforce and management employed by 
the line of business and those employed by the remainder of the 
employer. Rules for determining whether a line of business is organized 
and operated separately from the remainder of the employer and thus 
constitutes a separate line of business are provided in Sec.  1.414(r)-
3. These rules include an optional rule for vertically integrated lines 
of business.
    (iv) Qualified separate line of business--(A) In general. A 
qualified separate line of business must satisfy the three statutory 
requirements in section 414(r)(2). A separate line of business that 
satisfies these three statutory requirements in accordance with 
paragraphs (b)(2)(iv)(B) through (b)(2)(iv)(D) of this section 
constitutes a qualified separate line of business.
    (B) Fifty-employee requirement. Under section 414(r)(2)(A), a 
separate line of business must have at least 50 employees. Rules for 
determining whether this requirement is satisfied are provided in Sec.  
1.414(r)-4(b).
    (C) Notice requirement. Under section 414(r)(2)(B), the employer 
must notify the Secretary that it treats itself as operating qualified 
separate lines of business under section 414(r) for purposes of applying 
the requirements of section 410(b), 401(a)(26), or 129(d)(8)

[[Page 251]]

separately with respect to the employees of the separate line of 
business. Rules and procedures for complying with this requirement are 
provided in Sec.  1.414(r)-4(c).
    (D) Requirement of administrative scrutiny. Under section 
414(r)(2)(C), a separate line of business must pass administrative 
scrutiny. A separate line of business may satisfy this requirement in 
one of two ways. First, a separate line of business that satisfies any 
of the safe harbors in Sec.  1.414(r)-5 satisfies the requirement of 
administrative scrutiny. These safe harbors implement the statutory safe 
harbor of section 414(r)(3) as well as the guidelines prescribed under 
section 414(r)(2)(C). Second, a separate line of business that does not 
satisfy any of the safe harbors in Sec.  1.414(r)-5 nonetheless 
satisfies the requirement of administrative scrutiny if the employer 
requests and receives an individual determination from the Commissioner 
that the separate line of business satisfies the requirement of 
administrative scrutiny. Rules and procedures applicable to requesting 
and receiving an individual determination are provided in Sec.  
1.414(r)-6. A separate line of business is permitted to satisfy the 
requirement of administrative scrutiny in any manner permitted under 
this paragraph (b)(2)(iv)(D), regardless of how any other separate line 
of business of the employer satisfies the requirement.
    (3) Determining the employees of a qualified separate line of 
business. In order to apply certain provisions under these regulations, 
it is necessary to determine the employees of a qualified separate line 
of business. For these purposes, the employees of a qualified separate 
line of business consist of all employees who are substantial-service 
employees with respect to the qualified separate line of business, and 
all other employees who are assigned to the qualified separate line of 
business. Rules for making these determinations are provided in Sec.  
1.414(r)-7. These rules apply solely for the purposes specified in these 
regulations (see Sec.  1.414(r)-7(a)(2) for a comprehensive listing of 
these purposes). These rules do not apply for any other purpose (e.g., 
the determination under Sec.  1.414(r)-3 of whether a line of business 
is organized and operated separately from the remainder of the 
employer).
    (c) Separate application of certain Code requirements to employees 
of a qualified separate line of business--(1) In general. If an employer 
is treated as operating qualified separate lines of business under 
section 414(r) in accordance with paragraph (b) of this section, the 
requirements of sections 410(b), 401(a)(26), and 129(d)(8) may be 
applied separately with respect to the employees of each qualified 
separate line of business. Paragraphs (c)(2) through (c)(4) of this 
section provide for the separate application of these requirements. In 
general, the requirements of a Code section are applied separately with 
respect to the employees of a qualified separate line of business by 
treating those employees as if they were the only employees of the 
employer. Paragraph (c)(5) of this section prescribes the limited 
conditions under which other Code requirements may be applied separately 
with respect to the employees of a qualified separate line of business.
    (2) Separate application of section 410(b)--(i) General rule. Except 
as provided in paragraph (c)(2)(ii) of this section, an employer is 
permitted to apply the requirements of section 410(b) separately with 
respect to the employees of each qualified separate line of business 
operated by the employer only if the employer does so with respect to 
all its plans, all its employees, and all its qualified separate lines 
of business. For this purpose, the requirements of section 410(b) 
encompass the requirements of section 401(a)(4) (including, but not 
limited to, the permitted disparity rules of section 401(l), the actual 
deferral percentage test of section 401(k)(3) and the actual 
contribution percentage test of section 401(m)(2)). Rules for applying 
section 410(b) separately with respect to the employees of a qualified 
separate line of business are provided in Sec.  1.414(r)-8. An employer 
may apply the rules of section 414(r) for purposes of section 410(b) 
even if it does not apply the rules of section 414(r) for purposes of 
section 401(a)(26).
    (ii) Special rule for employer-wide plans. Notwithstanding paragraph 
(c)(2)(i) of this section, an employer that is treated as operating 
qualified

[[Page 252]]

separate lines of business for purposes of section 410(b) in accordance 
with paragraph (b) of this section may apply the requirements of section 
410(b) on an employer-wide rather than a qualified-separate-line-of-
business basis with respect to any plan (within the meaning of Sec.  
1.414(r)-8(d)(2), but without regard to the mandatory disaggregation 
rule of Sec.  1.410(b)-7(c)(4) for portions of a plan that benefit 
employees of different qualified separate lines of business) that 
benefits a group of employees that satisfies the percentage test of 
section 410(b)(1)(A) (i.e., benefits at least 70 percent of the 
employer's nonexcludable nonhighly compensated employees). If section 
401(a)(4) requires that a group of employees under the plan described in 
the preceding sentence satisfy section 410(b) for purposes of satisfying 
section 401(a)(4), the percentage test of section 410(b)(1)(A) must be 
satisfied by each such group of employees. See Sec.  1.414(r)-8(c). The 
rules of this paragraph (c)(2)(ii) are illustrated by the following 
example.

    Example. Employer A maintains a single profit-sharing plan, Plan W, 
and three pension plans, Plans X, Y and Z, each benefiting employees of 
a different one of Employer A's three qualified separate lines of 
business. Contributions to the profit-sharing plan are made pursuant to 
a cash or deferred arrangement in which all employees of Employer A are 
eligible to participate. Assume that, as a result, Plan W satisfies the 
requirements to be tested under this paragraph (c)(2)(ii). None of the 
pension plans benefits more than 70 percent of the nonexcludable 
nonhighly compensated employees of Employer A. Employer A is treated as 
operating qualified separate lines of business for purposes of applying 
section 410(b) to its qualified plans. The requirements of sections 
410(b) and 401(a)(4) must therefore be applied to Plans X, Y and Z 
separately with respect to the employees of each of the three qualified 
separate line of business operated by Employer A. Since Plan W benefits 
at least 70 percent of the nonexcludable nonhighly compensated employees 
of Employer A, however, the requirements of sections 410(b) and 
401(a)(4) (including section 401(k)) may be applied to Plan W on an 
employer-wide basis.

    (3) Separate application of section 401(a)(26)--(i) General rule. 
Except as provided in paragraph (c)(3)(ii) of this section, an employer 
is permitted to apply the requirements of section 401(a)(26) separately 
with respect to the employees of each qualified separate line of 
business operated by the employer only if the employer does so with 
respect to all its plans, all its employees, and all its qualified 
separate lines of business. Rules for applying the requirements of 
section 401(a)(26) separately with respect to the employees of a 
qualified separate line of business are provided in Sec.  1.414(r)-9. An 
employer may apply the rules of section 414(r) for purposes of section 
401(a)(26) even if it does not apply the rules of section 414(r) for 
purposes of section 410(b).
    (ii) Special rule for employer-wide plans. Notwithstanding the first 
sentence of paragraph (c)(3)(i) of this section, an employer that is 
treated as operating qualified separate lines of business in accordance 
with paragraph (b) of this section for purposes of both sections 410(b) 
and 401(a)(26) may apply the requirements of section 401(a)(26) on an 
employer-wide rather than a qualified-separate-line-of-business basis 
with respect to any plan (within the meaning of Sec.  1.414(r)-9(c)(2), 
but without regard to the mandatory disaggregation rule of Sec.  
1.401(a)(26)-2(d)(1)(iv) for portions of a plan that benefit employees 
of different qualified separate lines of business), but only if the 
special rule for employer-wide plans in paragraph (c)(2)(ii) of this 
section is applied to the same plan for the same plan year.
    (4) Separate application of section 129(d)(8). [Reserved]
    (5) Separate application of other Code requirements. Under no 
circumstance may the requirements of any section of the Code (other than 
a section described in paragraphs (c)(2) through (c)(4) of this section) 
be applied separately with respect to the employees of a qualified 
separate line of business unless the section specifically cross-
references, or is specifically cross-referenced by, section 414(r). The 
Code sections whose requirements may not be applied separately with 
respect to the employees of a qualified separate line of business 
include, but are not limited to, sections 79(d)(3), 105(h), 117(d)(3), 
120(c)(2), 125(g)(3), 127(b)(2), 129(d)(3), 132, 195, 401(a)(3) (as in 
effect on September 1, 1974), 414(q)(4),

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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 Sec. Sec.  
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 
Sec. Sec.  1.414(r)-2 through 1.414(r)-11, but that does not reflect the 
employer's operation of qualified separate lines of business for bona 
fide business reasons.
    (3) Separate operating units. No additional requirements beyond 
those provided in these regulations apply to a separate operating unit. 
Thus, a separate operating unit that satisfies the requirements of 
paragraph (b)(2) of this section is deemed to satisfy the geographic 
separation requirement of section 414(r)(7) and accordingly is treated 
as a qualified separate line of business for all purposes under this 
section, including the separate application of section 401(a)(26).
    (4) Certain mergers and acquisitions. A portion of an employer that 
is acquired in a transaction described in section 410(b)(6)(C) and Sec.  
1.410(b)-2(f) (i.e., an asset or stock acquisition, merger, or other 
similar transaction involving a change in the employer of the employees 
of a trade or business) is deemed to satisfy the requirements to be a 
qualified separate line of business, other than the 50-employee 
requirement and the notice requirement of pararaphs (b)(2)(iv)(R) and 
(b)(2)(iv)(C) of this section, respectively. In addition, the acquired 
employees are not taken into account, and the property and services 
provided by the acquired portion to customers of the employer are 
disregarded, for purposes of determining whether the employer's 
remaining lines of business satisfy the requirements of Sec. Sec.  
1.414(r)-3 through 1.414(r)-6. The rules in this paragraph (d)(4) apply 
only for those testing years with first testing days that fall within 
the transition period described in section 410(b)(6)(C). For this 
purpose, the transition period described in section 410(b)(6)(C) lasts 
only for so long as the conditions in that section are satisfied. For 
the definition of ``first testing day,'' see Sec.  1.414(r)-11(b)(7). 
See Sec.  1.414(r)-5(d)(4), Example 1, for an example of the application 
of the rule in this paragraph (d)(4). See also Sec.  1.414(r)-5(d) for 
an administrative scrutiny safe harbor applicable to certain separate 
lines of business acquired in a transaction described in this section.
    (5) Governmental and tax-exempt employers--(i) General rule. Except 
as provided in paragraph (d)(5)(ii) of this section, the rules of this 
section are applicable in determining whether section 401(a)(26) is 
satisfied by a plan maintained by an employer that is exempt from tax 
under Subtitle A of the Internal Revenue Code (including a governmental 
plan within the meaning of section 414(d)). Similarly, except as 
provided in paragraph (d)(5)(ii) of this section, the rules of this 
section are applicable in determining whether section 410(b) is 
satisfied by a plan that is subject to section 410(b) (including by 
virtue of Sec.  1410(b)-2(e)) and is maintained by an employer that is 
exempt from tax under Subtitle A of the Internal Revenue Code (including 
a governmental plan within the meaning of section 414(d)).
    (ii) Additional rules. [Reserved]
    (6) Testing year basis of application--(i) Section 414(r). Whether 
an employer is treated as operating qualified separate lines of business 
under section 414(r) in accordance with paragraph (b) of this section is 
determined on a year-by-year basis with respect to the testing year. It 
is therefore possible for an employer to satisfy paragraph (b) of this 
section for one testing year and to fail to satisfy it for another 
testing year. It is also possible for an employer to satisfy paragraph 
(b) of this section for two testing years but to have designated its 
lines of business differently in each of those two testing years. In 
determining

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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 Sec. Sec.  1.414(r)-8, 1.414(r)-9, and 
1.414(r)-10.
    (7) Averaging rules. The employer is permitted to apply certain 
provisions of these regulations on the basis of a consecutive-year 
average (not to exceed five consecutive years) under the averaging rules 
of Sec.  1.414(r)-11(c).
    (8) Definitions. In applying the provisions of this section and of 
Sec. Sec.  1.414(r)-2 through 1.414(r)-11, the definitions in Sec. Sec.  
1.414(r)-11(b) and 1.410(b)-9 govern, unless otherwise provided.
    (9) Effective--(i) General rule. The provisions of this section and 
of Sec. Sec.  1.414(r)-2 through 1.414(r)-11 apply to plan years and 
testing years beginning on or after January 1, 1994 (or January 1, 1996, 
in the case of plans maintained by organizations exempt from income 
taxation under section 501(a), including plans subject to section 
403(b)(12)(A)(i) (nonelective plans)).
    (ii) Reasonable compliance--(A) In general. With respect to plan 
years beginning before the date on which the Commissioner begins issuing 
determinations under section 414(r)(2)(C), and on or after the first day 
of the first plan year to which section 414(r) applies under section 
1112(a) of the Tax Reform Act of 1986, an employer is treated as 
operating qualified separate lines of business if the employer 
reasonably determines that it meets the requirements of section 414(r) 
(other than the requirement of administrative scrutiny under section 
414(r)(2)(C)).
    (B) Determination of reasonable compliance. Whether an employer 
reasonably determines that it meets the requirements of section 414(r) 
generally will be determined on the basis of all relevant facts and 
circumstances, including the extent to which the employer has resolved 
unclear issues in its favor. For the period described in paragraph 
(d)(9)(ii)(A) of this section, the Internal Revenue Service will 
consider the employer's compliance with the terms of these final 
regulations (other than the requirement of administrative scrutiny under 
paragraph (b)(2)(iv)(D) of this section) to constitute a reasonable 
determination that the employer meets the requirements of section 414(r) 
(other than the requirement of administrative scrutiny under section 
414(r)(2)(C)).
    (C) Effect on other plans. If an employer sponsors a plan that has a 
plan year beginning within the period decribed in paragraph 
(d)(9)(ii)(A) of this section, the employer's reasonable determination 
of its qualified separate lines of business for the testing year in 
which that plan year begins, and the allocation of employees to those 
qualified separate lines of business, must also be used for purposes of 
applying Sec.  1.414(r)-8 and Sec.  1.414(r)-9 for plan years that begin 
in that testing year but after the end of the period described in 
paragraph (d)(9)(ii)(A) of this section.
    (e) Additional rules. The Commissioner may, in revenue rulings, 
notices, and other guidance of general applicability, provide any 
additional rules that may be necessary or appropriate in applying the 
qualified separate line of business requirements of section 414(r). 
These additional rules may include, for example, new safe harbors in 
Sec.  1.414(r)-5.

[T.D. 8376, 56 FR 63437, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32916, June 27, 1994]

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Sec.  1.414(r)-2  Line of business.

    (a) General rule. A line of business is a portion of an employer 
that is identified by the property or services it provides to customers 
of the employer. For this purpose, an employer is permitted to determine 
its lines of business by designating the property or services that each 
of its lines of business provides to customers of the employer. 
Paragraph (b) of this section explains how an employer determines its 
lines of business for a testing year. Paragraph (c) of this section 
provides examples illustrating the application of this section.
    (b) Employer determination of its lines of business--(1) In general. 
An employer determines its lines of business for a testing year first by 
identifying all the property and services it provides to its customers 
during the testing year, and then by designating which portion of the 
property and services is provided by each of its lines of business.
    (2) Property and services provided to customers--(i) In general. 
Property, whether real or personal, tangible or intangible, is provided 
by an employer to a customer if the employer provides the property to or 
on behalf of the customer for consideration. Similarly, services are 
provided by an employer to a customer if the employer renders the 
services to or on behalf of the customer for consideration. An 
individual item of property or service is taken into account under this 
paragraph (b)(2) only if the employer provides the item to a person 
other than the employer in the ordinary course of a trade or business 
conducted by the employer and the person to whom the employer provides 
the item is acting in the capacity of a customer of the employer. A type 
of tangible property is deemed to be provided to customers of the 
employer for purposes of this section if, with respect to a business 
that produces or manufactures that type of tangible property, the 
employer satisfies the special rule in Sec.  1.414(r)-3(d)(2)(iii)(B) 
for vertically integrated businesses.
    (ii) Timing of provision of property or services. Generally an 
employer determines its lines of business on the basis of the property 
and services it provides to its customers for consideration during the 
testing year. However, it is not necessary both that property or 
services actually be provided, and that consideration for the property 
or services actually be paid, during the current testing year. For an 
employer to be considered to provide property or services to customers 
for consideration during a testing year under this paragraph (b)(2), it 
is sufficient that the property or services actually be provided to 
customers during the testing year, the consideration actually be paid 
during the testing year, or the employer actually incur significant 
costs during the testing year associated with the provision of the 
property or services to a specified customer or specified customers.
    (3) Employer designation--(i) In general. Once the employer has 
identified all the property and services it provides to its customers 
during the testing year under paragraph (b)(2) of this section, the 
employer determines its lines of business for the testing year by 
designating which portion of those property and services is provided by 
each of its lines of business. For this purpose, the employer must 
apportion all the property and services identified under paragraph 
(b)(2) of this section among its lines of business. An employer 
generally is not required to designate its lines of business for the 
testing year in the same manner as it designates its lines of business 
for any other testing year.
    (ii) Ability to combine unrelated types of property or services in a 
single line of business. For purposes of this paragraph (b)(3), there is 
no requirement that a line of business provide only one type of property 
or service, or only related types of property or services. Nor is there 
any requirement that a line of business provide solely property or 
solely services. Thus, the employer is permitted to combine in a single 
line of business dissimilar types of property or services that are 
otherwise unrelated to one another.
    (iii) Ability to separate related types of property or services into 
two or more lines of business. For purposes of this paragraph (b)(3), 
there is no requirement that all property or services of related types 
or the same type be provided by a single line of business. Thus, the 
employer is permitted to designate two or

[[Page 256]]

more lines of business that provide related types of property or 
services, or the same type of property or service. An employer might 
designate two or more lines of business that provide property or 
services of related types or the same type, for example, where the lines 
of business manufacture, prepare, or provide the property or services in 
different geographic areas (e.g., in different regions of the country or 
the world), or at different levels in the chain of commercial 
distribution (e.g., wholesale versus retail), or in different types of 
transactions (e.g, sale versus lease), or for different types of 
customers (e. g., governmental versus private), or subject to different 
legal constraints (e. g., regulated versus unregulated), or if the lines 
of business have developed differently (e.g., one line of business was 
acquired while another line of business developed internally). 
Notwithstanding the foregoing, an employer is not permitted to designate 
two or more lines of business that provide property or services of 
related types or the same type, if the employer's designation is 
unreasonable. An employer's designation would be unreasonable, for 
example, if the designation separated two types of property or services 
in different lines of business, but the employer did not provide those 
types of property or services separately from one another to its 
customers. Similarly, an employer's designation would be unreasonable if 
it separated two types of property or services in different lines of 
business, but the provision of one type of property or service was 
merely ancillary or incidental to, or regularly associated with, the 
provision of the other type of property or service. See generally Sec.  
1.414(r)-1(d)(2) (requiring an employer's operation of qualified 
separate lines of business to be for bona fide business reasons).
    (iv) Affiliated service groups. An employer is not permitted to 
designate its lines of business in a manner that results in separating 
employees of an affiliated service group (within the meaning of section 
414(m)) from other employees of the employer. See section 414(r)(8).
    (c) Examples--(1) In general. Paragraphs (c)(2) and (c)(3) of this 
section provide examples that illustrate the application of this 
section.
    (2) Examples illustrating employer designation. The following 
examples illustrate the application of paragraph (b)(3) of this section 
relating to an employer's designation of the property or services 
provided to customers by each of its lines of business.

    Example 1. Employer A is a domestic conglomerate engaged in the 
manufacture and sale of consumer food and beverage products and the 
provision of data processing services to private industry. Employer A 
provides no other property or services to its customers. Pursuant to 
paragraph (b)(3) of this section, Employer A apportions all the property 
and services it provides to its customers among three lines of business, 
one providing all its consumer food products, a second providing all its 
consumer beverage products, and a third providing all its data 
processing services. Employer A has three lines of business for purposes 
of this section.
    Example 2. The facts are the same as in Example 1, except that 
Employer A determines that neither the consumer food products line of 
business nor the consumer beverage products line of business would 
satisfy the separateness criteria of Sec.  1.414(r)-3 for recognition as 
a separate line of business. Accordingly, pursuant to paragraph (b)(3) 
of this section, Employer A apportions all the property and services it 
provides to its customers between only two lines of business, one 
providing all its consumer food and beverage products, and a second 
providing all its data processing services. Employer A has two lines of 
business for purposes of this section.
    Example 3. The facts are the same as in Example 2, except that 
Employer A also owns and operates a regional commuter airline, a 
professional basketball team, a pharmaceutical manufacturer, and a 
leather tanning company. Pursuant to paragraph (b)(3) of this section, 
Employer A apportions all the property and services it provides to its 
customers among three lines of business, one providing all its consumer 
food and beverage products, a second providing all its data processing 
services, and a third providing all the other property and services 
provided to customers through Employer A's regional commuter airline, 
professional basketball team, pharmaceutical manufacturer, and leather 
tanning company. Even though the third line of business includes 
dissimilar types of property and services that are otherwise unrelated 
to one another, paragraph (b)(3)(ii) of this section permits Employer A 
to combine these property and services in a single line of business. 
Employer A has three lines of business for purposes of this section.
    Example 4. The facts are the same as in Example 2, except that 
Employer A has recently

[[Page 257]]

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 
rendering legal and related services to clients of the firm. Under 
paragraph (b)(3)(iii) of this section, it would be unreasonable for 
Employer F to separate the services of the lawyers, paralegals, and 
secretaries in different lines of business.
    Example 11. Employer G is a management consulting firm. The 
employees of the firm

[[Page 258]]

include management consultants, secretaries, and other support staff 
personnel, all of whom participate in rendering management consulting 
and related services to clients of the firm. Under paragraph (b)(3)(iii) 
of this section, it would be unreasonable for Employer G to separate the 
services of the management consultants, secretaries, and other support 
staff personnel in different lines of business.

    (3) Examples illustrating property and services provided to 
customers. The following examples illustrate the application of 
paragraph (b)(2) of this section relating to property and services 
provided to customers of the employer.

    Example 1. Employer H operates several dairy farms and dairy product 
processing plants. The dairy farms provide part of their output of milk 
and milk by-products to Employer H's dairy product processing plants and 
also sell part to retail distributors unrelated to Employer H. The dairy 
farms' provision of milk and milk by-products to Employer H's dairy 
product processing plants does not constitute the provision of property 
or services to customers of Employer H because the milk and milk by-
products are not provided to a person other than employer H. However, 
the dairy farms' provision of milk and milk by-products to independent 
retail distributors does constitute the provision of property or 
services to customers of Employer H under paragraph (b)(2) of this 
section.
    Example 2. The facts are the same as in Example 1, except that the 
dairy farms provide their entire output of milk and milk by-products to 
Employer H's dairy product processing plants. The dairy farms' provision 
of milk and milk by-products to the dairy product processing plants 
generally does not constitute the provision of property or services to 
customers of Employer H because the milk and milk by-products are not 
provided to a person other than Employer H. However, paragraph (b)(2)(i) 
of this section provides a special rule for vertically integrated 
businesses that satisfy Sec.  1.414(r)-3(d)(2)(iii)(B). If Sec.  
1.414(r)-3(d)(2)(iii)(B) is satisfied, then, under the special rule of 
paragraph (b)(2)(i) of this section, the milk and milk by-products are 
deemed to be provided to customers of Employer H.
    Example 3. Among its other business activities, Employer J 
manufactures automobiles. Employer J operates a cafeteria at one of its 
automobile manufacturing facilities. The cafeteria is intended primarily 
for use by employees of Employer J, but nonemployees are not prohibited 
from using the cafeteria. The cafeteria charges the same prices to 
employees and non-employees. Under paragraph (b)(2) of this section, the 
provision of cafeteria services to employees of Employer J does not 
constitute the provision of property or services to customers of 
Employer J, because the cafeteria services are provided to the employees 
in their capacity as employees of Employer J and not as customers of 
Employer J.
    Example 4. Employer K sells books and periodicals to members of the 
public and provides telecommunications services to private industry. 
Employer K periodically acquires and disposes of businesses in both 
asset and stock transactions. In addition, for its own investment 
purposes, Employer K acquires and disposes of corporate and other 
securities. Under paragraph (b)(2) of this section, the sale by Employer 
K of businesses and investment securities does not constitute the 
provision of property or services to customers of Employer K, because 
the sales are not made in the ordinary course of a trade or business 
conducted by Employer K. However, the sale of published materials and 
the provision of telecommunications services to persons unrelated to 
Employer K does constitute the provision of property or services to 
customers of Employer K.
    Example 5. Employer L is active in the financial services industry. 
Subsidiary 1 of Employer L is a brokerage firm that is regulated as a 
broker-dealer under applicable federal and state law. In its capacity as 
a dealer, Subsidiary 1 holds in its own inventory securities of 
unrelated corporations and regularly sells these securities to unrelated 
persons. Under paragraph (b)(2) of this section, the sale by Subsidiary 
1 of the securities to unrelated persons constitutes the provision of 
property or services to customers of Employer L, because the sales are 
made in the ordinary course of Subsidiary 1's trade or business as a 
broker-dealer.
    Example 6. The facts are the same as in Example 5. Subsidiary 2 of 
Employer L is an insurance company that is regulated under applicable 
state insurance laws. In managing its investments, Subsidiary 2 
regularly makes use of the brokerage services of Subsidiary 1 (which 
Subsidiary 1 regularly provides to unrelated persons as well). Under 
paragraph (b)(2) of this section, Subsidiary 1's provision of brokerage 
services to Subsidiary 2 does not constitute the provision of property 
or services to customers of Employer L, because the brokerage services 
are not provided to a person other than Employer L. However, Subsidiary 
1's provision of brokerage services to unrelated persons does constitute 
the provision of property or services to customers of Employer L.
    Example 7. Employer M is a shipbuilder. In a testing year, Employer 
M enters into a contract with a customer to construct a new cargo ship 
for delivery two years later. Employer M incurs significant costs 
designing and planning for the production of the new ship during the 
testing year, but receives no payments from the customer during that

[[Page 259]]

year. Under paragraph (b)(2) of this section, Employer M is treated as 
providing the cargo ship to the customer during the testing year.
    Example 8. The facts are the same as in Example 7, except that, 
pursuant to a request from the customer, Employer M also incurred 
significant costs developing a prototype and submitting a bid on the new 
cargo ship in the prior testing year, and that these costs were not 
reimbursed by the customer. Under paragraph (b)(2) of this section, 
Employer M is also treated as providing the cargo ship to the customer 
in the prior testing year.

[T.D. 8376, 56 FR 63439, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32917, June 27, 1994]



Sec.  1.414(r)-3  Separate line of business.

    (a) General rule. A separate line of business is a line of business 
(as determined under Sec.  1.414(r)-2) that is organized and operated 
separately from the remainder of the employer. Paragraph (b) of this 
section sets forth the rules for determining whether a line of business 
is organized and operated separately from the remainder of the employer. 
Paragraph (c) of this section provides certain supplementary rules 
necessary to apply the requirements of paragraph (b) of this section, as 
well as examples illustrating the application of those requirements. 
Paragraph (d) of this section provides an optional rule for lines of 
business that are vertically integrated.
    (b) Separate organization and operation--(1) In general. A line of 
business is organized and operated separately from the remainder of the 
employer for a testing year only if it satisfies all the requirements of 
paragraphs (b)(2) through (b)(5) of this section for the testing year.
    (2) Separate organizational unit. The line of business must be 
formally organized as a separate organizational unit or group of 
separate organizational units within the employer. For this purpose, an 
organizational unit is a corporation, partnership, division, or other 
unit having a similar degree of organizational formality. This 
requirement must be satisfied on every day of the testing year.
    (3) Separate financial accountability. The line of business must be 
a separate profit center or group of separate profit centers within the 
employer. This requirement must be satisfied on every day of the testing 
year. In addition, the employer must maintain books and records that 
provide separate revenue and expense information that is used for 
internal planning and control with respect to each profit center 
comprising the line of business.
    (4) Separate employee workforce. The line of business must have its 
own separate employee workforce. A line of business has its own separate 
workforce only if at least 90 percent of the employees who provide 
services to the line of business, and who are not substantial-service 
employees with respect to any other line of business, are substantial-
service employees with respect to the line of business. See paragraph 
(c)(2) of this section to determine how the percentage in the preceding 
sentence is calculated for the testing year.
    (5) Separate management. The line of business must have its own 
separate management. A line of business has its own separate management 
only if at least 80 percent of the employees who are top-paid employees 
with respect to the line of business are substantial-service employees 
with respect to the line of business. See paragraph (c)(3) of this 
section to determine how the percentage in the preceding sentence is 
calculated for the testing year.
    (c) Supplementary rules--(1) In general. This paragraph (c) provides 
certain supplementary rules necessary to apply the requirements of 
paragraph (b) of this section, as well as examples illustrating the 
application of those requirements.
    (2) Determination of separate employee workforce. The percentage in 
paragraph (b)(4) of this section is the fraction (expressed as a 
percentage)--
    (i) The numerator of which is the number of substantial-service 
employees with respect to the line of business within the meaning of 
Sec.  1.414(r)-11(b)(2); and
    (ii) The denominator of which is the total number of employees who 
provide services to the line of business within the meaning of paragraph 
(c)(5) of this section and who are not substantial-service employees 
with respect to any other line of business.
    (3) Determination of separate management. The percentage in 
paragraph

[[Page 260]]

(b)(5) of this section is the fraction (expressed as a percentage)--
    (i) The numerator of which is the number of employees who are both 
top-paid employees and substantial-service employees with respect to the 
line of business within the meaning of Sec.  1.414(r)-11(b)(3) and (2), 
respectively; and
    (ii) The denominator of which is the total number of top-paid 
employees with respect to the line of business within the meaning of 
Sec.  1.414(r)-11(b)(3).
    (4) Employees taken into account. For purposes of applying this 
paragraph (c), only employees who are employees on the first testing day 
are taken into account. For this purpose, there are no excludable 
employees except nonresident aliens described in section 410(b)(3)(C). 
Consequently, all other employees who are employees on the first testing 
day are taken into account, including collectively bargained employees. 
For the definition of first testing day, see Sec.  1.414(r)-11(b)(7).
    (5) Services taken into account--(i) Provision of services to a line 
of business. An employee provides services to a line of business if more 
than a negligible portion of the employee's services contributes to 
providing the property or services provided by the line of business to 
customers of the employer. All of the services of each employee who 
provides services to the employer contribute, whether directly or 
indirectly, to the provision of property or services to customers of the 
employer, and therefore each employee who provides services to the 
employer must be treated as providing more than a negligible portion of 
the employee's services to one or more lines of business operated by the 
employer.
    (ii) Period for which services are provided. Only services performed 
by an employee during the testing year that contribute to providing the 
property or services provided by a line of business to customers are 
taken into account. An employee's services during the testing year are 
considered to contribute to providing the property or services provided 
by a line of business to customers of the employer if--
    (A) The employee's services during the testing year contribute to 
providing such property or services to customers of the employer during 
the testing year; or
    (B) It is reasonably anticipated that the employee's services during 
the testing year will contribute to providing such property and services 
to customers of the employer after the close of the testing year.
    (iii) Optional rule for employees who change status--(A) In general. 
Solely for purposes of the separateness rules of this section and the 
assignment rules of Sec.  1.414(r)-7, if an employee changes status as 
described in paragraph (c)(5)(iii)(B) of this section, an employer may, 
for up to three consecutive testing years after the base year (within 
the meaning of paragraph (c)(5)(iii)(B) (1) or (2) of this section), 
treat the employee as providing the same level of service to its lines 
of business as the employee provided in the base year.
    (B) Change in employee's status. An employee changes status as 
described in this paragraph (c)(5)(iii)(B) if--
    (1) For a testing year (the base year), the employee was a 
substantial-service employee with respect to a qualified separate line 
of business of the employer (prior line of business) and, for the 
immediately succeeding testing year, the employee is not a substantial-
service employee with respect to that prior line of business; or
    (2) For a testing year (the base year), the employee was a residual 
shared employee and, for the immediately succeeding testing year, the 
employee is a substantial-service employee with respect to a qualified 
separate line of business.
    (6) Examples of the separate employee workforce requirement. The 
following examples illustrate the application of the separate employee 
workforce requirement in paragraph (b)(4) of this section and the 
supplementary rules of this paragraph (c). Unless otherwise specified, 
it is assumed that the employees and their services described in these 
examples are taken into account under paragraphs (c) (4) and (5) of this 
section for the testing year and that the employer does not use the 
option under Sec.  1.414(r)-11(b)(2) to treat employees who provide less 
than 75 percent of their services to a line of business as

[[Page 261]]

substantial-service employees with respect to the line of business.

    Example 1. Employer A operates three lines of business as determined 
under Sec.  1.414(r)-2. One of Employer A's lines of business 
manufactures and sells tires and other automotive products. Employee M 
is a tire press operator in Employer A's tire factory. Employee N is the 
manager of the tire factory. Under these facts, the services of 
Employees M and N contribute to providing tires to customers of Employer 
A. Both employees therefore provide services to Employer A's tire and 
automotive products line of business within the meaning of paragraph 
(c)(5) of this section.
    Example 2. The facts are the same as in Example 1. In addition, none 
of the services of Employees M and N that contribute to providing 
property or services to customers contribute to providing any property 
or service other than tires to customers of Employer A. Under these 
facts, Employees M and N provide at least 75 percent of their respective 
services to Employer A's tire and automotive products line of business. 
Therefore Employees M and N are substantial-service employees with 
respect to Employer A's tire and automotive products line of business 
within the meaning of Sec.  1.414(r)-11(b)(2), and do not provide any 
services within the meaning of paragraph (c)(5) of this section to any 
of Employer A's other lines of business. Moreover, because Employees M 
and N provide at least 75 percent of their services to Employer A's tire 
and automotive products line of business and are substantial-service 
employees with respect to that line, they are disregarded in applying 
paragraph (b)(4) of this section to any other line of business, even if 
they provide services to the other line.
    Example 3. The facts are the same as in Example 2. Employer A's 
second line of business manufactures and sells construction machinery, 
and Employer A's third line of business manufactures and sells 
agricultural equipment. As part of these lines of business, Employer A 
operates a construction machinery factory and an agricultural equipment 
factory on the same site as the tire factory described in Example 2. 
Employer A's facilities at the site include a health clinic and a 
fitness center that serve the employees of the construction machinery 
factory, the agricultural equipment factory, and the tire factory. 
Employee O is a nurse in the health clinic, and Employee P is a fitness 
instructor in the fitness center. Both employees therefore provide 
services within the meaning of paragraph (c)(5) of this section to 
Employer A's tire and automotive products line of business, construction 
machinery line of business, and agricultural equipment line of business. 
In addition, under these facts, Employer A determines that approximately 
33 percent of the services of Employees O and P are provided to each of 
Employer A's three lines of business. As a result, neither Employee O or 
P provide at least 75 percent of their respective services to any of 
Employer A's lines of business. Therefore, Employees O and P are not 
substantial-service employees with respect to any of Employer A's three 
lines of business within the meaning of Sec.  1.414(r)-11(b)(2).
    Example 4. The facts are the same as in Example 3. Employee Q is the 
president and chief executive officer of Employer A and is responsible 
for reviewing the performance of all Employer A's lines of business. 
Under these facts, the services of Employee Q contributes to providing 
property and services to customers of each of Employer A's three lines 
of business. Employee Q therefore provides services to each of these 
three lines of business. Employer A determines that Employee Q provides 
the following percentages of his services to Employer A's three lines of 
business: tire and automotive products--40 percent; construction 
machinery--40 percent, and agricultural equipment--20 percent. Employee 
Q does not provide at least 75 percent of his services to any of 
Employer A's lines of business. Therefore, Employee Q is not a 
substantial-service employee with respect to any of Employer A's three 
lines of business within the meaning of Sec.  1.414(r)-11(b)(2).
    Example 5. The facts are the same as in Example 4, except that 
Employer A also owns 75 percent of Corporation X. Corporation X is not 
treated as part of Employer A within the meaning of Sec.  1.410(b)-9. 
Employee R is an accountant in the accounting department of Employer A. 
Employee R devotes all of his time to maintaining the accounting books 
and records of the tire and automotive products line of business of 
Employer A and the accounting books and records of Corporation X. 
Employer A determines that Employee R provides 40 percent of his 
services directly to the tire and automotive products line of business. 
Employer A also determines that Employee R provides the following 
percentages of the remainder of Employee R's services (i.e., his 
provision of services of maintaining the accounting books and records of 
Corporation X) indirectly to Employer A's three lines of business by 
virtue of the services he provides to Corporation X: tire and automotive 
products--25 percent; construction machinery--20 percent, and 
agricultural equipment--15 percent. Therefore, Employee R provides 65 
percent of his services to the tire and automotive products line of 
business of Employer A (i.e., 40 percent directly and 25 percent 
indirectly). Under the definition of substantial-service employee in 
Sec.  1.414(r)-11(b)(2), Employer A may treat Employee R as a 
substantial-service employee with respect to the tire and automotive 
products line of business because Employee R provides at least 50 
percent of his services to that

[[Page 262]]

line. In that case, Employee R would be disregarded in applying 
paragraph (b)(4) of this section to the construction machinery and 
agricultural equipment lines of business.
    Example 6. The facts are the same as in Example 5. Employee S is a 
lawyer in the legal department located at the headquarters who devotes 
all her time to product liability suits filed against the construction 
machinery line of business. Under these facts, the services of Employee 
S contribute to providing property and services to customers of Employer 
A in the construction machinery line of business, and therefore Employee 
S provides services to that line of business. Because Employee S's 
services do not contribute to providing property or services in any 
other of Employer A's lines of business within the meaning of paragraph 
(c)(5) of this section, Employee S provides more than 75 percent of her 
services to the construction machinery line of business and therefore is 
a substantial-service employee with respect to Employer A's construction 
machinery line of business within the meaning of Sec.  1.414(r)-
11(b)(2).
    Example 7. The facts are the same as in Example 6. Employer A also 
maintains a separate facility that houses a centralized procurement, 
marketing, and billing operation for all of its lines of business. None 
of the procurement, marketing, or billing employees specializes in any 
particular line of business. Under these facts, the services of the 
procurement, marketing, and billing employees contribute to providing 
property and services to customers of Employer A in each of Employer A's 
three lines of business. Employer A determines that each of the 
procurement, marketing, and billing employees provides approximately an 
equal proportion of their services to each of Employer A's three lines 
of business. These employees therefore provide services to all of 
Employer A's lines of business within the meaning of paragraph (c)(5) of 
this section. However, none of them provides at least 75 percent of his 
services to any line of business. Therefore, these employees are not 
substantial-service employees with respect to any of Employer A's three 
lines of business within the meaning of Sec.  1.414(r)-11(b)(2).
    Example 8. The facts are the same as in Example 7. Employee T works 
for the construction machinery line of business. During the testing 
year, he is temporarily detailed to the agricultural equipment line of 
business. His temporary detail lasts for one week, after which he 
returns to his regular duties with the construction machinery line of 
business. Under these facts, Employee T does not provide more than a 
negligible portion of his services during the testing year to the 
agricultural equipment line of business. Accordingly, Employee T does 
not provide services to the agricultural equipment line of business 
within the meaning of paragraph (c)(5) of this section. In addition, 
because Employee T provides at least 75 percent of his services to the 
construction machinery line of business, Employee T is a substantial-
service employee with respect to Employer A's agricultural equipment 
line of business within the meaning of Sec.  1.414(r)-11(b)(2).
    Example 9. The facts are the same as in Example 8, except that, 
during the testing year but before the first testing day, Employee T 
retires from employment with Employer A. Under paragraph (c)(5)(ii) of 
this section, Employee T is not taken into account in determining 
whether Employer A's construction machinery line of business has its own 
separate employee workforce within the meaning of paragraph (b)(4) of 
this section.
    Example 10. Employer B is a multinational controlled group of 
corporations that engages in the exploration, production, refining, and 
marketing of petrochemical products. Employer B operates two lines of 
business as determined under Sec.  1.414(r)-2. The first line of 
business (the ``exploration, production, and refining line of 
business'') provides lubricating oil, gasoline, and other petrochemical 
products to wholesale customers of Employer B as well as to the second 
line of business. The wholesale customers of Employer B include 
independent jobbers, independent franchisees that operate retail filling 
stations under Employer B's trademark and tradename, as well as chemical 
and plastics manufacturers. The second line of business (the ``retail 
marketing line of business'') provides lubricating oil and gasoline 
products to retail customers of Employer B through filling stations 
owned and operated by Employer B. Employee U is an attendant at a 
filling station owned and operated by Employer B. Employee U performs no 
other services for Employer B, Under these facts, Employee U provides at 
least 75 percent of his services to Employer B's retail marketing line 
of business and therefore is a substantial-service employee with respect 
to that line of business within the meaning of Sec.  1.414(r)-11(b)(2), 
and does not provide any services within the meaning of paragraph (c)(5) 
of this section to any of Employer B's other lines of business.
    Example 11. The facts are the same as in Example 10. Employer B 
operates a refinery that produces lubricating oil, gasoline, and other 
petrochemical products. Employee V is an operating engineer at the 
refinery who is involved at a stage in the refining process before 
lubricating oil and gasoline products have been separated from other 
types of petrochemical products. Employee V performs no other services 
for Employer B. Under these facts, Employee V's services contribute to 
providing property and services to customers of Employer B in both the 
exploration, production, and refining line of business and the retail 
marketing line of business. Employee V therefore provides services

[[Page 263]]

to both lines of business within the meaning of paragraph (c)(5) of this 
section. See paragraph (d) of this section, however, for an optional 
rule for vertically integrated lines of business.
    Example 12. The facts are the same as in Example 11. Employee W is a 
petroleum engineer who conducts geological studies of potential future 
drilling sites. Although Employee W's services during the testing year 
will not contribute to providing lubricating oil, gasoline, and other 
petrochemical products to customers of Employer B during the testing 
year, it is reasonably anticipated (in accordance with paragraph 
(c)(5)(ii)(B) of this section) that her services during the testing year 
will contribute to providing such products to customers of Employer B 
after the close of the testing year. Under these facts, Employee W 
provides her services to both of Employer B's lines of business within 
the meaning of paragraph (c)(5) of this section.

    (7) Examples of the separate management requirement. The following 
examples illustrate the application of the separate management 
requirement in paragraph (b)(5) of this section and the supplementary 
rules of this paragraph (c). Unless otherwise specified, it is assumed 
that employees who provide services to a line of business are not 
substantial-service employees with respect to any other line of business 
and that, in determining the top-paid employees with respect to a line 
of business, the employer is using the option under Sec.  1.414(r)-
11(b)(3) to disregard all employees who provide less than 25 percent of 
their services to that line of business.

    Example 1. (a) Employer C operates three lines of business as 
determined under Sec.  1.414(r)-2. One of its lines of business is the 
operation of a chain of athletic equipment and apparel stores. Of 
Employer C's total workforce, 12,000 employees provide more than a 
negligible amount of the services they provide to Employer C to the 
athletic equipment and apparel stores line of business, within the 
meaning of paragraph (c)(5) of this section. Of the 1,200 employees who 
constitute the top ten percent by compensation of those 12,000 
employees, 930 are substantial-service employees with respect to that 
line of business. Because 930 is 77.5 percent of 1,200, less than 80 
percent of the top-paid employees with respect to the line of business 
are substantial-service employees with respect to that line of business. 
Therefore, Employer C's athletic equipment and apparel stores line of 
business does not have its own separate management under paragraph 
(b)(5) of this section.
    (b) Assume that, in determining the top-paid employees with respect 
to the athletic equipment and apparel stores line of business, Employer 
C chooses to disregard all employees who provide less than 25 percent of 
their services to the line of business as permitted under the definition 
in Sec.  1.414(r)-11(b)(3). Of the 12,000 employees who provide more 
than a negligible amount of their services to the athletic equipment and 
apparel stores line of business, 10,000 provide at least 25 percent of 
their services to that line. Of the 1,000 employees who constitute the 
top ten percent by compensation of those 10,000 employees, 930 are 
substantial-service employees with respect to the athletic equipment and 
apparel stores line of business. Because 930 is 93 percent of 1,000, at 
least 80 percent of the top-paid employees with respect to the line of 
business are substantial-service employees with respect to that line of 
business. Therefore, Employer C's athletic equipment and apparel stores 
line of business has its own separate management and satisfies the 
requirement of paragraph (b)(5) of this section.
    Example 2. The facts are the same as in Example 1. Employee X is a 
vice president of the accounting department located at the headquarters, 
who devotes all of his time supervising the staff of Employer C's 
accounting department. Employer C determines that 10 percent of Employee 
X's services contribute to providing property and services to customers 
of Employer C's athletic equipment and apparel stores line of business 
and 45 percent of Employee X's services contribute to providing property 
and services to customers to each of Employer C's other two lines of 
business. Because Employee X does not provide at least 25 percent of his 
services to Employer C's athletic equipment and apparel stores line of 
business, Employee X is not one of the 10,000 employees described in 
Example 1 and therefore cannot be a top-paid employee within the meaning 
of Sec.  1.414(r)-11(b)(3) with respect to the athletic equipment and 
apparel stores line of business. Therefore, Employee X is not taken into 
account in determining whether the athletic equipment and apparel stores 
line of business satisfies the separate management requirement of 
paragraph (b)(5) of this section.
    Example 3. The facts are the same as in Example 2 except that 
Employee X provides 60 percent of his services to Employer C's second 
line of business, an athletic equipment factory, and 30 percent of his 
service to Employer C's third line of business, a fast-food chain. 
Because Employee X provides at least 50 percent of his services to the 
athletic equipment factory line of business, Employer C chooses to treat 
him as a substantial- service employee with respect to that line of 
business, as permitted under

[[Page 264]]

Sec.  1.414(r)-11(b)(2). Thus, Employee X is taken into account as a 
substantial-service employee with respect to the athletic equipment 
factory line of business and is disregarded in applying the separate 
workforce and separate management requirements under paragraphs (b) (4) 
and (5) to the fast-food chain line of business.
    Example 4. Employer D operates four lines of business as determined 
under Sec.  1.414(r)-2. One of its lines of business is a machine tool 
shop. Sixty of Employer D's employees provide at least 25 percent of 
their services to the machine tool shop line of business. Of the six 
employees who constitute the top 10 percent by compensation of those 60 
employees, four are substantial-service employees with respect to the 
line of business. Because four is 67 percent of six, 80 percent of the 
top-paid employees with respect to the machine tool shop line of 
business are not substantial-service employees with respect to that line 
of business. Therefore the machine tool shop line of business does not 
satisfy the separate management requirement of paragraph (b)(5) of this 
section.
    Example 5. The facts are the same as in Example 4, except that, in 
addition, another of Employer D's lines of business is an automotive 
repair shop, and 80 of Employer D's employees provide at least 25 
percent of their services to that line of business. Employer D combines 
the machine shop line of business with the automotive repair shop line 
of business and treats them as a single line of business. As a result, 
Employer D has three lines of business as determined under Sec.  
1.414(r)-2. Assume that 150 of Employer D's employees provide more than 
25 percent of their services to the machine tool shop/automotive repair 
shop line of business within the meaning of paragraph (c)(5) of this 
section. Of the 15 employees who constitute the top 10 percent by 
compensation of these 150 employees, 12 are substantial-service 
employees with respect to that line of business. Because 12 is 80 
percent of 15, at least 80 percent of the top-paid employees with 
respect to the machine tool shop/automotive repair shop line of business 
are substantial-service employees with respect to that line of business. 
Therefore, the machine tool shop/automotive repair shop line of business 
satisfies the separate management requirement of paragraph (b)(5) of 
this section.

    (d) Optional rule for vertically integrated lines of business--(1) 
In general. If two lines of business satisfy the requirements of this 
paragraph (d) with respect to a type of property or service for a 
testing year, the employer is permitted to apply the optional rule in 
this paragraph (d) for the testing year.
    (2) Requirements. Two lines of business satisfy the requirements of 
this paragraph (d) with respect to a type of property or service only 
if--
    (i) One of the lines of business (the upstream line of business) 
provides a type of property or service to the other line of business 
(the downstream line of business);
    (ii) The downstream line of business either--
    (A) Uses, consumes, or substantially modifies the property or 
service in the course of itself providing property or services to 
customers of the employer; or
    (B) Provides the same property or service to customers of the 
employer at a different level in the chain of commercial distribution 
from the upstream line of business (e.g., retail versus wholesale); and
    (iii) The upstream line of business either--
    (A) Provides the same type of property or service to customers of 
the employer, and at least 25 percent of the total number of units of 
the same type of property or service provided by the upstream line of 
business to all persons (including customers of the employer, the 
downstream line of business, and all other lines of business of the 
employer) are provided to customers of the employer by the upstream line 
of business, when measured on a uniform basis; or
    (B) Provides to the downstream line of business property consisting 
primarily of a type of tangible property (i.e., goods, not services) 
that it produces or manufactures, and some entities outside the 
employer's controlled group that are engaged in a similar business as 
the upstream line of business provide the same type of tangible property 
to unrelated customers (i.e., customers outside those entities' 
respective controlled groups).
    (3) Optional rule--(i) Treatment of employees. For purposes of 
determining the lines of business to which an employee provides services 
under paragraph (c)(5) of this section, an employee is not treated as 
providing services to the downstream line of business if--
    (A) The employee is considered to provide services to the downstream 
line of business under paragraph (c)(5) of this section (applied without 
regard

[[Page 265]]

to the optional rule in this paragraph (d)); and
    (B) The employee is so considered solely because the employee's 
services contribute to providing the property or service from the 
upstream line of business to the downstream line of business.
    (ii) Purposes for which optional rule applies. If an employee 
applies the optional rule in this paragraph (d), the treatment specified 
in paragraphs (d)(3)(i) (A) and (B) of this section applies for all the 
following purposes and only for the following purposes--
    (A) The separate employee workforce and separate management 
requirements of paragraphs (b)(4) and (b)(5) of this section;
    (B) The 50-employee requirement of Sec.  1.414(r)-4(b); and
    (C) The determination of the employees of a qualified separate line 
of business under Sec.  1.414(r)-7.
    (4) Examples. The following examples illustrate the application of 
the optional rule in this paragraph (d).

    Example 1. Employer E operates two lines of business as determined 
under Sec.  1.414(r)-2, one engaged in upholstery textile manufacturing 
and the other in furniture manufacturing. During the testing year, the 
upholstery textile line of business provides its entire output of 
upholstery textiles to the furniture line of business. The furniture 
line of business uses the upholstery textiles in the manufacture of 
upholstered furniture for sale to customers of Employer E. The furniture 
line of business thus substantially modifies the upholstery textiles 
provided to it by the upholstery textile line of business in providing 
upholstered furniture products to customers of Employer E. In addition, 
although the upholstery textile line of business does not provide 
upholstery textiles to customers of Employer E, some entities engaged in 
upholstery textile manufacturing provide upholstery textiles to 
customers outside their controlled groups. Under these facts, Employer 
E's two lines of business satisfy the requirements of this paragraph (d) 
with respect to upholstery textiles for the testing year.
    Example 2. Employer B is a multinational controlled group of 
corporations that engages in the exploration, production, refining, and 
marketing of petrochemical products. See Example 10 under paragraph 
(c)(7) of this section. Employer B operates two lines of business as 
determined under Sec.  1.414(r)-(2). The first line of business (``the 
exploration, production, and refining line of business'') provides 
lubricating oil, gasoline, and other petrochemical products to wholesale 
customers of Employee B as well as the second line of business. The 
wholesale customers of Employee B include independent jobbers, 
independent franchisees that operate retail filling stations under 
Employee B's trademark and tradename, as well as chemical and plastics 
manufacturers. The second line of business (the ``retail marketing line 
of business'') provides lubricating oil and gasoline products to retail 
customers of Employee B through filing stations owned and operated by 
Employee B. During the testing year, the exploration, production and 
refining line of business provides 25,000 gallons of lubricating oil, 
100,000 gallons of unleaded and 150,000 gallons of leaded gasoline to 
the retail marketing line of business, and 75,000 gallons of lubricating 
oil, 500,000 gallons of unleaded gasoline and 15,000 gallons of leaded 
gasoline to wholesale customers of Employer B. Thus, the exploration, 
production, and refining line of business provides 75 percent of its 
output of lubricating oil during the testing year to wholesale customers 
of Employer B. In addition, because unleaded and leaded gasoline is the 
same type of property (i.e., gasoline), the exploration, production, and 
refining line of business provides 67 percent of its output of gasoline 
products during the testing year to wholesale customers of Employer B. 
Furthermore, the retail line of business provides lubricating oil and 
gasoline products to customers of Employer B at different levels in the 
chain of commercial distribution than the exploration, production, and 
refining line of business. Under these facts, Employer B's two lines of 
business satisfy the requirements of this paragraph (d) with respect to 
both lubricating oil and gasoline products for the testing year.
    Example 3. The facts are the same as in Example 2. Employer B 
operates a refinery that produces lubricating oil, gasoline, and other 
petrochemical products. Employee V is an operating engineer at the 
refinery who is involved at a stage in the refining process before 
lubricating oil and gasoline products have been separated from other 
types of petrochemical products. Employee V performs no other services 
for Employer B. Absent application of the optional rule in this 
paragraph (d), Employee V would be considered to provide services to 
both of Employer B's lines of business. See Example 11 under paragraph 
(c)(7) of this section. However, because Employee V's services to the 
retail marketing line of business contribute solely to providing 
lubricating oil and gasoline products from the exploration, production, 
and refining line of business to the retail marketing line of business, 
under the optional rule in paragraph (d)(3)(i) of this section Employee 
V is not treated as providing services to the retail marketing line of 
business.
    Example 4. The facts are the same as in Example 3. Employee W is a 
petroleum engineer

[[Page 266]]

who conducts geological studies of potential future drilling sites. 
Employee W performs no other services for Employer B. Absent application 
of the optional rule in this paragraph (d), Employee W would be 
considered to provide services to both of Employer B's lines of 
business. See Example 12 under paragraph (c)(7) of this Section. 
However, because Employee W's services to the retail marketing line of 
business contribute solely to providing lubricating oil and gasoline 
products from the exploration, production, and refining line of business 
to the retail marketing line of business, under the optional rule in 
paragraph (d)(3)(i) of this section Employee W is not treated as 
providing services to the retail marketing line of business.
    Example 5. The facts are the same as in Example 4. Employee Y is a 
vice president in Employer B's home office. As part of his senior 
management responsibilities, Employee Y helps to set the rate of 
production at Employer B's refineries in the United States and also 
helps to set the price charged at the pump at the retail filling 
stations owned and operated by Employer B in this country. Absent 
application of the optional rule in this paragraph (d), Employee X would 
be considered to provide services to both of Employer B's lines of 
business within the meaning of paragraph (c)(5) of this section for 
purposes of satisfying the separate workforce requirement of paragraph 
(b)(4) of this section. Because Employee X helps to set the price 
charged at the pump by Employer B's retail marketing line of business, 
Employee X's services to the retail marketing line of business are not 
limited to contributing solely to providing lubricating oil and gasoline 
products from the exploration, production, and refining line of business 
to the retail marketing line of business, as required under paragraph 
(d)(3)(i)(B) of this section. Accordingly, even though Employer B's two 
lines of business satisfy the requirements of this paragraph (d) with 
respect to both lubricating oil and gasoline products for the testing 
year, and even though Employer B applies the optional rule in this 
paragraph (d), Employee X is still considered to provide services to 
both of Employer B's lines of business.

[T.D. 8376, 56 FR 63442, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32917, June 27, 1994]



Sec.  1.414(r)-4  Qualified separate line of business--fifty-employee 
and notice requirements.

    (a) In general. This section sets forth the rules for determining 
whether a separate line of business (as determined under Sec.  1.414(r)-
3) satisfies the 50-employee and notice requirements of Sec.  1.414(r-
1(b)(2)(iv) (B) and (C), respectively.
    (b) Fifty-employee requirement. A separate line of business 
satisfies the 50-employee requirement of Sec.  1.414(r)-1(b)(2)(iv)(B) 
for a testing year only if on each day of the testing year there are at 
least 50 employees who provide services to the separate line of business 
for the testing year and do not provide services to any other separate 
line of business of the employer for the testing year within the meaning 
of Sec.  1.414(r)-3(c)(5). For this purpose, all employees of the 
employer are taken into account (including collectively bargained 
employees), except employees described in Sec.  1.414(q)-1, Q&A-
9(g)(i.e., the same employees, subject to certain modifications, who are 
excluded in determining the number of employees in the top-paid group 
under section 414(q)(4)).
    (c) Notice requirement--(1) General rule. A separate line of 
business satisfies the notice requirement of Sec.  1.414(r)-
1(b)(2)(iv)(C) for a testing year only if the employer notifies the 
Secretary that it treats itself as operating qualified separate lines of 
business for the testing year in accordance with Sec.  1.414(r)-1(b). 
The employer's notice for the testing year must specify each of the 
qualified separate lines of business operated by the employer and the 
section or sections of the Code to be applied on a qualified-separate-
line-of-business basis. See Sec.  1.414(r)-1(c). The employer's notice 
must take the form, must be filed at the time and the place, and must 
contain any additional information prescribed by the Commissioner in 
revenue procedures, notices, or other guidance of general applicability. 
No other notice, whether actual or constructive, satisfies the 
requirement of this paragraph (c).
    (2) Effect of notice. Once an employer has provided the notice 
prescribed in this paragraph (c) for a testing year, and the time for 
filing the notice for the testing year has expired without its being 
modified, withdrawn, or revoked, the employer is deemed to have 
irrevocably elected to apply the requirements of the section or sections 
of the Code specified in the notice separately with respect to the 
employees of each qualified separate line of business

[[Page 267]]

specified in the notice for all plan years that begin in the testing 
year. The Commissioner may, in revenue procedures, notices, or other 
guidance of general applicability, provide for exceptions to the rule in 
this paragraph (c)(2) as well as for the effect that will be given to 
the employer's notice for purposes of any future testing year.

[T.D. 8376, 56 FR 63446, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32919, June 27, 1994]



Sec.  1.414(r)-5  Qualified separate line of business--
administrative scrutiny requirement--safe harbors.

    (a) In general. A separate line of business (as determined under 
Sec.  1.414(r)-3 satisfies the administrative scrutiny requirement of 
Sec.  1.414(r)-1(b)(2)(iv)(D) for a testing year if the separate line of 
business satisfies any of the safe harbors in paragraphs (b) through (g) 
of this section for the testing year. The safe harbor in paragraph (b) 
of this section implements the statutory safe harbor of section 
414(r)(3). The safe harbors in paragraphs (c) through (g) of this 
section constitute the guidelines provided for under section 
414(r)(2)(C). A separate line of business that does not satisfy any of 
the safe harbors in this section nonetheless satisfies the requirement 
of administrative scrutiny if the employer requests and receives an 
individual determination from the Commissioner under Sec.  1.414(r)-6 
that the separate line of business satisfies the requirement of 
administrative scrutiny.
    (b) Statutory safe harbor--(1) General rule. A separate line of 
business satisfies the safe harbor in this paragraph (b) for the testing 
year only if the highly compensated employee percentage ratio of the 
separate line of business is--
    (i) At least 50 percent; and
    (ii) Non more than 200 percent.
    (2) Highly compensated employee percentage ratio. For purposes of 
this paragraph (b), the highly compensated employee percentage ratio of 
a separate line of business is the fraction (expressed as a percentage), 
the numerator of which is the percentage of the employees of the 
separate line of business who are highly compensated employees, and the 
denominator of which is the percentage of all employees of the employer 
who are highly compensated employees.
    (3) Employees taken into account. For purposes of this paragraph 
(b), the employees taken into account are the same employees who are 
taken into account for purposes of applying section 410(b) with respect 
to the first testing day. For this purpose, employees described in 
section 410 (b)(3) and (b)(4) are excluded. However, section 410(b)(4) 
is applied with reference to the lowest minimum age requirement 
applicable under any plan of the employer, and with reference to the 
lowest service requirement applicable under any plan of the employer, as 
if all the plans were a single plan under Sec.  1.410(b)-6(b)(2). The 
employees of the separate line of business are determined by applying 
Sec.  1.414(r)-7 to the employees taken into account under this 
paragraph (b)(3). An employee is treated as a highly compensated 
employee for purposes of this paragraph (b) if the employee is treated 
as a highly compensated employee for purposes of applying section 410(b) 
with respect to the first testing day. For the definition of ``first 
testing day,'' see Sec.  1.414(r)-11(b)(7).
    (4) Ten-percent exception. A separate line of business is deemed to 
satisfy paragraph (b)(1)(i) of this section for the testing year if at 
least 10 percent of all highly compensated employees of the employer 
provide services to the separate line of business during the testing 
year and do not provide services to any other separate line of business 
of the employer during the testing year within the meaning of Sec.  
1.414(r)-3(c)(5).
    (5) Determination based on preceding testing year. A separate line 
of business that satisfied this safe harbor for the immediately 
preceding testing year (without taking into account the special rule in 
this paragraph (b)(5)) is deemed to satisfy the safe harbor for the 
current testing year. The preceding sentence applies to a separate line 
of business only if the employer designated the same line of business in 
the immediately preceding testing year as in the current testing year 
and either--
    (i) The highly compensated employee percentage ratio of the separate 
line of business for the current testing year

[[Page 268]]

does not deviate by more than 10 percent (not 10 percentage points) from 
the highly compensated employee percentage ratio of the separate line of 
business for the immediately preceding testing year; or
    (ii) No more than five percent of the employees of the separate line 
of business for the current testing year were employees of a different 
separate line of business for the immediately preceding testing year, 
and no more than five percent of the employees of the separate line of 
business for the immediately preceding testing year are employees of a 
different separate line of business for the current testing year.
    (6) Examples. The following examples illustrate the application of 
the safe harbor in this paragraph (b).

    Example 1. (i) Employer A operates three separate lines of business 
as determined under Sec.  1.414(r)-3, that respectively consist of a 
railroad, an insurance company, and a newspaper. Employer A employs a 
total of 400 employees, 100 of whom are highly compensated employees. 
Thus, the percentage of all employees of Employer A who are highly 
compensated employees in 25 percent. After applying Sec.  1.414(r)-7, 
the distribution of highly and nonhighly compensated employees among 
Employer A's separate lines of business is as follows:

----------------------------------------------------------------------------------------------------------------
                                                               Employer-                 Insurance
                                                                  wide       Railroad     company     Newspaper
----------------------------------------------------------------------------------------------------------------
Number of Employees.........................................          400          100          150          150
Number of HCEs..............................................          100           20           50           30
Number of Non-HCEs..........................................          300           80          100          120
HCE Percentage..............................................          25%          20%          33%          20%
                                                                (100/400)     (20/100)     (50/150)     (30/150)
HCE Percentage Ratio........................................          N/A          80%         133%          80%
                                                              ...........    (20%/25%)    (33%/25%)    (20%/25%)
----------------------------------------------------------------------------------------------------------------

    (ii) Because the highly compensated employee percentage ratio of 
each separate line of business is at least 50 percent and no more than 
200 percent, each of Employer A's separate lines of business satisfies 
the requirements of the safe harbor in this paragraph (b).
    Example 2. (i) Employer B operates three separate lines of business 
as determined under Sec.  1.414(r)-3, that respectively consist of a 
dairy products manufacturer, a candy manufacturer, and a chain of 
housewares stores. Employer B employs a total of 1,000 employees, 100 of 
whom are highly compensated employees. Thus, the percentage of all 
employees of Employer B who are highly compensated employees is 10 
percent. After applying Sec.  1.414(r)-7, the distribution of highly and 
nonhighly compensated employees among Employer B's separate lines of 
business is as follows:

----------------------------------------------------------------------------------------------------------------
                                                               Employer-      Dairy                   Housewares
                                                                  wide       products      Candy        stores
----------------------------------------------------------------------------------------------------------------
Number of Employees.........................................        1,000          200          500          300
Number of HCEs..............................................          100            5           50           45
Number of Non-HCEs..........................................          900          195          450          255
HCE Percentage..............................................          10%         2.5%          10%          15%
                                                              (100/1,000)      (5/200)     (50/500)     (45/300)
HCE Percentage Ratio........................................          N/A          25%         100%         150%
                                                              ...........   (2.5%/10%)    (10%/10%)    (15%/10%)
----------------------------------------------------------------------------------------------------------------

    (ii) Because the highly compensated employee percentage ratio for 
the dairy products line of business is less than 50 percent, it does not 
satisfy the requirements of the statutory safe harbor in this paragraph 
(b). However, because Employer B's other two separate lines of business 
(candy manufacturing and housewares stores) each has a highly 
compensated employee percentage ratio that is no less than 50 percent 
and no greater than 200 percent, they each satisfy the statutory safe 
harbor in this paragraph (b).
    Example 3. (i) The facts are the same as in Example 2, except that 
Employer B operates only two separate lines of business as determined 
under Sec.  1.414(r)-3, one consisting of the dairy products 
manufacturer and the candy manufacturer, and the other consisting of the 
chain of housewares stores. After applying Sec.  1.414(r)-7, the 
distribution of highly and nonhighly compensated employees among

[[Page 269]]

Employer B's separate lines of business is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                    Candy/Dairy     Housewares
                                                                   Employer-Wide     Products         Stores
----------------------------------------------------------------------------------------------------------------
Number of Employees.............................................           1,000             700             300
Number of HCEs..................................................             100              55              45
Number of Non-HCEs..............................................             900             645             255
HCE Percentage..................................................             10%            7.9%             15%
                                                                     (100/1,000)        (55/700)        (45/300)
HCE Percentage Ratio............................................             N/A             79%            150%
                                                                  ..............      (7.9%/10%)       (15%/10%)
----------------------------------------------------------------------------------------------------------------

    (ii) Because the highly compensated employee percentage ratio for 
both of Employer B's separate lines of business is at least 50 percent 
and no more than 200 percent, they each satisfy the requirements of the 
statutory safe harbor in this paragraph (b).

    (c) Safe harbor for separate lines of business in different 
industries--(1) In general. A separate line of business satisfies the 
safe harbor in this paragraph (c) for the testing year if it is in a 
different industry or industries from every other separate line of 
business of the employer. For this purpose, a separate line of business 
is in a different industry or industries from every other separate line 
of business of the employer only if--
    (i) The property or services provided to customers of the employer 
by the separate line of business (as designated by the employer for the 
testing year under Sec.  1.414(r)-2) fall exclusively within one or more 
industry categories established by the Commissioner for purposes of this 
paragraph (c); and
    (ii) None of the property or services provided to customers of the 
employer by any of the employer's other separate lines of business (as 
designated by the employer for the testing year under Sec.  1.414(r)-2) 
falls within the same industry category or categories.
    (2) Optional rule for foreign operations. For purposes of satisfying 
this paragraph (c), an employer is permitted to disregard any property 
or services provided to customers of the employer during the testing 
year by a foreign corporation or foreign partnership (as defined in 
section 7701(a)(5)), to the extent that income from the provision of the 
property or services is not effectively connected with the conduct of 
the trade or business within the United States within the meaning of 
section 864(c). Thus, for example, an employer is permitted to take into 
account only property and services provided to customers of the employer 
by its domestic subsidiaries and property and services provided by its 
foreign subsidiaries that generate income effectively connected with the 
conduct of a trade or business within the United States in determining 
whether the property or services provided to customers of the employer 
by a separate line of business fall exclusively within one or more 
industry categories and also whether the property or services provided 
by any other separate line of business fall within the same industry 
category or categories.
    (3) Establishment of industry categories. The Commissioner shall, by 
revenue procedure or other guidance of general applicability, establish 
industry categories for purposes of this paragraph (c).
    (4) Examples. The following examples illustrate the application of 
the safe harbor in this paragraph (c). For purposes of these examples, 
it is assumed that, pursuant to paragraph (c)(3) of this section, the 
Commissioner has established the following industry categories (among 
others): transportation equipment and services; banking, insurance, and 
finance; machinery and electronics; and entertainment, sports, and 
hotels.

    Example 1. Among its other business activities, Employer C operates 
a commercial airline that constitutes a separate line of business under 
Sec.  1.414(r)-3. In addition, no other separate line of business of 
Employer C provides to customers of Employer C any property or services 
in the transportation equipment and services industry category. Under 
these facts, the separate line of business described in this example 
satisfies the safe harbor in this paragraph (c).

[[Page 270]]

    Example 2. The facts are the same as in Example 1, except that 
Employer C also operates a trucking company that constitutes another 
separate line of business of Employer C under Sec.  1.414(r)-3. Because 
the commercial airline and the trucking company both provide to 
customers of Employer C services in the transportation equipment and 
services industry category, neither separate line of business satisfies 
the safe harbor in this paragraph (c).
    Example 3. Among its other business activities, Employer D operates 
a commercial bank and luxury hotel that together constitute a single 
separate line of business under Sec.  1.414(r)-3. No other separate line 
of business of employer D provides to customers of Employer D property 
or services in either the banking, insurance, or financial industry 
category, or the entertainment, sports, or hotel industry category. 
Under these facts, the separate line of business described in this 
example satisfies the safe harbor in this paragraph (c).
    Example 4. The facts are the same as in Example 3, except that 
Employer D also manufactures computers in the United States and abroad. 
Employer D apportions its computer operations by designating these 
operations between two separate lines of business, one consisting of its 
domestic operations located in the United States and the second 
consisting of its foreign operations by a foreign subsidiary. Because 
both lines of business provide property and services in the machinery 
and electronics industry category to customers of Employer D, neither 
separate line of business would satisfy the safe harbor in this 
paragraph (c). However, pursuant to the optional rule in paragraph 
(c)(2) of his section, Employer D disregards the property and services 
provided by its foreign computer subsidiary. As a result, no other 
separate line of business of Employer D provides to customers of 
Employer D any property or services in the machinery and electronics 
industry category. Under these facts, Employer D's domestic computer 
operations separate line of business satisfies the safe harbor in this 
paragraph (c).

    (d) Safe harbor for separate lines of business that are acquired 
through certain mergers and acquisitions--(1) General rule. A portion of 
the employer that is acquired through a transaction described in section 
410(b)(6)(C) and Sec.  1.410(b)-2(f) (i.e., an asset or stock 
acquisition, merger, or other similar transaction involving a change in 
the employer of the employees of a trade or business) (the ``acquired 
line of business'') satisfies the safe harbor in this paragraph (d) for 
each testing year in the transition period provided in paragraph (d)(3) 
of this section if each of the following requirements is satisfied--
    (i) For each testing year within the transition period the employer 
designates the acquired line of business as a line of business within 
the meaning of Sec.  1.414(r)-2;
    (ii) On the first testing day in each testing year in the transition 
period:
    (A) The acquired line of business constitutes a separate line of 
business within the meaning of Sec.  1.414(r)-3 (taking into account 
Sec.  1.414(r)-1(d)(4));
    (B) No more than 10 percent of the employees who are substantial-
service employees with respect to the acquired line of business were 
substantial-service employees with respect to a different separate line 
of business for the immediately preceding testing year; and
    (C) No more than 10 percent of the employees who were substantial-
service employees with respect to the acquired line of business for the 
immediately preceding testing year are substantial-service employees 
with respect to a different separate line of business in the respective 
testing year.
    (iii) If the transaction described in paragraph (d)(1) of this 
section occurs after the first testing day in a testing year, the 
determinations required by paragraphs (d)(1)(ii) (B) and (C) of this 
section with respect to that testing year are made as of the date of the 
transaction.
    (2) Employees taken into account. For purposes of this paragraph 
(d), the employees taken into account are the same employees who are 
taken into account for purposes of applying section 410(b) with respect 
to the first testing day. For this purpose, employees described in 
section 410(b)(3) and (b)(4) are excluded. However, section 410(b)(4) is 
applied with reference to the lowest minimum age requirement, and with 
reference to the lowest service requirement applicable under any plan of 
the employer that benefits employees of the separate line of business, 
as if all the plans were a single plan under Sec.  1.410(b)-6(b)(2). The 
employees of the separate line of business are determined by applying 
Sec.  1.414(r)-7 to the employees taken into account under this 
paragraph (d)(2). 0

[[Page 271]]

    (3) Transition period. The transition period for purposes of this 
safe harbor is the period that begins with the first testing year 
beginning after the date that the transaction described in paragraph 
(d)(1) of this section occurs. The employer is permitted, but not 
required, to extend the transition period to include one, two, or three 
of the testing years immediately succeeding that first testing year.
    (4) Examples. The following examples illustrate the application of 
the safe harbor in this paragraph (d).

    Example 1. Employer E is treated as operating three qualified 
separate lines of business pursuant to Sec.  1.414(r)-1(b). In 1996, 
Employer E acquires a company that employs 4,000 employees who 
manufacture and sell pharmaceutical supplies, and designates that 
portion as a line of business under Sec.  1.414(r)-2. Under Sec.  
1.414(r)-1(d)(4), the pharmaceutical supplies line of business is deemed 
to satisfy the requirements to be a qualified separate line of business 
(other than the 50-employee and notice requirements) for testing year 
1996. In addition, the determination of whether Employer E's remaining 
three lines of business constitute qualified separate lines of business 
for testing year 1996 is made without taking into account the acquired 
employees and by disregarding the property and services provided to 
customers of Employer E by the pharmaceutical supplies line of business.
    Example 2. The facts are the same as in Example 1 except that, by 
the first testing day in 1997 (Transition Year 1), there are 300 
additional substantial-service employees with respect to the 
pharmaceutical supplies line of business, increasing the total number to 
4,300. Of those 300 employees, 250 were substantial-service employees 
with respect to a different separate line of business for testing year 
1996 and 50 are new hires. Assume that, on the first testing day in 
Transition Year 1, the pharmaceutical supplies line of business 
satisfies the requirements of Sec.  1.414(r)-3 (taking into account 
Sec.  1.414(r)-1(d)(4)) and therefore constitutes a separate line of 
business. Because 250 is 6 percent of 4,300, no more than ten percent of 
the employees who are substantial-service employees with respect to the 
pharmaceutical supplies line of business were substantial- service 
employees with respect to a different separate line of business for the 
immediately preceding testing year. The 50 newly hired employees are 
disregarded in making this determination. Under these facts, the 
pharmaceutical supplies separate line of business satisfies the safe 
harbor in this paragraph (d) for Transition Year 1.
    Example 3. The facts are the same as in Example 2, except that, 
before the first day of the next testing year (``Transition Year 2''), 
Employer E permanently transfers 200 of the 4,300 employees who were 
substantial-service employees with respect to the pharmaceutical line of 
business on the first testing day in Transition Year 1 to a different 
line of business and does not hire any additional employees for the 
pharmaceutical supplies line of business. Therefore, by the first 
testing day in Transition Year 2, the number of employees who are 
substantial-service employees with respect to the pharmaceutical line of 
business of Employer E has decreased from 4,300 to 4,100. Assume that, 
on that first testing day in Transition Year 2, the pharmaceutical 
supplies line of business constitutes a separate line of business within 
the meaning of Sec.  1.414(r)-3. Because 200 is approximately 5 percent 
of 4,300, no more than 10 percent of the employees who were substantial-
service employees of the pharmaceutical line of business for Transition 
Year 1 are not substantial-service employees of the pharmaceutical line 
of business in Transition Year 2. Under these facts, the pharmaceutical 
supplies separate line of business continues to satisfy the safe harbor 
in this paragraph (d) for Transition Year 2.

    (e) Safe harbor for separate lines of business reported as industry 
segments--(1) In general. A separate line of business satisfies the safe 
harbor in this paragraph (e) for the testing year if, for the employer's 
fiscal year ending latest in the testing year, the separate line of 
business is reported as one or more industry segments on its annual 
report required to be filed in conformity with either--
    (i) Form 10-K, annual Report Pursuant to Section 13 or 15(d) of the 
Securities Exchange Act of 1934 (``Form 10-K''); or
    (ii) Form 20-F, Annual Report Pursuant to Section 13(a) or 15(d) of 
the Securities Exchange Act of 1934 with Item 18 financials (``Form 20-
F''), and the employer timely files either the Form 10-K or Form 20-F 
with the Securities and Exchange Commission (``SEC'').
    (2) Reported as an industry segment in conformity with Form 10-K or 
Form 20-F. For purposes of this paragraph (e), a separate line of 
business is reported as one or more industry segments in conformity with 
either Form 10-K or Form 20-F only if--
    (i) The separate line of business consists of one or more industry 
segments within the meaning of paragraphs 10(a),

[[Page 272]]

11(b), and 12 through 14 of the Statement of Financial Accounting 
Standards No. 14, Financial Reporting for Segments of a Business 
Enterprise (``FAS 14''); and
    (ii) The property or services provided to customers of the employer 
by the separate line of business (as designated by the employer for the 
testing year under Sec.  1.414(r)-2) is identical to the property or 
services provided to customers of the employer by the industry segment 
or segments (as determined under paragraphs 10(a), 11(b), and 12 through 
14 of FAS 14).
    (3) Timely filing of Form 10-K or Form 20-F. For purposes of this 
paragraph (e), a Form 10-K of Form 20-F is timely filed with the SEC if 
it is filed within the required period as provided under 17 CFR 240.12b-
25(b)(2)(ii). Therefore, the required period for timely filing of the 
Form 10-K is the 90-day period after the end of the fiscal year covered 
by the annual report (including the 15-day extension), and the required 
period for timely filing of the Form 20-F is the 6-month period after 
the end of the fiscal year covered by the annual report (including the 
15-day extension).
    (4) Examples. The following examples illustrate the application of 
the safe harbor in this paragraph (e).

    Example 1. Among its other business activities, Employer F operates 
a bearing manufacturing firm that constitutes a separate line of 
business under Sec.  1.414(r)-3. Employer F is required to file an 
annual Form 10-K with the SEC. On its timely filed Form 10-K, Employer F 
reports its bearing manufacturing operations as an industry segment in 
accordance of FAS 14 (as determined under paragraphs 10(a), 11(b), and 
12 through 14 of FAS 14). The group of bearing products provided by the 
separate line of business (as designated by Employer F under Sec.  
1.414(r)-2) is identical to the group of bearing products provided by 
the industry segment (as determined under paragraphs 10(a), 11(b), and 
12 through 14 of FAS 14). Under these facts, the separate line of 
business described in this example satisfies the safe harbor in this 
paragraph (e).
    Example 2. The facts are the same as in Example 1, except that 
Employer F has apportioned its bearing manufacturing operations between 
two separate lines of business as determined under Sec.  1.414(r)-3, one 
engaged in the manufacture of bearings for use in the automotive 
industry, and a second engaged in the manufacture of bearings for use in 
the aerospace industry. Because neither separate line of business 
provides a group of property or services to customers of Employer F that 
is identical to the group of bearing products provided by the industry 
segment reported on Employer F's annual Form 10-K, neither separate line 
of business described in this example satisfies the safe harbor in this 
paragraph (e).

    (f) Safe harbor for separate lines of business that provide the same 
average benefits as other separate lines of business--(1) General rule. 
A separate line of business satisfies the safe harbor in this paragraph 
(f) for the testing year only if the level of benefits provided to 
employees of the separate line of business satisfies paragraph (f)(2) or 
(f)(3) of this section, whichever is applicable.
    (2) Separate lines of business with a disproportionate number of 
nonhighly compensated employees--(i) Applicability of safe harbor. This 
paragraph (f)(2) applies to a separate line of business that for the 
testing year has a highly compensated employee percentage ratio of less 
than 50 percent (as determined under paragraph (b)(2) of this section).
    (ii) Requirement. A separate line of business satisfies this 
paragraph (f)(2) only if the actual benefit percentage of the group of 
nonhighly compensated employees of the separate line of business for the 
testing period that ends with or within the testing year is at least as 
great as the actual benefit percentage of the group of all other 
nonhighly compensated employees of the employer for the same testing 
period. See Sec.  1.410 (b)-5(c) and (d)(3)(ii) for the definitions of 
actual benefit percentage and testing period, respectively. In 
determining actual benefit percentages for purposes of this paragraph 
(f)(2)(ii), the special rule in Sec.  1.410(b)-5(e)(3) (permitting an 
employer to determine employee benefit percentages separately for 
defined contribution and defined benefit plans) may not be used.
    (3) Separate lines of business with a disproportionate number of 
highly compensated employees--(i) Applicability of safe harbor. This 
paragraph (f)(3) applies to a separate line of business that for the 
testing year has a highly compensated employee percentage ratio of more 
than 200 percent (as determined under paragraph (b)(2) of this section).
    (ii) Requirement. A separate line of business satisfies this 
paragraph (f)(3) only if the actual benefit percentage of

[[Page 273]]

the group of highly compensated employees of the separate line of 
business for the testing period that ends with or within the testing 
year is no greater than the actual benefit percentage of the group of 
all other highly compensated employees of the employer for the same 
testing period. See Sec.  1.410 (b)-5(c) and (d)(3)(ii) for the 
definitions of actual benefit percentage and testing period, 
respectively. In determining actual benefit percentages for purposes of 
this paragraph (f)(3)(ii), the special rule in Sec.  1.410(b)-5(e)(3) 
(permitting an employer to determine employee benefit percentages 
separately for defined contribution and defined benefit plans) may not 
be used.
    (4) Employees taken into account. An employee of a separate line of 
business (as determined under Sec.  1.414(r)-7 is taken into account for 
a testing period for purposes of this paragraph (f) only if the employee 
is an employee of the separate line of business on the first testing 
day, and would not be an excludable employee for purposes of applying 
the average benefit percentage test of Sec.  1.410(b)-5 to a plan for a 
plan year included in that testing period. In determining whether an 
employee is an excludable employee for purposes of the average benefit 
percentage test, the employer is assumed not to be operating qualified 
separate lines of business under Sec.  1.414(r)-1(b). An employee is 
treated as a highly compensated employee for purposes of this paragraph 
(f) if the employee is treated as a highly compensated employee for 
purposes of applying section 410(b) on the first testing day. See Sec.  
1.414(r)-11(b)(7) for the definition of ``first testing day''.
    (5) Example. The rules of this paragraph (f) are illustrated by the 
following example.

    Example. (i) Employer G is treated as operating two separate lines 
of business, Line 1 and Line 2, in accordance with Sec.  1.414(r)-1(b). 
Employer G maintains three qualified plans. Plan A is a calendar-year 
profit-sharing plan that benefits all employees of Employer G. Plan B is 
a defined benefit plan with a plan year ending March 31 that benefits 
all employees of Line 1. Plan C is a defined benefit plan with a plan 
year ending November 30 that benefits all employees of Line 2.
    (ii) In 1995, Line 1 has a highly compensated employee percentage 
ratio of 25 percent. Employer G's first testing day is March 31. After 
applying the rules of Sec.  1.414(r)-7, the nonhighly compensated 
employees of Line 1 and Line 2 on March 31, 1995, are N1-N80 and N81-
N100, respectively. N1 is an excludable employee under Sec.  1.410(b)-6 
for purposes of the average benefit percentage test during the testing 
period that includes the plan years of Plans A, B, and C that end in 
1995 (the ``1995 testing period''), and would therefore not be taken 
into account in determining whether any of those plans satisfied the 
average benefit percentage test of Sec.  1.410(b)-5 for plan years 
included in that testing period, because N1 does not satisfy the minimum 
age and service conditions under any plan of the employer. All other 
employees of Line 1 and Line 2 on March 31, 1995 are nonexcludable 
employees for purposes of the average benefit percentage test during the 
1995 testing period.
    (iii) In order for Line 1 to satisfy the requirements of this 
paragraph (f) for 1995, the actual benefit percentage of N2-N80 for the 
1995 testing period under Plans A, B and C must be at least as great as 
the actual benefit percentage of N81-N100 for the same testing period 
under the same plans. N1 is not taken into account because N1 is an 
excludable employees for purposes of the average benefit percentage test 
for the 1995 testing period. Any other employees who were taken into 
account for purposes of the average benefit percentage test for the 1995 
testing period are excluded because they are not employees of Line 1 or 
Line 2 on March 31, 1995.

    (g) Safe harbor for separate lines of business that provide minimum 
or maximum benefits--(1) In general. A separate line of business 
satisfied the safe harbor in this paragraph (g) for the testing only if 
the level of benefits provided to employees of the separate line of 
business satisfies paragraph (g)(2) or (g)(3) of this section, whichever 
is applicable. For this purpose, the level of benefits is determined 
with respect to all qualified plans of the employer that benefit 
employees of the separate line of business for plan years that begin in 
the testing year.
    (2) Minimum benefit required--(i) Applicability. This paragraph 
(g)(2) applies to a separate line of business that for the test year has 
a highly compensated employee percentage ratio of less than 50 percent 
(as determined under paragraph (b)(2) of this section).
    (ii) Requirement. A separate line of business satisfies this 
paragraph (g)(2) only if one of the following requirements is 
satisfied--
    (A) At least 80 percent of all nonhighly compensated employees of 
the

[[Page 274]]

separate line of business either accrue a benefit for the plan year that 
equals or exceeds the defined benefit minimum in paragraph (g)(2)(iii) 
of this section, receive all allocation for the plan year that equal or 
exceeds the defined contribution minimum in paragraph (g)(2)(iv) of this 
section, or accrue a benefit and receive an allocation that together 
equal or exceed the combined plan minimum in paragraph (g)(4) of this 
section. The defined benefit minimum must be provided in a defined plan, 
and the defined contribution minimum must be provided in a defined 
contribution plan.
    (B) The separate line of business would satisfy the requirements of 
paragraph (g)(2)(ii)(A) of this section if the 80 percent threshold were 
reduced to 60 percent, and the average of the accrual rates or 
allocation rates of all nonhighly compensated employees in the separate 
line of business equals or exceeds the minimum amount described for each 
individual employee in paragraph (g)(2)(ii)(A) of this section.
    (iii) Defined benefit minimum--(A) In general. The defined benefit 
minimum for a plan year is the employer-derived accrual that would 
result in a normal accrual rate for the plan year equal to 0.75 percent 
of compensation. For purposes of this paragraph (g)(2)(iii), the normal 
accrual rate is the percentage (not less than 0) determined by 
subtracting the employee's normalized accrued benefit as of the end of 
the prior plan year (expressed as a percentage of average annual 
compensation as of the end of the prior plan year) from the employee's 
normalized accrued benefit as of the end of the plan year (expressed as 
a percentage of average annual compensation as of the end of the plan 
year).
    (B) Normal form and equivalent benefits. The benefit that is tested 
for purposes of this paragraph (g)(2)(iii) is the accrued retirement 
benefit commencing at normal retirement age. If the normal form of 
benefit for a plan being tested is other than a straight life annuity 
beginning at a normal retirement age of 65, the benefit must be 
normalized (within the meaning of Sec.  1.401(a)(4)-12) to a straight 
life annuity commencing at age 65. No adjustment is permitted for early 
retirement benefits or for any ancillary benefit, including disability 
benefits.
    (C) Compensation definition. The underlying definition of 
compensation used for purposes of determining accrual rates under this 
paragraph (g)(2)(iii) must be a definition of compensation that 
automatically satisfies section 414(s) without a test for 
nondiscrimination (see Sec.  1.414(s)-1(c)).
    (D) Average compensation requirement. For purposes of determining 
accrual rates, compensation must be average annual compensation within 
the meaning of Sec.  1.401(a)(4)-3(e)(2) determined using a five-year 
averaging period. The compensation history to be taken into account are 
all years beginning with the first year in which the employee benefits 
under the plan, and ending with the last plan year in which the employee 
participates in the plan. However, a plan may disregard in a reasonable 
and consistent manner: years before the effective date of these 
regulations as set forth in Sec.  1.414(r)-1(d)(9)(i), years more than 
10 years preceding the current plan year, and years for which the 
employer does not use this paragraph (g)(2) to satisfy this safe harbor 
with respect to the separate line of business. If a plan provides a 
defined benefit minimum that uses three consecutive years (in lieu of 
five) for calculating average annual compensation, the 0.75 percent 
annual accrual in paragraph (g)(2)(iii)(A) of this section is multiplied 
by 93.3 percent, resulting in a normal accrual rate equal to 0.70 
percent. If a plan provides a defined benefit minimum that uses more 
than five consecutive years for calculating average annual compensation 
or the plan is an accumulation plan as defined in Sec.  1.401(a)(4)-12, 
the 0.75 percent annual accrual rate in paragraph (g)(2)(iii)(A) of this 
section is multiplied by 133.3 percent, resulting in a normal accrual 
rate equal to 1.0 percent.
    (E) Special rules. The special rules of Sec.  1.401(a)(4)-3(f) apply 
for purposes of determining whether a benefit accrual satisfies the 
minimum benefit requirement. For example, benefits may be determined on 
other than a plan year basis as permitted by Sec.  1.401(a)(4)-3(f)(6). 
A plan described in section 412(i)

[[Page 275]]

may be used to provide the defined benefit minimum described in this 
paragraph (g)(2). In such case, the rules in Sec.  1.416-1, M-17, apply 
to such a plan. For purposes of this paragraph (g)(2)(iii) an employee 
is treated as accruing a benefit equal to the minimum benefit in 
paragraph (g)(2)(iii)(A) of this section if the reason that the employee 
does not accrue such a benefit is either--
    (1) The application of a plan provision that applies uniformly to 
all employees in the plan and limits the service used for purposes of 
benefit accrual to a specified maximum no less than 25 years, or
    (2) The employee has attained normal retirement age and fails to 
accrue a benefit solely because of the provisions of section 
411(b)(1)(H)(iii) regarding adjustments for delayed retirement.
    (iv) Defined contribution minimum--(A) In general. The defined 
contribution minimum for a plan year is an allocation that results in an 
allocation rate for the plan year (within the meaning of Sec.  
1.401(a)(4)-2(c)) equal to three percent of an employee's plan year 
compensation. Plan year compensation must be based on a definition of 
compensation that automatically satisfies section 414(s) without a test 
for nondiscrimination (see Sec.  1.414(s)-1(c)). For this purpose, 
allocations that are taken into account to do not include matching 
contributions described in Sec.  1.401(m)-1(a)(2), elective 
contributions described in Sec.  1.401(k)-6, any adjustment in 
allocation rates permitted under section 401(l) or imputed disparity 
under Sec.  1.401(a)(4)-7.
    (B) Modified allocation definition for averaging. For purposes of 
determining whether the average allocation rates for all nonhighly 
compensated employees of the separate line of business satisfy the 
minimum benefit requirement in paragraph (g)(2)(ii)(B) of this section, 
matching contributions described in Sec.  1.401(m)-1(a)(2) are treated 
as employer allocations.
    (3) Maximum benefit permitted--( i) Applicability. This paragraph 
(g)(3) applies to a separate line of business that for the testing year 
has a highly compensated employee percentage ratio that exceeds 200 
percent (as determined under paragraph (b)(2) of this section).
    (ii) Requirement. A separate line of business satisfies this 
paragraph (g)(3) only if one of the following requirements is 
satisfied--
    (A) No highly compensated employee of the separate line of business 
accrues a benefit for the plan year that results in an accrual rate that 
exceeds the defined benefit maximum in paragraph (g)(3)(iii) of this 
section, receives an allocation that exceeds the defined contribution 
maximum in paragraph (g)(3)(iv) of this section, or accrues a benefit 
and receives an allocation that together exceed the combined plan 
maximum in paragraph (g)(4) of this section. All benefits provided by 
qualified defined benefit plans are subject to the defined benefit 
maximum, and all benefits provided by qualified defined contribution 
plans are subject to the defined contribution maximum.
    (B) The average of the accrual rates or allocation rates of all 
highly compensated employees of the separate line of business is no more 
than 80 percent of the maximum amount described for any individual 
employee in paragraph (g)(3)(ii)(A) of this section.
    (iii) Defined benefit maximum--(A) In general. The defined benefit 
maximum is the employer-derived accrued benefit that would result from 
calculating a normal accrual rate equal to 2.5 percent of compensation.
    (B) Determination of defined benefit maximum. The accrual rate used 
for the defined benefit maximum is determined in the same manner as the 
normal accrual rate used for the defined benefit minimum is determined 
under paragraph (g)(2)(iii) of this section, except as provided below. 
Thus, a defined benefit plan may provide, in addition to the defined 
benefit maximum, any benefit the value of which is not taken into 
account under paragraph (g)(2)(iii) of this section. For example, a plan 
may provide qualified disability benefits described in section 411(a)(9) 
or ancillary benefits described in Sec.  1.401(a)(4)-4(e)(2).
    (C) Adjustment for different compensation definitions. If a plan 
subject to the defined benefit maximum determines accrual rates by using 
three consecutive years (in lieu of five) for purposes

[[Page 276]]

of determining average annual compensation, the 2.5 percent annual 
accrual rate in paragraph (g)(3)(iii)(B) of this section is multiplied 
by 93.3 percent, resulting in a maximum accrual rate equal to 2.33 
percent. Compensation may be less inclusive than the compensation 
described in paragraph (g)(2)(iii)(C) of this section. However, no 
adjustment is made to the maximum normal accrual rate because of the use 
of a definition of compensation that is less inclusive than the 
compensation described in paragraph (g)(2)(iii)(C) of this section. In 
addition, no adjustment is made to the maximum normal accrual rate 
because the plan uses more than five consecutive years for calculating 
average annual compensation or the plan is an accumulation plan as 
defined in Sec.  1.401(a)(4)-12.
    (D) Adjustment for certain subsidies. If the plan provides 
subsidized optional forms of benefit, the accrual rate for purposes of 
this paragraph (g)(3) must be determined by taking those subsidies into 
account. An optional form of benefit is considered subsidized if the 
normalized optional form of benefit is larger than the normalized normal 
retirement benefit under the plan. In the case of a plan with subsidized 
optional forms, the determination of accrual rate for the plan year 
under paragraph (g)(2)(iii)(A) of this section is the percentage (not 
less than 0) determined by subtracting the largest of the sums of the 
employee's normalized QJSAs and QSUPPs determined for each age under 
Sec.  1.401(a)(4)-3(d)(1)(ii) as of the end of the prior plan year 
(expressed as a percentage of average annual compensation as of the end 
of the prior plan year) from the largest of the sums of the employee's 
normalized QJSAs and QSUPPs determined for each age under Sec.  
1.401(a)(4)-3(d)(1)(ii) as of the end of the plan year (expressed as a 
percentage of average annual compensation as of the end of the plan 
year).
    (iv) Defined contribution maximum. The defined contribution maximum 
is an allocation that results in an allocation rate for the plan year 
(within the meaning of Sec.  1.401(a)(4)-2(c)) equal to 10 percent of an 
employee's plan year compensation. Compensation may be less inclusive 
than the compensation described in paragraph (g)(2)(iv)(A) of this 
section. However, no adjustment is made to the defined contribution 
maximum because of the use of a definition of compensation that is less 
inclusive than the compensation described in paragraph (g)(2)(iv)(A) of 
this section. For this purpose, allocations that are taken into account 
do not include elective contributions described in Sec.  1.401(k)-6, any 
adjustment in allocation rates permitted under section 401(l) or imputed 
disparity under Sec.  1.401(a)(4)-7 but do include employer matching 
contributions under Sec.  1.401(m)-1(f)(12).
    (4) Duplication of benefits or contributions--(i) Plans of the same 
type. In the case of an employee who benefits under more than one 
defined benefit plan, the defined benefit minimum required or the 
defined benefit maximum permitted under this paragraph (g) is determined 
by reference to the employee's aggregate employer-provided benefit under 
all qualified defined benefit plans of the employer. In the case of an 
employee who benefits under more than one defined contribution plan, the 
defined contribution minimum required or the defined contribution 
maximum permitted under this paragraph (g) is determined by reference to 
the employee's aggregate employer-provided allocations under all 
qualified defined contribution plans of the employer.
    (ii) Plans of different types. In the case of an employee who 
benefits under both a defined benefit plan and a defined contribution 
plan, a percentage of the minimum benefit required or the maximum 
benefit permitted under this paragraph (g) may be provided in each type 
of plan as long as the combined percentage equals at least 100 percent 
in the case of the minimum benefit required and does not exceed 100 
percent in the case of the maximum benefit permitted. Thus, for example, 
if a highly compensated employee benefits under both types of plans and 
accrues an aggregate adjusted normal accrual rate equal to 1.25 percent 
of average annual compensation under all defined benefit plans of the 
employer (i.e, 50 percent of the defined benefit maximum described in 
paragraph (g)(3)(iii)

[[Page 277]]

of this section), in order to comply with the maximum benefit safe 
harbor, the employee may not receive an aggregate allocation under all 
defined contribution plans of the employer in excess of five percent of 
plan year compensation (i.e., 50 percent of the defined contribution 
maximum described in paragraph (g)(3)(iv) of this section).
    (iii) Special rule for floor-offset arrangements. In the case of a 
floor-offset arrangement (as described in Sec.  1.401(a)(4)-8(d)), the 
minimum or maximum benefit rules are applied to each plan as if the 
other plan did not exist. Thus, the defined benefit plan must provide at 
least 100 percent of the defined benefit minimum (or no more than 100 
percent of the defined benefit maximum) based on the gross benefit prior 
to offset, and the defined contribution plan must provide at least 100 
percent of the defined contribution minimum (or no more than 100 percent 
of the defined contribution maximum).
    (5) Certain contingency provisions ignored. For purposes of this 
paragraph (g), an employee's accrual or allocation rate is determined 
without regard to any minimum benefit or any maximum benefit limitation 
that is applicable to the employee only if the separate line of business 
fails otherwise to satisfy the requirement of administrative scrutiny.
    (6) Employees taken into account. For purposes of this paragraph 
(g), an employee is taken into account if the employee is taken into 
account for purposes of applying section 410(b) with respect to any 
testing day for the testing year. For this purpose, employees described 
in section 410 (b)(3) and (b)(4) are excluded. However, section 
410(b)(4) is applied with reference to the lowest minimum age 
requirement applicable, and with reference to the lowest service 
requirement applicable under any plan of the employer that benefits 
employees of the separate line of business, as if all the plans were a 
single plan under Sec.  1.410(b)-6(b)(2). For purposes of the minimum 
benefit requirement of paragraph (g)(2) of this section, section 
410(b)(4) may be applied with reference to the lowest minimum age 
requirement, and with reference to the lowest minimum service 
requirement, applicable under any plan of the employer that benefits 
highly compensated employees of the separate line of business, as if all 
the plans were a single plan under Sec.  1.410(b)-6(b)(2), or, if no 
plan of the employer benefits highly compensated employees of the 
separate line of business, with reference to the greatest age and 
service requirements permitted under section 410(a)(1)(A). The employees 
of the separate line of business are determined by applying Sec.  
1.414(r)-7 to the employees taken into account under this paragraph 
(g)(6). An employee is treated as a highly compensated employee for 
purposes of this paragraph (g) if the employee is treated as a highly 
compensated employee for purposes of applying section 410(b) on any 
testing day for the testing year. For the definition of ``testing day,'' 
see Sec.  1.414(r)-11(b)(6).

[T.D. 8376, 56 FR 63446, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32919, June 27, 1994; T.D. 9169, 69 FR 78153, Dec. 29, 2004]



Sec.  1.414(r)-6  Qualified separate line of business--
administrative scrutiny requirement--individual determinations.

    (a) In general. A separate line of business (as determined under 
Sec.  1.414(r)-3) that does not satisfy any of the safe harbors in Sec.  
1.414(r)-5 for a testing year nonetheless satisfies the administrative 
scrutiny requirement of Sec.  1.414(r)-1(b)(2)(iv)(D) if the employer 
requests and receives from the Commissioner an individual determination 
under this section that the separate line of business satisfies the 
requirement of administrative scrutiny for the testing year. This 
section implements the individual determinations provided for under 
section 414(r)(2)(C). The Commissioner shall issue such an individual 
determination only when it is consistent with the purpose of section 
414(r), taking into account the nondiscrimination requirements of 
sections 401(a)(4) and 410(b). Paragraph (b) of this section authorizes 
the Commissioner to establish procedures for requesting and granting 
individual determinations.
    (b) Authority to establish procedures. The Commissioner may, in 
revenue rulings and procedures, notices, and other guidance, published 
in the Internal Revenue Bulletin (see

[[Page 278]]

Sec.  601.601(d)(2)(ii)(b) of this chapter), provide any additional 
guidance that may be necessary or appropriate for requesting and 
granting individual determinations under this section. For example, such 
guidance may specify the circumstances in which an employer may request 
an individual determination and factors to be taken into account in 
deciding whether to grant a favorable individual determination. In 
addition, such guidance may describe situations that automatically fail 
the administrative scrutiny requirement.

[T.D. 8376, 56 FR 63452, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32920, June 27, 1994]



Sec.  1.414(r)-7  Determination of the employees of an employer's qualified 
separate lines of business.

    (a) Introduction--(1) In general. This section provides the rules 
for determining the employees of each qualified separate line of 
business operated by an employer. Paragraph (a)(2) of this section lists 
the specific provisions of the regulations for which these rules apply. 
Paragraph (b) of this section provides the procedure for assigning the 
employees of the employer among the qualified separate lines of business 
of the employer and for determining the day or days on which such 
assignments must be made. Under this procedure, each employee (i.e., a 
substantial-service employee or a residual shared employee as defined in 
Sec.  1.414(r)-11(b)(2) and (4)) is assigned to a single qualified 
separate line of business in a consistent manner for all purposes listed 
in paragraph (a)(2) of this section with respect to the testing year and 
plan years beginning within the testing year. Paragraph (c) of this 
section provides methods for allocating residual shared employees among 
qualified separate lines of business.
    (2) Purposes for which this section applies. This section applies 
solely for purposes of determining whether--
    (i) A separate line of business satisfies the statutory safe harbor 
of Sec.  1.414(r)-5(b) for a testing year (see Sec.  1.414(r)-5(b)(3) 
for the employees taken into account for this purpose);
    (ii) A separate line of business satisfies the merger and 
acquisition safe harbor of Sec.  1.414(r)-5(d) for a testing year (see 
Sec.  1.414(r)-5(d)(2) for the employees taken into account for this 
purpose);
    (iii) A separate line of business satisfies the average benefits 
safe harbor of Sec.  414(r)-5(f) for a testing year (see Sec.  414(r)-
5(f)(4) for the employees taken into account for this purpose);
    (iv) A separate line of business satisfies the minimum or maximum 
benefits safe harbor of Sec.  414(r)-5(g) for a testing year (see Sec.  
1.414(r)-5(g)(6) for the employees taken into account for this purpose);
    (v) A plan of the employer satisfies sections 410(b) and 401(a)(4) 
for a plan year (see Sec.  414(r)-8(d)(3) for the employees taken into 
account for this purpose); or
    (vi) A plan of the employer satisfies section 401(a)(26) for a plan 
year (see Sec.  414(r)-9(c)(3) for the employees taken into account for 
this purpose).
    (b) Assignment procedure--(1) In general. To apply the provisions 
listed in paragraph (a)(2) of this section with respect to a testing 
year or plan year, as the case may be, each of the employees taken into 
account under that provision must be assigned to a qualified separate 
line of business of the employer on one or more testing days (or section 
401(a)(26) testing days) during the year. The first day for which this 
assignment procedure is required for a testing year is the first testing 
day. See Sec.  414(r)-11(b)(6), (7) and (8) (definitions of ``testing 
day'', ``first testing day'' and ``section 401(a)(26) testing day''). 
Section Sec.  414(r)-8 may require that the assignment procedure be 
repeated for testing days that fall after the first testing day 
(including testing days that fall after the close of the testing year in 
a plan year that begins in the testing year). Accordingly, new employees 
may be taken into account for the first time on these later testing days 
who were not taken into account on the first testing day. Section Sec.  
414(r)-9 may have the same effect with respect to section 401(a)(26) 
testing days that fall after the first testing day.
    (2) Assignment for the first testing day. The employees taken into 
account under a provision described in paragraph (a)(2) of this section 
with respect to the first testing day for a testing

[[Page 279]]

year are assigned among the employer's qualified separate lines of 
business by applying the following procedure to each of those 
employees--
    (i) An employee who is a substantial-service employee with respect 
to a qualified separate line of business within the meaning of Sec.  
414(r)-11(b)(2) must be assigned to that qualified separate line of 
business;
    (ii) An employee who is a residual shared employee within the 
meaning of Sec.  414(r)-11(b)(4) must be assigned to a qualified 
separate line of business under paragraph (c) of this section.

Each employee assigned to a qualified separate line of business under 
paragraph (b)(2)(i) of this section or this paragraph (b)(2)(ii) remains 
assigned to the same qualified separate line of business for all 
purposes with respect to the testing year listed in paragraph (a)(2) of 
this section and for all plan years beginning in that testing year. Once 
an employee is assigned to a qualified separate line of business with 
respect to a particular testing day or section 401(a)(26) testing day, 
that employee remains assigned to that qualified separate line of 
business after the employee terminates employment. However, after the 
employee terminates employment, that employee will in most cases not be 
taken into account with respect to a subsequent testing day or section 
401(a)(26) testing day for purposes of applying one or more of the 
provisions in paragraph (a)(2) of this section.
    (3) Assignment of new employees for subsequent testing days. After 
the first testing day for the testing year, the employees taken into 
account under a provision described in paragraph (a)(2) of this section 
with respect to a subsequent testing day (or a section 401(a)(26) 
testing day) for the testing year may include one or more employees who 
previously have not been assigned to a qualified separate line of 
business for any purpose listed in paragraph (a)(2) of this section with 
respect to the testing year. An employee may not previously have been 
assigned to a qualified separate line of business for any purpose with 
respect to the testing year if, for example, the employee has just been 
hired or has just become a nonexcludable employee. Previously unassigned 
employees are assigned among the employer's qualified separate lines of 
business by applying the procedure in paragraph (b)(2) of this section 
to those employees. In determining whether an employee who is not 
employed by the employer during the testing year is a substantial-
service or a residual shared employee with respect to a qualified 
separate line of business, Sec.  414(r)-3(c)(5) is applied with 
reference to services performed by the employee during a period in the 
immediately succeeding testing year that are reasonably representative 
of the employee's services for the employer.
    (4) Special rule for employers using annual option under section 
410(b). Notwithstanding the fact that paragraphs (b)(1) through (b)(3) 
of this section generally only require employees to be assigned on 
testing days beginning with the first testing day, if a plan is tested 
under section 410(b) using the annual option of Sec.  410(b)-8(a)(4) 
(including for purposes of the average benefit percentage test), 
employees must be assigned on every day of the plan year of that plan 
for purposes of this paragraph (b). Thus, all employees who provide 
services at any time during the plan year of a plan that is tested using 
the annual option of Sec.  1.410(b)-8(a)(4) must be assigned to a line 
of business even if they terminate employment before the first testing 
day within the meaning of Sec.  414(r)-11(b)(7) of the testing year in 
which the plan year begins.
    (c) Assignment and allocation of residual shared employees--(1) In 
general. All residual shared employees must be allocated among an 
employer's qualified separate lines of business under one of the 
allocation methods provided in paragraphs (c)(2) through (5) of this 
section. An employer is permitted to select which method of allocation 
to apply for the testing year to residual shared employees. However, the 
same allocation method must be used for all of the employer's residual 
shared employees and for all purposes listed in paragraph (a)(2) of this 
section with respect to the testing year.
    (2) Dominant line of business method of allocation--(i) In general. 
Under the method of allocation in this paragraph (c)(2), all residual 
shared employees are allocated to the employer's dominant

[[Page 280]]

line of business. This method does not apply unless the employer has a 
dominant line of business within the meaning of paragraph (c)(2)(ii) or 
(c)(2)(iv) of this section. If an employer has more than one dominant 
line of business under this paragraph (c), the employer must select 
which qualified separate lines of business is its dominant line of 
business.
    (ii) Dominant line of business. An employer's dominant line of 
business is that qualified separate line of business that has an 
employee assignment percentage of at least 50 percent.
    (iii) Employee assignment percentage--(A) Determination of 
percentage. The employee assignment percentage of a qualified separate 
line of business is the fraction (expressed as a percentage)--
    (1) The numerator of which is the number of substantial-service 
employees with respect to the qualified separate line of business who 
are assigned to that line of business under paragraph (b) of this 
section; and
    (2) The denominator of which is the total number of substantial-
service employees who are assigned to all qualified separate lines of 
business of the employer under paragraph (b) of this section.
    (B) Employees taken into account. The employee assignment percentage 
is calculated solely with respect to employees who are taken into 
account for purposes of satisfying section 410(b) with respect to the 
first testing day. Therefore, this percentage is calculated only once 
for all purposes with respect to a testing year. The employees described 
in section 410(b)(3) and (4) are excluded. However, section 410(b)(4) is 
applied with reference to the lowest minimum age requirement applicable 
under any plan of the employer, and with reference to the lowest service 
requirement applicable under any plan of the employer, as if all the 
plans were a single plan under Sec.  1.410(b)-6(b)(2).
    (iv) Option to apply reduced percentage. An employer is permitted to 
determine whether it has a dominant line of business by substituting 25 
percent for 50 percent in paragraph (c)(2)(ii) of this section. This 
option is available for a testing year only if the qualified separate 
line of business satisfies one of the following requirements:
    (A) The qualified separate line of business accounts for at least 60 
percent of the employer's gross revenues for the employer's latest 
fiscal year ending in the testing year.
    (B) The employee assignment percentage of the qualified separate 
line of business would be at least 60 percent if collectively bargained 
employees were taken into account.
    (C) Each qualified separate line of business of the employer 
satisfies the statutory safe harbor of Sec.  1.414(r)-5(b), the average 
benefits safe harbor of Sec.  1.414(r)-5(f), or the minimum or maximum 
benefits safe harbor of Sec.  1.414(r)-5(g). Whether a qualified 
separate line of business satisfies one of these safe harbors is 
determined after the application of this section, including the 
assignment of all residual shared employees under this paragraph (c)(2).
    (D) The employee assignment percentage of the qualified separate 
line of business is at least twice the employee assignment percentages 
of each of the employer's other qualified separate lines of business.
    (v) Examples. The following examples illustrate the application of 
the method of allocation in this paragraph (c)(2).

    Example 1. (i) Employer A operates four qualified separate lines of 
business as determined under Sec.  1.414(r)-1(b) for the testing year, 
consisting of a software developer, a health food products supplier, a 
real estate developer, and a ski equipment manufacturer. In applying 
this section for the first testing day with respect to the testing year, 
Employer A determines that it has a total of 21,000 employees, of whom 
10,000 are substantial-service employees not excludable under section 
410(b)(3) or (b)(4). Pursuant to paragraph (b) of this section, these 
10,000 employees are assigned among Employer A's qualified separate 
lines of business as follows:

----------------------------------------------------------------------------------------------------------------
                                                                Software                                 Ski
                                                               developer   Health food  Real estate   equipment
----------------------------------------------------------------------------------------------------------------
Substantial-Service Employees...............................        2,500        1,000        2,500        4,000
Percentage Assigned to QSLOB................................          25%          10%          25%          40%
----------------------------------------------------------------------------------------------------------------


[[Page 281]]

    (ii) Under these facts, Employer A is not permitted to apply the 
method of allocation in paragraph (c)(2)(ii) of this section, because 
none of its qualified separate lines of business satisfies the 50 
percent requirement in paragraph (c)(3)(ii) of this section.
    Example 2. The facts are the same as in Example 1, except that, 
after allocating all residual shared employees to the ski equipment line 
of business, the software, ski equipment and health food supplier lines 
of business each would satisfy the statutory safe harbor of Sec.  
1.414(r)-5(b), and that the real estate development line of business 
would satisfy the minimum or maximum benefits safe harbor of Sec.  
1.414(r)-5(g). Under these facts, Employer A is permitted to apply the 
method of allocation in this paragraph (c)(2) to allocate all its 
residual shared employees to the ski equipment line of business, because 
the employee assignment percentage of the ski equipment line of business 
exceeds 25 percent and each qualified separate line of business 
satisfies either the statutory safe harbor of Sec.  1.414(r)-5(b) or the 
minimum or maximum benefits safe harbor of Sec.  1.414(r)-5(g).
    Example 3. (i) The facts are the same as in Example 1, except that, 
Employer A chooses not to satisfy the minimum or maximum benefits safe 
harbor of Sec.  1.414(r)-5(g). Instead, Employer A combines the real 
estate developer and ski equipment manufacturer into a single line of 
business. As a result, Employer A has three qualified separate lines of 
business as determined under Sec.  1.414(r)-1(b). Assume that no 
residual shared employee becomes a substantial-service employee as a 
result of the new combination. Employer A's substantial-service 
employees are assigned among Employer A's qualified separate lines of 
business as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                    Real estate/
                                                                          Software     Health food       ski
                                                                          developer                   equipment
----------------------------------------------------------------------------------------------------------------
Substantial-Service Employees.........................................         2,500         1,000         6,500
Percentage Assigned to QSLOB..........................................           25%           10%           65%
----------------------------------------------------------------------------------------------------------------

    (ii) Under these facts, Employer A is permitted to apply the method 
of allocation in this paragraph (c)(2) to allocate all its residual 
shared employees to the combined real estate development and ski 
equipment manufacturing line of business, because more than 50 percent 
of Employer A's substantial-service employees that are taken into 
account for the first testing day are assigned to that qualified 
separate line of business.
    Example 4. (i) The facts are the same as in Example 1, except that, 
of the remaining 11,000 employees of Employer A, 10,000 employees are 
substantial-service employees who are collectively bargained employees. 
Pursuant to paragraph (b) of this section, the 10,000 substantial-
service employees and the 10,000 substantial-service employees who are 
collectively bargained employees are assigned among Employer A's 
qualified separate lines of business as follows:

----------------------------------------------------------------------------------------------------------------
                                                            Software                                     Ski
                                                            developer    Health food   Real estate    equipment
----------------------------------------------------------------------------------------------------------------
Substantial-Service Employees...........................         2,500         1,000         2,500         4,000
Percentage of total substantial-service employees                  25%           10%           25%           40%
 assigned to QSLOB......................................
Substantial-Service Employees (including collectively            2,500         1,000         2,500        14,000
 bargained employees)...................................
Percentage of total employees (including collectively            12.5%            5%         12.5%           70%
 bargained employees) assigned to QSLOB.................
----------------------------------------------------------------------------------------------------------------

    (ii) Thus, the ski equipment line of business satisfies the 25-
percent threshold in paragraph (c)(2)(iv) of this section. In addition, 
the ski equipment's percentage of substantial-service employees is at 
least 60 percent when taking into account substantial-service employees 
who are collectively bargained employees and therefore satisfies the 
requirement under paragraph (c)(2)(iv)(B) of this section. Under these 
facts, Employer A is permitted to apply the method of allocation in this 
paragraph (c)(2) to allocate all its residual shared employees to the 
ski equipment line of business.

    (3) Pro-rata method of allocation--(i) In general. Under the method 
of allocation in this paragraph (c)(3), all residual shared employees 
are allocated among an employer's qualified separate lines of business 
in proportion to the employee assignment percentage of each qualified 
separate line of business, as determined under paragraph (c)(2)(iii) of 
this section.

[[Page 282]]

    (ii) Allocation procedure. The procedure for allocating residual 
shared employees under the method in this paragraph (c)(3) is as 
follows--
    (A) The number of highly compensated residual shared employees who 
are allocated to each qualified separate line of business is equal to 
the product determined by multiplying the total number of highly 
compensated residual shared employees of the employer by the employee 
assignment percentage determined with respect to the qualified separate 
line of business under paragraph (c)(3)(i) of this section;
    (B) The number of nonhighly compensated residual shared employees 
who are allocated to each qualified separate line of business is equal 
to the product determined by multiplying the total number of nonhighly 
compensated residual shared employees of the employer by the employee 
assignment percentage determined with respect to the qualified separate 
line of business under paragraph (c)(3)(i) of this section;
    (C) For purposes of this procedure, the employer is permitted to 
determine which highly compensated residual shares employees and which 
nonhighly compensated residual shared employees are allocated to each 
qualified separate line of business, provided that the required number 
of highly and nonhighly compensated residual shared employees are 
allocated to each qualified separate line of business.
    (iii) Examples. The following example illustrates the application of 
the method of allocation in this paragraph (c)(4).

    Example 1. The facts that are the same as in Example 1 under 
paragraph (c)(2)(v) of this section except that there are no additional 
residual shared employees after the first testing day. Of Employer A's 
1,000 residual shared employees, 800 are highly compensated employees 
and 200 are nonhighly compensated employees. Employer A applies the pro-
rata method of allocation in this paragraph (c)(3). Under these facts, 
the 1,000 residual shared employees are allocated among Employer A's 
qualified separate lines of business as follows:

----------------------------------------------------------------------------------------------------------------
                                                     Software
                                                     developer      Health food     Real estate    Ski equipment
----------------------------------------------------------------------------------------------------------------
Substantial-Service Employees...................           2,500           1,000           2,500           4,000
Percentage Assigned to QSLOB (``employee                     25%             10%             25%             40%
 assignment percentage'').......................
Residual Shared HCEs............................             200              80             200             320
Allocated to QSLOB..............................       (25%X800)       (10%X800)       (25%X800)       (40%X200)
Residual Shared NHCEs...........................              50              20              50              80
Allocated to QSLOB..............................       (25%X200)       (10%X200)       (25%X200)       (40%X200)
----------------------------------------------------------------------------------------------------------------

    (4) HCE percentage ratio method of allocation--(i) In general. Under 
the method of allocation in this paragraph (c)(4), all residual shared 
employees are allocated among an employer's qualified separate lines of 
business according to the highly compensated employee percentage 
assignment ratio of each qualified separate line of business.
    (ii) Highly compensated employee percentage assignment ratio. For 
purposes of this paragraph (c)(4), the highly compensated employee 
percentage assignment ratio of a qualified separate line of business is 
the fraction expressed as a percentage)--
    (A) The numerator of which is the percentage of all employees who 
have previously been assigned to the qualified separate line of business 
under this section with respect to the testing year who are highly 
compensated employees; and
    (B) The denominator of which is the percentage of all employees who 
have previously been assigned to any qualified separate line of business 
under this section with respect to the testing year who are highly 
compensated employees.

Thus, the highly compensated employee percentage assignment ratio of 
each of the employer's qualified separate lines of business is 
recalculated each time a residual shared employee is allocated to a 
qualified separate line of business under this paragraph (c)(5).
    (iii) Allocation procedure. The procedure for allocating all 
residual shared

[[Page 283]]

employees under the method in this paragraph (c)(4) is as follows--
    (A) If there are any qualified separate lines of business with a 
highly compensated employee percentage assignment ratio of less than 50 
percent (as determined immediately before the employee is allocated to a 
qualified separate line of business), the highly compensated residual 
shared employee must be allocated to one of these qualified separate 
lines of business;
    (B) If there are any qualified separate lines of business with a 
highly compensated employee percentage assignment ratio of greater than 
200 percent (as determined immediately before the employee is allocated 
to a qualified separate line of business), the nonhighly compensated 
residual shared employee must be allocated to one of these qualified 
separate lines of business;
    (C) If there are no qualified separate lines of business with a 
highly compensated employee percentage assignment ratio less than 50 
percent, a highly compensated residual shared employee may be allocated 
to any qualified separate line of business with a highly compensated 
employee percentage assignment ratio of no more than 200 percent, 
provided that the employee's allocation to the qualified separate line 
of business does not cause its highly compensated employee percentage 
assignment ratio to exceed 200 percent (as determined immediately after 
the employee is allocated to the qualified separate line of business);
    (D) If there are no qualified separate lines of business with a 
highly compensated employee percentage assignment ratio greater than 200 
percent, a nonhighly compensated residual shared employee may be 
allocated to any qualified separate line of business with a highly 
compensated employee percentage assignment ratio of no less than 50 
percent, provided that the employee's allocation to the qualified 
separate line of business does not cause its highly compensated employee 
percentage assignment ratio to fall below 50 percent (as determined 
immediately after the employee is allocated to the qualified separate 
line of business);
    (E) For purposes of this procedure, the employer is permitted to 
determine which highly compensated residual shared employees and which 
nonhighly compensated residual shared employees are allocated to each 
qualified separate line of business, provided that the requirements of 
this paragraph (c)(4)(iii) are satisfied.
    (5) Small group method--(i) In general. Under the method of 
allocation provided for in this paragraph (c)(5), each residual shared 
employee is allocated to a qualified separate line of business chosen by 
the employer. This method does not apply unless all of the requirements 
of paragraphs (c)(5)(ii), (iii), and (iv) of this section are satisfied.
    (ii) Size of group. The total number of the employer's residual 
shared employees allocated under this paragraph (c) must not exceed 
three percent of all of the employer's employees. For this purpose, the 
employer's employees include only those employees taken into account 
under paragraph (c)(2)(iii)(B) of this section.
    (iii) Composition of qualified separate line of business. The 
qualified separate line of business to which the residual shared 
employee is allocated must have an employee assignment percentage under 
paragraph (c)(2)(iii) of this section of at least ten percent. In 
addition, the qualified separate line of business to which the residual 
shared employee is allocated must satisfy the statutory safe harbor 
under Sec.  1.414(r)-5(b) after the employee is so allocated.
    (iv) Reasonable allocation. The allocation of residual shared 
employees under the small group method provided for in this paragraph 
(c)(5) must be reasonable. Reasonable allocations generally include 
allocations that are based on the level of services that the residual 
shared employees provide to the employer's qualified separate lines of 
business, the similar treatment of similarly situated residual shared 
employees, and other bona fide business criteria; in contrast, an 
allocation that is designed to maximize benefits for select employees is 
not considered a reasonable allocation. For example, allocation of all 
residual shared employees who work in the same department, or at the 
same location, to the same qualified separate line of business would be 
an indication of reasonableness. However, allocation of a group of

[[Page 284]]

similarly situated residual shared employees to a qualified separate 
line of business for which they provide minimal services might not be 
considered reasonable. In addition, the allocation of the professional 
employees of a department to one qualified separate line of business and 
the allocation of the support staff of the same department to a 
different qualified separate line of business would not be reasonable.

[T.D. 8376, 56 FR 63453, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32920, June 27, 1994]



Sec.  1.414(r)-8  Separate application of section 410(b).

    (a) General rule. If an employer is treated as operating qualified 
separate lines of business for purposes of section 410(b) in accordance 
with Sec.  1.414(r)-1(b) for a testing year, the requirements of section 
410(b) must be applied in accordance with this section separately with 
respect to the employees of each qualified separate line of business for 
purposes of testing all plans of the employer for plan years that begin 
in the testing year (other than a plan tested under the special rule for 
employer-wide plans in Sec.  1.414(r)-(c)(2)(ii) for such a plan year). 
Conversely, if an employer is not treated as operating qualified 
separate lines of business for purposes of section 410(b) in accordance 
with Sec.  1.414(r)-1(b) for a testing year, the requirements of section 
410(b) must be applied on an employer-wide basis for purposes of testing 
all plans of the employer for plan years that begin in the testing year. 
See Sec.  1.414(r)-1(c)(2) and (d)(6). Paragraph (b) of this section 
explains how the requirements of section 410(b) are applied separately 
with respect to the employees of a qualified separate line of business 
for purposes of testing a plan. Paragraph (c) of this section explains 
the coordination between sections 410(b) and 401(a)(4). Paragraph (d) of 
this section provides certain supplementary rules necessary for the 
application of this section.
    (b) Rules of separate application--(1) In general. If the 
requirements of section 410(b) are applied separately with respect to 
the employees of each qualified separate line of business operated by 
the employer for a testing year, a plan (other than a plan that is 
tested under the special rule for employer-wide plans in Sec.  1.414(r)-
1(c)(2)(ii) for a plan year) satisfies the requirements of section 
410(b) only if--
    (i) The plan satisfies section 410(b)(5)(B) of an employer-wide 
basis; and
    (ii) The plan satisfies section 410(b) on a qualified-separate-line-
of-business basis.
    (2) Satisfaction of section 410(b)(5)(B) on an employer-wide basis--
(i) General rule. Section 410(b)(5)(B) provides that a plan is not 
permitted to be tested separately with respect to the employees of a 
qualified separate line of business unless the plan benefits a 
classification of employees found by the Secretary to be 
nondiscriminatory. A plan satisfies this requirement only if the plan 
satisfies either the ratio percentage test of Sec.  1.410(b)-2(b)(2) or 
the nondiscriminatory classification test of Sec.  1.410(b)-4 (without 
regard to the average benefit percentage test of Sec.  1.410(b)-5), 
taking into account the other applicable provisions of Sec. Sec.  
1.410(b)-2 through 1.410(b)-10. For this purpose, the nonexcludable 
employees of the employer taken into account in testing the plan under 
section 410(b) are determined under Sec.  1.410(b)-6, without regard to 
the exclusion in Sec.  1.410(b)-6(e) for employees of other qualified 
separate lines of business of the employer. Thus, in testing a plan 
separately with respect to the employees of one qualified separate line 
of business under this paragraph (b)(2), the otherwise nonexcludable 
employees of the employer's other qualified separate lines of business 
are not treated as excludable employees. However, under the definition 
of ``plan'' in paragraph (d)(2) of this section, these employees are not 
treated as benefiting under the plan for purposes of applying this 
paragraph (b)(2).
    (ii) Application of facts and circumstances requirements under 
nondiscriminatory classification test. The fact that an employer has 
satisfied the qualified-separate-line-of-business requirements in 
Sec. Sec.  1.414(r)-1 through 1.414(r)-7 is taken into account in 
determining whether a classification of employees benefiting under a 
plan that falls between the safe and unsafe harbors satisfies Sec.  
1.410(b)-4(c)(3) (facts and circumstances requirements). Except

[[Page 285]]

in unusual circumstances, this fact will be determinative.
    (iii) Modification of unsafe harbor percentage for plans satisfying 
ratio percentage test at 90 percent level--(A) General rule. If a plan 
benefits a group of employees for a plan year that would satisfy the 
ratio percentage test of Sec.  1.410(b)-2(b)(2) on a qualified-separate-
line-of-business basis under paragraph (b)(3) of this section if the 
percentage in Sec.  1.410(b)-2(b)(2) were increased to 90 percent, the 
unsafe harbor percentage in Sec.  1.410(b)-4(c)(4)(ii) for the plan is 
reduced by five percentage points (not five percent) for the plan year 
and is applied without regard to the requirement that the unsafe harbor 
percentage not be less than 20 percent. Thus, if the requirements of 
this paragraph (b)(2)(iii)(A) are satisfied, the unsafe harbor 
percentage in Sec.  1.410(b)-4(c)(4)(ii) is treated as 35 percent, 
reduced by \3/4\ of a percentage point for each whole percentage point 
by which the nonhighly compensated employee concentration percentage 
exceeds 60 percent.
    (B) Facts and circumstances alternative. If a plan satisfies the 
requirements of paragraph (b)(2)(iii)(A) of this section, but has a 
ratio percentage on an employer-wide basis that falls below the unsafe 
harbor percentage determined under paragraph (b)(2)(iii)(A) of this 
section, the plan nonetheless is deemed to satisfy section 410(b)(5)(B) 
on an employer-wide basis if the Commissioner determines that, on the 
basis of all of the relevant facts and circumstances, the plan benefits 
such employees as qualify under a classification of employees that does 
not discriminate in favor of highly compensated employees.
    (3) Satisfaction of section 410(b) on a qualified-separate-line-of-
business basis. A plan satisfies section 410(b) on a qualified-separate-
line-of-business basis only if the plan satisfies either the ratio 
percentage test of Sec.  1.410(b)-2(b)(2) or the average benefit test of 
Sec.  1.410(b)-2(b)(3) (including the nondiscriminatory classification 
test of Sec.  1.410(b)-4 and the average benefit percentage test of 
Sec.  1.410(b)-5), taking into account the other applicable provisions 
of Sec. Sec.  1.410(b)-2 through 1.410(b)-10. For this purpose, the non-
excludable employees of the employer taken into account in testing the 
plan under section 40(b) are determined under Sec.  1.410(b)-6, taking 
into account the exclusion in Sec.  1.410(b)-6(e) for employees of other 
qualified separate lines of business of the employer. Thus, in testing a 
plan separately with respect to the employees of one qualified separate 
line of business under this paragraph (b)(3), all employees of the 
employer's other qualified separate lines of business are treated as 
excludable employees.
    (4) Examples. The following examples illustrate the application of 
this paragraph (b).

    Example 1. (i) Employer A is treated as operating qualified separate 
lines of business for purposes of section 410(b) in accordance with 
Sec.  1.414(r)-1(b) for the 1994 testing year with respect to all of its 
plans. Employer A operates two qualified separate lines of business as 
determined under Sec.  1.414(r)-1(b)(2), Line 1 and Line 2. Employer A 
maintains only two plans, Plan X which benefits solely employees of Line 
1, and Plan Y which benefits solely employees of Line 2. In testing Plan 
X under section 410(b) with respect to the first testing day for the 
plan year of Plan X beginning in the 1994 testing year, it is determined 
that Employer A has 2,100 nonexcludable employees, of whom 100 are 
highly compensated employees and 2,000 are nonhighly compensated 
employees. After applying Sec.  1.414(r)-7 to these employees, 50 of the 
highly compensated employees and 100 of the nonhighly compensated 
employees are treated as employees of Line 2, and the remaining 50 
highly compensated employees and the remaining 1,900 nonhighly 
compensated employees are treated as employees of Line 1.
    (ii) All of the highly compensated employees and 1,300 of the 
nonhighly compensated employees who are treated as employees of Line 1 
benefit under Plan X. Thus, on an employer-wide basis, Plan X benefits 
50 percent of all Employer A's highly compensated employees (50 out of 
100) and 65 percent of all Employer A's nonhighly compensated employees 
(1,300 out of 2,000). Plan X consequently has a ratio percentage 
determined on an employer-wide basis of 130 percent (65% / 50%), see 
Sec.  1.410(b)-9, and could satisfy section 410(b) under the ratio 
percentage test of Sec.  1.410(b)-2(b)(2) if that section were applied 
on an employer-wide basis without regard to the provisions of this 
paragraph (b). Under paragraph (a) of this section, however, the 
requirements of section 410(b) must be applied separately with respect 
to the employees of each qualified separate line of business operated by 
Employer A for all plans of Employer A for plan years that begin in the 
1994 testing year. This rule does

[[Page 286]]

not apply to plans tested under the special rule for employer-wide plans 
in Sec.  1.414(r)-1(c)(2)(ii). Plan X benefits only 65 percent of the 
nonhighly compensated employees of Employer A, however, and therefore 
cannot satisfy the 70 percent requirement necessary to be tested under 
that rule. As a result, for the plan year of Plan X beginning in the 
1994 testing year, Plan X is not permitted to satisfy section 410(b) on 
an employer-wide basis and, instead, is only permitted to satisfy 
section 410(b) separately with respect to the employees of each 
qualified separate line of business operated by Employer A, in 
accordance with paragraphs (b)(2) and (b)(3) of this section.
    Example 2. The facts are the same as in Example 1. All of the 50 
highly compensated employees treated as employees of Line 2 benefit 
under Plan Y, and 80 of the 100 nonhighly compensated employees treated 
as employees of Line 2 benefit under Plan Y. Thus, Plan Y benefits 50 
percent of all Employer A's highly compensated employees (50 out of 100) 
and only 4 percent of all Employer A's nonhighly compensated employees 
(80 out of 2,000). Thus, while Plan Y has a ratio percentage of 80 
percent (80% / 100%) on a qualified-separate-line-of-business basis, it 
has a ratio percentage of only 8 percent (4% / 50%) on an employer-wide 
basis. See Sec.  1.410(b)-9. Under Sec.  1.410(b)-4(c)(4)(iii), the 
nonhighly compensated employee concentration percentage is 2,000/2,100 
or 95 percent. Because 8 percent is less than 20 percent (the unsafe 
harbor percentage applicable to Employer A under Sec.  1.410(b)-
4(c)(4)(ii)), Plan Y does not satisfy the nondiscriminatory 
classification test of Sec.  1.410(b)-4 on an employer-wide basis. Nor 
does Plan Y satisfy the ratio percentage test of Sec.  1.410(b)-2(b)(2) 
on an employer-wide basis, since 8 percent is less than 70 percent. 
Under these facts, Plan Y does not satisfy section 410(b)(5)(B) on an 
employer-wide basis in accordance with paragraph (b)(2) of this section 
for the plan year of Plan Y beginning in the 1994 testing year, and 
therefore fails to satisfy section 410(b) for that year. This is true 
even though Plan Y satisfies section 410(b) on a qualified-separate-
line-of-business basis in accordance with paragraph (b)(3) of this 
section.
    Example 3. The facts are the same as in Example 2, except that all 
of the employees treated as employees of Line 2 benefit under Plan Y. 
Thus, Plan Y benefits 50 percent of all of Employer A's highly 
compensated employees (50 out of 100) and 5 percent of all of Employer 
A's nonhighly compensated employees (100 out of 2,000). Plan Y therefore 
has a ratio percentage of 100 percent (100% / 100%) on a qualified-
separate-line-of-business basis and a ratio percentage of 10 percent (5% 
/ 50%) on an employer-wide basis. Because Plan Y has a ratio percentage 
of at least 90 percent on a qualified-separate-line-of-business basis, a 
reduced unsafe harbor percentage applies to Plan Y under paragraph 
(b)(2)(iii)(A) of this section. The reduced unsafe harbor percentage 
applicable to Plan Y is 8.75 percent because Employer A's nonhighly 
compensated employee concentration percentage is 95 percent. Plan Y's 
employer-wide ratio percentage of 10 percent therefore exceeds the 
unsafe harbor percentage. Plan Y thus satisfies section 410(b)(5)(B) on 
an employer-wide basis in accordance with paragraph (b)(2) of this 
section for the plan year of Plan Y beginning in the 1994 testing year. 
Plan Y also satisfies section 410(b) on a qualified-separate-line-of-
business basis in accordance with paragraph (b)(3) of this section.
    Example 4. The facts are the same as in Example 3, except that 
Employer A's total nonexcludable nonhighly compensated employees are 
2,500 (rather than 2,000), of whom 100 are treated as employees of Line 
2 and of whom 90 benefit under Plan Y. Plan Y has a ratio percentage of 
90 percent (90% / 100%) on a qualified-separate-line-of-business basis, 
and Employer A's nonhighly compensated employee concentration percentage 
is 2,500/2,600 or 96 percent. Thus, the reduced unsafe harbor percentage 
applicable to Plan Y under paragraph (b)(2)(iii)(A) of this section is 8 
percent. Plan Y benefits 50 percent of all of Employer A's highly 
compensated employees (50 out of 100) and 3.6 percent of all of Employer 
A's nonhighly compensated employees (90 out of 2,500). Plan Y therefore 
has a ratio percentage of only 7.2 percent (3.6% / 50%) on an employer-
wide basis, which falls below the reduced unsafe harbor percentage of 8 
percent. Nonetheless, under paragraph (b)(2)(iii)(B) of this section, 
Plan Y will be deemed to satisfy section 410(b)(5)(B) on an employer-
wide basis if the Commissioner determines that, on the basis of all of 
the relevant facts and circumstances, the plan benefits such employees 
as qualify under a classification of employees that does not 
discriminate in favor of highly compensated employees.
    Example 5. (i) The facts are the same as in Example 1, except that 
Plan X benefits only 950 of the employees of Line 1. Assume Plan X 
satisfies the reasonable classification requirement of Sec.  1.410(b)-
4(b) on an employer-wide basis. Plan X benefits 50 percent of all 
Employer A's highly compensated employees (50 out 100) and 47.5 percent 
of all Employer A's nonhighly compensated employees (950 out of 2,000). 
Plan X consequently has a ratio percentage determined on an employer-
wide basis of 95 percent (47.5% / 50%), see Sec.  1.410(b)-9, and thus 
satisfies section 410(b)(5)(B) on an employer-wide basis.
    (ii) Plan X has a ratio percentage determined on a qualified-
separate-line-of-business basis of 50 percent (50% / 100%). Because 50 
percent is less than 70 percent, Plan X must satisfy the 
nondiscriminatory classification test of Sec.  1.410(b)-4 and the 
average

[[Page 287]]

benefit percentage test of Sec.  1.410(b)-5 on a qualified-separate-
line-of-business basis in order to satisfy the other requirements of 
section 410(b). Plan X satisfies the nondiscriminatory classification 
requirement of Sec.  1.410(b)-4(c) on a qualified-separate-line-of-
business because its ratio percentage determined on a qualified-
separate-line-of-business basis is more than 22.25 percent, the safe 
harbor percentage applicable to Line 1 under Sec.  1.410(b)-4(c)(4)(i). 
Because Plan X satisfies the reasonable classification requirement of 
Sec.  1.410(b)-4(b) on an employer-wide basis, it is also deemed to 
satisfy this requirement on a qualified-separate-line-of-business basis. 
See Sec.  1.410(b)-7(c)(5). In determining whether Plan X satisfies the 
average benefit percentage test of Sec.  1.410(b)-5, only Plan X and 
only employees of Line 1 are taken into account. See Sec. Sec.  
1.410(b)-6(e) and 1.410(b)-7(e).
    Example 6. The facts are the same as in Example 2, except that, 
prior to the 1994 testing year, Employer A merges Plan X and Plan Y so 
that they form a single plan within the meaning of section 414(l). Under 
the definition of ``plan'' in paragraph (d)(2) of this section, however, 
the portion of the newly merged plan that benefits employees of Line 2 
(former Plan Y) is still treated as a separate plan from the portion of 
the newly merged plan that benefits employees of Line 1 (former Plan X). 
The portion of the newly merged plan that benefits employees of Line 2 
(former Plan Y) fails to satisfy section 410(b) for the reasons stated 
in Example 2. Under these facts, because the portion of the newly merged 
plan that benefits employees of Line 2 fails to satisfy section 410(b), 
the entire newly merged plan fails to satisfy section 410(b) for the 
plan year of the newly merged plan that begins in the 1994 testing year. 
See paragraph (d)(5) of this section.

    (c) Coordination of section 401(a)(4) with section 410(b)--(1) 
General rule. For purposes of these regulations, the requirements of 
section 410(b) encompass the requirements of section 401(a)(4) 
(including, but not limited to, the permitted disparity rules of section 
401(l), the actual deferral percentage test of section 401(k)(3), and 
the actual contribution percentage test of section 401(m)(2)). 
Therefore, if the requirements of section 410(b) are applied separately 
with respect to the employees of each qualified separate line of 
business of an employer for purposes of testing one or more plans of the 
employer for plan years that begin in a testing year, the requirements 
of section 401(a)(4) must also be applied separately with respect to the 
employees of the same qualified separate lines of business for purposes 
of testing the same plans for the same plan years. Furthermore, if 
section 401(a)(4) requires that a group of employees under the plan 
satisfy section 410(b) for purposes of satisfying section 401(a)(4), 
section 410(b) must be applied for this purpose in the same manner 
provided in paragraph (b) of this section. See, for example, Sec. Sec.  
1.401(a)(4)-2(c)(1) and 1.401(a)(4)-3(c)(1) (requiring each rate group 
of employees under a plan to satisfy section 410(b)), Sec.  1.401(a)(4)-
4(b) (requiring the group of employees to whom each benefit, right, or 
feature is currently available under a plan to satisfy section 410(b)), 
and Sec.  1.401(a)(4)-9(c)(1) (requiring the group of employees included 
in each component plan into which a plan is restructured to satisfy 
section 410(b)). Thus, the group of employees must satisfy section 
410(b)(5)(B) on an employer-wide basis in accordance with paragraph 
(b)(2) of this section and also must satisfy section 410(b) on a 
qualified-separate-line-of-business basis in accordance with paragraph 
(b)(3) of this section, in both cases as if the group of employees were 
the only employees benefiting under the plan.
    (2) Examples. The following examples illustrate the application of 
the rule in this paragraph (c).

    Example 1. Employer B is treated as operating qualified separate 
lines of business for purposes of section 410(b) in accordance with 
Sec.  1.414(r)-1(b) for the 1993 testing year. Employer B operates two 
qualified separate lines of business as determined under Sec.  1.414(r)-
1(b)(2), Line 1 and Line 2. Employer B maintains Plan Z, which benefits 
employees in both Line 1 and Line 2. Under the definition of ``plan'' in 
paragraph (d)(2) of this section, the portion of Plan Z that benefits 
employees of Line 1 is treated as a separate plan from the portion of 
Plan Z that benefits employees of Line 2. Under this paragraph (c), this 
result applies for purposes of both section 410(b) and section 
401(a)(4).
    Example 2. The facts are the same as in Example 1, except that Plan 
Z benefits solely employees of Line 1. In testing Plan Z under section 
401(a)(4) for the plan year of Plan Z beginning in the 1993 testing 
year, Employer B restructures Plan Z into several component plans 
(within the meaning of Sec.  1.401(a)(4)-9(c)). Under Sec.  1.401(a)(4)-
9(c)(1), each of these component plans is required to satisfy section 
410(b). This paragraph (c) requires that each of the component plans be

[[Page 288]]

tested separately with respect to the employees of each qualified 
separate line of business operated by Employer B. This testing must be 
done in accordance with paragraph (b) of this section. Consequently, 
each component plan must satisfy section 410(b)(5)(B) on an employer-
wide basis in accordance with paragraph (b)(2) of this section and must 
also satisfy section 410(b) on a qualified-separate-line-of-business 
basis in accordance with paragraph (b)(3) of this section.
    Example 3. The facts are the same as in Example 1, except that Plan 
Z is a profit-sharing plan, and contributions to Plan Z are made 
pursuant to cash or deferred arrangement in which all employees of 
Employer B are eligible to participate. Assume that, as a result, Plan Z 
satisfies the requirements to be tested under the special rule for 
employer-wide plans in Sec.  1.414(r)-1(c)(2)(ii). Under these facts, 
the requirements of sections 410(b), 401(a)(4) and 401(k), including the 
actual deferral percentage test of section 401(k)(3) and Sec.  1.401(k)-
1(b), would generally be required to be applied separately to the 
portions of Plan Z that benefit the employees of Line 1 and Line 2, 
respectively. However, if Plan Z is tested under the special rule in 
Sec.  1.414(r)-1(c)(2)(ii), these requirements must be applied on an 
employer-wide basis.

    (d) Supplementary rules--(1) In general. This paragraph (d) provides 
certain supplementary rules necessary for the application of this 
section.
    (2) Definition of plan. For purposes of this section, the term plan 
means a plan within the meaning of Sec.  1.410(b)-7(a) and (b), after 
application of the mandatory disaggregation rules of Sec.  1.410(b)-7(c) 
(including the mandatory disaggregation rule for portions of a plan that 
benefit employees of different qualified separate lines of business) and 
the permissive aggregation rules of Sec.  1.410(b)-7(d). Thus, for 
purposes of this section, the portion of a plan that benefits employees 
of one qualified separate line of business is treated as a separate plan 
from the other portions of the same plan that benefit employees of other 
qualified separate lines of business of the employer, unless the plan is 
tested under the special rule for employer-wide plans in Sec.  1.414(r)-
1(c)(2)(ii) for the plan year.
    (3) Employees of a qualified separate line of business. For purposes 
of applying paragraph (b) of this section with respect to a testing day, 
the employees of each qualified separate line of business of the 
employer are determined by applying Sec.  1.414(r)-7 to the employees of 
the employer otherwise taken into account under section 410(b) for the 
testing day. For purposes of applying paragraph (c) of this section with 
respect to a testing day, the employees of each qualified separate line 
of business of the employer are determined by applying Sec.  1.414(r)-7 
to the employees of the employer otherwise taken into account under 
section 410(a)(4) for the testing day. For the definition of testing 
day, see Sec.  1.414(r)-11(b)(6).
    (4) Consequences of failure. If a plan fails to satisfy either 
paragraph (b)(2), (b)(3), or (c)(1) of this section, the plan (and any 
plan of which it constitutes a portion) fails to satisfy section 401(a). 
However, this failure alone does not cause the employer to fail to be 
treated as operating qualified separate lines of business in accordance 
with Sec.  1.414(r)-1(b), unless the employer is relying on benefits 
provided under the plan to satisfy the minimum benefit portion of the 
safe harbor in Sec.  1.414(r)-5(g)(2) with respect to at least one of 
its qualified separate lines of business.

[T.D. 8376, 56 FR 63457, Dec. 4, 1991, as amended by T.D. 8376, 57 FR 
52591, Nov. 4, 1992; T.D. 8548, 59 FR 32921, June 27, 1994; T.D. 9849, 
84 FR 9234, Mar. 14, 2019]



Sec.  1.414(r)-9  Separate application of section 401(a)(26).

    (a) General rule. If an employer is treated as operating qualified 
separate lines of business for purposes of section 401(a)(26) in 
accordance with Sec.  1.414(r)-1(b) for a testing year, the requirements 
of section 401(a)(26) must be applied separately with respect to the 
employees of each qualified separate line of business for purposes of 
testing all plans of the employer for plan years that begin in the 
testing year (other than a plan tested under the special rule for 
employer-wide plans in Sec.  1.414(r)-1(c)(3)(ii) for such a plan year). 
Conversely, if an employer is not treated as operating qualified 
separate lines of business for purposes of section 401(a)(26) in 
accordance with Sec.  1.414(r)-1(b) for a testing year, the requirements 
of section 401(a)(26) must be applied on an employer-wide basis for

[[Page 289]]

purposes of testing all plans of the employer for plan years that begin 
in the testing years. See Sec.  1414(r)-1(c)(3) and (d)(6). Paragraph 
(b) of this section explains how the requirements of section 401(a)(26) 
are applied separately with respect to the employees of a qualified 
separate line of business for purposes of testing a plan. Paragraph (c) 
of this section provides certain supplementary rules necessary for the 
application of this section.
    (b) Requirements applicable to a plan. If the requirements of 
section 401(a)(26) are applied separately with respect to the employees 
of a qualified separate line of business for a testing year, a plan 
(other than a plan that is tested under the special rule for employer-
wide plans in Sec.  1.414(r)-1(c)(3)(ii) for a plan year) satisfies 
section 401(a)(26) only if it satisfies the requirements of Sec. Sec.  
1.401(a)(26)-1 through 1.401(a)(26)-9 on a qualified-separate-line-of-
business basis. For this purpose, the nonexcludable employees of the 
employer taken into account in testing the plan under section 401(a)(26) 
are determined under Sec.  1.401(a)(26)-6(b), taking into account the 
exclusion in Sec.  1.401(a)(26)-6(b)(8) for employees of other qualified 
separate lines of business of the employer. Thus, in testing a plan 
separately with respect to the employees of one qualified separate line 
of business under this paragraph (b), all employees of the employer's 
other qualified separate lines of business are treated as excludable 
employees.
    (c) Supplementary rules--(1) In general. This paragraph (c) provides 
certain supplementary rules necessary for the application of this 
section.
    (2) Definition of plan. For purposes of this section, the term plan 
mean a plan within the meaning of Sec.  1.401(a)(26)-2(c) and (d), 
including the mandatory disaggregation rule of Sec.  1.401(a)(26)-
2(d)(6) for portions of a plan that benefit employees of different 
qualified separate lines of business. Thus, for purposes of this 
section, the portion of a plan that benefits employees of one qualified 
separate line of business is treated as a separate plan from the other 
portions of the same plan that benefit employees of other qualified 
separate lines of business of the employer, unless the plan is tested 
under the special rule for employer-wide plans in Sec.  1.414(r)-
1(c)(3)(ii) for the plan year.
    (3) Employees of a qualified separate line of business. For purposes 
of applying paragraph (b)(2) of this section with respect to a section 
401(a)(26) testing day, the employees of each qualified separate line of 
business of the employer are determined by applying Sec.  1.414(r)-7 to 
the employees of the employer otherwise taken into account under section 
401(a)(26) for the section 401(a)(26) testing day. For the definition of 
section 401(a)(26) testing day, see Sec.  1.414(r)-11(b)(8).
    (4) Consequences of failure. If a plan fails to satisfy paragraph 
(b)(2) of this section, the plan (and any plan of which it constitutes a 
portion) fails to satisfy section 401(a). However, this failure alone 
would not cause the employer to fail to be treated as operating 
qualified separate lines of business in accordance with Sec.  1.414(r)-
1(b), unless the employer is relying on benefits provided under the plan 
to satisfy the minimum benefit portion of the safe harbor in Sec.  
1.414(r)-5(g)(2) with respect to at least one of its qualified separate 
lines of business.

[T.D. 8376, 56 FR 63459, Dec. 4, 1991]



Sec.  1.414(r)-10  Separate application of section 129(d)(8). [Reserved]



Sec.  1.414(r)-11  Definitions and special rules.

    (a) In general. This section contains certain definitions and 
special rules applicable under these regulations. Paragraph (b) of this 
section provides certain definitions that apply for purposes of these 
regulations. Paragraph (c) of this section provides averaging rules 
under which certain provisions of these regulations may be applied on 
the basis of a two-year or a three-year average.
    (b) Definitions--(1) In general. In applying the provisions of this 
section and of Sec. Sec.  1.414(r)-1 through 1.414(r)-10, unless 
otherwise provided, the definitions in this paragraph (b) govern in 
addition to the definitions in Sec.  1.410(b)-9.

[[Page 290]]

    (2) Substantial-service employee. An employee is a substantial-
service employee with respect to a line of business for a testing year 
if at least 75 percent of the employee's services are provided to that 
line of business for that testing year within the meaning of Sec.  
1.414(r)-3(c)(5). In addition, if an employee provides at least 50% and 
less than 75% of the employee's services to a line of business for the 
testing year within the meaning of Sec.  1.414(r)-3(c)(5), the employer 
may treat that employee as a substantial-service employee with respect 
to that line of business provided the employee is so treated for all 
purposes of these regulations. The employer may choose such treatment 
separately with respect to each employee.
    (3) Top-paid employee. Generally, an employee is a top-paid employee 
with respect to a line of business for a testing year if the employee is 
among the top 10 percent by compensation of those employees who provide 
services to that line of business for that testing year within the 
meaning of Sec.  1.414(r)-3(c)(5) and who are not substantial-service 
employees within the meaning of paragraph (b)(2) of this section with 
respect to any other line of business. In addition, in determining the 
group of top-paid employees, the employer may choose to disregard all 
employees who provide less than 25 percent of their services to the line 
of business. For purposes of this paragraph (b)(3), an employee's 
compensation is the compensation used to determine the employee's status 
as a highly or nonhighly compensated employee under section 414(q) for 
purposes of applying section 410(b) with respect to the first testing 
day. For this purpose, only compensation received during the 
determination year (within the meaning of Sec.  1.414(q)-1T, Q&A-13) is 
taken into account. See Sec.  1.414(r)-3(c)(7) for examples of the 
determination of top-paid employee.
    (4) Residual shared employee. An employee is a residual shared 
employee for a testing year if the employee is not a substantial-service 
employee with respect to any line of business for the testing year.
    (5) Testing year. The term testing year means the calendar year.
    (6) Testing day. The term testing day means any day on which Sec.  
1.410(b)-8(a)(1) requires any plan (within the meaning of Sec.  
1.414(r)-8(d)(2)) of the employer actually to satisfy section 410(b) 
with respect to plan year that begins in the testing year. Thus, if a 
plan is required to satisfy section 410(b) on one day within each 
quarter of the plan year under the quarterly testing option of Sec.  
1.410(b)-8(a)(3), each of those four days is a testing day. Similarly, 
if a plan is required to satisfy section 410(b) on every day of the plan 
year under the daily testing option of Sec.  1.410(b)-8(a)(2), every day 
of the plan year is a testing day.
    (7) First testing day. The term first testing day means the testing 
day that occurs earliest in time of all the testing days under all plans 
of the employer with respect to the testing year. If a plan is tested 
under the annual testing option of Sec.  1.410(b)-8(a)(4) (other than 
for purposes of the average benefit percentage test of Sec.  1.410(b)-5) 
for a plan year that begins in a testing year, then, solely for purposes 
of determining the first testing day in a testing year, the employer may 
treat any day in the plan year as a testing day, provided that the 
coverage of each plan of the employer on the day selected is reasonably 
representative of the coverage of the plan over the entire plan year. 
The first testing day with respect to a testing year must fall within 
that testing year.
    (8) Section 401(a)(26) testing day. The term section 401(a)(26) 
testing day means any day on which Sec.  1.401(a)(26)-7(a) or (b) 
requires any plan of the employer actually to satisfy section 401(a)(26) 
with respect to a plan year that begins in the testing year. In no event 
may a section 401(a)(26) testing day with respect to a testing year fall 
before the first testing day for that testing year. For purposes of this 
paragraph (b)(8), the term plan has the same meaning as in Sec.  
1.414(r-9(c)(2).
    (c) Averaging rules--(1) In general. The provisions specified in 
this paragraph (c) are permitted to be applied based on the average of 
the percentages for the current testing year and the consecutive testing 
years (not to exceed four consecutive testing years) immediately 
preceding the current testing year.

[[Page 291]]

    (2) Specified provisions. The provisions specified in this paragraph 
(c) are--
    (i) The 90-percent separate employee workforce requirement of Sec.  
1.414(r)-3(b)(4);
    (ii) The 80-percent separate management requirement of Sec.  
1.414(r)-3(b)(5);
    (iii) The 25-percent provision-to-customers requirement of Sec.  
1.414(r)-3(d)(2)(iii);
    (iv) The minimum and maximum highly compensated employee percentage 
ratios under the statutory safe harbor of Sec.  1.414(r)-5(b)(1)(i) and 
(ii) (50 percent and 200 percent, respectively), but not the 10-percent 
exception in Sec.  1.414(r)-5(b)(4);
    (v) The employee assignment percentage applied for purposes of the 
dominant line of business method of allocating residual shared employees 
under Sec.  1.414(r)-7(c)(2) and the pro-rata method for allocating 
residual shared employees under Sec.  1.414(r)-7(c)(3).
    (3) Averaging of large fluctuations not permitted. A provision is 
not permitted to be applied based on an average determined under this 
paragraph (c) if the percentage for any testing year taken into account 
in calculating the average falls below a minimum percentage, or exceeds 
a maximum percentage, by more than 10 percent (not 10 percentage points) 
of the respective minimum or maximum percentage. Thus, for example, the 
statutory safe harbor of Sec.  1.414(r)-5(b) is not permitted to be 
applied based on an average determined under this paragraph (c) if the 
percentage for any testing year taken into account in calculating the 
average falls below 45 percent (which is 10 percent below the 50-percent 
minimum) or exceeds 220 percent (which is 10 percent above the 200-
percent maximum).
    (4) Consistency requirements. A provision is permitted to be applied 
on an averaging basis under this paragraph (c) regardless of how any 
other provision is applied, except in the case of the separate employee 
workforce and separate management requirements of Sec.  1.414(r)-3(b)(4) 
and (5), which each must be applied on the same basis as the other. A 
provision is also permitted to be applied on an averaging basis under 
this paragraph (c) for a testing year, regardless of how the provision 
is applied for any other testing year. However, once a provision is 
applied on an averaging basis under this paragraph (c) for a testing 
year, it must be applied on the same basis to all the employer's lines 
of business to which the provision is applied for the testing year. The 
percentage for a preceding testing year may be taken into account under 
this paragraph (c) only if--
    (i) The employer calculates the percentage for the preceding testing 
year in the same manner as the employer calculates the percentage for 
the current testing year;
    (ii) The employer is treated as operating qualified separate lines 
of business in accordance with Sec.  1.414(r)-1(b) for the preceding 
testing year; and
    (iii) The employer designated the same lines of business in the 
preceding testing year as in the current testing year.

[T.D. 8376, 56 FR 63460, Dec. 4, 1991, as amended by T.D. 8548, 59 FR 
32922, June 27, 1994]



Sec.  1.414(s)-1  Definition of compensation.

    (a) Introduction--(1) In general. Section 414(s) and this section 
provide rules for defining compensation for purposes of applying any 
provision that specifically refers to section 414(s) or this section. 
For example, section 414(s) is referred to in many of the 
nondiscrimination provisions applicable to pension, profit-sharing, and 
stock bonus plans qualified under section 401(a). In accordance with 
section 414(s)(1), this section defines compensation as compensation 
within the meaning of section 415(c)(3). It also implements the election 
provided in section 414(s)(2) to treat certain deferrals as compensation 
and exercises the authority granted to the Secretary in section 
414(s)(3) to prescribe alternative nondiscriminatory definitions of 
compensation.
    (2) Limitations on scope of section 414(s). Section 414(s) and this 
section do not apply unless a provision specifically refers to section 
414(s) or this section. For example, even though a definition of 
compensation permitted under section 414(s) must be used in determining 
whether the contributions or

[[Page 292]]

benefits under a pension, profit-sharing, or stock bonus plan satisfy a 
certain applicable provision (such as section 401(a)(4)), except as 
otherwise specified, the plan is not required to use a definition of 
compensation that satisfies section 414(s) in calculating the amount of 
contributions or benefits actually provided under the plan.
    (3) Overview. Paragraph (b) of this section provides rules of 
general application that govern a definition of compensation that 
satisfies section 414(s). Paragraph (c) of this section contains 
specific definitions of compensation that satisfy section 414(s) without 
satisfying any additional nondiscrimination requirement under section 
414(s). Paragraph (d) of this section provides rules permitting the use 
of alternative definitions of compensation that satisfy section 414(s) 
as long as the nondiscrimination requirement and other requirements 
described in paragraph (d) of this section are satisfied. Paragraph (e) 
and (f) of this section provide special rules permitting the use of rate 
of compensation, or prior-employer compensation or imputed compensation, 
rather than actual compensation, under a definition of compensation that 
satisfies section 414(s). Paragraph (g) of this section provides other 
special rules, including a special rule for determining the compensation 
of a self-employed individual under an alternate definition of 
compensation. Paragraph (h) of this section provides definitions for 
certain terms used in this section.
    (b) Rules of general application--(1) Use of a definition. Any 
definition of compensation that satisfies section 414(s) may be used 
when a provision explicitly refers to section 414(s) unless the 
reference or this section specifically indicates otherwise.
    (2) Consistency rule--(i) General rule. A definition of compensation 
selected by an employer for use in satisfying an applicable provision 
must be used consistently to define the compensation of all employees 
taken into account in satisfying the requirements of the applicable 
provision for the determination period. For example, although any 
definition of compensation that satisfies section 414(s) may be used for 
section 401(a)(4) purposes, the same definition of compensation 
generally must be used consistently to define the compensation of all 
employees taken into account in determining whether a plan satisfies 
section 401(a)(4). Furthermore, a different definition of compensation 
that satisfies section 414(s) is permitted to be used to determine 
whether another plan maintained by the same employer separately 
satisfies the requirements of section 401(a)(4). Although a definition 
of compensation must be used consistently, an employer may change its 
definition of compensation for a subsequent determination period with 
respect to the applicable provision. Rules provided under any applicable 
provision may modify the consistency requirements of this paragraph 
(b)(2).
    (ii) Scope of consistency rule. Compensation will not fail to be 
defined consistently for a group of employees merely because some 
employees do not receive one or more of the types of compensation 
included in the definition. For example, a definition of compensation 
that includes salary, regular or scheduled pay, overtime, and specified 
types of bonuses will not fail to define compensation consistently 
merely because only salaried employees receive salary and these 
specified types of bonuses and only hourly employees receive regular or 
scheduled pay and overtime.
    (3) Self-employed individuals. Notwithstanding paragraph (b)(1) of 
this section, self-employed individuals' compensation can only be 
determined under paragraph (c)(2) of this section (with or without the 
modification permitted by paragraph (c)(4) of this section or a 
modification permitted by paragraph (c)(5) of this section) or by using 
an equivalent alternative compensation amount determined in accordance 
with paragraph (g)(1) of this section. These limitations on self-
employed individuals do not affect their common-law employees. Thus, the 
compensation of common-law employees of a partnership or sole 
proprietorship may be defined using an alternative definition, provided 
the definition otherwise satisfies paragraph (c)(3), (d), (e), or (f) of 
this section. If an alternative definition of compensation under 
paragraph (c)(3), (d), (e), or

[[Page 293]]

(f) of this section is used for other employees to satisfy an applicable 
provision, the consistency requirement is only met if paragraph (g) of 
this section is used for the self-employed individuals.
    (c) Specific definitions of compensation that satisfy section 
414(s)--(1) General rules. The definitions of compensation provided in 
paragraphs (c)(2) and (c)(3) of this section satisfy section 414(s) and 
need not satisfy any additional requirements under section 414(s). 
Paragraph (c)(2) of this section describes definitions of compensation 
within the meaning of section 415(c)(3). Paragraph (c)(3) of this 
section provides a safe harbor alternative definition that excludes 
certain additional items of compensation. Paragraph (c)(4) of this 
section permits any definition provided in paragraph (c)(2) or (c)(3) of 
this section to include certain types of elective contributions and 
deferred compensation. Paragraph (c)(5) of this section permits certain 
modifications to a definition otherwise provided under this paragraph 
(c).
    (2) Compensation within the meaning of section 415(c)(3). A 
definition of compensation that includes all compensation within the 
meaning of section 415(c)(3) and excludes all other compensation 
satisfies section 414(s). Sections 1.415(c)-2(b) and (c) provide rules 
for determining items of compensation included in and excluded from 
compensation within the meaning of section 415(c)(3). In addition, 
section 414(s) is satisfied by the safe harbor definitions provided in 
Sec.  1.415(c)-2(d)(2), (d)(3) and (d)(4) and any additional definitions 
of compensation prescribed by the Commissioner under the authority 
provided in Sec.  1.415(c)-2(d)(1) that are treated as satisfying 
section 415(c)(3).
    (3) Safe harbor alternative definition. Under the safe harbor 
alternative definition in this paragraph (c)(3), compensation is 
compensation as defined in paragraph (c)(2) of this section, reduced by 
all of the following items (even if includible in gross income): 
reimbursements or other expense allowances, fringe benefits (cash and 
noncash), moving expenses, deferred compensation, and welfare benefits.
    (4) Inclusion of certain deferrals in compensation. Any definition 
of compensation provided in paragraph (c)(2) or (c)(3) of this section 
satisfies section 414(s) even though it is modified to include all of 
the following types of elective contributions and all of the following 
types of deferred compensation--
    (i) Elective contributions that are made by the employer on behalf 
of its employees that are not includible in gross income under section 
125, section 402(e)(3), section 402(h), and section 403(b);
    (ii) Compensation deferred under an eligible deferred compensation 
plan within the meaning of section 457(b) (deferred compensation plans 
of state and local governments and tax-exempt organizations); and
    (iii) Employee contributions (under governmental plans) described in 
section 414(h)(2) that are picked up by the employing unit and thus are 
treated as employer contributions.
    (5) Exclusions applicable solely to highly compensated employees. 
Any definition of compensation that satisfies paragraph (c)(2) or (c)(3) 
of this section, with or without the modification permitted by paragraph 
(c)(4) of this section, may be modified to exclude any portion of the 
compensation of some or all of the employer's highly compensated 
employees (including, for example, any one or more of the types of 
elective contributions or deferred compensation described in paragraph 
(c)(4) of this section).
    (d) Alternative definitions of compensation that satisfy section 
414(s)--(1) General rule. In addition to the definitions provided in 
paragraph (c) of this section, any definition of compensation satisfies 
section 414(s) with respect to employees (other than self-employed 
individuals treated as employees under section 401(c)(1)) if the 
definition of compensation does not by design favor highly compensated 
employees, is reasonable within the meaning of paragraph (d)(2) of this 
section, and satisfies the nondiscrimination requirement in paragraph 
(d)(3) of this section.
    (2) Reasonable definition of compensation--(i) General rule. An 
alternative definition of compensation under this paragraph (d) is 
reasonable under section 414(s) if it is a definition of compensation 
provided in paragraph (c) of

[[Page 294]]

this section, modified to exclude all or any portion of one or more of 
the types of compensation described in paragraph (d)(2)(ii) of this 
section. See paragraph (e) of this section, however, for special rules 
that permit definitions of compensation based on employees' rates of 
compensation and paragraph (f) of this section for special rules that 
permit definitions of compensation that include prior-employer 
compensation or imputed compensation.
    (ii) Items that may be excluded. A reasonable definition of 
compensation is permitted to exclude, on a consistent basis, all or any 
portion of irregular or additional compensation, including (but not 
limited to) one or more of the following: Any type of additional 
compensation for employees working outside their regularly scheduled 
tour of duty (such as overtime pay, premiums for shift differential, and 
call-in premiums), bonuses, or any one or more of the types of 
compensation excluded under the safe harbor alternative definition in 
paragraph (c)(3) of this section. Whether a type of compensation is 
irregular or additional is determined based on all the relevant facts 
and circumstances. A reasonable definition is also permitted to include, 
on a consistent basis, all or any portion of the types of elective 
contributions or deferred compensation described in paragraph (c)(4) of 
this section and, thus, need not include all those types of elective 
contributions or deferred compensation as otherwise required under 
paragraph (c)(4) of this section.
    (iii) Limits on the amount excluded from compensation. A definition 
of compensation is not reasonable if it provides that each employee's 
compensation is a specified portion of the employee's compensation 
measured for the otherwise applicable determination period under another 
definition. For example, a definition of compensation that specifically 
limits each employee's compensation for a determination period to 95 
percent of the employee's compensation using a definition provided in 
paragraph (c) of this section is not reasonable. Similarly, a definition 
of compensation that limits each employee's compensation used to satisfy 
an applicable provision with a 12-month determination period to 
compensation under a definition provided in paragraph (c) of this 
section for one month is not a reasonable definition of compensation. 
However, a definition of compensation is not unreasonable merely because 
it excludes all compensation in excess of a specified dollar amount.
    (3) Nondiscrimination requirement--(i) In general. An alternative 
definition of compensation under this paragraph (d) is nondiscriminatory 
under section 414(s) for a determination period if the average 
percentage of total compensation included under the alternative 
definition of compensation for an employer's highly compensated 
employees, as a group for the determination period does not exceed by 
more than a de minimis amount the average percentage of total 
compensation included under the alternative definition for the 
employer's nonhighly compensated employees as a group.
    (ii) Total compensation--(A) General rule. For purposes of this 
paragraph (d)(3), total compensation must be determined using a 
definition of compensation provided in paragraph (c)(2) of this section, 
either with or without the modification permitted by paragraph (c)(4) of 
this section. Thus, total compensation does not include prior-employer 
compensation or imputed compensation described in paragraph (f)(1) of 
this section (including imputed compensation for a period during which 
an employee performs services for another employer). Total compensation 
taken into account for each employee (including, if added, the elective 
contributions and deferred compensation described in paragraph (c)(4) of 
this section) may not exceed the annual compensation limit of section 
401(a)(17).
    (B) Alternative definitions with exclusions applicable solely to 
highly compensated employees. If an alternative definition of 
compensation contains a provision that excludes amounts from 
compensation and, as described in paragraph (c)(5) of this section, the 
provision only applies in defining the compensation of some highly 
compensated employees, then, for purposes of this paragraph (d)(3), the 
total compensation of any highly compensated

[[Page 295]]

employee subject to the provision must be reduced by any amount excluded 
from the employee's compensation as a result of the provision. However, 
if the provision applies consistently in defining the compensation of 
all highly compensated employees, this adjustment to total compensation 
is not required.
    (iii) Employees taken into account--(A) General rule. In applying 
the requirement of this paragraph (d)(3), the employees taken into 
account are the same employees taken into account in satisfying the 
requirements of the applicable provision for the determination period. 
For example, in determining whether a plan satisfies section 401(a)(4), 
an alternative definition must satisfy this paragraph (d)(3) taking into 
account all employees who benefit under the plan for the plan year 
(within the meaning of Sec.  1.410(b)-3(a)). If an employer is using the 
same alternative definition of compensation to determine whether more 
than one separate plan satisfies section 401(a)(4), the employer is 
permitted to take into account all the employees who benefit under all 
of those plans for the plan year in determining whether the alternative 
definition of compensation being used satisfies this paragraph (d)(3).
    (B) Exclusion of self-employed individuals. In applying the 
requirement of this paragraph (d)(3), self-employed individuals are 
disregarded.
    (C) Certain employees disregarded. If an employee's total 
compensation for the determination period, determined under paragraph 
(d)(3)(ii) and (d)(3)(vi)(B) of this section, is zero, the employee is 
disregarded in determining whether the nondiscrimination requirement of 
paragraph (d)(3) of this section is satisfied for that determination 
period. For example, an employee who does not receive any actual 
compensation during a determination period because the employee is on 
unpaid leave of absence for the entire period, but who is credited with 
imputed compensation described in paragraph (f)(1) of this section, is 
disregarded in determining whether the nondiscrimination requirement of 
this paragraph (d)(3) is satisfied for that determination period.
    (iv) Calculation of average percentages--(A) General rule. To 
determine the average percentages described in paragraph (d)(3)(i) of 
this section, an individual compensation percentage must be calculated 
for each employee in a group, and then the average of the separately 
calculated compensation percentages for each employee in the group must 
be determined. The individual compensation percentage for an employee is 
calculated by dividing the amount of the employee's compensation that is 
included under the alternative definition by the amount of the 
employee's total compensation.
    (B) Other reasonable methods. Notwithstanding paragraph 
(d)(3)(iv)(A) of this section, any other reasonable method is permitted 
to be used to determine the average percentages described in paragraph 
(d)(3)(i) of this section for either or both of the groups (i.e., highly 
compensated employees and nonhighly compensated employees), provided 
that the method cannot reasonably be expected to create a significant 
variance from the average percentage for that group determined using the 
individual-percentage method provided in paragraph (d)(3)(iv)(A) of this 
section. The same method is not required to be used for calculating the 
two average percentages. For example, to determine the average 
percentage for nonhighly compensated employees as a group, an employer 
may calculate an aggregate compensation percentage by dividing the 
aggregate amount of compensation of nonhighly compensated employees that 
are included under the alternative definition by the aggregate amount of 
total compensation of nonhighly compensated employees, provided the 
resulting percentage is not reasonably expected to vary significantly 
from the average percentage produced using the individual-percentage 
method provided in paragraph (d)(3)(iv)(A) of this section because of 
the extra weight given employees with higher compensation.
    (v) Facts and circumstances determination. The determination of 
whether the average percentage of total compensation included for the 
employer's highly compensated employees as a group for a determination 
period exceeds by more than a de minimis amount the

[[Page 296]]

average percentage of total compensation included for the employer's 
nonhighly compensated employees as a group is based on all the relevant 
facts and circumstances. The differences between the percentages for 
prior determination periods may be considered in determining whether the 
amount of the difference between the percentages is more than de 
minimis. In addition, an isolated instance of a more than de minimis 
difference between the compensation percentages that is due to an 
extraordinary unforeseeable event (such as overtime payments to 
employees of a public utility due to a major hurricane) will be 
disregarded if the amount of the difference in prior determination 
periods was de minimis.
    (vi) Special rules for definitions of compensation based on rate of 
compensation or that include prior-employer or imputed compensation--(A) 
Special rule for determining compensation included under an alternative 
definition. If an alternative definition uses rate of compensation or 
includes prior-employer compensation or imputed compensation, the amount 
of each employee's compensation for a determination period that is 
treated as included under the alternative definition for purposes of 
determining the average percentages for the nondiscrimination 
requirement (i.e. the amount used in the numerator) must not be more 
than 100 percent of the employee's total compensation for that period, 
determined under paragraph (d)(3)(ii) and (d)(3)(vi)(B) of this section. 
This limit on the amount of compensation treated as included under the 
alternative definition applies even if the amount of compensation 
actually credited to the employee for the determination period under the 
definition and, thus, used as compensation within the meaning of section 
414(s), exceeds the employee's total compensation for the period.
    (B) Special rule for determining total compensation. If an 
alternative definition uses rate of compensation or includes prior-
employer compensation or imputed compensation, each employee's total 
compensation for purposes of determining the average percentages for the 
nondiscrimination requirement (i.e. the amount used in the denominator) 
must include all the types of elective contributions and deferred 
compensation described in paragraph (c)(4) of this section.
    (e) Rate of compensation--(1) General rule. A definition of 
compensation satisfies section 414(s) as a reasonable definition of 
compensation even though it defines the amount of each employee's basic 
or regular compensation using the employee's basic or regular rate of 
compensation rather than using the employee's actual basic or regular 
compensation from the employer if the definition satisfies the 
requirements specified in paragraph (e)(3) of this section and otherwise 
satisfies the requirements of paragraph (d) of this section, including 
the nondiscrimination test in paragraph (d)(3) of this section. For this 
purpose, the employee's rate of compensation must be determined using an 
hourly pay scale, weekly salary, or similar unit of basic or regular 
compensation applicable to the employee. A definition will not fail to 
satisfy the requirements of this paragraph (e) merely because it defines 
compensation as including each employee's basic or regular compensation, 
the amount of which is determined using each employee's basic or regular 
rate of compensation, plus actual amounts of irregular or additional 
compensation, such as overtime or bonuses. In addition, a definition of 
compensation will not fail to satisfy section 414(s) merely because it 
defines compensation for each employee as the greater of the employee's 
actual compensation, the amount of which is determined using a 
definition that would otherwise satisfy paragraph (c) or (d)(2) of this 
section, or the employee's basic or regular compensation, the amount of 
which is determined using the employee's basic or regular rate of 
compensation.
    (2) Not applicable to certain contributions. This paragraph (e) does 
not apply to a definition of compensation used in determining whether 
elective deferrals (as defined in section 402(g)(3)), matching 
contributions (as defined in section 401(m)(4)), or employee 
contributions subject to section 401(m) satisfy any applicable 
provision. Thus, for example, a definition of compensation that defines 
compensation based on each employee's basic or regular rate of 
compensation may not be used to

[[Page 297]]

measure compensation for purposes of determining if a qualified cash or 
deferred arrangement satisfies the actual deferral percentage test in 
section 401(k)(3).
    (3) Requirements for definitions of compensation based on rate of 
compensation--(i) Benefit determination. The definition of compensation 
must actually be used to calculate the benefits, contributions, or other 
amounts, that are subject to the applicable provision. For example, a 
definition of compensation that defines compensation based on each 
employee's basic or regular rate of compensation may not be used to 
determine whether a plan satisfies section 401(a)(4) unless the 
benefits, contributions, or other amounts for each employee in the plan 
are determined using that definition of compensation.
    (ii) Period for determining compensation. The amount of each 
employee's basic or regular compensation for the determination period 
must be determined using the employee's basic or regular rate of 
compensation as of a designated date in the determination period. For 
example, if the determination period is a calendar year, this 
requirement would be satisfied if the amount of each employee's basic or 
regular compensation for the calendar year is determined using the 
employee's basic or regular rate of compensation as of January 1 of the 
calendar year. Alternatively, the amount of each employee's basic or 
regular compensation for a determination period can be the sum of the 
amounts separately determined for shorter specified periods (e.g., weeks 
or months) within the determination period provided the amount of each 
employee's basic or regular compensation for each specified period is 
determined using the employee's basic or regular rate of compensation as 
of a designated date within the specified period.
    (iii) Dates for determining rate of compensation. One or more dates 
may be used to determine employees' rates of compensation for a 
determination period or specified period provided that, if the same date 
is not used for all employees, the dates selected are designed to 
determine the rates of compensation for that period on a consistent 
basis for all employees taken into account for the determination period. 
For example, if annual compensation increases are provided to different 
groups of employees on different dates during the year, it would be 
consistent to choose a different date for each group in order to include 
the annual increase in the employees' rates of compensation for the 
determination period. In addition, the date or dates selected, by 
themselves, must not cause the portion of total compensation included to 
vary significantly among employees.
    (iv) Periods without compensation or with reduced compensation. An 
employee's compensation may generally only be determined using the 
employee's rate of compensation for employment periods during which the 
employer actually compensates the employee. However, if an employee 
terminates employment or otherwise stops performing services (such as 
for a leave of absence, layoff or similar event) either without 
compensation or with reduced compensation during a determination period, 
the employer may continue to credit the employee with compensation based 
on the employee's rate of compensation for a period of up to 31 days 
after the event, but not beyond the end of the determination period. 
Paragraph (f) of this section contains special rules for crediting 
imputed compensation for periods extending beyond 31 days during which 
an employee is not compensated or an employee's compensation is reduced. 
See also the definition of Section 414(s) compensation in Sec.  
1.401(a)(4)-12 that, for purposes of satisfying section 401(a)(4), 
permits adjustments to compensation to reflect the equivalent of full-
time compensation to the extent necessary to satisfy the requirements of 
29 CFR 2530.204-2(d) (regarding double proration of service and 
compensation).
    (f) Prior-employer compensation and imputed compensation--(1) 
General rule. Solely for purposes of determining whether a defined 
benefit plan, as defined in Sec.  1.410(b)-9, satisfies section 
401(a)(4) or 410(b), an alternative definition that includes prior-
employer compensation or imputed compensation satisfies section 414(s) 
as a reasonable alternative definition if the definition satisfies the 
requirements specified in

[[Page 298]]

paragraphs (f) (2) and (3) of this section. For this purpose, prior-
employer compensation is compensation from an employer other than the 
employer (determined at the time that the compensation is paid) 
maintaining the plan that is credited for periods prior to the 
employee's employment with the employer maintaining the plan and during 
which the employee performed services for the other employer. For this 
purpose, imputed compensation is compensation credited for periods after 
an employee has commenced or recommenced participation in a plan while 
the employee is not compensated by the employer maintaining the plan or 
is compensated at a reduced rate by that employer because the employee 
is not performing services as an employee for the employer (including a 
period in which the employee performs services for another employer, 
e.g., a joint venture) or because the employee has a reduced work 
schedule.
    (2) Requirements for definitions of compensation crediting prior-
employer compensation or imputed compensation--(i) General requirement. 
The definition must otherwise be described in paragraph (c) of this 
section or must otherwise satisfy the requirements of paragraph (d) or 
(e) of this section for alternative definitions of compensation, 
including the nondiscrimination requirement in paragraph (d)(3) of this 
section.
    (ii) Benefit determination. A definition of compensation that 
credits prior-employer compensation or imputed compensation must 
actually be used to calculate the benefits under the plan. For example, 
the definition may not be used to determine whether a defined benefit 
plan satisfies section 401(a)(4) unless the benefits for each employee 
in the plan are determined using that definition of compensation.
    (iii) Provision applied to all similarly-situated employees. A 
provision in a plan's definition of compensation crediting prior-
employer compensation or imputed compensation must apply on the same 
terms to all similarly-situated employees in the plan. The criteria for 
determining whether employees are similarly situated for this purpose 
are the same as the criteria for determining whether a plan provision 
crediting pre-participation or imputed service satisfies the 
requirements of Sec.  1.401(a)(4)-11(d)(3)(iii)(A).
    (iv) Legitimate business purpose. There must be a legitimate 
business purpose, based on all of the relevant facts and circumstances, 
for crediting prior-employer compensation or imputed compensation to an 
employee for the period being credited. The standard for determining 
whether crediting prior-employer compensation or imputed compensation 
satisfies this requirement is the same as the standard for determining 
whether crediting pre-participation or imputed service under a plan 
satisfies the requirements of Sec.  1.401(a)(4)-11(d)(3)(iii)(B) and 
whether crediting imputed service satisfies the additional requirements 
of Sec.  1.401(a)(4)-11(d)(3)(iv)(A). However, if the legitimate 
business reason for crediting imputed compensation relates to the 
services the employee is performing for another employer and the reason 
satisfies the standard in Sec.  1.401(a)(4)-11(d)(3)(iii)(B), the 
additional requirements of Sec.  1.401(a)(4)-11(d)(3)(iv)(A) are deemed 
to be satisfied. For example, if an employee becomes employed by another 
employer as a result of a merger, acquisition or similar transaction 
with the other employer and imputed compensation is credited to the 
employee while the employee is performing services for the other 
employer, the crediting of imputed compensation to the employee 
satisfies the standard in Sec.  1.401(a)(4)-11(d)(3)(iii)(B). Thus, 
under that example, crediting the imputed compensation to the employee 
is deemed to satisfy the additional requirements of Sec.  1.401(a)(4)-
11(d)(3)(iv)(A), even if the employee is not performing those services 
under an arrangement that provides an ongoing business benefit to the 
employer maintaining the plan.
    (v) No significant discrimination. Based on all of the relevant 
facts and circumstances, crediting prior-employer compensation or 
imputed compensation must not by design or in operation discriminate 
significantly in favor of highly compensated employees. The standard for 
determining whether crediting prior-employer compensation or imputed 
compensation satisfies this requirement is the same as the standard

[[Page 299]]

for determining whether crediting pre-participation or imputed service 
satisfies the requirement in Sec.  1.401(a)(4)-11(d)(3)(iii)(C) and 
whether crediting imputed service satisfies the additional requirement 
of Sec.  1.401(a)(4)-11(d)(3)(iv)(B).
    (3) Reasonable method--(i) General rule. Any reasonable method may 
be used to determine the amount of prior-employer compensation or 
imputed compensation provided that the requirements of paragraph (f)(3) 
(ii) or (iii) of this section are satisfied, whichever is applicable.
    (ii) Requirements for prior-employer compensation. Prior-employer 
compensation credited to an employee for a period that an employee is 
performing services for another employer must be compensation for the 
employee from the other employer (or be based on the employee's basic or 
regular rate of compensation from the other employer) for that period. 
In addition, prior employer compensation credited to an employee must 
not exceed the amount of compensation from the other employer that would 
have been included under the definition of compensation in effect for 
that period for compensation from the employer maintaining the plan. 
Reasonable assumptions may be made in determining the amount of 
compensation received from another employer for a period that would have 
been included under the definition of compensation in effect for that 
period for compensation from the employer maintaining the plan.
    (iii) Requirements for imputed compensation--(A) General rule. The 
amount of imputed compensation credited to an employee during any 
period, when combined with the amount of any actual compensation being 
included, must not exceed an amount that, based on all of the relevant 
facts and circumstances, is reasonably representative of the amount of 
compensation that the employee would have received and that would have 
been included under the definition of compensation in effect for the 
period if the employee had continued to perform services for the 
employer during that period at the same level as the employee was 
performing before the employee stopped performing services or changed to 
a reduced work schedule. The relevant facts and circumstances include 
the compensation that the employee was receiving immediately before the 
employee stopped performing services or changed to a reduced work 
schedule, and, if applicable, the rate of compensation in effect while 
the employee is not performing services or has a reduced work schedule 
that is applicable to the employee's specific job grade immediately 
before the change occurred.
    (B) Imputed compensation from another employer. Imputed compensation 
credited for a period that an employee is performing services for 
another employer is deemed to satisfy paragraph (f)(3)(iii)(A) of this 
section if the amount of compensation credited satisfies the 
requirements of paragraph (f)(3)(ii) of this section for prior-employer 
compensation. Thus, for example, the amount of imputed compensation 
credited to an employee for a period that the employee is performing 
services for another employer is deemed to satisfy paragraph 
(f)(3)(iii)(A) of this section if the amount credited is compensation 
for the employee from the other employer (or is based on the employee's 
basic or regular rate of compensation from the other employer) for that 
period, and the amount credited does not exceed the compensation from 
the other employer that would be included for the employee under the 
definition of compensation in effect for that period for compensation 
from the employer maintaining the plan.
    (4) Special nondiscrimination rule for safe harbor definitions. If a 
definition of compensation crediting prior-employer or imputed 
compensation is otherwise described in paragraph (c) of this section, 
and the prior-employer compensation or imputed compensation credited 
satisfies the requirements of paragraphs (f) (1), (2), and (3) of this 
section, then the definition is deemed to satisfy paragraph (d) of this 
section (i.e., it is deemed to be nondiscriminatory).
    (g) Special rules--(1) Self-employed individuals--(i) General rule. 
If an alternative definition of compensation under paragraph (c)(3), 
(d), (e), or (f) of this section is used to satisfy an applicable 
provision, an equivalent alternative compensation amount must be

[[Page 300]]

determined for any self-employed individual who is in the group of 
employees for whom paragraph (b) of this section requires a single 
definition of compensation to be used. This equivalent alternative 
compensation amount is determined by multiplying the self-employed 
individual's total earned income (as defined in section 401 (c)(2)) for 
the determination period by the percentage of total compensation (as 
defined in paragraph (d)(3)(ii) of this section) included under the 
alternative definition for the employer's nonhighly compensated common-
law employees as a group (determined in a manner consistent with the 
rules in paragraph (d)(3)(iii) of this section and, if applicable, 
paragraph (d)(3)(vi) of this section). Thus, for purposes of this 
determination, highly compensated common-law employees must be 
disregarded. This equivalent alternative compensation amount will be 
treated as the self-employed individual's compensation under the 
alternative definition of compensation for the determination period.
    (ii) Inclusion of elective contributions. If the alternative 
definition of compensation includes any types of elective contributions 
described in paragraph (c)(4) of this section, the self-employed 
individual's earned income for this determination must be increased by 
the amount of elective contributions made by the employer on behalf of 
the self-employed individual, and the definition of total compensation 
for this determination must include all the types of elective 
contributions described in paragraph (c)(4) of this section made by the 
employees (other than highly compensated employees.
    (iii) Reductions in equivalent alternative compensation amount 
applicable only to highly compensated employees. An alternative 
definition of compensation may provide that compensation under the 
alternative definition for some or all self-employed individuals who are 
highly compensated employees is a specified portion of, rather than 
equal to, the equivalent compensation amount determined under paragraph 
(g)(1)(i).
    (2) Leased employees. [Reserved]
    (h) Definitions. The following definitions apply for purposes of 
this section:
    (1) Applicable provision. Applicable provision means a provision 
that specifically refers to section 414(s) or this section.
    (2) Determination period. Determination period means a period during 
which the amount of compensation is measured for use in determining 
whether the requirements of an applicable provision are satisfied. If no 
period is provided under the applicable provision for measuring 
compensation, the determination period is the period for which the 
applicable provision must be satisfied. The applicable provision may 
provide additional rules concerning the determination period to be used 
for satisfying the nondiscrimination requirement in paragraph (d) of 
this section.
    (3) Employee. Employee means employee within the meaning of Sec.  
1.410(b)-9.
    (4) Highly compensated employee. Highly compensated employee means 
highly compensated employee within the meaning of Sec.  1.410(b)-9.
    (5) Nonhighly compensated employee. Nonhighly compensated employee 
means nonhighly compensated employee within the meaning of Sec.  
1.410(b)-9.
    (6) Self-employed individual. Self-employed individual means self-
employed individual within the meaning of section 401(c)(1).
    (i) Additional rules. The Commissioner may in revenue rulings, 
notices, and other guidance of general applicability provide additional 
rules for defining compensation within the meaning of section 414(s), 
including additional definitions of compensation that satisfy section 
414(s).
    (j) Effective date and transition rules--(1) Statutory effective 
date. Section 414(s) applies to years beginning on or after January 1, 
1987.
    (2) Regulatory effective date--(i) In general. Except as otherwise 
provided in paragraph (j)(2)(ii) of this section, Sec.  1.414(s)-1 (a) 
through (i) apply to years beginning on or after January 1, 1994.
    (ii) Plans of tax-exempt organizations. In the case of a plan 
maintained by an organization that is exempt from income taxation 
pursuant to section 501(a), including plans subject to section 
403(b)(12)(A)(i) (nonelective plans),

[[Page 301]]

Sec.  1.414(s)-1 (a) through (i) apply to plan years beginning on or 
after January 1, 1996.
    (3) Compliance during transition period. For plan years beginning 
before the effective date of these regulations, as set forth in 
paragraph (j)(2) of this section, and on or after the statutory 
effective date as set forth in paragraph (j)(1) of this section, a plan 
must be operated in accordance with a reasonable, good faith 
interpretation of section 414(s). Whether a plan is operated in 
accordance with a reasonable, good faith interpretation of section 
414(s) will generally be determined based on all relevant facts and 
circumstances, including the extent to which an employer has resolved 
unclear issues in its favor. A plan will be deemed to be operated in 
accordance with a reasonable, good faith interpretation of section 
414(s)(1) and (2) if it is operated in accordance with the terms of 
Sec.  1.414(s)-1 (a) through (i). For years beginning on or after the 
statutory effective date and before the effective date of these 
regulations, a definition of compensation is also deemed to satisfy 
section 414(s) as an alternative method of determining compensation 
under section 414(s)(3) if the definition satisfies the requirements of 
Sec.  1.414(s)-1 (a) through (i) or if the definition satisfies the 
prior regulation provisions of Sec.  1.414(s)-1T. (See Sec.  1.414(s)-1T 
as contained in the CFR edition revised as of April 1, 1991.) In 
addition, for those transition years, a definition of compensation is 
deemed to satisfy section 414(s) as an alternative method of determining 
compensation under section 414(s)(3) if, based on all the relevant facts 
and circumstances in effect for the year, use of the definition does not 
cause discrimination in favor of highly compensated employees.

[T.D. 8361, 56 FR 47662, Sept. 19, 1991; 57 FR 10815, 10953, Mar. 31, 
1992, as amended by T.D. 8488, 58 FR 47063, Sept. 7, 1993; T.D. 9319, 72 
FR 16894, Apr. 5, 2007]



Sec.  1.414(v)-1  Catch-up contributions.

    (a) Catch-up contributions--(1) General rule. An applicable employer 
plan shall not be treated as failing to meet any requirement of the 
Internal Revenue Code solely because the plan permits a catch-up 
eligible participant to make catch-up contributions in accordance with 
section 414(v) and this section. With respect to an applicable employer 
plan, catch-up contributions are elective deferrals made by a catch-up 
eligible participant that exceed any of the applicable limits set forth 
in paragraph (b) of this section and that are treated under the 
applicable employer plan as catch-up contributions, but only to the 
extent they do not exceed the catch-up contribution limit described in 
paragraph (c) of this section (determined in accordance with the special 
rules for employers that maintain multiple applicable employer plans in 
paragraph (f) of this section, if applicable). To the extent provided 
under paragraph (d) of this section, catch-up contributions are 
disregarded for purposes of various statutory limits. In addition, 
unless otherwise provided in paragraph (e) of this section, all catch-up 
eligible participants of the employer must be provided the opportunity 
to make catch-up contributions in order for an applicable employer plan 
to comply with the universal availability requirement of section 
414(v)(4). The definitions in paragraph (g) of this section apply for 
purposes of this section and Sec.  1.402(g)-2.
    (2) Treatment as elective deferrals. Except as specifically provided 
in this section, elective deferrals treated as catch-up contributions 
remain subject to statutory and regulatory rules otherwise applicable to 
elective deferrals. For example, catch-up contributions under an 
applicable employer plan that is a section 401(k) plan are subject to 
the distribution and vesting restrictions of section 401(k)(2)(B) and 
(C). In addition, the plan is permitted to provide a single election for 
catch-up eligible participants, with the determination of whether 
elective deferrals are catch-up contributions being made under the terms 
of the plan.
    (3) Coordination with section 457(b)(3). In the case of an 
applicable employer plan that is a section 457 eligible governmental 
plan, the catch-up contributions permitted under this section shall not 
apply to a catch-up eligible participant for any taxable year for which 
a higher limitation applies to such participant under section 457(b)(3). 
For additional guidance, see regulations under section 457.

[[Page 302]]

    (b) Elective deferrals that exceed an applicable limit--(1) 
Applicable limits. An applicable limit for purposes of determining 
catch-up contributions for a catch-up eligible participant is any of the 
following:
    (i) Statutory limit. A statutory limit is a limit on elective 
deferrals or annual additions permitted to be made (without regard to 
section 414(v) and this section) with respect to an employee for a year 
provided in section 401(a)(30), 402(h), 403(b), 408, 415(c), or 
457(b)(2) (without regard to section 457(b)(3)), as applicable.
    (ii) Employer-provided limit. An employer-provided limit is any 
limit on the elective deferrals an employee is permitted to make 
(without regard to section 414(v) and this section) that is contained in 
the terms of the plan, but which is not required under the Internal 
Revenue Code. Thus, for example, if, in accordance with the terms of the 
plan, highly compensated employees are limited to a deferral percentage 
of 10% of compensation, this limit is an employer-provided limit that is 
an applicable limit with respect to the highly compensated employees.
    (iii) Actual deferral percentage (ADP) limit. In the case of a 
section 401(k) plan that would fail the ADP test of section 401(k)(3) if 
it did not correct under section 401(k)(8), the ADP limit is the highest 
amount of elective deferrals that can be retained in the plan by any 
highly compensated employee under the rules of section 401(k)(8)(C) 
(without regard to paragraph (d)(2)(iii) of this section). In the case 
of a simplified employee pension (SEP) with a salary reduction 
arrangement (within the meaning of section 408(k)(6)) that would fail 
the requirements of section 408(k)(6)(A)(iii) if it did not correct in 
accordance with section 408(k)(6)(C), the ADP limit is the highest 
amount of elective deferrals that can be made by any highly compensated 
employee under the rules of section 408(k)(6) (without regard to 
paragraph (d)(2)(iii) of this section).
    (2) Contributions in excess of applicable limit--(i) Plan year 
limits--(A) General rule. Except as provided in paragraph (b)(2)(ii) of 
this section, the amount of elective deferrals in excess of an 
applicable limit is determined as of the end of the plan year by 
comparing the total elective deferrals for the plan year with the 
applicable limit for the plan year. In addition, except as provided in 
paragraph (b)(2)(i)(B) of this section, in the case of a plan that 
provides for separate employer-provided limits on elective deferrals for 
separate portions of plan compensation within the plan year, the 
applicable limit for the plan year is the sum of the dollar amounts of 
the limits for the separate portions. For example, if a plan sets a 
deferral percentage limit for each payroll period, the applicable limit 
for the plan year is the sum of the dollar amounts of the limits for the 
payroll periods.
    (B) Alternative method for determining employer-provided limit--(1) 
General rule. If the plan limits elective deferrals for separate 
portions of the plan year, then, solely for purposes of determining the 
amount that is in excess of an employer-provided limit, the plan is 
permitted to provide that the applicable limit for the plan year is the 
product of the employee's plan year compensation and the time-weighted 
average of the deferral percentage limits, rather than determining the 
employer-provided limit as the sum of the limits for the separate 
portions of the year. Thus, for example, if, in accordance with the 
terms of the plan, highly compensated employees are limited to 8% of 
compensation during the first half of the plan year and 10% of 
compensation for the second half of the plan year, the plan is permitted 
to provide that the applicable limit for a highly compensated employee 
is 9% of the employee's plan year compensation.
    (2) Alternative definition of compensation permitted. A plan using 
the alternative method in this paragraph (b)(2)(i)(B) is permitted to 
provide that the applicable limit for the plan year is determined as the 
product of the catch-up eligible participant's compensation used for 
purposes of the ADP test and the time-weighted average of the deferral 
percentage limits. The alternative calculation in this paragraph 
(b)(2)(i)(B)(2) is available regardless of whether the deferral 
percentage limits change during the plan year.
    (ii) Other year limit. In the case of an applicable limit that is 
applied on the basis of a year other than the plan year

[[Page 303]]

(e.g., the calendar-year limit on elective deferrals under section 
401(a)(30)), the determination of whether elective deferrals are in 
excess of the applicable limit is made on the basis of such other year.
    (c) Catch-up contribution limit--(1) General rule. Elective 
deferrals with respect to a catch-up eligible participant in excess of 
an applicable limit under paragraph (b) of this section are treated as 
catch-up contributions under this section as of a date within a taxable 
year only to the extent that such elective deferrals do not exceed the 
catch-up contribution limit described in paragraphs (c)(1) and (2) of 
this section, reduced by elective deferrals previously treated as catch-
up contributions for the taxable year, determined in accordance with 
paragraph (c)(3) of this section. The catch-up contribution limit for a 
taxable year is generally the applicable dollar catch-up limit for such 
taxable year, as set forth in paragraph (c)(2) of this section. However, 
an elective deferral is not treated as a catch-up contribution to the 
extent that the elective deferral, when added to all other elective 
deferrals for the taxable year under any applicable employer plan of the 
employer, exceeds the participant's compensation (determined in 
accordance with section 415(c)(3)) for the taxable year. See also 
paragraph (f) of this section for special rules for employees who 
participate in more than one applicable employer plan maintained by the 
employer.
    (2) Applicable dollar catch-up limit--(i) In general. The applicable 
dollar catch-up limit for an applicable employer plan, other than a plan 
described in section 401(k)(11) or 408(p), is determined under the 
following table:

------------------------------------------------------------------------
                                                            Applicable
             For taxable years beginning in                dollar catch-
                                                             up limit
------------------------------------------------------------------------
2002....................................................          $1,000
2003....................................................           2,000
2004....................................................           3,000
2005....................................................           4,000
2006....................................................           5,000
------------------------------------------------------------------------

    (ii) SIMPLE plans. The applicable dollar catch-up limit for a SIMPLE 
401(k) plan described in section 401(k)(11) or a SIMPLE IRA plan as 
described in section 408(p) is determined under the following table:

------------------------------------------------------------------------
                                                            Applicable
             For taxable years beginning in                dollar catch-
                                                             up limit
------------------------------------------------------------------------
2002....................................................           $ 500
2003....................................................           1,000
2004....................................................           1,500
2005....................................................           2,000
2006....................................................           2,500
------------------------------------------------------------------------

    (iii) Cost of living adjustments. For taxable years beginning after 
2006, the applicable dollar catch-up limit is the applicable dollar 
catch-up limit for 2006 described in paragraph (c)(2)(i) or (ii) of this 
section increased at the same time and in the same manner as adjustments 
under section 415(d), except that the base period shall be the calendar 
quarter beginning July 1, 2005, and any increase that is not a multiple 
of $500 shall be rounded to the next lower multiple of $500.
    (3) Timing rules. For purposes of determining the maximum amount of 
permitted catch-up contributions for a catch-up eligible participant, 
the determination of whether an elective deferral is a catch-up 
contribution is made as of the last day of the plan year (or in the case 
of section 415, as of the last day of the limitation year), except that, 
with respect to elective deferrals in excess of an applicable limit that 
is tested on the basis of the taxable year or calendar year (e.g., the 
section 401(a)(30) limit on elective deferrals), the determination of 
whether such elective deferrals are treated as catch-up contributions is 
made at the time they are deferred.
    (d) Treatment of catch-up contributions--(1) Contributions not taken 
into account for certain limits. Catch-up contributions are not taken 
into account in applying the limits of section 401(a)(30), 402(h), 
403(b), 408, 415(c), or 457(b)(2) (determined without regard to section 
457(b)(3)) to other contributions or benefits under an applicable 
employer plan or any other plan of the employer.
    (2) Contributions not taken into account in application of ADP 
test--(i) Calculation of ADR. Elective deferrals that are treated as 
catch-up contributions pursuant to paragraph (c) of this section with 
respect to a section 401(k) plan because they exceed a statutory or 
employer-provided limit described in

[[Page 304]]

paragraph (b)(1)(i) or (ii) of this section, respectively, are 
subtracted from the catch-up eligible participant's elective deferrals 
for the plan year for purposes of determining the actual deferral ratio 
(ADR) (as defined in regulations under section 401(k)) of a catch-up 
eligible participant. Similarly, elective deferrals that are treated as 
catch-up contributions pursuant to paragraph (c) of this section with 
respect to a SEP because they exceed a statutory or employer-provided 
limit described in paragraph (b)(1)(i) or (ii) of this section, 
respectively, are subtracted from the catch-up eligible participant's 
elective deferrals for the plan year for purposes of determining the 
deferral percentage under section 408(k)(6)(D) of a catch-up eligible 
participant.
    (ii) Adjustment of elective deferrals for correction purposes. For 
purposes of the correction of excess contributions in accordance with 
section 401(k)(8)(C), elective deferrals under the plan treated as 
catch-up contributions for the plan year and not taken into account in 
the ADP test under paragraph (d)(2)(i) of this section are subtracted 
from the catch-up eligible participant's elective deferrals under the 
plan for the plan year.
    (iii) Excess contributions treated as catch-up contributions. A 
section 401(k) plan that satisfies the ADP test of section 401(k)(3) 
through correction under section 401(k)(8) must retain any elective 
deferrals that are treated as catch-up contributions pursuant to 
paragraph (c) of this section because they exceed the ADP limit in 
paragraph (b)(1)(iii) of this section. In addition, a section 401(k) 
plan is not treated as failing to satisfy section 401(k)(8) merely 
because elective deferrals described in the preceding sentence are not 
distributed or recharacterized as employee contributions. Similarly, a 
SEP is not treated as failing to satisfy section 408(k)(6)(A)(iii) 
merely because catch-up contributions are not treated as excess 
contributions with respect to a catch-up eligible participant under the 
rules of section 408(k)(6)(C). Notwithstanding the fact that elective 
deferrals described in this paragraph (d)(2)(iii) are not distributed, 
such elective deferrals are still considered to be excess contributions 
under section 401(k)(8), and accordingly, matching contributions with 
respect to such elective deferrals are permitted to be forfeited under 
the rules of section 411(a)(3)(G).
    (3) Contributions not taken into account for other nondiscrimination 
purposes--(i) Application for top-heavy. Catch-up contributions with 
respect to the current plan year are not taken into account for purposes 
of section 416. However, catch-up contributions for prior years are 
taken into account for purposes of section 416. Thus, catch-up 
contributions for prior years are included in the account balances that 
are used in determining whether the plan is top-heavy under section 
416(g).
    (ii) Application for section 410(b). Catch-up contributions with 
respect to the current plan year are not taken into account for purposes 
of section 410(b). Thus, catch-up contributions are not taken into 
account in determining the average benefit percentage under Sec.  
1.410(b)-5 for the year if benefit percentages are determined based on 
current year contributions. However, catch-up contributions for prior 
years are taken into account for purposes of section 410(b). Thus, 
catch-up contributions for prior years would be included in the account 
balances that are used in determining the average benefit percentage if 
allocations for prior years are taken into account.
    (4) Availability of catch-up contributions. An applicable employer 
plan does not violate Sec.  1.401(a)(4)-4 merely because the group of 
employees for whom catch-up contributions are currently available (i.e., 
the catch-up eligible participants) is not a group of employees that 
would satisfy section 410(b) (without regard to Sec.  1.410(b)-5). In 
addition, a catch-up eligible participant is not treated as having a 
right to a different rate of allocation of matching contributions merely 
because an otherwise nondiscriminatory schedule of matching rates is 
applied to elective deferrals that include catch-up contributions. The 
rules in this paragraph (d)(4) also apply for purposes of satisfying the 
requirements of section 403(b)(12).
    (e) Universal availability requirement--(1) General rule--(i) 
Effective opportunity. An applicable employer plan

[[Page 305]]

that offers catch-up contributions and that is otherwise subject to 
section 401(a)(4) (including a plan that is subject to section 401(a)(4) 
pursuant to section 403(b)(12)) will not satisfy the requirements of 
section 401(a)(4) unless all catch-up eligible participants who 
participate under any applicable employer plan maintained by the 
employer are provided with an effective opportunity to make the same 
dollar amount of catch-up contributions. A plan fails to provide an 
effective opportunity to make catch-up contributions if it has an 
applicable limit (e.g., an employer-provided limit) that applies to a 
catch-up eligible participant and does not permit the participant to 
make elective deferrals in excess of that limit. An applicable employer 
plan does not fail to satisfy the universal availability requirement of 
this paragraph (e) solely because an employer-provided limit does not 
apply to all employees or different limits apply to different groups of 
employees under paragraph (b)(2)(i) of this section. However, a plan may 
not provide lower employer-provided limits for catch-up eligible 
participants.
    (ii) Certain practices permitted--(A) Proration of limit. An 
applicable employer plan does not fail to satisfy the universal 
availability requirement of this paragraph (e) merely because the plan 
allows participants to defer an amount equal to a specified percentage 
of compensation for each payroll period and for each payroll period 
permits each catch-up eligible participant to defer a pro-rata share of 
the applicable dollar catch-up limit in addition to that amount.
    (B) Cash availability. An applicable employer plan does not fail to 
satisfy the universal availability requirement of this paragraph (e) 
merely because it restricts the elective deferrals of any employee 
(including a catch-up eligible participant) to amounts available after 
other withholding from the employee's pay (e.g., after deduction of all 
applicable income and employment taxes). For this purpose, an employer 
limit of 75% of compensation or higher will be treated as limiting 
employees to amounts available after other withholdings.
    (2) Certain employees disregarded. An applicable employer plan does 
not fail to satisfy the universal availability requirement of this 
paragraph (e) merely because employees described in section 410(b)(3) 
(e.g., collectively bargained employees) are not provided the 
opportunity to make catch-up contributions.
    (3) Exception for certain plans. An applicable employer plan does 
not fail to satisfy the universal availability requirement of this 
paragraph (e) merely because another applicable employer plan that is a 
section 457 eligible governmental plan does not provide for catch-up 
contributions to the extent set forth in section 414(v)(6)(C) and 
paragraph (a)(3) of this section.
    (4) Exception for section 410(b)(6)(C)(ii) period. If an applicable 
employer plan satisfies the universal availability requirement of this 
paragraph (e) before an acquisition or disposition described in Sec.  
1.410(b)-2(f) and would fail to satisfy the universal availability 
requirement of this paragraph (e) merely because of such event, then the 
applicable employer plan shall continue to be treated as satisfying this 
paragraph (e) through the end of the period determined under section 
410(b)(6)(C)(ii).
    (f) Special rules for an employer that sponsors multiple plans--(1) 
General rule. For purposes of paragraph (c) of this section, all 
applicable employer plans, other than section 457 eligible governmental 
plans, maintained by the same employer are treated as one plan and all 
section 457 eligible governmental plans maintained by the same employer 
are treated as one plan. Thus, the total amount of catch-up 
contributions under all applicable employer plans of an employer (other 
than section 457 eligible governmental plans) is limited to the 
applicable dollar catch-up limit for the taxable year, and the total 
amount of catch-up contributions for all section 457 eligible 
governmental plans of an employer is limited to the applicable dollar 
catch-up limit for the taxable year.
    (2) Coordination of employer-provided limits. An applicable employer 
plan is permitted to allow a catch-up eligible participant to defer 
amounts in excess of an employer-provided limit under that plan without 
regard to whether

[[Page 306]]

elective deferrals made by the participant have been treated as catch-up 
contributions for the taxable year under another applicable employer 
plan aggregated with such plan under this paragraph (f). However, to the 
extent elective deferrals under another plan maintained by the employer 
have already been treated as catch-up contributions during the taxable 
year, the elective deferrals under the plan may be treated as catch-up 
contributions only up to the amount remaining under the catch-up limit 
for the year. Any other elective deferrals that exceed the employer-
provided limit may not be treated as catch-up contributions and must 
satisfy the otherwise applicable nondiscrimination rules. For example, 
the right to make contributions in excess of the employer-provided limit 
is another right or feature which must satisfy Sec.  1.401(a)(4)-4 to 
the extent that the contributions are not catch-up contributions. Also, 
contributions in excess of the employer provided limit are taken into 
account under the ADP test to the extent they are not catch-up 
contributions.
    (3) Allocation rules. If a catch-up eligible participant makes 
additional elective deferrals in excess of an applicable limit under 
paragraph (b)(1) of this section under more than one applicable employer 
plan that is aggregated under the rules of this paragraph (f), the 
applicable employer plan under which elective deferrals in excess of an 
applicable limit are treated as catch-up contributions is permitted to 
be determined in any manner that is not inconsistent with the manner in 
which such amounts were actually deferred under the plan.
    (g) Definitions--(1) Applicable employer plan. The term applicable 
employer plan means a section 401(k) plan, a SIMPLE IRA plan as defined 
in section 408(p), a simplified employee pension plan as defined in 
section 408(k) (SEP), a plan or contract that satisfies the requirements 
of section 403(b), or a section 457 eligible governmental plan.
    (2) Elective deferral. The term elective deferral means an elective 
deferral within the meaning of section 402(g)(3) or any contribution to 
a section 457 eligible governmental plan.
    (3) Catch-up eligible participant. An employee is a catch-up 
eligible participant for a taxable year if--
    (i) The employee is eligible to make elective deferrals under an 
applicable employer plan (without regard to section 414(v) or this 
section); and
    (ii) The employee's 50th or higher birthday would occur before the 
end of the employee's taxable year.
    (4) Other definitions. (i) The terms employer, employee, section 
401(k) plan, and highly compensated employee have the meanings provided 
in Sec.  1.410(b)-9.
    (ii) The term section 457 eligible governmental plan means an 
eligible deferred compensation plan described in section 457(b) that is 
established and maintained by an eligible employer described in section 
457(e)(1)(A).
    (h) Examples. The following examples illustrate the application of 
this section. For purposes of these examples, the limit under section 
401(a)(30) is $15,000 and the applicable dollar catch-up limit is $5,000 
and, except as specifically provided, the plan year is the calendar 
year. In addition, it is assumed that the participant's elective 
deferrals under all plans of the employer do not exceed the 
participant's section 415(c)(3) compensation, that the taxable year of 
the participant is the calendar year and that any correction pursuant to 
section 401(k)(8) is made through distribution of excess contributions. 
The examples are as follows:

    Example 1. (i) Participant A is eligible to make elective deferrals 
under a section 401(k) plan, Plan P. Plan P does not limit elective 
deferrals except as necessary to comply with sections 401(a)(30) and 
415. In 2006, Participant A is 55 years old. Plan P also provides that a 
catch-up eligible participant is permitted to defer amounts in excess of 
the section 401(a)(30) limit up to the applicable dollar catch-up limit 
for the year. Participant A defers $18,000 during 2006.
    (ii) Participant A's elective deferrals in excess of the section 
401(a)(30) limit ($3,000) do not exceed the applicable dollar catch-up 
limit for 2006 ($5,000). Under paragraph (a)(1) of this section, the 
$3,000 is a catch-up contribution and, pursuant to paragraph (d)(2)(i) 
of this section, it is not taken into account in determining Participant 
A's ADR for purposes of section 401(k)(3).
    Example 2. (i) Participants B and C, who are highly compensated 
employees each earning $120,000, are eligible to make elective

[[Page 307]]

deferrals under a section 401(k) plan, Plan Q. Plan Q limits elective 
deferrals as necessary to comply with section 401(a)(30) and 415, and 
also provides that no highly compensated employee may make an elective 
deferral at a rate that exceeds 10% of compensation. However, Plan Q 
also provides that a catch-up eligible participant is permitted to defer 
amounts in excess of 10% during the plan year up to the applicable 
dollar catch-up limit for the year. In 2006, Participants B and C are 
both 55 years old and, pursuant to the catch-up provision in Plan Q, 
both elect to defer 10% of compensation plus a pro-rata portion of the 
$5,000 applicable dollar catch-up limit for 2006. Participant B 
continues this election in effect for the entire year, for a total 
elective contribution for the year of $17,000. However, in July 2006, 
after deferring $8,500, Participant C discontinues making elective 
deferrals.
    (ii) Once Participant B's elective deferrals for the year exceed the 
section 401(a)(30) limit ($15,000), subsequent elective deferrals are 
treated as catch-up contributions as they are deferred, provided that 
such elective deferrals do not exceed the catch-up contribution limit 
for the taxable year. Since the $2,000 in elective deferrals made after 
Participant B reaches the section 402(g) limit for the calendar year 
does not exceed the applicable dollar catch-up limit for 2006, the 
entire $2,000 is treated as a catch-up contribution.
    (iii) As of the last day of the plan year, Participant B has 
exceeded the employer-provided limit of 10% (10% of $120,000 or $12,000 
for Participant B) by an additional $3,000. Since the additional $3,000 
in elective deferrals does not exceed the $5,000 applicable dollar 
catch-up limit for 2006, reduced by the $2,000 in elective deferrals 
previously treated as catch-up contributions, the entire $3,000 of 
elective deferrals is treated as a catch-up contribution.
    (iv) In determining Participant B's ADR, the $5,000 of catch-up 
contributions are subtracted from Participant B's elective deferrals for 
the plan year under paragraph (d)(2)(i) of this section. Accordingly, 
Participant B's ADR is 10% ($12,000/$120,000). In addition, for purposes 
of applying the rules of section 401(k)(8), Participant B is treated as 
having elective deferrals of $12,000.
    (v) Participant C's elective deferrals for the year do not exceed an 
applicable limit for the plan year. Accordingly, Participant C's $8,500 
of elective deferrals must be taken into account in determining 
Participant C's ADR for purposes of section 401(k)(3).
    Example 3. (i) The facts are the same as in Example 2, except that 
Plan Q is amended to change the maximum permitted deferral percentage 
for highly compensated employees to 7%, effective for deferrals after 
April 1, 2006. Participant B, who has earned $40,000 in the first 3 
months of the year and has been deferring at a rate of 10% of 
compensation plus a pro-rata portion of the $5,000 applicable dollar 
catch-up limit for 2006, reduces the 10% of pay deferral rate to 7% for 
the remaining 9 months of the year (while continuing to defer a pro-rata 
portion of the $5,000 applicable dollar catch-up limit for 2006). During 
those 9 months, Participant B earns $80,000. Thus, Participant B's total 
elective deferrals for the year are $14,600 ($4,000 for the first 3 
months of the year plus $5,600 for the last 9 months of the year plus an 
additional $5,000 throughout the year).
    (ii) The employer-provided limit for Participant B for the plan year 
is $9,600 ($4,000 for the first 3 months of the year, plus $5,600 for 
the last 9 months of the year). Accordingly, Participant B's elective 
deferrals for the year that are in excess of the employer-provided limit 
are $5,000 (the excess of $14,600 over $9,600), which does not exceed 
the applicable dollar catch-up limit of $5,000.
    (iii) Alternatively, Plan Q may provide that the employer-provided 
limit is determined as the time-weighted average of the different 
deferral percentage limits over the course of the year. In this case, 
the time-weighted average limit is 7.75% for all participants, and the 
applicable limit for Participant B is 7.75% of $120,000, or $9,300. 
Accordingly, Participant B's elective deferrals for the year that are in 
excess of the employer-provided limit are $5,300 (the excess of $14,600 
over $9,300). Since the amount of Participant B's elective deferrals in 
excess of the employer-provided limit ($5,300) exceeds the applicable 
dollar catch-up limit for the taxable year, only $5,000 of Participant 
B's elective deferrals may be treated as catch-up contributions. In 
determining Participant B's actual deferral ratio, the $5,000 of catch-
up contributions are subtracted from Participant B's elective deferrals 
for the plan year under paragraph (d)(2)(i) of this section. 
Accordingly, Participant B's actual deferral ratio is 8% ($9,600/
$120,000). In addition, for purposes of applying the rules of section 
401(k)(8), Participant B is treated as having elective deferrals of 
$9,600.
    Example 4. (i) The facts are the same as in Example 1. In addition 
to Participant A, Participant D is a highly compensated employee who is 
eligible to make elective deferrals under Plan P. During 2006, 
Participant D, who is 60 years old, elects to defer $14,000.
    (ii) The ADP test is run for Plan P (after excluding the $3,000 in 
catch-up contributions from Participant A's elective deferrals), but 
Plan P needs to take corrective action in order to pass the ADP test. 
After applying the rules of section 401(k)(8)(C) to allocate the total 
excess contributions determined under section 401(k)(8)(B), the maximum 
deferrals which may be retained by any highly compensated employee in 
Plan P is $12,500.

[[Page 308]]

    (iii) Pursuant to paragraph (b)(1)(iii) of this section, the ADP 
limit under Plan P of $12,500 is an applicable limit. Accordingly, 
$1,500 of Participant D's elective deferrals exceed the applicable 
limit. Similarly, $2,500 of Participant A's elective deferrals (other 
than the $3,000 of elective deferrals treated as catch-up contributions 
because they exceed the section 401(a)(30) limit) exceed the applicable 
limit.
    (iv) The $1,500 of Participant D's elective deferrals that exceed 
the applicable limit are less than the applicable dollar catch-up limit 
and are treated as catch-up contributions. Pursuant to paragraph 
(d)(2)(iii) of this section, Plan P must retain Participant D's $1,500 
in elective deferrals and Plan P is not treated as failing to satisfy 
section 401(k)(8) merely because the elective deferrals are not 
distributed to Participant D.
    (v) The $2,500 of Participant A's elective deferrals that exceed the 
applicable limit are greater than the portion of the applicable dollar 
catch-up limit ($2,000) that remains after treating the $3,000 of 
elective deferrals in excess of the section 401(a)(30) limit as catch-up 
contributions. Accordingly, $2,000 of Participant A's elective deferrals 
are treated as catch-up contributions. Pursuant to paragraph (d)(2)(iii) 
of this section, Plan P must retain Participant A's $2,000 in elective 
deferrals and Plan P is not treated as failing to satisfy section 
401(k)(8) merely because the elective deferrals are not distributed to 
Participant A. However, $500 of Participant A's elective deferrals 
cannot be treated as catch-up contributions and must be distributed to 
Participant A in order to satisfy section 401(k)(8).
    Example 5. (i) Participant E is a highly compensated employee who is 
a catch-up eligible participant under a section 401(k) plan, Plan R, 
with a plan year ending October 31, 2006. Plan R does not limit elective 
deferrals except as necessary to comply with section 401(a)(30) and 
section 415. Plan R permits all catch-up eligible participants to defer 
an additional amount equal to the applicable dollar catch-up limit for 
the year ($5,000) in excess of the section 401(a)(30) limit. Participant 
E did not exceed the section 401(a)(30) limit in 2005 and did not exceed 
the ADP limit for the plan year ending October 31, 2005. Participant E 
made $3,200 of deferrals in the period November 1, 2005 through December 
31, 2005 and an additional $16,000 of deferrals in the first 10 months 
of 2006, for a total of $19,200 in elective deferrals for the plan year.
    (ii) Once Participant E's elective deferrals for the calendar year 
2006 exceed $15,000, subsequent elective deferrals are treated as catch-
up contributions at the time they are deferred, provided that such 
elective deferrals do not exceed the applicable dollar catch-up limit 
for the taxable year. Since the $1,000 in elective deferrals made after 
Participant E reaches the section 402(g) limit for the calendar year 
does not exceed the applicable dollar catch-up limit for 2006, the 
entire $1,000 is a catch-up contribution. Pursuant to paragraph 
(d)(2)(i) of this section, $1,000 is subtracted from Participant E's 
$19,200 in elective deferrals for the plan year ending October 31, 2006 
in determining Participant E's ADR for that plan year.
    (iii) The ADP test is run for Plan R (after excluding the $1,000 in 
elective deferrals in excess of the section 401(a)(30) limit), but Plan 
R needs to take corrective action in order to pass the ADP test. After 
applying the rules of section 401(k)(8)(C) to allocate the total excess 
contributions determined under section 401(k)(8)(C), the maximum 
deferrals that may be retained by any highly compensated employee under 
Plan R for the plan year ending October 31, 2006 (the ADP limit) is 
$14,800.
    (iv) Under paragraph (d)(2)(ii) of this section, elective deferrals 
that exceed the section 401(a)(30) limit under Plan R are also 
subtracted from Participant E's elective deferrals under Plan R for 
purposes of applying the rules of section 401(k)(8). Accordingly, for 
purposes of correcting the failed ADP test, Participant E is treated as 
having contributed $18,200 of elective deferrals in Plan R. The amount 
of elective deferrals that would have to be distributed to Participant E 
in order to satisfy section 401(k)(8)(C) is $3,400 ($18,200 minus 
$14,800), which is less than the excess of the applicable dollar catch-
up limit ($5,000) over the elective deferrals previously treated as 
catch-up contributions under Plan R for the taxable year ($1,000). Under 
paragraph (d)(2)(iii) of this section, Plan R must retain Participant 
E's $3,400 in elective deferrals and is not treated as failing to 
satisfy section 401(k)(8) merely because the elective deferrals are not 
distributed to Participant E.
    (v) Even though Participant E's elective deferrals for the calendar 
year 2006 have exceeded the section 401(a)(30) limit, Participant E can 
continue to make elective deferrals during the last 2 months of the 
calendar year, since Participant E's catch-up contributions for the 
taxable year are not taken into account in applying the section 
401(a)(30) limit for 2006. Thus, Participant E can make an additional 
contribution of $3,400 ($15,000 minus ($16,000 minus $4,400)) without 
exceeding the section 401(a)(30) for the calendar year and without 
regard to any additional catch-up contributions. In addition, 
Participant E may make additional catch-up contributions of $600 (the 
$5,000 applicable dollar catch-up limit for 2006, reduced by the $4,400 
($1,000 plus $3,400) of elective deferrals previously treated as catch-
up contributions during the taxable year). The $600 of catch-up 
contributions will not be taken into account in the ADP test for the 
plan year ending October 31, 2007.

[[Page 309]]

    Example 6. (i) The facts are the same as in Example 5, except that 
Participant E exceeded the section 401(a)(30) limit for 2005 by $1,300 
prior to October 31, 2005, and made $600 of elective deferrals in the 
period November 1, 2005, through December 31, 2005 (which were catch-up 
contributions for 2005). Thus, Participant E made $16,600 of elective 
deferrals for the plan year ending October 31, 2006.
    (ii) Once Participant E's elective deferrals for the calendar year 
2006 exceed $15,000, subsequent elective deferrals are treated as catch-
up contributions as they are deferred, provided that such elective 
deferrals do not exceed the applicable dollar catch-up limit for the 
taxable year. Since the $1,000 in elective deferrals made after 
Participant E reaches the section 402(g) limit for calendar year 2006 
does not exceed the applicable dollar catch-up limit for 2006, the 
entire $1,000 is a catch-up contribution. Pursuant to paragraph 
(d)(2)(i) of this section, $1,000 is subtracted from Participant E's 
elective deferrals in determining Participant E's ADR for the plan year 
ending October 31, 2006. In addition, the $600 of catch-up contributions 
from the period November 1, 2005 to December 31, 2005 are subtracted 
from Participant E's elective deferrals in determining Participant E's 
ADR. Thus, the total elective deferrals taken into account in 
determining Participant E's ADR for the plan year ending October 31, 
2006, is $15,000 ($16,600 in elective deferrals for the current plan 
year, less $1,600 in catch-up contributions).
    (iii) The ADP test is run for Plan R (after excluding the $1,600 in 
elective deferrals in excess of the section 401(a)(30) limit), but Plan 
R needs to take corrective action in order to pass the ADP test. After 
applying the rules of section 401(k)(8)(C) to allocate the total excess 
contributions determined under section 401(k)(8)(C), the maximum 
deferrals that may be retained by any highly compensated employee under 
Plan R (the ADP limit) is $14,800.
    (iv) Under paragraph (d)(2)(ii) of this section, elective deferrals 
that exceed the section 401(a)(30) limit under Plan R are also 
subtracted from Participant E's elective deferrals under Plan R for 
purposes of applying the rules of section 401(k)(8). Accordingly, for 
purposes of correcting the failed ADP test, Participant E is treated as 
having contributed $15,000 of elective deferrals in Plan R. The amount 
of elective deferrals that would have to be distributed to Participant E 
in order to satisfy section 401(k)(8)(C) is $200 ($15,000 minus 
$14,800), which is less than the excess of the applicable dollar catch-
up limit ($5,000) over the elective deferrals previously treated as 
catch-up contributions under Plan R for the taxable year ($1,000). Under 
paragraph (d)(2)(iii) of this section, Plan R must retain Participant 
E's $200 in elective deferrals and is not treated as failing to satisfy 
section 401(k)(8) merely because the elective deferrals are not 
distributed to Participant E.
    (v) Even though Participant E's elective deferrals for calendar year 
2006 have exceeded the section 401(a)(30) limit, Participant E can 
continue to make elective deferrals during the last 2 months of the 
calendar year, since Participant E's catch-up contributions for the 
taxable year are not taken into account in applying the section 
401(a)(30) limit for 2006. Thus Participant E can make an additional 
contribution of $200 ($15,000 minus ($16,000 minus $1,200)) without 
exceeding the section 401(a)(30) for the calendar year and without 
regard to any additional catch-up contributions. In addition, 
Participant E may make additional catch-up contributions of $3,800 (the 
$5,000 applicable dollar catch-up limit for 2006, reduced by the $1,200 
($1,000 plus $200) of elective deferrals previously treated as catch-up 
contributions during the taxable year). The $3,800 of catch-up 
contributions will not be taken into account in the ADP test for the 
plan year ending October 31, 2007.
    Example 7. (i) Participant F, who is 58 years old, is a highly 
compensated employee who earns $100,000 per year. Participant F 
participates in a section 401(k) plan, Plan S, for the first 6 months of 
the year and then transfers to another section 401(k) plan, Plan T, 
sponsored by the same employer, for the second 6 months of the year. 
Plan S limits highly compensated employees' elective deferrals to 6% of 
compensation for the period of participation, but permits catch-up 
eligible participants to defer amounts in excess of 6% during the plan 
year, up to the applicable dollar catch-up limit for the year. Plan T 
limits highly compensated employees' elective deferrals to 8% of 
compensation for the period of participation, but permits catch-up 
eligible participants to defer amounts in excess of 8% during the plan 
year, up to the applicable dollar catch-up limit for the year. 
Participant F earned $50,000 in the first 6 months of the year and 
deferred $6,000 under Plan S. Participant F also deferred $6,500 under 
Plan T.
    (ii) As of the last day of the plan year, Participant F has $3,000 
in elective deferrals under Plan S that exceed the employer-provided 
limit of $3,000. Under Plan T, Participant F has $2,500 in elective 
deferrals that exceed the employer-provided limit of $4,000. The total 
amount of elective deferrals in excess of employer-provided limits, 
$5,500, exceeds the applicable dollar catch-up limit by $500. 
Accordingly, $500 of the elective deferrals in excess of the employer-
provided limits are not catch-up contributions and are treated as 
regular elective deferrals (and are taken into account in the ADP test). 
The determination of which elective deferrals in excess of an applicable 
limit are treated as catch-up contributions is permitted to be made in 
any manner that is not inconsistent

[[Page 310]]

with the manner in which such amounts were actually deferred under Plan 
S and Plan T.
    Example 8. (i) Employer X sponsors Plan P, which provides for 
matching contributions equal to 50% of elective deferrals that do not 
exceed 10% of compensation. Elective deferrals for highly compensated 
employees are limited, on a payroll-by-payroll basis, to 10% of 
compensation. Employer X pays employees on a monthly basis. Plan P also 
provides that elective contributions are limited in accordance with 
section 401(a)(30) and other applicable statutory limits. Plan P also 
provides for catch-up contributions. Under Plan P, for purposes of 
calculating the amount to be treated as catch-up contributions (and to 
be excluded from the ADP test), amounts in excess of the 10% limit for 
highly compensated employees are determined at the end of the plan year 
based on compensation used for purposes of ADP testing (testing 
compensation), a definition of compensation that is different from the 
definition used under the plan for purposes of calculating elective 
deferrals and matching contributions during the plan year (deferral 
compensation).
    (ii) Participant A, a highly compensated employee, is a catch-up 
eligible participant under Plan P with deferral compensation of $10,000 
per monthly payroll period. Participant A defers 10% per payroll period 
for the first 10 months of the year, and is allocated a matching 
contribution each payroll period of $500. In addition, Participant A 
defers an additional $4,000 during the first 10 months of the year. 
Participant A then reduces deferrals during the last 2 months of the 
year to 5% of compensation. Participant A is allocated a matching 
contribution of $250 for each of the last 2 months of the plan year. For 
the plan year, Participant A has $15,000 in elective deferrals and 
$5,500 in matching contributions.
    (iii) A's testing compensation is $118,000. At the end of the plan 
year, based on 10% of testing compensation, or $11,800, Plan P 
determines that A has $3,200 in deferrals that exceed the 10% employer 
provided limit. Plan P excludes $3,200 from ADP testing and calculates 
A's ADR as $11,800 divided by $118,000, or 10%. Although A has not been 
allocated a matching contribution equal to 50% of $11,800, because Plan 
P provides that matching contributions are calculated based on elective 
deferrals during a payroll period as a percentage of deferral 
compensation, Plan P is not required to allocate an additional $400 of 
matching contributions to A.

    (i) Effective date--(1) Statutory effective date. Section 414(v) 
applies to contributions in taxable years beginning on or after January 
1, 2002.
    (2) Regulatory effective date. Paragraphs (a) through (h) of this 
section apply to contributions in taxable years beginning on or after 
January 1, 2004.

[T.D. 9072, 68 FR 40515, July 8, 2003]



Sec.  1.414(w)-1  Permissible withdrawals from eligible automatic 
contribution arrangements.

    (a) Overview. Section 414(w) provides rules under which certain 
employees are permitted to elect to make a withdrawal of default 
elective contributions from an eligible automatic contribution 
arrangement. This section sets forth the rules applicable to permissible 
withdrawals from an eligible automatic contribution arrangement within 
the meaning of section 414(w). Paragraph (b) of this section defines an 
eligible automatic contribution arrangement. Paragraph (c) of this 
section describes a permissible withdrawal and addresses which employees 
are eligible to elect a withdrawal, the timing of the withdrawal 
election, and the amount of the withdrawal. Paragraph (d) of this 
section describes the tax and other consequences of the withdrawal. 
Paragraph (e) of this section includes the definitions applicable to 
this section.
    (b) Eligible automatic contribution arrangement--(1) In general. An 
eligible automatic contribution arrangement is an automatic contribution 
arrangement under an applicable employer plan that is intended to be an 
eligible automatic contribution arrangement for the plan year and that 
satisfies the uniformity requirement under paragraph (b)(2) of this 
section, and the notice requirement under paragraph (b)(3) of this 
section. An eligible automatic contribution arrangement need not cover 
all employees who are eligible to elect to have contributions made on 
their behalf under the applicable employer plan.
    (2) Uniformity requirement--(i) In general. An eligible automatic 
contribution arrangement must provide that the default elective 
contribution is a uniform percentage of compensation.
    (ii) Exception to uniform percentage requirement. An arrangement 
does not violate the uniformity requirement of paragraph (b)(2)(i) of 
this section merely because the percentage varies in a manner that is 
permitted under Sec.  1.401(k)-3(j)(2)(iii), except that the

[[Page 311]]

rule of Sec.  1.401(k)-3(j)(2)(iii)(B) is applied without regard to 
whether the arrangement is intended to be a qualified automatic 
contribution arrangement.
    (iii) Rules of application. For purposes of this paragraph (b)(2), 
all automatic contribution arrangements that are intended to be eligible 
automatic contribution arrangements within a plan (or within the 
disaggregated plan under Sec.  1.410(b)-7, in the case of a plan subject 
to section 410(b)) are aggregated. Thus, for example, if a single plan 
within the meaning of section 414(l) covering employees in two separate 
divisions has two different automatic contribution arrangements that are 
intended to be eligible automatic contributions arrangements, the two 
automatic contribution arrangements can constitute eligible automatic 
contribution arrangements only if the default elective contributions 
under the arrangements are the same percentage of compensation. However, 
if the different automatic contribution arrangements cover employees in 
portions of the plan that are mandatorily disaggregated under the rules 
of section 410(b), then there is no requirement to aggregate those 
automatic contribution arrangements under the uniformity requirements of 
this paragraph (b)(2).
    (3) Notice requirement--(i) General rule. The notice requirement of 
this paragraph (b)(3) is satisfied for a plan year if each covered 
employee is given notice of the employee's rights and obligations under 
the arrangement. The notice must be sufficiently accurate and 
comprehensive to apprise the employee of such rights and obligations, 
and be written in a manner calculated to be understood by the average 
employee to whom the arrangement applies. The notice must be in writing; 
however, see Sec.  1.401(a)-21 for rules permitting the use of 
electronic media to provide applicable notices.
    (ii) Content requirement. The notice must include the provisions 
found in Sec.  1.401(k)-3(d)(2)(ii) to the extent those provisions apply 
to the arrangement. A notice is not considered sufficiently accurate and 
comprehensive unless the notice accurately describes--
    (A) The level of the default elective contributions which will be 
made on the employee's behalf if the employee does not make an 
affirmative election;
    (B) The employee's rights to elect not to have default elective 
contributions made to the plan on his or her behalf or to have a 
different percentage of compensation or different amount of contribution 
made to the plan on his or her behalf;
    (C) How contributions made under the arrangement will be invested in 
the absence of any investment election by the employee; and
    (D) The employee's rights to make a permissible withdrawal, if 
applicable, and the procedures to elect such a withdrawal.
    (iii) Timing--(A) General rule. The timing requirement of this 
paragraph (b)(3)(iii) is satisfied if the notice is provided within a 
reasonable period before the beginning of each plan year or, in the plan 
year the employee is first eligible to make a cash or deferred election 
(or first becomes covered under the automatic contribution arrangement 
as a result of a change in employment status), within a reasonable 
period before the employee becomes a covered employee. In addition, a 
notice satisfies the timing requirements of paragraph (b)(3) of this 
section only if it is provided sufficiently early so that the employee 
has a reasonable period of time after receipt of the notice in order to 
make the election described under paragraph (e)(2)(i) or (e)(2)(ii) of 
this section.
    (B) Deemed satisfaction of timing requirement. The timing 
requirement of this paragraph (b)(3)(iii) is satisfied if at least 30 
days (and no more than 90 days) before the beginning of each plan year, 
the notice is given to each employee covered under the automatic 
contribution arrangement for the plan year. In the case of an employee 
who does not receive the notice within the period described in the 
previous sentence because the employee becomes eligible to make a cash 
or deferred election (or becomes covered under the automatic 
contribution arrangement as a result of a change in employment status) 
after the 90th day before the beginning of the plan year, the timing 
requirement is deemed to be satisfied if the notice is provided no more 
than 90

[[Page 312]]

days before the employee becomes eligible to make a cash or deferred 
election (or becomes covered under the automatic contribution 
arrangement as a result of a change in employment status), and no later 
than the date that affords the employee a reasonable period of time 
after receipt of the notice to make the election described under 
paragraph (e)(2)(i) or (e)(2)(ii) of this section. If it is not 
practicable for the notice to be provided on or before the date 
specified in the plan that an employee becomes eligible to make a cash 
or deferred election, the notice will nonetheless be treated as provided 
timely if it is provided as soon as practicable after that date and the 
employee is permitted to elect to defer from all types of compensation 
that may be deferred under the plan earned beginning on that date.
    (c) Permissible withdrawal--(1) In general. If the plan so provides, 
any employee who has default elective contributions made under the 
eligible automatic contribution arrangement may elect to make a 
withdrawal of such contributions (and earnings attributable thereto) in 
accordance with the requirements of this paragraph (c). An applicable 
employer plan that includes an eligible automatic contribution 
arrangement will not fail to satisfy the prohibition on in-service 
withdrawals under section 401(k)(2)(B), 403(b)(7), 403(b)(11), or 
457(d)(1) merely because it permits withdrawals that satisfy the timing 
requirement of paragraph (c)(2) of this section and the amount 
requirement of paragraph (c)(3) of this section.
    (2) Timing--(i) Last date to make election. A covered employee's 
election to withdraw default elective contributions must be made no 
later than 90 days after the date of the first default elective 
contribution under the eligible automatic contribution arrangement and 
must be effective no later than the date set forth in paragraph 
(c)(2)(iii) of this section. A plan is permitted to set an earlier 
deadline for making this election, but if a plan provides that a covered 
employee may withdraw default elective contributions, then the election 
period for the covered employee must be at least 30 days.
    (ii) Determination of date of first default elective contribution. 
For purposes of this paragraph (c)(2), the date of the first default 
elective contribution is the date that the compensation that is subject 
to the cash or deferred election would otherwise have been included in 
gross income.
    (iii) Latest effective date of the election. The effective date of 
an election described in this paragraph (c)(2) cannot be after the 
earlier of--
    (A) The pay date for the second payroll period that begins after the 
date the election is made; and
    (B) The first pay date that occurs at least 30 days after the 
election is made.
    (iv) Special rules--(A) Treatment of periods without default 
elective contributions. For purposes of determining the date of the 
first default elective contribution under the eligible automatic 
contribution arrangement, a plan is permitted to treat an employee who 
for an entire plan year did not have default elective contributions made 
under the eligible automatic contribution arrangement as if the employee 
had not had such contributions for any prior plan year as well.
    (B) Treatment relating to aggregation of arrangements. The 
determination of whether an election is made no later than 90 days after 
the date of the first default elective contribution under the eligible 
automatic contribution arrangement must take into account any other 
eligible automatic contribution arrangement that is required to be 
aggregated with the eligible automatic contribution arrangement under 
the rules of paragraph (b)(2)(iii) of this section.
    (3) Amount and timing of distributions--(i) In general. A 
distribution satisfies the requirement of this paragraph (c)(3) if the 
distribution is equal to the amount of default elective contributions 
made under the eligible automatic contribution arrangement through the 
effective date of the election described in paragraph (c)(2) of this 
section (adjusted for allocable gains and losses to the date of 
distribution). If default elective contributions are separately 
accounted for in the participant's account, the amount of the 
distribution will be the total amount in that account. However, if 
default

[[Page 313]]

elective contributions are not separately accounted for under the plan, 
the amount of the allocable gains and losses will be determined under 
rules similar to those provided under Sec.  1.401(k)-2(b)(2)(iv) for the 
distribution of excess contributions.
    (ii) Fees. The distribution amount as determined under this 
paragraph (c)(3) may be reduced by any generally applicable fees. 
However, the plan may not charge a higher fee for a distribution under 
section 414(w) than would apply to any other distributions of cash.
    (iii) Date of distribution. The distribution must be made in 
accordance with the plan's ordinary timing procedures for processing 
distributions and making distributions.
    (d) Consequences of the withdrawal--(1) Income tax consequences--(i) 
Year of inclusion. The amount of the withdrawal is includible in the 
eligible employee's gross income for the taxable year in which the 
distribution is made. However, any portion of the distribution 
consisting of designated Roth contributions is not included in an 
employee's gross income a second time. The portion of the withdrawal 
that is treated as an investment in the contract is determined without 
regard to any plan contributions other than those distributed as a 
withdrawal of default elective contributions.
    (ii) No additional tax on early distributions from qualified 
retirement plans. The withdrawal is not subject to the additional tax 
under section 72(t).
    (iii) Reporting. The amount of the withdrawal is reported on Form 
1099-R, ``Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc.,'' as described in the 
applicable instructions.
    (iv) Disregarded for purposes of section 402(g). The amount of the 
withdrawal is not taken into account in determining the limitation on 
elective deferrals under section 402(g).
    (2) Forfeiture of matching contributions. In the case of any 
withdrawal made under paragraph (c) of this section, employer matching 
contributions with respect to the amount withdrawn that have been 
allocated to the participant's account (adjusted for allocable gains and 
losses) must be forfeited. A plan is permitted to provide that employer 
matching contributions will not be made with respect to any withdrawal 
made under paragraph (c) of this section if the withdrawal has been made 
prior to the date as of which the match would otherwise be allocated.
    (3) Consent rules. A withdrawal made under paragraph (c) of this 
section may be made without regard to any notice or consent otherwise 
required under section 401(a)(11) or 417.
    (e) Definitions. Unless indicated otherwise, the following 
definitions apply for purposes of section 414(w) and this section.
    (1) Applicable employer plan. An applicable employer plan means a 
plan that--
    (i) Is qualified under section 401(a);
    (ii) Satisfies the requirements of section 403(b);
    (iii) Is a section 457(b) eligible governmental plan described in 
Sec.  1.457-2(f);
    (iv) Is a simplified employee pension the terms of which provide for 
a salary reduction arrangement described in section 408(k)(6); or
    (v) Is a SIMPLE described in section 408(p).
    (2) Automatic contribution arrangement. An automatic contribution 
arrangement means an arrangement that provides for a cash or deferred 
election and which specifies that, in the absence of a covered 
employee's affirmative election, a default election applies under which 
the employee is treated as having elected to have default elective 
contributions made on his or her behalf under the plan. The default 
election begins to apply with respect to an eligible employee no earlier 
than a reasonable period of time after receipt of the notice describing 
the automatic contribution arrangement. This default election ceases to 
apply with respect to an eligible employee for periods of time with 
respect to which the employee has an affirmative election that is 
currently in effect to--
    (i) Not have any default elective contributions made on his or her 
behalf; or
    (ii) Have contributions made in a different amount or percentage of 
compensation.
    (3) Covered employee. Covered employee means an employee who is 
covered under the automatic contribution

[[Page 314]]

arrangement, determined under the terms of the plan. A plan must provide 
whether an employee who makes an affirmative election remains a covered 
employee. If a plan provides that an employee who makes an affirmative 
election described in paragraph (e)(2)(i) or (e)(2)(ii) of this section 
remains a covered employee, then the employee must continue to receive 
the notice described in paragraph (b)(3) of this section and the plan 
may be eligible for the excise tax relief with respect to excess amounts 
distributed within 6 months after the end of the plan year under section 
4979(f)(1). Such an employee will also have the default election reapply 
if the plan provides that the employee's prior affirmative election no 
longer remains in effect and the employee does not make a new 
affirmative election.
    (4) Default elective contributions. Default elective contributions 
means the contributions that are made at a specified level or amount 
under an automatic contribution arrangement in the absence of a covered 
employee's affirmative election that are--
    (i) Contributions described in section 402(g)(3); or
    (ii) Contributions made to an eligible governmental plan within the 
meaning of Sec.  1.457-2(f) that would be elective contributions if they 
were made under a qualified plan.
    (f) Effective/applicability date--(1) Statutory effective date. 
Section 414(w) applies to plan years beginning on or after January 1, 
2008.
    (2) Regulatory effective date. This section applies to plan years 
beginning on or after January 1, 2010. For plan years that begin in 
2008, a plan must operate in accordance with a good faith interpretation 
of section 414(w). For this purpose, a plan that operates in accordance 
with this section will be treated as operating in accordance with a good 
faith interpretation of section 414(w).

[T.D. 9447, 74 FR 8212, Feb. 24, 2009]



Sec.  1.415(a)-1  General rules with respect to limitations on benefits 
and contributions under qualified plans.

    (a) Trusts. Under sections 415 and 401(a)(16), a trust that forms 
part of a pension, profit-sharing, or stock bonus plan will not be 
qualified under section 401(a) if any of the following conditions 
exists:
    (1) In the case of a defined benefit plan, the annual benefit with 
respect to any participant for any limitation year exceeds the 
limitations of section 415(b) and Sec.  1.415(b)-1.
    (2) In the case of a defined contribution plan, the annual additions 
credited with respect to any participant for any limitation year exceed 
the limitations of section 415(c) and Sec.  1.415(c)-1.
    (3) The trust has been disqualified under section 415(g) and Sec.  
1.415(g)-1 for any year.
    (b) Certain annuities and accounts--(1) In general. Under section 
415, an employee annuity plan described in section 403(a), an annuity 
contract described in section 403(b), or a simplified employee pension 
described in section 408(k) will not be considered to be described in 
the otherwise applicable section if any of the following conditions 
exists:
    (i) The annual benefit under a defined benefit plan with respect to 
any participant for any limitation year exceeds the limitations of 
section 415(b) and Sec.  1.415(b)-1.
    (ii) The contributions and other additions credited under a defined 
contribution plan with respect to any participant for any limitation 
year exceed the limitations of section 415(c) and Sec.  1.415(c)-1.
    (iii) The employee annuity plan, annuity contract, or simplified 
employee pension has been disqualified under section 415(g) and Sec.  
1.415(g)-1 for any year.
    (2) Special rule for section 403(b) annuity contracts. If the 
contributions and other additions under an annuity contract that 
otherwise satisfies the requirements of section 403(b) exceed the 
limitations of section 415(c) and Sec.  1.415(c)-1 with respect to any 
participant for any limitation year (regardless of whether the annuity 
contract is a defined contribution plan or a defined benefit plan), then 
the portion of the contract that includes such excess annual addition 
fails to be a section 403(b) annuity contract, and the remaining portion 
of the contract is a section 403(b) annuity contract. However, the 
status of the remaining portion of the contract as a section 403(b) 
annuity

[[Page 315]]

contract is not retained unless, for the year of the excess and each 
year thereafter, the issuer of the contract maintains separate accounts 
for each such portion. In addition, if the benefit under an annuity 
contract that is a defined benefit plan and that otherwise satisfies the 
requirements of section 403(b) exceeds the limitations of section 415(b) 
and Sec.  1.415(b)-1 with respect to any participant for any limitation 
year, then the contract fails to be a section 403(b) annuity contract.
    (3) Section 403(b) annuity contract. For purposes of section 415 and 
regulations promulgated under section 415, the term section 403(b) 
annuity contract includes arrangements that are treated as annuity 
contracts for purposes of section 403(b). Thus, such term includes 
custodial accounts described in section 403(b)(7) and retirement income 
accounts described in section 403(b)(9).
    (c) Regulations--(1) In general. This section provides general rules 
regarding the application of section 415. For further rules regarding 
the application of section 415, see--
    (i) Section 1.415(b)-1 (for general rules regarding the limits 
applicable to defined benefit plans);
    (ii) Section 1.415(b)-2 (for special rules for defined benefit plans 
where a participant has multiple annuity starting dates);
    (iii) Section 1.415(c)-1 (for general rules regarding the limits 
applicable to defined contribution plans);
    (iv) Section 1.415(c)-2 (for rules regarding the definition of 
compensation for purposes of section 415);
    (v) Section 1.415(d)-1 (for rules regarding cost-of-living 
adjustments to the various limits of section 415);
    (vi) Section 1.415(f)-1 (for rules for aggregating plans for 
purposes of section 415);
    (vii) Section 1.415(g)-1 (for rules regarding disqualification of 
plans that fail to satisfy the requirements of section 415); and
    (viii) Section 1.415(j)-1 (for rules regarding limitation years).
    (2) Cross references to special rules for section 403(b) annuity 
contracts. For special rules relating to section 403(b) annuity 
contracts, see--
    (i) Section 1.415(c)-2(g)(1) and (3) (relating to the definition of 
compensation for section 403(b) annuity contracts);
    (ii) Section 1.415(f)-1(f) (relating to rules for section 403(b) 
annuity contracts for purposes of aggregating plans);
    (iii) Section 1.415(g)-1(b)(3)(iv)(C) (regarding disqualification of 
a section 403(b) annuity contract aggregated with a qualified defined 
contribution plan if the aggregated plans exceed the limitations of 
section 415(c));
    (iv) Section 1.415(g)-1(c) (relating to the plan year for section 
403(b) annuity contracts); and
    (v) Section 1.415(j)-1(e) (relating to the limitation year for 
section 403(b) annuity contracts).
    (3) Cross references to special rules for governmental plans. For 
special rules relating to governmental plans, see--
    (i) Paragraph (f)(4) of this section (regarding permissive service 
credits);
    (ii) Paragraph (g)(2) of this section (providing a delayed effective 
date for governmental plans);
    (iii) Section 1.415(b)-1(a)(6)(i) (providing an exception from the 
compensation-based limit of section 415(b)(1)(B) for governmental 
plans);
    (iv) Section 1.415(b)-1(a)(7)(ii) (regarding a special limitation 
for certain governmental plans making an election during 1990);
    (v) Section 1.415(b)-1(b)(4) (regarding qualified governmental 
excess benefit arrangements);
    (vi) Section 1.415(b)-1(d)(3) and (4) (regarding age adjustments to 
the dollar limit of section 415(b)(1)(A) for employees of police and 
fire departments and members of the Armed Forces of the United States, 
and for survivor and disability benefits);
    (vii) Section 1.415(b)-1(g)(3) (regarding adjustments to applicable 
limitations for years of participation, and adjustments to applicable 
limitations for years of service for survivor and disability benefits 
under governmental plans);
    (viii) Section 1.415(c)-1(b)(2)(ii) and (3)(iii) (regarding amounts 
not treated as annual additions under governmental plans); and
    (ix) Section 1.415(c)-2(e)(5) (providing an alternative rule for 
inclusion of compensation after a severance from employment for 
governmental plans).

[[Page 316]]

    (4) Cross references to special rules for multiemployer plans. For 
special rules relating to multiemployer plans as defined in section 
414(f), see--
    (i) Paragraph (e) of this section (regarding benefits or 
contributions taken into account where a plan is maintained by more than 
one employer);
    (ii) Paragraph (f)(5)(ii) of this section (providing a special 
definition of severance from employment for multiemployer plans);
    (iii) Section 1.415(b)-1(a)(6)(ii) (providing an exception from the 
compensation-based limit for multiemployer plans);
    (iv) Section 1.415(b)-1(f)(3) (regarding the application of the 
minimum $10,000 limitation on benefits in the case of a multiemployer 
plan);
    (v) Section 1.415(f)-1(g) (providing special rules for aggregating 
multiemployer plans with other plans); and
    (vi) Section 1.415(g)-1(b)(3)(ii) (regarding plan disqualification 
rules where a multiemployer plan is aggregated with a plan that is not a 
multiemployer plan and the aggregated plans exceed the limitations of 
section 415).
    (5) Cross references to special rules for plans that are not subject 
to the requirements of section 411. For special rules relating to plans 
that are not subject to the requirements of section 411, see--
    (i) Paragraph (d)(1) of this section and Sec.  1.415(b)-1(a)(7)(iii) 
(providing that the rule limiting accruals to the section 415(b) limits 
does not apply to plans that are not subject to the requirements of 
section 411); and
    (ii) Section 1.415(b)-1(b)(2)(iii) (providing rules for applying the 
section 411(c) factors in determining the annual benefit attributable to 
employee contributions for plans that are not subject to the 
requirements of section 411).
    (6) Cross references to special rules for plans maintained by 
churches. For special rules relating to plans maintained by churches as 
defined in section 3121(w)(3)(A), see Sec. Sec.  1.415(b)-1(a)(6)(iv) 
and 1.415(b)-1(a)(7)(iv) (providing an exception from the compensation-
based limit for participants who have never been a highly compensated 
employee of the church).
    (d) Plan provisions--(1) In general. Although no specific plan 
provision is required under section 415 in order for a plan to establish 
or maintain its qualification, the plan provisions must preclude the 
possibility that any distribution under a defined benefit plan or annual 
addition under a defined contribution plan will exceed the limitations 
of section 415. In addition, a defined benefit plan that is subject to 
the requirements of section 411 must preclude the possibility that any 
accrual under the plan will exceed the limitations of section 415. A 
defined benefit plan may include provisions that automatically freeze or 
reduce the rate of benefit accrual (or limit the benefit payable in the 
case of a plan that is not subject to the requirements of section 411), 
and a defined contribution plan may include provisions that 
automatically limit the annual addition to a level necessary to prevent 
the limitations of section 415 from being exceeded with respect to any 
participant. For rules relating to this type of plan provision and the 
definitely determinable benefit requirement for pension plans, see Sec.  
1.401(a)-1(b)(1)(iii). Because Sec.  1.401(a)-1(b)(1)(iii) requires that 
the operation of such a provision preclude discretion by the employer, 
if two defined benefit plans that are aggregated under the rules of 
section 415(f) would otherwise provide for aggregate benefits that might 
exceed the limits of section 415(b), the plan provisions must specify 
(without involving employer discretion) how benefits will be limited to 
prevent a violation of section 415(b).
    (2) Special rule for profit-sharing and stock bonus plans. A 
provision of a profit-sharing or stock bonus plan that automatically 
freezes or reduces the amount of annual additions to ensure that the 
limitations of section 415 will not be exceeded must comply with the 
requirement set forth in Sec.  1.401-1(b)(1)(ii) or (iii) (as 
applicable) that such plans provide a definite predetermined formula for 
allocating the contributions made to the plan among the participants. If 
the operation of a provision that automatically freezes or reduces the 
amount of annual additions to ensure that the limitations of section 415 
are not exceeded does not involve discretionary action on the part

[[Page 317]]

of the employer, the definite predetermined allocation formula 
requirement is not violated by the provision. If the operation of such a 
provision involves discretionary action on the part of the employer, the 
definite predetermined allocation formula requirement is violated. For 
example, if two profit-sharing plans of one employer otherwise provide 
for aggregate contributions which may exceed the limits of section 
415(c), the plan provisions must specify (without involving employer 
discretion) under which plan contributions and allocations will be 
reduced to prevent an excess annual addition and how the reduction will 
occur.
    (3) Incorporation by reference--(i) In general. A plan is permitted 
to incorporate by reference the limitations of section 415, and will not 
fail to meet the definitely determinable benefit requirement or the 
definite predetermined allocation formula requirement, whichever applies 
to the plan, merely because it incorporates the limits of section 415 by 
reference.
    (ii) Section 415 can be applied in more than one manner, but a 
statutory or regulatory default rule exists. Where a provision of 
section 415 is permitted to be applied in more than one manner but is to 
be applied in a specified manner in the absence of contrary plan 
provisions (in other words, a default rule exists), if a plan 
incorporates the limitations of section 415 by reference with respect to 
that provision of section 415 and does not specifically vary from the 
default rule, then the default rule applies. With respect to a provision 
of section 415 for which a default rule exists, if the limitations of 
section 415 are to be applied in a manner other than using the default 
rule, the plan must specify the manner in which the limitation is to be 
applied in addition to generally incorporating the limitations of 
section 415 by reference. For example, if a plan generally incorporates 
the limitations of section 415 by reference and does not restrict the 
accrued benefits to which the amendments to section 415(b)(2)(E) made by 
the Uruguay Round Agreements Act of 1994, Public Law 103-465 (108 Stat. 
4809) (GATT), apply (as permitted by Q&A-12 of Rev. Rul. 98-1 (1998-1 CB 
249) (see Sec.  601.601(d)(2) of this chapter), which reflects the 
amendments to section 767 of GATT made by section 1449 of the Small 
Business Job Protection Act of 1996, Public Law 104-188 (110 Stat. 
1755)), then the amendments to section 415(b)(2)(E) made by GATT apply 
to all benefits under the plan.
    (iii) Section 415 can be applied in more than one manner with no 
statutory or regulatory default. If a limitation of section 415 may be 
applied in more than one manner, and if there is no governing principle 
pursuant to which that limitation is applied in the absence of contrary 
plan provisions, then the plan must specify the manner in which the 
limitation is to be applied in addition to generally incorporating the 
limitations of section 415 by reference. For example, if an employer 
maintains two profit-sharing plans, and if any participant participates 
in more than one such plan, then both plans must specify (in a 
consistent manner) under which of the employer's two profit-sharing 
plans annual additions must be reduced if aggregate annual additions 
would otherwise exceed the limitations of section 415(c).
    (iv) Former requirements. A plan is not permitted to incorporate by 
reference formerly applicable requirements of section 415 that are no 
longer in force (such as the limits of former section 415(e)).
    (v) Cost-of-living adjustments--(A) In general. A plan is permitted 
to incorporate by reference the annual adjustments to the limitations of 
section 415 that are made pursuant to section 415(d). See Sec.  
1.415(d)-1 for additional rules relating to cost-of-living adjustments 
under section 415(d).
    (B) Cost-of-living adjustments not included in accrued benefit until 
effective. Notwithstanding that a plan incorporates the increases to the 
applicable limits under section 415(d) by reference, the accrued benefit 
of a participant for purposes of section 411 and any amount payable to a 
participant for purposes of Sec.  1.415(b)-1(a)(1) are not permitted to 
reflect increases pursuant to the annual increase under section 415(d) 
of the dollar limitation described in section 415(b)(1)(A) or the 
compensation limit described in section 415(b)(1)(B) for any period 
before the annual increase becomes effective. See

[[Page 318]]

Sec.  1.415(d)-1(a)(3) for rules relating to when the annual adjustments 
to the dollar and compensation limitations are effective. A plan 
amendment does not violate the requirements of section 411(d)(6) merely 
because it eliminates the incorporation by reference of the increases 
under section 415(d) with respect to increases that have not yet 
occurred.
    (C) Application of increase in defined benefit dollar limit to 
participants who have incurred a severance from employment or commenced 
receiving benefits. If a plan incorporates by reference the annual 
adjustments to the limitations of section 415 pursuant to this paragraph 
(d)(3)(v), the plan will be treated as applying the section 415(d) cost-
of-living adjustments to the maximum extent permitted under the safe 
harbor described in Sec.  1.415(d)-1(a)(5), except to the extent 
provided in this paragraph (d)(3)(v)(C). Thus, such a plan is not 
subject to the requirements of Sec.  1.415(b)-1(b)(1)(iii) (providing 
special rules for determining the annual benefit of an employee in the 
case of multiple annuity starting dates) with respect to benefit 
increases that result solely from an increase in the section 415(b) 
limits pursuant to section 415(d). If a plan incorporates by reference 
the annual adjustments to the limitations of section 415 pursuant to 
this paragraph (d)(3)(v), the annual increase under section 415(d) of 
the dollar limitation described in section 415(b)(1)(A) does not apply 
with respect to a participant if the increase is effective after the 
participant's severance from employment with the employer maintaining 
the plan (or, if earlier, after the annuity starting date in the case of 
a participant who has commenced receiving benefits), unless the plan 
specifies that this annual increase applies. Similarly, if a plan 
incorporates by reference the annual adjustments to the limitations of 
section 415 pursuant to this paragraph (d)(3)(v), the annual increase 
under section 415(d) of the compensation-based limitation described in 
section 415(b)(1)(B) does not apply with respect to a participant for 
increases that are effective after the participant's severance from 
employment with the employer maintaining the plan (or, if earlier, after 
the annuity starting date in the case of a participant who has commenced 
receiving benefits), unless the plan specifies that this annual increase 
applies.
    (D) Treatment of cost-of-living adjustments for funding and 
deduction purposes. In general, the annual increase under section 415(d) 
of the dollar limitation described in section 415(b)(1)(A) and the 
compensation limitation described in section 415(b)(1)(B) is treated as 
a plan amendment, regardless of whether the plan reflects the increase 
automatically through operation of plan provisions in accordance with 
this paragraph (d)(3)(v) or the plan is amended to reflect the increase 
(pursuant to Sec.  1.415(d)-1(a)(5)). However, where a plan reflects the 
annual increase under section 415(d) of the dollar limitation described 
in section 415(b)(1)(A) or the compensation limitation described in 
section 415(b)(1)(B) automatically through operation of plan provisions 
pursuant to this paragraph (d)(3)(v), the funding method for the plan is 
permitted to provide for this annual increase to be treated as an 
experience loss for purposes of applying sections 404, 412, and 431.
    (e) Rules for plans maintained by more than one employer. Except as 
provided in Sec.  1.415(f)-1(g)(2)(i) (regarding aggregation of 
multiemployer plans with plans other than multiemployer plans), for 
purposes of applying the limitations of section 415 with respect to a 
participant in a plan maintained by more than one employer, benefits and 
contributions attributable to such participant from all of the employers 
maintaining the plan must be taken into account. Furthermore, in 
applying the limitations of section 415 with respect to a participant in 
such a plan, the total compensation received by the participant from all 
of the employers maintaining the plan is taken into account under the 
plan, unless the plan specifies otherwise.
    (f) Special rules--(1) Affiliated employers. Pursuant to section 
414(b) and Sec.  1.414(b)-1, all employees of all corporations that are 
members of a controlled group of corporations (within the meaning of 
section 1563(a), as modified by section 1563(f)(5), and determined 
without regard to section 1563(a)(4) and (e)(3)(C)) are treated as

[[Page 319]]

employed by a single employer for purposes of section 415. Similarly, 
pursuant to section 414(c) and regulations promulgated under section 
414(c), all employees of trades or businesses that are under common 
control are treated as employed by a single employer. Thus, any defined 
benefit plan or defined contribution plan maintained by any member of a 
controlled group of corporations (within the meaning of section 414(b)) 
or by any trade or business (whether or not incorporated) that is part 
of a group of trades or businesses that are under common control (within 
the meaning of section 414(c)) is deemed maintained by all such members 
or such trades or businesses. Pursuant to section 415(h), for purposes 
of section 415, sections 414(b) and 414(c) are applied by using the 
phrase ``more than 50 percent'' instead of the phrase ``at least 80 
percent'' each place the latter phrase appears in section 1563(a)(1) and 
in the regulations under section 414(c) (except for purposes of 
determining whether two or more organizations are a brother-sister group 
of trades or businesses under common control under the rules in Sec.  
1.414(c)-2(c)).
    (2) Affiliated service groups. Any defined benefit plan or defined 
contribution plan maintained by any member of an affiliated service 
group (within the meaning of section 414(m)) is deemed maintained by all 
members of that affiliated service group.
    (3) Leased employees--(i) In general. Pursuant to section 414(n), 
except as provided in paragraph (f)(3)(ii) of this section, with respect 
to any person (referred to as the recipient) for whom a leased employee 
(within the meaning of section 414(n)(2)) performs services, the leased 
employee is treated as an employee of the recipient, but contributions 
or benefits provided by the leasing organization that are attributable 
to services performed for the recipient are treated as provided under a 
plan maintained by the recipient.
    (ii) Exception for leased employees covered by safe harbor plans. 
Pursuant to section 414(n)(5), the rule of paragraph (f)(3)(i) of this 
section does not apply to a leased employee with respect to services 
performed for a recipient if--
    (A) The leased employee is covered by a plan that is maintained by 
the leasing organization and that meets the requirements of section 
414(n)(5)(B); and
    (B) Leased employees (determined without regard to this paragraph 
(f)(3)(ii)) do not constitute more than 20 percent of the recipient's 
nonhighly compensated workforce.
    (4) Permissive service credit under governmental plans. See section 
415(n) for rules regarding the application of the limitations of 
sections 415(b) and (c) where a participant makes contributions 
(including a transfer described in section 403(b)(13) or section 
457(e)(17)) to a defined benefit governmental plan to purchase 
permissive service credit under the plan.
    (5) Definition of severance from employment--(i) General rule. For 
purposes of this section and Sec. Sec.  1.415(b)-1, 1.415(b)-2, 
1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 
1.415(j)-1, whether an employee has a severance from employment with the 
employer that maintains a plan is determined in the same manner as under 
Sec.  1.401(k)-1(d)(2) except that, for purposes of determining the 
employer of an employee, the modifications provided under section 415(h) 
(described in paragraph (f)(1) of this section) to the employer 
aggregation rules apply. Thus, an employee has a severance from 
employment when the employee ceases to be an employee of the employer 
maintaining the plan, and an employee does not have a severance from 
employment if, in connection with a change of employment, the employee's 
new employer maintains such plan with respect to the employee. The 
determination of whether an employee ceases to be an employee of the 
employer maintaining the plan is based on all of the relevant facts and 
circumstances.
    (ii) Multiemployer plans. A participant in a multiemployer plan 
(within the meaning of section 414(f)) is not treated as having incurred 
a severance from employment with the employer maintaining the 
multiemployer plan for purposes of this section and Sec. Sec.  1.415(b)-
1, 1.415(b)-2, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-
1, and 1.415(j)-1 if the participant continues to

[[Page 320]]

be an employee of another employer maintaining the multiemployer plan.
    (6) Qualified domestic relations orders. A benefit provided to an 
alternate payee (as defined in section 414(p)(8)) of a participant 
pursuant to a qualified domestic relations order (as defined in section 
414(p)(1)(A)) is treated as if it were provided to the participant for 
purposes of applying the limitations of section 415. See Sec.  1.401(a)-
13(g)(4)(iv).
    (7) Effect on other requirements. Except as provided in Sec.  
1.417(e)-1(d)(1), the application of section 415 does not relieve a plan 
from the obligation to satisfy other applicable qualification 
requirements. Accordingly, the terms of the plan must provide for the 
plan to satisfy section 415 as well as all other applicable 
requirements. For example, if a defined benefit plan has a normal 
retirement age of 62, and if a participant's benefit remains unchanged 
between the ages of 62 and 65 because of the application of the section 
415(b)(1)(A) dollar limit, the plan satisfies the requirements of 
section 411 only if the plan either commences distribution of the 
participant's benefit at normal retirement age (without regard to 
severance from employment) or provides for a suspension of benefits at 
normal retirement age that satisfies the requirements of section 
411(a)(3)(B) and 29 CFR 2530.203-3. Similarly, if the increase to a 
participant's benefit under a defined benefit plan in a year after the 
participant has attained normal retirement age is less than the 
actuarial increase to the participant's previously accrued benefit 
because of the application of the section 415(b)(1)(B) compensation 
limitation (which is not adjusted for commencement after age 65), the 
plan satisfies the requirements of section 411 only if the plan either 
commences distribution of the participant's benefit at normal retirement 
age (without regard to severance from employment) or provides for a 
suspension of benefits at normal retirement age that satisfies the 
requirements of section 411(a)(3)(B) and 29 CFR 2530.203-3.
    (g) Effective date--(1) General rule. Except as otherwise provided, 
this section and Sec. Sec.  1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 
1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 apply to limitation 
years beginning on or after July 1, 2007.
    (2) Governmental plans. In the case of a governmental plan as 
defined in section 414(d), this section and Sec. Sec.  1.415(b)-1, 
1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 
1.415(j)-1 apply to limitation years that begin more than 90 days after 
the close of the first regular legislative session of the legislative 
body with authority to amend the plan that begins on or after July 1, 
2007. A governmental plan is permitted to apply the provisions of this 
section and Sec. Sec.  1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 
1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 to limitation years beginning on 
or after July 1, 2007, provided the plan applies all the applicable 
provisions of this section and Sec. Sec.  1.415(b)-1, 1.415(c)-1, 
1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 for such 
limitation years.
    (3) Option to apply regulations earlier. A plan may apply the rules 
in Sec.  1.415(c)-2(e) regarding post-severance compensation payments 
for limitation years prior to the effective date described in paragraphs 
(g)(1) and (2) of this section. This early application affects the rules 
relating to the definition of compensation in Sec.  1.401(k)-1(e)(8) and 
Sec.  1.457-4(d).
    (4) Grandfather rule for preexisting benefits. A defined benefit 
plan is considered to satisfy the limitations of section 415(b) for a 
participant with respect to benefits accrued or payable under the plan 
as of the end of the limitation year that is immediately prior to the 
effective date of final regulations under this section and Sec. Sec.  
1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, 
and 1.415(j)-1 (as provided under paragraph (g)(1) or (2) of this 
section) pursuant to plan provisions (including plan provisions relating 
to the plan's limitation year) that were both adopted and in effect 
before April 5, 2007, but only if such plan provisions meet the 
applicable requirements of statutory provisions, regulations, and other 
published guidance relating to section 415 in effect immediately before 
the effective date of final regulations under this section and 
Sec. Sec.  1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 
1.415(g)-1, and 1.415(j)-1 (as provided under paragraph

[[Page 321]]

(g)(1) or (2) of this section). Plan provisions will not be treated as 
failing to satisfy these requirements merely because the plan has not 
been amended to reflect changes to section 415(b) made by the Pension 
Funding Equity Act of 2004, Public Law 108-218 (118 Stat. 596), and the 
Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780). In 
addition, plan provisions will not be treated as failing to satisfy 
these requirements merely because the plan's definition of compensation 
for a limitation year that is used for purposes of applying the 
limitations of section 415(b)(1)(B) reflects compensation for a plan 
year that is in excess of the limitation under section 401(a)(17) that 
applies to that plan year. If benefits under a plan are accrued after 
the applicable effective date under paragraph (g)(1) or (2) of this 
section, then the sum of the benefits grandfathered under the first 
sentence of this paragraph (g)(4) and benefits accrued after the 
applicable effective date must satisfy the requirements of section 415, 
taking into account the requirements of this section and Sec. Sec.  
1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, 
and 1.415(j)-1.

[T.D. 9319, 72 FR 16895, Apr. 5, 2007]



Sec.  1.415(b)-1  Limitations for defined benefit plans.

    (a) General rules--(1) Maximum limitations. Except as otherwise 
provided under this section, a defined benefit plan fails to satisfy the 
requirements of section 415(a) for a limitation year if, during the 
limitation year, either the annual benefit (as defined in paragraph 
(b)(1)(i) of this section) accrued by a participant (whether or not the 
benefit is vested) or the annual benefit payable to a participant at any 
time under the plan exceeds the lesser of--
    (i) $160,000 (as adjusted pursuant to section 415(d), Sec.  
1.415(d)-1(a), and this section); or
    (ii) 100 percent of the participant's average compensation for the 
period of the participant's high-3 years of service (as adjusted 
pursuant to section 415(d), Sec.  1.415(d)-1(a), and this section).
    (2) Defined benefit plan. For purposes of section 415 and 
regulations promulgated under section 415, a defined benefit plan is any 
plan, contract, or account to which section 415 applies pursuant to 
Sec.  1.415(a)-1(a) or (b) (or any portion thereof) that is not a 
defined contribution plan within the meaning of Sec.  1.415(c)-1(a)(2). 
In addition, a section 403(b) annuity contract that is not described in 
section 414(i) is treated as a defined benefit plan for purposes of 
section 415 and regulations promulgated under section 415.
    (3) Plan provisions. As required in Sec.  1.415(a)-1(d)(1), in order 
to satisfy the limitations on benefits under this section, the plan 
provisions (including the provisions of any annuity) must preclude the 
possibility that any annual benefit exceeding these limitations will be 
accrued (except as provided in paragraph (a)(7)(iii) of this section), 
distributed, or otherwise payable in any optional form of benefit 
(including the normal form of benefit) at any time (from the plan, from 
an annuity contract that will make distributions to the participant on 
behalf of the plan, or from an annuity contract that has been 
distributed under the plan). Thus, for example, a plan that is subject 
to the requirements of section 411 will fail to satisfy the limitations 
of this section if the plan does not contain terms that preclude the 
possibility that any annual benefit exceeding these limitations will be 
accrued or payable in any optional form of benefit (including the normal 
form of benefit) at any time, even though no participant has actually 
accrued a benefit in excess of these limitations.
    (4) Adjustments to dollar limitation for commencement before age 62 
or after age 65. The age-adjusted section 415(b)(1)(A) dollar limit 
computed pursuant to paragraph (d) or (e) of this section is used in 
place of the dollar limitation described in section 415(b)(1)(A) and 
paragraph (a)(1)(i) of this section in the case of a benefit with an 
annuity starting date that occurs before the participant attains age 62 
or after the participant attains age 65.
    (5) Average compensation for period of high-3 years of service--(i) 
In general. Except as otherwise provided in this paragraph (a)(5), for 
purposes of applying the limitation on benefits described in this 
section, the period of a participant's high-3 years of service is the 
period of 3 consecutive calendar years

[[Page 322]]

(taking into account the rule in paragraph (a)(5)(iii) of this section) 
during which the employee had the greatest aggregate compensation (as 
defined in Sec.  1.415(c)-2) from the employer, and the average 
compensation for the period of a participant's high-3 years of service 
is determined by dividing the aggregate compensation for this period by 
3. For purposes of this paragraph (a)(5), in determining a participant's 
high-3 years of service, the plan may use any 12-month period to 
determine a year of service instead of the calendar year, provided that 
it is uniformly and consistently applied in a manner that is specified 
under the terms of the plan. As provided under Sec.  1.415(c)-2(f), 
because a plan is not permitted to base benefits on compensation in 
excess of the limitation under section 401(a)(17), a plan's definition 
of compensation for a year that is used for purposes of applying the 
limitations of section 415 is not permitted to reflect compensation for 
a year that is in excess of the limitation under section 401(a)(17) that 
applies to that year. See Sec. Sec.  1.401(a)(17)-1(a)(3)(i) and 
1.401(a)(17)-1(b)(3)(ii) for rules regarding the effective date of 
increases in the section 401(a)(17) compensation limitation for a plan 
year and for a 12-month period other than the plan year.
    (ii) Short periods of service. For a participant who is employed 
with an employer for less than 3 consecutive years, the period of the 
participant's high-3 years of service is the actual number of 
consecutive years of service (including fractions of years, but not less 
than one year). In such a case, the limitation of section 415(b)(1)(B) 
of 100 percent of the participant's average compensation for the period 
of the participant's high-3 years of service is computed by dividing the 
participant's compensation during the participant's longest consecutive 
period of service by the number of years in that period (including 
fractions of years, but not less than one year). The rule in paragraph 
(a)(5)(iii) of this section is used for purposes of determining a 
participant's consecutive years of service.
    (iii) Break in service. In the case of a participant who has had a 
severance from employment with an employer that maintains the plan and 
who is subsequently rehired by the employer, the period of the 
participant's high-3 years of service is calculated by excluding all 
years for which the participant performs no services for and receives no 
compensation from the employer maintaining the plan (referred to as the 
break period), and by treating the year of service immediately prior to 
and the year of service immediately after the break period as if such 
years of service were consecutive. See Sec.  1.415(d)-1(a)(2)(iii) for a 
special rule for determining a rehired participant's section 
415(b)(1)(B) compensation limit in the case of a plan that adjusts the 
compensation limit for limitation years after the limitation year in 
which the participant incurs a severance from employment.
    (iv) Examples. For purposes of these examples, except as otherwise 
stated, the plan year and the limitation year are the calendar year, and 
the plan uses the calendar year for purposes of determining the period 
of high-3 years of service. In addition, except as otherwise stated, it 
is assumed that the plan's normal retirement age is 65, and all 
participants discussed in these examples have at least ten years of 
service with the employer and at least ten years of participation in the 
plan at issue. It is also assumed that none of the plans in the examples 
are governmental plans. The following examples illustrate the rules of 
this paragraph (a)(5):

    Example 1. (i) Facts. Plan A, which was established on January 1, 
2008, covers Participant M, who was hired on January 1, 1990. 
Participant M's compensation (as defined in Sec.  1.415(c)-2) from the 
employer maintaining the plan is $140,000 each year for 1990 through 
1992, is $120,000 each year for 1993 through 2007, and is $165,000 for 
2008 and 2009. Assume that for Plan A's 2008 and 2009 limitation years, 
the section 415(b)(1)(A) age-adjusted dollar limit for M is $185,000 and 
$190,000, respectively, prior to the reduction of the age-adjusted 
dollar limit pursuant to paragraph (g)(1) of this section (which 
requires a reduction in the dollar limit if a participant has less than 
10 years of participation in the plan).
    (ii) Conclusion. As of the end of the 2008 limitation year, the 
period of M's high-3 consecutive years of service runs from January 1, 
1990, through December 31, 1992, and M's average compensation for this 
period is $140,000. Thus, the limitation under section

[[Page 323]]

415(b)(1)(B) for the 2008 limitation year is $140,000. As of the end of 
the 2009 limitation year, the period of M's high-3 consecutive years of 
service runs from January 1, 2007, through December 31, 2009, and M's 
average compensation for this period is $150,000. Thus, the limitation 
under section 415(b)(1)(B) for the 2009 limitation year is $150,000.
    Example 2 (i) Facts. Participant N is a participant in Plan B. N's 
compensation for 2008, 2009, and 2010 is $300,000 for each year. N's 
average compensation for the period of N's high-3 years of service 
(determined before the application of section 401(a)(17)) is $300,000, 
based on N's compensation for 2008, 2009, and 2010. For all years before 
2008, Participant N's compensation was less than the then-applicable 
section 401(a)(17) limit. On January 1, 2011, N commences receiving 
benefits from Plan B at the age of 75, 10 years after attaining N's 
normal retirement age under Plan B, when the age-adjusted section 
415(b)(1)(A) dollar limit for benefits commencing at that age is 
$293,453.
    (ii) Conclusion. Pursuant to Sec.  1.415(c)-2(f) and section 
401(a)(17), Plan B is not permitted to provide for a definition of 
compensation that includes compensation for a year that is in excess of 
the limitation under section 401(a)(17) that applies to that year. 
Accordingly, the limitation under section 415(b)(1)(B) based on N's 
average compensation for the period of N's high three years of service 
must not reflect compensation for a year that is in excess of the 
limitation under section 401(a)(17) that applies to that year. Thus, if 
the limitation under section 401(a)(17) for years beginning in 2008, 
2009, and 2010 is $230,000, $235,000, and $240,000, respectively, then 
the limitation under section 415(b)(1)(B) based on N's average 
compensation for the period of N's high three years of service is 
$235,000.
    Example 3. (i) Facts. The facts are the same as in Example 2, except 
that N commences receiving benefits from Plan B on January 1, 2008, at 
the age of 75, 10 years after attaining N's normal retirement age under 
Plan B. In addition, N's period of high three years of service is from 
January 1, 2003, through December 31, 2005, and N's average compensation 
for this period is $300,000. The section 401(a)(17) limits for 2003, 
2004 and 2005 are $200,000, $205,000, and $210,000, respectively. As of 
December 31, 2007, pursuant to plan provisions adopted and in effect on 
January 1, 2007, N's accrued benefit under Plan B, payable in the form 
of a straight life annuity, actuarially adjusted to reflect commencement 
10 years after normal retirement age, is $300,000. Plan B has not been 
amended during 2007, and that as of December 31, 2007, Plan B satisfied 
all of the requirements of section 415(b) with respect to N's accrued 
benefit, pursuant to statutory provisions, regulations, and other 
published guidance in effect immediately before the limitation year 
beginning on January 1, 2008.
    (ii) Conclusion. Under Sec.  1.415(a)-1(g)(4), Plan B is considered 
to satisfy the section 415(b)(1)(B) compensation limit with respect to 
N's benefit payable at age 75 of $300,000 (which N accrued prior to 
January 1, 2008), for limitation years beginning after December 31, 
2007. This is because Sec.  1.415(a)-1(g)(4) provides that plan 
provisions will not be treated as failing to satisfy the requirements of 
section 415(b)(1)(B) merely because the plan's definition of 
compensation that is used for purposes of applying the limitations of 
section 415(b)(1)(B) reflects compensation in excess of the section 
401(a)(17) limitation for limitation years beginning before January 1, 
2008. N, however, cannot accrue any additional benefits under Plan B for 
limitation years beginning after December 31, 2007, until N's section 
415(b)(1)(B) compensation limit, as limited by Sec.  1.415(c)-2(f) and 
section 401(a)(17), increases above $300,000.
    Example 4. (i) Facts. Participant O participates in Plan C, 
maintained by Employer X. Plan C does not adjust a participant's section 
415(b)(1)(B) compensation limit for limitation years after the 
limitation year in which the participant incurs a severance from 
employment. Prior to separating from employment with X in 2010, O's 
average compensation for O's period of high-3 years of service is 
$50,000, based on O's compensation for 2007, 2008, and 2009, which was 
$50,000 for each year. O's compensation for 2010 was $45,000. O's 
compensation is $0 for 2011. In 2012, O is rehired by X and resumes 
participation in Plan C. O's compensation in 2012 is $45,000, and is 
$70,000 in 2013.
    (ii) Conclusion. As of the end of the 2013 limitation year, O's 
average compensation for O's period of high-3 years of service is 
$53,333, based on O's compensation in 2010, 2012, and 2013. See 
paragraph (a)(5)(iii) of this section.
    Example 5. (i) Facts. The facts are the same as in Example 4, except 
that, in accordance with Sec.  1.415(a)-1(d)(3)(v), Plan C incorporates 
by reference section 415(d) adjustments to a participant's section 
415(b)(1)(B) compensation limit for limitation years after the 
limitation year in which the participant incurs a severance from 
employment. Assume that the annual adjustment factor described in Sec.  
1.415(d)-1(a)(2)(ii) for 2011 through 2013 is 1.03 for each year. Thus, 
disregarding O's rehire by X, O's average compensation for O's period of 
high-3 years of service for the 2013 limitation year is equal to $54,636 
($50,000 * 1.03 * 1.03 * 1.03).
    (ii) Conclusion. Under Sec.  1.415(d)-1(a)(2)(iii), O's average 
compensation for O's period of high-3 years of service for the 2013 
limitation year is $54,636.

    (6) Exceptions from compensation limit. The limit under paragraph 
(a)(1)(ii) of

[[Page 324]]

this section (100 percent of the participant's average compensation for 
the participant's high-3 years of service) does not apply to--
    (i) A governmental plan (as defined in section 414(d));
    (ii) A multiemployer plan (as defined in section 414(f));
    (iii) A collectively bargained plan that is described in section 
415(b)(7); or
    (iv) A participant in a plan maintained by an organization described 
in section 3121(w)(3)(A) who has never been a highly compensated 
employee (within the meaning of section 414(q)) of the organization.
    (7) Special rules--(i) Total benefits not in excess of $10,000. See 
section 415(b)(4) and paragraph (f) of this section for an exception 
from the limits of section 415(b)(1) and paragraph (a)(1) of this 
section with respect to retirement benefits that do not exceed $10,000 
for the limitation year.
    (ii) Governmental plans electing during 1990. For a special 
limitation applicable to certain governmental plans electing the 
application of this rule during the first plan year beginning after 
December 31, 1989, see section 415(b)(10).
    (iii) Defined benefit plans not subject to the requirements of 
section 411. In the case of a defined benefit plan that is not subject 
to the requirements of section 411, the limitations described in this 
paragraph (a) are not required to be applied to the annual benefit 
accrued by a participant before the benefit is payable. However, such a 
defined benefit plan is subject to the limitations described in this 
paragraph (a) with respect to the annual benefit payable to a 
participant at any time under the plan.
    (iv) Application of compensation limitation exception to a church 
employee who becomes a highly compensated employee--(A) In general. If a 
participant who was described in paragraph (a)(6)(iv) of this section 
for a prior limitation year later becomes a highly compensated employee 
(within the meaning of section 414(q)) of the organization that 
maintains the defined benefit plan, the plan is not treated as failing 
to satisfy the compensation-based limitation described in paragraph 
(a)(1)(ii) of this section with respect to the participant if the 
requirements of paragraph (a)(7)(iv)(B) of this section are satisfied 
with respect to the participant.
    (B) Limitation on accruals. The requirements of this paragraph 
(a)(7)(iv)(B) are satisfied with respect to a participant if no plan 
amendments increasing the participant's benefits are adopted during the 
limitation year in which the participant first becomes a highly 
compensated employee (within the meaning of section 414(q)) of the 
organization that maintains the plan, and there is no increase in the 
participant's accrued benefit derived from employer contributions 
(including increases as a result of increased compensation or service) 
in subsequent limitation years.
    (b) Annual benefit--(1) In general--(i) Definition of annual 
benefit--(A) Straight life annuities. For purposes of this section and 
Sec.  1.415(b)-2, the term annual benefit means a benefit that is 
payable in the form of a straight life annuity. A straight life annuity 
means an annuity payable in equal installments for the life of the 
participant that terminates upon the participant's death. Examples of 
benefits that are not in the form of a straight life annuity include an 
annuity with a post-retirement death benefit and an annuity providing a 
guaranteed number of payments. If a benefit is payable in the form of a 
straight life annuity, no adjustment is made to the benefit to account 
for differences in the timing of payments during a year (for example, no 
adjustment is made on account of the annuity being payable in annual or 
monthly installments).
    (B) Other benefit forms. With respect to a benefit payable in a form 
other than a straight life annuity, the annual benefit is determined as 
the straight life annuity payable on the first day of each month that is 
actuarially equivalent to the benefit payable in such other form, 
determined under the rules of paragraph (c) of this section.
    (ii) Rules for determination of annual benefit. The annual benefit 
does not include the annual benefit attributable to either employee 
contributions or rollover contributions (as described in sections 
401(a)(31), 402(c)(1), 403(a)(4),

[[Page 325]]

403(b)(8), 408(d)(3), and 457(e)(16)), determined pursuant to the rules 
of paragraph (b)(2) of this section. The treatment of transferred 
benefits is determined under the rules of paragraph (b)(3) of this 
section. Paragraph (b)(4) of this section discusses the treatment of 
qualified governmental excess benefit arrangements.
    (iii) Determination of annual benefit in the case of multiple 
annuity starting dates--(A) General rule. If a participant has or will 
have distributions commencing at more than one annuity starting date, 
then the limitations of section 415 must be satisfied as of each of the 
annuity starting dates, taking into account the benefits that have been 
or will be provided at all of the annuity starting dates. This will 
happen, for example, where benefit distributions to a participant have 
previously commenced under a plan that is aggregated for purposes of 
section 415 with a plan under which the participant receives current 
accruals. In determining the annual benefit for such a participant as of 
a particular annuity starting date, the plan must actuarially adjust the 
past and future distributions with respect to the benefits that 
commenced at the other annuity starting dates. For limitation years to 
which Sec.  1.415(b)-2 applies, these adjustments must be made using the 
rules of Sec.  1.415(b)-2. For purposes of this paragraph (b)(1)(iii) 
and Sec.  1.415(b)-2, the determination of whether a new annuity 
starting date has occurred is made without regard to the rule of Sec.  
1.401(a)-20, Q&A-10(d) (under which the commencement of certain 
distributions may not give rise to a new annuity starting date).
    (B) Scope of multiple annuity starting date rules. The rules 
provided in this paragraph (b)(1)(iii) and Sec.  1.415(b)-2 apply for 
purposes of determining the annual benefit of a participant where a new 
distribution election is effective during the current limitation year 
with respect to a distribution that previously commenced. The rules of 
this paragraph (b)(1)(iii) and Sec.  1.415(b)-2 also apply for 
determining the annual benefit of a participant for purposes of applying 
the limitations of section 415(b) and this section where benefit 
payments are increased as a result of plan terms or a plan amendment 
applying a cost-of-living adjustment or similar benefit increase, unless 
the increase is described in paragraph (b)(1)(iii)(C) of this section.
    (C) Safe harbors for certain benefit increases. An increase to 
benefit payments as a result of plan terms or a plan amendment applying 
a cost-of-living adjustment or similar benefit increase is described in 
this paragraph (b)(1)(iii)(C) if the increase--
    (1) Has previously been accounted for as part of the annual benefit 
under the rules of paragraph (c) of this section;
    (2) Is not required to be accounted for as part of the annual 
benefit, pursuant to the exception for certain automatic benefit 
increase features under paragraph (c)(5) of this section;
    (3) Is pursuant to a plan provision that automatically incorporates 
section 415(d) cost-of-living adjustments under Sec.  1.415(a)-
1(d)(3)(v); or
    (4) Complies with one of the safe harbors described in Sec.  
1.415(d)-1(a)(5) or (6) (providing safe harbors for annual and other 
periodic adjustments to distributions).
    (2) Determination of annual benefit attributable to employee 
contributions and rollover contributions--(i) In general. If employee 
contributions (other than contributions described in paragraph 
(b)(2)(ii) of this section) or rollover contributions are made to the 
plan, the annual benefit attributable to these contributions is 
determined as provided in this paragraph (b)(2).
    (ii) Certain employee contributions disregarded. For purposes of 
this paragraph (b)(2), the following are not treated as employee 
contributions:
    (A) Contributions that are picked up by a governmental employer as 
provided under section 414(h)(2).
    (B) Repayment of any loan made to a participant from the plan.
    (C) Repayment of a previously distributed amount as described in 
section 411(a)(7)(B) in accordance with section 411(a)(7)(C).
    (D) Repayment of a withdrawal of employee contributions as provided 
under section 411(a)(3)(D).
    (E) Repayments that would have been described in paragraph 
(b)(2)(ii)(C) or (b)(2)(ii)(D) of this section except

[[Page 326]]

that the plan does not restrict the timing of repayments to the maximum 
extent permitted by section 411(a).
    (iii) Annual benefit attributable to mandatory employee 
contributions. In the case of mandatory employee contributions as 
defined in section 411(c)(2)(C) and Sec.  1.411(c)-1(c)(4) (or 
contributions that would be mandatory employee contributions if section 
411 applied to the plan), the annual benefit attributable to those 
contributions is determined by applying the factors applicable to 
mandatory employee contributions as described in section 411(c)(2)(B) 
and (C) and regulations promulgated under section 411 to those 
contributions to determine the amount of a straight life annuity 
commencing at the annuity starting date, regardless of whether the 
requirements of sections 411 and 417 apply to that plan. For purposes of 
applying such factors to a plan that is not subject to the requirements 
of section 411, the applicable effective date of section 411(a)(2) 
(which is used under Sec.  1.411(c)-1(c)(3) to determine the beginning 
date from which statutorily specified interest must be credited to 
mandatory employee contributions) must be determined as if section 411 
applied to the plan, and in determining the annual benefit that is 
actuarially equivalent to these accumulated contributions, the plan must 
determine the interest rate that would have been required under section 
417(e)(3) as if section 417 applied to the plan. See Sec.  1.415(c)-
1(a)(2)(ii)(B) and (b)(3) for rules regarding treatment of mandatory 
employee contributions to a defined benefit plan as annual additions 
under a defined contribution plan.
    (iv) Voluntary employee contributions. If voluntary employee 
contributions are made to the plan, the portion of the plan to which 
voluntary employee contributions are made is treated as a defined 
contribution plan pursuant to section 414(k) and, accordingly, is a 
defined contribution plan pursuant to Sec.  1.415(c)-1(a)(2)(i). 
Accordingly, the portion of a plan to which voluntary employee 
contributions are made is not a defined benefit plan within the meaning 
of paragraph (a)(2) of this section and is not taken into account in 
determining the annual benefit under the portion of the plan that is a 
defined benefit plan.
    (v) Annual benefit attributable to rollover contributions. The 
annual benefit attributable to rollover contributions from an eligible 
retirement plan, as defined in section 402(c)(8)(B) (for example, a 
contribution received pursuant to a direct rollover under section 
401(a)(31)(A)), is determined in the same manner as the annual benefit 
attributable to mandatory employee contributions if the plan provides 
for a benefit derived from the rollover contribution (other than a 
benefit derived from a separate account to be maintained with respect to 
the rollover contribution and actual earnings and losses thereon). Thus, 
in the case of rollover contributions from a defined contribution plan 
to a defined benefit plan to provide an annuity distribution, the annual 
benefit attributable to those rollover contributions for purposes of 
section 415(b) is determined by applying the rules of section 411(c) as 
described in paragraph (b)(2)(iii) of this section, regardless of the 
assumptions used to compute the annuity distribution under the plan and 
regardless of whether the plan is subject to the requirements of 
sections 411 and 417. Accordingly, in such a case, if the plan uses more 
favorable factors than those specified in section 411(c) to determine 
the amount of annuity payments arising from rollover contributions, the 
annual benefit under the plan would reflect the excess of those annuity 
payments over the amounts that would be payable using the factors 
specified in section 411(c). See Sec.  1.415(c)-1(b)(3)(i) for rules 
excluding rollover contributions maintained in a separate account that 
is treated as a defined contribution plan pursuant to section 414(k) 
from annual additions to a defined contribution plan.
    (3) Treatment of transferred benefits--(i) In general--(A) Treatment 
of transferor plan if transferred benefits are aggregated with 
transferor plan. Except as provided in paragraph (b)(3)(ii) of this 
section, when there has been a transfer of benefits from one defined 
benefit plan to another plan, to the extent the benefits transferred to 
the transferee plan are otherwise required to be taken into account 
pursuant to section 415(f)

[[Page 327]]

and Sec.  1.415(f)-1 in determining whether the transferor plan 
satisfies the limitations of section 415(b) for a limitation year, the 
transferred benefits are not treated as being provided under the 
transferor plan. This will occur, for example, if the employer 
sponsoring the transferor plan and the employer sponsoring the 
transferee plan are in the same controlled group within the meaning of 
section 414(b).
    (B) Treatment of transferor plan if transferred benefits are not 
aggregated with transferor plan. Except as provided in paragraph 
(b)(3)(ii) of this section, when there has been a transfer of benefits 
from one defined benefit plan to another plan, to the extent the 
benefits transferred to the transferee plan are not otherwise required 
to be taken into account pursuant to section 415(f) and Sec.  1.415(f)-1 
in determining whether the transferor plan satisfies the limitations of 
section 415(b) for a limitation year, the transferred benefits are 
treated by the transferor plan as if such benefits were provided under 
annuities purchased to provide benefits under a plan that must be 
aggregated with the transferor plan and that terminated immediately 
prior to the transfer with sufficient assets to pay all benefit 
liabilities under the plan, in accordance with the rules of paragraph 
(b)(5)(i) of this section. This will occur, for example, in the case of 
a transfer of benefits between defined benefit plans maintained by 
employers that are not required to be aggregated under sections 414(b) 
and (c) (as modified by section 415(h)) or sections 414(m).
    (C) Treatment of transferee plan. Except as provided in paragraph 
(b)(3)(ii) of this section, where there has been a transfer of benefits 
from one defined benefit plan to another defined benefit plan, the 
transferee plan must take into account the transferred benefits in 
determining whether it satisfies the limitations of section 415(b).
    (ii) Elective transfer of distributable benefit. Where, as described 
in Sec.  1.411(d)-4, Q&A-3(c) (permitting certain elective transfers of 
distributable benefits), a distributable benefit is transferred to a 
defined benefit plan from either a defined contribution plan or a 
defined benefit plan, the amount transferred is treated as a benefit 
paid from the transferor plan, and the annual benefit provided by the 
transferee defined benefit plan does not include the annual benefit 
attributable to the amount transferred (determined as if the transferred 
amount were a rollover contribution subject to the rules of paragraph 
(b)(2)(v) of this section). The rule in the preceding sentence applies 
regardless of whether the requirements of section 411 apply to the plan 
and, in the case of a transfer from a defined contribution plan that is 
not subject to the requirements of section 411 (such as a governmental 
plan) to a defined benefit plan, the rule applies even if the 
participant's benefits are not distributable from the defined 
contribution plan at the time of the transfer.
    (4) Treatment of qualified governmental excess benefit arrangements. 
Pursuant to section 415(m), in determining whether a governmental plan 
(as defined in section 414(d)) meets the requirements of this section, 
the annual benefit does not include benefits provided under a qualified 
governmental excess benefit arrangement, as defined in section 
415(m)(3). Thus, the limitation of section 415(b) does not apply to 
benefits to the extent the benefits are provided under a qualified 
governmental excess benefit arrangement.
    (5) Treatment of benefits provided under a terminated plan--(i) 
Terminated plan with sufficient assets. If a defined benefit plan is 
terminated with sufficient assets for the payment of the benefit 
liabilities of all plan participants and a participant in the plan has 
not yet commenced benefits under the plan, for purposes of satisfying 
section 415(b) with respect to the participant, all other defined 
benefit plans maintained by the employer that maintained the terminated 
plan are required to take into account the benefits provided pursuant to 
the annuities purchased to provide benefits under the terminated plan at 
each possible annuity starting date. In such a case, see paragraph 
(b)(1)(iii) of this section for rules regarding the determination of a 
participant's annual benefit if the participant commences receiving 
benefits under the terminated plan.
    (ii) Terminated plan with insufficient assets. If a defined benefit 
plan is terminated and there are not sufficient

[[Page 328]]

assets for the payment of the benefit liabilities of all plan 
participants, for purposes of satisfying section 415(b) with respect to 
a participant, all other defined benefit plans maintained by the 
employer that maintained the terminated plan are required to take into 
account the benefits that are actually provided to the participant under 
the terminated plan. For example, in the case of a plan that is subject 
to title IV of the Employee Retirement Income Security Act of 1974 (88 
Stat. 829), Public Law 93-406 (ERISA), and that terminates with 
insufficient assets for the payment of the benefit liabilities of all 
plan participants, all other defined benefit plans maintained by the 
employer that maintained the terminating plan must take into account 
benefits that are paid by the Pension Benefit Guaranty Corporation. In 
such a case, see paragraph (b)(1)(iii) of this section for rules 
regarding the determination of a participant's annual benefit if the 
participant commences receiving benefits under the terminated plan.
    (iii) Other guidance. The Commissioner may provide guidance 
regarding the rules applicable to terminated plans (and plans that are 
deemed to have been terminated pursuant to paragraph (b)(3)(i)(B) of 
this section) in revenue rulings, notices, and other guidance published 
in the Internal Revenue Bulletin. See Sec.  601.601(d) of this chapter.
    (c) Adjustment to form of benefit for forms other than a straight 
life annuity--(1) In general. This paragraph (c) provides rules for 
adjusting a form of benefit other than a straight life annuity to an 
actuarially equivalent straight life annuity beginning at the same time 
for purposes of determining the annual benefit described in paragraph 
(b) of this section. Paragraph (c)(2) of this section describes how to 
adjust a benefit paid in a form to which section 417(e)(3) does not 
apply. Paragraph (c)(3) of this section describes how to adjust a 
benefit paid in a form to which section 417(e)(3) applies. Paragraph 
(c)(4) of this section describes benefit forms for which no adjustment 
is required. Paragraph (c)(5) of this section provides an exception from 
the requirements of this paragraph (c) with respect to certain automatic 
benefit increase features. Paragraph (c)(6) of this section sets forth 
examples illustrating the application of this paragraph (c). The 
Commissioner may, in revenue rulings, notices, or other guidance 
published in the Internal Revenue Bulletin set forth simplified methods 
for adjusting a form of benefit other than a straight life annuity to an 
actuarially equivalent straight life annuity beginning at the same time 
for purposes of determining the annual benefit described in paragraph 
(b) of this section. See Sec.  601.601(d)(2) of this chapter.
    (2) Benefits paid in a form to which section 417(e)(3) does not 
apply. For a benefit paid in a form to which section 417(e)(3) does not 
apply, the actuarially equivalent straight life annuity benefit is the 
greater of--
    (i) The annual amount of the straight life annuity (if any) payable 
to the participant under the plan commencing at the same annuity 
starting date as the form of benefit payable to the participant; or
    (ii) The annual amount of the straight life annuity commencing at 
the same annuity starting date that has the same actuarial present value 
as the form of benefit payable to the participant, computed using a 5 
percent interest assumption and the applicable mortality table described 
in Sec.  1.417(e)-1(d)(2) for that annuity starting date.
    (3) Benefits paid in a form to which section 417(e)(3) applies--(i) 
In general. Except as otherwise provided in this paragraph (c)(3), for a 
benefit paid in a form to which section 417(e)(3) applies, the 
actuarially equivalent straight life annuity benefit is the greatest of:
    (A) The annual amount of the straight life annuity commencing at the 
annuity starting date that has the same actuarial present value as the 
particular form of benefit payable, computed using the interest rate and 
mortality table, or tabular factor, specified in the plan for actuarial 
equivalence;
    (B) The annual amount of the straight life annuity commencing at the 
annuity starting date that has the same actuarial present value as the 
particular form of benefit payable, computed using a 5.5 percent 
interest

[[Page 329]]

assumption and the applicable mortality table for the distribution under 
Sec.  1.417(e)-1(d)(2); or
    (C) The annual amount of the straight life annuity commencing at the 
annuity starting date that has the same actuarial present value as the 
particular form of benefit payable (computed using the applicable 
interest rate for the distribution under Sec.  1.417(e)-1(d)(3) and the 
applicable mortality table for the distribution under Sec.  1.417(e)-
1(d)(2)), divided by 1.05.
    (ii) Special rule for distributions in plan years beginning in 2004 
and 2005. For a distribution to which section 417(e)(3) applies and 
which has an annuity starting date occurring in plan years beginning in 
2004 or 2005, except as provided in section 101(d)(3) of the Pension 
Funding Equity Act of 2004, Public Law 108-218 (118 Stat. 596), the 
actuarially equivalent straight life annuity benefit is the greater of--
    (A) The annual amount of the straight life annuity commencing at the 
annuity starting date that has the same actuarial present value as the 
particular form of benefit payable, computed using the interest rate and 
mortality table, or tabular factor, specified in the plan for actuarial 
equivalence; or
    (B) The annual amount of the straight life annuity commencing at the 
annuity starting date that has the same actuarial present value as the 
particular form of benefit payable, computed using a 5.5 percent 
interest assumption and the applicable mortality table for the 
distribution under Sec.  1.417(e)-1(d)(2).
    (4) Certain benefit forms for which no adjustment is required--(i) 
In general. For purposes of the adjustments described in this paragraph 
(c), the following benefits are not taken into account:
    (A) Survivor benefits payable to a surviving spouse under a 
qualified joint and survivor annuity (as defined in section 417(b)) to 
the extent that such benefits would not be payable if the participant's 
benefit were not paid in the form of a qualified joint and survivor 
annuity.
    (B) Ancillary benefits that are not directly related to retirement 
benefits, such as preretirement disability benefits not in excess of the 
qualified disability benefit, preretirement incidental death benefits 
(including a qualified preretirement survivor annuity), and post-
retirement medical benefits.
    (ii) Rules of application--(A) Social security supplements. Although 
a social security supplement described in section 411(a)(9) and Sec.  
1.411(a)-7(c)(4) may be an ancillary benefit, it is included in 
determining the annual benefit because it is payable upon retirement and 
therefore is directly related to retirement income benefits.
    (B) Qualified joint and survivor annuities combined with other 
distributions. If benefits are paid partly in the form of a qualified 
joint and survivor annuity (QJSA) and partly in some other form (such as 
a single-sum distribution), the rule of paragraph (c)(4)(i)(A) of this 
section (under which survivor benefits are not included in determining 
the annual benefit) applies to the survivor annuity payments under the 
portion of the benefit that is paid in the form of a QJSA.
    (5) Exception for certain automatic benefit increase features--(i) 
General rule. Notwithstanding paragraph (b)(1)(i)(B) of this section, no 
adjustment is required to a benefit that is paid in a form that is not a 
straight life annuity to take into account the inclusion in that form of 
an automatic benefit increase feature, as described in paragraph 
(c)(5)(ii) of this section, if:
    (A) The benefit is paid in a form to which section 417(e)(3) does 
not apply.
    (B) The plan satisfies the requirements of paragraph (c)(5)(iii) of 
this section.
    (ii) Definition of automatic benefit increase feature. An automatic 
benefit increase feature is included in a form of benefit if that form 
provides for automatic, periodic increases to the benefits paid in that 
form, such as a form of benefit that automatically increases the benefit 
paid under that form annually according to a specified percentage or 
objective index, or a form of benefit that automatically increases the 
benefit paid in that form to share favorable investment returns on plan 
assets.
    (iii) Requirements. A plan satisfies the requirements of this 
paragraph

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(c)(5)(iii) with respect to a form of benefit that includes an automatic 
benefit increase feature if the form of benefit without regard to the 
automatic benefit increase feature satisfies the requirements of section 
415(b) and this section, and the plan provides that in no event will the 
amount payable to the participant under the form of benefit in any 
limitation year be greater than the section 415(b) limit applicable at 
the annuity starting date (which is the lesser of the age-adjusted 
section 415(b)(1)(A) dollar limit described in paragraph (a)(1)(i) of 
this section or the section 415(b)(1)(B) compensation limit described in 
paragraph (a)(1)(ii) of this section), as increased in subsequent years 
pursuant to section 415(d) and Sec.  1.415(d)-1. If the form of benefit 
without regard to the automatic benefit increase feature is not a 
straight life annuity, then the preceding sentence is applied by 
reducing the section 415(b) limit applicable at the annuity starting 
date to an actuarially equivalent amount (determined using the 
assumptions specified in paragraph (c)(2)(ii) of this section) that 
takes into account the death benefits under the form of benefit (other 
than the survivor portion of a QJSA).
    (6) Examples. The following examples illustrate the provisions of 
this paragraph (c). For purposes of these examples, except as otherwise 
stated, actuarial equivalence under the plan is determined using a 5 
percent interest assumption and the mortality table that applies under 
section 417(e)(3) as of January 1, 2003. It is assumed for purposes of 
these examples that the interest rate that applies under section 
417(e)(3) and Sec.  1.417(e)-1(d)(3) for relevant time periods is 5.25 
percent and that the mortality table that applies under section 
417(e)(3) and Sec.  1.417(e)-1(d)(2) for relevant time periods is the 
mortality table that applies under section 417(e)(3) as of January 1, 
2003. In addition, it is assumed that all participants discussed in 
these examples have at least ten years of service with the employer and 
at least ten years of participation in the plan at issue, all payments 
other than a payment of a single sum are made monthly, on the first day 
of each calendar month, and each plan's normal retirement age is 65. The 
examples are as follows:

    Example 1. (i) Facts. Plan A provides a single-sum distribution 
determined as the actuarial present value of the straight life annuity 
payable at the actual retirement date. Plan A provides that a 
participant's single sum is determined as the greater of the present 
value determined using the otherwise applicable actuarial assumptions of 
the plan and the present value determined using the applicable interest 
rate and the applicable mortality table for the distribution under 
section 417(e)(3). In accordance with Sec.  1.417(e)-1(d)(1), Plan A 
also provides that the single sum is not less than the actuarial present 
value of the accrued benefit payable at normal retirement age, 
determined using the applicable interest rate and the applicable 
mortality table under section 417(e)(3) and Sec.  1.417(e)-1(d). 
Participant M retires at age 65 with a benefit under the plan formula 
(and before the application of section 415) of $152,619 and elects to 
receive a distribution in the form of a single sum. Under the plan and 
before the application of section 415, the amount of the single sum is 
$1,800,002 (which is based on the 5 percent interest rate and applicable 
mortality table as of January 1, 2003, since that present value is 
greater than the present value that would have been determined using the 
applicable interest rate (5.25 percent) and the applicable mortality 
table (the January 1, 2003, table) for the distribution under section 
417(e)(3)).
    (ii) Conclusion. For purposes of this section, the annual benefit is 
the greatest of the annual amount of the actuarially equivalent straight 
life annuity commencing at the same age (determined using the plan's 
actuarial factors), the annual amount of the actuarially equivalent 
straight life annuity commencing at the same age (determined using a 5.5 
percent interest assumption and the applicable mortality table for the 
distribution under Sec.  1.417(e)-1(d)(2)), and the annual amount of the 
actuarially equivalent straight life annuity commencing at the same age 
(determined using the applicable interest rate and applicable mortality 
table for the distribution under Sec. Sec.  1.417(e)-1(d)(2) and (d)(3)) 
divided by 1.05. Based on the factors used in the plan to determine the 
actuarially equivalent lump sum (in this case, an interest rate of 5 
percent and the applicable mortality table as of January 1, 2003), 
$1,800,002 payable as a single sum is actuarially equivalent to an 
immediate straight life annuity at age 65 of $152,619. A single sum 
payment of $1,800,002 is actuarially equivalent to an immediate straight 
life annuity at age 65 of $159,105, using a 5.5 percent interest 
assumption and the applicable mortality table under Sec.  1.417(e)-
1(d)(2). Based on the applicable interest rate and the applicable 
mortality table for the distribution under

[[Page 331]]

Sec. Sec.  1.417(e)-1(d)(2) and (d)(3), $1,800,002 payable as a single 
sum is actuarially equivalent to an immediate straight life annuity at 
age 65 of $155,853. $148,432 is the result when this annual amount is 
divided by 1.05. With respect to the single-sum distribution, M's annual 
benefit for purposes of section 415(b) is equal to the greatest of the 
three resulting amounts ($152,619, $159,105, and $148,432), or $159,105.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that Participant M elects to receive his benefit in the form of a 10-
year certain and life annuity. Applying the plan's actuarial equivalence 
factors, the benefit payable in this form is $146,100.
    (ii) Conclusion. Since the form of benefit elected by M is a form of 
benefit to which section 417(e)(3) does not apply, the annual benefit 
for purposes of this section is the greater of the annual amount of the 
plan's straight life annuity commencing at the same age or the annual 
amount of the actuarially equivalent straight life annuity commencing at 
the same age, determined using a 5 percent interest rate and the 
applicable mortality table described in Sec.  1.417(e)-1(d)(2) for that 
annuity starting date. In this case, the straight life annuity payable 
under the plan commencing at the same age is $152,619. Because the 
plan's factors for actuarial equivalence in this case are the same 
standardized actuarial factors required to be applied to determine the 
actuarially equivalent straight life annuity, the actuarially equivalent 
straight life annuity using the required standardized factors is also 
$152,619. With respect to the 10-year certain and life annuity 
distribution, M's annual benefit is equal to the greater of the two 
resulting amounts ($152,619 and $152,619), or $152,619.
    Example 3. (i) Facts. The facts are the same as in Example 1. 
Participant M retires at age 62 with a benefit under the plan (before 
the application of section 415) of $100,000 (after application of the 
plan's early retirement factors) and a Social Security supplement of 
$10,000 per year payable until age 65. N chooses to receive the accrued 
benefit in the form of a straight life annuity. The Plan has no 
provisions under which the actuarial value of the Social Security 
supplement can be paid as a level annuity for life.
    (ii) Conclusion. Because the form of benefit elected by M is a form 
of benefit to which section 417(e)(3) does not apply and because the 
plan does not provide for a straight life annuity beginning at age 62, 
the annual benefit for purposes of this section is the annual amount of 
the straight life annuity commencing at age 62 that is actuarially 
equivalent to the distribution stream of $110,000 for three years and 
$100,000 thereafter, where actuarial equivalence is determined using a 5 
percent interest rate and the applicable mortality table described in 
Sec.  1.417(e)-1(d)(2) for the annuity starting date. In this case, the 
actuarially equivalent straight life annuity is $102,180. Accordingly, 
with respect to this distribution stream, N's annual benefit is equal to 
$102,180. The results are the same without regard to whether the Social 
Security supplement is a QSUPP (as defined in Sec.  1.401(a)(4)-12).
    Example 4. (i) Facts. Plan B is a defined benefit plan that provides 
a benefit equal to 100 percent of a participant's average compensation 
for the period of the participant's high-3 years of service, payable as 
a straight life annuity. For a married participant who does not elect 
another form of benefit, the benefit is payable in the form of a joint 
and 100 percent survivor annuity benefit that is a QJSA within the 
meaning of section 417 and that is reduced from the straight life 
annuity. For purposes of determining the amount of this QJSA, the plan 
provides that the reduction is only half of the reduction that would 
normally apply under the actuarial assumptions specified in the plan for 
determining actuarial equivalence of optional forms. The plan also 
provides that a married participant can elect to receive the plan 
benefits as a straight life annuity, or in the form of a single sum 
distribution that is the actuarial equivalent of the joint and 100 
percent survivor annuity determined using the applicable interest rate 
and the applicable mortality table under section 417(e)(3) and Sec.  
1.417(e)-1(d). Participant O elects, with spousal consent, a single-sum 
distribution.
    (ii) Conclusion. The special rule that disregards the value of the 
survivor portion of a QJSA set forth in paragraph (c)(4)(i) of this 
section only applies to a benefit that is payable in the form of a 
qualified joint and survivor annuity. Any other form of benefit must be 
adjusted to a straight life annuity in accordance with paragraph (c)(1) 
of this section. Accordingly, because the benefit payable under the plan 
in the form of a single-sum distribution is actuarially equivalent to a 
straight life annuity that is greater than 100 percent of a 
participant's average compensation for the period of the participant's 
high-3 years of service, the limitation of section 415(b)(1)(B) has been 
exceeded.
    Example 5. (i) Facts. Plan C is a defined benefit plan that provides 
an option to receive the benefit in the form of a joint and 100 percent 
survivor annuity with a 10-year certain feature, where the survivor 
beneficiary is the participant's spouse.
    (ii) Conclusion. Since this form of benefit is not subject to 
section 417(e)(3), for a participant at age 65, the annual benefit with 
respect to the joint and 100 percent survivor annuity with a 10-year 
certain feature is determined for purposes of this section as the 
greater of the annual amount of the straight life annuity payable to the 
participant under the plan at age 65 (if any), or the annual

[[Page 332]]

amount of the straight life annuity commencing at age 65 that has the 
same actuarial present value as the joint and 100 percent survivor 
annuity with a 10-year certain feature (but excluding the survivor 
annuity payments pursuant to paragraph (c)(4)(i)(A) of this section), 
computing using a 5 percent interest assumption and the applicable 
mortality table described in Sec.  1.417(e)-1(d)(2) for the annuity 
starting date. This latter amount is equal to the product of the annual 
payments under this optional form of benefit and the factor that 
provides for actuarial equivalence between a straight life annuity and a 
10-year certain and life annuity (with no annuity for the survivor) 
computed using a 5 percent interest rate and the applicable mortality 
table described in Sec.  1.417(e)-1(d)(2) for the annuity starting date.
    Example 6. (i) Facts. Plan E provides a benefit at age 65 of a 
straight life annuity equal to the lesser of 90 percent of the 
participant's average compensation for the period of the participant's 
high-3 years of service and $148,500. Upon retirement at age 65, the 
optional forms of benefit available to a participant include payment of 
a QJSA with annual payments equal to 50 percent of the annual payments 
under the straight life annuity, along with a single-sum distribution 
that is actuarially equivalent (determined as the greater of the single 
sum calculated using a 5 percent interest assumption and the section 
417(e)(3)(A)(ii)(I) mortality table in effect on January 1, 2003, and 
the single sum calculated using the section 417(e)(3)(A)(ii)(II) 
applicable interest rate and the section 417(e)(3)(A)(ii)(I) applicable 
mortality table for the distribution) to 50 percent of the annual 
payments under the straight life annuity. Participant Q retires at age 
65. Q's average compensation for the period of Q's high-3 years of 
service is $100,000. Q elects to receive a distribution in the optional 
form of benefit described above, under which the annual payments under 
the QJSA are $45,000 and the single-sum distribution is equal to 
$530,734. Q's spouse is 3 years younger than Q.
    (ii) Determination of annual benefit. Q's annual benefit under Plan 
E for purposes of section 415(b) is determined as the sum of the annual 
benefit attributable to the QJSA portion of the distribution and the 
annual benefit attributable to the single-sum portion of the 
distribution.
    (iii) Annual benefit attributable to QJSA portion. Because survivor 
benefits are not taken into account in determining the annual benefit 
attributable to the QJSA portion of the distribution, the annual benefit 
attributable to the QJSA portion of the distribution is determined as if 
that distribution were a straight life annuity of $45,000 per year 
commencing at age 65. Thus, no form adjustment is needed to determine 
the annual benefit attributable to the QJSA portion of the distribution, 
and the annual benefit attributable to the QJSA portion of the benefit 
is $45,000.
    (iv) Annual benefit attributable to single sum portion. The annual 
benefit attributable to the single sum portion of the distribution is 
determined as the greatest of the annual amount of the actuarially 
equivalent straight life annuity commencing at the same age (determined 
using the plan's actuarial factors), the annual amount of the 
actuarially equivalent straight life annuity commencing at the same age 
(determined using a 5.5 percent interest assumption and the applicable 
mortality table under Sec.  1.417(e)-1(d)(2) for the distribution), and 
the annual amount of the actuarially equivalent straight life annuity 
commencing at the same age (determined using the applicable interest 
rate and applicable mortality table under section 417(e)(3) and 
Sec. Sec.  1.417(e)-1(d)(2) and (d)(3) for the distribution) divided by 
1.05. With respect to the single-sum distribution, the annual amount of 
the actuarially equivalent straight life annuity commencing at the same 
age determined using the plan's actuarial factors is equal to $45,000. 
The annual amount of the actuarially equivalent straight life annuity 
commencing at the same age determined using a 5.5 percent interest 
assumption and the applicable mortality table under Sec.  1.417(e)-
1(d)(2) for the distribution is $46,912. The actuarially equivalent 
straight life annuity commencing at the same age determined using the 
applicable interest rate and the applicable mortality table under 
section 417(e)(3) and Sec. Sec.  1.417(e)-1(d)(2) and (d)(3) for the 
distribution is equal to $45,954. This amount divided by 1.05 is equal 
to $43,766. Thus, the annual benefit attributable to the single sum 
portion of the benefit is $46,912.
    (v) Conclusion. Q's annual benefit under the optional form of 
benefit for purposes of section 415(b) is equal to the sum of the annual 
benefit attributable to the QJSA portion of the distribution and the 
annual benefit attributable to the single sum portion of the 
distribution, or $91,912. Because Q's average compensation for the 
period of Q's high-3 years of service is $100,000, the distribution 
satisfies the compensation limit of section 415(b)(1)(B).
    Example 7. (i) Facts. Plan D is a defined benefit plan with a normal 
retirement age of 65. The normal retirement benefit under Plan D (and 
the only life annuity available under Plan D) is a life annuity with a 
fixed increase of 2 percent per year. The increase applies to the 
benefit provided in the prior year and is thus compounded. The plan 
provides that the benefit is limited to the lesser of 84 percent of the 
participant's average compensation for the period of the participant's 
high-3 years of service or 84 percent of the age-adjusted section 
415(b)(1)(A) dollar limit (which is assumed to be $180,000 at age

[[Page 333]]

65). Plan D does not incorporate the section 415(d) cost-of-living 
adjustments to the section 415(b) limits for limitation years following 
the limitation year in which a participant incurs a severance from 
employment. Participant P retires at age 65, at which time P's average 
compensation for the period of P's high-3 years of service is $165,000. 
Under Plan D, P commences receiving benefits in the form of a life 
annuity of $138,600 with a fixed increase of 2 percent per year.
    (ii) Conclusion. Because Plan D does not provide for a straight life 
annuity and the form of benefit is not subject to section 417(e)(3), P's 
annual benefit for purposes of section 415(b) is the annual amount of 
the straight life annuity, commencing at age 65, that is actuarially 
equivalent to the distribution stream of $138,600 with a fixed increase 
of 2 percent per year, where actuarial equivalence is determined using a 
5 percent interest rate and the applicable mortality table for the 
distribution under section 417(e)(3) and Sec.  1.417(e)-1(d)(2). In 
order to satisfy the requirements of section 415 and this section, this 
annual benefit must not exceed 100 percent of the average compensation 
for the period of the participant's high-3 years of service, or 
$165,000. Using a 5 percent interest rate and the section 417(e)(3) 
applicable mortality table for the distribution, the actuarially 
equivalent straight life annuity is $165,453, which exceeds $165,000. 
Accordingly, the plan fails to satisfy the compensation-based limitation 
of section 415(b)(1)(B).
    Example 8. (i) Facts. The facts are the same as in Example 7, except 
that Plan D incorporates by reference the section 415(d) cost-of-living 
adjustments to the section 415(b) limits as described in Sec.  1.415(a)-
1(d)(3)(v) and Plan D provides that the benefit is limited to the 
applicable section 415(b) limit. Under Plan D, P commences receiving 
benefits at age 65 in the form of a life annuity of $138,221 with a 
fixed increase of 2 percent per year.
    (ii) Conclusion. Because Plan D does not provide for a straight life 
annuity and the form of benefit is not subject to section 417(e)(3), P's 
annual benefit for purposes of section 415(b) is the annual amount of 
the straight life annuity, commencing at age 65, that is actuarially 
equivalent to the distribution stream of $138,221 with a fixed increase 
of 2 percent per year, where actuarial equivalence is determined using a 
5 percent interest rate and the applicable mortality table for P's 
annuity starting date under section 417(e)(3) and Sec.  1.417(e)-
1(d)(2). In order to satisfy the requirements of section 415(b) and this 
section, this annual benefit must not exceed 100 percent of P's average 
compensation for the period of P's high-3 years of service, or $165,000. 
Using a 5 percent interest rate and the section 417(e)(3) applicable 
mortality table for the distribution, the actuarially equivalent 
straight life annuity is $165,000, which does not exceed $165,000. 
Accordingly, the plan satisfies the compensation-based limitation of 
section 415(b)(1)(B).
    (iii) Section 415(d) adjustments. In addition to the fixed 2 percent 
per year automatic increase, P's benefit will be increased in limitation 
years following the limitation year in which P retires in accordance 
with the plan provisions that incorporate by reference the section 
415(d) cost-of-living adjustments to the section 415(b) limits (or, if 
Plan D did not incorporate by reference the section 415(d) adjustments, 
P's benefit may be increased pursuant to plan amendments that comply 
with the safe harbors provided in Sec.  1.415(d)-1(a)(5) or (6)), and 
such increases will not cause P's benefit to violate the requirements of 
section 415(b). For example, if in a later limitation year the 
applicable section 415(b) limit is increased by 3 percent pursuant to 
section 415(d) and Sec.  1.415(d)-1, P's benefit payable under Plan D 
will be increased by both the fixed automatic 2 percent per year 
increase and by the 3 percent section 415(d) cost-of-living adjustment. 
The effect of the combined increases may result in P's benefits for a 
year exceeding the then applicable dollar limit under section 415(b), 
but the plan will not violate section 415(b).
    Example 9. (i) Facts. The facts are the same as in Example 7, except 
that the plan provides that benefits are limited to the lesser of 100 
percent of the participant's average compensation for the period of the 
participant's high-3 years of service or 100 percent of the age-adjusted 
section 415(b)(1)(A) dollar limit. Assume that P retires at age 65 with 
a benefit in the form of a life annuity of $165,000 per year with a 
fixed increase of 2 percent per year. Additionally, assume that Plan D 
incorporates by reference the section 415(d) cost-of-living adjustments 
to the section 415(b) limits as described in Sec.  1.415(a)-1(d)(3)(v) 
and the plan provides pursuant to paragraph (c)(5) of this section that 
in no event will a benefit payable from the plan, as increased by the 
fixed increase of 2 percent per year, be greater than the section 415(b) 
limit applicable as of the annuity starting date for the benefit 
(increased pursuant to the rules of section 415(d) and Sec.  1.415(d)-
1).
    (ii) Conclusion. The benefit payable to P at age 65 is not required 
to be adjusted to take into account the fixed increase of 2 percent per 
year. This is because the benefit payable to P satisfies the 
requirements of section 415(b) without regard to the fixed increase of 2 
percent per year, and pursuant to paragraph (c)(5) of this section, the 
plan provides that the benefit payable to P, as increased by the fixed 
increase of 2 percent per year, will never be greater than the section 
415(b) limit applicable as of P's annuity starting date (increased in 
subsequent limitation years pursuant to the rules of section 415(d) and 
Sec.  1.415(d)-1).

[[Page 334]]

    (iii) Section 415(d) adjustments. In addition to the fixed 2 percent 
per year automatic increase, P's benefit will be increased in limitation 
years following the limitation year in which P retires in accordance 
with the plan provisions that incorporate by reference the section 
415(d) cost-of-living adjustments to the section 415(b) limits (or, if 
Plan D did not incorporate by reference the section 415(d) adjustments, 
P's benefit may be increased pursuant to plan amendments that comply 
with the safe harbors provided in Sec.  1.415(d)-1(a)(5) or (6)), and 
such increases will not cause P's benefit to violate the requirements of 
section 415(b). However, pursuant to paragraph (c)(5)(iii) of this 
section, P's benefit during any limitation year, as increased by the 2 
percent per year automatic increase feature and any plan provisions that 
incorporate by reference the section 415(d) cost-of-living adjustments 
or any plan amendments that increase P's benefits, cannot exceed the 
then applicable section 415(b) limit (as increased pursuant to section 
415(d) and Sec.  1.415(d)-1).
    Example 10. (i) Facts. Employer T maintains a defined benefit plan. 
Under the terms of the plan, all benefits in pay status (other than 
single sum payments) are adjusted upwards or downwards annually 
depending on an annual comparison of actual return on plan assets and an 
assumed interest rate of 4 percent. Thus, the plan does not offer a 
straight life annuity form of benefit, and the plan must determine for 
purposes of applying the section 415(b) limits the actuarially 
equivalent straight life annuity for benefits provided under the plan.
    (ii) Conclusion. Benefits under the plan are paid in a form to which 
section 417(e)(3) does not apply. In determining the actuarially 
equivalent straight life annuity of benefits that are subject to the 
annual investment performance adjustment, the plan must assume a 5 
percent return on plan assets. See paragraph (c)(2) of this section. 
Therefore, in determining the actuarially equivalent straight life 
annuity, the plan must assume that the form of benefit payable under the 
plan will be an annuity that increases annually by a factor equal to 
1.05 divided by 1.04. This increasing annuity is then converted to an 
actuarially equivalent straight life annuity under paragraph (c)(2) of 
this section using a 5 percent interest rate and the applicable 
mortality table described in Sec.  1.417(e)-1(d)(2) for the relevant 
annuity starting date.
    Example 11. (i) Facts. R is a participant in a defined benefit plan 
maintained by R's employer. Under the terms of the plan, R must make 
contributions to the plan in a stated amount to accrue benefits derived 
from employer contributions.
    (ii) Conclusion. R's contributions are mandatory employee 
contributions within the meaning of section 411(c)(2)(C) and, thus, the 
annual benefit attributable to these contributions is not taken into 
account for purposes of testing the annual benefit derived from employer 
contributions against the applicable limitation on benefits. However, 
these contributions are treated as contributions to a defined 
contribution plan maintained by R's employer for purposes of section 
415(c). See Sec.  1.415(c)-1(a)(2)(ii)(B). Accordingly, with respect to 
the current limitation year, the limitation on benefits (as described in 
paragraph (a)(1) of this section) is applicable to the annual benefit 
attributable to employer contributions to the defined benefit plan, and 
the limitation on contributions and other additions (as described in 
Sec.  1.415(c)-1) is applicable to the portion of the plan treated as a 
defined contribution plan, which consists of R's mandatory 
contributions. These same limitations would also apply if, instead of 
providing for mandatory employee contributions, the plan permitted 
voluntary employee contributions, because the portion of the plan 
attributable to voluntary employee contributions and earnings thereon is 
treated as a defined contribution plan maintained by the employer 
pursuant to section 414(k), and thus is not subject to the limitations 
of section 415(b).
    Example 12. (i) Facts. V is a participant in a defined benefit plan 
maintained by V's employer. Under the terms of the plan, V must make 
contributions to the plan in a stated amount to accrue benefits derived 
from employer contributions. V's contributions are mandatory employee 
contributions within the meaning of section 411(c)(2)(C). Thus, the 
annual benefit attributable to these contributions is not taken into 
account for purposes of testing the annual benefit derived from employer 
contributions against the applicable limitation on benefits. V 
terminates employment and receives a distribution from the plan that 
includes V's mandatory employee contributions. Subsequently, V resumes 
employment with the employer maintaining the plan. V recommences 
participation in the plan and repays the prior distribution from the 
plan (including the portion of the distribution that included V's prior 
mandatory employee contributions to the plan) with reasonable interest.
    (ii) Conclusion. In determining V's annual benefit under the plan 
for purposes of applying the limitations of section 415(b), no portion 
of V's repayment of the prior distribution is treated as employee 
contributions. See paragraphs (b)(2)(ii)(C), (D) and (E) of this 
section. However, V's annual benefit under the plan is determined by 
excluding the portion of the annual benefit attributable to V's employee 
contributions to the plan made both prior to the first distribution and 
during V's subsequent recommencement of plan participation.

    (d) Adjustment to section 415(b)(1)(A) dollar limit for commencement 
before age

[[Page 335]]

62--(1) General rule--(i) Calculation using statutory factors. For a 
distribution with an annuity starting date that occurs before the 
participant attains the age of 62, the age-adjusted section 415(b)(1)(A) 
dollar limit generally is determined as the actuarial equivalent of the 
annual amount of a straight life annuity commencing at the annuity 
starting date that has the same actuarial present value as a deferred 
straight life annuity commencing at age 62, where annual payments under 
the straight life annuity commencing at age 62 are equal to the dollar 
limitation of section 415(b)(1)(A) (as adjusted pursuant to section 
415(d) and Sec.  1.415(d)-1 for the limitation year), and where the 
actuarially equivalent straight life annuity is computed using a 5 
percent interest rate and the applicable mortality table under Sec.  
1.417(e)-1(d)(2) that is effective for that annuity starting date (and 
expressing the participant's age based on completed calendar months as 
of the annuity starting date). However, if the plan has an immediately 
commencing straight life annuity payable both at age 62 and the age of 
benefit commencement, then the age-adjusted section 415(b)(1)(A) dollar 
limit is equal to the lesser of--
    (A) The limit as otherwise determined under this paragraph 
(d)(1)(i); and
    (B) The amount determined under paragraph (d)(1)(ii) of this 
section.
    (ii) Calculation using plan factors. The amount determined under 
this paragraph (d)(1)(ii) is equal to the section 415(b)(1)(A) dollar 
limit (as adjusted pursuant to section 415(d) and Sec.  1.415(d)-1 for 
the limitation year) multiplied by the ratio of the annual amount of the 
immediately commencing straight life annuity under the plan to the 
annual amount of the straight life annuity under the plan commencing at 
age 62, with both annual amounts determined without applying the rules 
of section 415.
    (2) Mortality adjustments--(i) In general. For purposes of 
determining the actuarially equivalent amount described in paragraph 
(d)(1)(i) of this section, to the extent that a forfeiture does not 
occur upon the participant's death before the annuity starting date, no 
adjustment is made to reflect the probability of the participant's death 
between the annuity starting date and the participant's attainment of 
age 62, unless the plan provides for such an adjustment. To the extent 
that a forfeiture occurs upon the participant's death before the annuity 
starting date, an adjustment must be made to reflect the probability of 
the participant's death between the annuity starting date and the 
participant's attainment of age 62.
    (ii) No forfeiture deemed to occur where qualified preretirement 
survivor annuity payable. For purposes of paragraphs (d)(2)(i) and 
(e)(2)(i) of this section, a plan is permitted to treat no forfeiture as 
occurring upon a participant's death if the plan does not charge 
participants for providing a qualified preretirement survivor annuity 
(QPSA) (as defined in section 417(c)) on the participant's death, but 
only if the plan applies this treatment both for adjustments before age 
62 and adjustments after age 65. Thus, in such a case, the plan is 
permitted to provide that, in computing the adjusted dollar limitation 
under section 415(b)(1)(A), no adjustment is made to reflect the 
probability of a participant's death after the annuity starting date and 
before age 62 or after age 65 and before the annuity starting date.
    (3) Exception for certain participants of certain governmental 
plans. Pursuant to section 415(b)(2)(G) and (H), no age adjustment is 
made to the dollar limit for commencement before age 62 for any 
qualified participant. For this purpose, a qualified participant is a 
participant in a defined benefit plan that is maintained by a state, 
Indian tribal government (as defined in section 7701(a)(40)), or any 
political subdivision of a state or Indian tribal government with 
respect to whom the service taken into account in determining the amount 
of the benefit under the defined benefit plan includes at least 15 years 
of service of the participant--
    (i) As a full-time employee of any police department or fire 
department that is organized and operated by the state, Indian tribal 
government, or political subdivision maintaining such defined benefit 
plan to provide police protection, firefighting services, or emergency 
medical services for any

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area within the jurisdiction of such state, Indian tribal government, or 
political subdivision; or
    (ii) As a member of the Armed Forces of the United States.
    (4) Exception for survivor and disability benefits under 
governmental plans. Pursuant to section 415(b)(2)(I), no age adjustment 
is made to the dollar limit for commencement before age 62 for a 
distribution from a governmental plan (as defined in section 414(d)) on 
account of the participant's becoming disabled by reason of personal 
injuries or sickness, or as a result of the death of the participant.
    (5) Special rule for commercial airline pilots. Pursuant to section 
415(b)(9), no age adjustment is made to the dollar limit for early 
commencement on or after age 60 for a participant if--
    (i) The participant is a commercial airline pilot;
    (ii) The participant separates from service upon or after attaining 
age 60; and
    (iii) As of the time of the participant's retirement, regulations 
prescribed by the Federal Aviation Administration require an individual 
to separate from service as a commercial airline pilot after attaining 
any age occurring on or after age 60 and before age 62.
    (6) No decrease in age-adjusted section 415(b)(1)(A) dollar limit on 
account of age or service. Notwithstanding any other provision of this 
paragraph (d), the age-adjusted section 415(b)(1)(A) dollar limit 
applicable to a participant does not decrease on account of an increase 
in age or the performance of additional service.
    (7) Examples. The following examples illustrate the application of 
this paragraph (d). For purposes of these examples, it is assumed that 
the dollar limitation under section 415(b)(1)(A) for all relevant years 
is $180,000, that the normal form of benefit under the plan is a 
straight life annuity payable beginning at age 65, and that all payments 
other than a payment of a single sum are made monthly, on the first day 
of each calendar month. The examples are as follows:

    Example 1. (i) Plan A provides that early retirement benefits are 
determined by reducing the accrued benefit by 4 percent for each year 
that the early retirement age is less than age 65. Participant M retires 
at age 60 with exactly 30 years of service with a benefit (prior to the 
application of section 415) in the form of a straight life annuity of 
$100,000 payable at age 65, and is permitted to elect to commence 
benefits at any time between M's retirement and M's attainment of age 
65. For example, M can elect to commence benefits at age 60 in the 
amount of $80,000, can wait until age 62 and commence benefits in the 
amount of $88,000, or can wait until age 65 and commence benefits in the 
amount of $100,000. Plan A provides a QPSA to all married participants 
without charge. Plan A provides (consistent with paragraph (d)(2)(ii) of 
this section) that, for purposes of adjusting the dollar limitation 
under section 415(b)(1)(A) for commencement before age 62 or after age 
65, no forfeiture is treated as occurring upon a participant's death 
before retirement and, therefore, in computing the adjusted dollar 
limitation under section 415(b)(1)(A), no adjustment is made to reflect 
the probability of a participant's death after the annuity starting date 
and before age 62 or after age 65 and before the annuity starting date.
    (ii) The age-adjusted section 415(b)(1)(A) dollar limit that applies 
for commencement of M's benefit at age 60 is the lesser of the section 
415(b)(1)(A) dollar limit multiplied by the ratio of the annuity payable 
at age 60 to the annuity payable at age 62, or the straight life annuity 
payable at age 60 that is actuarially equivalent, using 5 percent 
interest and the applicable mortality table effective for that annuity 
starting date under section 417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-
1(d)(2), to the deferred annuity payable at age 62 of $180,000 per year. 
In this case, the age-adjusted section 415(b)(1)(A) dollar limit at age 
60 is $156,229 (the lesser of $163,636 ($180,000* $80,000/$88,000) and 
$156,229 (the straight life annuity at age 60 that is actuarially 
equivalent to a deferred annuity of $180,000 commencing at age 62, 
determined using 5 percent interest and the applicable mortality table, 
without a mortality decrement for the period between 60 and 62)).
    Example 2. (i) The facts are the same as in Example 1, except that 
participant M elects to retire at age 60, 6 months, and 21 days.
    (ii) Under paragraph (d)(1)(i) of this section, M is treated as age 
60 and 6 months (or, age 60.5). Absent the rule provided in paragraph 
(d)(6) of this section, the age-adjusted section 415(b)(1)(A) dollar 
limit that applies for commencement of M's benefit at age 60.5 is the 
lesser of the section 415(b)(1)(A) dollar limit multiplied by the ratio 
of the annuity payable at age 60.5 to the annuity payable at age 62, or 
the straight life annuity payable at age 60.5 that is actuarially 
equivalent, using 5 percent interest and the applicable mortality table 
for that annuity starting date under section 417(e)(3)(A)(ii)(I) and

[[Page 337]]

Sec.  1.417(e)-1(d)(2), to the deferred annuity payable at age 62 of 
$180,000 per year. The age-adjusted section 415(b)(1)(A) dollar limit at 
age 60.5 is $161,769 (the lesser of $167,727 ($180,000* $82,000/$88,000) 
and $161,769 (the straight life annuity at age 60.5 that is actuarially 
equivalent to a deferred annuity of $180,000 commencing at age 62, 
determined using 5 percent interest and the applicable mortality table, 
without a mortality decrement for the period between 60.5 and 62).
    Example 3. (i) The facts are the same as in Example 1, except the 
plan provides that, if a participant has 30 or more years of service, no 
reduction applies for benefits commencing at age 62 and later.
    (ii) Absent the rule provided in paragraph (d)(6) of this section, 
the age-adjusted section 415(b)(1)(A) dollar limit that applies for 
commencement of M's benefit at age 60 is the lesser of the section 
415(b)(1)(A) dollar limit multiplied by the ratio of the annuity payable 
at age 60 to the annuity payable at age 62, or the straight life annuity 
payable at age 60 that is actuarially equivalent, using 5 percent 
interest and the applicable mortality table for that annuity starting 
date under section 417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2), to 
the deferred annuity payable at age 62 of $180,000 per year. In this 
case, because M has 30 years of service and would be eligible for the 
unreduced early retirement benefit at age 62, the age-adjusted section 
415(b)(1)(A) dollar limit at age 60 would be $144,000 (the lesser of 
$144,000 ($180,000* $80,000/$100,000) and $156,229 (the straight life 
annuity at age 60 that is actuarially equivalent to a deferred annuity 
of $180,000 commencing at age 62, determined using 5 percent interest 
and the applicable mortality table, without a mortality decrement for 
the period between 60 and 62)).
    (iii) However, at age 59\11/12\ with 29\11/12\ years of service, the 
age-adjusted section 415(b)(1)(A) dollar limit for M is $155,311 (the 
lesser of $162,955 ($180,000* $79,667/$88,000) and $155,311 (the 
straight life annuity at age 59\11/12\ that is actuarially equivalent to 
a deferred annuity of $180,000 commencing at age 62, determined using 5 
percent interest and the applicable mortality table, without a mortality 
decrement for the period between 59 and 62)). Thus, after applying the 
rule provided in paragraph (d)(6) of this section, the age-adjusted 
section 415(b)(1)(A) dollar limit that applies for commencement of M's 
benefit at age 60 is $155,311.
    Example 4. (i) The facts are the same as in Example 1, except that 
the plan provides that, if a participant has 30 or more years of 
service, then no reduction is made in early retirement benefits if the 
early retirement age is at least age 62 and, in the case of an early 
retirement age before age 62, the early retirement benefit is determined 
by reducing the accrued benefit by 4 percent for each year that the 
early retirement age is less than age 62.
    (ii) The age-adjusted section 415(b)(1)(A) dollar limit that applies 
for commencement of M's benefit at age 60 is the lesser of the section 
415(b)(1)(A) dollar limit multiplied by the ratio of the annuity payable 
at age 60 to the annuity payable at age 62, or the straight life annuity 
payable at age 60 that is actuarially equivalent, using 5 percent 
interest and the applicable mortality table for that annuity starting 
date under section 417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2), to 
the deferred annuity payable at age 62 of $180,000 per year. In this 
case, because M has 30 years of service and would be eligible for the 
unreduced early retirement benefit at age 62, the age-adjusted section 
415(b)(1)(A) dollar limit at age 60 is $156,229 (the lesser of $165,600 
($180,000* $92,000/$100,000) and $156,229 (the straight life annuity at 
age 60 that is actuarially equivalent to a deferred annuity of $180,000 
commencing at age 62, determined using 5 percent interest and the 
applicable mortality table, without a mortality decrement for the period 
between 60 and 62)).
    Example 5. (i) The facts are the same as in Example 1, except that 
Participant M chooses to receive benefits in the form of a 10-year 
certain and life annuity under which payments are 97 percent of the 
periodic payments that would be made under the immediately commencing 
straight life annuity. Annual payments to M are 97 percent of $80,000, 
or $77,600. Additionally, M's average compensation for the period of M's 
high-3 years of service is $120,000. As in Example 1, the age-adjusted 
section 415(b)(1)(A) dollar limit at age 60 is $156,229.
    (ii) In the case of a form of benefit to which section 417(e)(3) 
does not apply, the annual benefit for purposes of this section is the 
greater of the annual amount of the plan's straight life annuity 
commencing at the same age or the annual amount of the actuarially 
equivalent straight life annuity commencing at the same age, determined 
using a 5 percent interest rate and the applicable mortality table for 
that annuity starting date under section 417(e)(3)(A)(ii)(I) and Sec.  
1.417(e)-1(d)(2). In this case, the straight life annuity payable under 
the plan commencing at the same age is $80,000. The annual amount of the 
straight life annuity that is actuarially equivalent to the $77,600 
benefit payable as a 10-year certain and life annuity is determined by 
applying the required standardized factors (a 5 percent interest 
assumption and the applicable mortality under section 
417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2), and is $79,416. With 
respect to the 10-year certain and life annuity commencing at age 62, 
M's annual benefit is equal to the greater of the two resulting amounts 
($80,000 and $79,416), or $80,000. Because M's annual benefit is less 
than the age-adjusted section 415(b)(1)(A) dollar limit and is less than 
the

[[Page 338]]

section 415(b)(1)(B) compensation limit, M's benefit satisfies section 
415.
    Example 6. (i) Participant O is a full-time civilian employee of the 
Harbor Police Division of the State of X Port Authority. The Harbor 
Police Division provides police protection services. O performs clerical 
services for the Harbor Police Division. O is a participant in the 
defined benefit plan that is maintained by the State of X with respect 
to whom the years of service taken into account in determining the 
amount of the benefit under the plan includes 10 years of service 
working for the Harbor Police Division and 5 years of service as a 
member of the Armed Forces of the United States.
    (ii) For a distribution with an annuity starting date that occurs 
before O attains the age of 62, there is no age adjustment to the 
section 415(b)(1)(A) dollar limit.
    Example 7. (i) Participant R is a full-time employee of the 
Emergency Medical Service Department of County Y (which is not a part of 
a police or fire department) who performs services as a driver of an 
ambulance. R is a participant in the defined benefit plan that is 
maintained by County Y with respect to whom the years of service taken 
into account in determining the amount of the benefit under the plan 
includes 15 years of service working for County Y. R does not have 
service credit for time in the Armed Forces of the United States.
    (ii) The age adjustments to the limitations of section 415(b)(1)(A) 
pursuant to section 415(b)(2)(C) and (D) will apply if R commences 
receiving a distribution at an age to which either of those adjustments 
applies.

    (e) Adjustment to section 415(b)(1)(A) dollar limit for commencement 
after age 65--(1) General rule--(i) Calculation using statutory factors. 
For a distribution with an annuity starting date that occurs after the 
participant attains the age of 65, the age-adjusted section 415(b)(1)(A) 
dollar limit generally is determined as the actuarial equivalent of the 
annual amount of a straight life annuity commencing at the annuity 
starting date that has the same actuarial present value as a straight 
life annuity commencing at age 65, where annual payments under the 
straight life annuity commencing at age 65 are equal to the dollar 
limitation of section 415(b)(1)(A) (as adjusted pursuant to section 
415(d) and Sec.  1.415(d)-1 for the limitation year), and where the 
actuarially equivalent straight life annuity is computed using a 5 
percent interest rate and the applicable mortality table under Sec.  
1.417(e)-1(d)(2) that is effective for that annuity starting date (and 
expressing the participant's age based on completed calendar months as 
of the annuity starting date). However, if the plan has an immediately 
commencing straight life annuity payable as of the annuity starting date 
and an immediately commencing straight life annuity payable at age 65, 
then the age-adjusted section 415(b)(1)(A) dollar limit is equal to the 
lesser of--
    (A) The limit as otherwise determined under this paragraph 
(e)(1)(i); and
    (B) The amount determined under paragraph (e)(1)(ii) of this 
section.
    (ii) Calculation using plan factors. The amount determined under 
this paragraph (e)(1)(ii) is equal to the section 415(b)(1)(A) dollar 
limit (as adjusted pursuant to section 415(d) and Sec.  1.415(d)-1 for 
the limitation year) multiplied by the adjustment ratio described in 
paragrap. (e)(2)(i) of this section.
    (2) Adjustment ratio--(i) General rule. For purposes of applying the 
rule of paragraph (e)(1)(ii) of this section, the adjustment ratio is 
equal to the ratio of the annual amount of the adjusted immediately 
commencing straight life annuity under the plan described in paragraph 
(e)(2)(ii) of this section to the adjusted age 65 straight life annuity 
described in paragraph (e)(2)(iii) of this section.
    (ii) Adjusted immediately commencing straight life annuity. The 
adjusted immediately commencing straight life annuity that is used for 
purposes of paragraph (e)(2)(i) of this section is the annual amount of 
the immediately commencing straight life annuity payable to the 
participant, computed disregarding the participant's accruals after age 
65 but including actuarial adjustments even if those actuarial 
adjustments are applied to offset accruals. For this purpose, the annual 
amount of the immediately commencing straight life annuity is determined 
without applying the rules of section 415.
    (iii) Adjusted age 65 straight life annuity. The adjusted age 65 
straight life annuity that is used for purposes of paragraph (e)(2)(i) 
of this section is the annual amount of the straight life annuity that 
would be payable under the plan to a hypothetical participant who

[[Page 339]]

is 65 years old and has the same accrued benefit (with no actuarial 
increases for commencement after age 65) as the participant receiving 
the distribution (determined disregarding the participant's accruals 
after age 65 and without applying the rules of section 415).
    (3) Mortality adjustments--(i) In general. For purposes of 
determining the actuarially equivalent amount described in paragraph 
(e)(1)(i) of this section, to the extent that a forfeiture does not 
occur upon the participant's death before the annuity starting date, no 
adjustment is made to reflect the probability of the participant's death 
between the participant's attainment of age 65 and the annuity starting 
date. To the extent that a forfeiture occurs upon the participant's 
death before the annuity starting date, an adjustment must be made to 
reflect the probability of the participant's death between the 
participant's attainment of age 65 and the annuity starting date.
    (ii) No forfeiture deemed to occur where QPSA payable. See paragraph 
(d)(2)(ii) of this section for a rule deeming no forfeiture to occur if 
the plan does not charge participants for providing a QPSA on the 
participant's death.
    (4) Examples. The following examples illustrate the application of 
this paragraph (e):

    Example 1. (i) Plan A provides that monthly benefits payable upon 
commencement after normal retirement age (which is age 65) are increased 
by 0.5 percent for each month of delay in commencement after attainment 
of normal retirement age. Plan A provides a QPSA to all married 
participants without charge. Plan A provides (consistent with paragraph 
(d)(2)(ii) of this section) that, for purposes of adjusting the dollar 
limitation under section 415(b)(1)(A) for commencement before age 62 or 
after age 65, no adjustment is made to reflect the probability of a 
participant's death between the annuity starting date and the 
participant's attainment of age 62 or between the age of 65 and the 
annuity starting date. The normal form of benefit under Plan A is a 
straight life annuity commencing at age 65. Plan A does not provide 
additional benefit accruals once a participant is credited with 30 years 
of service. Participant M was credited with 30 years of service under 
Plan A when M attained age 65. M retires at age 70 on January 1, 2008, 
with a benefit (prior to the application of section 415) that is payable 
monthly in the form of a straight life annuity of $195,000, which 
reflects the actuarial increase of 30 percent applied to the accrued 
benefit of $150,000. It is assumed that all payments under Plan A, other 
than a payment of a single sum, are made monthly, on the first day of 
each calendar month. It is also assumed that the dollar limit in 2008 is 
$185,000.
    (ii) The age-adjusted section 415(b)(1)(A) dollar limit at age 70 is 
the lesser of the section 415(b)(1)(A) dollar limit multiplied by the 
ratio of the adjusted immediately commencing straight life annuity 
payable at age 70 (computed disregarding the rules of section 415 and 
accruals after age 65, but including actuarial adjustments) to the 
adjusted age 65 straight life annuity (computed disregarding the rules 
of section 415 and any accruals after age 65), or the straight life 
annuity payable at age 70 that is actuarially equivalent, using 5 
percent interest and the applicable mortality table for that annuity 
starting date under section 417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-
1(d)(2), to the straight life annuity payable at age 65, where annual 
payments under the straight life annuity payable at age 65 are equal to 
the dollar limitation of section 415(b)(1)(A). In this case, the age-
adjusted section 415(b)(1)(A) dollar limit at age 70 is $240,500 (the 
lesser of $240,500 ($185,000* $195,000/$150,000) and $271,444 (the 
straight life annuity at age 70 that is actuarially equivalent to an 
annuity of $185,000 commencing at age 65, determined using 5 percent 
interest and the applicable mortality table, without a mortality 
decrement for the period between 65 and 70)).
    Example 2. (i) The facts are the same as in Example 1, except that 
Plan A does not limit benefit accruals to 30 years of credited service, 
and thus M accrues benefits between ages 65 and 70.
    (ii) Since M's accruals after attaining age 65 are disregarded for 
purposes of determining the age-adjusted section 415(b)(1)(A) dollar 
limit applicable to M at age 70, the result is the same as in Example 1.
    Example 3. (i) The facts are the same as in Example 1, except that 
Plan A does not limit benefit accruals to 30 years of credited service. 
However, benefit accruals after an employee has reached normal 
retirement age (age 65), are offset by the actuarial increase that the 
plan provides for commencement of benefits after normal retirement age.
    (ii) The result is the same as in Example 1, even if the actuarial 
increases for post-age 65 benefit commencement provided under Plan A do 
or do not fully offset M's benefit accruals after attaining age 65. This 
is because benefit accruals after age 65 are disregarded for purposes of 
determining the age-adjusted section 415(b)(1)(A) dollar limit 
applicable to M after age 65.

    (f) Total annual payments not in excess of $10,000--(1) In general. 
Pursuant to section 415(b)(4), the annual benefit

[[Page 340]]

(without regard to the age at which benefits commence) payable with 
respect to a participant under any defined benefit plan is not 
considered to exceed the limitations on benefits described in section 
415(b)(1) and in paragraph (a)(1) of this section if--
    (i) The benefits (other than benefits not taken into account in the 
computation of the annual benefit under the rules of paragraph (b) or 
(c) of this section) payable with respect to the participant under the 
plan and all other defined benefit plans of the employer do not in the 
aggregate exceed $10,000 (as adjusted under paragraph (g) of this 
section) for the limitation year, or for any prior limitation year; and
    (ii) The employer (or a predecessor employer) has not at any time 
maintained a defined contribution plan in which the participant 
participated.
    (2) Computation of benefits for purposes of applying the $10,000 
amount. For purposes of paragraph (f)(1)(i) of this section, the 
benefits payable with respect to the participant under a plan for a 
limitation year reflect all amounts payable under the plan for the 
limitation year (other than benefits not taken into account in the 
computation of the annual benefit under the rules of paragraph (b) or 
(c) of this section), and are not adjusted for form of benefit or 
commencement date.
    (3) Special rule with respect to participants in multiemployer 
plans. The special $10,000 exception set forth in paragraph (f)(1) of 
this section applies to a participant in a multiemployer plan described 
in section 414(f) without regard to whether that participant ever 
participated in one or more other plans maintained by an employer who 
also maintains the multiemployer plan, provided that none of such other 
plans were maintained as a result of collective bargaining involving the 
same employee representative as the multiemployer plan.
    (4) Special rule with respect to employee contributions. 
Notwithstanding Sec. Sec.  1.415(c)-1(a)(2)(ii)(B) and 1.415(c)-1(b)(3), 
mandatory employee contributions under a defined benefit plan described 
in paragraph (b)(2)(iii) of this section are not considered a separate 
defined contribution plan maintained by the employer for purposes of 
paragraph (f)(1)(ii) of this section. Thus, the special dollar 
limitation provided for in this paragraph (f) applies to a contributory 
defined benefit plan.
    Similarly, for purposes of this paragraph (f), an individual medical 
account under section 401(h) or an account for postretirement medical 
benefits established pursuant to section 419A(d)(1) is not considered a 
separate defined contribution plan maintained by the employer.
    (5) Examples. The application of this paragraph (f) may be 
illustrated by the following examples. For purposes of these examples, 
it is assumed that each participant has 10 years of participation in the 
plan and service with the employer. The examples are as follows:

    Example 1. (i) B is a participant in a defined benefit plan 
maintained by X Corporation, which provides for a benefit payable in the 
form of a straight life annuity beginning at age 65. B's average 
compensation for the period of B's high-3 years of service is $6,000. 
The plan does not provide for mandatory employee contributions, and at 
no time has B been a participant in a defined contribution plan 
maintained by X. With respect to the current limitation year, B's 
benefit under the plan (before the application of section 415) is 
$9,500.
    (ii) Because annual payments under B's benefit do not exceed 
$10,000, and because B has at no time participated in a defined 
contribution plan maintained by X, the benefits payable under the plan 
are not considered to exceed the limitation on benefits otherwise 
applicable to B ($6,000).
    (iii) This result would remain the same even if, under the terms of 
the plan, B's benefit of $9,500 were payable at age 60, or if the plan 
provided for mandatory employee contributions.
    Example 2. (i) The facts are the same as in Example 1, except that 
the plan provides for a benefit payable in the form of a life annuity 
with a 10-year certain feature with annual payments of $9,500. Assume 
that, after the adjustment described in paragraph (c) of this section, 
B's actuarially equivalent straight life annuity (which is the annual 
benefit used for demonstrating compliance with section 415) for the 
current limitation year is $10,400.
    (ii) For purposes of applying the special rule provided in this 
paragraph for total benefits not in excess of $10,000, there is no 
adjustment required if the retirement benefit payable under the plan is 
not in the form of a straight life annuity. Therefore, because B's 
retirement benefit does not exceed $10,000, B may receive the full 
$9,500 benefit

[[Page 341]]

without the otherwise applicable benefit limitations of this section 
being exceeded.
    Example 3. (i) The facts are the same as in Example 1, except that 
the plan provides for a benefit payable in the form of a single sum and 
the amount of the single sum that is the actuarial equivalent of the 
straight life annuity payable to B ($9,500 annually), determined in 
accordance with the rules of section 417(e)(3) and Sec.  1.417(e)-1(d), 
is $95,000.
    (ii) Because the amount payable to B for the limitation year would 
exceed $10,000, the rule of this paragraph (f) does not provide an 
exception from the generally applicable limits of section 415(b)(1) for 
the single-sum distribution. Thus, the otherwise applicable limits apply 
to the single-sum distribution, and a single-sum distribution of $95,000 
would not satisfy the requirements of section 415(b). Limiting the 
single-sum distribution to $60,000 (the present value of the annuity 
that complies with the compensation-based limitation of section 
415(b)(1)(B)) in order to satisfy section 415 would be an impermissible 
forfeiture under the requirements of section 411(a). Accordingly, the 
plan should not provide for a single-sum distribution in these 
circumstances.

    (g) Special rule for participation or service of less than 10 
years--(1) Proration of dollar limit based on years of participation--
(i) In general. Pursuant to section 415(b)(5)(A), where a participant 
has less than 10 years of participation in the plan, the dollar limit 
described in paragraph (a)(1)(i) of this section (as adjusted pursuant 
to section 415(d), Sec.  1.415(d)-1, and paragraphs (d) and (e) of this 
section) is reduced by multiplying the otherwise applicable limitation 
by a fraction--
    (A) The numerator of which is the number of years of participation 
in the plan (or 1, if greater); and
    (B) The denominator of which is 10.
    (ii) Years of participation. The following rules apply for purposes 
of determining a participant's years of participation for purposes of 
this paragraph (g)(1)--
    (A) A participant is credited with a year of participation (computed 
to fractional parts of a year) for each accrual computation period for 
which the participant is credited with at least the number of hours of 
service (or period of service if the elapsed time method is used for 
benefit accrual purposes) required under the terms of the plan in order 
to accrue a benefit for the accrual computation period, and the 
participant is included as a plan participant under the eligibility 
provisions of the plan for at least one day of the accrual computation 
period. If these two conditions are met, the portion of a year of 
participation credited to the participant is equal to the amount of 
benefit accrual service credited to the participant for such accrual 
computation period. For example, if under the terms of a plan, a 
participant receives \1/10\ of a year of benefit accrual service for an 
accrual computation period for each 200 hours of service, and the 
participant is credited with 1,000 hours of service for the period, the 
participant is credited with \1/2\ a year of participation for purposes 
of section 415(b)(5)(A) and this paragraph (g)(1).
    (B) A participant who is permanently and totally disabled within the 
meaning of section 415(c)(3)(C)(i) for an accrual computation period is 
credited with a year of participation with respect to that period for 
purposes of section 415(b)(5)(A) and this paragraph (g)(1).
    (C) For a participant to receive a year of participation (or part 
thereof) for an accrual computation period for purposes of section 
415(b)(5)(A) and this paragraph (g)(1), the plan must be established no 
later than the last day of such accrual computation period.
    (D) No more than one year of participation may be credited for any 
12-month period for purposes of section 415(b)(5)(A) and this paragraph 
(g)(1).
    (2) Proration of compensation limit and special rule for total 
annual payments less than $10,000 based on years of service--(i) In 
general. Pursuant to section 415(b)(5)(B), where a participant has less 
than 10 years of service with the employer, the compensation limit 
described in paragraph (a)(1)(ii) of this section and the $10,000 amount 
under the special rule for small annual payments under paragraph (f) of 
this section are reduced by multiplying the otherwise applicable 
limitation by a fraction--
    (A) The numerator of which is the number of years of service with 
the employer (or 1, if greater); and
    (B) The denominator of which is 10.
    (ii) Years of service--(A) In general. For purposes of applying this 
paragraph (g)(2), years of service must be

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determined on a reasonable and consistent basis. A plan is considered to 
be determining years of service on a reasonable and consistent basis for 
this purpose if, subject to the limits of paragraph (g)(2)(ii)(B) of 
this section, a participant is credited with a year of service (computed 
to fractional parts of a year) for each accrual computation period for 
which the participant is credited with at least the number of hours of 
service (or period of service if the elapsed time method is used for 
benefit accrual purposes) required under the terms of the plan in order 
to accrue a benefit for the accrual computation period.
    (B) Rules of application. No more than one year of service may be 
credited for any 12-month period for purposes of section 415(b)(5)(B). 
In addition, only the participant's service with the employer or a 
predecessor employer (as defined in Sec.  1.415(f)-1(c)) may be taken 
into account in determining the participant's years of service for this 
purpose. Thus, if an employer does not maintain a former employer's 
plan, a participant's service with the former employer may be taken into 
account in determining the participant's years of service for purposes 
of this paragraph (g)(2) only if the former employer is a predecessor 
employer with respect to the employer pursuant to Sec.  1.415(f)-1(c)(2) 
(which defines predecessor employer to include, under certain 
circumstances, a former entity that antedates the employer).
    (C) Period of disability. Notwithstanding the rules of paragraph 
(g)(2)(ii)(B) of this section, a plan is permitted to provide that a 
participant who is permanently and totally disabled within the meaning 
of section 415(c)(3)(C)(i) for an accrual computation period is credited 
with service with respect to that period for purposes of section 
415(b)(5)(B).
    (3) Exception for survivor and disability benefits under 
governmental plans. The requirements of this paragraph (g) (regarding 
participation or service of less than 10 years) do not apply to a 
distribution from a governmental plan (as defined in section 414(d)) on 
account of the participant's becoming disabled by reason of personal 
injuries or sickness, or as a result of the death of the participant.
    (4) Examples. The provisions of this paragraph (g) may be 
illustrated by the following examples:

    Example 1. (i) C begins employment with Employer A on January 1, 
2005, at the age of 58. Employer A maintains only a noncontributory 
defined benefit plan which provides for a straight life annuity 
beginning at age 65 and uses the calendar year for the limitation and 
plan year. Employer A has never maintained a defined contribution plan. 
C becomes a participant in Employer A's plan on January 1, 2006, and 
works through December 31, 2011, when C is age 65. C begins to receive 
benefits under the plan in 2012. C's average compensation for the period 
of C's high-3 years of service is $40,000. Furthermore, under the terms 
of Employer A's plan, for purposes of computing C's nonforfeitable 
percentage in C's accrued benefit derived from employer contributions, C 
has only 7 years of service with Employer A (2005-2011).
    (ii) Because C has only 7 years of service with Employer A at the 
time he begins to receive benefits under the plan, the maximum 
permissible annual benefit payable with respect to C is $28,000 ($40,000 
multiplied by 7/10).
    Example 2. (i) The facts are the same as in Example 1, except that 
C's average compensation for the period of his high-3 years of service 
is $8,000.
    (ii) Because C has only 7 years of service with Employer A at the 
time he begins to receive benefits, the maximum benefit payable with 
respect to C would be reduced to $5,600 ($8,000 multiplied by 7/10). 
However, the special rule for total benefits not in excess of $10,000, 
provided in paragraph (f) of this section, is applicable in this case. 
Accordingly, C may receive an annual benefit of $7,000 ($10,000 
multiplied by 7/10) without the benefit limitations of this section 
being exceeded.
    Example 3. (i) Employer B maintains a defined benefit plan. Benefits 
under the plan are computed based on months of service rather than years 
of service. Accordingly, for purposes of applying the reduction based on 
years of service less than 10 to the limitations under section 415(b), 
the plan provides that the otherwise applicable limitation is multiplied 
by a fraction, the numerator of which is the number of completed months 
of service with the employer (but not less than 12 months), and the 
denominator of which is 120. The plan further provides that months of 
service are computed in the same manner for this purpose as for purposes 
of computing plan benefits.
    (ii) The manner in which the plan applies the reduction based on 
years of service less than 10 to the limitations under section

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415(b) is consistent with the requirements of this paragraph (g).
    Example 4. (i) G begins employment with Employer D on January 1, 
2003, at the age of 58. Employer D maintains a noncontributory defined 
benefit plan which provides for a straight life annuity beginning at age 
65 and uses the calendar year for the limitation and plan year. G 
becomes a participant in Employer D's plan on January 1, 2004, and works 
through December 31, 2009, when G is age 65. G performs sufficient 
service to be credited with a year of service under the plan for each 
year during 2003 through 2009 (although G is not credited with a year of 
service for 2003 because G is not yet a plan participant). G begins to 
receive benefits under the plan during 2010. The plan's accrual 
computation period is the plan year. The plan provides that, for 
purposes of applying the rules of section 415(b)(5)(B), a participant is 
credited with a year of service (computed to fractional parts of a year) 
for each plan year for which the participant is credited with sufficient 
service to accrue a benefit for the plan year. G's average compensation 
for the period of G's high-3 years of service is $200,000. It is assumed 
for purposes of this example that the dollar limitation of section 
415(b)(1)(A) for limitation years ending in 2010 is $195,000.
    (ii) G has 7 years of service and 6 years of participation in the 
plan at the time G begins to receive benefits under the plan. 
Accordingly, the limitation under section 415(b)(1)(B) based on G's 
average compensation for the period of G's high-3 years of service that 
applies pursuant to the adjustment required under section 415(b)(5)(B) 
is $140,000 ($200,000 multiplied by 7/10), and the dollar limitation 
under section 415(b)(1)(A) that applies to G pursuant to the adjustment 
required under section 415(b)(5)(A) is $117,000 ($195,000 multiplied by 
6/10).

    (h) Retirement Protection Act of 1994 transition rules. For special 
rules affecting the actuarial adjustment for form of benefit under 
paragraph (c) of this section and the adjustment to the dollar limit for 
early or late commencement under paragraphs (d) and (e) of this section 
for certain plans adopted and in effect before December 8, 1994, see 
section 767(d)(3)(A) of the Uruguay Round Agreements Act of 1994, Public 
Law 103-465 (108 Stat. 4809) as amended by section 1449(a) of the Small 
Business Job Protection Act of 1996, Public Law 104-188 (110 Stat. 
1755). The Commissioner may provide guidance regarding these special 
rules in revenue rulings, notices, and other guidance published in the 
Internal Revenue Bulletin. See Sec.  601.601(d) of this chapter.

[T.D. 9319, 72 FR 16899, Apr. 5, 2007; 72 FR 28854, May 23, 2007]



Sec.  1.415(b)-2  Multiple annuity starting dates. [Reserved]



Sec.  1.415(c)-1  Limitations for defined contribution plans.

    (a) General rules--(1) Maximum limitations. Under section 415(c) and 
this section, to satisfy the provisions of section 415(a) for any 
limitation year, except as provided by paragraph (a)(3) of this section, 
the annual additions (as defined in paragraph (b) of this section) 
credited to the account of a participant in a defined contribution plan 
for the limitation year must not exceed the lesser of--
    (i) $40,000 (adjusted pursuant to section 415(d) and Sec.  1.415(d)-
1(b)); or
    (ii) 100 percent of the participant's compensation (as defined in 
Sec.  1.415(c)-2) for the limitation year.
    (2) Defined contribution plan--(i) Definition. For purposes of 
section 415 and regulations promulgated under section 415, the term 
defined contribution plan means a defined contribution plan within the 
meaning of section 414(i) (including the portion of a plan treated as a 
defined contribution plan under the rules of section 414(k)) that is--
    (A) A plan described in section 401(a) which includes a trust which 
is exempt from tax under section 501(a);
    (B) An annuity plan described in section 403(a); or
    (C) A simplified employee pension described in section 408(k).
    (ii) Additional plans treated as defined contribution plans--(A) In 
general. Contributions to the types of arrangements described in 
paragraphs (a)(2)(ii)(B) through (D) of this section are treated as 
contributions to defined contribution plans for purposes of section 415 
and regulations promulgated under section 415.
    (B) Employee contributions to a defined benefit plan. Mandatory 
employee contributions (as defined in section 411(c)(2)(C) and Sec.  
1.411(c)-1(c)(4), regardless of whether the plan is subject to the 
requirements of section 411) to a defined benefit plan are treated as 
contributions to a defined contribution

[[Page 344]]

plan. For this purpose, contributions that are picked up by the employer 
as described in section 414(h)(2) are not considered employee 
contributions.
    (C) Individual medical benefit accounts under section 401(h). 
Pursuant to section 415(l)(1), contributions allocated to any individual 
medical benefit account which is part of a pension or annuity plan 
established pursuant to section 401(h) are treated as contributions to a 
defined contribution plan.
    (D) Post-retirement medical accounts for key employees. Pursuant to 
section 419A(d)(2), amounts attributable to medical benefits allocated 
to an account established for a key employee (any employee who, at any 
time during the plan year or any preceding plan year, is or was a key 
employee as defined in section 416(i)) pursuant to section 419A(d)(1) 
are treated as contributions to a defined contribution plan.
    (iii) Section 403(b) annuity contracts. Annual additions under an 
annuity contract described in section 403(b) are treated as annual 
additions under a defined contribution plan for purposes of this 
section.
    (3) Alternative contribution limitations--(i) Church plans. For 
alternative contribution limitations relating to church plans, see 
paragraph (d) of this section.
    (ii) Special rules for medical benefits. For additional rules 
relating to certain medical benefits, see paragraph (e) of this section.
    (iii) Employee stock ownership plans. For additional rules relating 
to employee stock ownership plans, see paragraph (f) of this section.
    (b) Annual additions--(1) In general--(i) General definition. The 
term annual addition means, for purposes of this section, the sum, 
credited to a participant's account for any limitation year, of--
    (A) Employer contributions;
    (B) Employee contributions; and
    (C) Forfeitures.
    (ii) Certain excess amounts treated as annual additions. 
Contributions do not fail to be annual additions merely because they are 
excess contributions (as described in section 401(k)(8)(B)) or excess 
aggregate contributions (as described in section 401(m)(6)(B)), or 
merely because excess contributions or excess aggregate contributions 
are corrected through distribution.
    (iii) Direct transfers. The direct transfer of a benefit or employee 
contributions from a qualified plan to a defined contribution plan does 
not give rise to an annual addition.
    (iv) Reinvested employee stock ownership plan dividends. The 
reinvestment of dividends on employer securities under an employee stock 
ownership plan pursuant to section 404(k)(2)(A)(iii)(II) does not give 
rise to an annual addition.
    (2) Employer contributions--(i) Amounts treated as an annual 
addition. For purposes of paragraph (b)(1)(i)(A) of this section, the 
term annual addition includes employer contributions credited to the 
participant's account for the limitation year and other allocations 
described in paragraph (b)(4) of this section that are made during the 
limitation year. See paragraph (b)(6) of this section for timing rules 
applicable to annual additions with respect to employer contributions.
    (ii) Amounts not treated as annual additions--(A) Certain 
restorations of accrued benefits. The restoration of an employee's 
accrued benefit by the employer in accordance with section 411(a)(3)(D) 
or section 411(a)(7)(C) or resulting from the repayment of cashouts (as 
described in section 415(k)(3)) under a governmental plan (as defined in 
section 414(d)) is not considered an annual addition for the limitation 
year in which the restoration occurs. This treatment of a restoration of 
an employee's accrued benefit as not giving rise to an annual addition 
applies regardless of whether the plan restricts the timing of 
repayments to the maximum extent allowed by section 411(a).
    (B) Catch-up contributions. A catch-up contribution made in 
accordance with section 414(v) and Sec.  1.414(v)-1 does not give rise 
to an annual addition.
    (C) Restorative payments. A restorative payment that is allocated to 
a participant's account does not give rise to an annual addition for any 
limitation year. For this purpose, restorative payments are payments 
made to restore losses to a plan resulting from actions by a fiduciary 
for which there is reasonable risk of liability for breach of a

[[Page 345]]

fiduciary duty under title I of the Employee Retirement Income Security 
Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA) or under other 
applicable federal or state law, where plan participants who are 
similarly situated are treated similarly with respect to the payments. 
Generally, payments to a defined contribution plan are restorative 
payments only if the payments are made in order to restore some or all 
of the plan's losses due to an action (or a failure to act) that creates 
a reasonable risk of liability for such a breach of fiduciary duty 
(other than a breach of fiduciary duty arising from failure to remit 
contributions to the plan). This includes payments to a plan made 
pursuant to a Department of Labor order, the Department of Labor's 
Voluntary Fiduciary Correction Program, or a court-approved settlement, 
to restore losses to a qualified defined contribution plan on account of 
the breach of fiduciary duty (other than a breach of fiduciary duty 
arising from failure to remit contributions to the plan). Payments made 
to a plan to make up for losses due merely to market fluctuations and 
other payments that are not made on account of a reasonable risk of 
liability for breach of a fiduciary duty under title I of ERISA are not 
restorative payments and generally constitute contributions that give 
rise to annual additions under paragraph (b)(4) of this section.
    (D) Excess deferrals. Excess deferrals that are distributed in 
accordance with Sec.  1.402(g)-1(e)(2) or (3) do not give rise to annual 
additions.
    (3) Employee contributions. For purposes of paragraph (b)(1)(i)(B) 
of this section, the term annual addition includes mandatory employee 
contributions (as defined in section 411(c)(2)(C) and regulations 
promulgated under section 411) as well as voluntary employee 
contributions. The term annual addition does not include--
    (i) Rollover contributions (as described in sections 401(a)(31), 
402(c)(1), 403(a)(4), 403(b)(8), 408(d)(3), and 457(e)(16));
    (ii) Repayments of loans made to a participant from the plan;
    (iii) Repayments of amounts described in section 411(a)(7)(B) (in 
accordance with section 411(a)(7)(C)) and section 411(a)(3)(D) or 
repayment of contributions to a governmental plan (as defined in section 
414(d)) as described in section 415(k)(3);
    (iv) Repayments that would have been described in paragraph 
(b)(3)(iii) of this section except that the plan does not restrict the 
timing of repayments to the maximum extent permitted by section 411(a); 
or
    (v) Employee contributions to a qualified cost of living arrangement 
within the meaning of section 415(k)(2)(B).
    (4) Transactions with plan. The Commissioner may in an appropriate 
case, considering all of the facts and circumstances, treat transactions 
between the plan and the employer, transactions between the plan and the 
employee, or certain allocations to participants' accounts as giving 
rise to annual additions. Further, where an employee or employer 
transfers assets to a plan in exchange for consideration that is less 
than the fair market value of the assets transferred to the plan, there 
is an annual addition in the amount of the difference between the value 
of the assets transferred and the consideration. A transaction described 
in this paragraph (b)(4) may constitute a prohibited transaction with 
the meaning of section 4975(c)(1).
    (5) Contributions other than cash. For purposes of this paragraph 
(b), a contribution by the employer or employee of property rather than 
cash is considered to be a contribution in an amount equal to the fair 
market value of the property on the date the contribution is made. For 
this purpose, the fair market value 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 to sell and both having reasonable 
knowledge of relevant facts. In addition, a contribution described in 
this paragraph (b)(5) may constitute a prohibited transaction within the 
meaning of section 4975(c)(1).
    (6) Timing rules--(i) In general--(A) Date of allocation. For 
purposes of this paragraph (b), an annual addition is credited to the 
account of a participant for a particular limitation year if it is 
allocated to the participant's account under the terms of the plan as of 
any

[[Page 346]]

date within that limitation year. Similarly, an annual addition that is 
made pursuant to a corrective amendment that complies with the 
requirements of Sec.  1.401(a)(4)-11(g) is credited to the account of a 
participant for a particular limitation year if it is allocated to the 
participant's account under the terms of the corrective amendment as of 
any date within that limitation year. However, if the allocation of an 
annual addition is dependent upon the satisfaction of a condition (such 
as continued employment or the occurrence of an event) that has not been 
satisfied by the date as of which the annual addition is allocated under 
the terms of the plan, then the annual addition is considered allocated 
for purposes of this paragraph (b) as of the date the condition is 
satisfied.
    (B) Date of employer contributions. For purposes of this paragraph 
(b), employer contributions are not treated as credited to a 
participant's account for a particular limitation year unless the 
contributions are actually made to the plan no later than 30 days after 
the end of the period described in section 404(a)(6) applicable to the 
taxable year with or within which the particular limitation year ends. 
If, however, contributions are made by an employer exempt from Federal 
income tax (including a governmental employer), the contributions must 
be made to the plan no later than the 15th day of the tenth calendar 
month following the end of the calendar year or fiscal year (as 
applicable, depending on the basis on which the employer keeps its 
books) with or within which the particular limitation year ends. If 
contributions are made to a plan after the end of the period during 
which contributions can be made and treated as credited to a 
participant's account for a particular limitation year, allocations 
attributable to those contributions are treated as credited to the 
participant's account for the limitation year during which those 
contributions are made.
    (C) Date of employee contributions. For purposes of this paragraph 
(b), employee contributions, whether voluntary or mandatory, are not 
treated as credited to a participant's account for a particular 
limitation year unless the contributions are actually made to the plan 
no later than 30 days after the close of that limitation year.
    (D) Date for forfeitures. A forfeiture is treated as an annual 
addition for the limitation year that contains the date as of which it 
is allocated to a participant's account as a forfeiture.
    (E) Treatment of elective contributions as plan assets. The extent 
to which elective contributions constitute plan assets for purposes of 
the prohibited transaction provisions of section 4975 and title I of 
ERISA, is determined in accordance with regulations and rulings issued 
by the Department of Labor. See 29 CFR 2510.3-102.
    (ii) Special timing rules--(A) Corrective contributions. For 
purposes of this section, if, in a particular limitation year, an 
employer allocates an amount to a participant's account because of an 
erroneous forfeiture in a prior limitation year, or because of an 
erroneous failure to allocate amounts in a prior limitation year, the 
corrective allocation will not be considered an annual addition with 
respect to the participant for that particular limitation year, but will 
be considered an annual addition for the prior limitation year to which 
it relates. An example of a situation in which an employer contribution 
might occur under the circumstances described in the preceding sentence 
is a retroactive crediting of service for an employee under 29 CFR 
2530.200b-2(a)(3) in accordance with an award of back pay. For purposes 
of this paragraph (b)(6)(ii), if the amount so contributed in the 
particular limitation year takes into account actual investment gains 
attributable to the period subsequent to the year to which the 
contribution relates, the portion of the total contribution that 
consists of such gains is not considered as an annual addition for any 
limitation year.
    (B) Contributions for accumulated funding deficiencies and 
previously waived contributions--(1) Accumulated funding deficiency. In 
the case of a defined contribution plan to which the rules of section 
412 apply, a contribution made to reduce an accumulated funding 
deficiency will be treated as if it were timely made for purposes of 
determining the limitation year in which the annual additions arising 
from the contribution are made, but only if the

[[Page 347]]

contribution is allocated to those participants who would have received 
an annual addition if the contribution had been timely made.
    (2) Previously waived contributions. In the case of a defined 
contribution plan to which the rules of section 412 apply and for which 
there has been a waiver of the minimum funding standard in a prior 
limitation year in accordance with section 412(d), that portion of an 
employer contribution in a subsequent limitation year which, if not for 
the waiver, would have otherwise been required in the prior limitation 
year under section 412(a) will be treated as if it were timely made 
(without regard to the funding waiver) for purposes of determining the 
limitation year in which the annual additions arising from the 
contribution are made, but only if the contribution is allocated to 
those participants who would have received an annual addition if the 
contribution had been timely made (without regard to the funding 
waiver).
    (3) Interest. For purposes of determining the amount of the annual 
addition under paragraphs (b)(6)(ii)(B)(1) and (2) of this section, a 
reasonable amount of interest paid by the employer is disregarded. 
However, any interest paid by the employer that is in excess of a 
reasonable amount, as determined by the Commissioner, is taken into 
account as an annual addition for the limitation year during which the 
contribution is made.
    (C) Simplified employee pensions. For purposes of this paragraph 
(b), amounts contributed to a simplified employee pension described in 
section 408(k) are treated as allocated to the individual's account as 
of the last day of the limitation year ending with or within the taxable 
year for which the contribution is made.
    (D) Treatment of certain contributions made pursuant to veterans' 
reemployment rights. If, in a particular limitation year, an employer 
contributes an amount to an employee's account with respect to a prior 
limitation year and such contribution is required by reason of such 
employee's rights under chapter 43 of title 38, United States Code, 
resulting from qualified military service, as specified in section 
414(u)(1), then such contribution is not considered an annual addition 
with respect to the employee for that particular limitation year in 
which the contribution is made, but, in accordance with section 
414(u)(1)(B), is considered an annual addition for the limitation year 
to which the contribution relates.
    (c) Examples. The following examples illustrate the rules of 
paragraphs (a) and (b) of this section:

    Example 1. (i) P is a participant in a qualified profit-sharing plan 
maintained by his employer, ABC Corporation. The limitation year for the 
plan is the calendar year. P's compensation (as defined in Sec.  
1.415(c)-2) for the current limitation year is $30,000.
    (ii) Because the compensation limitation described in section 
415(c)(1)(B) applicable to P for the current limitation year is lower 
than the dollar limitation described in section 415(c)(1)(A), the 
maximum annual addition which can be allocated to P's account for the 
current limitation year is $30,000 (100 percent of $30,000).
    Example 2. (i) The facts are the same as in Example 1, except that 
P's compensation for the current limitation year is $140,000.
    (ii) The maximum amount of annual additions that may be allocated to 
P's account in the current limitation year is the lesser of $140,000 
(100 percent of P's compensation) or the dollar limitation of section 
415(c)(1)(A) as in effect as of January 1 of the calendar year in which 
the current limitation year ends. If, for example, the dollar limitation 
of section 415(c)(1)(A) in effect as of January 1 of the calendar year 
in which the current limitation year ends is $45,000, then the maximum 
annual addition that can be allocated to P's account for the current 
limitation year is $45,000.
    Example 3. (i) Employer N maintains a qualified profit-sharing plan 
that uses the calendar year as its plan year and its limitation year. 
N's taxable year is a fiscal year beginning June 1 and ending May 31. 
Under the terms of the profit-sharing plan maintained by N, employer 
contributions are made to the plan two months after the close of N's 
taxable year and are allocated as of the last day of the plan year 
ending within the taxable year (and are not dependent on the 
satisfaction of a condition). Thus, employer contributions for the 2008 
calendar year limitation year are made on July 31, 2009 (the date that 
is two months after the close of N's taxable year ending May 31, 2009) 
and are allocated as of December 31, 2008.
    (ii) Because the employer contributions are actually made to the 
plan no later than 30 days after the end of the period described in 
section 404(a)(6) with respect to N's taxable year ending May 31, 2009, 
the contributions will be considered annual additions for the 2008 
calendar year limitation year.

[[Page 348]]

    Example 4. (i) The facts are the same as in Example 3, except that 
the plan year for the profit-sharing plan maintained by N is the 12-
month period beginning on February 1 and ending on January 31. The 
limitation year continues to be the calendar year. Under the terms of 
the plan, an employer contribution which is made to the plan on July 31, 
2009, is allocated to participants' accounts as of January 31, 2009.
    (ii) Because the last day of the plan year is in the 2009 calendar 
year limitation year, and because, under the terms of the plan, employer 
contributions are allocated to participants' accounts as of the last day 
of the plan year, the contributions are considered annual additions for 
the 2009 calendar year limitation year.
    Example 5. (i) XYZ Corporation maintains a profit-sharing plan to 
which a participant may make voluntary employee contributions for any 
year not to exceed 10 percent of the participant's compensation for the 
year. The plan permits a participant to make retroactive make-up 
contributions for any year for which the participant contributed less 
than 10 percent of compensation. XYZ uses the calendar year as the plan 
year and the limitation year. Under the terms of the plan, voluntary 
employee contributions are credited to a participant's account for a 
particular limitation year if such contributions are allocated to the 
participant's account as of any date within that limitation year. 
Participant A's compensation is as follows--

------------------------------------------------------------------------
                     Limitation year                       Compensation
------------------------------------------------------------------------
2008....................................................         $30,000
2009....................................................         $32,000
2010....................................................         $34,000
2011....................................................         $36,000
------------------------------------------------------------------------

    (ii) Participant A makes no voluntary employee contributions during 
limitation years 2008, 2009, and 2010. On October 1, 2011, participant A 
makes a voluntary employee contribution of $13,200 (10 percent of A's 
aggregate compensation for limitation years 2008, 2009, 2010, and 2011 
of $132,000). Under the terms of the plan, $3,000 of this 2011 
contribution is allocated to A's account as of limitation year 2008; 
$3,200 is allocated to A's account of limitation year 2009; $3,400 is 
allocated to A's account as of limitation year 2010, and $3,600 is 
allocated to A's account as of limitation year 2011.
    (iii) Under the rule set forth in paragraph (b)(6)(i)(C) of this 
section, employee contributions will not be considered credited to a 
participant's account for a particular limitation year for section 415 
purposes unless the contributions are actually made to the plan no later 
than 30 days after the close of that limitation year. Thus, A's 
voluntary employee contribution of $13,200 made on October 1, 2011, 
would be considered as credited to A's account only for the 2011 
calendar year limitation year, notwithstanding the plan provisions.

    (d) Special rules relating to church plans--(1) Alternative 
contribution limitation--(i) In general. Pursuant to section 
415(c)(7)(A), notwithstanding the general rule of paragraph (a)(1) of 
this section, additions for a section 403(b) annuity contract for a year 
with respect to a participant who is an employee of a church or a 
convention or association of churches, including an organization 
described in section 414(e)(3)(B)(ii), when expressed as an annual 
addition to such participant's account, are treated as not exceeding the 
limitation of paragraph (a)(1) of this section if such annual additions 
for the year are not in excess of $10,000.
    (ii) $40,000 aggregate limitation. With respect to any participant, 
the total amount of annual additions that are in excess of the 
limitation of paragraph (a)(1) of this section but, pursuant to the rule 
of paragraph (d)(1)(i) of this section, are treated as not exceeding 
that limitation (taking into account the rule of paragraph (d)(3) of 
this section) cannot exceed $40,000. Thus, the aggregate of annual 
additions for all limitation years that would exceed the limitation of 
this section but for this paragraph (d)(1) is limited to $40,000.
    (2) Years of service taken into account for duly ordained, 
commissioned, or licensed ministers or lay employees. For purposes of 
this paragraph (d)--
    (i) All years of service by an individual as an employee of a 
church, or a convention or association of churches, including an 
organization described in section 414(e)(3)(B)(ii), are considered as 
years of service for one employer; and
    (ii) All amounts contributed for annuity contracts by each such 
church (or convention or association of churches) during such years for 
the employee are considered to have been contributed by one employer.
    (3) Foreign missionaries. Pursuant to section 415(c)(7)(C), in the 
case of any individual described in paragraph (d)(1) of this section 
performing any services for the church outside the United States during 
the limitation year, additions for an annuity contract under section 
403(b) for any year are not treated as exceeding the limitation of

[[Page 349]]

paragraph (a)(1) of this section if such annual additions for the year 
do not exceed $3,000. The preceding sentence shall not apply with 
respect to any taxable year to any individual whose adjusted gross 
income for such taxable year (determined separately and without regard 
to community property law) exceeds $17,000.
    (4) Church, convention or association of churches. For purposes of 
this paragraph (d), the terms ``church'' and ``convention or association 
of churches'' have the same meaning as when used in section 414(e).
    (5) Examples. The following examples illustrate the rules of this 
paragraph (d):

    Example 1. (i) E is an employee of ABC Church earning $7,000 during 
each calendar year. E participates in a section 403(b) annuity contract 
maintained by ABC Church beginning in the year 2008. E's taxable year is 
the calendar year, and the limitation year for the plan coincides with 
the calendar year. ABC Church contributes $10,000 to be allocated to E's 
account under the plan for the year 2008.
    (ii) Under paragraph (d)(1) of this section, this allocation is 
treated as not violating the limits established in paragraph (a)(1) of 
this section because it does not exceed $10,000. Moreover, since an 
annual addition of $10,000 would otherwise exceed the limitation of 
paragraph (a)(1) of this section by $3,000, $3,000 is counted toward the 
aggregate limitation specified in paragraph (d)(1)(ii) of this section 
for year 2008. Accordingly, ABC Church may make such allocations for 13 
years (for example, for years 2008 through 2020) without exceeding the 
aggregate limitation of $40,000 specified in paragraph (d) of this 
section. For the fourteenth year, ABC Church could allocate only $8,000 
to E's account (the sum of the $7,000 limitation computed under 
paragraph (a)(1)(ii) of this section and the remaining $1,000 of the 
$40,000 aggregate limitation under paragraph (d)(1)(ii) of this section 
on annual additions in excess of the limits under paragraph (a)(1) of 
this section).
    Example 2. (i) F is an employee of XYZ Church and F's taxable year 
is the calendar year. F earns $2,000 during each calendar year for 
services he provides to XYZ Church, all of which are performed outside 
the United States during each calendar year. F participates in a section 
403(b) annuity contract maintained by ABC Church beginning in the year 
2008. The limitation year for the plan coincides with the calendar year. 
ABC Church contributes $10,000 to be allocated to F's account under the 
plan for the year 2008. F's adjusted gross income for each taxable year 
(determined separately and without regard to community property law) 
does not exceed $17,000.
    (ii) Under paragraph (d)(1) of this section, this allocation is 
treated as not violating the limits established in paragraph (a)(1) of 
this section because it does not exceed $10,000. Moreover, since an 
annual addition of $10,000 would otherwise exceed the limitation of 
paragraph (a)(1) of this section by $7,000 (the excess of $10,000 over 
the greater of the $2,000 compensation limitation under section 
415(c)(1)(B) or the $3,000 section 415(c)(7)(C) amount), XYZ Church may 
make such allocations for 5 years (for example, for years 2008 through 
2012) without exceeding the aggregate limitation of $40,000 specified in 
paragraph (d) of this section. In year 2013, XYZ church may contribute 
$8,000 to be allocated to F's account under the plan (the sum of the 
$3,000 limitation computed under paragraph (d)(3) of this section and 
the remaining $5,000 of the $40,000 aggregate limitation under paragraph 
(d)(1)(ii) of this section on annual additions in excess of the limits 
under paragraph (a)(1) of this section). For years after 2013, pursuant 
to paragraph (d)(3) of this section, XYZ Church could allocate $3,000 
per year to F's account.

    (e) Special rules for medical benefits. The limit under paragraph 
(a)(1)(ii) of this section (100 percent of the participant's 
compensation for the limitation year) does not apply to--
    (1) An individual medical benefit account (as defined in section 
415(l)); or
    (2) A post-retirement medical benefits account for a key employee 
(as defined in section 419A(d)(1)).
    (f) Special rules for employee stock ownership plans--(1) In 
general. Special rules apply to employee stock ownership plans, as 
provided in paragraphs (f)(2) through (f)(4) of this section.
    (2) Determination of annual additions for leveraged employee stock 
ownership plans--(i) In general. Except as provided in this paragraph 
(f) of this section, in the case of an employee stock ownership plan to 
which an exempt loan as described in Sec.  54.4975-7(b) of this chapter 
has been made, the amount of employer contributions that is considered 
an annual addition for the limitation year is calculated with respect to 
employer contributions of both principal and interest used to repay that 
exempt loan for the limitation year.
    (ii) Employer stock that has decreased in value. A plan may provide 
that, in lieu of computing annual additions in accordance with paragraph 
(f)(2)(i) of

[[Page 350]]

this section, annual additions with respect to a loan repayment 
described in paragraph (f)(2)(i) of this section are determined as the 
fair market value of shares released from the suspense account on 
account of the repayment and allocated to participants for the 
limitation year if that amount is less than the amount determined in 
accordance with paragraph (f)(2)(i) of this section.
    (3) Exclusions from annual additions for certain employee stock 
ownership plans that allocate to a broad range of participants--(i) 
General rule. Pursuant to section 415(c)(6), in the case of an employee 
stock ownership plan (as described in section 4975(e)(7)) that meets the 
requirements of paragraph (f)(3)(ii) of this section for a limitation 
year, the limitations imposed by this section do not apply to--
    (A) Forfeitures of employer securities (within the meaning of 
section 409(l)) under such an employee stock ownership plan if such 
securities were acquired with the proceeds of a loan (as described in 
section 404(a)(9)(A)); or
    (B) Employer contributions to such an employee stock ownership plan 
which are deductible under section 404(a)(9)(B) and charged against the 
participant's account.
    (ii) Employee stock ownership plans to which the special exclusion 
applies. An employee stock ownership plan meets the requirements of this 
paragraph (f)(3)(ii) for a limitation year if no more than one-third of 
the employer contributions for the limitation year that are deductible 
under section 404(a)(9) are allocated to highly compensated employees 
(within the meaning of section 414(q)).
    (4) Gratuitous transfers under section 664(g)(1). The amount of any 
qualified gratuitous transfer (as defined in section 664(g)(1)) 
allocated to a participant for any limitation year is not taken into 
account in determining whether any other annual addition exceeds the 
limitations imposed by this section, but only if the amount of the 
qualified gratuitous transfer does not exceed the limitations imposed by 
section 415.

[T.D. 9319, 72 FR 16911, Apr. 5, 2007]



Sec.  1.415(c)-2  Compensation.

    (a) General definition. Except as otherwise provided in this 
section, compensation from the employer within the meaning of section 
415(c)(3), which is used for purposes of section 415 and regulations 
promulgated under section 415, means all items of remuneration described 
in paragraph (b) of this section, but excludes the items of remuneration 
described in paragraph (c) of this section. Paragraph (d) of this 
section provides safe harbor definitions of compensation that are 
permitted to be provided in a plan in lieu of the generally applicable 
definition of compensation. Paragraph (e) of this section provides 
timing rules relating to compensation. Paragraph (f) of this section 
provides rules regarding the application of the rules of section 
401(a)(17) to the definition of compensation for purposes of section 
415. Paragraph (g) of this section provides special rules relating to 
the determination of compensation, including rules for determining 
compensation for a section 403(b) annuity contract, rules for 
determining the compensation of employees of controlled groups or 
affiliated service groups, rules for disabled employees, rules relating 
to foreign compensation, rules regarding deemed section 125 
compensation, rules for employees in qualified military service, and 
rules relating to back pay.
    (b) Items includible as compensation. For purposes of applying the 
limitations of section 415, except as otherwise provided in this 
section, the term compensation means remuneration for services of the 
following types--
    (1) The employee's wages, salaries, fees for professional services, 
and other amounts received (without regard to whether or not an amount 
is paid in cash) for personal services actually rendered in the course 
of employment with the employer maintaining the plan, to the extent that 
the amounts are includible in gross income (or to the extent amounts 
would have been received and includible in gross income but for an 
election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 
402(k), or 457(b)). These amounts include, but are not limited to, 
commissions paid to salespersons, compensation for services on the basis 
of a percentage of profits, commissions on insurance premiums,

[[Page 351]]

tips, bonuses, fringe benefits, and reimbursements or other expense 
allowances under a nonaccountable plan as described in Sec.  1.62-2(c).
    (2) In the case of an employee who is an employee within the meaning 
of section 401(c)(1) and regulations promulgated under section 
401(c)(1), the employee's earned income (as described in section 
401(c)(2) and regulations promulgated under section 401(c)(2)), plus 
amounts deferred at the election of the employee that would be 
includible in gross income but for the rules of section 402(e)(3), 
402(h)(1)(B), 402(k), or 457(b).
    (3) Amounts described in section 104(a)(3), 105(a), or 105(h), but 
only to the extent that these amounts are includible in the gross income 
of the employee.
    (4) Amounts paid or reimbursed by the employer for moving expenses 
incurred by an employee, but only to the extent that at the time of the 
payment it is reasonable to believe that these amounts are not 
deductible by the employee under section 217.
    (5) The value of a nonstatutory option (which is an option other 
than a statutory option as defined in Sec.  1.421-1(b)) granted to an 
employee by the employer, but only to the extent that the value of the 
option is includible in the gross income of the employee for the taxable 
year in which granted.
    (6) The amount includible in the gross income of an employee upon 
making the election described in section 83(b).
    (7) Amounts that are includible in the gross income of an employee 
under the rules of section 409A or section 457(f)(1)(A) or because the 
amounts are constructively received by the employee.
    (c) Items not includible as compensation. The term compensation does 
not include--
    (1) Contributions (other than elective contributions described in 
section 402(e)(3), section 408(k)(6), section 408(p)(2)(A)(i), or 
section 457(b)) made by the employer to a plan of deferred compensation 
(including a simplified employee pension described in section 408(k) or 
a simple retirement account described in section 408(p), and whether or 
not qualified) to the extent that the contributions are not includible 
in the gross income of the employee for the taxable year in which 
contributed. In addition, any distributions from a plan of deferred 
compensation (whether or not qualified) are not considered as 
compensation for section 415 purposes, regardless of whether such 
amounts are includible in the gross income of the employee when 
distributed. However, if the plan so provides, any amounts received by 
an employee pursuant to a nonqualified unfunded deferred compensation 
plan are permitted to be considered as compensation for section 415 
purposes in the year the amounts are actually received, but only to the 
extent such amounts are includible in the employee's gross income.
    (2) Amounts realized from the exercise of a nonstatutory option 
(which is an option other than a statutory option as defined in Sec.  
1.421-1(b)), or when restricted stock or other property held by an 
employee either becomes freely transferable or is no longer subject to a 
substantial risk of forfeiture (see section 83 and regulations 
promulgated under section 83).
    (3) Amounts realized from the sale, exchange, or other disposition 
of stock acquired under a statutory stock option (as defined in Sec.  
1.421-1(b)).
    (4) Other amounts that receive special tax benefits, such as 
premiums for group-term life insurance (but only to the extent that the 
premiums are not includible in the gross income of the employee and are 
not salary reduction amounts that are described in section 125).
    (5) Other items of remuneration that are similar to any of the items 
listed in paragraphs (c)(1) through (c)(4) of this section.
    (d) Safe harbor rules with respect to plan's definition of 
compensation--(1) In general. Paragraphs (d)(2) through (4) of this 
section contain safe harbor definitions of compensation that are 
automatically considered to satisfy section 415(c)(3) if specified in 
the plan. The Commissioner may, in revenue rulings, notices, and other 
guidance of general applicability published in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2) of this chapter), provide additional 
definitions of compensation that are treated as satisfying section 
415(c)(3).

[[Page 352]]

    (2) Simplified compensation. The safe harbor definition of 
compensation under this paragraph (d)(2) includes only those items 
specified in paragraph (b)(1) or (2) of this section and excludes all 
those items listed in paragraph (c) of this section.
    (3) Section 3401(a) wages. The safe harbor definition of 
compensation under this paragraph (d)(3) includes wages within the 
meaning of section 3401(a) (for purposes of income tax withholding at 
the source), plus amounts that would be included in wages but for an 
election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 
402(k), or 457(b). However, any rules that limit the remuneration 
included in wages based on the nature or location of the employment or 
the services performed (such as the exception for agricultural labor in 
section 3401(a)(2)) are disregarded for this purpose.
    (4) Information required to be reported under sections 6041, 6051 
and 6052. The safe harbor definition of compensation under this 
paragraph (d)(4) includes amounts that are compensation under the safe 
harbor definition of paragraph (d)(3) of this section, plus all other 
payments of compensation to an employee by his employer (in the course 
of the employer's trade or business) for which the employer is required 
to furnish the employee a written statement under sections 6041(d), 
6051(a)(3), and 6052. See Sec. Sec.  1.6041-1(a), 1.6041-2(a)(1), 
1.6052-1, and 1.6052-2, and also see Sec.  31.6051-1(a)(1)(i)(C) of this 
chapter. This safe harbor definition of compensation may be modified to 
exclude amounts paid or reimbursed by the employer for moving expenses 
incurred by an employee, but only to the extent that, at the time of the 
payment, it is reasonable to believe that these amounts are deductible 
by the employee under section 217.
    (e) Timing rules--(1) In general--(i) Payment during the limitation 
year. Except as otherwise provided in this paragraph (e), in order to be 
taken into account for a limitation year, compensation within the 
meaning of section 415(c)(3) must be actually paid or made available to 
an employee (or, if earlier, includible in the gross income of the 
employee) within the limitation year. For this purpose, compensation is 
treated as paid on a date if it is actually paid on that date or it 
would have been paid on that date but for an election under section 125, 
132(f)(4), 401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 457(b).
    (ii) Payment prior to severance from employment. Except as otherwise 
provided in this paragraph (e), in order to be taken into account for a 
limitation year, compensation within the meaning of section 415(c)(3) 
must be paid or treated as paid to the employee (in accordance with the 
rules of paragraph (e)(1)(i) of this section) prior to the employee's 
severance from employment with the employer maintaining the plan. See 
Sec.  1.415(a)-1(f)(5) for the definition of severance from employment.
    (2) Certain minor timing differences. Notwithstanding the provisions 
of paragraph (e)(1)(i) of this section, a plan may provide that 
compensation for a limitation year includes amounts earned during that 
limitation year but not paid during that limitation year solely because 
of the timing of pay periods and pay dates if--
    (i) These amounts are paid during the first few weeks of the next 
limitation year;
    (ii) The amounts are included on a uniform and consistent basis with 
respect to all similarly situated employees; and
    (iii) No compensation is included in more than one limitation year.
    (3) Compensation paid after severance from employment--(i) In 
general. Any compensation described in paragraph (e)(3)(ii) of this 
section does not fail to be compensation (within the meaning of section 
415(c)(3)) pursuant to the rule of paragraph (e)(1)(ii) of this section 
merely because it is paid after the employee's severance from employment 
with the employer maintaining the plan, provided the compensation is 
paid by the later of 2\1/2\ months after severance from employment with 
the employer maintaining the plan or the end of the limitation year that 
includes the date of severance from employment with the employer 
maintaining the plan. In addition, the plan may provide that amounts 
described in paragraph (e)(3)(iii) of this section are included in 
compensation (within the meaning of section 415(c)(3)) if--
    (A) Those amounts are paid by the later of 2\1/2\ months after 
severance

[[Page 353]]

from employment with the employer maintaining the plan or the end of the 
limitation year that includes the date of severance from employment with 
the employer maintaining the plan; and
    (B) Those amounts would have been included in the definition of 
compensation if they were paid prior to the employee's severance from 
employment with the employer maintaining the plan.
    (ii) Regular pay after severance from employment. An amount is 
described in this paragraph (e)(3)(ii) if--
    (A) The payment is regular compensation for services during the 
employee's regular working hours, or compensation for services outside 
the employee's regular working hours (such as overtime or shift 
differential), commissions, bonuses, or other similar payments; and
    (B) The payment would have been paid to the employee prior to a 
severance from employment if the employee had continued in employment 
with the employer.
    (iii) Leave cashouts and deferred compensation. An amount is 
described in this paragraph (e)(3)(iii) if the amount is either--
    (A) Payment for unused accrued bona fide sick, vacation, or other 
leave, but only if the employee would have been able to use the leave if 
employment had continued; or
    (B) Received by an employee pursuant to a nonqualified unfunded 
deferred compensation plan, but only if the payment would have been paid 
to the employee at the same time if the employee had continued in 
employment with the employer and only to the extent that the payment is 
includible in the employee's gross income.
    (iv) Other post-severance payments. Any payment that is not 
described in paragraph (e)(3)(ii) or (iii) of this section is not 
considered compensation under paragraph (e)(3)(i) of this section if 
paid after severance from employment with the employer maintaining the 
plan, even if it is paid within the time period described in paragraph 
(e)(3)(i) of this section. Thus, compensation does not include severance 
pay, or parachute payments within the meaning of section 280G(b)(2), if 
they are paid after severance from employment with the employer 
maintaining the plan, and does not include post-severance payments under 
a nonqualified unfunded deferred compensation plan unless the payments 
would have been paid at that time without regard to the severance from 
employment.
    (4) Salary continuation payments for military service and disabled 
participants. The rule of paragraph (e)(1)(ii) of this section does not 
apply to payments to an individual who does not currently perform 
services for the employer by reason of qualified military service (as 
that term is used in section 414(u)(1)) to the extent those payments do 
not exceed the amounts the individual would have received if the 
individual had continued to perform services for the employer rather 
than entering qualified military service, but only if the plan so 
provides. In addition, the rule of paragraph (e)(1)(ii) of this section 
does not apply to compensation paid to a participant who is permanently 
and totally disabled (as defined in section 22(e)(3)) if the conditions 
set forth in paragraph (g)(4)(ii)(A) of this section are satisfied 
(applied by substituting a continuation of compensation for the 
continuation of contributions), but only if the plan so provides.
    (5) Special rule for governmental plans. For purposes of applying 
the rules of paragraph (e)(3) of this section, a governmental plan (as 
defined in section 414(d)) may provide for the substitution of the 
calendar year in which the severance from employment with the employer 
maintaining the plan occurs for the limitation year in which the 
severance from employment with the employer maintaining the plan occurs.
    (6) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1. (i) Facts. Participant A was a common law employee of 
Employer X, performing services as a script writer for Employer X from 
January 1, 2005 to December 31, 2005. Pursuant to a collective 
bargaining agreement, Employer X, Employer Y and Employer Z maintain and 
contribute to Plan T, a multiemployer plan (as defined in section 
414(f)) in which Participant A participates. Under the collective 
bargaining agreement, Participant A is entitled to residual payments 
whenever television shows that

[[Page 354]]

Participant A wrote are re-used commercially (These residual payments 
constitute compensation described in paragraph (b) of this section and 
do not constitute compensation described in paragraph (c) of this 
section.). In the year 2008, Participant A receives residual payments 
from Employer X for television programs using the scripts that 
Participant A wrote in the year 2005 that were rebroadcast in the year 
2008. In the years 2006, 2007, and 2008, Participant A was a common law 
employee of Employer Y, and did not perform any services for Employer X.
    (ii) Conclusion. The residual payments received from Employer X by 
Participant A in the year 2008 are compensation for purposes of section 
415(c)(3). The payments are not treated as made after severance from 
employment because Plan T is a multiemployer plan (as defined in section 
414(f)) and Participant A continues to be employed by an employer 
maintaining Plan T.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that Participant A: ceased employment with Employer Y in the year 2006; 
subsequently moved away from the area in which A formerly worked; 
performs no services as an employee for any employer; and commenced 
receiving distributions under Plan T in March, 2006.
    (ii) Conclusion. Based on the facts and circumstances, A has ceased 
employment with any employer maintaining Plan T. Pursuant to paragraph 
(e)(1)(ii) of this section, compensation must be paid prior to an 
employee's severance from employment with the employer maintaining the 
plan. Accordingly, the residual payments received by Participant A in 
the year 2008 are not compensation for purposes of section 415(c)(3).

    (f) Interaction with section 401(a)(17). Because a plan may not base 
allocations (in the case of a defined contribution plan) or benefits (in 
the case of a defined benefit plan) on compensation in excess of the 
limitation under section 401(a)(17), a plan's definition of compensation 
for a year that is used for purposes of applying the limitations of 
section 415 is not permitted to reflect compensation for a year that is 
in excess of the limitation under section 401(a)(17) that applies to 
that year. See Sec. Sec.  1.401(a)(17)-1(a)(3)(i) and 1.401(a)(17)-
1(b)(3)(ii) for rules regarding the effective date of increases in the 
section 401(a)(17) compensation limitation for a plan year and for a 12-
month period other than the plan year.
    (g) Special rules--(1) Compensation for section 403(b) annuity 
contract. In the case of an annuity contract described in section 
403(b), the term participant's compensation means the participant's 
includible compensation determined under section 403(b)(3). Accordingly, 
the rules for determining a participant's compensation pursuant to 
section 415(c)(3) (other than section 415(c)(3)(E)) and this section do 
not apply to a section 403(b) annuity contract.
    (2) Employees of controlled groups of corporations, etc. In the case 
of an employee of two or more corporations which are members of a 
controlled group of corporations (as defined in section 414(b) as 
modified by section 415(h)), the term compensation for such employee 
includes compensation from all employers that are members of the group, 
regardless of whether the employee's particular employer has a qualified 
plan. This special rule is also applicable to an employee of two or more 
trades or businesses (whether or not incorporated) that are under common 
control (as defined in section 414(c) as modified by section 415(h)), to 
an employee of two or more members of an affiliated service group as 
defined in section 414(m), and to an employee of two or more members of 
any group of employers who must be aggregated and treated as one 
employer pursuant to section 414(o).
    (3) Aggregation of section 403(b) annuity with qualified plan of 
controlled employer. If a section 403(b) annuity contract is aggregated 
with a qualified plan of a controlled employer in accordance with Sec.  
1.415(f)-1(f)(2), then, in applying the limitations of section 415(c) in 
connection with the aggregation of the section 403(b) annuity with a 
qualified plan, the total compensation from both employers is permitted 
to be taken into account.
    (4) Permanent and total disability of defined contribution plan 
participant--(i) In general. Pursuant to section 415(c)(3)(C), if the 
conditions set forth in paragraph (g)(4)(ii) of this section are 
satisfied, then, in the case of a participant in any defined 
contribution plan who is permanently and totally disabled (as defined in 
section 22(e)(3)), the participant's compensation means the compensation 
the participant would have received for the year if the participant was 
paid at the rate of compensation paid immediately before

[[Page 355]]

becoming permanently and totally disabled, if such compensation is 
greater than the participant's compensation determined without regard to 
this paragraph (g)(4).
    (ii) Conditions for deemed disability compensation. The rule of 
paragraph (g)(4)(i) of this section applies only if the following 
conditions are satisfied--
    (A) Either the participant is not a highly compensated employee (as 
defined in section 414(q)) immediately before becoming disabled, or the 
plan provides for the continuation of contributions on behalf of all 
participants who are permanently and totally disabled for a fixed or 
determinable period;
    (B) The plan provides that the rule of this paragraph (g)(4) 
(treating certain amounts as compensation for a disabled participant) 
applies with respect to the participant; and
    (C) Contributions made with respect to amounts treated as 
compensation under this paragraph (g)(4) are nonforfeitable when made.
    (5) Foreign compensation, etc.--(i) In general. Amounts paid to an 
individual as compensation for services do not fail to be treated as 
compensation under paragraphs (b)(1) and (2) of this section (and are 
not excluded from the definition of compensation pursuant to paragraph 
(c)(4) of this section) merely because those amounts are not includible 
in the individual's gross income on account of the location of the 
services. Similarly, compensation for services do not fail to be treated 
as compensation under paragraphs (b)(1) and (2) of this section (and are 
not excluded from the definition of compensation pursuant to paragraph 
(c)(4) of this section) merely because those amounts are paid by an 
employer with respect to which all compensation paid to the participant 
by such employer is excluded from gross income. Thus, for example, the 
determination of whether an amount is treated as compensation under 
paragraph (b)(1) or (2) of this section is made without regard to the 
exclusions from gross income under sections 872, 893, 894, 911, 931, and 
933.
    (ii) Exclusion of non-participant compensation by the plan. With 
respect to a nonresident alien who is not a participant in a plan, the 
plan may provide that the compensation described in paragraph (g)(5)(i) 
of this section is not treated as compensation for purposes of 
paragraphs (b)(1) and (b)(2) of this section to the extent the 
compensation is excludable from gross income and is not effectively 
connected with the conduct of a trade or business within the United 
States, but only if the plan applies this rule uniformly to all such 
employees. For purposes of this paragraph (g)(5)(ii), nonresident alien 
has the same meaning as in section 7701(b)(1)(B).
    (6) Deemed section 125 compensation--(i) General rule. A plan is 
permitted to provide that deemed section 125 compensation (as defined in 
paragraph (g)(6)(ii) of this section) is compensation within the meaning 
of section 415(c)(3), but only if the plan applies this rule uniformly 
to all employees with respect to whom amounts subject to section 125 are 
included in compensation.
    (ii) Definition of deemed section 125 compensation. Deemed section 
125 compensation is an amount that is excludable from the income of the 
participant under section 106 that is not available to the participant 
in cash in lieu of group health coverage under a section 125 arrangement 
solely because that participant is not able to certify that the 
participant has other health coverage. Under this definition, amounts 
are deemed section 125 compensation only if the employer does not 
otherwise request or collect information regarding the participant's 
other health coverage as part of the enrollment process for the health 
plan.
    (7) Employees in qualified military service. See section 414(u)(7) 
for special rules regarding compensation of employees who are in 
qualified military service within the meaning of section 414(u)(5).
    (8) Back pay. Payments awarded by an administrative agency or court 
or pursuant to a bona fide agreement by an employer to compensate an 
employee for lost wages are compensation within the meaning of section 
415(c)(3) for the limitation year to which the back pay relates, but 
only to the extent such payments represent wages

[[Page 356]]

and compensation that would otherwise be included in compensation under 
this section.

[T.D. 9319, 72 FR 16916, Apr. 5, 2007]



Sec.  1.415(d)-1  Cost-of-living adjustments.

    (a) Defined benefit plans--(1) Dollar limitation--(i) Determination 
of adjusted limit. Under section 415(d)(1)(A), the dollar limitation 
described in section 415(b)(1)(A) applicable to defined benefit plans is 
adjusted annually to take into account increases in the cost of living. 
The adjustment of the dollar limitation is made by multiplying the 
adjustment factor for the year, as described in paragraph (a)(1)(ii)(A) 
of this section, by $160,000, and rounding the result in accordance with 
paragraph (a)(1)(iii) of this section. The adjusted dollar limitation is 
prescribed by the Commissioner and published in the Internal Revenue 
Bulletin. See Sec.  601.601(d)(2) of this chapter.
    (ii) Determination of adjustment factor--(A) Adjustment factor. The 
adjustment factor for a calendar year is equal to a fraction, the 
numerator of which is the value of the applicable index for the calendar 
quarter ending September 30 of the preceding calendar year, and the 
denominator of which is the value of such index for the base period. The 
applicable index is determined consistent with the procedures used to 
adjust benefit amounts under section 215(i)(2)(A) of the Social Security 
Act, Public Law 92-336 (86 Stat. 406), as amended. If, however, the 
value of that fraction is less than one for a calendar year, then the 
adjustment factor for the calendar year is equal to one.
    (B) Base period. For the purpose of adjusting the dollar limitation 
pursuant to paragraph (a)(1)(ii)(A) of this section, the base period is 
the calendar quarter beginning July 1, 2001.
    (iii) Rounding. Any increase in the $160,000 amount specified in 
section 415(b)(1)(A) which is not a multiple of $5,000 is rounded to the 
next lowest multiple of $5,000.
    (2) Average compensation for high-3 years of service limitation--(i) 
Determination of adjusted limit. Under section 415(d)(1)(B), with regard 
to participants who have had a severance from employment with the 
employer maintaining the plan, the compensation limitation described in 
section 415(b)(1)(B) is permitted to be adjusted annually to take into 
account increases in the cost of living. For any limitation year 
beginning after the severance occurs, the adjustment of the compensation 
limitation is made by multiplying the annual adjustment factor (as 
defined in paragraph (a)(2)(ii) of this section) by the compensation 
limitation applicable to the participant in the prior limitation year. 
The annual adjustment factor is prescribed by the Commissioner and 
published in the Internal Revenue Bulletin. See Sec.  601.601(d)(2) of 
this chapter.
    (ii) Annual adjustment factor. The annual adjustment factor for a 
calendar year is equal to a fraction, the numerator of which is the 
value of the applicable index for the calendar quarter ending September 
30 of the preceding calendar year, and the denominator of which is the 
value of such index for the calendar quarter ending September 30 of the 
calendar year prior to that preceding calendar year. The applicable 
index is determined consistent with the procedures used to adjust 
benefit amounts under section 215(i)(2)(A) of the Social Security Act. 
If the value of the fraction described in the first sentence of this 
paragraph (a)(2)(ii) is less than one for a calendar year, then the 
adjustment factor for the calendar year is equal to one. In such a case, 
the annual adjustment factor for future calendar years will be 
determined in accordance with revenue rulings, notices, or other 
published guidance prescribed by the Commissioner and published in the 
Internal Revenue Bulletin. See Sec.  601.601(d)(2) of this chapter.
    (iii) Special rule for rehired employees. If, after having a 
severance from employment with the employer maintaining the plan, an 
employee is rehired by the employer maintaining the plan, the employee's 
compensation limit under section 415(b)(1)(B) is the greater of--
    (A) 100 percent of the participant's average compensation for the 
period of the participant's high-3 years of service, as determined prior 
to the employee's severance from employment with the employer 
maintaining the plan, as adjusted pursuant to paragraph (a)(2)(i) of 
this section (if the plan so provides); or

[[Page 357]]

    (B) 100 percent of the participant's average compensation for the 
period of the participant's high-3 years of service, with the period of 
the participant's high-3 years of service determined pursuant to Sec.  
1.415(b)-1(a)(5)(iii).
    (3) Effective date of adjustment. The adjusted dollar limitation 
applicable to defined benefit plans and the adjusted compensation limit 
applicable to a participant are effective as of January 1 of each 
calendar year and apply with respect to limitation years ending with or 
within that calendar year. However, benefit payments (and, in the case 
of plans that are subject to the requirements of section 411, accrued 
benefits for a limitation year) cannot exceed the currently applicable 
dollar limitation or compensation limitation (as in effect before the 
January 1 adjustment) prior to January 1. Thus, where there is an 
increase in the limitation under section 415(b)(1), any increase in a 
participant's benefits associated with the limitation increase is 
permitted to occur as of a date no earlier than January 1 of the 
calendar year for which the increase in the limitation is effective, and 
can only be applied for payments due on or after January 1 of such 
calendar year. For example, assume that a participant in a defined 
benefit plan is currently receiving a benefit in the form of a straight 
life annuity, payable monthly, in an amount equal to the section 
415(b)(1)(A) dollar limit, and the defined benefit plan has a limitation 
year that runs from July 1 to June 30. If the plan is amended to reflect 
the section 415(d) increase to the section 415(b)(1)(A) dollar limit 
that is effective as of January 1, 2009, the associated increase in the 
participant's monthly benefit payments is only effective for payments 
due on or after January 1, 2009, and the participant's benefit cannot be 
increased to reflect the section 415(d) increase that is effective 
January 1, 2009, with respect to any monthly payment due prior to 
January 1, 2009.
    (4) Application of adjusted figure--(i) In general. If the dollar 
limitation of section 415(b)(1)(A) or the compensation limitation of 
section 415(b)(1)(B) is adjusted pursuant to section 415(d) for a 
limitation year, the adjustment is applied as provided in this paragraph 
(a)(4).
    (ii) Application of adjusted limitations to benefits that have not 
commenced. An adjustment to the dollar limitation of section 
415(b)(1)(A) is permitted to be applied to a participant who has not 
commenced benefits before the date on which the adjustment is effective. 
Annual adjustments to the compensation limit of section 415(b)(1)(B) as 
described in paragraph (a)(2) of this section are permitted to be made 
for all limitation years that begin after the participant's severance 
from employment, and apply to distributions that commence after the 
effective dates of such adjustments. However, no adjustment to the 
compensation limit of section 415(b)(1)(B) is made for any limitation 
year that begins on or before the date of the participant's severance 
from employment with the employer maintaining the plan.
    (iii) Application of adjusted dollar limitation to remaining 
payments under benefits that have commenced. With respect to a 
distribution of accrued benefits that commenced before the date on which 
an adjustment to the section 415(b)(1)(A) dollar limitation is 
effective, a plan is permitted to apply the adjusted limitations to that 
distribution, but only to the extent that benefits have not been paid. 
Thus, for example, a plan cannot provide that the adjusted dollar 
limitation applies to a participant who has previously received the 
entire plan benefit in a single-sum distribution. However, a plan can 
provide for an increase in benefits to a participant who accrues 
additional benefits under the plan that could have been accrued without 
regard to the adjustment of the dollar limitation (including benefits 
that accrue as a result of a plan amendment) on or after the effective 
date of the adjusted limitation.
    (iv) Manner of adjustment for benefits that have commenced. If a 
plan is amended to increase benefits payable under the plan in 
accordance with paragraphs (a)(5) or (a)(6) of this section (or the plan 
is treated as applying paragraph (a)(5) of this section because the plan 
incorporates the section 415(d) cost-of-living adjustments automatically 
by reference pursuant to

[[Page 358]]

Sec.  1.415(a)-1(d)(3)(v)), or if benefits payable under the plan are 
increased pursuant to a form of benefit that is described in Sec.  
1.415(b)-1(c)(5), then the distribution as increased will be treated as 
continuing to satisfy the requirements of section 415(b). If benefits 
payable under a plan are increased in a manner other than as described 
in the preceding sentence, the plan must satisfy the requirements of 
Sec.  1.415(b)-1(b)(1)(iii), treating the commencement of the additional 
benefit as the commencement of a new distribution that gives rise to a 
new annuity starting date.
    (5) Safe harbor for annual adjustments to distributions. An 
amendment to a plan to incorporate adjustments to the section 415(b) 
limits that increases a distribution that has previously commenced is 
described in this paragraph (a)(5) if--
    (i) The employee has received one or more distributions that satisfy 
the requirements of section 415(b) before the date the adjustment to the 
applicable limits is effective (as determined under paragraph (a)(3) of 
this section);
    (ii) The increased distribution is solely as a result of the 
amendment of the plan to reflect the adjustment to the applicable limits 
pursuant to section 415(d); and
    (iii) The amounts payable to the employee on and after the effective 
date of the adjustment (as determined under paragraph (a)(3) of this 
section) are not greater than the amounts that would otherwise be 
payable without regard to the adjustment, multiplied by a fraction 
determined for the limitation year, the numerator of which is the 
limitation under section 415(b) (which is the lesser of the applicable 
dollar limitation under section 415(b)(1)(A), as adjusted for age at 
commencement, and the applicable compensation-based limitation under 
section 415(b)(1)(B)) in effect with respect to the distribution taking 
into account the section 415(d) adjustment, and the denominator of which 
is the limitation under section 415(b) in effect for the distribution 
immediately before the adjustment.
    (6) Safe harbor for periodic adjustments to distributions--(i) 
General rule. An amendment to a plan that increases a distribution that 
has previously commenced is made using the safe harbor methodology of 
this paragraph (a)(6) if--
    (A) The employee has received one or more distributions that satisfy 
the requirements of section 415(b) before the date on which the increase 
is effective; and
    (B) The amounts payable to the employee on and after the effective 
date of the increase are not greater than the amounts that would 
otherwise be payable without regard to the increase, multiplied by the 
cumulative adjustment fraction.
    (ii) Cumulative adjustment fraction. The cumulative adjustment 
fraction for purposes of this paragraph (a)(6) is equal to the product 
of all of the fractions described in paragraph (a)(5)(iii) of this 
section that would have applied after benefits commence if the plan had 
been amended each year to incorporate the section 415(d) adjustments to 
the applicable section 415(b) limits and had otherwise satisfied the 
safe harbor methodology described in paragraph (a)(5) of this section. 
For purposes of the preceding sentence, if for the limitation year for 
which the increase to the section 415(b)(1)(A) dollar limitation 
pursuant to section 611(a)(1)(A) of the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (115 Stat. 38), Public Law 107-16 (EGTRRA), 
is first effective (generally, the first limitation year beginning after 
December 31, 2001), the section 415(b)(1)(A) dollar limit applicable to 
a participant is less than the section 415(b)(1)(B) compensation limit 
for the participant, then the fraction described in paragraph 
(a)(5)(iii) of this section for that limitation year is 1.0.
    (7) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example 1. (i) X is a participant in a qualified defined benefit 
plan maintained by X's employer. The plan has a calendar year limitation 
year. Under the terms of the plan, X is entitled to a benefit consisting 
of a straight life annuity equal to 100 percent of X's average 
compensation for the period of X's high-3 years of service. X's average 
compensation for the period of X's high-3 years of service is $50,000. X 
incurs a severance from employment with the employer maintaining the 
plan on October 3, 2007, at age 65 with a nonforfeitable right to the 
accrued

[[Page 359]]

benefit after more than 10 years of participation in the plan. X begins 
to receive annual benefit payments (payable monthly) of $50,000, 
commencing on November 1, 2007. The dollar limitation for the 2007 
limitation year (as adjusted pursuant to section 415(d)) is $180,000. 
Assume that the dollar limitation for the 2008 limitation year (as 
adjusted pursuant to section 415(d)) is $185,000 and the annual 
adjustment factor for adjusting the compensation limitation of section 
415(b)(1)(B) for the 2008 limitation year is 1.0334. Effective January 
1, 2008, the plan is amended to incorporate these adjustments to the 
dollar and compensation limitations, and accordingly, X's annual benefit 
payment is increased, effective for payments due on or after January 1, 
2008. Prior to the plan amendment incorporating the application of the 
adjusted dollar and compensation limitations, X has received one or more 
distributions that satisfy the requirements of section 415(b). In 
addition, the adjustment to X's annual benefit payments is solely on 
account of the plan amendment incorporating the adjusted limitations.
    (ii) For the limitation year beginning January 1, 2008, the dollar 
limit applicable to X under section 415(b)(1)(A) is $185,000, and the 
compensation limit applicable to X under section 415(b)(1)(B) is $51,670 
($50,000 multiplied by the annual adjustment factor of 1.0334). 
Accordingly, the adjustment to X's benefit satisfies the safe harbor for 
cost-of-living adjustments under paragraph (a)(5) of this section if, 
after the adjustment, X's benefit payable in the 2008 limitation year is 
no greater than $50,000 multiplied by $51,670 (X's section 415(b) 
limitation for 2008)/$50,000 (X's section 415(b) limitation for 2007).
    Example 2. (i) The facts are the same as in Example 1, except that 
X's average compensation for the period of X's high-3 consecutive years 
of service is $200,000. Consequently, X's annual benefit payments 
commencing on November 1, 2007, are limited to $180,000.
    (ii) For the limitation year beginning January 1, 2008, the dollar 
limit applicable to X under section 415(b)(1)(A) is $185,000, and the 
compensation limit applicable to X under section 415(b)(1)(B) is 
$206,680 ($200,000 multiplied by the annual adjustment factor of 
1.0334). Accordingly, the adjustment to X's benefit satisfies the safe 
harbor for cost-of-living adjustments under paragraph (a)(5) of this 
section if, after the adjustment, X's benefit payable in 2008 is no 
greater than $180,000 multiplied by $185,000 (X's section 415(b) 
limitation for 2008)/$180,000 (X's section 415(b) limitation for 2007).
    Example 3. (i) X is a participant in Plan T, a qualified defined 
benefit plan maintained by X's employer. In the year 2008, X receives a 
single-sum distribution of X's entire accrued benefit under the plan. At 
the time that X receives the single-sum distribution, X's accrued 
benefit under Plan T is limited by the section 415(b)(1)(A) age-adjusted 
dollar limit. X accrues no further benefits under Plan T after X 
receives the single-sum distribution. In the 2009 limitation year, 
pursuant to section 415(d) and Sec.  1.415(d)-1, the section 
415(b)(1)(A) dollar limit is increased.
    (ii) In the 2009 limitation year, Plan T may not provide additional 
benefits to X on account of the increase in the section 415(b)(1)(A) 
dollar limit pursuant to section 415(d) and Sec.  1.415(d)-1.
    Example 4. (i) X is a participant in Plan T, a qualified defined 
benefit plan maintained by X's employer, Employer S. Plan T has a 
calendar limitation year. In 2008, X incurs a severance from employment 
with Employer S and X commences receiving distributions from Plan T in 
the form of a single life annuity in an annual amount of $30,000. At the 
time that X commences receiving distributions from Plan T, X's accrued 
benefit under Plan T is limited by the section 415(b)(1)(B) compensation 
limit. In 2009, the annual adjustment factor described in paragraph 
(a)(2) of this section (which is the factor for adjusting the 
compensation limit described in section 415(b)(1)(B)) is 1.03. Employer 
S amends Plan T, effective as of January 1, 2009, to increase the annual 
benefit of all participants who, prior to January 1, 2009, incurred a 
severance from employment with Employer S and who have commenced 
receiving benefits from Plan T by a factor of 1.015. Assume that for 
limitation years prior to 2009, X's distributions from Plan T satisfy 
the requirements of section 415(b).
    (ii) The increase in X's annual benefit pursuant to the amendment 
effective January 1, 2009, is within the safe harbor described in 
paragraph (a)(6) of this section. This is because the amount payable to 
X under Plan T for the 2009 limitation year and limitation years 
thereafter (as increased by the amendment effective January 1, 2009) is 
not greater than the product of the amount payable to X under Plan T for 
such limitation years (as determined without regard to the amendment 
increasing X's benefit effective January 1, 2009) and the cumulative 
adjustment fraction (which, in X's case, is 1.03). Thus, X's annual 
benefit, as increased by the amendment, is not determined pursuant to 
the rules of Sec.  1.415(b)-1(b)(1)(iii).
    Example 5. (i) Participant P participated in Plan A, maintained by 
Employer M, for more than 10 years. Plan A uses a calendar year 
limitation year and Plan A automatically adjusts a participant's section 
415(b)(1)(B) compensation limit for limitation years after the 
limitation year in which the participant incurs a severance from 
employment as described in Sec.  1.415(a)-1(d)(3)(v). Prior to 
separating from employment with M in 2010, P's average compensation for 
P's period of high-3 years while a participant in Plan A is $50,000, 
based on P's compensation for 2007, 2008, and 2009, which was $50,000 
for each

[[Page 360]]

year. P's compensation for year 2010 was $45,000. In year 2012, P is 
rehired by M and resumes participation in Plan A. P's compensation in 
year 2012 is $45,000, and is $70,000 in year 2013. Assume that the 
annual adjustment factor described in Sec.  1.415(d)-1(a)(2)(ii) for the 
limitation years 2011 through 2013 is 1.03 for each year. Thus, 
disregarding P's rehire by M, P's average compensation for P's period of 
high-3 years while a participant in Plan A for the 2013 limitation year 
would be equal to $54,636 (or 1.03 * 1.03 * 1.03 * $50,000). See Sec.  
1.415(b)-1(a)(5)(iii).
    (ii) Under Sec.  1.415(d)-1(a)(2)(iii), P's average compensation for 
P's period of high-3 years while a participant in Plan A for the 2013 
limitation year is $54,636.

    (b) Defined contribution plans--(1) In general. Under section 
415(d)(1)(C), the dollar limitation described in section 415(c)(1)(A) is 
adjusted annually to take into account increases in the cost of living. 
The adjusted dollar limitation is prescribed by the Commissioner and 
published in the Internal Revenue Bulletin. See Sec.  601.601(d)(2) of 
this chapter.
    (2) Determination of adjusted limit--(i) Base period. The base 
period taken into account for purposes of adjusting the dollar 
limitation pursuant to paragraph (b)(2)(ii) of this section is the 
calendar quarter beginning July 1, 2001.
    (ii) Method of adjustment--(A) In general. The dollar limitation is 
adjusted with respect to a calendar year based on the increase in the 
applicable index for the calendar quarter ending September 30 of the 
preceding calendar year over such index for the base period. Adjustment 
procedures similar to the procedures used to adjust benefit amounts 
under section 215(i)(2)(A) of the Social Security Act will be used.
    (B) Rounding. Any increase in the $40,000 amount specified in 
section 415(c)(1)(A) which is not a multiple of $1,000 shall be rounded 
to the next lowest multiple of $1,000.
    (iii) Effective date of adjustment. The adjusted dollar limitation 
applicable to defined contribution plans is effective as of January 1 of 
each calendar year and applies with respect to limitation years ending 
with or within that calendar year. Annual additions for a limitation 
year cannot exceed the currently applicable dollar limitation (as in 
effect before the January 1 adjustment) prior to January 1. However, 
after a January 1 adjustment is made, annual additions for the entire 
limitation year are permitted to reflect the dollar limitation as 
adjusted on January 1.
    (c) Application of rounding rules to other cost-of-living 
adjustments. Pursuant to section 415(d)(4)(A), the $5,000 rounding 
methodology of paragraph (a)(1)(iii) of this section is used for 
purposes of any provision of chapter 1 of subtitle A of the Internal 
Revenue Code that provides for adjustments in accordance with section 
415(d), except to the extent provided by that provision. Thus, the 
$5,000 rounding methodology of paragraph (a)(1)(iii) of this section is 
used for purposes of--
    (1) Determining the level of compensation specified in section 
414(q)(1)(B) that is used to determine whether an employee is a highly 
compensated employee;
    (2) Calculating the amounts used pursuant to section 409(o)(1)(C) to 
determine the maximum period over which distributions from an employee 
stock ownership plan may be made without participant consent; and
    (3) Determining the levels of compensation specified in Sec.  1.61-
21(f)(5)(i) and (iii) used in determining whether an employee is a 
control employee of a nongovernmental employer for purposes of the 
commuting valuation rule of Sec.  1.61-21(f).
    (d) Implementation of cost-of-living adjustments. A plan is 
permitted to be amended to reflect any of the adjustments described in 
this section at any time after those limitations become applicable. 
Alternatively, a plan is permitted to incorporate by reference any of 
the adjustments described in this section in accordance with the rules 
of Sec.  1.415(a)-1(d)(3)(v). Because the accrued benefit of a 
participant can reflect increases in the applicable limitations only 
after those increases become effective, a pattern of repeated plan 
amendments increasing annual benefits to reflect the increases in the 
section 415(b) limitations pursuant to section 415(d) does not result in 
any protection under section 411(d)(6) for future increases to reflect 
increases in the section 415(b) limitations pursuant to Sec.  1.411(d)-
4, Q&A-1(c)(1). Thus, a plan does not violate the requirements of 
section 411(d)(6) merely because the plan has been amended annually for 
a

[[Page 361]]

number of years to increase annual benefits to reflect the increases in 
the section 415(b) limitations pursuant to section 415(d) and 
subsequently is not amended to reflect later increases in the section 
415(b) limitations.

[T.D. 9319, 72 FR 16919, Apr. 5, 2007]



Sec.  1.415(f)-1  Aggregating plans.

    (a) In general. Except as provided in paragraph (g) of this section 
(regarding multiemployer plans), and taking into account the rules of 
paragraph (b)(2) (regarding the break-up of affiliated employers and 
affiliated service groups), paragraph (c) (regarding predecessor 
employers), and paragraph (d)(1) (regarding nonduplication rules) of 
this section, section 415(f) and this section require that for purposes 
of applying the limitations of sections 415(b) and (c) applicable to a 
participant for a particular limitation year--
    (1) All defined benefit plans (without regard to whether a plan has 
been terminated) ever maintained by the employer (or a predecessor 
employer within the meaning of paragraphs (c)(1) and (c)(2) of this 
section) under which the participant has accrued a benefit are treated 
as one defined benefit plan;
    (2) All defined contribution plans (without regard to whether a plan 
has been terminated) ever maintained by the employer (or a predecessor 
employer within the meaning of paragraphs (c)(1) and (c)(2) of this 
section) under which the participant receives annual additions are 
treated as one defined contribution plan; and
    (3) All section 403(b) annuity contracts purchased by an employer 
(including plans purchased through salary reduction contributions) for 
the participant are treated as one section 403(b) annuity contract.
    (b) Affiliated employers, affiliated service groups, and leased 
employees--(1) General rule. See Sec.  1.415(a)-1(f)(1) and (2) for 
rules regarding aggregation of employers in the case of affiliated 
employers and affiliated service groups. See Sec.  1.415(a)-1(f)(3) for 
rules regarding the treatment of leased employees.
    (2) Special rule in the case of the break-up of an affiliated 
employer or an affiliated service group--(i) In general. A formerly 
affiliated plan of an employer is taken into account for purposes of 
applying paragraph (a) of this section to the employer, but the formerly 
affiliated plan is treated as if it had terminated immediately prior to 
the cessation of affiliation with sufficient assets to pay benefit 
liabilities under the plan, and had purchased annuities to provide plan 
benefits. See Sec.  1.415(b)-1(b)(5)(i) for rules determining annual 
benefits under a terminated defined benefit plan under which annuities 
are purchased to provide plan benefits.
    (ii) Definitions. For purposes of this paragraph (b)(2), a formerly 
affiliated plan of an employer is a plan that, immediately prior to the 
cessation of affiliation, was actually maintained by one or more of the 
entities that constitute the employer (as determined under the employer 
affiliation rules described in Sec.  1.415(a)-1(f)(1) and (2)), and 
immediately after the cessation of affiliation, is not actually 
maintained by any of the entities that constitute the employer (as 
determined under the employer affiliation rules described in Sec.  
1.415(a)-1(f)(1) and (2)). For purposes of this paragraph (b)(2), a 
cessation of affiliation means the event that causes an entity to no 
longer be aggregated with one or more other entities as a single 
employer under the employer affiliation rules described in Sec.  
1.415(a)-1(f)(1) and (2) (such as the sale of a subsidiary outside a 
controlled group), or that causes a plan to not actually be maintained 
by any of the entities that constitute the employer under the employer 
affiliation rules of Sec.  1.415(a)-1(f)(1) and (2) (such as a transfer 
of plan sponsorship outside of a controlled group).
    (c) Predecessor employer--(1) Where plan is maintained by successor. 
For purposes of section 415 and regulations promulgated under section 
415, a former employer is a predecessor employer with respect to a 
participant in a plan maintained by an employer if the employer 
maintains a plan under which the participant had accrued a benefit while 
performing services for the former employer (for example, the employer 
assumed sponsorship of the former employer's plan, or the employer's 
plan received a transfer of benefits from the former employer's plan), 
but only if that benefit is provided under the plan maintained by the 
employer.

[[Page 362]]

In such a case, in applying the limitations of section 415 to a 
participant in a plan maintained by the employer, paragraph (a) of this 
section requires the plan to take into account benefits provided to the 
participant under plans that are maintained by the predecessor employer 
and that are not maintained by the employer. For this purpose, the 
formerly affiliated plan rules in paragraph (b)(2) of this section apply 
as if the employer and predecessor employer constituted a single 
employer under the rules described in Sec.  1.415(a)-1(f)(1) and (2) 
immediately prior to the cessation of affiliation (and as if they 
constituted two, unrelated employers under the rules described in Sec.  
1.415(a)-1(f)(1) and (2) immediately after the cessation of affiliation) 
and cessation of affiliation was the event that gives rise to the 
predecessor employer relationship, such as a transfer of benefits or 
plan sponsorship.
    (2) Where plan is not maintained by successor. With respect to an 
employer of a participant, a former entity that antedates the employer 
is a predecessor employer with respect to the participant if, under the 
facts and circumstances, the employer constitutes a continuation of all 
or a portion of the trade or business of the former entity. This will 
occur, for example, where formation of the employer constitutes a mere 
formal or technical change in the employment relationship and continuity 
otherwise exists in the substance and administration of the business 
operations of the former entity and the employer.
    (d) Special rules--(1) Nonduplication. In applying the limitations 
of section 415 to a plan maintained by an employer, if the plan is 
aggregated with another plan pursuant to the aggregation rules of 
paragraph (a) of this section, a participant's benefits are not counted 
more than once in determining the participant's aggregate annual benefit 
or annual additions. For example, if a defined benefit plan is treated 
as if it terminated immediately prior to a cessation of affiliation 
under paragraph (b)(2) of this section, the plans maintained by the 
employer (as determined after the cessation of affiliation) that 
actually maintains the plan do not double count the annual benefit 
provided under the plan by aggregating under paragraph (a) of this 
section both the participant's annual benefit provided under the plan 
and the participant's annual benefit under the plan as a formerly 
affiliated plan (which is a plan that the employers formerly affiliated 
with the employer must take into account as a terminated plan under the 
rules of paragraph (b)(2) of this section). Instead, the plans 
maintained by the employer include the annual benefit provided to the 
participant under the actual plan that the employer maintains. 
Similarly, if a defined benefit plan maintained by an employer (the 
transferee plan) receives a transfer of benefits from a defined benefit 
plan maintained by a predecessor employer (the transferor plan) and the 
transfer is described in Sec.  1.415(b)-1(b)(3)(i)(B) (which requires 
the transferred benefits to be treated by the transferor plan as if the 
benefits were provided under a plan that must be aggregated with the 
transferor plan that terminated immediately prior to the transfer), the 
transferee plan does not double count the transferred benefits under 
paragraph (a) of this section by taking into account both the actual 
benefit provided under the transferee plan and the benefit provided 
under the deemed terminated plan that the predecessor employer is 
treated as maintaining (and that otherwise would have to be taken into 
account by the transferee plan under the predecessor employer 
aggregation rules of paragraph (a) of this section). Instead, the 
transferee plan takes into account the transferred benefits that are 
actually provided under the transferee plan (see Sec.  1.415(b)-
1(b)(3)(i)(C)) and, pursuant to paragraph (c)(1) of this section, any 
nontransferred benefits provided under plans maintained by the 
predecessor employer with respect to a participant whose benefits have 
been transferred to the transferee plan.
    (2) Determination of years of participation for multiple plans. If 
two or more defined benefit plans are aggregated under section 415(f) 
and this section for a particular limitation year, in applying the 
reduction for participation of

[[Page 363]]

less than ten years (as described in section 415(b)(5)(A)) to the dollar 
limitation under section 415(b)(1)(A), time periods that are counted as 
years of participation under any of the plans are counted in computing 
the limitation of the aggregated plans under this section.
    (3) Determination of years of service for multiple plans. If two or 
more defined benefit plans are aggregated under section 415(f) and this 
section for a particular limitation year, in applying the reduction for 
service of less than ten years (as described in section 415(b)(5)(B)) to 
the compensation limitation under section 415(b)(1)(B), time periods 
that are counted as years of service under any of the plans are counted 
in computing the limitation of the aggregated plans under this section.
    (e) Previously unaggregated plans--(1) In general. This paragraph 
(e) provides rules for those situations in which two or more existing 
plans, which previously were not required to be aggregated pursuant to 
section 415(f) and this section, are aggregated during a particular 
limitation year and, as a result, the limitations of section 415(b) or 
(c) are exceeded for that limitation year. Paragraph (e)(2) of this 
section provides rules for defined contribution plans that are first 
required to be aggregated pursuant to section 415(f) and this section in 
a plan year. Paragraph (e)(3) of this section provides rules for defined 
benefit plans that are first required to be aggregated pursuant to 
section 415(f) and this section, and for defined benefit plans under 
which a participant's benefit is frozen following aggregation.
    (2) Defined contribution plans. Two or more defined contribution 
plans that are not required to be aggregated pursuant to section 415(f) 
and this section as of the first day of a limitation year do not fail to 
satisfy the requirements of section 415 with respect to a participant 
for the limitation year merely because they are aggregated later in that 
limitation year, provided that no annual additions are credited to the 
participant's account after the date on which the plans are required to 
be aggregated.
    (3) Defined benefit plans--(i) First year of aggregation. Two or 
more defined benefit plans that are not required to be aggregated 
pursuant to section 415(f) and this section as of the first day of a 
limitation year do not fail to satisfy the requirements of section 415 
for the limitation year merely because they are aggregated later in that 
limitation year, provided that no plan amendments increasing benefits 
with respect to the participant under either plan are made after the 
occurrence of the event causing the plan to be aggregated.
    (ii) All years of aggregation in which accrued benefits are frozen. 
Two or more defined benefit plans that are required to be aggregated 
pursuant to section 415(f) and this section during a limitation year 
subsequent to the limitation year during which the plans were first 
aggregated do not fail to satisfy the requirements of section 415 with 
respect to a participant for the limitation year merely because they are 
aggregated if there have been no increases in the participant's accrued 
benefit derived from employer contributions (including increases as a 
result of increased compensation or service) under any of the plans 
within the period during which the plans have been aggregated.
    (f) Section 403(b) annuity contracts--(1) In general. In the case of 
a section 403(b) annuity contract, except as provided in paragraph 
(f)(2) of this section, the participant on whose behalf the annuity 
contract is purchased is considered for purposes of section 415 to have 
exclusive control of the annuity contract. Accordingly, except as 
provided in paragraph (f)(2) of this section, the participant, and not 
the participant's employer who purchased the section 403(b) annuity 
contract, is deemed to maintain the annuity contract, and such a section 
403(b) annuity contract is not aggregated with a qualified plan that is 
maintained by the participant's employer.
    (2) Special rules under which the employer is deemed to maintain the 
annuity contract--(i) In general. Where a participant on whose behalf a 
section 403(b) annuity contract is purchased is in control of any 
employer for a limitation year as defined in paragraph (f)(2)(ii) of 
this section (regardless of whether the employer controlled by

[[Page 364]]

the participant is the employer maintaining the section 403(b) annuity 
contract), the annuity contract for the benefit of the participant is 
treated as a defined contribution plan maintained by both the controlled 
employer and the participant for that limitation year. Accordingly, 
where a participant on whose behalf a section 403(b) annuity contract is 
purchased is in control of any employer for a limitation year, the 
section 403(b) annuity contract is aggregated with all other defined 
contribution plans maintained by that employer. In addition, in such a 
case, the section 403(b) annuity contract is aggregated with all other 
defined contribution plans maintained by the employee or any other 
employer that is controlled by the employee. Thus, for example, if a 
doctor is employed by a non-profit hospital to which section 501(c)(3) 
applies and which provides him with a section 403(b) annuity contract, 
and the doctor also maintains a private practice as a shareholder owning 
more than 50 percent of a professional corporation, then any qualified 
defined contribution plan of the professional corporation must be 
aggregated with the section 403(b) annuity contract for purposes of 
applying the limitations of section 415(c) and Sec.  1.415(c)-1. For 
purposes of this paragraph (f)(2), it is immaterial whether the section 
403(b) annuity contract is purchased as a result of a salary reduction 
agreement between the employer and the participant.
    (ii) Determination of when a participant is in control of an 
employer. For purposes of paragraph (f)(2)(i) of this section, a 
participant is in control of an employer for a limitation year if, 
pursuant to Sec.  1.415(a)-1(f)(1) and (2), a plan maintained by that 
employer would have to be aggregated with a plan maintained by an 
employer that is 100 percent owned by the participant. Thus, for 
example, if a participant owns 60 percent of the common stock of a 
corporation, the participant is considered to be in control of that 
employer for purposes of applying paragraph (f)(2)(i) of this section.
    (3) Aggregation of section 403(b) annuity with qualified plan of 
controlled employer. If a section 403(b) annuity contract is aggregated 
with a qualified plan of a controlled employer in accordance with 
paragraph (f)(2) of this section, the plans must satisfy the limitations 
of section 415(c) both separately and on an aggregate basis. In applying 
separately the limitations of section 415 to the qualified plan and to 
the section 403(b) annuity contract, compensation from the controlled 
employer may not be aggregated with compensation from the employer 
purchasing the section 403(b) annuity contract (that is, without regard 
to Sec.  1.415(c)-2(g)(3)).
    (g) Multiemployer plans--(1) Multiemployer plan aggregated with 
another multiemployer plan. Pursuant to section 415(f)(3)(B), 
multiemployer plans, as defined in section 414(f), are not aggregated 
with other multiemployer plans for purposes of applying the limits of 
section 415.
    (2) Multiemployer plan aggregated with other plan--(i) Aggregation 
only for benefits provided by the employer. Notwithstanding the rule of 
Sec.  1.415(a)-1(e), a multiemployer plan, as defined in section 414(f), 
is permitted to provide that only the benefits under that multiemployer 
plan that are provided by an employer are aggregated with benefits under 
plans maintained by that employer that are not multiemployer plans. If 
the multiemployer plan so provides, then, where an employer maintains 
both a plan which is not a multiemployer plan and a multiemployer plan, 
only the benefits under the multiemployer plan that are provided by the 
employer are aggregated with benefits under the employer's plans other 
than multiemployer plans (in lieu of including benefits provided by all 
employers under the multiemployer plan pursuant to the generally 
applicable rule of Sec.  1.415(a)-1(e)).
    (ii) Exception from aggregation for purposes of applying section 
415(b)(1)(B) compensation limit. Pursuant to section 415(f)(3)(A), a 
multiemployer plan, as defined in section 414(f), is not aggregated with 
any other plan that is not a multiemployer plan for purposes of applying 
the compensation limit of section 415(b)(1)(B) and Sec.  1.415(b)-
1(a)(1)(ii).
    (h) Special rules for aggregating certain plans, etc. If a plan, 
annuity contract or arrangement is subject to a special limitation in 
addition to, or instead of,

[[Page 365]]

the regular limitations described in section 415(b) or (c), and is 
aggregated under this section with a plan which is subject only to the 
regular section 415(b) or (c) limitations, the following rules apply:
    (1) Each plan, annuity contract or arrangement which is subject to a 
special limitation must meet its own applicable limitation and each plan 
subject to the regular limitations of section 415 must meet its 
applicable limitation.
    (2) The limitation for the aggregated plans is the larger of the 
applicable limitations for the separate plans.
    (i) [Reserved]
    (j) Examples. The following examples illustrate the rules of this 
section. Except to the extent otherwise stated in an example, each 
entity is not and has never been affiliated with another entity under 
the employer affiliation rules of Sec.  1.415(a)-1(f)(1) and (2), each 
entity has never maintained a qualified plan (other than the plans 
specifically mentioned in the example), and the limitation year for each 
qualified plan is the calendar year.

    Example 1. (i) Facts. M was formerly an employee of ABC Corporation 
and is currently an employee of XYZ Corporation. ABC maintains a 
qualified defined benefit plan (Plan ABC) and a qualified defined 
contribution plan in which M participates and XYZ maintains a qualified 
defined benefit plan (Plan XYZ) and a qualified defined contribution 
plan in which M participates. ABC Corporation owns 60 percent of XYZ 
Corporation.
    (ii) Treatment as a single employer. ABC Corporation and XYZ 
Corporation are members of a controlled group of corporations within the 
meaning of section 414(b) as modified by section 415(h). Because ABC 
Corporation and XYZ Corporation are members of a controlled group of 
corporations within the meaning of section 414(b) as modified by section 
415(h), M is treated as being employed by a single employer under Sec.  
1.415(a)-1(f)(1).
    (iii) Plan aggregation. Under paragraph (a)(1) of this section, the 
sum of M's annual benefit under Plan ABC and M's annual benefit under 
Plan XYZ is not permitted to exceed the limitations of section 415(b) 
and Sec.  1.415(b)-1; and, under paragraph (a)(2) of this section, the 
sum of the annual additions to M's account under the defined 
contribution plans maintained by ABC and XYZ may not exceed the 
limitations of section 415(c) and Sec.  1.415(c)-1. For purposes of 
determining the limitations of section 415(b) and Sec.  1.415(b)-1 for 
the aggregated plans, a year of service for either employer is 
considered as a year of service for purposes of Sec.  1.415(b)-1(g)(2) 
(phase-in rules for the compensation limit) and a year of participation 
under either plan is considered as a year of participation for purposes 
of Sec.  1.415(b)-1(g)(1) (phase-in rules for the dollar limit).
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that ABC Corporation and XYZ Corporation do not maintain defined 
contribution plans. In addition, Participant O was formerly an employee 
of ABC Corporation and is currently an employee of XYZ Corporation. 
Participant O has an accrued benefit under the ABC Plan, but Participant 
O has no accrued benefit under the XYZ Plan. Effective January 1, 2010, 
ABC Corporation sells all of its shares of stock of XYZ Corporation to 
an unaffiliated entity, LMN Corporation (the 2010 stock sale). After the 
2010 stock sale, XYZ Corporation continues to maintain Plan XYZ. LMN 
Corporation maintains a qualified defined benefit plan (Plan LMN). After 
the 2010 stock sale, M begins to accrue benefits under Plan LMN, but O 
does not participate in Plan LMN.
    (ii) Affiliated employer status of the corporations. Immediately 
after the 2010 stock sale, ABC Corporation and XYZ Corporation are no 
longer members of a controlled group of corporations under section 
414(b) (as modified by section 414(h)) and accordingly are no longer 
treated as a single employer under the employer affiliation rules of 
Sec.  1.415(a)-1(f)(1). Immediately after the 2010 stock sale, LMN 
Corporation and XYZ Corporation are members of a controlled group of 
corporations under section 414(b) (as modified by section 414(h)) and 
accordingly are treated as a single employer under the employer 
affiliation rules of Sec.  1.415(a)-1(f)(1).
    (iii) Treatment of plans maintained by ABC Corporation after the 
2010 stock sale. Under Sec.  1.415(a)-1(f)(1), any plan maintained by 
any member of a controlled group of corporations is deemed maintained by 
all members of the controlled group, and paragraph (a)(1) of this 
section requires that, for purposes of applying the limitations of 
section 415(b), all defined benefit plans ever maintained by an employer 
(as determined under the affiliation rules of Sec.  1.415(a)-1(f)(1) and 
(2)) are treated as one defined benefit plan. Therefore, defined benefit 
plans maintained by ABC Corporation must take into account the annual 
benefit of a participant provided under Plan XYZ in applying the 
limitations of section 415(b) to the participant because Plan XYZ is a 
plan that had once been maintained by ABC Corporation. However, 
beginning with the 2010 limitation year, the aggregation of the annual 
benefit accrued by a participant under Plan XYZ for purposes of testing 
defined benefit plans maintained by ABC Corporation is limited to the 
annual benefit accrued by the participant under Plan XYZ immediately 
prior to the 2010 stock sale. This is because paragraph (b)(2)(i)

[[Page 366]]

of this section provides that a formerly affiliated plan of an employer 
is treated as if it had terminated immediately prior to the cessation of 
affiliation with sufficient assets to pay benefit liabilities under the 
plan, and had purchased annuities to provide plan benefits. The 2010 
stock sale is a cessation of affiliation under paragraph (b)(2)(ii) of 
this section because this event caused XYZ Corporation to no longer be 
affiliated with ABC Corporation under the employer affiliation rules of 
Sec.  1.415(a)-1(f)(1) and (2). Immediately after the 2010 stock sale, 
Plan XYZ is a formerly affiliated plan with respect to ABC Corporation 
under paragraph (b)(2)(ii) of this section because immediately prior to 
the cessation of affiliation, Plan XYZ was actually maintained by XYZ 
Corporation (which together with ABC Corporation constituted a single 
employer under the employer affiliation rules of Sec.  1.415(a)-1(f)(1) 
and (2)), and immediately after the cessation of affiliation, Plan XYZ 
is not actually maintained by ABC Corporation or any other entity 
affiliated with it.
    (iv) Application of rules to Participants M and O with respect to 
plans maintained by ABC Corporation after the 2010 stock sale. In 
applying the limitations of section 415(b) to Participant M for the 2010 
limitation year and later limitation years, Plan ABC must take into 
account the annual benefit provided under Plan ABC to Participant M and 
the annual benefit provided under Plan XYZ to Participant M, but 
treating Plan XYZ as if it had terminated immediately prior to the 2010 
stock sale with sufficient assets to pay benefit liabilities under the 
plan, and had purchased annuities to provide plan benefits. The 
aggregation of Plan XYZ with Plan ABC is irrelevant for purposes of 
Participant O because Participant O does not have any accrued benefit 
under Plan XYZ (as determined prior to the 2010 stock sale).
    (v) Treatment of plans maintained by LMN Corporation and XYZ 
Corporation after the 2010 stock sale. Under Sec.  1.415(a)-1(f)(1) and 
paragraph (a)(1) of this section, when applying the limitations of 
section 415(b) to a participant under Plans LMN and XYZ for the 2010 
limitation year and later years, the annual benefit provided to the 
participant under Plans LMN, XYZ and ABC must be aggregated. Benefits 
under Plan ABC must be included in this aggregation because XYZ 
Corporation is deemed to have once maintained Plan ABC pursuant to Sec.  
1.415(a)-1(f)(1), and since LMN Corporation and XYZ Corporation 
constitute a single employer under Sec.  1.415(a)-1(f)(1), paragraph 
(a)(1) of this section requires the aggregation of all defined benefit 
plans ever maintained by LMN Corporation and XYZ Corporation. However, 
in performing this aggregation, a participant's annual benefit under 
Plan ABC is limited to the annual benefit accrued by the participant 
immediately prior to the 2010 stock sale. This is because, pursuant to 
paragraph (b)(2)(i) of this section, Plan ABC is a formerly affiliated 
plan of LMN Corporation and XYZ Corporation.
    (vi) Application of rules to Participants M and O with respect to 
plans maintained by LMN Corporation and XYZ Corporation after the 2010 
stock sale. In applying the limitation of section 415(b) to Participant 
M for the 2010 limitation year and later limitation years, Plan LMN and 
Plan XYZ must take into account the annual benefit provided under Plans 
LMN and XYZ to Participant M and the annual benefit provided under Plan 
ABC to Participant M as if Plan ABC had terminated immediately prior to 
the 2010 stock sale with sufficient assets to pay benefit liabilities 
under the plan, and had purchased annuities to provide plan benefits. 
Participant O does not have an accrued benefit under Plan LMN or Plan 
XYZ, so the aggregation of Plan ABC with Plans LMN and XYZ is currently 
irrelevant with respect to Participant O. However, if Participant O were 
to ever participate in Plans LMN or XYZ after the 2010 stock sale, 
Participant O's annual benefit under Plan ABC (determined as if Plan ABC 
terminated immediately prior to the 2010 stock sale) would have to be 
aggregated with any annual benefit that Participant O accrues under Plan 
LMN or Plan XYZ.
    (vii) Application of nonduplication rule. In applying paragraph 
(a)(1) of this section to plans maintained by ABC Corporation after 2010 
stock sale, plans maintained by ABC Corporation do not take into account 
the deemed termination of Plan ABC since ABC Corporation maintains Plan 
ABC after the cessation of affiliation. Similarly, in applying paragraph 
(a)(1) of this section to plans maintained by LMN Corporation and XYZ 
Corporation after the 2010 stock sale, plans maintained by LMN 
Corporation and XYZ Corporation do not take into account the deemed 
termination of Plan XYZ since XYZ Corporation maintains Plan XYZ after 
the cessation of affiliation. See paragraph (d)(1) of this section.
    Example 3. (i) Facts. The facts are the same as in Example 2, except 
that on January 1, 2009, Plan ABC transfers Participant M's benefit to 
Plan XYZ.
    (ii) Treatment of plans maintained by ABC Corporation. Pursuant to 
Sec.  1.415(b)-1(b)(3)(i)(A), M's benefit that is transferred from Plan 
ABC to Plan XYZ is not treated as being provided under Plan ABC for the 
limitation year in which the transfer occurs (2009). This is because M's 
transferred benefit is otherwise required to be taken into account by 
Plan ABC for the 2009 limitation year since Plan XYZ must be aggregated 
with Plan ABC pursuant to paragraph (a)(1) of this section. This result 
does not change for the 2010 limitation year and later limitation years, 
where pursuant to paragraph

[[Page 367]]

(b)(2)(i) of this section, Plan XYZ becomes a formerly affiliated plan 
with respect to ABC Corporation due to the 2010 stock sale. Under 
paragraph (b)(2)(i) of this section, Plan XYZ (the formerly affiliated 
plan) is treated from the perspective of plans maintained by ABC 
Corporation (Plan ABC) as if Plan XYZ terminated immediately prior to 
the 2010 stock sale with sufficient assets to pay benefit liabilities 
under the plan, and had purchased annuities to provide plan benefits. 
However, the pre-2010 stock sale benefits of Plan XYZ include the 
January 1, 2009, transfer of Participant M's benefit. Thus, in the 2010 
limitation year, M's transferred benefit is still otherwise required to 
be taken into account by Plan ABC on account of the aggregation of Plan 
XYZ with Plan ABC pursuant to paragraph (a)(1) of this section, and 
therefore the transferred benefit is not treated as being provided by 
Plan ABC.
    (iii) Treatment of plans maintained by LMN Corporation and XYZ 
Corporation. Pursuant to Sec.  1.415(b)-1(b)(3)(i)(C), Participant M's 
benefit that is transferred to Plan XYZ from Plan ABC must be treated as 
provided under Plan XYZ for purposes of applying the limitations of 
section 415 to Plan XYZ with respect to Participant M for the limitation 
year in which the transfer occurs and later years. This result does not 
change on account of the 2010 stock sale. When applying the limitation 
of section 415 to Plans LMN and XYZ for the 2010 limitation year and 
later years, Plans LMN and XYZ must aggregate the annual benefit 
provided to a participant under each plan along with the participant's 
benefit under Plan ABC pursuant to Sec.  1.415(a)-1(f)(1) and paragraph 
(a)(1) of this section. However, under paragraph (b)(2)(i) of this 
section, for the 2010 limitation year and later years, this aggregation 
of M's Plan ABC benefit only includes the annual benefit attributable to 
a participant's accrued benefit under Plan ABC immediately prior to the 
2010 stock sale, which (due to the 2009 transfer) is zero.
    Example 4. (i) Facts. The facts are the same as in Example 2, except 
that on January 1, 2011, Plan ABC transfers Participant M's benefit to 
Plan XYZ.
    (ii) Treatment of plans maintained by ABC Corporation for the 2011 
limitation year and later years. Pursuant to Sec.  1.415(b)-
1(b)(3)(i)(B), M's benefit that is transferred from Plan ABC to Plan XYZ 
during the 2011 limitation year is treated by Plan ABC for the 2011 
limitation year and later years as if the transferred benefit were 
provided under a plan that must be aggregated with Plan ABC that 
terminated immediately prior to the transfer with sufficient assets to 
pay benefit liabilities under the plan, and had purchased annuities to 
provide plan benefits. This is because M's transferred benefit is not 
otherwise required to be taken into account by Plan ABC for the 2011 
limitation year and later years pursuant to paragraphs (a)(1) and 
(b)(2)(i) of this section. While Plan ABC must take into account 
Participant M's annual benefit under Plan XYZ under paragraph (a)(1) of 
this section, Participant M's annual benefit for this purpose is limited 
under paragraph (b)(2)(i) of this section to M's accrued benefit under 
Plan XYZ immediately prior to the 2010 stock sale, and Participant M's 
pre-2010 stock sale accrued benefit under Plan XYZ excludes the 2011 
transfer.
    (iii) Treatment of plans maintained by LMN Corporation and XYZ 
Corporation for the 2011 limitation year and later years. Pursuant to 
Sec.  1.415(b)-1(b)(3)(i)(C), Participant M's benefit that is 
transferred to Plan XYZ from Plan ABC must be treated as provided under 
Plan XYZ for purposes of applying the limitations of section 415 to Plan 
XYZ with respect to Participant M for the limitation year in which the 
transfer occurs and later years. In applying the limitations of section 
415(b) to Plans LMN and XYZ with respect to Participant M for the 2010 
limitation year and later years, the annual benefit of Participant M 
under Plans ABC, LMN, and XYZ must be aggregated pursuant to Sec.  
1.415(a)-1(f)(1) and paragraph (a)(1) of this section, but for this 
purpose, Participant M's benefit under Plan ABC is treated as if it were 
provided under a plan that terminated immediately prior to the cessation 
of affiliation of ABC Corporation and XYZ Corporation with sufficient 
assets to pay benefit liabilities under the plan, and had purchased an 
annuity to provide Participant M's benefits. (See paragraph (b)(2)(i) of 
this section and Example 2.) In applying the limitations of section 
415(b) to Plans LMN and XYZ with respect to Participant M for the 2011 
limitation year and later years, the annual benefit of Participant M 
under Plans ABC, LMN, and XYZ still must be aggregated pursuant to Sec.  
1.415(a)-1(f)(1) and paragraph (a)(1) of this section. However, 
beginning with the 2011 limitation year, ABC Corporation is a 
predecessor employer with respect to LMN Corporation and XYZ Corporation 
with respect to Participant M on account of the transfer of benefits 
from Plan ABC to Plan XYZ, pursuant to paragraph (c)(1) of this section. 
Therefore, Plans LMN and XYZ must take into account benefits that 
Participant M accrued under Plan ABC after the January 1, 2010, 
cessation of affiliation of ABC Corporation and XYZ Corporation that 
were not transferred to Plan XYZ on January 1, 2011, pursuant to 
paragraphs (c)(1) and (d)(1) of this section. Since all of Participant 
M's benefit in Plan ABC is transferred to Plan XYZ on January 1, 2011, 
Participant M's annual benefit from Plan ABC for purposes of aggregating 
Plan ABC with Plans LMN and XYZ is zero.
    Example 5. (i) Facts. The facts are the same as in Example 2, except 
that instead of the 2010 stock sale, XYZ Corporation sells some of its 
operating assets to LMN Corporation

[[Page 368]]

(and, under the facts and circumstances, the sale does not result in XYZ 
Corporation constituting a predecessor employer of LMN Corporation under 
the rules of paragraph (c)(2) of this section), and in connection with 
the asset sale, LMN Corporation assumes sponsorship of Plan XYZ in place 
of XYZ Corporation, effective January 1, 2010.
    (ii) Treatment of plans maintained by ABC Corporation and XYZ 
Corporation. Pursuant to paragraph (a)(1) of this section, all defined 
benefit plans ever maintained by ABC Corporation and XYZ Corporation 
must be aggregated as a single defined benefit plan for purposes of 
applying the limitations of section 415(b). However, for purposes of 
determining the annual benefit under Plan XYZ for the 2010 limitation 
year and later years, the aggregation of a participant's benefit under 
Plan XYZ is limited to the participant's annual benefit accrued 
immediately prior to the January 1, 2010, transfer of sponsorship of 
Plan XYZ. This is because paragraph (b)(2)(i) of this section provides 
that a formerly affiliated plan of an employer is treated as if it were 
a plan that terminated immediately prior to the cessation of affiliation 
with sufficient assets to pay benefit liabilities under the plan, and 
had purchased annuities to provide plan benefits. The January 1, 2010, 
transfer of sponsorship of Plan XYZ is a cessation of affiliation under 
paragraph (b)(2)(ii) of this section because this event causes Plan XYZ 
to no longer actually be maintained by either ABC Corporation or XYZ 
Corporation. Effective immediately after the January 1, 2010, transfer 
of sponsorship, Plan XYZ is a formerly affiliated plan with respect to 
ABC Corporation and XYZ Corporation under paragraph (b)(2)(ii) of this 
section because immediately prior to the cessation of affiliation, Plan 
XYZ was actually maintained by XYZ Corporation, and immediately after 
the cessation of affiliation, Plan XYZ is not actually maintained by 
either XYZ Corporation or ABC Corporation. Therefore, in applying the 
limitation of section 415(b) to Participant M for the 2010 limitation 
year and later limitation years, Plan ABC must take into account the 
annual benefit provided under Plan ABC to Participant M and the annual 
benefit provided under Plan XYZ to Participant M as if Plan XYZ had 
terminated immediately prior to the 2010 stock sale with sufficient 
assets to pay benefit liabilities under the plan, and had purchased 
annuities to provide plan benefits. The aggregation of Plan XYZ with 
Plan ABC is irrelevant for purposes of Participant O because Participant 
O does not have any accrued benefit under Plan XYZ (as determined prior 
to the 2010 transfer of sponsorship).
    (iii) Treatment of plans maintained by LMN Corporation. Under 
paragraph (a)(1) of this section, all defined benefit plans ever 
maintained by LMN Corporation or a predecessor employer must be 
aggregated as a single plan for purposes of applying the limitations of 
section 415(b). ABC Corporation and XYZ Corporation constitute a 
predecessor employer pursuant to paragraph (c)(1) of this section with 
respect to the participants who participate in Plan XYZ on the date of 
the transfer of sponsorship of Plan XYZ (the transferred participants) 
from XYZ Corporation to LMN Corporation, such as Participant M. This is 
because, effective with the January 1, 2010, transfer of sponsorship, 
LMN Corporation maintains a plan (Plan XYZ) under which the participants 
accrued a benefit while performing services for XYZ Corporation (which 
is in turn affiliated with ABC Corporation under Sec.  1.415(a)-1(f)(1)) 
and such benefits are provided under a plan maintained by LMN 
Corporation. Therefore, for the 2010 limitation year and later years, 
the annual benefit under Plan ABC of the transferred participants (such 
as Participant M) must be aggregated with the annual benefit provided to 
such participants under Plans XYZ and LMN for purposes of determining 
whether Plan LMN or Plan XYZ satisfies the limitations of section 
415(b). However, the aggregation of the transferred participants' Plan 
ABC annual benefits is limited to the annual benefit accrued under Plan 
ABC immediately prior to January 1, 2010, transfer of sponsorship. This 
is because, pursuant to paragraph (c)(1) of this section, Plan ABC is 
treated from the perspective of plans maintained by LMN Corporation as 
if Plan ABC had terminated immediately prior to the transfer of 
sponsorship of Plan ABC to LMN Corporation with sufficient assets to pay 
benefit liabilities under the plan, and had purchased annuities to 
provide plan benefits. ABC Corporation and XYZ Corporation do not 
constitute a predecessor employer with respect to Participant O. Thus, 
if Participant O is a participant in Plan LMN or becomes a participant 
in Plan XYZ after the 2010 transfer of sponsorship, neither plan 
aggregates Participant O's Plan ABC benefits for purposes of satisfying 
section 415(b). In applying paragraph (a)(1) of this section to a 
participant, plans maintained by LMN Corporation do not double count the 
participant's annual benefit. See paragraph (d)(1) of this section. 
Thus, such plans do not aggregate the annual benefit provided under Plan 
XYZ with the annual benefit from the deemed termination of Plan XYZ that 
LMN Corporation's predecessor employer (which is ABC and XYZ 
Corporations) must take into account in applying paragraph (a)(1) of 
this section, and instead consider the annual benefit actually provided 
under Plan XYZ.
    Example 6. (i) Facts. N is employed by a hospital which purchases an 
annuity contract described in section 403(b) on N's behalf for the 
current limitation year. N is in control of the hospital within the 
meaning of section 414(b) or (c), as modified by section

[[Page 369]]

415(h). The hospital also maintains a qualified defined contribution 
plan during the current limitation year in which N participates.
    (ii) Conclusion. Under section 415(k)(4), the hospital, as well as 
N, is considered to maintain the annuity contract. Accordingly, for N 
the sum of the annual additions under the qualified defined contribution 
plan and the annuity contract must satisfy the limitations of section 
415(c) and Sec.  1.415(c)-1.
    Example 7. (i) Facts. The facts are the same as in Example 6, except 
that instead of being in control of the hospital, N is the 100 percent 
owner of a professional corporation P, which maintains a qualified 
defined contribution plan in which N participates.
    (ii) Conclusion. Under section 415(k)(4), the professional 
corporation, as well as N, is considered to maintain the annuity 
contract. Accordingly, the sum of the annual additions under the 
qualified defined contribution plan maintained by professional 
corporation P and the annuity contract must satisfy the limitations of 
section 415(c) and Sec.  1.415(c)-1. See Sec.  1.415(g)-
1(b)(3)(iv)(C)(2) for an example of the treatment of a contribution to a 
section 403(b) annuity contract that exceeds the limits of section 
415(c) by reason of the aggregation required by this section.
    Example 8. (i) Facts. J is an employee of two corporations, N and M, 
each of which has employed J for more than 10 years. N and M are not 
required to be aggregated pursuant to section 415(f) and this section. 
Each corporation has a qualified defined benefit plan in which J has 
participated for more than 10 years. Each plan provides a benefit which 
is equal to 75 percent of a participant's average compensation for the 
period of the participant's high-3 years of service and is payable in 
the form of a straight life annuity beginning at age 65. J's average 
compensation for the period of his high-3 years of service from each 
corporation is $160,000. In July 2008, N Corporation becomes a wholly 
owned subsidiary of M Corporation.
    (ii) Plan aggregation analysis. As a result of the acquisition of N 
Corporation by M Corporation, J is treated as being employed by a single 
employer under section 414(b). Therefore, because section 415(f)(1)(A) 
requires that all defined benefit plans of an employer be treated as one 
defined benefit plan, the two plans must be aggregated for purposes of 
applying the limitations of section 415. However, under paragraph 
(e)(3)(i) of this section, since the plans were not aggregated as of the 
first day of the 2008 limitation year (January 1, 2008), they will not 
be considered aggregated until the limitation year beginning January 1, 
2009, provided that no plan amendment increasing benefits with respect 
to participant J is made after the acquisition of N by M.
    (iii) Application to Participant J. J has a total benefit under the 
two plans of $240,000, which, as a result of the plan aggregation, is in 
excess of the section 415(b) limit. However, under paragraph (e)(3)(ii) 
of this section, the limitations of section 415(b) and Sec.  1.415(b)-1 
applicable to J may be exceeded in this situation without plan 
disqualification so long as J's accrued benefit derived from employer 
contributions is not increased (that is, J's accrued benefit does not 
increase on account of increased compensation, service, participation, 
or other accruals) during the period within which the limitations are 
being exceeded.
    Example 9. (i) Facts. A, age 30, owns all of the stock of X 
Corporation and also owns 10 percent of the stock of Z Corporation. F, 
A's father, directly owns 75 percent of the stock of Z Corporation. Both 
corporations have qualified defined contribution plans in which A 
participates. A's compensation (within the meaning of Sec.  1.415(c)-2) 
for 2008 is $20,000 from Z Corporation and $150,000 from X Corporation. 
During the period January 1, 2008 through June 30, 2008, annual 
additions of $20,000 are credited to A's account under the plan of Z 
Corporation, while annual additions of $40,000 are credited to A's 
account under the plan of X Corporation. In both instances, the amount 
of annual additions represent the maximum allowable under section 415(c) 
and Sec.  1.415(c)-1. On July 15, 2008, F dies, and A inherits all of 
F's stock in Z in 2008.
    (ii) Conclusion. As of July 15, 2008, A is considered to be in 
control of X and Z Corporations, and the two plans must be aggregated 
for purposes of applying the limitations of section 415. However, even 
though A's total annual additions for 2008 are $60,000, the limitations 
of section 415(c) and Sec.  1.415(c)-1 are not violated for 2008, 
provided no annual additions are credited to A's accounts after July 15, 
2008 (the date that A is first in control of Z) for the remainder of the 
2008 limitation year.
    Example 10. (i) Facts. P is a key employee of employer XYZ who 
participates in a qualified defined contribution plan (Plan X). P is 
also provided post-retirement medical benefits, and XYZ has taken into 
account a reserve for those benefits under section 419A(c)(2). In the 
2008 limitation year, P's compensation is $30,000 and P's annual 
additions under Plan X are $5,000. Pursuant to section 419A(d), a 
separate account is maintained for P, and that account is credited with 
an allocation of $32,000 for the 2008 limitation year. It is assumed 
that the section 415(c)(1)(A) dollar limit for 2008 is $46,000.
    (ii) Separate testing analysis. Under paragraph (h)(1) of this 
section, Plan X and the individual medical account must separately 
satisfy the requirements of section 415(c), taking into account any 
special limit applicable to that arrangement. In this case, the 
contributions to Plan X separately satisfy the limitations of section 
415(c). While the individual medical account is treated as a

[[Page 370]]

defined contribution plan subject to the rules of section 415(c), it is 
not subject to the 100 percent of compensation limit of section 
415(c)(1)(B), so the contributions to that account satisfy the 
limitations of section 415(c).
    (iii) Aggregation analysis. The sum of the annual additions under 
Plan X and the amounts contributed to the separate account on P's behalf 
must satisfy the requirements of section 415(c). Under paragraph (h)(2) 
of this section, the limit applicable to the aggregated plan is equal to 
the greater of the limits applicable to the separate plans. In this 
case, the limit applicable to the medical account is $46,000 (which is 
greater than the limit of $30,000 applicable to the qualified plan), so 
the limit that applies to the aggregated plan is $46,000, and the 
aggregated plan satisfies the requirements of section 415.

[T.D. 9319, 72 FR 16922, Apr. 5, 2007; 72 FR 28854, May 23, 2007]



Sec.  1.415(g)-1  Disqualification of plans and trusts.

    (a) Disqualification of plans--(1) In general. Under section 415(g) 
and this section, with respect to a particular limitation year, a plan 
(and the trust forming part of the plan) is disqualified in accordance 
with the rules provided in paragraph (b) of this section, if the 
conditions described in paragraph (a)(2) or (a)(3) of this section 
apply. For purposes of this paragraph (a), the determination of whether 
a plan or a group of aggregated plans exceeds the limitations imposed by 
section 415 for a particular limitation year is, except as otherwise 
provided, made by taking into account the aggregation of plan rules 
provided in section 415(f) and Sec.  1.414(f)-1.
    (2) Defined contribution plans. A plan is disqualified in accordance 
with the rules provided in paragraph (b) of this section if annual 
additions (as defined in Sec.  1.415(c)-1(b)) with respect to the 
account of any participant in a defined contribution plan maintained by 
the employer exceed the limitations of section 415(c) and Sec.  
1.415(c)-1.
    (3) Defined benefit plans. A plan is disqualified in accordance with 
the rules provided in paragraph (b) of this section if the annual 
benefit (as defined in Sec.  1.415(b)-1(b)(1)) of a participant in a 
defined benefit plan maintained by the employer exceeds the limitations 
of section 415(b) and Sec.  1.415(b)-1.
    (b) Rules for disqualification of plans and trusts--(1) In general. 
If any plan (including a trust which forms part of such plan) is 
disqualified for a particular limitation year under the rules set forth 
in this paragraph (b), then the disqualification is effective as of the 
first day of the first plan year containing any portion of the 
particular limitation year.
    (2) Single plan. In the case of a single qualified defined benefit 
plan (determined without regard to section 415(f) and Sec.  1.415(f)-1) 
maintained by the employer that provides an annual benefit (as defined 
in Sec.  1.415(b)-1(b)(1)) in excess of the limitations of section 
415(b) and Sec.  1.415(b)-1 for any particular limitation year, such 
plan is disqualified in that limitation year. Similarly, if the employer 
only maintains a single defined contribution plan (determined without 
regard to section 415(f) and Sec.  1.415(f)-1) under which annual 
additions (as defined in Sec.  1.415(c)-1(b)) allocated to the account 
of any participant exceed the limitations of section 415(c) and Sec.  
1.415(c)-1 for any particular limitation year, such plan is also 
disqualified in that limitation year.
    (3) Multiple plans--(i) In general. If the limitations of section 
415(b) and Sec.  1.415(b)-1, or section 415(c) and Sec.  1.415(c)-1, are 
exceeded for a particular limitation year with respect to any 
participant solely because of the application of the aggregation rules 
of section 415(f)(1) and Sec.  1.415(f)-1 (taking into account the rules 
of Sec.  1.415(a)-1(f)), then one or more of the plans is disqualified 
in accordance with the ordering rules set forth in paragraph (b)(3)(ii) 
of this section, applied in accordance with the rules of application set 
forth in paragraph (b)(3)(iii) of this section, subject to the special 
rules set forth in paragraph (b)(3)(iv) of this section, until, without 
regard to annual benefits or annual additions under the disqualified 
plan or plans, the remaining plans satisfy the applicable limitations of 
section 415.
    (ii) Ordering rules--(A) Disqualification of ongoing plans other 
than multiemployer plans. If there are two or more plans that have not 
been terminated at any time including the last day of the particular 
limitation year, and if one

[[Page 371]]

or more of those plans is a multiemployer plan described in section 
414(f), then one or more of the plans (as needed to satisfy the 
limitations of section 415) that has not been terminated and is not a 
multiemployer plan is disqualified in that limitation year. For purposes 
of the preceding sentence, the determination of whether a plan is a 
multiemployer plan described in section 414(f) is made as of the last 
day of the particular limitation year.
    (B) Disqualification of ongoing multiemployer plans. If, after the 
application of paragraph (b)(3)(ii)(A) of this section, there are two or 
more plans and one or more of the plans has been terminated at any time 
including the last day of the particular limitation year, then one or 
more of the plans (as needed to satisfy the applicable limitations of 
section 415) that has not been so terminated (regardless of whether the 
plan is a multiemployer plan described in section 414(f)) is 
disqualified in that limitation year.
    (iii) Rules of application--(A) Employer elects which plan is 
disqualified. If there are two or more plans of an employer within a 
group of plans one or more of which is to be disqualified pursuant to 
paragraph (b)(3)(ii)(A) or (B) of this section, then the employer may 
elect, in a manner determined by the Commissioner, which plan or plans 
are disqualified. If those two or more plans are involved because of the 
application of Sec.  1.415(a)-1(f), the employers involved may elect, in 
a manner determined by the Commissioner, which plan or plans are 
disqualified. However, the election described in the preceding sentence 
is not effective unless made by all of those employers.
    (B) Commissioner determines which plan is disqualified. If the 
election described in paragraph (b)(3)(iii)(A) of this section is not 
made with respect to the two plans described in paragraph (b)(3)(iii)(A) 
of this section, then the Commissioner, taking into account all of the 
facts and circumstances, has the discretion to determine the plan that 
is disqualified in the particular limitation year. In making this 
determination, some of the factors that will be taken into account 
include, but are not limited to, the number of participants in each 
plan, the amount of benefits provided on an overall basis by each plan, 
and the extent to which benefits are distributed or retained in each 
plan.
    (iv) Special rules--(A) Simplified employee pensions. If there are 
two or more plans one or more of which is to be disqualified pursuant to 
paragraph (b)(3)(ii)(A) or (B) of this section, and if one of the plans 
is a simplified employee pension (as defined in section 408(k)), then 
the simplified employee pension is not disqualified until all of the 
other plans have been disqualified. However, if one of the plans has 
been terminated, then the simplified employee pension is disqualified 
before the terminated plan. For purposes of this paragraph 
(b)(3)(iv)(A), the disqualification of a simplified employee pension 
means that the simplified employee pension is no longer described under 
section 408(k).
    (B) Aggregating medical accounts with defined contribution plans. In 
the event that aggregating a medical account described in Sec.  
1.415(c)-1(a)(2)(ii)(C) or (D) and a defined contribution plan other 
than such a medical account causes the limitations of section 415(c) and 
Sec.  1.415(c)-1 applicable to a participant to be exceeded for a 
particular limitation year, the defined contribution plan other than the 
medical account is disqualified for the limitation year.
    (C) Aggregating section 403(b) annuity contract and qualified 
defined contribution plan--(1) In general. In the event that aggregating 
a section 403(b) annuity contract and a qualified defined contribution 
plan under the provisions of section 415(f)(1)(B) causes the limitations 
of section 415(c) and Sec.  1.415(c)-1 applicable to a participant under 
the aggregated defined contribution plans to be exceeded for a 
particular limitation year, the excess of the contributions to the 
annuity contract plus the annual additions to the qualified plan over 
such limitations is attributed to the annuity contract and therefore 
includable in the gross income of the participant for the taxable year 
with or within which that limitation year ends. See Sec.  1.415(a)-
1(b)(2) for rules regarding the treatment of a contribution to a section 
403(b) annuity contract that exceeds the limitations of section 415.

[[Page 372]]

    (2) Example. The following example illustrates the application of 
this paragraph (b)(3)(iv)(C). It is assumed for purposes of this example 
that the dollar limitation under section 415(c)(1)(A) that applies for 
all relevant limitation years is $45,000. The example is as follows:

    Example. (i) N is employed by a hospital which purchases an annuity 
contract described in section 403(b) on N's behalf for the current 
limitation year. N is also the 100 percent owner of a professional 
corporation P that maintains a qualified defined contribution plan 
during the current limitation year in which N participates. (The facts 
of this example are the same as in Sec.  1.415(f)-1(j) Example 7.) N's 
compensation (within the meaning of Sec.  1.415(c)-2) from the hospital 
for the current limitation year is $150,000. For the current limitation 
year, the hospital contributes $30,000 for the section 403(b) annuity 
contract on N's behalf, which is within the limitations applicable to N 
under the annuity contract (specifically, the limit under the annuity 
contract is $45,000)). Professional corporation P also contributes 
$20,000 to the qualified defined contribution plan on N's behalf for the 
current limitation year (which represents the only annual additions 
allocated to N's account under the plan for such year), which is within 
the $45,000 limitation of section 415(c)(1) applicable to N under the 
plan.
    (ii) Under section 415(k)(4), the professional corporation, as well 
as N, is considered to maintain the annuity contract. Accordingly, the 
sum of the annual additions under the qualified defined contribution 
plan maintained by professional corporation P and the annuity contract 
must satisfy the limitations of section 415(c) and Sec.  1.415(c)-1.
    (iii) Because the total aggregate contributions ($50,000) exceed the 
section 415(c) limitation applicable to N ($45,000), $5,000 of the 
$30,000 contributed to the section 403(b) annuity contract is considered 
an excess contribution and therefore currently includable in N's gross 
income. The contract continues to be a section 403(b) annuity contract 
only if, for the current limitation year and all years thereafter, the 
issuer of the contract maintains separate accounts for each portion 
attributable to such excess contributions. See Sec. Sec.  1.415(a)-
1(b)(2).

    (c) Plan year for certain annuity contracts and individual 
retirement plans. For purposes of this section, unless the plan under 
which the annuity contract or individual retirement plan is provided 
specifies that a different twelve-month period is considered to be the 
plan year--
    (1) An annuity contract described in section 403(b) is considered to 
have a plan year coinciding with the taxable year of the individual on 
whose behalf the contract has been purchased; and
    (2) A simplified employee pension described in section 408(k) is 
considered to have a plan year coinciding with the year under the plan 
that is used pursuant to section 408(k)(7)(C).

[T.D. 9319, 72 FR 16927, Apr. 5, 2007]



Sec.  1.415(j)-1  Limitation year.

    (a) In general. Unless the terms of a plan provide otherwise, the 
limitation year, with respect to any qualified plan maintained by the 
employer, is the calendar year.
    (b) Alternative limitation year election. The terms of a plan may 
provide for the use of any other consecutive twelve month period as the 
limitation year. This includes a fiscal year with an annual period 
varying from 52 to 53 weeks, so long as the fiscal year satisfies the 
requirements of section 441(f). A plan may only provide for one 
limitation year regardless of the number or identity of the employers 
maintaining the plan.
    (c) Multiple limitation years--(1) In general. Where an employer 
maintains more than one qualified plan, those plans may provide for 
different limitation years. The rule described in this paragraph (c) 
also applies to a controlled group of employers (within the meaning of 
section 414(b) or (c), as modified by section 415(h)). If the plans of 
an employer (or a controlled group of employers whose plans are 
aggregated) have different limitation years, section 415 is applied in 
accordance with the rule of paragraphs (c)(2) and (3) of this section.
    (2) Testing rule for defined contribution plans. If a participant is 
credited with annual additions in only one defined contribution plan, in 
determining whether the requirements of section 415(c) are satisfied, 
only the limitation year applicable to that plan is considered. However, 
if a participant is credited with annual additions in more than one 
defined contribution plan, each such plan satisfies the requirements of 
section 415(c) only if the limitations of section 415(c) are satisfied

[[Page 373]]

with respect to amounts that are annual additions for the limitation 
year with respect to the participant under the plan, plus amounts 
credited to the participant's account under all other plans required to 
be aggregated with the plan pursuant to section 415(f) and Sec.  
1.415(f)-1 that would have been considered annual additions for the 
limitation year under the plan if they had been credited under the plan 
rather than an aggregated plan.
    (3) Testing rule for defined benefit plans. If a participant has 
participated in only one defined benefit plan, in determining whether 
the requirements of section 415(b) are satisfied, only the limitation 
year applicable to that plan is considered. However, if a participant 
has participated in more than one defined benefit plan, a plan satisfies 
the requirements of section 415(b) only if the annual benefit under all 
plans required to be aggregated pursuant to section 415(f) and Sec.  
1.415(f)-1 for the limitation year of that plan with respect to the 
participant satisfy the applicable limitations of section 415(b). Thus, 
for example, the dollar limitation of section 415(b)(1)(A) applicable to 
the limitation year for each plan must be applied to annual benefits 
under all aggregated plans to determine whether the plan satisfies the 
requirements of section 415(b).
    (d) Change of limitation year--(1) In general. Once established, the 
limitation year may be changed only by amending the plan. Any change in 
the limitation year must be a change to a 12-month period commencing 
with any day within the current limitation year. For purposes of this 
section, the limitations of section 415 are to be applied in the normal 
manner to the new limitation year.
    (2) Application to short limitation period. Where there is a change 
of limitation year, the limitations of section 415 are to be separately 
applied to a limitation period which begins with the first day of the 
current limitation year and which ends on the day before the first day 
of the first limitation year for which the change is effective. In the 
case of a defined contribution plan, the dollar limitation with respect 
to this limitation period is determined by multiplying the applicable 
dollar limitation for the calendar year in which the limitation period 
ends by a fraction, the numerator of which is the number of months 
(including any fractional parts of a month) in the limitation period, 
and the denominator of which is 12. In the case of a defined benefit 
plan, no adjustment is made to the section 415(b) limitations to reflect 
a short limitation period.
    (3) Deemed change of limitation year. If a defined contribution plan 
is terminated effective as of a date other than the last day of the 
plan's limitation year, the plan is treated for purposes of this section 
as if the plan was amended to change its limitation year. Thus, the 
rules of this paragraph (d) apply to the terminating plan's final 
limitation year.
    (e) Limitation year for individuals on whose behalf section 403(b) 
annuity contracts have been purchased. The limitation year of an 
individual on whose behalf a section 403(b) annuity contract has been 
purchased by an employer is determined in the following manner.
    (1) If the individual is not in control of any employer (within the 
meaning of Sec.  1.415(f)-1(f)(2)(ii)), the limitation year is the 
calendar year. However, the individual may elect to change the 
limitation year to another twelve-month period. To do this, the 
individual must attach a statement to his or her income tax return filed 
for the taxable year in which the change is made. Any change in the 
limitation year must comply with the rules set forth in paragraph (d) of 
this section.
    (2) If the individual is in control of an employer (within the 
meaning of Sec.  1.415(f)-1(f)(2)(ii)), the limitation year is the 
limitation year of that employer.
    (f) Limitation year for individuals on whose behalf individual 
retirement plans are maintained. The limitation year of an individual on 
whose behalf an individual retirement plan (within the meaning of 
section 7701(a)(37)) is maintained is determined in the manner described 
in paragraph (e) of this section.
    (g) Examples. The following examples illustrate the application of 
this section:

    Example 1. (i) Participant M is employed by both Employer A and 
Employer B, each of which maintains a qualified defined contribution 
plan. M participates in both of

[[Page 374]]

these plans. The limitation year for Employer A's plan is January 1 
through December 31, and the limitation year for Employer B's plan is 
April 1 through March 31. Employer A and Employer B are both 
corporations, and Corporation X owns 100 percent of the stock of 
Employer A and Employer B.
    (ii) The two plans in which M participates are required under 
section 415(f) to be aggregated for purposes of applying the limitations 
of section 415(c) to annual additions made with respect to M. Thus, for 
example, for the limitation year of Employer A's plan that begins 
January 1, 2008, annual additions with respect to M that are subject to 
the limitations of section 415(c) include both amounts that are annual 
additions with respect to M under Employer A's plan for the period 
beginning January 1, 2008, and ending December 31, 2008, and amounts 
contributed to Employer B's plan with respect to M that would have been 
considered annual additions for the period beginning January 1, 2008, 
and ending December 31, 2008, under Employer A's plan if those amounts 
had instead been contributed to Employer A's plan.
    Example 2. In 2008, an employer with a qualified defined 
contribution plan using the calendar year as the limitation year elects 
to change the limitation year to a period beginning July 1 and ending 
June 30. Because of this change, the plan must satisfy the limitations 
of section 415(c) for the limitation period beginning January 1, 2008, 
and ending June 30, 2008. In applying the limitations of section 415(c) 
to this limitation period, the amount of compensation taken into account 
may only include compensation for this period. Furthermore, the dollar 
limitation for this period is the otherwise applicable dollar limitation 
for calendar year 2008, multiplied by 6/12.

[T.D. 9319, 72 FR 16928, Apr. 5, 2007]



Sec.  1.416-1  Questions and answers on top-heavy plans.

    The following questions and answers relate to special rules for top-
heavy plans under section 416 of the Internal Revenue Code of 1954, as 
added by section 240 of the Tax Equity and Fiscal Responsibility Act of 
1982 (Pub. L. 97-248) (TEFRA), and amended by sections 524 and 713(f) of 
the Tax Reform Act of 1984 (Pub. L. 98-369):

                            Table of Contents

G--General Provisions
T--Top-Heaviness Determinations
V--Vesting Rules for Top-Heavy Plans
M--Minimum Benefits Under Top-Heavy Plans

                          G. General Provisions

    G-1 Q. What requirement plans are subject to the top-heavy rules 
added to the Code by the Tax Equity and Fiscal Responsibility Act and 
amended by the Tax Reform Act of 1984?
    A. All stock bonus, pension, or profit-sharing plans intended to 
qualify under section 401(a), annuity contracts described in section 
403(a), and simplified employee pensions described in section 408(k) are 
subject to the new top-heavy rules added to the Code by the Tax Equity 
and Fiscal Responsibility Act and amended by the Tax Reform Act 
(``TRA'') of 1984.
    G-2 Q. Is a multiple employer plan subject to the top-heavy 
requirements of section 416?
    A. A multiple employer plan is subject to the requirements of 
section 416, but only with respect to each individual employer. Thus, if 
twelve employers contribute to a multiple employer plan and the accrued 
benefits for the key employees of one employer exceed 60 percent of the 
accrued benefits of all employees for such employer, the plan is top-
heavy with respect to that employer. A failure by the multiple employer 
plan to satisfy section 416 with respect to the employees of such 
employer means that all employers are maintaining a plan that is not a 
qualified plan.
    G-3 Q. As of what date must plan amendments to comply with top-heavy 
rules be effective?
    A. Amendments required to comply with the top-heavy rules must be 
effective as of the first day of the first plan year which begins after 
1983. See Sec.  1.401(b)-1 for the date by which such amendments must be 
adopted.

                     T. Top-Heaviness Determinations

    T-1 Q. What factors must be considered in determining whether a plan 
is top-heavy?
    A. (a) In order to determine whether a plan is top-heavy for a plan 
year, it is necessary to determine which employers will be treated as a 
single employer for purposes of section 416; what the determination date 
is for the plan year; which employees are or formerly were key 
employees; which former employees have not performed any service

[[Page 375]]

for the employer maintaining the plan at any time during the five-year 
period ending on the determination date; which plans of such employers 
are required or permitted to be aggregated to determine top-heavy 
status; and the present value of the accrued benefits (including 
distributions made during the plan year containing the determination 
date and the four preceding plan years) of key employees, former key 
employees, and non-key employees.
    (b) All employers that are aggregated under section 414 (b), (c), 
and (m) must be taken into account as a single employer for the plan 
year in question, and those employees in all plans maintained by the 
employers that are aggregated must be categorized as key employees, as 
former key employees, or as non-key employees. See Question and Answer 
T-12 for the determination of which employees are or were key employees. 
All plans maintained by the employers in which a key employee 
participates, and certain other plans, must then be aggregated (the 
required aggregation group). See Question and Answer T-6 for rules 
concerning required aggregation. Other plans may in some cases be 
aggregated with the required aggregation group. See Question and Answer 
T-7 for rules concerning such permissive aggregation.
    (c) Once aggregated, all plans that are required to be aggregated 
will either be top-heavy or not top-heavy, depending upon whether the 
aggregation group is top-heavy. A plan or aggregation group will be 
considered top-heavy if the sum of the present value of the accrued 
benefits for key employees is more than 60 percent of the sum of the 
present value of accrued benefits of all employees.
    (d) Except as otherwise stated, for purposes of section 416(g), an 
employee is an individual currently or formerly employed by an employer. 
Former key employees are non-key employees and are excluded entirely 
from the calculation to determine top-heaviness. In all cases, the 
present value of accrued benefits includes distributions made during the 
plan year containing the determination date and the preceding four plan 
years. See Questions and Answers T-24 and T-25 for rules concerning the 
account balances and present value of accrued benefits. For plan years 
beginning after December 31, 1984, the accrued benefit of an employee 
who has not performed any sevice for the employer maintaining the plan 
at any time during the five-year period ending on the determination date 
is excluded from the calculation to determine top-heaviness. However, if 
an employee performs no services for five years and then performs 
sevices, such employee's total accrued benefit is included in the 
calculation for top-heaviness.
    T-2 Q. To what extent are multiemployer plans and multiple employer 
plans to which an employer makes contributions on behalf of its 
employees treated as plans of that employer for top-heavy purposes?
    A. Multiemployer plans described in section 414(f) and multiple 
employer plans described in section 413(c) to which an employer makes 
contributions on behalf of its employees are treated as plans of that 
employer to the extent that benefits under the plan are provided to 
employees of the employer because of service with that employer.
    T-3 Q. Must a collectively-bargained plan be aggregated with other 
plans of the employer to determine whether some or all of the employer's 
plans are top-heavy?
    A. A collectively-bargained plan that includes a key employee of an 
employer must be included in the required aggregation group for that 
employer. See Question and Answer T-6 for rules concerning required 
aggregation. A collectively-bargained plan that does not include a key 
employee may be included in a permissive aggregation group. See Question 
and Answer T-7 for rules concerning permissive aggregation. However, the 
special rules in section 416 (b), (c), or (d) applicable to top-heavy 
plans do not apply with respect to any employee included in a unit of 
employees covered by an agreement which the Secretary of Labor finds to 
be a collective-bargaining agreement between employee representatives 
and one or more employers if there is evidence that retirement benefits 
were the subject of good faith bargaining between such employee 
representatives

[[Page 376]]

and such employer or employers. In determining whether there is a 
collective-bargaining agreement between employee representatives and one 
or more employers, the additional condition of section 7701(a)(46) must 
be satisfied after March 31, 1984.
    T-4 Q. How is a terminated plan treated for purposes of the top-
heavy rules?
    A. A terminated plan is treated like any other plan for purposes of 
the top-heavy rules. For purposes of section 416, a terminated plan is 
one that has been formally terminated, has ceased crediting service for 
benefit accruals and vesting, and has been or is distributing all plan 
assets to participants or their beneficiaries as soon as 
administratively feasible. Such a plan must be aggregated with other 
plans of the employer if it was maintained within the last five years 
ending on the determination date for the plan year in question and 
would, but for the fact that it terminated, be part of a required 
aggregation group for such plan year. Distributions which have taken 
place within the five years ending on the determination date must be 
accounted for in accordance with section 416(g)(3). No additional 
vesting, benefit accruals or contributions must be provided for 
participants in a terminated plan.
    T-5 Q. How are frozen plans treated for purposes of the top-heavy 
rules?
    A. For purposes of section 416, a frozen plan is one in which 
benefit accruals have ceased but all assets have not been distributed to 
participants or their beneficiaries. Such plans are treated, for 
purposes of the top-heavy rules, as any non-frozen plan. That is, such 
plans must provide minimum contributions or benefit accruals, limit the 
amount of compensation which can be taken into account in providing 
benefits, and provide top-heavy vesting. A frozen defined contribution 
plan may not be required to provide additional contributions because of 
the rule in section 416(c)(2)(B).
    T-6 Q. What is a required aggregation group?
    A. For purposes of determining whether the plans of an employer are 
top-heavy for a particular plan year, the required aggregation group 
includes each plan of the employer in which a key employee participates 
in the plan year containing the determination date, or any of the four 
preceding plan years. In addition, each other plan of the employer 
which, during this period, enables any plan in which a key employee 
participates to meet the requirements of section 401(a)(4) or 410 is 
part of the required aggregation group. This concept may be illustrated 
by the following examples:

    Example 1. An employer maintains two plans. Key employees 
participate in one plan, but not in the other. If the plan containing 
key employees independently satisfies the coverage and non-
discrimination rules of sections 410 and 401(a)(4), it may be tested 
independently to determine whether it is top-heavy. Also, the plan not 
covering key employees would not be part of a required aggregation group 
and would not need to be tested to determine whether it is top-heavy. 
However, if the plan containing key employees satisfies the coverage 
requirements of section 410(b) or the non-discrimination requirements of 
section 401(a)(4) only when it is considered together with the other 
plan in accordance with Sec.  1.410(b)-7(d), the plan not covering key 
employees would be part of the required aggregation group.
    Example 2. A sole proprietor terminated a Keogh plan in 1981. In 
1982, the sole proprietor incorporated and established a corporate plan 
with a calendar-year plan year. For purposes of determining whether the 
corporate plan is top-heavy for its 1984 plan year, the terminated Keogh 
plan and the corporate plan would be part of a required aggregation 
group. The sole proprietor and the corporation would be treated as a 
single employer under section 414(c). Under Question and Answer T-4, the 
terminated plan would be aggregated with the corporate plan because it 
was maintained within the five-year period ending on the determination 
date for the 1984 plan year and because, but for the fact that it 
terminated, it would be aggregated with the corporate plan because it 
covered a key employee.

    T-7 Q. What is a permissive aggregation group?
    A. A permissive aggregation group consists of plans of the employer 
that are required to be aggregated, plus one or more plans of the 
employer that are not part of a required aggregation group but that 
satisfy the requirements of sections 401(a)(4) and 410 when considered 
together with the required aggregation group. This concept may

[[Page 377]]

be illustrated by the following examples:

    Example 1. (a) An employer maintains two plans:
    1. Plan A covers key employees and independently satisfies the 
requirements of sections 410 and 401(a)(4).
    2. Plan B covers no key employees. It also independently satisfies 
the requirements of sections 410 and 401(a)(4).
    (b) As indicated in Question and Answer T-6, Plan B is not required 
to be aggregated with Plan A. Further, if Plan B provided contributions 
or benefits that were not at least comparable to the contributions or 
benefits provided under Plan A, then Plan B could not be permissively 
aggregated with Plan A because the contributions and benefits would 
discriminate if the two plans were considered as a unit. However, if the 
benefits or contributions under Plan B were comparable to those under 
Plan A, the two plans would be permitted to be aggregated to determine 
whether or not the group consisting of both plans is top-heavy. If Plan 
A and Plan B are permitted to be aggregated, and if the permissive 
aggregation group is not top-heavy, then neither Plan A nor Plan B would 
be considered top-heavy.
    Example 2. (a) Employer W maintains two plans.
    1. Plan C covers salaried employees and independently satisfies the 
requirements of sections 410 and 401(a)(4).
    2. Plan D covers employees who are included in a unit of employees 
covered by an agreement which the Secretary of Labor has found to be a 
collective-bargaining agreement between employee representatives and the 
employer and retirement benefits were bargained for between employee 
representatives and the employer.
    (b) The fact that Plan D is a collectively-bargained plan does not 
necessarily mean that it may be permissively aggregated with Plan C. In 
order to be permissively aggregated with Plan C, Plan D must provide 
contributions or benefits with respect to service with Employer W that 
are at least comparable to the contributions or benefits provided under 
Plan C.

    T-8 Q. May an employer permissively aggregate multiemployer plans, 
multiple employer plans and simplified employee pension plans to which 
the employer contributes with a plan covering key employees or a 
required aggregated group?
    A. Yes. Multiemployer plans, multiple employer plans and simplified 
employee pensions to which an employer makes contributions may be 
permissively aggregated with a plan covering key employees or with a 
required aggregation group if the contributions or benefits provided 
under the multiemployer plan, multiple employer plan or simplified 
employee pension by the employer are comparable to the contributions or 
benefits provided under the plan covering key employees or the plans in 
the required aggregation group. In making this determination, only the 
employer's contribution to the simplified employee pension may be used.
    T-9 Q. What plans will be treated as top-heavy if they are part of a 
required aggregation group that is top-heavy?
    A. In the case of plans that are required to be aggregated, each 
plan in the required aggregation group will be top-heavy if the group is 
top-heavy. No plan in the required aggregation group will be top-heavy 
if the group is not top-heavy.
    T-10 Q. If a required aggregation group is top-heavy, and one plan 
of the group satisfies the requirements of sections 416 (b), (c), and 
(d), may other plans in the group include provisions which do not 
satisfy sections 416 (b), (c) and (d)?
    A. No. Each plan in a required aggregation group is top-heavy if the 
group is top-heavy. Thus, each plan must contain provisions satisfying 
the requirements of sections 416 (b) and (d). If all the plans are 
defined contribution plans, only one plan need satisfy the requirements 
of section 416(c)(2) with respect to any non-key employee who 
participates in more than one of the plans. If all the plans are defined 
benefit plans, only one plan need satisfy the requirements of section 
416(c)(1) with respect to any non-key employee who participates in more 
than one of the plans. However, in the case of non-key employees who do 
not participate in more than one plan, each plan must separately provide 
the applicable minimum contribution or benefit with respect to each such 
employee. See Question and Answer M-12 in the case of employees who are 
covered under both a defined benefit and a defined contribution plan.
    T-11 Q. What plans will be treated as top-heavy if a permissive 
aggregation group is top-heavy?
    A. If a permissive aggregation group is top-heavy, only those plans 
that are

[[Page 378]]

part of the required aggregation group will be subject to the 
requirements of section 416 (b), (c) and (d). Plans that are not part of 
the required aggregation group will not be subject to these 
requirements. Thus, if an employer wishes to demonstrate that the plans 
maintained by the employer are not top-heavy, the employer need consider 
only the required aggregation group. If, after considering the required 
aggregation group, it is determined that the plans are not top-heavy, 
the requirements of section 416 (b), (c) and (d) will not apply to any 
of the plans. If, on the other hand, the plans required to be aggregated 
are top-heavy, the employer may wish to determine whether there are any 
plans that may be permissively aggregated to demonstrate that the plans 
are not top-heavy. Assuming that there are plans that are eligible for 
permissive aggregation, the employer may take these plans into 
consideration. If, after taking such plans into consideration, the net 
result is that the entire group is not top-heavy, the top-heavy 
requirements do not apply to any plan in the group.
    T-12 Q. For purposes of determining whether a plan is top-heavy for 
a plan year, who is a key employee?
    A. Under section 416(i)(1), a key employee is any employee 
(including any deceased employee) who at any time during the plan year 
containing the determination date for the plan year in question or the 
four preceding plan years (including plan years before 1984) is:
    1. An officer of the employer having annual compensation from the 
employer for a plan year greater than 150 percent of the dollar 
limitation in effect under section 415(c)(1)(A) for the calendar year in 
which such plan year ends (see Questions and Answers T-13, T-14, and T-
15),
    2. One of the ten employees having annual compensation from the 
employer for a plan year greater than the dollar limitation in effect 
under section 415(c)(1)(A) for the calendar year in which such plan year 
ends and owning (or considered as owning within the meaning of section 
318) both more than a \1/2\ percent interest and the largest interests 
in the employer (see Question and Answer T-19),
    3. A 5-percent owner of the employer, or
    4. A 1-percent owner of the employer having annual compensation from 
the employer for a plan year more than $150,000 (see Questions and 
Answers T-16 and T-21).
    An individual may be considered a key employee in a plan year for 
more than one reason. For example, an individual may be both an officer 
and one of the ten largest owners. However, in testing whether a plan or 
group is top-heavy, an individual's accrued benefit is counted only 
once. The terms key employee, former key employee, and non-key employee 
include the beneficiaries of such individuals. This Question and Answer 
is illustrated by the following examples:

    Example 1. An employer maintains a calendar-year plan. An individual 
who was an employee of the employer and a 5-percent owner of the 
employer in 1986 was neither an employee nor an owner in 1987 or 
thereafter. Even though the individual is no longer an employee or owner 
of the employer, the individual would be treated as a key employee for 
purposes of determining whether the plan is top-heavy for each plan year 
through the 1991 plan year. However, for purposes of determining whether 
the plan is top-heavy for the 1992 plan year and for subsequent plan 
years, the individual would be treated as a former key employee.
    Example 2. The facts are the same as in example (1), except that the 
individual died in early 1987 and his total benefit under the plan was 
distributed to his beneficiary in 1987. Such distribution would be 
treated as the accrued benefit of the individual for each year through 
the 1991 plan year. However, such individual would be treated as a 
former key employee for purposes of determining whether the plan is top-
heavy for the 1992 plan year and for subsequent plan years. The 
conclusions are not affected by whether the beneficiary of the 
individual is a non-key employee or a key employee of the employer.

    T-13 Q. For purposes of defining a key employee, who is an officer?
    A. Whether an individual is an officer shall be determined upon the 
basis of all the facts, including, for example, the source of his 
authority, the term for which elected or appointed, and the nature and 
extent of his duties. Generally, the term officer means an 
administrative executive who is in regular and continued service. The 
term officer implies continuity of service

[[Page 379]]

and excludes those employed for a special and single transaction. An 
employee who merely has the title of an officer but not the authority of 
an officer is not considered an officer for purposes of the key employee 
test. Similarly, an employee who does not have the title of an officer 
but has the authority of an officer is an officer for purposes of the 
key employee test. In the case of one or more employers treated as a 
single employer under sections 414(b), (c), or (m), whether or not an 
individual is an officer shall be determined based upon his 
responsibilities with respect to the employer or employers for which he 
is directly employed, and not with respect to the controlled group of 
corporations, employers under common control or affiliated service 
group. A partner of a partnership will not be treated as an officer for 
purposes of the key employee test merely because he owns a capital or 
profits interest in the partnership, exercises his voting rights as a 
partner, and may, for limited purposes, be authorized and does in fact 
act as an agent of the partnership.
    T-14 Q. For purposes of determining whether a plan is top-heavy for 
a plan year, how many officers must be taken into account?
    A. There is no minimum number of officers that must be taken into 
account. Only individuals who are in fact officers within the meaning of 
Question and Answer T-13 must be considered. For example, a corporation 
with only one officer and two employees would have only one officer for 
purposes of section 416(i)(1)(A)(i). After aggregating all employees 
(including leased employees within the meaning of section 414(n)) of 
employers required to be aggregated under section 414(b), (c) or (m), 
there is a maximum limit to the number of officers that are to be taken 
into account as officers for the entire group of employers that are so 
aggregated. The number of employees an employer (including all employers 
required to be aggregated under section 414(b), (c), or (m)) has for the 
plan year containing the determination date is the greatest number of 
employees it had during that plan year or any of the four preceding plan 
years. For purposes of this Question and Answer, employees include only 
those individuals who perform services for the employer during a plan 
year. If the number of employees (including part-time employees) of all 
the employers aggregated under section 414(b), (c) or (m) is less than 
30 employees, no more than three individuals shall be treated as key 
employees for the plan year containing the determination date by reason 
of being officers. If the number of employees of all organizations 
aggregated under section 414(b), (c) or (m) is greater than 30 but less 
than 500, no more than 10% of the number of employees will be treated as 
key employees by reason of being officers. (If 10% of the number of 
employees is not an integer, the maximum number of individuals to be 
treated as key employees by reason of being officers shall be increased 
to the next integer). If the number of employees of employers aggregated 
under section 414 (b), (c) and (m) exceeds 500, no more than 50 
employees are to be considered as key employees by reason of being 
officers. This limited number of officers is comprised of the individual 
officers, selected from the group of all individuals who were officers 
in the plan year containing the determination date or any one of the 
four preceding plan years, who had annual plan year compensation (in the 
officer year) in excess of 150 percent of the dollar limitation in 
effect under section 415(c)(1)(A) for the calendar year in which the 
plan year ends and who had the largest annual plan-year compensation in 
that five-year period. (The definition of compensation contained in 
Question and Answer T-21 is to be used for this purpose.) In determining 
the officers of an employer, an employee who is an officer shall be 
counted as an officer for key employee purposes without regard to 
whether the employee is a key employee for any other reason. However, in 
testing whether the plan(s) is top-heavy, an individual's present value 
of accrued benefits is counted only once.

    Example. A company is testing to see if its plan is top-heavy for 
the 1985 plan year. In each year from 1980 through 1984 it has more than 
500 employees. Assume that (1) because of rapid turnover among officers, 
the individuals who are officers each year are different from the 
individuals who are officers in any preceding year, and (2) the annual 
plan year

[[Page 380]]

compensation of each officer exceeds 150 percent of the dollar 
limitation in effect under section 415(c)(1)(A) for the calendar year in 
which the plan year ends. Under the limitations, only a total of 50 
individuals would be considered to be key employees by virtue of being 
officers in testing for top-heaviness for the 1985 plan year. Further, 
the 50 individuals considered as key employees under this test would be 
determined by selecting the 50 out of 250 individuals (50 different 
officers each year) who had the highest annual plan-year compensation 
during the 1980-1984 period (while officers).

    T-15 Q. For purposes of section 416, do organizations other than 
corporations have officers?
    A. Yes. For purposes of the top-heavy rules, sole proprietorships, 
partnerships, associations, trusts, and labor organizations may have 
officers. This rule is effective for purposes of determining whether a 
plan is top-heavy for plan years which begin after February 28, 1985.
    T-16 Q. Who is a 1-percent owner of the employer?
    A. (a) If the employer is a corporation, a 1-percent owner is any 
employee who owns (or is considered as owning within the meaning of 
section 318) more than 1 percent of the value of the outstanding stock 
of the corporation or stock possessing more than 1 percent of the total 
combined voting power of all stock of the corporation. If the employer 
is not a corporation, a 1-percent owner is any employee who owns more 
than 1 percent of the capital or profits interest in the employer. The 
rules of subsections (b), (c), and (m) of section 414 do not apply for 
purposes of determining who is a 1-percent owner.
    (b) For purposes of determining who is a 1-percent owner, 5-percent 
owner, or top-ten owner, value means fair market value taking into 
account all facts and circumstances.
    T-17 Q. Who is a 5-percent owner of the employer?
    A. If the employer is a corporation, a 5-percent owner is any 
employee who owns (or is considered as owning within the meaning of 
section 318) more than 5 percent of the value of the outstanding stock 
of the corporation or stock possessing more than 5 percent of the total 
combined voting power of all stock of the corporation. If the employer 
is not a corporation, a 5-percent owner is any employee who owns more 
than 5 percent of the capital or profits interest in the employer. The 
rules of subsections (b), (c), and (m) of section 414 do not apply for 
purposes of determining who is a 5-percent owner.
    T-18 Q. How do the rules of section 318 apply for purposes of 
determining ownership in an entity other than a corporation?
    A. For purposes of determining ownership is an entity other than a 
corporation, the rules of section 318 apply in a manner similar to the 
way in which they apply for purposes of determining ownership in a 
corporation. For non-corporate interests, capital or profits interest 
must be substituted for stock.
    T-19 Q. Which employees will be considered one of the top ten 
owners?
    A. (a) For purposes of determining whether a plan is top-heavy for a 
plan year, the top ten owners are the ten employees who (1) own (or are 
considered as owning within the meaning of section 318) during the plan 
year containing the determination date or any of the four preceding plan 
years both more than a \1/2\ percent ownership interest in value and the 
largest percentage ownership interests in value of any of the employers 
required to be aggregated under section 414(b), (c), or (m), and (2) 
have during the plan year of ownership annual plan year compensation 
from the employer more than the limitation in effect under section 
415(c)(1)(A) for the calendar year in which such plan year ends. The 
five years for which the test is made will be referred to as the 
``testing period.'' An employee whose annual plan year compensation 
exceeds the section 415(c)(1)(A) limit in effect for the calendar year 
in which a plan year in the testing period ends who has an ownership 
interest greater than \1/2\ percent in that plan year is considered to 
be one of the top ten owners unless at least ten other employees own a 
greater interest in the employer during any year of the testing period 
and have annual plan year compensation during such plan year of 
ownership greater than the section 415(c)(1)(A) limit in effect for the 
calendar year in which such plan year ends. Ownership each plan

[[Page 381]]

year is determined on the basis of percentage of ownership interest in 
total ownership value and not dollar amounts. Thus, an employee whose 
stock interest is valued at 15 percent of the total stock value of a 
corporation in year one that was worth $15,000 is ranked higher than an 
employee whose stock interest is valued at 5 percent of the total stock 
value of the same corporation in year three which is now worth $50,000.
    (b) If an employee's ownership interest changes during a plan year, 
his ownership interest for the year is the largest interest owned at any 
time during the year. If two employees have the same ownership interest 
in the employer during the testing period, the employee having the 
largest annual compensation from the employer for the plan year during 
any part of which that ownership interest existed shall be treated as 
having a larger interest. Thus, if 25 employees each own 4 percent in 
value of the employer during the testing period, the 10 employees with 
the largest single plan year compensation during this period will be 
considered the top ten owners. For purposes of this Question and Answer, 
compensation has the meaning set forth in Question and Answer T-21. This 
Question and Answer is illustrated by the following examples:

    Example 1. Corporation K maintains a calendar year defined 
contribution plan. On January 1, 1986, Corporation K has five owners who 
owned the following value percentages of K stock: A = 50%, B = 20%, C = 
15%, D = 10%, and E = 5%. On June 30, 1987, the five owners of 
Corporation K sold all of their shares of stock. The new owners and 
their respective ownership percentages were: F = 40%, G = 30%, H = 10%, 
I = 10%, and J = 10%. Assume that, for 1986, A, B, C, D, and E had 
annual compensation from Corporation K greater than the section 
415(c)(1)(A) limit and that, for 1987, F, G, H, I, and J also had 
compensation from Corporation K greater than the section 415(c)(1)(A) 
limit. For purposes of determining whether the plan is top-heavy for the 
1991 plan year, the top ten owners will include A, B, C, D, E, F, G, H, 
I, and J because no 10 individuals during the testing period, 1986-1990, 
had a greater ownership interest than these individuals.
    Example 2. Assume the same facts in Example 1, except that on June 
1, 1988, F, G, H, I, and J sold their interests to new owners, K, L, M, 
N, and O. K, L, M, N, and O owned, respectively, 30%, 30%, 30%, 5% and 
5% of the value of the shares of X. Assume also that for 1988 K, L, M, 
N, and O earned more than the section 415(c)(1)(A) limitation. For 
purposes of determining whether the plan is top-heavy for the 1991 plan 
year, the top ten owners will include: A, B, F, K, G, L, M, and C 
because these eight individuals owned the highest value percentages of 
the Corporation K stock. Since D, H, I, and J owned equal 10% interests 
in value, the two employees of this group who had the largest annual 
plan year compensation during the plan years of their ownership will be 
the last 2 top ten owners.

    T-20 Q. For purposes of determining whether an employee is a key 
employee under section 416(i)(1)(A), what aggregation rules apply?
    A. In the case of ownership percentages, each employer that would 
otherwise be aggregated under section 414 (b), (c) and (m) is treated as 
a separate employer. (See section 416(i)(1)(C).) However, for purposes 
of determining whether an individual has compensation of $150,000, or 
whether an individual is a key employee by reason of being an officer or 
a top ten owner, compensation from each entity required to be aggregated 
under sections 414 (b), (c) and (m) is taken into account. These rules 
may be illustrated by the following example:

    Example. An individual owns two percent of the value of a 
professional corporation, which in turn owns a \1/10\th of 1 percent 
interest in a partnership. The entities must be aggregated in accordance 
with section 414(m). The individual performs services for the 
professional corporation and for the partnership. The individual 
receives compensation of $125,000 from the professional corporation and 
$26,000 from the partnership. The individual is considered to be a key 
employee with respect to the employer that comprises both the 
professional corporation and the partnership because he has a two 
percent interest in the professional corporation and because his 
combined compensation from both the professional corporation and the 
partnership is more than $150,000.

    T-21. Q. For purposes of testing whether an individual has 
compensation of more than $150,000, what definition of compensation must 
be used?
    A. The definition of compensation to be used is the definition in 
Sec.  1.415(c)-2, however, compensation must be determined for a plan 
year, not a limitation year. Alternatively, compensation that would be 
stated on an employee's Form

[[Page 382]]

W-2, ``Wage and Tax Statement,'' for the calendar year that ends with or 
within the plan year may be used, although amounts that would have been 
stated on the employee's Form W-2 but for an election under section 125, 
132(f)(4), 401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 457(b) must be 
included. A plan must use the same definition of compensation for all 
top-heavy plan purposes for which the definition in this Q and A must be 
used.
    T-22 Q. In the case of an employer who maintains a single plan, when 
must the determination whether the plan is top-heavy be made?
    A. Whether a plan is top-heavy for a particular plan year is 
determined as of the determination date for such plan year. The 
determination date with respect to a plan year is defined in section 
416(g)(4)(C) as (1) the last day of the preceding plan year, or (2) in 
the case of the first plan year, the last day of such plan year. 
Distributions made and the present value of accrued benefits are 
generally determined as of the determination date. (See Questions and 
Answers T-24 and T-25 for more specific rules.)
    T-23 Q. In the case of an aggregation group, when must the 
determination whether the group is top-heavy be made?
    A. When two or more plans constitute an aggregation group in 
accordance with section 416(g)(2), the following procedures are used to 
determine whether the plans are top-heavy for a particular plan year. 
First, the present value of the accrued benefits (including 
distributions for key employees and all employees) is determined 
separately for each plan as of each plan's determination date. The plans 
are then aggregated by adding together the results for each plan as of 
the determination dates for such plans that fall within the same 
calendar year. The combined results will indicate whether or not the 
plans so aggregated are top-heavy. These rules may be illustrated by the 
following example:

    Example. An employer maintains Plan A and Plan B, each containing a 
key employee. Plan A's plan year commences July 1 and ends June 30. Plan 
B's plan year is the calendar year. For Plan A's plan year commencing 
July 1, 1984, the determination date is June 30, 1984. For Plan B's plan 
year in 1985, the determination date is December 31, 1984. These plans 
are required to be aggregated. For each of these plans as of their 
respective determination dates, the present value of the accrued 
benefits for key employees and all employees are separately determined. 
The two determination dates, June 30, 1984, and December 31, 1984, fall 
within the same calendar year. Accordingly, the present values of 
accrued benefits as of each of these determination dates are combined 
for purposes of determining whether the group is top-heavy. If, after 
combining the two present values, the total results show that the group 
is top-heavy, Plan A will be top-heavy for the plan year commencing July 
1, 1984, and Plan B will be top-heavy for the 1985 calendar year.

    T-24 Q. How is the present value of an accrued benefit determined in 
a defined contribution plan?
    A. The present value of accrued benefits as of the determination 
date for any individual is the sum of (a) the account balance as of the 
most recent valuation date occurring within a 12-month period ending on 
the determination date, and (b) an adjustment for contributions due as 
of the determination date. In the case of a plan not subject to the 
minimum funding requirements of section 412, the adjustment in (b) is 
generally the amount of any contributions actually made after the 
valuation date but on or before the determination date. However, in the 
first plan year of the plan, the adjustment in (b) should also reflect 
the amount of any contributions made after the determination date that 
are allocated as of a date in that first plan year. In the case of a 
plan that is subject to the minimum funding requirements, the account 
balance in (a) should include contributions that would be allocated as 
of a date not later than the determination date, even though those 
amounts are not yet required to be contributed. Thus, the account 
balance will include contributions waived in prior years as reflected in 
the adjusted account balance and contributions not paid that resulted in 
a funding deficiency. The adjusted account balance is described in Rev. 
Rul. 78-223, 1978-1 C.B. 125. Also, the adjustment in (b) should reflect 
the amount of any contribution actually made (or due to be

[[Page 383]]

made) after the valuation date but before the expiration of the extended 
payment period in section 412(c)(10).
    T-25. Q. How is the present value of an accrued benefit determined 
in a defined benefit plan?
    A. The present value of an accrued benefit as of a determination 
date must be determined as of the most recent valuation date which is 
within a 12-month period ending on the determination date. In the first 
plan year of a plan, the accrued benefit for a current employee must be 
determined either (i) as if the individual terminated service as of the 
determination date or (ii) as if the individual terminated service as of 
the valuation date, but taking into account the estimated accrued 
benefit as of the determination date. For the second plan year of a 
plan, the accrued benefit taken into account for a current participant 
must not be less than the accrued benefit taken into account for the 
first plan year unless the difference is attributable to using an 
estimate of the accrued benefit as of the determination date for the 
first plan year and using the actual accrued benefit as of the 
determination date for the second plan year. For any other plan year, 
the accrued benefit for a current employee must be determined as if the 
individual terminated service as of such valuation date. For this 
purpose, the valuation date must be the same valuation date for 
computing plan costs for minimum funding, regardless of whether a 
valuation is performed that year.
    T-26. Q. What actuarial assumptions are used for determining the 
present value of accrued benefits for defined benefit plans?
    A. (a) There are no specific prescribed actuarial assumptions that 
must be used for determining the present value of accrued benefits. The 
assumptions used must be reasonable and need not relate to the actual 
plan and investment experience. The assumptions need not be the same as 
those used for minimum funding purposes or for purposes of determining 
the actuarial equivalence of optional benefits under the plan. The 
accrued benefit for each current employee is computed as if the employee 
voluntarily terminated service as of the valuation date. The present 
value must be computed using an interest and a post-retirement mortality 
assumption. Pre-retirement mortality and future increases in cost of 
living (but not in the maximum dollar amount permitted by section 415) 
may also be assumed. However, assumptions as to future withdrawals or 
future salary increases may not be used. In the case of a plan providing 
a qualified joint and survivor annuity within the meaning of section 
401(a)(11) as a normal form of benefit, for purposes of determining the 
present value of the accrued benefit, the spouse of the participant may 
be assumed to be the same age as the participant.
    (b) Except in the case where the plan provides for a nonproportional 
subsidy, the present value should reflect a benefit payable commencing 
at normal retirement age (or attained age, if later). Thus, benefits not 
relating to retirement benefits, such as pre-retirement death and 
disability benefits and post-retirement medical benefits, must not be 
taken into account. Further, subsidized early retirement benefits and 
subsidized benefit options must not be taken into account unless they 
are nonproportional subsidies. See Question and Answer

T-27.
    (c) Where the plan provides for a nonproportional subsidy, the 
benefit should be assumed to commence at the age at which the benefit is 
most valuable. In the case of two or more defined benefit plans which 
are being tested for determining whether an aggregation group is top-
heavy, the actuarial assumptions used for all plans within the group 
must be the same. Any assumptions which reflect a reasonable mortality 
experience and an interest rate not less than five percent or greater 
than six percent will be considered as reasonable. Plans, however, are 
not required to use an interest rate in this range.
    T-27 Q. In determining the present value of accrued benefits in a 
defined benefit plan, what standards are applied toward determining 
whether a subsidy is nonproportional?
    A. A subsidy is nonproportional unless the subsidy applies to a 
group of employees that would independently satisfy the requirements of 
section

[[Page 384]]

410(b). If two or more plans are considered as a unit for comparability 
purposes under Sec.  1.410(b)-1(d)(3), subsidies may be necessary in 
both plans or else the subsidy may be nonproportional. Thus, for 
example, in the case of a plan which provides an early retirement 
benefit after age 55 and 20 years of service equal to the normal 
retirement benefit without actuarial reduction and if the employees who 
may conceivably reach age 55 with 20 years of service would, as a group, 
satisfy the requirements of section 410(b), that subidy is proportional. 
However, in contrast, consider a plan that provides an early retirement 
benefit that is the actuarial equivalent of the normal retirement 
benefit. In determining the early retirement benefit, the plan imposes 
the section 415 limits only on the early retirement benefit (not on the 
normal retirement benefit before applying the early retirement reduction 
factors). In such a plan, a participant with a normal retirement benefit 
(before limitation by section 415) in excess of the section 415 limits 
will receive a subsidized early retirement benefit, whereas a 
participant with a lower normal retirement benefit will not. Thus, such 
a benefit would be a nonproportional subsidy if the group of individuals 
who are limited by the limitations under section 415 do not, by 
themselves, constitute a cross section of employees that could satisfy 
section 410(b).
    T-28 Q. For purposes of determining the present value of accrued 
benefits in either a defined benefit or defined contribution plan, are 
the accrued benefits attributable to employee contributions considered 
to be part of the accrued benefits?
    A. The accrued benefits attributable to employee contributions are 
considered to be part of the accrued benefits without regard to whether 
such contributions are mandatory or voluntary. However, the amounts 
attributable to deductible employee contributions (as defined in section 
72(o)(5)(A)) are not considered to be part of the accrued benefits.
    T-29 Q. How are plans described in section 401(k) treated for 
purposes of the top-heavy rules?
    A. No special top-heavy rules are provided for plans described in 
section 401(k), except a transitional rule. For plan years beginning 
after December 31, 1984, amounts which an employee elects to defer are 
treated as employer contributions for purposes of determining minimum 
required contributions under section 416(c)(2). However, for plan years 
beginning prior to January 1, 1985, amounts which an employee elects to 
have contributed to a plan described in section 401(k) are not treated 
as employer contributions for these purposes. A plan described in 
section 401(k) which is top-heavy must provide minimum contributions by 
the employer and limit the amount of compensation which can be taken 
into account in providing benefits under the plan.
    T-30 Q. What distributions are added to the present value of accrued 
benefits in determining whether a plan is top-heavy for a particular 
plan year?
    A. Under section 416(g)(3)(A), distributions made within the plan 
year that includes the determination date and within the four preceding 
plan years are added to the present value of accrued benefits of key 
employees and non-key employees in testing for top-heaviness. However, 
in the case of distributions made after the valuation date and prior to 
the determination date, such distributions are not included as 
distributions in section 416(g)(3)(A) to the extent that such 
distributions are included in the present value of the accrued benefits 
as of the valuation date. In the case of the distribution of an annuity 
contract, the amount of such distribution is deemed to be the current 
actuarial value of the contract, determined on the date of the 
distribution. Certain distributions that are rolled over by the employee 
are not included as distributions. See Question and Answer T-32. A 
distribution will not fail to be considered in determining the present 
value of accrued benefits merely because it was made before the 
effective date of section 416. For purposes of this question and answer, 
distributions mean all distributions made by a plan, including all 
distributions of employee contributions made during and before the plan 
year.

[[Page 385]]

    T-31 Q. Are benefits paid on account of death treated as 
distributions for purposes of section 416(g)(3)?
    A. Benefits paid on account of death are treated as distributions 
for purposes of section 416(g)(3) to the extent such benefits do not 
exceed the present value of accrued benefits existing immediately prior 
to death; benefits paid on account of death are not treated as 
distributions for purposes of section 416(g)(3) to the extent such 
benefits exceed the present value of accrued benefits existing 
immediately prior to death. The distribution from a defined contribution 
plan (including the cash value of life insurance policies) of a 
participant's account balance on account of death will be treated as a 
distribution for purposes of section 416(g)(3).
    T-32 Q. How are rollovers and plan-to-plan transfers treated in 
testing whether a plan is top-heavy?
    A. The rules for handling rollovers and transfers depend upon 
whether they are unrelated (both initiated by the employee and made from 
a plan maintained by one employer to a plan maintained by another 
employer) or related (a rollover or transfer either not initiated by the 
employee or made to a plan maintained by the same employer). Generally, 
a rollover or transfer made incident to a merger or consolidation of two 
or more plans or the division of a single plan into two or more plans 
will not be treated as being initiated by the employee. The fact that 
the employer initiated the distribution does not mean that the rollover 
was not initiated by the employee. For purposes of determining whether 
two employers are to be treated as the same employer, all employers 
aggregated under section 414(b), (c) or (m) are treated as the same 
employer. In the case of unrelated rollovers and transfers, (1) the plan 
making the distribution or transfer is to count the distribution as a 
distribution under section 416(g)(3), and (2) the plan accepting the 
rollover or transfer is not to consider the rollover or transfer as part 
of the accrued benefit if such rollover or transfer was accepted after 
December 31, 1983, but is to consider it as part of the accrued benefit 
if such rollover or transfer was accepted prior to January 1, 1984. In 
the case of related rollovers and transfers, the plan making the 
distribution or transfer is not to count the distribution or transfer 
under section 416(g)(3) and the plan accepting the rollover or transfer 
counts the rollover or transfer in the present value of the accrued 
benefits. Rules for related rollovers and transfers do not depend on 
whether the rollover or transfer was accepted prior to January 1, 1984.
    T-33 Q. How are the aggregate defined benefit and defined 
contribution limits under section 415(e) affected by the top-heavy 
rules?
    A. Section 416(h) modifies the aggregate limits in section 415(e) 
for super top-heavy plans and for top-heavy plans that are not super 
top-heavy but do not provide for an additional minimum contribution or 
benefit. A plan is a super top-heavy plan if the present value of 
accrued benefits for key employees exceeds 90% of the present value of 
the accrued benefits for all employees. In the case of a top-heavy 
aggregation group, the test is applied to all plans in the group as a 
whole. These present values are computed using the same rules as are 
used for determining whether the plan is top-heavy. In the case of a 
super top-heavy plan, in computing the denominators of the defined 
benefit and defined contribution fractions under section 415(e), a 
factor of 1.0 is used instead of 1.25 for all employees. In the case of 
a top-heavy plan that is not super top-heavy, the same rule applies 
unless each non-key employee who is entitled to a minimum contribution 
or benefit receives an additional minimum contribution or benefit. In 
the case of a defined benefit plan, the additional minimum benefit is 
one percentage point (up to a maximum of ten percentage points) for each 
year of service described in Question and Answer M-2 of the 
participant's average compensation for the years described in Question 
and Answer M-2. In the case of a defined contribution plan, the 
additional minimum contribution is one percent of the participant's 
compensation. If a plan does not provide the applicable additional one 
percent minimum or if a plan is super top-heavy, the factor of 1.25 may 
be used for an individual only if there

[[Page 386]]

are both no further accruals for that individual under any defined 
benefit plan and no further annual additions for that individual under 
any defined contribution plan until the combined fraction satisfies the 
rules of section

415(e) using the 1.0 factor for that individual. The rules contained in 
this Question and Answer apply for each limitation year that contains 
any portion of a plan year for which the plan is top-heavy. This 
Question and Answer may be illustrated by the following example:

    Example. A Corporation maintains a profit-sharing plan and a defined 
benefit plan, and these plans constitute a required aggregation group. 
Both plans use the calendar year for the plan year and the limitation 
year under section 415. The plans were determined to be top-heavy for 
plan year 1986. The plans use the 1.25 factor under section 415(e), and 
non-key employees covered by both the profit-sharing and the defined 
benefit plan accrue, under the defined benefit plan, 3% of compensation 
for each year of service (up to a maximum of 30%). The plans become 
super top-heavy for the 1990 plan year. In order to satisfy section 415, 
no further accruals and no further annual additions may take place for 
any employee covered by both plans until the combined defined benefit-
defined contribution fraction for such employee is less than 1.0, using 
the 1.0 factor in place of 1.25.

    T-34 Q. May plans be permissively aggregated to avoid being super 
top-heavy?
    A. Yes, plans may be permissively aggregated to avoid being super 
top-heavy.
    T-35 Q. What provisions must be contained in a plan to comply with 
the top-heavy requirements?
    A. Section 401(a)(10)(B) provides that a plan will qualify only if 
it contains provisions which will take effect if the plan becomes top-
heavy and which meet the requirements of section 416. See Questions and 
Answers T-39 and T-40 for rules on what provisions must be included. 
Under section 401(a)(10)(B)(ii), regulations may waive this requirement 
for some plans. See Question and Answer T-38 for a description of plans 
that need not include such provisions.
    T-36 Q. For an employer who has no employee who has participated or 
is eligible to participate in both a defined benefit and defined 
contribution plan (or a simplified employee pension, ``SEP'') of that 
employer, what provisions must be in the plan(s) to comply with the top-
heavy requirements?
    A. (a) If the defined benefit plan has no participants who are or 
could be participants in a defined contribution plan of the employer (or 
vice versa), the defined benefit plan (or defined contribution plan) 
need not include provisions describing the defined benefit or defined 
contribution fractions for purposes of section 415 and, thus, the plan 
need not contain provisions to determine whether the plan is super top-
heavy or to change any plan provisions if the plan becomes super top-
heavy. Furthermore, if the plan contains a single benefit structure that 
satisfies the requirements of section 416 (b), (c), and (d) for each 
plan year without regard to whether the plan is top-heavy for such year, 
the plan need not include separate provisions to determine whether the 
plan is top-heavy or that apply if the plan is top-heavy. If the plan's 
single benefit structure does not assure that section 416 (b), (c), and 
(d) will be satisfied in all cases, then the plan must include three 
types of provisions.
    (b) First, the plan must contain provisions describing how to 
determine whether the plan is top-heavy. These provisions must include 
(1) the criteria for determining which employees are key employees (or 
non-key employees), (2) in the case of a defined benefit plan, the 
actuarial assumptions and benefits considered to determine the present 
value of accrued benefits, (3) a description of how the top-heavy ratio 
is computed, (4) a description of what plans (or types of plans) will be 
aggregated in testing whether the plan is top-heavy, and (5) a 
definition of the determination date and the valuation date applicable 
to the determination date. These determinations must be based on 
standards that are uniformly and consistently applied and that satisfy 
the rules set forth in section 416 and these Questions and Answers. The 
provisions in (1) and (3) above may be incorporated in the plan by 
reference to the applicable sections of the Internal Revenue Code 
without adversely affecting the qualification of the plan. However, the 
plan must state the definition of

[[Page 387]]

compensation for purposes of determining who is a key employee.
    (c) Second, the plan must specifically contain the following 
provisions that will become effective if the plan becomes top-heavy: 
vesting that satisfies the minimum vesting requirements of section 
416(b), benefits that will not be less than the minimum benefits set 
forth in section 416(c), and the compensation limitation described in 
section 416(d). The compensation limitation described in section 416(d) 
may be incorporated by reference. If a plan always meets the 
requirements of either section 416(b), (c) or (d), the plan need not 
include additional provisions to meet any such requirements.
    (d) Third, the plan must include provisions insuring that any change 
in the plan's benefit structure (including vesting schedules) resulting 
from a change in the plan's top-heavy status will not violate section 
411(a)(10). Thus, if a plan ceases being top-heavy, certain restrictions 
apply with respect to the change in the applicable vesting schedule.
    T-37 Q. For an employer who maintains or has maintained both a 
defined benefit and a defined contribution plan (or a simplified 
employee pension, ``SEP'') and some participants do or could participate 
in both types of plan, what provisions must be in the plans to comply 
with the top-heavy requirements?
    A. If an employer maintains (or has maintained) both a defined 
benefit plan and a defined contribution plan (or SEP), and the plans 
have or could have participants who participate in both types of plans, 
then the plans must contain more provisions than those described in 
Question and Answer T-36. First, the plans may exclude rules to 
determine whether the plan is top-heavy (or to apply when the plan is 
top-heavy) only if both plans contain a single benefit structure that 
satisfies sections 416 (b), (c), and (d) without regard to whether the 
plans are top-heavy. Second, unless the plans always satisfy the 
requirements of section 415(e) using the 1.0 factor in the defined 
benefit and defined contribution fractions as described in section 
416(h)(i), the plans must include provisions similar to those in 
Question and Answer T-36 (for top-heavy) to determine whether the plan 
is super top-heavy and to satisfy section 416(h) if it is.
    T-38 Q. Are any plans exempted from including top-heavy provisions?
    A. Section 401(a)(10)(B) exempts governmental plans (as defined in 
section 414(d)) from the top-heavy requirements and provides that 
regulations may exempt certain plans from including the top-heavy 
provisions. A plan need not include any top-heavy provisions if the 
plan: (1) is not top-heavy, and (2) covers only employees who are 
included in a unit of employees covered by a collective-bargaining 
agreement (if retirement benefits were the subject of good faith 
bargaining) or employees of employee representatives. The requirement 
set forth in section 7701(a)(46) must be met before an agreement will be 
considered a collective-bargaining agreement after March 31, 1984.
    T-39 Q. Must ratios be computed each year to determine whether a 
plan is top-heavy?
    A. No. In order to administer the plan, the plan administrator must 
know whether the plan is top-heavy. However, precise top-heavy ratios 
need not be computed every year. If, on examination, the Internal 
Revenue Service requests a demonstration as to whether the plan is top-
heavy (or super top-heavy; see Question and Answer T-33) the employer 
must demonstrate to the Service's satisfaction that the plan is not 
operating in violation of section 401(a)(10)(B). For purposes of any 
demonstration, the employer may use computations that are not precisely 
in accordance with this section but which mathematically prove that the 
plan is not top-heavy. For example, if the employer determined the 
present value of accrued benefits for key employees in a simplified 
manner which overstated that value, determined the present value for 
non-key employees in a simplified manner which understated that value, 
and the ratio of the key employee present value divided by the sum of 
the present values was less than 60 percent, the plan would not be 
considered top-heavy. This would be a sufficient demonstration because 
the simplified fraction could be shown to be greater than the exact 
fraction and,

[[Page 388]]

thus, the exact fraction must also be less than 60 percent.
    Several methods that may be used to simplify the determinations are 
indicated below.
    (1) If the top-heavy ratio, computed considering all the key 
employees and only some of the non-key employees, is less than 60 
percent, then it is not necessary to accumulate employee data on the 
remaining non-key employees. Inclusion of additional non-key employees 
would only further decrease the ratio.
    (2) If the number of key employees is known but the identity of the 
key employees is not known (i.e. if the only key employees are officers 
and the limit on officers is applicable), the numerator may be 
determined by using a hypothetical ``worst case'' basis. Thus, in the 
case of a defined benefit plan, if the numerator of the top-heavy ratio 
were determined assuming each key employee's present value of accrued 
benefits were equal to the maximum section 415 benefits at the age that 
would maximize such present value, that assumption would only overstate 
the present value of accrued benefits for key employees. Thus, if that 
ratio is less than 60 percent, the plan is not top-heavy and accurate 
data on the key employees need not be collected.
    (3) If the employer has available present value of accrued benefit 
computations for key and non-key employees in a defined benefit plan, 
and these values differ from those that would be produced under Question 
and Answer T-25 only by inclusion of a withdrawal assumption, the 
present value for the key employees (but not the non-key employees) may 
be adjusted to a ``worst case'' value by dividing by the lowest possible 
probability of not withdrawing from plan participation before normal 
retirement age. If the top-heavy ratio based on this inflated key 
employee value is less than 60 percent, the present value need not be 
recomputed without the withdrawal assumption. The methods set forth in 
this answer may also be used to determine whether a plan is super top-
heavy by inserting ``90%'' for ``60%'' in the appropriate places.
    T-40 Q. Will a plan fail to qualify if it provides that the $200,000 
maximum amount of annual compensation taken into account under section 
416(d) for any plan year that the plan is top-heavy may be automatically 
increased in accordance with regulations under section 416?
    A. No.
    T-41 Q. If a plan provides benefits based on compensation in excess 
of $200,000 and the plan becomes top-heavy, must any accrued benefits 
attributable to this excess compensation be eliminated?
    A. No. For any year that a plan is top-heavy, section 416(d) 
provides that compensation in excess of $200,000 must not be taken into 
account. However, a top-heavy plan may continue to provide for any 
benefits attributable to compensation in excess of $200,000 to the 
extent such benefits were accrued before the plan was top-heavy. 
Furthermore, section 411(d)(6) will be violated if any individual's pre-
top-heavy benefit is reduced by either (1) a plan amendment adding the 
$200,000 restriction, or (2) an automatic change in the plan benefits 
structure imposing the $200,000 restriction due to the plan's becoming 
top-heavy.
    T-42 Q. Under a top-heavy defined benefit plan, are the requirements 
of section 416(d) satisfied if the annual compensation of an employee 
taken into account to determine plan benefits is limited to the amount 
currently described in section 416(d) for years during which the plan is 
top-heavy but higher compensation is taken into account for years before 
the plan became top-heavy?
    A. No. For the top-heavy plan to meet the requrements of section 
416(d), compensation for all years, including years before the plan 
became top-heavy, that is taken into account to determine plan benefits 
must not exceed the amount currently described in section 416(d). 
However, if the accrued benefit as of the end of the last plan year 
before the plan became top-heavy (ignoring any plan amendments after 
that date) is greater than the accrued benefit determined by limiting 
compensation in accordance with section 416(d), that higher accrued 
benefit as of the end of the last plan year before the plan became top-
heavy must not be reduced. Providing such higher accrued

[[Page 389]]

benefit will not cause the plan to violate section 416(d).
    T-43 Q. What happens to an individual who has ceased employment 
before a plan becomes top-heavy?
    A. If an individual has ceased employment before a plan becomes top-
heavy, such individual would not be required to receive any additional 
benefit accruals, contributions, or vesting, unless the individual 
returned to employment with the employer. See Questions and Answers V-3, 
M-4, and M-10. In addition, if the individual is receiving benefits 
based on annual compensation greater than $200,000, such benefits cannot 
be decreased.

                  V. Vesting Rules for Top-Heavy Plans

    V-1 Q. What vesting must be provided under a top-heavy plan?
    A. Under section 416(b), the accrued benefits attributable to 
employer contributions must be nonforfeitable in accordance with one of 
two statutory standards. Either such accrued benefits must be 
nonforfeitable after 3 years of service or the nonforfeitable portion of 
accrued benefits must be at least 20 percent after 2 years of service, 
40 percent after 3 years of service, 60 percent after 4 years of 
service, 80 percent after 5 years of service, and 100 percent after 6 
years of service. The accrued benefits attributable to employer 
contributions has the same meaning as under section 411(c) of the Code. 
As under section 411(a), the accrued benefits attributable to employee 
contributions must be nonforfeitable at all times.
    V-2 Q. What service must be counted in determining vesting 
requirements?
    A. All service required to be counted under section 411(a) must be 
counted for these purposes. All service permitted to be disregarded 
under section 411(a)(4) may similarly be disregarded under the schedules 
of section 416(b).
    V-3 Q. What benefits must be subject to the minimum vesting schedule 
of section 416(b)?
    A. All accrued benefits within the meaning of section 411(a)(7) must 
be subject to the minimum vesting schedule. These accrued benefits 
include benefits accrued before the effective date of section 416 and 
benefits accrued before a plan becomes top-heavy. However, when a plan 
becomes top-heavy, the accrued benefits of any employee who does not 
have an hour of service after the plan becomes top-heavy are not 
required to be subject to the minimum vesting schedule. Accrued benefits 
which have been forfeited before a plan becomes top-heavy need not vest 
when a plan becomes top-heavy.
    V-4 Q. May a top-heavy plan provide a minimum eligibility 
requirement of the later of age 21 or the completion of 3 years of 
service and provide that all benefits are nonforfeitable when accrued?
    A. Yes. For plan years which begin after December 31, 1984, a top-
heavy plan may provide a minimum eligibility requirement of the later of 
age 21, or the completion of 3 years of service, and provide that all 
benefits are nonforfeitable when accrued. For plan years which begin 
before January 1, 1985, ``25'' may be substituted for ``21'' in the 
preceding sentence.
    V-5 Q. What does nonforfeitable mean?
    A. In general, nonforfeitable has the same meaning as in section 
411(a). However, the minimum benefits required under section 416 (to the 
extent required to be nonforfeitable under section 416(b)) may not be 
forfeited under section 411(a)(3) (B) or (D). Thus, if benefits are 
suspended (ceased) during a period of reemployment, the benefit payable 
upon the subsequent resumption of payments must be actuarially increased 
to reflect the nonpayment of benefits during such period of re-
employment.
    V-6 Q. Will a class-year plan automatically satisfy the minimum 
vesting requirements in section 416(b) if it provides that contributions 
with respect to any plan year become nonforfeitable no later than the 
end of the third plan year following the plan year for which the 
contribution was made?
    A. No. Although this vesting schedule is similar to the 3-year 
minimum vesting schedule permitted by section 416(b)(1)(A), it does not 
satisfy that minimum. The 3-year vesting schedule in section 
416(b)(1)(A) requires that, after completion of 3 years of service, the 
entire accrued benefit of a participant be nonforfeitable. Under the 
class-year vesting schedule described above,

[[Page 390]]

a portion of a participant's accrued benefit (that portion attributable 
to contributions for the prior 3 years) is forfeitable regardless of the 
participant's years of service.
    V-7 Q. When a top-heavy plan ceases to be a top-heavy, may the 
vesting schedule be altered to a vesting schedule permitted without 
regard to section 416?
    A. When a top-heavy plan ceases to be top-heavy, the vesting 
schedule may be changed to one that would otherwise be permitted. 
However, in changing the vesting schedule, the rules described in 
section 411(a)(10) apply. Thus, the nonforfeitable percentage of the 
accrued benefit before the plan ceased to be top-heavy must not be 
reduced; also, any employee with five or more years of service must be 
given the option of remaining under the prior (i.e., top-heavy) vesting 
schedule.

                M. Minimum Benefits under Top-heavy Plans

    M-1 Q. Which employees must receive minimum contributions or 
benefits in a top-heavy plan?
    A. Generally, every non-key employee who is a participant in a top-
heavy plan must receive minimum contributions or benefits under such 
plan. However, see Questions and Answers M-4 and M-10 for certain 
exceptions. Different minimums apply for defined benefit and defined 
contribution plans.
    M-2 Q. What is the defined benefit minimum?
    A. (a) The defined benefit minimum requires that the accrued benefit 
at any point in time must equal at least the product of (i) an 
employee's average annual compensation for the period of consecutive 
years (not exceeding five) when the employee had the highest aggregate 
compensation from the employer and (ii) the lesser of 2% per year of 
service with the employer or 20%.
    (b) For purposes of the defined benefit minimum, years of service 
with the employer are generally determined under the rules of section 
411(a) (4), (5) and (6). However, a plan may disregard any year of 
service if the plan was not top-heavy for any plan year ending during 
such year of service, or if the year of service was completed in a plan 
year beginning before January 1, 1984.
    (c) In determining the average annual compensation for a period of 
consecutive years during which the employee had the largest aggregate 
compensation, years for which the employee did not earn a year of 
service under the rules of section 411(a) (4), (5), and (6) are to be 
disregarded. Thus, if an employee has received compensation from the 
employer during years one two, and three, and for each of these years 
the employee earned a year of service, then the employee's average 
annual compensation is determined by dividing the employee's aggregate 
compensation for these three years by three. If the employee fails to 
earn a year of service in the next year, but does earn a year of service 
in the fifth year, the employee's average annual compensation is 
calculated by dividing the employee's aggregate compensation for years 
one, two, three, and five by four. The compensation required to be taken 
into account is the compensation described in Question and Answer T-21. 
In addition, compensation received for years ending in plan years 
beginning before January 1, 1984, and compensation received for years 
beginning after the close of the last plan year in which the plan is 
top-heavy may be disregarded.
    (d) The defined benefit minimum is expressed as a life annuity (with 
no ancillary benefits) commencing at normal retirement age. Thus, if 
post-retirement death benefits are also provided, the 2% minimum annuity 
benefit may be adjusted. (See Question and Answer M-3.) The 2% minimum 
annuity benefit may not be adjusted due to the provision of pre-
retirement ancillary benefits. Normal retirement age has the same 
meaning as under section 411(a)(8).
    (e) Any accruals of employer-derived benefits, whether or not 
attributable to years for which the plan is top-heavy, may be used to 
satisfy the defined benefit minimums. Thus, if a non-key employee had 
already accrued a benefit of 20 percent of final average pay at the time 
the plan became top-heavy, no additional minimum accruals are required 
(although the accrued benefit

[[Page 391]]

would increase as final average pay increased). Accrued benefits 
attributable to employee contributions must be ignored. Accrued benefits 
attributable to employer and employee contributions have the same 
meaning as under section 411(c).
    M-3 Q. What defined benefit minimum must be received if an employee 
receives a benefit in a form other than a single life annuity or a 
benefit other than at normal retirement age?
    A. If the form of benefit is other than a single life annuity, the 
employee must receive an amount that is the actuarial equivalent of the 
minimum single life annuity benefit. If the benefit commences at a date 
other than at normal retirement age, the employee must receive at least 
an amount that is the acturial equivalent of the minimum single life 
annuity benefit commencing at normal retirement age. Thus, the employee 
may receive a lower benefit if the benefit commences before the normal 
retirement age and the employee must receive a higher benefit if the 
benefit commences after the normal retirement age. No specific actuarial 
assumptions are mandated providing different actuarial equivalents. 
However, the assumptions must be reasonable.
    M-4 Q. Which employees must accrue a minimum benefit in a top-heavy 
defined benefit plan?
    A. Each non-key employee who is a participant in a top-heavy defined 
benefit plan and who has at least one thousand hours of service (or 
equivalent service as determined under Department of Labor regulations, 
29 CFR 2530.200b-3) for an accrual computation period must accrue a 
minimum benefit in a top-heavy defined benefit plan for that accrual 
computation period. If the accrual computation period does not coincide 
with the plan year, a minimum benefit must be provided, if required, for 
both accrual periods within the top-heavy plan year. For a top-heavy 
plan that does not base accruals on accrual computation periods, minimum 
benefits must be credited for all periods of service required to be 
credited for benefit accrual. (See Sec.  1.410(a)-7). A non-key employee 
may not fail to accrue a minimum benefit merely because the employee was 
not employed on a specified date. Similarly, a non-key employee may not 
fail to accrue a minimum benefit because either (1) an employee is 
excluded from participation (or accrues no benefit) merely because the 
employee's compensation is less than a stated amount, or (2) the 
employee is excluded from participation (or accrues no benefit) merely 
because of a failure to make mandatory employee contributions.
    M-5 Q. Would the defined benefit minimum be satisfied if the plan 
provides a normal retirement benefit equal to the greater of the plan's 
projected formula or the projected minimum benefit and if benefits 
accrue in accordance with the fractional rule described in section 
411(b)(1)(C)?
    A. No. The fact that this fractional rule would not satisfy the 
defined benefit minimum may be illustrated by the following example. 
Consider a non-key employee, age 25, entering a top-heavy plan in which 
the projected minimum for the employee is greater than the projected 
benefit under the normal formula. Under the fractional rule, the 
employee's accrued benefit ten years later at age 35 would be 5% (20% x 
(10/40)). Under section 416, the employee's minimum accrued benefit 
after ten years of service must be at least 20%. Thus, because the 5% 
benefit is less than the 20% benefit required under section 416, such 
benefit would not satisfy the required minimum.
    M-6 Q. What benefit must an employer provide in a top-heavy defined 
benefit employee pay-all plan?
    A. The defined benefit minimum in an employee pay-all top-heavy plan 
is the same as that for a plan which has employer contributions. That 
is, the employer must provide the benefits specified in Question and 
Answer M-2.
    M-7 Q. What is the defined contribution minimum?
    A. The sum of the contributions and forfeitures allocated to the 
account of any non-key employee who is a participant in a top-heavy 
defined contribution plan must equal at least 3% of such employee's 
compensation (see Question and Answer T-21 for the definition of 
compensation) for that plan year or for the calendar year ending within 
the plan year. However, a lower minimum is permissible where the

[[Page 392]]

largest contribution made or required to be made for key employees is 
less than 3%. The preceding sentence does not apply to any plan required 
to be included in an aggregation group if such plan enables a defined 
benefit plan required to be included in such group to meet the 
requirements of section 401(a)(4) or 410. The contribution made or 
required to be made on behalf of any key employee is equal to the ratio 
of the sum of the contributions made or required to be made and 
forfeitures allocated for such key employee divided by the compensation 
(not in excess of $200,000) for such key employee. Thus, the defined 
contribution minimum that must be provided for any non-key employee for 
a top-heavy plan year is the largest percentage of compensation (not in 
excess of $200,000) provided on behalf of any key employee for that plan 
year (if the largest percentage of compensation provided on behalf of 
any key employee for that plan year is less than 3%).
    M-8 Q. If an employer maintains two top-heavy defined contribution 
plans, must both plans provide the defined contribution minimum for each 
non-key employee who is a participant in both plans?
    A. No. If one of the plans provides the defined contribution minimum 
for each non-key employee who participates in both plans, the other plan 
need not provide an additional contribution for such employees. However, 
the other plan must provide the vesting required by section 416(b) and 
must limit compensation (based on all compensation from all aggregated 
employers) in providing benefits as required by section 416(d).
    M-9 Q. In the case of the waiver of minimum funding standards of 
section 412(d), how does section 416 treat the defined contribution 
minimum?
    A. For purposes of determining the contribution that is required to 
be made on behalf of a key employee, a waiver of the minimum funding 
requirements is disregarded. Thus, if a defined contribution plan 
receives a waiver of the minimum funding requirement, and if the minimum 
contribution required under the plan without regard to the waiver 
exceeds 3%, the exception described in Question and Answer M-7 does not 
apply even though no key employee receives a contribution in excess of 
3% and even though the amount required to be contributed on behalf of 
the key employee has been waived. Also, a waiver of the minimum funding 
requirements will not alter the requirements of section 416. Thus, in 
the case of the top-heavy defined contribution plan in which the non-key 
employee must receive an allocation, a waiver of the minimum funding 
requirements may eliminate a funding violation and such waiver will 
preclude a violation under section 416 even though the required 
contribution is not made. However, the adjusted account balance (as 
described in Rev. Rul. 78-223, 1978-1 C.B. 125) of the non-key employees 
must reflect the required minimum contribution even though such 
contribution was not made.
    M-10 Q. Which employees must receive the defined contribution 
minimum?
    A. Those non-key employees who are participants in a top-heavy 
defined contribution plan who have not separated from service by the end 
of the plan year must receive the defined contribution minimum. Non-key 
employees who have become participants but who subsequently fail to 
complete 1,000 hours of service (or the equivalent) for an accrual 
computation period must receive the defined contribution minimum. A non-
key employee may not fail to receive a defined contribution minimum 
because either (1) the employee is excluded from participation (or 
accrues no benefit) merely because the employee's compensation is less 
than a stated amount, or (2) the employee is excluded from participation 
(or accrues no benefit) merely because of a failure to make mandatory 
employee contributions or, in the case of a cash or deferred 
arrangement, elective contributions.
    M-11 Q. May either the defined benefit minimum or the defined 
contribution minimum be integrated with social security?
    A. No.
    M-12 Q. What minimum contribution or benefit must be received by a 
non-key employee who participates in a top-heavy plan?

[[Page 393]]

    A. In the case of an employer maintaining only one plan, if such 
plan is a defined benefit plan, each non-key employee covered by that 
plan must receive the defined benefit minimum. If such plan is a defined 
contribution plan (including a target benefit plan), each non-key 
employee covered by the plan must receive the defined contribution 
minimum. In the case of an employer who maintains more than one plan, 
employees covered under only the defined benefit plan must receive the 
defined benefit minimum. Employees covered under only the defined 
contribution plan must receive the defined contribution minimum. In the 
case of employees covered under both defined benefit and defined 
contribution plans, the rules are more complicated. Section 416(f) 
precludes, in the case of employees covered under both defined benefit 
and defined contribution plans, either required duplication or 
inappropriate omission. Therefore, such employees need not receive both 
the defined benefit and the defined contribution minimums.
    There are four safe harbor rules a plan may use in determining which 
minimum must be provided to a non-key employee who is covered by both 
defined benefit and defined contribution plans. Since the defined 
benefit minimums are generally more valuable, if each employee covered 
under both a top-heavy defined benefit plan and a top-heavy defined 
contribution plan receives the defined benefit minimum, the defined 
benefit and defined contribution minimums will be satisfied. Another 
approach that may be used is a floor offset approach (see Rev. Rul. 76-
259, 1976-2 C.B. 111) under which the defined benefit minimum is 
provided in the defined benefit plan and is offset by the benefits 
provided under the defined contribution plan. Another approach that may 
be used in the case of employees covered under both defined benefit and 
defined contribution plans is to prove, using a comparability analysis 
(see Rev. Rul. 81-202, 1981-2 C.B. 93) that the plans are providing 
benefits at least equal to the defined benefit minimum. Finally, in 
order to preclude the cost of providing the defined benefit minimum 
alone, the complexity of a floor offset plan and the annual fluctuation 
of a comparability analysis, a safe haven minimum defined contribution 
is being provided. If the contributions and forfeitures under the 
defined contribution plan equal 5% of compensation for each plan year 
the plan is top-heavy, such minimum will be presumed to satisfy the 
section 416 minimums.
    M-13 Q. An employer maintains a defined benefit plan and a profit-
sharing plan. Both plans are top-heavy and are members of a required 
aggregation group. In order to meet the minimum contribution/minimum 
benefit requirements, the employer decides to contribute 5% of 
compensation to the profit-sharing plan. What happens if for a 
particular plan year there are no profits out of which to make 
contributions to the profit-sharing plan?
    A. In this particular situation, in order to satisfy the 
requirements of section 416(c), the employer must provide the defined 
contribution minimum, 5% of compensation. This rule is an exception to 
the general rule that an employer cannot make a contribution to a 
profit-sharing plan if there are no profits. Alternatively, the employer 
may provide the defined benefit minimum for this year.
    M-14 Q. What minimum contribution or benefit must be received by a 
non-key employee when he is covered under both a defined benefit plan 
and defined contribution plan (both of which are top-heavy) of an 
employer and the employer desires to use a factor of 1.25 in computing 
the denominators of the defined benefit and defined contribution 
fractions under section 415(e)?
    A. In this particular situation, the employer may use one of the 
four rules set forth in Question and Answer M-12, subject to the 
following modifications. The defined benefit minimum must be increased 
by one percentage point (up to a maximum of ten percentage points) for 
each year of service described in Question and Answer M-2 of the 
participant's average compensation for the years described in Question 
and Answer M-2. The defined contribution minimum is increased to 7\1/2\ 
percent of compensation. If the floor offset or comparability analysis 
approach is used, the defined benefit minimum must be increased by one 
percentage

[[Page 394]]

point (up to a maximum of ten percentage points) for each year of 
service described in Question and Answer M-2 of the participant's 
average compensation for the years described in Question and Answer M-2.
    M-15 Q. May an employer use a different method each year to meet the 
requirements of Question and Answer M-12 or Question and Answer M-14 
without amending the plans each year?
    A. No. An employer must set forth in the plan document the method he 
will use to meet the requirements of Question and Answer M-12 or M-14, 
as the case may be. If an employer desires to change the method, the 
plan document must be amended.
    M-16 Q. Will target benefit plans be treated as defined benefit or 
defined contribution plans for purposes of the top-heavy rules?
    A. Target benefit plans will be treated as defined contribution 
plans for purposes of the top-heavy rules.
    M-17 Q. Can a plan described in section 412(i) (funded exclusively 
by level premium insurance contracts) also satisfy the minimum benefit 
requirements of section 416?
    A. The accrued benefits provided for a non-key employee under most 
level premium insurance contracts might not provide a benefit satisfying 
the defined benefit minimum because of the lower cash values in early 
years under most level premium insurance contracts, and because such 
contracts normally provide for level premiums until normal retirement 
age. However, a plan will not be considered to violate the requirements 
of section 412(i) merely because it funds certain benefits through 
either an auxiliary fund or deferred annuity contracts, if the following 
conditions are met:
    (1) The targeted benefit at normal retirement age under the level 
premium insurance contract is determined, taking into account the 
defined benefit minimum that would be required assuming the current top-
heavy (or non top-heavy) status of the plan continues until normal 
retirement age; and
    (2) The benefits provided by the auxiliary fund or deferred annuity 
contracts do not exceed the excess of the defined benefit minimum 
benefits over the benefits provided by the level premium insurance 
contract.
    If the above conditions are satisfied, then the plan is still exempt 
from the minimum funding requirements under section 412 and may still 
utilize the special accrued benefit rule in section 411(b)(1)(F) subject 
to the following modifications: Although the portion of the plan funded 
by the level premium annuity contract is exempt from the minimum funding 
requirements, the portion funded by an auxiliary fund is subject to 
those requirements. (Thus, a funding standard account must be maintained 
and a Schedule B must be filed with the annual report). The accrued 
benefit for any participant may be determined using the rule in section 
411(b)(1)(F) but must not be less than the defined benefit minimum.
    M-18 Q. May qualified nonelective contributions described in section 
401(m)(4)(C) be treated as employer contributions for purposes of the 
minimum contribution or benefit requirement of section 416?
    A. Yes. This is the case even if the qualified nonelective 
contributions are taken into account under the actual deferral 
percentage test of Sec.  1.401(k)-1(b)(2) or under the actual 
contribution percentage test of Sec.  1.401(m)-1(b).
    M-19 Q. May matching contributions described in section 40l(m)(4)(A) 
be treated as employer contributions for purposes of the minimum 
contribution or benefit requirement of section 416?
    A. Matching contributions allocated to key employees are treated as 
employer contributions for purposes of determining the minimum 
contribution or benefit under section 416. However, if a plan uses 
contributions allocated to employees other than key employees on the 
basis of employee contributions or elective contributions to satisfy the 
minimum contribution requirement, these contributions are not treated as 
matching contributions for purposes of applying the requirements of 
sections 401(k) and 401(m) for plan years beginning after December 31, 
1988. Thus these contributions must meet the nondiscrimination 
requirements of section 401(a)(4) without regard to section 401(m). See 
Sec.  1.401(m)-1(f)(12)(iii).
    M-20 Q. May elective contributions be treated as employer 
contributions

[[Page 395]]

for purposes of satisfying the minimum contribution or benefit 
requirement of section 416(c)(2)?
    A. Elective contributions on behalf of key employees are taken into 
account in determining the minimum required contribution under section 
416(c)(2). However, elective contributions on behalf of employees other 
than key employees may not be treated as employer contributions for 
purposes of the minimum contribution or benefit requirement of section 
416. See section 401(k)(4)(C) and the regulations thereunder. This 
Question and Answer is effective for plan years beginning after December 
31, 1988.

[T.D. 7997, 49 FR 50646, Dec. 31, 1984, as amended by T.D. 8357, 56 FR 
40550, Aug. 15, 1991; T.D. 9319, 72 FR 16929, Apr. 5, 2007; T.D. 9849, 
84 FR 9234, Mar. 14, 2019]



Sec.  1.417(a)(3)-1  Required explanation of qualified joint 
and survivor annuity and qualified preretirement survivor annuity.

    (a) Written explanation requirement--(1) General rule. A plan meets 
the survivor annuity requirements of section 401(a)(11) only if the plan 
meets the requirements of section 417(a)(3) and this section regarding 
the written explanation required to be provided a participant with 
respect to a QJSA or a QPSA. A written explanation required to be 
provided to a participant with respect to either a QJSA or a QPSA under 
section 417(a)(3) and this section is referred to in this section as a 
section 417(a)(3) explanation. See Sec.  1.401(a)-20, Q&A-37, for 
exceptions to the written explanation requirement in the case of a fully 
subsidized QPSA or QJSA, and Sec.  1.401(a)-20, Q&A-38, for the 
definition of a fully subsidized QPSA or QJSA.
    (2) Time for providing section 417(a)(3) explanation--(i) QJSA 
explanation. See Sec.  1.417(e)-1(b)(3)(ii) for rules governing the 
timing of the QJSA explanation.
    (ii) QPSA explanation. See Sec.  1.401(a)-20, Q&A-35, for rules 
governing the timing of the QPSA explanation.
    (3) Required method for providing section 417(a)(3) explanation. A 
section 417(a)(3) explanation must be a written explanation. First class 
mail to the last known address of the participant is an acceptable 
delivery method for a section 417(a)(3) explanation. Likewise, hand 
delivery is acceptable. However, the posting of the explanation is not 
considered provision of the section 417(a)(3) explanation. But see Sec.  
1.401(a)-21 of this chapter for rules permitting the use of electronic 
media to provide applicable notices to recipients with respect to 
retirement plans.
    (4) Understandability. A section 417(a)(3) explanation must be 
written in a manner calculated to be understood by the average 
participant.
    (b) Required content of section 417(a)(3) explanation--(1) Content 
of QPSA explanation. The QPSA explanation must contain a general 
description of the QPSA, the circumstances under which it will be paid 
if elected, the availability of the election of the QPSA, and, except as 
provided in paragraph (d)(3) of this section, a description of the 
financial effect of the election of the QPSA on the participant's 
benefits (i.e., an estimate of the reduction to the participant's 
estimated normal retirement benefit that would result from an election 
of the QPSA).
    (2) Content of QJSA explanation. The QJSA explanation must satisfy 
either paragraph (c) or paragraph (d) of this section. Under paragraph 
(c) of this section, the QJSA explanation must contain certain specific 
information relating to the benefits available under the plan to the 
particular participant. Alternatively, under paragraph (d) of this 
section, the QJSA explanation can contain generally applicable 
information in lieu of specific participant information, provided that 
the participant has the right to request additional information 
regarding the participant's benefits under the plan.
    (c) Participant-specific information required to be provided--(1) In 
general. A QJSA explanation satisfies this paragraph (c) if it provides 
the following information with respect to each of the optional forms of 
benefit presently available to the participant (i.e., optional forms of 
benefit for which the QJSA explanation applies that have an annuity 
starting date after the providing of the QJSA explanation and optional 
forms of benefit with retroactive annuity starting dates that are 
available with payments commencing at that same time)--

[[Page 396]]

    (i) A description of the optional form of benefit;
    (ii) A description of the eligibility conditions for the optional 
form of benefit;
    (iii) A description of the financial effect of electing the optional 
form of benefit (i.e., the amounts and timing of payments to the 
participant under the form of benefit during the participant's lifetime, 
and the amounts and timing of payments after the death of the 
participant);
    (iv) In the case of a defined benefit plan, a description of the 
relative value of the optional form of benefit compared to the value of 
the QJSA, in the manner described in paragraph (c)(2) of this section; 
and
    (v) A description of any other material features of the optional 
form of benefit.
    (2) Requirement for numerical comparison of relative values--(i) In 
general. The description of the relative value of an optional form of 
benefit compared to the value of the QJSA under paragraph (c)(1)(iv) of 
this section must be expressed to the participant in a manner that 
provides a meaningful comparison of the relative economic values of the 
two forms of benefit without the participant having to make calculations 
using interest or mortality assumptions. Thus, in performing the 
calculations necessary to make this comparison, the benefits under one 
or both optional forms of benefit must be converted, taking into account 
the time value of money and life expectancies, so that the values of 
both optional forms of benefit are expressed in the same form. For 
example, such a comparison may be expressed to the participant using any 
of the following techniques--
    (A) Expressing the actuarial present value of the optional form of 
benefit as a percentage or factor of the actuarial present value of the 
QJSA;
    (B) Stating the amount of the annuity that is the actuarial 
equivalent of the optional form of benefit and that is payable at the 
same time and under the same conditions as the QJSA; or
    (C) Stating the actuarial present value of both the optional form of 
benefit and the QJSA.
    (ii) Use of one form for both married and unmarried individuals--(A) 
In general. Under the rules of this paragraph (c)(2)(ii), in lieu of 
providing different QJSA explanations for married and unmarried 
individuals, the plan may provide a QJSA explanation to an individual 
that does not vary based on the participant's marital status. Except as 
specifically provided in this section, any reference in this section to 
comparing the relative value of an optional form of benefit to the value 
of the QJSA may be satisfied using the substitution permitted under 
paragraph (c)(2)(ii)(B) or (C) of this section.
    (B) Substitution of single life annuity for married individual. For 
a married participant, in lieu of comparing the value of each optional 
form of benefit presently available to the participant to the value of 
the QJSA, the plan can compare the value of each optional form of 
benefit (including the QJSA) to the value of a QJSA for an unmarried 
participant (i.e., a single life annuity), but only if that same single 
life annuity is available to that married participant.
    (C) Substitution of joint and survivor annuity for unmarried 
individual. For an unmarried participant, in lieu of comparing the value 
of each optional form of benefit presently available to the participant 
to the value of the QJSA for that individual (which is a single life 
annuity), the plan can compare the value of each optional form of 
benefit (including the single life annuity) to the value of the joint 
and survivor annuity that is the QJSA for a married participant, but 
only if that same joint and survivor annuity is available to that 
unmarried participant.
    (iii) Simplified presentations permitted--(A) Grouping of certain 
optional forms. Two or more optional forms of benefit that have 
approximately the same value may be grouped for purposes of a required 
numerical comparison described in this paragraph (c)(2). For this 
purpose, two or more optional forms of benefit have approximately the 
same value if none of those optional forms of benefit vary in relative 
value in comparison to the value of the QJSA by more than 5 percentage 
points when the relative value comparison is made by expressing the 
actuarial

[[Page 397]]

present value of each of those optional forms of benefit as a percentage 
of the actuarial present value of the QJSA. For such a group of optional 
forms of benefit, the requirement relating to disclosing the relative 
value of each optional form of benefit compared to the value of the QJSA 
can be satisfied by disclosing the relative value of any one of the 
optional forms in the group compared to the value of the QJSA, and 
disclosing that the other optional forms of benefit in the group are of 
approximately the same value. If a single-sum distribution is included 
in such a group of optional forms of benefit, the single-sum 
distribution must be the distribution form that is used for purposes of 
this comparison.
    (B) Representative relative value for grouped optional forms. If, in 
accordance with paragraph (c)(2)(iii)(A) of this section, two or more 
optional forms of benefits are grouped, the relative values for all of 
the optional forms of benefit in the group can be stated using a 
representative relative value as the approximate relative value for the 
entire group. For this purpose, a representative relative value is any 
relative value that is not less than the relative value of the member of 
the group of optional forms of benefit with the lowest relative value 
and is not greater than the relative value of the member of that group 
with the highest relative value when measured on a consistent basis. For 
example, if three grouped optional forms have relative values of 87.5 
percent, 89 percent, and 91 percent of the value of the QJSA, all three 
optional forms can be treated as having a relative value of 
approximately 90 percent of the value of the QJSA. As required under 
paragraph (c)(2)(iii)(A) of this section, if a single-sum distribution 
is included in the group of optional forms of benefit, the 90 percent 
relative factor of the value of the QJSA must be disclosed as the 
approximate relative value of the single sum, and the other forms can be 
described as having the same approximate value as the single sum.
    (C) Special rule for optional forms of benefit that are close in 
value to the QJSA. The relative value of all optional forms of benefit 
that have an actuarial present value that is at least 95% of the 
actuarial present value of the QJSA and no greater than 105% of the 
actuarial present value of the QJSA is permitted to be described by 
stating that those optional forms of benefit are approximately equal in 
value to the QJSA, or that all of those forms of benefit and the QJSA 
are approximately equal in value.
    (iv) Actuarial assumptions used to determine relative values. For 
the purpose of providing a numerical comparison of the value of an 
optional form of benefit to the value of the immediately commencing QJSA 
under this paragraph (c)(2), the following rules apply--
    (A) If an optional form of benefit is subject to the requirements of 
section 417(e)(3) and Sec.  1.417(e)-1(d), any comparison of the value 
of the optional form of benefit to the value of the QJSA must be made 
using the applicable mortality table and the applicable interest rate as 
defined in Sec.  1.417(e)-1(d)(2) and (3) (or, at the option of the 
plan, another reasonable interest rate and reasonable mortality table 
used under the plan to calculate the amount payable under the optional 
form of benefit); and
    (B) All other optional forms of benefit payable to the participant 
must be compared with the QJSA using a single set of interest and 
mortality assumptions that are reasonable and that are applied uniformly 
with respect to all such optional forms payable to the participant 
(regardless of whether those assumptions are actually used under the 
plan for purposes of determining benefit payments). For this purpose, 
the reasonableness of interest and mortality assumptions is determined 
without regard to the circumstances of the individual participant. In 
addition, the applicable mortality table and the applicable interest 
rate as defined in Sec.  1.417(e)-1(d)(2) and (3) are considered 
reasonable actuarial assumptions for this purpose and thus are permitted 
(but not required) to be used.
    (v) Required disclosure of assumptions--(A) Explanation of concept 
of relative value. The notice must provide an explanation of the concept 
of relative value, communicating that the relative value comparison is 
intended to allow the participant to compare the total value of 
distributions paid in different

[[Page 398]]

forms, that the relative value comparison is made by converting the 
value of the optional forms of benefit presently available to a common 
form (such as the QJSA or a single-sum distribution), and that this 
conversion uses interest and life expectancy assumptions. The 
explanation of relative value must include a general statement that all 
comparisons provided are based on average life expectancies, and that 
the relative value of payments ultimately made under an annuity optional 
form of benefit will depend on actual longevity.
    (B) Disclosure of assumptions. A required numerical comparison of 
the value of the optional form of benefit to the value of the QJSA under 
this paragraph (c)(2) is required to include a disclosure of the 
interest rate that is used to develop the comparison. If all optional 
forms of benefit are permitted to be grouped under paragraph 
(c)(2)(iii)(A) of this section, then the requirement of this paragraph 
(c)(2)(v)(B) does not apply for any optional form of benefit not subject 
to the requirements of section 417(e)(3) and Sec.  1.417(e)-1(d)(3).
    (C) Offer to provide actuarial assumptions. If the plan does not 
disclose the actuarial assumptions used to calculate the numerical 
comparison required under paragraph (c)(2) of this section, then, the 
notice must be accompanied by a statement that includes an offer to 
provide, upon the participant's request, the actuarial assumptions used 
to calculate the relative value of optional forms of benefit under the 
plan.
    (3) Permitted estimates of financial effect and relative value--(i) 
General rule. For purposes of providing a description of the financial 
effect of the distribution forms available to a participant as required 
under paragraph (c)(1)(iii) of this section, and for purposes of 
providing a description of the relative value of an optional form of 
benefit compared to the value of the QJSA for a participant as required 
under paragraph (c)(1)(iv) of this section, the plan is permitted to 
provide reasonable estimates (e.g., estimates based on data as of an 
earlier date than the annuity starting date, a reasonable assumption for 
the age of the participant's spouse, or, in the case of a defined 
contribution plan, reasonable estimates of amounts that would be payable 
under a purchased annuity contract), including reasonable estimates of 
the applicable interest rate under section 417(e)(3).
    (ii) Right to more precise calculation. If a QJSA notice uses a 
reasonable estimate under paragraph (c)(3)(i) of this section, the QJSA 
explanation must identify the estimate and explain that the plan will, 
upon the request of the participant, provide a more precise calculation 
and the plan must provide the participant with a more precise 
calculation if so requested. Thus, for example, if a plan provides an 
estimate of the amount of the QJSA that is based on a reasonable 
assumption concerning the age of the participant's spouse, the 
participant can request a calculation that takes into account the actual 
age of the spouse, as provided by the participant.
    (iii) Revision of prior information. If a more precise calculation 
described in paragraph (c)(3)(ii) of this section materially changes the 
relative value of an optional form compared to the value of the QJSA, 
the revised relative value of that optional form must be disclosed, 
regardless of whether the financial effect of selecting the optional 
form is affected by the more precise calculation. For example, if a 
participant provides a plan with the age of the participant's spouse and 
that information materially changes the relative value of an optional 
form of benefit (such as a single sum) compared to the value of the 
QJSA, then the revised relative value of the optional form of benefit 
and the value of the QJSA must be disclosed, regardless of whether the 
amount of the payment under that optional form of benefit is affected by 
the more precise calculation.
    (4) Special rules for disclosure of financial effect for defined 
contribution plans. For a written explanation provided by a defined 
contribution plan, a description of financial effect required by 
paragraph (c)(1)(iii) of this section with respect to an annuity form of 
benefit must include a statement that the annuity will be provided by 
purchasing an annuity contract from an insurance company with the 
participant's account balance under the plan. If the description of the 
financial effect of the

[[Page 399]]

optional form of benefit is provided using estimates rather than by 
assuring that an insurer is able to provide the amount disclosed to the 
participant, the written explanation must also disclose this fact.
    (5) Simplified presentations of financial effect and relative value 
to enhance clarity for participants--(i) In general. This paragraph 
(c)(5) permits certain simplified presentations of financial effect and 
relative value of optional forms of benefit to permit more useful 
presentations of information to be provided to participants in certain 
cases in which a plan offers a range of optional forms of benefit. 
Paragraph (c)(5)(ii) of this section permits simplified presentations of 
financial effect and relative value for a plan that offers a significant 
number of substantially similar optional forms of benefit. Paragraph 
(c)(5)(iii) of this section permits simplified presentations of 
financial effect and relative value for a plan that permits the 
participant to make separate benefit elections with respect to parts of 
a benefit.
    (ii) Disclosure for plans offering a significant number of 
substantially similar optional forms of benefit--(A) In general. If a 
plan offers a significant number of substantially similar optional forms 
of benefit within the meaning of paragraph (c)(5)(ii)(B) of this section 
and disclosing the financial effect and relative value of each such 
optional form of benefit would provide a level of detail that could be 
overwhelming rather than helpful to participants, then the financial 
effect and relative value of those optional forms of benefit can be 
disclosed by disclosing the relative value and financial effect of a 
representative range of examples of those optional forms of benefit as 
described in paragraph (c)(5)(ii)(C) of this section if the requirements 
of paragraph (c)(5)(ii)(D) of this section (relating to additional 
information available upon request) are satisfied.
    (B) Substantially similar optional forms of benefit. For purposes of 
this paragraph (c)(5)(ii), optional forms of benefit are substantially 
similar if those optional forms of benefit are identical except for a 
particular feature or features (with associated adjustment factors) and 
the feature or features vary linearly. For example, if a plan offers 
joint and survivor annuity options with survivor payments available in 
every whole number percentage between 50% and 100%, those joint and 
survivor annuity options are substantially similar optional forms of 
benefit. Similarly, if a participant is entitled under the plan to 
receive a particular form of benefit with an annuity starting date that 
is the first day of any month beginning three years before commencement 
of a distribution and ending on the date of commencement of the 
distribution, those forms of benefit are substantially similar optional 
forms of benefit.
    (C) Representative range of examples. A range of examples with 
respect to substantially similar optional forms of benefit as permitted 
under this paragraph (c)(5) is representative only if it includes 
examples illustrating the financial effect and relative value of the 
optional forms of benefit that reflect each varying feature at both 
extremes of its linear range, plus at least one example illustrating the 
financial effect and relative value of the optional forms of benefit 
that reflects each varying feature at an intermediate point. However, if 
one intermediate example is insufficient to illustrate the pattern of 
variation in relative value with respect to a varying feature, examples 
sufficient to illustrate such pattern must be provided. Thus, for 
example, if a plan offers joint and survivor annuity options with 
survivor payments available in every whole number percentage between 50% 
and 100%, and if all such optional forms of benefit would be permitted 
to be disclosed as approximately equal in value as described in 
paragraph (c)(5)(ii)(B) of this section, the plan could satisfy the 
requirement to disclose the financial effect and relative value of a 
representative range of examples of those optional forms of benefit by 
disclosing the financial effect and relative value with respect to the 
joint and 50% survivor annuity, the joint and 75% survivor annuity, and 
the joint and 100% survivor annuity.
    (D) Requirement to provide information with respect to other 
optional forms of benefit upon request. If a QJSA explanation discloses 
the financial effect

[[Page 400]]

and relative value of substantially similar optional forms of benefit by 
disclosing the financial effect and relative value of a representative 
range of examples in accordance with this paragraph (c)(5)(ii), the QJSA 
explanation must explain that the plan will, upon the request of the 
participant, disclose the financial effect and relative value of any 
particular optional form of benefit from among the substantially similar 
optional forms of benefit and the plan must provide the participant with 
the financial effect and relative value of any such optional form of 
benefit if the participant so requests.
    (iii) Separate presentations permitted for elections that apply to 
parts of a benefit. If the plan permits the participant to make separate 
benefit elections with respect to two or more portions of the 
participant's benefit, the description of the financial effect and 
relative values of optional forms of benefit can be made separately for 
each such portion of the benefit, rather than for each optional form of 
benefit (i.e., each combination of possible elections).
    (d) Substitution of generally applicable information for participant 
information in the section 417(a)(3) explanation--(1) Forms of benefit 
available. In lieu of providing the information required under 
paragraphs (c)(1)(i) through (v) of this section for each optional form 
of benefit presently available to the participant as described in 
paragraph (c) of this section, the QJSA explanation may contain the 
information required under paragraphs (c)(1)(i) through (v) of this 
section for the QJSA and each other optional form of benefit generally 
available under the plan, along with a reference to where a participant 
may readily obtain the information required under paragraphs (c)(1)(i) 
through (v) of this section for any other optional forms of benefit that 
are presently available to the participant.
    (2) Financial effect and comparison of relative values--(i) General 
rule. In lieu of providing a statement of the financial effect of 
electing an optional form of benefit as required under paragraph 
(c)(1)(iii) of this section, or a comparison of relative values as 
required under paragraph (c)(1)(iv) of this section, based on the actual 
age and benefit of the participant, the QJSA explanation is permitted to 
include a chart (or other comparable device) showing the financial 
effect and relative value of optional forms of benefit in a series of 
examples specifying the amount of the optional form of benefit payable 
to a hypothetical participant at a representative range of ages and the 
comparison of relative values at those same representative ages. Each 
example in this chart must show the financial effect of electing the 
optional form of benefit pursuant to the rules of paragraph (c)(1)(iii) 
of this section, and a comparison of the relative value of the optional 
form of benefit to the value of the QJSA pursuant to the rules of 
paragraph (c)(2) of this section, using reasonable assumptions for the 
age of the hypothetical participant's spouse and any other variables 
that affect the financial effect, or relative value, of the optional 
form of benefit. The requirement to show the financial effect of 
electing an optional form can be satisfied through the use of other 
methods (e.g., expressing the amount of the optional form as a 
percentage or a factor of the amount payable under the normal form of 
benefit), provided that the method provides sufficient information so 
that a participant can determine the amount of benefits payable in the 
optional form. The chart (or other comparable device) must be 
accompanied by the disclosures described in paragraph (c)(2)(v) of this 
section explaining the concept of relative value and disclosing certain 
interest assumptions. In addition, the chart (or other comparable 
device) must be accompanied by a general statement describing the effect 
of significant variations between the assumed ages or other variables on 
the financial effect of electing the optional form of benefit and the 
comparison of the relative value of the optional form of benefit to the 
value of the QJSA.
    (ii) Actual benefit must be disclosed. The generalized notice 
described in this paragraph (d)(2) will satisfy the requirements of 
paragraph (b)(2) of this section only if the notice includes either the 
amount payable to the participant under the normal form of benefit or 
the amount payable to the participant under the normal form of benefit

[[Page 401]]

adjusted for immediate commencement. For this purpose, the normal form 
of benefit is the form under which payments due to the participant under 
the plan are expressed under the plan, prior to adjustments for form of 
benefit. For example, assuming that a plan's benefit accrual formula is 
expressed as a straight life annuity, the generalized notice must 
provide the amount of either the straight life annuity commencing at 
normal retirement age or the straight life annuity commencing 
immediately. Reasonable estimates of the type described in paragraph 
(c)(3)(i) of this section may be used to determine the amount payable to 
the participant under the normal form of benefit for purposes of this 
paragraph (d)(2)(ii) if the requirements of paragraphs (c)(3)(ii) and 
(iii) of this section are satisfied with respect to those estimates.
    (iii) Ability to request additional information. The generalized 
notice described in this paragraph (d)(2) must be accompanied by a 
statement that includes an offer to provide, upon the participant's 
request, a statement of financial effect and a comparison of relative 
values that is specific to the participant for any presently available 
optional form of benefit, and a description of how a participant may 
obtain this additional information.
    (3) Financial effect of QPSA election. In lieu of providing a 
specific description of the financial effect of the QPSA election, the 
QPSA explanation may provide a general description of the financial 
effect of the election. Thus, for example, the description can be in the 
form of a chart showing the reduction to a hypothetical participant's 
normal retirement benefit at a representative range of participant ages 
as a result of the QPSA election (using a reasonable assumption for the 
age of the hypothetical participant's spouse relative to the age of the 
hypothetical participant). In addition, this chart must be accompanied 
by a statement that includes an offer to provide, upon the participant's 
request, an estimate of the reduction to the participant's estimated 
normal retirement benefit, and a description of how a participant may 
obtain this additional information.
    (4) Additional information required to be furnished at the 
participant's request--The generalized notice described in paragraph 
(d)(2) of this section must be accompanied by a statement that includes 
an offer to provide, upon the participant's request, information 
described in this paragraph (d)(4)(i) and (ii), and a description of how 
a participant may obtain this additional information.
    (i) Explanation of QJSA. If, as permitted under paragraphs (d)(1) 
and (2) of this section, the content of a QJSA explanation does not 
include all the items described in paragraph (c) of this section, then, 
upon a participant's request for any of the information required under 
paragraphs (c)(1)(i) through (v) of this section for one or more 
presently available optional forms (including a request for all optional 
forms presently available to the participant), the plan must furnish the 
information required under paragraphs (c)(1)(i) through (v) of this 
section with respect to those optional forms. Thus, with respect to 
those optional forms of benefit, the participant must receive a QJSA 
explanation specific to the participant that is based on the 
participant's actual age and benefit. In addition, the plan must comply 
with paragraph (c)(3)(iii) of this section. Further, if as permitted 
under paragraph (c)(2)(v)(B) of this section, the plan does not disclose 
the actuarial assumptions used to calculate the numerical comparison 
required under paragraph (c)(2) of this section, then, upon request, the 
plan must provide the actuarial assumptions used to calculate the 
relative value of optional forms of benefit under the plan.
    (ii) Explanation of QPSA. If, as permitted under paragraph (d)(3) of 
this section, the content of a QPSA explanation does not include all the 
items described in paragraph (b)(1) of this section, then, upon a 
participant's request, the plan must furnish an estimate of the 
reduction to the participant's estimated normal retirement benefit that 
would result from a QPSA election.

[[Page 402]]

    (5) Use of participant-specific information in generalized notice. A 
QJSA explanation does not fail to satisfy the requirements of this 
paragraph (d) merely because it contains an item of participant-specific 
information in place of the corresponding generally applicable 
information.
    (e) Examples. The following examples illustrate the application of 
this section. Solely for purposes of these examples, the applicable 
interest rate that applies to any distribution that is subject to the 
rules of section 417(e)(3) is assumed to be 52\1/2\ percent, and the 
applicable mortality table under section 417(e)(3) and Sec.  1.417(e)-
1(d)(2) is assumed to be the table that applies as of January 1, 2003. 
In addition, solely for purposes of these examples, assume that a plan 
which determines actuarial equivalence using 6 percent interest and the 
applicable mortality table under section 417(e)(3) and Sec.  1.417(e)-
1(d)(2) that applies as of January 1, 1995, is using reasonable 
actuarial assumptions. The examples are as follows:

    Example 1. (i) Participant M participates in Plan A, a qualified 
defined benefit plan. Under Plan A, the QJSA is a joint and 100 percent 
survivor annuity, which is actuarially equivalent to the single life 
annuity determined using 6 percent interest and the section 417(e)(3) 
applicable mortality table that applies as of January 1, 1995. On 
October 1, 2004, M will terminate employment at age 55. When M 
terminates employment, M will be eligible to elect an unreduced early 
retirement benefit, payable as either a single life annuity or the QJSA. 
M will also be eligible to elect a single-sum distribution equal to the 
actuarial present value of the single life annuity payable at normal 
retirement age (age 65), determined using the applicable mortality table 
and the applicable interest rate under section 417(e)(3).
    (ii) Consistent with paragraph (c) of this section, Participant M is 
provided with a QJSA explanation that describes the single life annuity, 
the QJSA, and single-sum distribution options under the plan, and any 
eligibility conditions associated with these options. Participant M is 
married when the explanation is provided. The explanation indicates 
that, if Participant M commenced benefits at age 55 and had a spouse age 
55, the monthly benefit under an immediately commencing single life 
annuity is $3,000, the monthly benefit under the QJSA is estimated to be 
89.96 percent of the monthly benefit under the immediately commencing 
single life annuity or $2,699, and the single sum is estimated to be 
74.7645 times the monthly benefit under the immediately commencing 
single life annuity or $224,293.
    (iii) The QJSA explanation indicates that the single life annuity 
and the QJSA are of approximately the same value, but that the single-
sum option is equivalent in value to a monthly benefit under the QJSA of 
$1,215. (This amount is 45 percent of the value of the QJSA at age 55 
($1,215 divided by 89.96 percent of $3,000 equals 45 percent).) The 
explanation states that the relative value comparison converts the value 
of the single life annuity and the single-sum options to the value of 
each if paid in the form of the QJSA and that this conversion uses 
interest and life expectancy assumptions. The explanation specifies that 
the calculations relating to the single-sum distribution were prepared 
using 5.5 percent interest and average life expectancy, that the other 
calculations were prepared using a 6 percent interest rate and that the 
relative value of actual annuity payments for an individual can vary 
depending on how long the individual and spouse live. The explanation 
notes that the calculation of the QJSA assumed that the spouse was age 
55, that the amount of the QJSA will depend on the actual age of the 
spouse (for example, annuity payments will be significantly lower if the 
spouse is significantly younger than the participant), and that the 
amount of the single-sum payment will depend on the interest rates that 
apply when the participant actually takes a distribution. The 
explanation also includes an offer to provide a more precise calculation 
to the participant taking into account the spouse's actual age.
    (iv) In accordance with paragraph (c)(3)(ii) of this section, 
Participant M requests a more precise calculation of the financial 
effect of choosing a QJSA taking into account that Participant M's 
spouse is 50 years of age. Using the actual age of Participant M's 
spouse, Plan A determines that the monthly payments under the QJSA are 
87.62 percent of the monthly payments under the single life annuity, or 
$2,628.60 per month, and provides this information to M. Plan A is not 
required to provide an updated calculation of the relative value of the 
single sum because the value of single sum continues to be 45 percent of 
the value of the QJSA.
    Example 2. (i) The facts are the same as in Example 1, except that 
the comparison of the relative values of optional forms of benefit to 
the value of the QJSA is not expressed as a percentage of the actuarial 
present value of the QJSA, but instead is expressed by disclosing the 
actuarial present values of the optional forms and the QJSA. In 
addition, the Plan uses the applicable interest rate and the applicable 
mortality table under section 417(e)(3) for all comparison purposes.
    (ii) Accordingly, the QJSA explanation indicates that the QJSA has 
an actuarial

[[Page 403]]

present value of $498,089, while the single-sum payment has an actuarial 
present value of $224,293 (i.e. the amount of the single sum is 
$224,293) and that the single life annuity is approximately equal in 
value to the QJSA. The explanation states that the relative value 
comparison converts the value of single life annuity and the QJSA into 
an amount payable in the form of the single-sum option (even though a 
single-sum distribution in that amount is not available under the plan) 
and that this conversion uses interest and life expectancy assumptions. 
The explanation specifies that the calculations were prepared using 5.5 
percent interest and average life expectancy, and that the relative 
value of actual annuity payments for an individual can vary depending on 
how long the individual and spouse live. The explanation notes that the 
calculation of the QJSA assumed that the spouse was age 55, that the 
amount of the QJSA will depend on the actual age of the spouse (for 
example, annuity payments will be significantly lower if the spouse is 
significantly younger than the participant), and that the amount of the 
single-sum payment will depend on the interest rates that apply when the 
participant actually takes a distribution. The explanation also includes 
an offer to provide a more precise calculation to the participant taking 
into account the spouse's actual age.
    Example 3. (i) The facts are the same as in Example 1, except that, 
in lieu of providing information specific to Participant M in the QJSA 
notice as set forth in paragraph (c) of this section, Plan A satisfies 
the QJSA explanation requirement in accordance with paragraph (d)(2) of 
this section by providing M with a statement that M's monthly benefit 
under an immediately commencing single life annuity (which is the normal 
form of benefit under Plan A, adjusted for immediate commencement) is 
$3,000, along with the following chart. The chart shows the financial 
effect of electing each optional form of benefit for a hypothetical 
participant with a $1,000 benefit and a spouse who is the same age as 
the participant. Instead of showing the relative value of these optional 
forms of benefit compared to the value of the QJSA, the chart shows the 
relative value of these optional forms of benefit compared to the value 
of the single life annuity. Separate charts are provided for ages 55, 
60, and 65 as follows:

                           Age 55 Commencement
------------------------------------------------------------------------
                                       Amount of
                                   distribution per
          Optional form                $1,000 of        Relative value
                                   immediate single
                                     life annuity
------------------------------------------------------------------------
Life Annuity....................  $1,000 per month..  n/a.
QJSA (Joint and 100 percent       $900 per month      Approximately the
 survivor annuity).                ($900 per month     same value as the
                                   for survivor        Life Annuity.
                                   annuity).
Lump sum........................  $74,764...........  Approximately 45
                                                       percent of the
                                                       value of the Life
                                                       Annuity.
------------------------------------------------------------------------


                           Age 60 Commencement
------------------------------------------------------------------------
                                       Amount of
                                   distribution per
          Optional form                $1,000 of        Relative value
                                   immediate single
                                     life annuity
------------------------------------------------------------------------
Life Annuity....................  $1,000 per month..  n/a.
QJSA (Joint and 100 percent       $878 per month      Approximately the
 survivor annuity).                ($878 per month     same value as the
                                   for survivor        Life Annuity.
                                   annuity).
Lump sum........................  $99,792...........  Approximately 66
                                                       percent of the
                                                       value of the Life
                                                       Annuity.
------------------------------------------------------------------------


                           Age 65 Commencement
------------------------------------------------------------------------
                                       Amount of
                                   distribution per
          Optional form                $1,000 of        Relative value
                                   immediate single
                                     life annuity
------------------------------------------------------------------------
Life Annuity....................  $1,000 per month..  n/a.
QJSA (Joint and 100 percent       $852 per month      Approximately the
 survivor annuity).                ($852 per month     same value as the
                                   for survivor        Life Annuity.
                                   annuity).
Lump sum........................  $135,759..........  Approximately the
                                                       same value as the
                                                       Life Annuity.
------------------------------------------------------------------------

    (ii) In accordance with paragraph (d)(4)(i) of this section, when 
Participant M requests specific information regarding the amounts 
payable under the QJSA, the joint and 100 percent survivor annuity, and 
the single-sum distribution and provides the age of M's spouse, Plan A 
determines that M's QJSA is $2,628.60 per month and the single-sum 
distribution is $224,293. The actuarial present value of the QJSA 
(determined using the 5.5

[[Page 404]]

percent interest and the section 417(e)(3) applicable mortality table) 
is $498,896 and the actuarial present value of the single life annuity 
is $497,876. Accordingly, the specific information discloses that the 
single-sum distribution has a value that is 45 percent of the value of 
the single life annuity available to M on October 1, 2004. In accordance 
with paragraph (c)(2)(iii)(C) of this section, the QJSA notice provides 
that the QJSA is of approximately the same value as the single life 
annuity.
    Example 4. (i) The facts are the same as in Example 1, except that 
under Plan A, the single-sum distribution is determined as the actuarial 
present value of the immediately commencing single life annuity. In 
addition, Plan A provides a joint and 75 percent survivor annuity that 
is reduced from the single life annuity and that is the QJSA under Plan 
A. For purposes of determining the amount of the QJSA, if the 
participant is married the reduction is only half of the reduction that 
would normally apply under the actuarial assumptions specified in Plan A 
for determining actuarial equivalence of optional forms.
    (ii) In lieu of providing information specific to Participant M in 
the QJSA notice as set forth in paragraph (c) of this section, Plan A 
satisfies the QJSA explanation requirement in accordance with paragraph 
(d)(2) of this section by providing M with a statement that M's monthly 
benefit under an immediately commencing single life annuity (which is 
the normal form of benefit under Plan A, adjusted for immediate 
commencement) is $3,000, along with the following chart showing the 
financial effect and the relative value of the optional forms of benefit 
compared to the QJSA for a hypothetical participant with a $1,000 
benefit and a spouse who is three years younger than the participant. 
For each optional form generally available under the plan, the chart 
shows the financial effect and the relative value, using the grouping 
rules of paragraph (c)(2)(iii) of this section. Separate charts are 
provided for ages 55, 60, and 65, as follows:

                           Age 55 Commencement
------------------------------------------------------------------------
                                       Amount of
                                   distribution per
          Optional form                $1,000 of        Relative value
                                   immediate single
                                     life annuity
------------------------------------------------------------------------
Life Annuity....................  $1,000 per month..  Approximately the
                                                       same value as the
                                                       QJSA.
QJSA (joint and 75 percent        $956 per month      n/a.
 survivor annuity for a            ($717 per month
 participant who is married).      for survivor
                                   annuity).
Joint and 100 percent survivor    $886 per month      Approximately the
 annuity.                          ($886 per month     same value as the
                                   for survivor        QJSA.
                                   annuity).
Lump sum........................  $165,959..........  Approximately the
                                                       same value as the
                                                       QJSA.
------------------------------------------------------------------------


                           Age 60 Commencement
------------------------------------------------------------------------
                                       Amount of
                                   distribution per
          Optional form                $1,000 of        Relative value
                                   immediate single
                                     life annuity
------------------------------------------------------------------------
Life Annuity....................  $1,000 per month..  Approximately 94
                                                       percent of the
                                                       value of the
                                                       QJSA.
QJSA (joint and 75 percent        $945 per month      n/a.
 survivor annuity for a            ($709 per month
 participant who is married).      for survivor
                                   annuity).
Joint and 100 percent survivor    $859 per month      Approximately 94
 annuity.                          ($859 per month     percent of the
                                   for survivor        value of the
                                   annuity).           QJSA.
Lump sum........................  $151,691..........  Approximately the
                                                       same value as the
                                                       QJSA.
------------------------------------------------------------------------


                           Age 65 Commencement
------------------------------------------------------------------------
                                       Amount of
                                   distribution per
          Optional form                $1,000 of        Relative value
                                   immediate single
                                     life annuity
------------------------------------------------------------------------
Life Annuity....................  $1,000 per month..  Approximately 93
                                                       percent of the
                                                       value of the
                                                       QJSA.
QJSA (joint and 75 percent        $932 per month      n/a.
 survivor annuity for a            ($699 per month
 participant who is married).      for survivor
                                   annuity).
Joint and 100 percent survivor    $828 per month      Approximately 93
 annuity.                          ($828 per month     percent of the
                                   for survivor        value of the
                                   annuity).           QJSA.
Lump sum........................  $135,759..........  Approximately 93
                                                       percent of the
                                                       value of the
                                                       QJSA.
------------------------------------------------------------------------


[[Page 405]]

    (iii) The chart disclosing the financial effect and relative value 
of the optional forms specifies that the calculations were prepared 
assuming that the spouse is three years younger than the participant, 
that the calculations relating to the single-sum distribution were 
prepared using 5.5 percent interest and average life expectancy, that 
the other calculations were prepared using a 6 percent interest rate, 
and that the relative value of actual payments for an individual can 
vary depending on how long the individual and spouse live. The 
explanation states that the relative value comparison converts the 
single life annuity, the joint and 100 percent survivor annuity, and the 
single-sum options to value of each if paid in the form of the QJSA and 
that this conversion uses interest and life expectancy assumptions. The 
explanation notes that the calculation of the QJSA depends on the actual 
age of the spouse (for example, annuity payments will be significantly 
lower if the spouse is significantly younger than the participant), and 
that the amount of the single-sum payment will depend on the interest 
rates that apply when the participant actually takes a distribution. The 
explanation also includes an offer to provide a calculation specific to 
the participant upon request, and an offer to provide mortality tables 
used in preparing calculations upon request.
    (iv) In accordance with paragraph (d)(4)(i) of this section, 
Participant M requests specific information regarding the amounts 
payable under the QJSA, the joint and 100 percent survivor annuity, and 
the single sum.
    (v) Based on the information about the age of Participant M's 
spouse, Plan A determines that M's QJSA is $2,856.30 per month, the 
joint and 100 percent survivor annuity is $2,628.60 per month, and the 
single sum is $497,876. The actuarial present value of the QJSA 
(determined using the 5.5 percent interest and the section 417(e)(3) 
applicable mortality table, the actuarial assumptions required under 
section 417) is $525,091. Accordingly, the value of the single-sum 
distribution available to M on October 1, 2004, is 94.8 percent of the 
actuarial present value of the QJSA. In addition, the actuarial present 
value of the life annuity and the 100 percent joint and survivor annuity 
are 95.0 percent of the actuarial present value of the QJSA.
    (vi) Plan A provides M with a QJSA explanation that incorporates 
these more precise calculations of the financial effect and relative 
value of the optional forms for which M requested information.

    (f) Effective date--(1) General effective date for QJSA 
explanations--(i) In general. Except as otherwise provided in this 
paragraph (f), this section applies to a QJSA explanation with respect 
to any distribution with an annuity starting date that is on or after 
February 1, 2006.
    (ii) Reasonable, good faith transition rule. Except with respect to 
any portion of a QJSA explanation that is subject to the earlier 
effective date rule of paragraph (f)(2) of this section, a reasonable, 
good faith effort to comply with these regulations will be deemed to 
satisfy the requirements of these regulations for QJSA explanations 
provided before January 1, 2007, with respect to distributions with 
annuity starting dates that are on or after February 1, 2006. For this 
purpose, a reasonable, good faith effort to comply with these 
regulations includes substantial compliance with Sec.  1.417(a)(3)-1 as 
it appeared in 26 CFR part 1 revised April 1, 2004.
    (2) Special effective date for certain QJSA explanations--(i) 
Application to QJSA explanations with respect to certain optional forms 
that are less valuable than the QJSA. This section also applies to a 
QJSA explanation with respect to any distribution with an annuity 
starting date that is on or after October 1, 2004, and before February 
1, 2006, if the actuarial present value of any optional form of benefit 
that is subject to the requirements of section 417(e)(3) is less than 
the actuarial present value (as determined under Sec.  1.417(e)-1(d)) of 
the QJSA. For purposes of this paragraph (f)(2)(i), the actuarial 
present value of an optional form is treated as not less than the 
actuarial present value of the QJSA if--
    (A) Using the applicable interest rate and applicable mortality 
table under Sec.  1.417(e)-1(d)(2) and (3), the actuarial present value 
of that optional form is not less than the actuarial present value of 
the QJSA for an unmarried participant; and
    (B) Using reasonable actuarial assumptions, the actuarial present 
value of the QJSA for an unmarried participant is not less than the 
actuarial present value of the QJSA for a married participant.
    (ii) Requirement to disclose differences in value for certain 
optional forms. A QJSA explanation with respect to any distribution with 
an annuity starting date that is on or after October 1, 2004,

[[Page 406]]

and before February 1, 2006, is only required to be provided under this 
section with respect to--
    (A) An optional form of benefit that is subject to the requirements 
of section 417(e)(3) and that has an actuarial present value that is 
less than the actuarial present value of the QJSA (as described in 
paragraph (f)(2)(i) of this section); and
    (B) The QJSA (determined without application of paragraph (c)(2)(ii) 
of this section).
    (iii) Application to QJSA explanations with respect to optional 
forms that are approximately equal in value to the QJSA. Paragraph 
(c)(2)(iii)(C) of this section, relating to disclosures of optional 
forms of benefit that are permitted to be described as approximately 
equal in value to the QJSA, is not applicable to a QJSA explanation 
provided before January 1, 2007. However, Sec.  1.417(a)(3)-
1(c)(2)(iii)(C), as it appeared in 26 CFR part 1 revised April 1, 2004, 
applies to a QJSA explanation with respect to any distribution with an 
annuity starting date that is on or after October 1, 2004, and that is 
provided before January 1, 2007.
    (3) Annuity starting date. For purposes of paragraphs (f)(1) and (2) 
of this section, in the case of a retroactive annuity starting date 
under section 417(a)(7), as described in Sec.  1.417(e)-1(b)(3)(vi), the 
date of commencement of the actual payments based on the retroactive 
annuity starting date is substituted for the annuity starting date.
    (4) Effective date for QPSA explanations. This section applies to 
any QPSA explanation provided on or after July 1, 2004.

[T.D. 9099, 68 FR 70144, Dec. 17, 2003, as amended by T.D. 9256, 71 FR 
14802, Mar. 24, 2006; 71 FR 26688, May 8, 2006; T.D. 9294, 71 FR 61888, 
Oct. 20, 2006]



Sec.  1.417(e)-1  Restrictions and valuations of distributions 
from plans subject to sections 401(a)(11) and 417.

    (a) Scope--(1) In general. A plan does not satisfy the requirements 
of sections 401(a)(11) and 417 unless it satisfies the consent 
requirements, the determination of present value requirements and the 
other requirements set forth in this section. See section 401(a)(11) and 
Sec.  1.401(a)-20 for other rules regarding the survivor annuity 
requirements.
    (2) Additional requirements. See Sec.  1.411(a)-11 for other rules 
applicable to the consent requirements.
    (3) Accrued benefit. The definition of ``accrued benefit'' in Sec.  
1.411(a)-11 applies when that term is used in this section.
    (b) Consent, etc. requirements--(1) General rule. Generally plans 
may not commence the distribution of any portion of a participant's 
accrued benefit in any form unless the applicable consent requirements 
are satisfied. No consent of the participant or spouse is needed for 
distribution of a QJSA or QPSA after the benefit is no longer 
immediately distributable (after the participant attains (or would have 
attained if not dead) the later of normal retirement age (as defined in 
section 411(a)(8)) or age 62). No consent of the spouse is needed for 
distribution of a QJSA at any time. After the participant's death, a 
benefit may be paid to a nonspouse beneficiary without the beneficiary's 
consent. A distribution cannot be made at any time in a form other than 
a QJSA unless such QJSA has been waived by the participant and such 
waiver has been consented to by the spouse. A QJSA is an annuity that 
commences immediately. Thus, for example, a plan may not offer a 
participant separating from service at age 45 a choice only between a 
single sum distribution at separation of service and a joint and 
survivor annuity that satisfies all the requirements of a QJSA except 
that it commences at normal retirement age rather than immediately. To 
satisfy this section, the plan must also offer a QJSA (i.e., an annuity 
that satisfies all the requirements for a QJSA including the requirement 
that it commences immediately).
    (2) Consent. (i) Written consent of the participant and, if the 
participant is married at the annuity starting date and the benefit is 
to be paid in a form other than a QJSA, the participant's spouse (or, if 
either the participant or the spouse has died, the survivor) is required 
before the commencement of the distribution of any part of an accrued 
benefit if the present value of the

[[Page 407]]

nonforfeitable benefit is greater than the cash-out limit in effect 
under Sec.  1.411(a)-11(c)(3)(ii). No consent is valid unless the 
participant has received a general description of the material features, 
and an explanation of the relative values of, the optional forms of 
benefit available under the plan in a manner which would satisfy the 
notice requirements of section 417(a)(3). See Sec.  1.417(a)(3)-1. No 
consent is required before the annuity starting date if the present 
value of the nonforfeitable benefit is not more than the cash-out limit 
in effect under Sec.  1.411(a)-11(c)(3)(ii). After the annuity starting 
date, consent is required for the immediate distribution of the present 
value of the accrued benefit being distributed in any form, including a 
qualified joint and survivor annuity or a qualified preretirement 
survivor annuity, regardless of the amount of such present value.
    (ii) In determining the present value of any nonforfeitable accrued 
benefit, a defined benefit plan is limited by the interest rate 
restriction as set forth in paragraph (d) of this section.
    (iii) Paragraph (b)(2)(i) of this section applies to distributions 
made on or after October 17, 2000. For distributions prior to October 
17, 2000, Sec.  1.417(e)-1(b)(2)(i) in effect prior to October 17, 2000 
(as contained in 26 CFR part 1 revised as of April 1, 2000) applies.
    (3) Time of consent. (i) Written consent of the participant and the 
participant's spouse to the distribution must be made not more than 90 
days before the annuity starting date, and, except as otherwise provided 
in paragraphs (b)(3)(iii) and (b)(3)(iv) of this section, no later than 
the annuity starting date.
    (ii) A plan must provide participants with the written explanation 
of the QJSA required by section 417(a)(3) no less than 30 days and no 
more than 90 days before the annuity starting date, except as provided 
in paragraph (b)(3)(iv) of this section regarding retroactive annuity 
starting dates. However, if the participant, after having received the 
written explanation of the QJSA, affirmatively elects a form of 
distribution and the spouse consents to that form of distribution (if 
necessary), a plan will not fail to satisfy the requirements of section 
417(a) merely because the written explanation was provided to the 
participant less than 30 days before the annuity starting date, provided 
that the following conditions are met:
    (A) The plan administrator provides information to the participant 
clearly indicating that (in accordance with the first sentence of this 
paragraph (b)(3)(ii)) the participant has a right to at least 30 days to 
consider whether to waive the QJSA and consent to a form of distribution 
other than a QJSA.
    (B) The participant is permitted to revoke an affirmative 
distribution election at least until the annuity starting date, or, if 
later, at any time prior to the expiration of the 7-day period that 
begins the day after the explanation of the QJSA is provided to the 
participant.
    (C) The annuity starting date is after the date that the explanation 
of the QJSA is provided to the participant.
    (D) Distribution in accordance with the affirmative election does 
not commence before the expiration of the 7-day period that begins the 
day after the explanation of the QJSA is provided to the participant.
    (iii) The plan may permit the annuity starting date to be before the 
date that any affirmative distribution election is made by the 
participant (and before the date that distribution is permitted to 
commence under paragraph (b)(3)(ii)(D) of this section), provided that, 
except as otherwise provided in paragraph (b)(3)(vii) of this section 
regarding administrative delay, distributions commence not more than 90 
days after the explanation of the QJSA is provided.
    (iv) Retroactive annuity starting dates. (A) Notwithstanding the 
requirements of paragraphs (b)(3)(i) and (ii) of this section, pursuant 
to section 417(a)(7), a defined benefit plan is permitted to provide 
benefits based on a retroactive annuity starting date if the 
requirements described in paragraph (b)(3)(v) of this section are 
satisfied. A defined benefit plan is not required to provide for 
retroactive annuity starting dates. If a plan does provide for a 
retroactive annuity starting date, it may impose

[[Page 408]]

conditions on the availability of a retroactive annuity starting date in 
addition to those imposed by paragraph (b)(3)(v) of this section, 
provided that imposition of those additional conditions does not violate 
any of the rules applicable to qualified plans. For example, a plan that 
includes a single sum payment as a benefit option may limit the election 
of a retroactive annuity starting date to those participants who do not 
elect the single sum payment. A defined contribution plan is not 
permitted to have a retroactive annuity starting date.
    (B) For purposes of this section, a ``retroactive annuity starting 
date'' is an annuity starting date affirmatively elected by a 
participant that occurs on or before the date the written explanation 
required by section 417(a)(3) is provided to the participant. In order 
for a plan to treat a participant as having elected a retroactive 
annuity starting date, future periodic payments with respect to a 
participant who elects a retroactive annuity starting date must be the 
same as the future periodic payments, if any, that would have been paid 
with respect to the participant had payments actually commenced on the 
retroactive annuity starting date. The participant must receive a make-
up payment to reflect any missed payment or payments for the period from 
the retroactive annuity starting date to the date of the actual make-up 
payment (with an appropriate adjustment for interest from the date the 
missed payment or payments would have been made to the date of the 
actual make-up payment). Thus, the benefit determined as of the 
retroactive annuity starting date must satisfy the requirements of 
sections 417(e)(3), if applicable, and section 415 with the applicable 
interest rate and applicable mortality table determined as of that date. 
Similarly, a participant is not permitted to elect a retroactive annuity 
starting date that precedes the date upon which the participant could 
have otherwise started receiving benefits (e.g., in the case of an 
ongoing plan, the earlier of the participant's termination of employment 
or the participant's normal retirement age) under the terms of the plan 
in effect as of the retroactive annuity starting date. A plan does not 
fail to treat a participant as having elected a retroactive annuity 
starting date as described in this paragraph (b)(3)(iv)(B) merely 
because the distributions are adjusted to the extent necessary to 
satisfy the requirements of paragraph (b)(3)(v)(B) and (C) of this 
section relating to sections 415 and 417(e)(3).
    (C) If the participant's spouse as of the retroactive annuity 
starting date would not be the participant's spouse determined as if the 
date distributions commence was the participant's annuity starting date, 
consent of that former spouse is not needed to waive the QJSA with 
respect to the retroactive annuity starting date, unless otherwise 
provided under a qualified domestic relations order (as defined in 
section 414(p)).
    (D) A distribution payable pursuant to a retroactive annuity 
starting date election is treated as excepted from the present value 
requirements of paragraph (d) of this section under paragraph (d)(6) of 
this section if the distribution form would have been described in 
paragraph (d)(6) of this section had the distribution actually commenced 
on the retroactive annuity starting date. Similarly, annuity payments 
that otherwise satisfy the requirements of a QJSA under section 417(b) 
will not fail to be treated as a QJSA for purposes of section 
415(b)(2)(B) merely because a retroactive annuity starting date is 
elected and a make-up payment is made. Also, for purposes of section 
72(t)(2)(A)(iv), a distribution that would otherwise be one of a series 
of substantially equal periodic payments will be treated as one of a 
series of substantially equal periodic payments notwithstanding the 
distribution of a make-up payment provided for in paragraph 
(b)(3)(iv)(B) of this section.
    (E) The following example illustrates the application of paragraph 
(b)(3)(iv)(D) of this section:

    Example. Under the terms of a defined benefit plan, participant A is 
entitled to a QJSA with a monthly payment of $1,500 beginning as of his 
annuity starting date. Due to administrative error, the QJSA explanation 
is provided to A after the annuity starting date. After receiving the 
QJSA explanation A elects a retroactive annuity starting date.

[[Page 409]]

Pursuant to this election, A begins to receive a monthly payment of 
$1,500 and also receives a make-up payment of $10,000. Under these 
circumstances the monthly payments may be treated as a QJSA for purposes 
of section 415(b)(2)(B). In addition, the monthly payments of $1,500 and 
the make-up payment of $10,000 may be treated as part of as series of 
substantially equal periodic payments for purpose of section 
72(t)(2)(A)(iv).

    (v) Requirements applicable to retroactive annuity starting dates. A 
distribution is permitted to have a retroactive annuity starting date 
with respect to a participant's benefit only if the following 
requirements are met:
    (A) The participant's spouse (including an alternate payee who is 
treated as the spouse under a qualified domestic relations order (QDRO), 
as defined in section 414(p)), determined as if the date distributions 
commence were the participant's annuity starting date, consents to the 
distribution in a manner that would satisfy the requirements of section 
417(a)(2). The spousal consent requirement of this paragraph 
(b)(3)(v)(A) is satisfied if such spouse consents to the distribution 
under paragraph (b)(2)(i) of this section. The spousal consent 
requirement of this paragraph (b)(3)(v)(A) does not apply if the amount 
of such spouse's survivor annuity payments under the retroactive annuity 
starting date election is no less than the amount that the survivor 
payments to such spouse would have been under an optional form of 
benefit that would satisfy the requirements to be a QJSA under section 
417(b) and that has an annuity starting date after the date that the 
explanation was provided.
    (B) The distribution (including appropriate interest adjustments) 
provided based on the retroactive annuity starting date would satisfy 
the requirements of section 415 if the date the distribution commences 
is substituted for the annuity starting date for all purposes, including 
for purposes of determining the applicable interest rate and the 
applicable mortality table. However, in the case of a form of benefit 
that would have been excepted from the present value requirements of 
paragraph (d) of this section under paragraph (d)(6) of this section if 
the distribution had actually commenced on the retroactive annuity 
starting date, the requirement to apply section 415 as of the date 
distribution commences set forth in this paragraph (b)(3)(v)(B) does not 
apply if the date distribution commences is twelve months or less from 
the retroactive annuity starting date.
    (C) In the case of a form of benefit that would have been subject to 
section 417(e)(3) and paragraph (d) of this section if distributions had 
commenced as of the retroactive annuity starting date, the distribution 
is no less than the benefit produced by applying the applicable interest 
rate and the applicable mortality table determined as of the date the 
distribution commences to the annuity form that corresponds to the 
annuity form that was used to determine the benefit amount as of the 
retroactive annuity starting date. Thus, for example, if a distribution 
paid pursuant to an election of a retroactive annuity starting date is a 
single-sum distribution that is based on the present value of the 
straight life annuity payable at normal retirement age, then the amount 
of the distribution must be no less than the present value of the 
annuity payable at normal retirement age, determined as of the 
distribution date using the applicable mortality table and applicable 
interest rate that apply as of the distribution date. Likewise, if a 
distribution paid pursuant to an election of a retroactive annuity 
starting date is a single-sum distribution that is based on the present 
value of the early retirement annuity payable as of the retroactive 
annuity starting date, then the amount of the distribution must be no 
less than the present value of the early retirement annuity payable as 
of the distribution date, determined as of the distribution date using 
the applicable mortality table and applicable interest rate that apply 
as of the distribution date.
    (vi) Timing of notice and consent requirements in the case of 
retroactive annuity starting dates. In the case of a retroactive annuity 
starting date, the date of the first actual payment of benefits based on 
the retroactive annuity starting date is substituted for the annuity 
starting date for purposes of satisfying the timing requirements for

[[Page 410]]

giving consent and providing an explanation of the QJSA provided in 
paragraphs (b)(3)(i) and (ii) of this section, except that the 
substitution does not apply for purposes of paragraph (b)(3)(iii) of 
this section. Thus, the written explanation required by section 
417(a)(3)(A) must generally be provided no less than 30 days and no more 
than 90 days before the date of the first payment of benefits and the 
election to receive the distribution must be made after the written 
explanation is provided and on or before the date of the first payment. 
Similarly, the written explanation may also be provided less than 30 
days prior to the first payment of benefits if the requirements of 
paragraph (b)(3)(ii) of this section would be satisfied if the date of 
the first payment is substituted for the annuity starting date.
    (vii) Administrative delay. A plan will not fail to satisfy the 90-
day timing requirements of paragraphs (b)(3)(iii) and (vi) of this 
section merely because, due solely to administrative delay, a 
distribution commences more than 90 days after the written explanation 
of the QJSA is provided to the participant.
    (viii) The following example illustrates the provisions of this 
paragraph (b)(3):

    Example. Employee E, a married participant in a defined benefit plan 
who has terminated employment, is provided with the explanation of the 
QJSA on November 28.
    Employee E elects (with spousal consent) on December 2 to waive the 
QJSA and receive an immediate distribution in the form of a single life 
annuity. The plan may permit Employee E to receive payments with an 
annuity starting date of December 1, provided that the first payment is 
made no earlier than December 6 and the participant does not revoke the 
election before that date. The plan can make the remaining monthly 
payments on the first day of each month thereafter in accordance with 
its regular payment schedule.

    (ix) The additional rules of this paragraph (b)(3) concerning the 
notice and consent requirements of section 417 apply to distributions on 
or after September 22, 1995. For distributions before September 22, 
1995, the additional rules concerning the notice and consent 
requirements of section 417 in Sec.  1.417(e)-1(b)(3) in effect prior to 
September 22, 1995 (see Sec.  1.417(e)-1 (b)(3) in 26 CFR Part 1 revised 
as of April 1, 1995) apply.
    (4) Delegation to Commissioner. The Commissioner, in revenue 
rulings, notices, and other guidance published in the Internal Revenue 
Bulletin, may modify, or provide additional guidance with respect to, 
the notice and consent requirements of this section. See Sec.  
601.601(d)(2)(ii)(b) of this chapter.
    (c) Permitted distributions. A plan may not require that a 
participant or surviving spouse begin to receive benefits without 
satisfying paragraph (b) of this section while such benefits are 
immediately distributable, (see paragraph (b)(1) of this section). Once 
benefits are no longer immediately distributable, all benefits that the 
plan requires to begin must be provided in the form of a QJSA and QPSA 
unless the applicable written explanation, election and consent 
requirements of section 417 are satisfied.
    (d) Present value requirement-- (1) General rule-- (i) Defined 
benefit plans. Except as provided in section 411(a)(13) and the 
regulations thereunder, a defined benefit plan must provide that the 
present value of any accrued benefit and the amount (subject to sections 
411(c)(3) and 415) of any distribution, including a single sum, must not 
be less than the amount calculated using the applicable interest rate 
described in paragraph (d)(3) of this section (determined for the month 
described in paragraph (d)(4) of this section) and the applicable 
mortality table described in paragraph (d)(2) of this section. The 
present value of any optional form of benefit cannot be less than the 
present value of the normal retirement benefit determined in accordance 
with the preceding sentence. The same rules used for the plan under this 
paragraph (d) must also be used to compute the present value of the 
benefit for purposes of determining whether consent for a distribution 
is required under paragraph (b) of this section.
    (ii) Defined contribution plans. Because the accrued benefit under a 
defined contribution plan equals the account balance, a defined 
contribution plan is not subject to the requirements of this paragraph 
(d), regardless of

[[Page 411]]

whether the requirements of section 401(a)(11) apply to the plan.
    (2) Applicable mortality table. The applicable mortality table is 
the mortality table based on the prevailing commissioners' standard 
table (described in section 807(d)(5)(A)) used to determine reserves for 
group annuity contracts issued on the date as of which present value is 
being determined (without regard to any other subparagraph of section 
807(d)(5)), that is prescribed by the Commissioner in revenue rulings, 
notices, or other guidance published in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2)(ii)(b) of this chapter). The Commissioner may 
prescribe rules that apply in the case of a change to the prevailing 
commissioners' standard table (described in section 807(d)(5)(A)) used 
to determine reserves for group annuity contracts, in revenue rulings, 
notices, or other guidance published in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (3) Applicable interest rate--(i) General rule. The applicable 
interest rate for a month is the annual interest rate on 30-year 
Treasury securities as specified by the Commissioner for that month in 
revenue rulings, notices or other guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (ii) Example. This example illustrates the rules of this paragraph 
(d)(3):

    Example. Plan A is a calendar year plan. For its 1995 plan year, 
Plan A provides that the applicable mortality table is the table 
described in Rev. Rul. 95-6 (1995-1 C.B. 80), and that the applicable 
interest rate is the annual interest rate on 30-year Treasury securities 
as specified by the Commissioner for the first full calendar month 
preceding the calendar month that contains the annuity starting date. 
Participant P is age 65 in January 1995, which is the month that 
contains P's annuity starting date. P has an accrued benefit payable 
monthly of $1,000 and has elected to receive a distribution in the form 
of a single sum in January 1995. The annual interest rate on 30-year 
Treasury securities as published by the Commissioner for December 1994 
is 7.87 percent. To satisfy the requirements of section 417(e)(3) and 
this paragraph (d), the single sum received by P may not be less than 
$111,351.

    (4) Time for determining interest rate--(i) General rule. Except as 
provided in paragraph (d)(4)(iv) or (v) of this section, the applicable 
interest rate to be used for a distribution is the rate determined under 
paragraph (d)(3) of this section for the applicable lookback month. The 
applicable lookback month for a distribution is the lookback month (as 
described in paragraph (d)(4)(iii) of this section) for the month (or 
other longer stability period described in paragraph (d)(4)(ii) of this 
section) that contains the annuity starting date for the distribution. 
The time and method for determining the applicable interest rate for 
each participant's distribution must be determined in a consistent 
manner that is applied uniformly to all participants in the plan.
    (ii) Stability period. A plan must specify the period for which the 
applicable interest rate remains constant. This stability period may be 
one calendar month, one plan quarter, one calendar quarter, one plan 
year, or one calendar year.
    (iii) Lookback month. A plan must specify the lookback month that is 
used to determine the applicable interest rate. The lookback month may 
be the first, second, third, fourth, or fifth full calendar month 
preceding the first day of the stability period.
    (iv) Permitted average interest rate. A plan may apply the rules of 
paragraph (d)(4)(i) of this section by substituting a permitted average 
interest rate with respect to the plan's stability period for the rate 
determined under paragraph (d)(3) of this section for the applicable 
lookback month for the stability period. For this purpose, a permitted 
average interest rate with respect to a stability period is an interest 
rate that is computed by averaging the applicable interest rates 
determined under paragraph (d)(3) of this section for two or more 
consecutive months from among the first, second, third, fourth, and 
fifth calendar months preceding the first day of the stability period. 
For this paragraph (d)(4)(iv) to apply, a plan must specify the manner 
in which the permitted average interest rate is computed.
    (v) Additional determination dates. The Commissioner may prescribe, 
in revenue rulings, notices or other guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b)), other

[[Page 412]]

times that a plan may provide for determining the applicable interest 
rate.
    (vi) Example. This example illustrates the rules of this paragraph 
(d)(4):

    Example. Employer X maintains Plan A, a calendar year plan. Employer 
X wishes to amend Plan A so that the applicable interest rate will 
remain fixed for each plan quarter, and so that the applicable interest 
rate for distributions made during each plan quarter can be determined 
approximately 80 days before the beginning of the plan quarter. To 
comply with the provisions of this paragraph (d)(4), Plan A is amended 
to provide that the applicable interest rate is the annual interest rate 
on 30-year Treasury securities as specified by the Commissioner for the 
fourth calendar month preceding the first day of the plan quarter during 
which the annuity starting date occurs.

    (5) Use of alternative interest rate and mortality table. If a plan 
provides for use of an interest rate or mortality table other than the 
applicable interest rate or the applicable mortality table, the plan 
must provide that a participant's benefit must be at least as great as 
the benefit produced by using the applicable interest rate and the 
applicable mortality table. For example, if a plan provides for use of 
an interest rate of 7% and the UP-1984 Mortality Table (see Sec.  
1.401(a)(4)-12, Standard mortality table) in calculating single-sum 
distributions, the plan must provide that any single-sum distribution is 
calculated as the greater of the single-sum benefit calculated using 7% 
and the UP-1984 Mortality Table and the single-sum benefit calculated 
using the applicable interest rate and the applicable mortality table.
    (6) Exceptions. This paragraph (d) (other than the provisions 
relating to section 411(d)(6) requirements in paragraph (d)(10) of this 
section) does not apply to the amount of a distribution paid in the form 
of an annual benefit that--
    (i) Does not decrease during the life of the participant, or, in the 
case of a QPSA, the life of the participant's spouse; or
    (ii) Decreases during the life of the participant merely because 
of--
    (A) The death of the survivor annuitant (but only if the reduction 
is to a level not below 50% of the annual benefit payable before the 
death of the survivor annuitant); or
    (B) The cessation or reduction of Social Security supplements or 
qualified disability benefits (as defined in section 411(a)(9)).
    (7) Application to portion of a participant's benefit--(i) In 
general. This paragraph (d)(7) provides rules under which the 
requirements of this paragraph (d) apply to the distribution of only a 
portion of a participant's accrued benefit. Paragraph (d)(7)(ii) of this 
section provides rules for how a participant's accrued benefit may be 
bifurcated into separate components for purposes of applying this 
paragraph (d). Paragraph (d)(7)(iii) of this section provides rules of 
application. Paragraph (d)(7)(iv) of this section provides certain 
limited section 411(d)(6) relief, and paragraph (d)(7)(v) of this 
section provides examples of the application of the rules of this 
paragraph (d)(7).
    (ii) Bifurcation of accrued benefit--(A) Explicit plan-specified 
bifurcation. A plan is permitted to provide that the requirements of 
this paragraph (d) apply to a specified portion of a participant's 
accrued benefit as if that portion were the participant's entire accrued 
benefit. For example, a plan is permitted to provide that a distribution 
in the form of a single-sum payment described in this paragraph 
(d)(7)(ii)(A) is made to settle a specified percentage of the 
participant's accrued benefit. As another example, a plan is permitted 
to provide that a distribution in the form of a single-sum payment 
described in this paragraph (d)(7)(ii)(A) is made to settle the accrued 
benefit derived from contributions made by an employee. In both 
examples, the distribution must satisfy the requirements of this 
paragraph (d) with respect to the specified portion of the accrued 
benefit, and the remaining portion of the accrued benefit (the 
participant's total accrued benefit less the portion of the accrued 
benefit settled by the single-sum payment) can be paid in some other 
form of distribution that is available under the plan.
    (B) Distribution of specified amount. A plan that provides for a 
distribution of a single-sum payment that is not described in paragraph 
(d)(7)(ii)(A) of this section satisfies the requirements of this 
paragraph (d) with respect to that

[[Page 413]]

distribution if the portion of the participant's accrued benefit, 
expressed in the normal form of benefit under the plan and commencing at 
normal retirement age (or at the current date, if later), that is not 
settled by the distribution is no less than the excess of--
    (1) The participant's total accrued benefit expressed in that form; 
over
    (2) The annuity payable in that form that is actuarially equivalent 
to the single-sum payment, determined using the applicable interest rate 
and the applicable mortality table.
    (iii) Rules of operation--(A) Multiple distribution options. If a 
participant selects different distribution options with respect to two 
separate portions of the participant's accrued benefit that were 
determined in accordance with paragraph (d)(7)(ii) of this section, then 
the two different distribution options are treated as two separate 
optional forms of benefit for purposes of applying the requirements of 
section 417(e)(3) and this paragraph (d), even if the distribution 
options have the same annuity starting date. Thus, if the exception from 
the requirements of section 417(e)(3) and this paragraph (d) that is 
contained in paragraph (d)(6) of this section applies to one of those 
optional forms of benefit, then this paragraph (d) applies only to the 
other optional form of benefit.
    (B) Repeated application of rule. If a participant's accrued benefit 
has been bifurcated in accordance with paragraph (d)(7)(ii) of this 
section, then the provisions of paragraph (d)(7)(ii) of this section may 
be applied again to bifurcate the remaining accrued benefit.
    (C) Requirement to use explicit plan-specified bifurcation in 
certain cases--(1) Section 411(d)(6)--protected optional form. If the 
amount of a distribution in an optional form of benefit to which this 
paragraph (d) applies is determined by reference to the portion of a 
participant's accrued benefit as of the applicable amendment date for an 
amendment that eliminates that optional form of benefit (but, in 
accordance with section 411(d)(6), retains the optional form of benefit 
with respect to benefits accrued as of the applicable amendment date), 
then the plan must provide for explicit bifurcation of the accrued 
benefit as described in paragraph (d)(7)(ii)(A) of this section.
    (2) Single-sum available with respect to entire accrued benefit. If 
a plan provides that a single-sum distribution is available to settle a 
participant's entire accrued benefit, then, in order to also provide for 
a distribution in the form of a single-sum payment that settles only a 
portion of a participant's accrued benefit, the plan must provide for 
explicit bifurcation of the accrued benefit as described in paragraph 
(d)(7)(ii)(A) of this section.
    (D) Application of different factors to different portions of the 
accrued benefit. If a plan provides for an early retirement benefit, a 
retirement-type subsidy, an optional form of benefit, or an ancillary 
benefit, that applies only to a portion of a participant's accrued 
benefit, and the plan provides for a distribution that settles some, but 
not all, of the participant's accrued benefit, then the plan must 
specify which portion of the participant's total accrued benefit is 
settled by that distribution. For example, if a plan had one set of 
early retirement factors that applied to the accrued benefit as of 
December 31, 2005, but a different set of early retirement factors that 
applied to benefit accruals earned after that date, and the plan 
provides for a single-sum distribution that settles only a portion of a 
participant's accrued benefit, then the plan must specify which portion 
of the accrued benefit is settled by that distribution (in order to 
determine which early retirement factors apply to the remaining portion 
of the accrued benefit).
    (iv) Limited section 411(d)(6) anti-cutback relief. This paragraph 
(d)(7)(iv) applies in the case of a plan that, for plan years beginning 
before January 1, 2017, uses the section 417(e)(3) applicable interest 
rate and applicable mortality table to calculate the amount of a 
distribution that is made to settle a portion of the accrued benefit if, 
pursuant to this paragraph (d)(7), the requirements of section 417(e)(3) 
and this paragraph (d) need not apply to the distribution. In such a 
case, section 411(d)(6) is not violated merely because, in accordance 
with this paragraph (d)(7), the plan is amended on or before December 
31, 2017, to provide that the

[[Page 414]]

amount of a distribution described in the preceding sentence is 
determined for an annuity starting date on or after the applicable 
amendment date (within the meaning of Sec.  1.411(d)-3(g)(4)) using the 
same actuarial assumptions that apply to calculate the amount of a 
distribution in the same form of benefit that is made to settle the 
participant's entire accrued benefit.

    (v) Examples. The following examples illustrate the rules of this 
paragraph (d)(7). Unless otherwise indicated, these examples are based 
on the following assumptions: The taxpayers elect to apply the rules of 
this paragraph (d)(7) in 2016; each plan is a noncontributory defined 
benefit plan with a calendar-year plan year and a normal retirement age 
of age 65; a one-year stability period coinciding with the calendar year 
and a two-month lookback are used for determining the applicable 
interest rate; and all participant elections are made with proper 
spousal consent. The November 2015 segment rates are 1.76%, 4.15% and 
5.13%.

    Example 1. (i) Plan A offers a number of optional forms of payment, 
including a qualified joint and survivor annuity and a single-sum 
payment. The single-sum payment is equal to the present value of the 
participant's immediate benefit (but not less than the present value of 
the participant's accrued benefit payable at normal retirement age) 
using the applicable interest and mortality rates under section 
417(e)(3). The amount of the joint and survivor annuity is determined 
using plan factors that are not based on the applicable interest and 
mortality rates under section 417(e)(3). Plan A permits a participant to 
elect to receive a percentage of the accrued benefit as a single sum and 
the remainder in any annuity form provided under the plan, with the 
amount of the single-sum payment determined by multiplying the amount 
that would be payable if the entire benefit were paid as a single sum by 
the percentage of the accrued benefit settled by the single-sum payment.
    (ii) Participant S retires at age 62 in 2016, with an accrued 
benefit of $1,000 per month payable as a straight life annuity at normal 
retirement age. Participant S is eligible for an unreduced early 
retirement benefit and can therefore collect a straight life annuity 
benefit of $1,000 per month beginning immediately. Alternatively, 
Participant S can elect to receive the benefit in other forms, including 
a single-sum payment of $168,516 (based on the applicable interest and 
mortality rates under section 417(e), which are the November 2015 
segment rates and the 2016 applicable mortality table), or a 100% joint 
and survivor annuity of $850 per month (based on the plan's actuarial 
equivalence factors). Participant S elects to receive 25% of the accrued 
benefit in the form of a single-sum payment and the remaining 75% of the 
accrued benefit as a 100% joint and survivor annuity.
    (iii) Participant S receives a single-sum payment with respect to 
25% of the accrued benefit. Accordingly, this single-sum payment is 
equal to 25% of the full single-sum amount, or $42,129. The remaining 
portion of the accrued benefit is 75% of the total accrued benefit, or 
$750 per month payable as a straight life annuity at normal retirement 
age.
    (iv) To settle the remaining portion of the accrued benefit, in 
addition to the single-sum payment of $42,129, Participant S receives a 
100% joint and survivor annuity in the amount of $637.50 per month, 
which is determined by applying the plan's unreduced early retirement 
and actuarial equivalence factors to the remaining portion of the 
accrued benefit of $750 per month payable as a straight life annuity at 
normal retirement age. The joint and survivor annuity benefit is not 
subject to the minimum present value requirements of section 417(e)(3) 
because it is treated as a separate optional form of benefit under 
paragraph (d)(7)(iii)(A) of this section.
    Example 2. (i) Plan B is a contributory defined benefit plan that 
permits a participant to elect a single sum distribution equal to the 
participant's employee contributions, accumulated with interest, with 
the remainder payable as an annuity. Plan B provides that the 
probability of death before normal retirement age is not taken into 
account for purposes of determining actuarial equivalence between the 
single-sum payment and an annuity at normal retirement age. Based on the 
applicable mortality table for 2016 and the November 2015 segment rates, 
the deferred annuity factor at age 60 for lifetime payments commencing 
at age 65 (determined without taking mortality before age 65 into 
account) is 10.209.
    (ii) Participant T retires at age 60 in 2016 with an accrued benefit 
of $1,500 per month payable as a straight life annuity commencing at 
normal retirement age. For benefits commencing at age 60, Plan B 
provides for an early retirement reduction factor of 75% and an 
actuarial equivalence factor of 98% for adjusting a straight life 
annuity to a 10-year certain and life annuity, neither of which is based 
on the applicable interest and mortality rates under section 417(e)(3). 
Participant T's benefit commencing at age 60 in the form of a 10-year 
certain and life annuity would be $1,500 x 75% x 98% = $1,102.50 per 
month. Participant T elects to receive a single sum payment of $32,000 
equal to T's accumulated contributions with interest, and the

[[Page 415]]

remainder as a 10-year certain and life annuity.
    (iii) The single-sum payment elected by Participant T is a 
distribution that is determined by reference to Participant T's 
contributions and interest, and not by reference to a specified portion 
of the participant's accrued benefit. Therefore, the single-sum payment 
is not described in paragraph (d)(7)(ii)(A) of this section. In order to 
satisfy paragraph (d)(7)(ii)(B) of this section, the portion of the 
participant's accrued benefit that is not settled by the single-sum 
payment must be no less than the excess of (A) the participant's total 
accrued benefit over (B) the annuity that is actuarially equivalent to 
the single-sum payment, (determined using the applicable interest and 
mortality rates under section 417(e)(3) as applicable), both expressed 
in the normal form of benefit commencing at normal retirement age. The 
amount of that actuarially equivalent annuity is determined by dividing 
Participant T's single-sum payment of $32,000 by the deferred annuity 
factor for lifetime payments commencing at age 65 under the terms of 
Plan B (10.209, not considering mortality for the deferral period) and 
dividing by 12 for an actuarially equivalent monthly benefit commencing 
at age 65 of $261.21. Thus, in order to satisfy paragraph (d)(7)(ii)(B) 
of this section, the remaining portion of T's accrued benefit must be at 
least $1,238.79 per month ($1,500.00-$261.21) payable as a straight life 
annuity at normal retirement age.
    (iv) Based on Plan B's early retirement and optional form factors 
applied to the remaining portion, the annuity benefit payable to 
Participant T in the form of a 10-year certain and life annuity 
beginning at age 60 cannot be less than $910.51 per month ($1,238.79 x 
75% x 98%). Participant T receives this in addition to the single-sum 
payment of $32,000. The 10-year certain and life benefit is not subject 
to the minimum present value requirements of section 417(e)(3) because 
it is treated as a separate optional form of benefit under paragraph 
(d)(7)(iii)(A) of this section.
    (v) If, instead, Plan B's terms had provided for a single-sum 
payment equal to the present value of the participant's employee-
provided accrued benefit as determined under section 411(c)(3), then the 
plan is determining the single-sum payment as the present value of a 
specified portion of the accrued benefit. In such a case, the plan is 
using explicit bifurcation as described in paragraph (d)(7)(ii)(A) of 
this section and the single-sum payment would have to be set equal to 
the present value, determined under Plan B's terms, of T's employee-
provided accrued benefit (which may or may not be equal to T's 
accumulated contributions and interest, depending on the plan's terms). 
The remaining annuity benefit payable to Participant T would have been 
based on an accrued benefit equal to $1,500 per month minus the amount 
of T's employee-provided accrued benefit.
    Example 3. (i) The facts are the same as in Example 2 of this 
paragraph (d)(7)(v), except that Plan B also offers a single-sum payment 
option with respect to a participant's entire benefit. The single-sum 
payment is determined as the present value of the participant's early 
retirement benefit (but no less than the present value of the 
participant's accrued benefit) using the applicable interest and 
mortality rates under section 417(e)(3). Based on the applicable 
mortality table for 2016 and the November 2015 segment rates, the 
immediate annuity factor for lifetime payments commencing at age 60 is 
14.632. Under the terms of the plan, the early retirement benefit 
payable as a straight life annuity to Participant T at age 60 with 
respect to T's full accrued benefit is $1,125 ($1,500 x 75%), and the 
corresponding single-sum amount payable to T is $1,125 x 14.632 x 12 = 
$197,532. (Note that this amount is larger than the age-60 present value 
of T's accrued benefit without taking mortality before age 65 into 
account, $1,500 x 10.209 x 12 = $183,762.) Participant T elects to 
receive a partial single-sum payment of $32,000, equal to T's 
accumulated contributions with interest and to take the remaining 
accrued benefit in the form of a 10-year certain and life annuity 
commencing at age 60.
    (ii) Because the plan also provides for a single-sum payment option 
with respect to a participant's entire benefit, pursuant to paragraph 
(d)(7)(iii)(C)(2) of this section the partial single-sum payment must be 
determined pursuant to the explicit bifurcation rules of paragraph 
(d)(7)(ii)(A) of this section.
    (iii) The portion of the participant's accrued benefit that is 
settled by the single-sum payment of $32,000 is determined as the amount 
that bears the same ratio to the total accrued benefit as that single-
sum payment bears to the single-sum payment with respect to the entire 
accrued benefit (($32,000 / $197,532) x $1,500), which is $243 per month 
payable as a straight life annuity at normal retirement age. Thus, the 
remaining portion of the accrued benefit is $1,257.00 per month payable 
as a straight life annuity at normal retirement age.
    (iv) Based on Plan B's early retirement and optional form factors 
applied to the remaining portion, the annuity benefit payable to 
Participant T in the form of a 10-year certain and life annuity 
beginning at age 60 is $923.90 per month ($1,257 x 75% x 98%). 
Participant T receives this benefit in addition to the single sum 
payment of $32,000. The 10-year certain and life benefit is not subject 
to the minimum present value requirements of section 417(e)(3) because 
it is treated as a separate optional form of benefit under paragraph 
(d)(7)(iii)(A) of this section.

[[Page 416]]

    Example 4. (i) Plan C was amended to freeze benefits under a 
traditional defined benefit formula as of December 31, 2016, and to 
provide benefits under a cash balance formula beginning January 1, 2017. 
The plan provides that participants may elect separate distribution 
options for the portion of the benefit accrued under the traditional 
formula as of December 31, 2016, and the portion of the benefit earned 
under the cash balance formula. Furthermore, the plan provides that a 
participant may elect to receive a single-sum payment only with respect 
to the portion of the benefit earned under the cash balance formula.
    (ii) In accordance with paragraph (d)(7)(ii)(A) of this section, 
Plan C provides for an explicitly bifurcated accrued benefit because the 
portion of the accrued benefit settled by a distribution is determined 
separately for the portion under the traditional formula and the portion 
under the cash balance formula. As provided under paragraph 
(d)(7)(iii)(A) of this section, a single-sum payment under the cash 
balance formula and a distribution option under the traditional formula 
are treated as two separate optional forms of benefit for purposes of 
applying the provisions of the plan implementing the requirements of 
section 417(e)(3) and this paragraph (d). Therefore, whether a 
participant elects to receive a single-sum payment of the portion of the 
benefit earned under the cash balance formula does not affect whether 
the distribution elected with respect to the portion of the benefit 
earned as of December 31, 2016, is subject to the minimum present value 
requirements of section 417(e)(3).
    Example 5. (i) The facts are the same as in Example 4 of this 
paragraph (d)(7)(v), except that Plan C also permits a participant to 
elect, with respect to the cash balance portion of the benefit, to 
receive a percentage of that portion as a single sum and the remainder 
in any annuity form provided under the plan, with the amount of the 
single-sum payment determined by multiplying the amount that would be 
payable if the entire cash balance portion were paid as a single sum by 
the percentage of the cash balance portion settled by the single-sum 
payment. Participant W retires at age 65, with an accrued benefit under 
the traditional defined benefit formula (earned as of December 31, 2016) 
of $500 per month payable as a straight life annuity at normal 
retirement age and a cash balance hypothetical account balance of 
$45,000. Based on Plan C's actuarial equivalence factors, Participant 
W's accrued benefit derived from the cash balance hypothetical account 
is $320 per month, payable as a straight life annuity at normal 
retirement age. Participant W elects to receive \1/3\ or $15,000 of the 
current hypothetical account balance in the form of a single sum and to 
receive the remainder of the total accrued benefit as a straight life 
annuity.
    (ii) Under the analysis set forth in Example 4 of this paragraph 
(d)(7)(v), Plan C provides for an explicitly bifurcated accrued benefit 
with respect to the traditional defined benefit portion and the cash 
balance portion because the portion of the accrued benefit settled by a 
distribution is determined separately for the portion under the 
traditional formula and the portion under the cash balance formula. As 
provided under paragraph (d)(7)(iii)(A) of this section, a single-sum 
payment under the cash balance formula and a distribution option under 
the traditional formula are treated as two separate optional forms of 
benefit for purposes of applying the provisions of the plan implementing 
the requirements of section 417(e)(3) and this paragraph (d). Thus, a 
separate distribution option may be chosen for each of these two 
portions, and section 417(e)(3) applies separately to each portion.
    (iii) In accordance with paragraph (d)(7)(ii)(A) of this section, 
Plan C also provides for an explicitly bifurcated accrued benefit with 
respect to the cash balance benefit because the plan provides that a 
distribution in the form of a single-sum payment is made to settle a 
specified percentage of the cash balance benefit. As provided under 
paragraph (d)(7)(iii)(A) of this section, the single-sum payment and the 
annuity selected by Participant W with respect to the cash balance 
benefit are treated as two separate optional forms of benefit for 
purposes of applying the provisions of the plan implementing the 
requirements of section 417(e)(3) and this paragraph (d). Thus, in 
accordance with paragraph (d)(7)(ii)(A) of this section, \1/3\ of the 
cash balance hypothetical account is settled by the distribution paid 
out as a single sum (that is, $15,000 / $45,000). After the single-sum 
payment, the remaining portion of the accrued benefit derived from the 
cash balance account is \2/3\ of the initial accrued benefit derived 
from the cash balance account, or a straight life annuity at normal 
retirement age of $213.33 per month (\2/3\ x $320).
    (iv) To settle the remaining portion of the entire accrued benefit 
(the portion of the benefit attributable to service as of December 31, 
2016 plus the remaining portion of the cash balance benefit), 
Participant W receives a monthly life annuity of $713.33 per month 
payable as a straight life annuity at normal retirement age (equal to 
the $500 straight life annuity at normal retirement age earned as of 
December 31, 2016 plus the remaining benefit derived from the cash 
balance portion of a straight life annuity payable at normal retirement 
age of $213.33 per month). Participant W's election to receive a single-
sum payment of part of the benefit earned under the cash balance formula 
does not affect whether the remainder of Participant W's distribution is 
subject to the minimum

[[Page 417]]

present value requirements of section 417(e)(3).
    Example 6. (i) Plan D permits participants to elect a single-sum 
payment of up to $10,000 with the remaining benefit payable in the form 
of an annuity. Participant X retires in 2016 at age 55 with an accrued 
benefit of $1,000 per month payable as a straight life annuity at normal 
retirement age. Participant X is eligible for an unreduced early 
retirement benefit of $1,000 per month payable as a straight life 
annuity. Alternatively, based on Plan D's definition of actuarial 
equivalence (which is not based on the applicable interest and mortality 
rates under section 417(e)(3)), Participant X can receive an immediate 
benefit in the form of a 100% joint and survivor annuity of $800 per 
month. Participant X elects to receive a single-sum payment of $10,000, 
with the balance of the benefit payable as a 100% joint and survivor 
annuity beginning at age 55. Based on the applicable mortality table for 
2016 and the November 2015 segment rates, the deferred annuity factor at 
age 55 for lifetime payments commencing at age 65 is 7.602.
    (ii) Plan D provides for a single-sum distribution of a portion of 
the participant's accrued benefit but, because the plan initially 
specifies the amount of the single-sum distribution (rather than the 
portion of the accrued benefit that is being settled by that 
distribution), Plan D is described in paragraph (d)(7)(ii)(B) of this 
section. As provided under paragraph (d)(7)(iii)(A) of this section, the 
single-sum payment and the joint-and-survivor annuity selected by 
Participant X are treated as two separate optional forms of benefit for 
purposes of applying the provisions of the plan implementing the 
requirements of section 417(e)(3) and this paragraph (d).
    (iii) A straight life annuity of $109.62 per month payable at normal 
retirement age is actuarially equivalent to the $10,000 single-sum 
payment, determined using the applicable mortality table for 2016 and 
the November 2015 segment rates ($10,000 / 12 / 7.602). Therefore, 
pursuant to paragraph (d)(7)(ii)(B) of this section, in order to satisfy 
this paragraph (d) the remaining portion of the accrued benefit after 
the single-sum payment of $10,000 must be no less than $890.38 per month 
payable as a straight life annuity at normal retirement age ($1,000.00-
$109.62).
    (iv) Based on Plan D's early retirement and optional form factors, 
in order to satisfy this paragraph (d), the annuity benefit payable to 
Participant X in the form of a 100% joint-and-survivor annuity beginning 
at age 55 must be no less than $712.30 per month ($890.38 x .8). 
Participant X receives this benefit in addition to the single sum 
payment of $10,000. The joint and survivor annuity benefit is not 
subject to the minimum present value requirements of section 417(e)(3) 
because it is treated as a separate optional form of benefit under 
paragraph (d)(7)(iii)(A) of this section.
    Example 7. (i) Plan E provides for an unreduced early retirement 
benefit for participants who have met certain age and service 
requirements. Prior to amendment, Plan E permitted participants to elect 
a single-sum payment equal to the present value of the participant's 
unreduced early retirement benefit, determined using the applicable 
interest rate and applicable mortality table under section 417(e)(3). 
Plan E did not permit participants to elect a single-sum payment with 
respect to only a portion of their benefits. Effective December 31, 
2012, Plan E was amended to eliminate the single-sum payment with 
respect to benefits accrued after that date.
    (ii) Participant Y retires on December 31, 2016, at age 60, after 
meeting Plan E's age and service requirements for an unreduced early 
retirement benefit. Participant Y's accrued benefit is $1,000 per month 
payable as a straight life annuity commencing at normal retirement age, 
of which $800 per month was accrued as of December 31, 2012. Participant 
Y elects to take a single-sum payment based on the benefit accrued as of 
December 31, 2012, with the remainder paid as a lifetime annuity 
commencing at age 60. Based on the applicable mortality table for 2016 
and the November 2015 segment rates, the immediate annuity factor for 
lifetime payments commencing at age 60 is 14.632, so Y's single-sum 
payment is $800 x 12 x 14.632 = $140,467.20.
    (iii) In accordance with paragraph (d)(7)(iii)(C)(1) of this 
section, Plan E provides for explicit bifurcation of the accrued benefit 
as described in paragraph (d)(7)(ii)(A) of this section. Therefore, 
Participant Y must receive an annuity of $200 earned after December 31, 
2012 in addition to the single-sum payment of $140,467. Plan E is not 
permitted to use the approach described in paragraph (d)(7)(ii)(B) of 
this section to reduce or eliminate the $200 annuity earned after 
December 31, 2012.

    (8) Effective/applicability date--(i) In general. Except as 
otherwise provided in this paragraph (d)(8), this paragraph (d) applies 
to distributions with annuity starting dates in plan years beginning on 
or after January 1, 1995.
    (ii) Optional delayed effective date of Retirement Protection Act of 
1994 (RPA '94)(108 Stat. 5012) rules for plans adopted and in effect 
before December 8, 1994. For a plan adopted and in effect before 
December 8, 1994, the application of the rules relating to the 
applicable mortality table and applicable interest rate under paragraphs 
(d)(2) through (4) of this section is delayed to the extent provided in 
this paragraph (d)(8)(ii), if

[[Page 418]]

the plan provisions in effect on December 7, 1994, met the requirements 
of section 417(e)(3) and Sec.  1.417(e)-1(d) as in effect on December 7, 
1994 (as contained in 26 CFR part 1 revised April 1, 1995). In the case 
of a distribution from such a plan with an annuity starting date that 
precedes the optional delayed effective date described in paragraph 
(d)(8)(iv) of this section, and that precedes the first day of the first 
plan year beginning after December 31, 1999, the rules of paragraph 
(d)(9) of this section (which generally apply to distributions with 
annuity starting dates in plan years beginning before January 1, 1995) 
apply in lieu of the rules of paragraphs (d)(2) through (4) of this 
section. The interest rate under the rules of paragraph (d)(9) of this 
section is determined under the provisions of the plan as in effect on 
December 7, 1994, reflecting the interest rate or rates published by the 
Pension Benefit Guaranty Corporation (PBGC) and the provisions of the 
plan for determining the date on which the interest rate is fixed. The 
above described interest rate or rates published by the PBGC are those 
determined by the PBGC (for the date determined under those plan 
provisions) pursuant to the methodology under the regulations of the 
PBGC for determining the present value of a lump sum distribution on 
plan termination under 29 CFR part 2619 that were in effect on September 
1, 1993 (as contained in 29 CFR part 2619 revised July 1, 1994).
    (iii) Optional accelerated effective date of RPA '94 rules. This 
paragraph (d) is also effective for a distribution with an annuity 
starting date after December 7, 1994, during a plan year beginning 
before January 1, 1995, if the employer elects, on or before the annuity 
starting date, to make the rules of this paragraph (d) effective with 
respect to the plan as of the optional accelerated effective date 
described in paragraph (d)(8)(iv) of this section. An employer is 
treated as making this election by making the plan amendments described 
in paragraph (d)(8)(iv) of this section.
    (iv) Determination of delayed or accelerated effective date by plan 
amendment adopting RPA '94 rules. The optional delayed effective date of 
paragraph (d)(8)(ii) of this section, or the optional accelerated 
effective date of paragraph (d)(8)(iii) of this section, whichever is 
applicable, is the date plan amendments applying both the applicable 
mortality table of paragraph (d)(2) of this section and the applicable 
interest rate of paragraph (d)(3) of this section are adopted or, if 
later, are made effective.
    (v) Effective date for special rules applicable to the payment of a 
portion of a participant's benefit. Paragraph (d)(7) of this section 
applies to distributions with annuity starting dates in plan years 
beginning on or after January 1, 2017. However, taxpayers may elect to 
apply the rules of paragraph (d)(7) of this section to earlier periods.
    (9) Plan years beginning before January 1, 1995--(i) Interest rate. 
(A) For distributions made in plan years beginning after December 31, 
1986, and before January 1, 1995, the following interest rate described 
in paragraph (d)(9)(i)(A)(1) or (2) of this section, whichever applies, 
is substituted for the applicable interest rate for purposes of this 
section--
    (1) The rate or rates that would be used by the PBGC for a trusteed 
single-employer plan to value the participant's (or beneficiary's) 
vested benefit (PBGC interest rate) if the present value of such benefit 
does not exceed $25,000; or
    (2) 120 percent of the PBGC interest rate, as determined in 
accordance with paragraph (d)(9)(i)(A)(1) of this section, if such 
present value exceeds $25,000. In no event shall the present value 
determined by use of 120 percent of the PBGC interest rate result in a 
present value less than $25,000.
    (B) The PBGC interest rate may be a series of interest rates for any 
given date. For example, the PBGC interest rate for immediate annuities 
for November 1994 is 6%, and the PBGC interest rates for the deferral 
period for that month are as follows: 5.25% for the first 7 years of the 
deferral period, 4% for the following 8 years of the deferral period, 
and 4% for the remainder of the deferral period. For November 1994, 120 
percent of the PBGC interest rate is 7.2% (1.2 times 6%) for an 
immediate annuity, 6.3% (1.2 times 5.25%) for the first 7 years of the 
deferral period, 4.8% (1.2 times 4%) for the following 8 years

[[Page 419]]

of the deferral period, and 4.8% (1.2 times 4%) for the remainder of the 
deferral period. The PBGC interest rates are the interest rates that 
would be used (as of the date of the distribution) by the PBGC for 
purposes of determining the present value of that benefit upon 
termination of an insufficient trusteed single employer plan. Except as 
otherwise provided by the Commissioner, the PBGC interest rates are 
determined by PBGC regulations. See subpart B of 29 CFR part 4044 for 
the applicable PBGC rates.
    (ii) Time for determining interest rate. (A) Except as provided in 
paragraph (d)(9)(ii)(B) of this section, the PBGC interest rate or rates 
are determined on either the annuity starting date or the first day of 
the plan year that contains the annuity starting date. The plan must 
provide which date is applicable.
    (B) The plan may provide for the use of any other time for 
determining the PBGC interest rate or rates provided that such time is 
not more than 120 days before the annuity starting date if such time is 
determined in a consistent manner and is applied uniformly to all 
participants.
    (C) The Commissioner may, in revenue rulings, notices or other 
guidance published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b), prescribe other times for determining the PBGC 
interest rate or rates.
    (iii) No applicable mortality table. In the case of a distribution 
to which this paragraph (d)(9) applies, the rules of this paragraph (d) 
are applied without regard to the applicable mortality table described 
in paragraph (d)(2) of this section.
    (10) Relationship with section 411(d)(6)--(i) In general. A plan 
amendment that changes the interest rate, the time for determining the 
interest rate, or the mortality assumptions used for the purposes 
described in paragraph (d)(1) of this section is subject to section 
411(d)(6). But see Sec.  1.411(d)-4, Q&A-2(b)(2)(v) (regarding plan 
amendments relating to involuntary distributions). In addition, a plan 
amendment that changes the interest rate or the mortality assumptions 
used for the purposes described in paragraph (d)(1) of this section 
merely to eliminate use of the interest rate described in paragraph 
(d)(3) or paragraph (d)(9) of this section, or the applicable mortality 
table, with respect to a distribution form described in paragraph (d)(6) 
of this section, for distributions with annuity starting dates occurring 
after a specified date that is after the amendment is adopted, does not 
violate the requirements of section 411(d)(6) if the amendment is 
adopted on or before the last day of the last plan year ending before 
January 1, 2000.
    (ii) Section 411(d)(6) relief for change in time for determining 
interest rate. Notwithstanding the general rule of paragraph (d)(10)(i) 
of this section, if a plan amendment changes the time for determining 
the applicable interest rate (including an indirect change as a result 
of a change in plan year), the amendment will not be treated as reducing 
accrued benefits in violation of section 411(d)(6) merely on account of 
this change if the conditions of this paragraph (d)(10)(ii) are 
satisfied. If the plan amendment is effective on or after the adoption 
date, any distribution for which the annuity starting date occurs in the 
one-year period commencing at the time the amendment is effective must 
be determined using the interest rate provided under the plan determined 
at either the date for determining the interest rate before the 
amendment or the date for determining the interest rate after the 
amendment, whichever results in the larger distribution. If the plan 
amendment is adopted retroactively (that is, the amendment is effective 
prior to the adoption date), the plan must use the interest rate 
determination date resulting in the larger distribution for the period 
beginning with the effective date and ending one year after the adoption 
date.
    (iii) Section 411(d)(6) relief for plan amendments pursuant to 
changes to section 417 made by RPA '94 providing for statutory interest 
rate determination date. Notwithstanding the general rule of paragraph 
(d)(10)(i) of this section, except as provided in paragraph 
(d)(10)(vi)(B) of this section, a participant's accrued benefit is not 
considered to be reduced in violation of section 411(d)(6) merely 
because of a plan amendment that changes any interest

[[Page 420]]

rate or mortality assumption used to calculate the present value of a 
participant's benefit under the plan, if the following conditions are 
satisfied--
    (A) The amendment replaces the PBGC interest rate (or an interest 
rate or rates based on the PBGC interest rate) as the interest rate used 
under the plan in determining the present value of a participant's 
benefit under this paragraph (d); and
    (B) After the amendment is effective, the present value of a 
participant's benefit under the plan cannot be less than the amount 
calculated using the applicable mortality table and the applicable 
interest rate for the first full calendar month preceding the calendar 
month that contains the annuity starting date.
    (iv) Section 411(d)(6) relief for plan amendments pursuant to 
changes to section 417 made by RPA '94 providing for prior determination 
date or up to two months earlier. Notwithstanding the general rule of 
paragraph (d)(10)(i) of this section, except as provided in paragraph 
(d)(10)(vi)(B) of this section, a participant's accrued benefit is not 
considered to be reduced in violation of section 411(d)(6) merely 
because of a plan amendment that changes any interest rate or mortality 
assumption used to calculate the present value of a participant's 
benefit under the plan, if the following conditions are satisfied--
    (A) The amendment replaces the PBGC interest rate (or an interest 
rate or rates based on the PBGC interest rate) as the interest rate used 
under the plan in determining the present value of a participant's 
benefit under this paragraph (d); and
    (B) After the amendment is effective, the present value of a 
participant's benefit under the plan cannot be less than the amount 
calculated using the applicable mortality table and the applicable 
interest rate, but only if the applicable interest rate is the annual 
interest rate on 30-year Treasury securities for the calendar month that 
contains the date as of which the PBGC interest rate (or an interest 
rate or rates based on the PBGC interest rate) was determined 
immediately before the amendment, or for one of the two calendar months 
immediately preceding such month.
    (v) Section 411(d)(6) relief for plan amendments pursuant to changes 
to section 417 made by RPA '94 providing for other interest rate 
determination date. Notwithstanding the general rule of paragraph 
(d)(10)(i) of this section, except as provided in paragraph 
(d)(10)(vi)(B) of this section, a participant's accrued benefit is not 
considered to be reduced in violation of section 411(d)(6) merely 
because of a plan amendment that changes any interest rate or mortality 
assumption used to calculate the present value of a participant's 
benefit under the plan, if the following conditions are satisfied--
    (A) The amendment replaces the PBGC interest rate (or an interest 
rate or rates based on the PBGC interest rate) as the interest rate used 
under the plan in determining the present value of a participant's 
benefit under this paragraph (d);
    (B) After the amendment is effective, the present value of a 
participant's benefit under the plan cannot be less than the amount 
calculated using the applicable mortality table and the applicable 
interest rate; and
    (C) The plan amendment satisfies either the condition of paragraph 
(d)(10)(ii) of this section (determined using the interest rate provided 
under the terms of the plan after the effective date of the amendment) 
or the special early transition interest rate rule of paragraph 
(d)(10)(vi)(C) of this section.
    (vi) Special rules--(A) Provision of temporary additional benefits. 
A plan amendment described in paragraph (d)(10)(iii), (iv), or (v) of 
this section is not considered to reduce a participant's accrued benefit 
in violation of section 411(d)(6) even if the plan amendment provides 
for temporary additional benefits to accommodate a more gradual 
transition from the plan's old interest rate to the new rules.
    (B) Replacement of non-PBGC interest rate. The section 411(d)(6) 
relief provided in paragraphs (d)(10)(iii) through (v) of this section 
does not apply to a plan amendment that replaces an interest rate other 
than the PBGC interest rate (or an interest rate or rates based on the 
PBGC interest rate) as an

[[Page 421]]

interest rate used under the plan in determining the present value of a 
participant's benefit under this paragraph (d). Thus, the accrued 
benefit determined using that interest rate and the associated mortality 
table is protected under section 411(d)(6). For purposes of this 
paragraph (d), an interest rate is based on the PBGC interest rate if 
the interest rate is defined as a specified percentage of the PBGC 
interest rate, the PBGC interest rate minus a specified number of basis 
points, or an average of such interest rates over a specified period.
    (C) Special early transition interest rate rule for paragraph 
(d)(10)(v). A plan amendment satisfies the special rule of this 
paragraph (d)(10)(vi)(C) if any distribution for which the annuity 
starting date occurs in the one-year period commencing at the time the 
plan amendment is effective is determined using whichever of the 
following two interest rates results in the larger distribution--
    (1) The interest rate as provided under the terms of the plan after 
the effective date of the amendment, but determined at a date that is 
either one month or two months (as specified in the plan) before the 
date for determining the interest rate used under the terms of the plan 
before the amendment; or
    (2) The interest rate as provided under the terms of the plan after 
the effective date of the amendment, determined at the date for 
determining the interest rate after the amendment.
    (vii) Examples. The provisions of this paragraph (d)(10) are 
illustrated by the following examples:

    Example 1. On December 31, 1994, Plan A provided that all single-sum 
distributions were to be calculated using the UP-1984 Mortality Table 
and 100% of the PBGC interest rate for the date of distribution. On 
January 4, 1995, and effective on February 1, 1995, Plan A was amended 
to provide that all single-sum distributions are calculated using the 
applicable mortality table and the annual interest rate on 30-year 
Treasury securities for the first full calendar month preceding the 
calendar month that contains the annuity starting date. Pursuant to 
paragraph (d)(10)(iii) of this section, this amendment of Plan A is not 
considered to reduce the accrued benefit of any participant in violation 
of section 411(d)(6).
    Example 2. On December 31, 1994, Plan B provided that all single-sum 
distributions were to be calculated using the UP-1984 Mortality Table 
and an interest rate equal to the lesser of 100% of the PBGC interest 
rate for the date of distribution, or 6%. On January 4, 1995, and 
effective on February 1, 1995, Plan B was amended to provide that all 
single-sum distributions are calculated using the applicable mortality 
table and the annual interest rate on 30-year Treasury securities for 
the second full calendar month preceding the calendar month that 
contains the annuity starting date. Pursuant to paragraph (d)(10)(iv) of 
this section, this amendment of Plan B is not considered to reduce the 
accrued benefit of any participant in violation of section 411(d)(6) 
merely because of the replacement of the PBGC interest rate. However, 
under paragraph (d)(10)(vi)(B) of this section, the section 411(d)(6) 
relief provided in paragraphs (d)(10)(iii) through (v) of this section 
does not apply to a plan amendment that replaces an interest rate other 
than the PBGC interest rate (or a rate based on the PBGC interest rate). 
Therefore, pursuant to paragraph (d)(10)(vi)(B) of this section, to 
satisfy the requirements of section 411(d)(6), the plan must provide 
that the single-sum distribution payable to any participant must be no 
less than the single-sum distribution calculated using the UP-1984 
Mortality Table and an interest rate of 6%, based on the participant's 
benefits under the plan accrued through January 31, 1995, and based on 
the participant's age at the annuity starting date.
    Example 3. On December 31, 1994, Plan C, a calendar year plan, 
provided that all single sum distributions were to be calculated using 
the UP-1984 Mortality Table and an interest rate equal to the PBGC 
interest rate for January 1 of the plan year. On March 1, 1995, and 
effective on July 1, 1995, Plan C was amended to provide that all 
single-sum distributions are calculated using the applicable mortality 
table and the annual interest rate on 30-year Treasury securities for 
August of the year before the plan year that contains the annuity 
starting date. The plan amendment provides that each distribution with 
an annuity starting date after June 30, 1995, and before July 1, 1996, 
is calculated using the 30-year Treasury rate for August of the year 
before the plan year that contains the annuity starting date, or the 30-
year Treasury rate for January of the plan year that contains the 
annuity starting date, whichever produces the larger benefit. Pursuant 
to paragraph (d)(10)(v) of this section, the amendment of Plan C is not 
considered to have reduced the accrued benefit of any participant in 
violation of section 411(d)(6).
    Example 4. (a) Employer X maintains Plan D, a calendar year plan. As 
of December 7,

[[Page 422]]

1994, Plan D provided for single-sum distributions to be calculated 
using the PBGC interest rate as of the annuity starting date for 
distributions not greater than $25,000, and 120% of that interest rate 
(but not an interest rate producing a present value less than $25,000) 
for distributions over $25,000. Employer X wishes to delay the effective 
date of the RPA '94 rules for a year, and to provide for an extended 
transition from the use of the PBGC interest rate to the new applicable 
interest rate under section 417(e)(3). On December 1, 1995, and 
effective on January 1, 1996, Employer X amends Plan D to provide that 
single-sum distributions are determined as the sum of--
    (i) The single-sum distribution calculated based on the applicable 
mortality table and the annual interest rate on 30-year Treasury 
securities for the first full calendar month preceding the calendar 
month that contains the annuity starting date; and
    (ii) A transition amount.
    (b) The amendment provides that the transition amount for 
distributions in the years 1996-99 is a transition percentage of the 
excess, if any, of the amount that the single-sum distribution would 
have been under the plan provisions in effect prior to this amendment 
over the amount of the single sum described in paragraph (a)(i) of this 
Example 4. The transition percentages are 80% for 1996, decreasing to 
60% for 1997, 40% for 1998 and 20% for 1999. The amendment also provides 
that the transition amount is zero for plan years beginning on or after 
the year 2000. Pursuant to paragraphs (d)(10)(iii) and (vi)(A) of this 
section, the amendment of Plan D is not considered to have reduced the 
accrued benefit of any participant in violation of section 411(d)(6).
    Example 5. On December 31, 1994, Plan E, a calendar year plan, 
provided that all single-sum distributions were to be calculated using 
the UP-1984 Mortality Table and an interest rate equal to the PBGC 
interest rate for January 1 of the plan year. On March 1, 1995, and 
effective on July 1, 1995, Plan E was amended to provide that all 
single-sum distributions are calculated using the applicable mortality 
table and the annual interest rate on 30-year Treasury securities for 
August of the year before the plan year that contains the annuity 
starting date. The plan amendment provides that each distribution with 
an annuity starting date after June 30, 1995, and before July 1, 1996, 
is calculated using the 30-year Treasury rate for August of the year 
before the plan year that contains the annuity starting date, or the 30-
year Treasury rate for November of the plan year preceding the plan year 
that contains the annuity starting date, whichever produces the larger 
benefit. Pursuant to paragraphs (d)(10)(v) and (vi)(C) of this section, 
the amendment of Plan E is not considered to have reduced the accrued 
benefit of any participant in violation of section 411(d)(6).

    (e) Special rules for annuity contracts--(1) General rule. Any 
annuity contract purchased by a plan subject to section 401(a)(11) and 
distributed to or owned by a participant must provide that benefits 
under the contract are provided in accordance with the applicable 
consent, present value, and other requirements of sections 401(a)(11) 
and 417 applicable to the plan.
    (2) [Reserved]
    (f) Effective dates--(1) Annuity contracts. (i) Paragraph (e) of 
this section does not apply to contracts distributed to or owned by a 
participant prior to September 17, 1985, unless additional contributions 
are made under the plan by the employer with respect to such contracts.
    (ii) In the case of a contract owned by the employer or distributed 
to or owned by a participant prior to the first plan year beginning 
after December 31, 1988, paragraph (e) of this section shall be 
satisfied if the annuity contracts described therein satisfy the 
requirements in Sec. Sec.  1.401(a)-11T and 1.417(e)-1T. The preceding 
sentence shall not apply if additional contributions are made under the 
plan by the employer with respect to such contracts on or after the 
beginning of the first plan year beginning after December 31, 1988.
    (2) Interest rates. (i) A plan that uses the PBGC immediate interest 
rate as required by Sec.  1.417(e)-1T(e) for distributions commencing in 
plan years beginning before January 1, 1987, shall be deemed to satisfy 
paragraph (d) of this section for such years.
    (ii) For a special exception to the requirements of section 
411(d)(6) for certain plan amendments that incorporate applicable 
interest rates, see section 1139(d)(2) of the Tax Reform Act of 1986.
    (3) Other effective dates and transitional rules. (i) Except as 
otherwise provided, a plan will be treated as satisfying sections 
401(a)(11) and 417 for plan years beginning before the first plan year 
that the requirements of section 410(b) as amended by TRA 86 apply to 
such plan, if the plan satisfied the requirements in Sec. Sec.  
1.401(a)-11T and 1.417(e)-1T.

[[Page 423]]

    (ii) See Sec.  1.401(a)-20 for other effective dates and 
transitional rules that apply to plans subject to sections 401(a)(11) 
and 417.

[T.D. 8219, 53 FR 31854, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988, as 
amended by T.D. 8591, 60 FR 17219, Apr. 5, 1995; T.D. 8620, 60 FR 49221, 
Sept. 22, 1995; T.D. 8768, 63 FR 16898, Apr. 7, 1998; T.D. 8796, 63 FR 
70011, Dec. 18, 1998; T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D. 8891, 
65 FR 44681, 44682, July 19, 2000; T.D. 9076, 68 FR 41909, July 16, 
2003; T.D. 9099, 68 FR 70149, Dec. 17, 2003; T.D. 9783, 81 FR 62361, 
Sept. 9, 2016]



Sec.  1.417(e)-1T  Restrictions and valuations of distributions 
from plans subject to sections 401(a)(11) and 417. (Temporary)

    (a) [Reserved]
    (b) Consent, etc. requirements--(1) General rule. [Reserved]
    (2) Consent. [Reserved]
    (c) [Reserved]
    (d) For rules regarding the present value of a participant's accrued 
benefit and related matters, see Sec.  1.417(e)-1(d).

[T.D. 8591, 60 FR 17219, Apr. 5, 1995, as amended by T.D. 8620, 60 FR 
49221, Sept. 22, 1995; T.D. 8768, 63 FR 16902, Apr. 7, 1998; T.D. 8796, 
63 FR 70012, Dec. 18, 1998]



Sec.  1.419-1T  Treatment of welfare benefit funds. (Temporary)

    Q-1: What does section 419 of the Internal Revenue Code provide?
    A-1: Section 419 prescribes limitations upon deductions for 
contributions paid or accrued with respect to a welfare benefit fund. 
Under section 419 (a) and (b), an employer's contributions to a welfare 
benefit fund are not deductible under section 162 (relating to trade or 
business expenses) or section 212 (relating to expenses for production 
of income) but, if the requirements of section 162 or 212 are otherwise 
met, are deductible under section 419 for the taxable year of the 
employer in which paid to the extent of the welfare benefit fund's 
qualified cost (within the meaning of section 419(c)(1)) for the taxable 
year of the fund that relates to such taxable year of the employer. 
Under section 419(g), section 419 and this section shall also apply to 
the deduction by a taxpayer of contributions with respect to a fund that 
would be a welfare benefit fund but for the fact that there is no 
employer-employee relationship between the person providing the services 
and the person for whom the services are provided. Contributions paid to 
a welfare benefit fund after section 419 becomes effective with respect 
to such contributions are deemed to relate, first, to amounts accrued 
and deducted (but not paid) by the employer with respect to such fund 
before section 419 becomes effective with respect to such contributions 
and thus shall not be treated as satisfying the payment requirement of 
section 419. See paragraph (b) of Q&A-5 for special deduction limits 
applicable to employer contributions to welfare benefit funds with 
excess reserves.
    Q-2: When do the deduction rules of section 419, as enacted by the 
Tax Reform Act of 1984, become effective?
    A-2: (a) Section 419 generally applies to contributions paid or 
accrued with respect to a welfare benefit fund after December 31, 1985, 
in taxable years of employers ending after that date. See Q&A-9 of this 
regulation for special rules relating to the deduction limit for the 
first taxable year of a fiscal year employer ending after December 31, 
1985.
    (b) In the case of a welfare benefit fund which is part of a plan 
maintained pursuant to one or more collective bargaining agreements (1) 
between employee representatives and one or more employers, and (2) that 
are in effect on July 1, 1985 (or ratified on or before such date), 
sections 419 shall not apply to contributions paid or accrued in taxable 
years beginning before the termination of the last of the collective 
bargaining agreements pursuant to which the plan is maintained 
(determined without regard to any extension thereof agreed to after July 
1, 1985). For purposes of the preceding sentence, any plan amendment 
made pursuant to a collective bargaining agreement relating to the plan 
which amends the plan solely to conform to any requirement added under 
section 511 of the Tax Reform Act of 1984 (i.e., requirements under 
sections 419, 419A, 512(a)(3)(E), and 4976) shall not be treated as a 
termination of such collective bargaining agreement. See Sec.  1.419A-2T 
for special rules relating to the application of section 419 to 
collectively bargained welfare benefit funds.

[[Page 424]]

    (c) Notwithstanding paragraphs (a) and (b), section 419 applies to 
any contribution of a facility to a welfare benefit fund (or other 
contribution, such as cash, which is used to acquire, construct, or 
improve such a facility) after June 22, 1984, unless such facility is 
placed in service by the fund before January 1, 1987, and either (1) is 
acquired or improved by the fund (or contributed to the fund) pursuant 
to a binding contract in effect on June 22, 1984, and at all times 
thereafter, or (2) the construction of which was begun by or for the 
welfare benefit fund before June 22, 1984. See Q&A-11 of this regulation 
for special rules relating to the application of section 419 to the 
contribution of a facility to a welfare benefit fund (and to the 
contribution of other amounts, such as cash, used to acquire, construct, 
or improve such a facility) before section 419 generally becomes 
effective with respect to contributions to the fund.
    Q-3. What is a ``welfare benefit fund'' under section 419?
    A-3. (a) A ``welfare benefit fund'' is any fund which is part of a 
plan, or method or arrangement, of an employer and through which the 
employer provides welfare benefits to employees or their beneficiaries. 
For purposes of this section, the term ``welfare benefit'' includes any 
benefit other than a benefit with respect to which the employer's 
deduction is governed by section 83(h), section 404 (determined without 
regard to section 404(b)(2)), section 404A, or section 463.
    (b) Under section 419(e)(3) (A) and (B), the term ``fund'' includes 
any organization described in section 501(c) (7), (9), (17) or (20), and 
any trust, corporation, or other organization not exempt from tax 
imposed by chapter 1, subtitle A, of the Internal Revenue Code. Thus, a 
taxable trust or taxable corporation that is maintained for the purpose 
of providing welfare benefits to an employer's employees is a ``welfare 
benefit fund.''
    (c) Section 419(e)(3)(C) also provides that the term ``fund'' 
includes, to the extent provided in regulations, any account held for an 
employer by any person. Pending the issuance of further guidance, only 
the following accounts, and arrangements that effectively constitute 
accounts, as described below, are ``funds'' within section 419(e)(3)(C).
    A retired lives reserve or a premium stabilization reserve 
maintained by an insurance company is a ``fund,'' or part of a ``fund,'' 
if it is maintained for a particular employer and the employer has the 
right to have any amount in the reserve applied against its future 
years' benefit costs or insurance premiums. Also, if an employer makes a 
payment to an insurance company under an ``administrative services 
only'' arrangement with respect to which the life insurance company 
maintains a separate account to provide benefits, then the arrangement 
would be considered to be a ``fund.'' Finally, an insurance or premium 
arrangement between an employer and an insurance company is a ``fund'' 
if, under the arrangement, the employer has a right to a refund, credit, 
or additional benefits (including upon termination of the arrangement) 
based on the benefit or claims experience, administrative cost 
experience, or investment experience attributable to such employer. 
However, an arrangement with an insurance company is not a ``fund'' 
under the previous sentence merely because the employer's premium for a 
renewal year reflects the employer's own experience for an earlier year 
if the arrangement is both cancellable by the insurance company and 
cancellable by the employer as of the end of any policy year and, upon 
cancellation by either of the parties, neither of the parties can 
receive a refund or additional amounts or benefits and neither of the 
parties can incur a residual liability beyond the end of the policy year 
(other than, in the case of the insurer, to provide benefits with 
respect to claims incurred before cancellation). The determination 
whether either of the parties can receive a refund or additional amounts 
or benefits or can incur a residual liability upon cancellation of an 
arrangement will be made by examining both the contractual rights and 
obligations of the parties under the arrangement and the actual practice 
of the insurance company (and other insurance companies) with respect to 
other employers upon cancellation of similar arrangements. Similarly, a 
disability income policy

[[Page 425]]

does not constitute a ``fund'' under the preceding provisions merely 
because, under the policy, an employer pays an annual premium so that 
employees who became disabled in such year may receive benefit payments 
for the duration of the disability.
    Q-4: For purposes of determining the section 419 limit on the 
employer's deduction for contributions to the fund for a taxable year of 
the employer, which taxable year of the welfare benefit fund is related 
to the taxable year of the employer?
    A-4: The amount of an employer's deduction for contributions to a 
welfare benefit fund for a taxable year of the employer is limited to 
the ``qualified cost'' of the welfare benefit fund for the taxable year 
of the fund that is related to such taxable year of the employer. The 
taxable year of the welfare benefit fund that ends with or within the 
taxable year of the employer is the taxable year of the fund that is 
related to the taxable year of the employer. Thus, for example, if an 
employer has a calendar taxable year and it makes contributions to a 
fund having a taxable year ending June 30, the ``qualified cost'' of the 
fund for the taxable year of the fund ending on June 30, 1986, applies 
to limit the employer's deduction for contributions to the fund in the 
employer's 1986 taxable year. In the case of employer contributions paid 
directly to an account or arrangement with an insurance company that is 
treated as a welfare benefit fund for the purposes of section 419, the 
policy year will be treated as the taxable year of the fund. See Q&A-7 
of this regulation for special section 419 rules relating to the 
coordination of taxable years for the taxable year of the employer in 
which a welfare benefit fund is established and for the next following 
taxable year of the employer.
    Q-5: What is the ``qualified cost'' of a welfare benefit fund for a 
taxable year under section 419?
    A-5: (a) Under section 419(c), the ``qualified cost'' of a welfare 
benefit fund for a taxable year of the fund is the sum of: (1) The 
``qualified direct cost'' of such fund for such taxable year of the 
fund, and (2) the amount that may be added to the qualified asset 
account for such taxable year of the fund to the extent that such 
addition does not result in a total amount of such account as of the end 
of such taxable year of the fund that exceeds the applicable account 
limit under section 419A(c). However, in calculating the qualified cost 
of a welfare benefit fund for a taxable year of the fund, this sum is 
reduced by the fund's ``after-tax income'' (as defined in section 
419(c)(4)) for such taxable year of the fund. Also, the qualified cost 
of a welfare benefit fund is reduced further under the provisions of 
paragraph (b) of this Q&A.
    (b)(1) Pursuant to section 419A(i), notwithstanding section 419 and 
Sec.  1.419-1T, contributions to a welfare benefit fund during any 
taxable year of the employer beginning after December 31, 1985, shall 
not be deductible for such taxable year to the extent that such 
contributions result in the total amount in the fund as of the end of 
the last taxable year of the fund ending with or within such taxable 
year of the employer exceeding the account limit applicable to such 
taxable year of the fund (as adjusted under section 419A(f)(7)). Solely 
for purposes of this subparagraph, (i) contributions paid to a welfare 
benefit fund during the taxable year of the employer but after the end 
of the last taxable year of the fund that relates to such taxable year 
of the employer, and (ii) contributions accrued with respect to a 
welfare benefit fund during the taxable year of the employer or during 
any prior taxable year of the employer (but not actually paid to such 
fund on or before the end of a taxable year of the employer) and 
deducted by the employer for such or any prior taxable year of the 
employer, shall be treated as an amount in the fund as of the end of the 
last taxable year of the fund that relates to the taxable year of the 
employer. Contributions that are not deductible under this subparagraph 
are in excess of the qualified cost of the welfare benefit fund for the 
taxable year of the fund that relates to the taxable year of the 
employer and thus are treated as contributed to the fund on the first 
day of the employer's next taxable year.
    (2) Paragraph (b)(1) of this section shall not apply to 
contributions with respect to a collectively bargained welfare benefit 
fund within the meaning of

[[Page 426]]

Sec.  1.419A-2T. In addition, paragraph (b)(1) of this section shall not 
apply to any taxable year of an employer beginning after the end of the 
earlier of the following taxable years: (i) the first taxable year of 
the employer beginning after December 31, 1985, for which the employer's 
deduction limit under section 419 (after the application of paragraph 
(b)(1) of this section) is at least equal to the qualified direct cost 
of the fund for the taxable year (or years) of the fund that relates to 
such first taxable year of the employer, or (ii) the first taxable year 
of the employer beginning after December 31, 1985, with or within which 
ends the first taxable year of the fund with respect to which the total 
amount in the fund as of the end of such taxable year of the fund does 
not exceed the account limit for such taxable year of the fund (as 
adjusted under section 419A(f)(7)).
    (3) For example, assume an employer with a taxable year ending June 
30 and a welfare benefit fund with a taxable year ending January 31. 
During its taxable year ending June 30, 1987, and on or before January 
31, 1987, the employer contributes $250,000 to the fund, and during the 
remaining portion of its taxable year ending June 30, 1987, the employer 
contributes $200,000. The qualified direct cost of the fund for its 
taxable year ending January 31, 1987, is $500,000, the account limit 
applicable to such taxable year (after the adjustment under section 
419A(f)(7)) is $750,000, and the total amount in the fund as of January 
31, 1987, is $800,000. Before the application of this paragraph, the 
employer may deduct the entire $450,000 contribution for its taxable 
year ending June 30, 1987. However, under this paragraph, the excess of 
(i) the sum of the total amount in the fund as of January 31, 1987 
($800,000), and employer contributions to the fund after January 31, 
1987, and on or before June 30, 1987 ($200,000), over (ii) the account 
limit applicable to the fund for its taxable year ending January 31, 
1987 ($750,000), is $250,000. Thus, under this paragraph, only $200,000 
of the $450,000 contribution the employer made during its taxable year 
ending June 30, 1987, is deductible for such taxable year. If the excess 
were $450,000 or greater, no portion of the $450,000 contribution would 
be deductible by the employer for its taxable year ending June 30, 1987. 
Such nondeductible contributions are in excess of the fund's qualified 
cost for the taxable year related to the employer's taxable year and 
thus are deemed to be contributed on the first day of the employer's 
next taxable year.
    (c) See Q&A-7 of this regulation for special rules relating to the 
calculation of the qualified cost of a welfare benefit fund for an 
Initial Fund Year and an Overlap Fund Year (as defined in Q&A-7). See 
Q&A-11 of this regulation for special rules relating to the application 
of section 419 to the contribution to a welfare benefit fund of a 
facility (and to the contribution of other amounts, such as cash, used 
to acquire, construct, or improve a facility) before section 419 
generally becomes effective with respect to contributions to the fund. 
See Sec.  1.419A-2T for special rules relating to certain collectively 
bargained welfare benefit funds.
    Q-6: What is the ``qualified direct cost'' of a welfare benefit fund 
under section 419(c)(3)?
    A-6: (a) Under section 419(c)(3), the ``qualified direct cost'' of a 
welfare benefit fund for any taxable year of the fund is the aggregate 
amount which would have been allowable as a deduction to the employer 
for benefits provided by such fund during such year (including insurance 
coverage for such year) if (1) such benefits were provided directly by 
the employer and (2) the employer used the cash receipts and 
disbursements method of accounting and had the same taxable year as the 
fund. In this regard, a benefit is treated as provided when such benefit 
would be includible in the gross income of the employee if provided 
directly by the employer (or would be so includible but for a provision 
of chapter 1, subtitle A, of the Internal Revenue Code excluding it from 
gross income). Thus, for example, if a calendar year welfare benefit 
fund pays an insurance company in July 1986 the full premium for 
coverage of its current employees under a term health insurance policy 
for the twelve month period ending June 30, 1987, the insurance coverage 
will be treated as provided by the fund over such twelve month period. 
Accordingly, only the

[[Page 427]]

portion of the premium for coverage during 1986 will be treated as a 
``qualified direct cost'' of the fund for 1986; the remaining portion of 
the premium will be treated as a ``qualified direct cost'' of the fund 
for 1987. The ``qualified direct cost'' for a taxable year of the fund 
includes the administrative expenses incurred by the welfare benefit 
fund in delivering the benefits for such year.
    (b) If, in a taxable year of a welfare benefit fund, the fund holds 
an asset with a useful life extending substantially beyond the end of 
the taxable year (e.g., buildings, vehicles, tangible assets, and 
licenses) and, for such taxable year of the fund, the asset is used in 
the provision of welfare benefits to employees, the ``qualified direct 
cost'' of the fund for such taxable year of the fund includes the amount 
that would have been allowable to the employer as a deduction under the 
applicable Code provisions (e.g., sections 168 and 179) with respect to 
the portion of the asset used in the provision of welfare benefits for 
such year if the employer had acquired and placed in service the asset 
at the same time the fund received and placed in service the asset, and 
the employer had the same taxable year as the fund. This rule applies 
regardless of whether the fund received the asset through a contribution 
of the asset by the employer or through an acquisition or the 
construction by the fund of the asset. For example, assume that in 1986 
a calendar year employer contributes recovery property under section 
168(c) to a welfare benefit fund with a calendar taxable year to be used 
in the provision of welfare benefits. The employer will be treated as 
having sold the property in such year and thus will recognize gain to 
the extent that the fair market value of the property exceeds the 
employer's adjusted basis in the property. In this regard, see section 
1239(d). Also, the employer will be treated as having made a 
contribution to the fund in such year equal to the fair market value of 
the property. Finally, the qualified direct cost of the welfare benefit 
fund for 1986 will include the amount that the employer could have 
deducted in 1986 with respect to the portion of the property used in the 
provision of welfare benefits if the employer had acquired the property 
in 1986 and had placed the property in service when the fund actually 
placed the property in service. Similarly, for example, assume that in 
1986 a welfare bendfit fund purchases and places in service a facility 
to be used in the provision of welfare benefits. The qualified direct 
cost of the fund for 1986 will include the amount that the employer 
could have deducted with respect to such facility if the employer had 
purchased and placed in service the facility at the same time that the 
fund purchased and placed in service the facility.
    (c) The qualified direct cost of a welfare benefit fund does not 
include expenditures by the fund that would not have been deductible if 
they had been made directly by the employer. For example, a fund's 
purchase of land in a year for an employee recreational facility will 
not be treated as a qualified direct cost because, if made directly by 
the employer, the purchase would not have been deductible under section 
263. See also sections 264 and 274.
    (d) Notwithstanding the preceding paragraphs, the qualified direct 
cost of a welfare benefit fund with respect to that portion of a child 
care facility used in the provision of welfare benefits for a year will 
include the amount that would have been allowable to the employer as a 
deduction for the year under a straight-line depreciation schedule for a 
period of 60 months beginning with the month in which the facility is 
placed in service under rules similar to those provided for section 188 
property under Sec.  1.188-1(a). For purposes of this section, a ``child 
care facility'' is tangible property of a character subject to 
depreciation that is located in the United States and specifically used 
as an integral part of a ``qualified child care center facility'' within 
the meaning of Sec.  1.188-1(d)(4).
    (e) See Q&A-7 of this regulation for special section 419 rules 
relating to the calculation of the qualified direct cost of a welfare 
benefit fund for an Initial Fund Year and an Overlap Fund Year (as 
defined in Q&A-7). See Q&A-11 of this regulation for special rules 
relating to the contribution to a welfare benefit fund of a facility 
(and to the contribution of other amounts, such as

[[Page 428]]

cash, used to acquire, construct, or improve a facility) before section 
419 generally becomes effective with respect to contributions to the 
fund.
    Q-7: What special rules apply for purposes of determining the 
section 419 limit on the employer's deduction for contributions to a 
welfare benefit fund for the taxable year of the employer in which the 
fund is established and for the next following taxable year of the 
employer?
    A-7: (a) If the taxable year of a welfare benefit fund is the same 
as the taxable year of the employer, there are no special rules that 
apply for purposes of determining the section 419 limit on an employer's 
deduction for contributions to the fund for either the taxable year of 
the employer in which the fund is established or the next following 
taxable year of the employer. However, if the taxable year of a welfare 
benefit fund is different from the taxable year of the employer, the 
general section 419 rules are modified by the special rules set forth 
below for purposes of determining the section 419 deduction limit for 
the taxable year of the employer in which a fund is established and for 
the next following taxable year of the employer.
    (b) If a welfare benefit fund is established after December 31, 
1985, during a taxable year of an employer and either (i) the first 
taxable year of the fund ends after the close of such taxable year of 
the employer, or (ii) the first taxable year of the fund is six months 
or less and ends before the close of such taxable year of the employer 
and the second taxable year of the fund begins before and ends after the 
close of such taxable year of the employer, the taxable year of the fund 
that contains the closing day of such taxable year of the employer will 
be treated as an ``Overlap Fund Year.'' For purposes of determining the 
limit on the employer's deduction for contributions to a welfare benefit 
fund for the taxable year of the employer in which the fund was 
established, the period between the beginning of the fund's Overlap Fund 
Year and the end of the employer's taxable year in which the Overlap 
Fund Year began will be treated as a taxable year of the fund (``Initial 
Fund Year'').
    (c) The qualified cost of a welfare benefit fund for its Initial 
Fund Year will be equal to the qualified direct cost of the fund for 
such Initial Fund Year. The qualified cost of a fund for its Overlap 
Fund Year will be determined under the general rules of Q&A-5 of this 
regulation and section 419(c), with the exception that such qualfied 
cost will be reduced by the employer contributions made during the 
Initial Fund Year and deductible by the employer for the taxable year of 
the employer in which the Overlap Fund Year of the fund begins.
    (d) Assume that an employer with a calendar taxable year establishes 
on July 1, 1986, a welfare benefit fund with a taxable year ending on 
June 30. The fund's first taxable year from July 1, 1986, to June 30, 
1987, is an Overlap Fund Year. The employer contributes $1,000 to the 
fund during its taxable year ending December 31, 1986 (i.e., during the 
period between July 1, 1986, and December 31, 1986, which is also the 
Initial Fund Year) and another $1,500 to the fund during its taxable 
year ending December 31, 1987. Assume further that the qualified direct 
cost of the fund for the Initial Fund Year is $900 and that the 
qualified cost for the Overlap Fund Year is $2,500 (prior to the 
reduction required by paragraph (c) of this Q&A). Under the special 
rules of paragraphs (b) and (c), the employer may deduct $900 for its 
taxable year ending on December 31, 1986, and $1,600 for its taxable 
year ending on December 31, 1987. If the qualified direct cost of the 
fund for the Initial Fund Year had been $1,050 and the qualified cost 
for the Overlap Fund Year had been $2,500 (prior to the reduction 
required by paragraph (c) of this Q&A), the employer's deduction for its 
taxable year ending December 31, 1986, would have been $1,000 and its 
deduction for its taxable year ending December 31, 1987, would have been 
$1,500.
    (e) Assume that an employer with a calendar taxable year establishes 
on March 1, 1986, a welfare benefit fund with a taxable year ending June 
30. Thus, the fund has a short first taxable year ending June 30, 1986, 
an Overlap Fund Year from July 1, 1986, until June 30, 1987, and an 
ongoing June 30 taxable year. The employer contributes $1,750

[[Page 429]]

to the fund during the employer's taxable year ending December 31, 
1986--$750 during the short first taxable year of the fund and $1,000 
during the Initial Fund Year (i.e., the period between July 1, 1986, and 
December 31, 1986)--and $1,500 to the fund during its taxable year 
ending December 31, 1987. Assume that the qualified cost of the fund for 
the short first taxable year of the fund is $800, the qualified direct 
cost for the Initial Fund Year is $900, and the qualified cost for the 
Overlap Fund Year is $2,500 (prior to the reduction required by 
paragraph (c) of this Q&A). Under the special rules of paragraphs (b) 
and (c), the employer may deduct $1,700 for its taxable year ending 
December 31, 1986, and $1,550 for its taxable year ending December 31, 
1987.
    Q-8: How does section 419 treat an employer's contribution with 
respect to a welfare benefit fund in excess of the applicable deduction 
limit for a taxable year of the employer?
    A-8: (a) If an employer makes contributions to a welfare benefit 
fund in a taxable year of the employer and such contributions (when 
combined with prior contributions that are deemed under the rule of this 
Q&A and section 419(d) to have been made in such taxable year) exceed 
the section 419 deduction limit for such taxable year of the employer, 
the excess amounts are deemed to be contributed to the fund on the first 
day of the next taxable year of the employer. Such deemed contributions 
are combined with amounts actually contributed by the employer to the 
fund during the next taxable year and may be deductible for such year, 
subject to the otherwise applicable section 419 deduction limit for such 
year.
    (b) Contributions to a welfare benefit fund on or before December 
31, 1985, that were not deductible by the employer for any taxable year 
of the employer ending on or before December 31, 1985, or for the first 
taxable year of the employer ending after December 31, 1985, as pre-1986 
contributions (see Q&A-9 of this regulation) are deemed to be 
contributed to the fund on January 1, 1986, However, see Q&A-11 of this 
regulation for special rules relating to the contribution to a welfare 
benefit fund of amounts (such as cash) used to acquire, construct, or 
improve a facility before section 419 generally becomes effective with 
respect to contributions to the fund. Generally, such contributions (to 
the extent that they were made after June 22, 1984 and on or before 
December 31, 1985) are treated as nondeductible pre-1986 contributions 
and are deemed to be contributed in the form of a facility at the same 
time as when the facility is placed in service by the fund.
    Q-9: How does an employer with a fiscal taxable year calculate its 
deduction limit for contributions with respect to a welfare benefit fund 
for the first taxable year of the employer ending after December 31, 
1985?
    A-9: (a) If the first taxable year of an employer ending after 
December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 of 
this section, the first taxable year of an employer beginning after 
termination of the last of the collective bargaining agreements pursuant 
to which the fund is maintained) is a fiscal year, the employer's 
deduction for such taxable year for contributions to a welfare benefit 
fund that is not a collectively bargained welfare benefit fund under 
Sec.  1.419A-2T is limited to the greater of the following two amounts: 
(1) The contributions paid to the fund during such first taxable year up 
to the qualified cost of the welfare benefit fund for the taxable year 
of the fund that relates to such taxable year of the employer, and (2) 
the contributions paid to the fund during the 1985 portion of such first 
taxable year of the employer (``the pre-1986 contributions'') to the 
extent that such pre-1986 contributions are deductible under the rules 
governing the deduction of such contributions before section 419 
generally becomes effective (including the rules set forth in Q&A-10 of 
this regulation, modified for purposes of this Q&A-9 by substituting 
``December 31, 1986'' for ``December 31, 1985'' in paragraph (c)). See 
Q&A-11 of this regulation for special rules relating to the contribution 
to a welfare benefit fund of a facility (and to the contribution of 
other amounts, such as cash, used to acquire, construct, or improve such 
a facility) before section 419 generally becomes effective with respect 
to contributions to such fund.

[[Page 430]]

    (b) For example, assume that an employer with a taxable year ending 
June 30, contributes to a welfare benefit fund with a taxable year 
ending January 31. This employer contributes $1,000 to the fund between 
July 1, 1985, and December 31, 1985, and an additional $500 to the fund 
between January 1, 1986, and June 30, 1986. Assume further that the 
qualified direct cost of the fund for the taxable year of the fund 
ending January 31, 1986, is $500 and that the qualified cost for such 
taxable year is $800. Under the deduction rule set forth above, the 
employer's deduction for its taxable year ending June 30, 1986, is the 
greater of two amounts: (1) The contributions made during such full 
taxable year ($1,500) up to the qualifed cost of the fund with respect 
to such taxable year ($800), and (2) the pre-1986 contributions ($1,000) 
to the extent that such pre-1986 contributions are deductible under the 
pre-section 419 rules. In determining the extent to which the pre-1986 
contributions are deductible under the pre-section 419 rules, the rules 
contained in Q&A-10 apply as though December 31, 1985, in paragraph (c) 
were December 31, 1986. Assuming that only $875 is deductible under the 
pre-section 419 rules, because $875 is greater than $800, this employer 
may deduct $875 for its first taxable year ending after December 31, 
1985. This full $875 deduction for 1985 is deemed to consist entirely of 
pre-1986 contributions.
    Q-10: How do the rules of sections 263, 446(b), 461(a), and 461(h) 
apply in determining whether contributions with respect to a welfare 
benefit fund are deductible for a taxable year?
    A-10: (a) Both before and after the effective date of section 419 
(see Q&A-2 of this regulation), an employer is allowed a deduction for 
taxable year for contributions paid or accrued with respect to a 
``welfare benefit fund'' (as defined in Q&A-3 of this regulation and 
section 419(e)) only to the extent that such contributions satisfy the 
requirements of section 162 or 212. These requirements must be satisfied 
after the effective date of section 419 because 419 requires that (among 
other requirements) contributions to a welfare benefit fund satisfy the 
requirements of section 162 or 212.
    (b) Except as provided in paragraphs (c) and (d), in determinig the 
extent to which contributions paid or accrued with respect to welfare 
benefit fund satisfy the requirements of section 162 or 212 for a 
taxable year (both before and after section 419 generally becomes 
effective with respect to such contributions), the rules of sections 
263, 446(b), 461(a) (including the rules that relate to the creation of 
an asset with a useful life extending substantially beyond the close of 
the taxable year), and 461(h) (to the extent that such section is 
effective with respect to such contributions) are are generally 
applicable.
    (c) Notwithstanding paragraph (b), under the authority of section 
7805(b), the rules of sections 263, 446(b), and 461(a) shall not be 
applied in determining the extent to which an employer's contribution 
with respect to a welfare benefit fund is deductible under section 162 
or 212 with respect to any taxable year of the employer ending on or 
before December 31, 1985, to the extent that, for such taxable year, (1) 
the contribution was made pursuant to a bona fide collective bargaining 
agreement requiring fixed and determinable contributions to a 
collectively bargained welfare benefit fund (as defined in Sec.  1.419A-
2T), or (2) the contribution was not in excess of the amount deductible 
under the principles of Revenue Rulings 69-382, 1969-2 C.B. 28; 69-478, 
1969-2 C.B. 29; and 73-599, 1973-2 C.B. 40, modified as appropriate for 
benefits for active employees.
    (d) Notwithstanding paragraph (b), in determining the extent to 
which contributions paid or accrued with respect to a welfare benefit 
fund are deductible under section 419, the rules of sections 263, 
446(b), and 461(a) will be treated as having been satisfied to the 
extent that such contributions satisfy the otherwise applicable rules of 
section 419. Thus, for example, contributions to a welfare benefit fund 
will not fail to be deductible under section 419 merely because they 
create an asset with a useful life extending substantially beyoud the 
close of the taxable year if such contributions satisfy the otherwise 
applicable requirements of section 419.
    (e) In determining the extent to which contributions with respect to 
a

[[Page 431]]

welfare benefit fund satisfy the requirements of section 461(h) for any 
taxable year for which section 461(h) is effective, pursuant to the 
authority under section 461(h)(2), economic performance occurs as 
contributions to the welfare benefit fund are made. Solely for purposes 
of section 461(h), in the case of an employer's taxable year ending on 
or after July 18, 1984, and on or before March 21, 1986, contributions 
made to the welfare benefit fund after the end of such taxable year and 
on or before March 21, 1986 shall be deemed to have been made on the 
last day of such taxable year.
    Q-11: What special section 419 rules apply to the payment or accrual 
with respect to a welfare benefit fund of a facility (and the payment or 
accrual of other amounts, such as cash, used to acquire, construct, or 
improve such a facility)?
    A-11: (a)(1) In the case of an employer's payment or accrual with 
respect to a welfare benefit fund after June 22, 1984, and on or before 
December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 of 
this regulation, before section 419 generally becomes effective with 
respect to contributions to such fund), of a facility, the rules of 
section 419, Sec.  1.419-1T, and Sec.  1.419A-2T generally apply to 
determine the extent to which such contribution is deductible by the 
employer for its taxable year of contribution. For this purpose, 
however, the facility is to be treated as the only contribution made to 
the fund and the qualified cost of the fund for the taxable year of the 
fund in which the facility was contributed is to be equal to the 
qualified direct cost directly attributable to the facility (as 
determined under Q&A-6 of this regulation). Also, for this purpose, the 
welfare benefit fund to which the facility was contributed may not be 
aggregated with any other fund. For purposes of this Q&A, ``facility'' 
means any tangible asset with a useful life extending substantially 
beyond the end of the taxable year (e.g., vehicles, buildings) and any 
intangible asset (e.g., licenses) related to a tangible asset, whether 
or not such asset is used in the provision of welfare benefits. See, 
however, paragraph (c) of Q&A-2 of this regulation for a binding 
contract exception.
    (2) For example, assume that an employer and a welfare benefit fund 
each has a calendar taxable year and that, during 1985, the employer 
contributes to the fund $200,000 in cash and a facility with a fair 
market value of $100,000. Such facility is used in the provision of 
welfare benefits under the fund. The employer is treated as having sold 
the facility in such year and thus will recognize gain to the extent 
that the fair market value of the facility exceeds the employer's 
adjusted basis in the facility. In this regard, see section 1239(d). The 
extent to which the facility contribution is deductible by the employer 
for its 1985 taxable year is determined as though it were the only 
contribution made by the employer to the fund during such year and the 
qualified cost of the fund for the taxable year of the fund in which the 
contribution was made (i.e., the 1985 taxable year) were equal to the 
amount that would have been allowable to the employer as a deduction for 
such year under the applicable Code provisions with respect to the 
portion of the facility used in the provision of welfare benefits for 
such year if the employer had placed in service the facility at the time 
the fund placed in service the facility and if the employer had the same 
taxable year as the fund. If, under these assumptions, the employer 
would have been allowed a $10,000 deduction with respect to the facility 
for the 1985 taxable year, the fund's qualified cost for its 1985 
taxable year would be only $10,000. Thus, only $10,000 of the $100,000 
facility contribution would be deductible by the employer for its 1985 
taxable year (i.e., the taxable year of the employer with or within 
which the applicable taxable year of the fund ends). However, in 
determining the extent to which the $200,000 in cash is deductible by 
the employer for its 1985 taxable year, the $100,000 facility is not to 
be disregarded. Thus, if under the applicable pre-section 419 rules the 
employer is allowed for 1985 a total deduction of only $175,000, the 
employer would be permitted a deduction for 1985 of $175,000 ($10,000 
with respect to the facility and $165,000 of the cash contribution). The 
nondeductible portion of the cash contribution is to be treated as 
contributed to the fund on the first day

[[Page 432]]

of the next taxable year of the employer. If under the applicable pre-
section 419 rules the employer were allowed a total deduction of 
$300,000 for 1985, the employer would be permitted a deduction for 1985 
of only $210,000 ($10,000 with respect to the facility and the full 
$200,000 cash contribution).
    (3) For example, assume that an employer has a June 30 taxable year 
and maintains a welfare benefit fund with a taxable year ending January 
31. During the 1985 portion of its taxable year ending June 30, 1986, 
the employer contributes $50,000 in cash and a facility with a fair 
market value of $100,000; and during the 1986 portion of such taxable 
year, the employer contributes another $75,000 in cash to the fund. The 
facility is used in the provision of welfare benefits under the fund. 
Under the rules of Q&A-9 of this regulation, the employer's deduction 
for its June 30, 1986, taxable year is limited to the greater of the 
following two amounts: (i) The contributions paid to the fund during 
such taxable year ($225,000) up to the qualified cost of the fund for 
the taxable year of the fund ending January 31, 1986, and (ii) the 
contributions paid to the fund during the 1985 portion of the employer's 
taxable year ending June 30, 1986 (``the pre-1986 contributions'') 
($150,000) to the extent that such pre-1986 contributions are deductible 
under the rules governing the deduction of such contributions before 
section 419 is generally effective with respect to the fund. For 
purposes of this rule, the contribution of the facility on or before 
December 31, 1985, is to be treated as a pre-1986 contribution and the 
rules of section 419 and this Q&A are to be treated as rules governing 
the deduction of such contribution before section 419 generally becomes 
effective with respect to the fund. Thus, in determining the extent to 
which the facility is deductible as a pre-1986 contribution under the 
rules before section 419 generally becomes effective, the facility is 
treated as the only contribution to the welfare benefit fund and the 
qualified cost of such fund for the taxable year of the fund in which 
the facility was contributed is the amount that would have been 
allowable to the employer as a deduction with respect to the portion of 
the facility used in the provision of welfare benefits if the employer 
had placed in service the facility at the same time that the fund placed 
in service the facility and the employer's taxable year ended on January 
31, 1986.
    (b)(1) The preceding rules shall also apply for purposes of 
determining when and the extent to which an employer may deduct 
contributions or other items and amounts after June 22, 1984 and on or 
before December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 
of this regulation, before section 419 generally becomes effective with 
respect to contributions to the fund) that are not facilities (e.g., 
cash contributions) to a welfare benefit fund that are used by the fund 
to acquire, construct, or improve a facility. The most recent non-
facility contributions made to a welfare benefit fund before the 
facility in question is placed in service by the fund (up to the fair 
market value of the facility at such time) are to be treated as used by 
the fund for the acquisition, construction, or improvement (as the case 
may be) of such facility. To the extent that contributions before such a 
facility is placed in service are not at least equal to the value of the 
facility at such time, contributions after such date (up to the value of 
the facility at the time it is placed in service) are treated as used 
for acquisition, construction, or improvement of the facility. Such non-
facility contributions, to the extent that they were made after June 22, 
1984, and on or before December 31, 1985 (or, if applicable under 
paragraph (b) of Q&A-2 of this regulation, before section 419 generally 
becomes effective with respect to contributions to the fund), are not 
deductible by the employer as non-facility contributions for any year. 
Instead, the employer is permitted a deduction with respect to such 
contributions only under the rules of this Q&A as though the employer 
had contributed a facility to the fund at the same time that the fund 
placed in service the facility in question and, at such time, the 
facility had a fair market value equal to the total of such non-facility 
contributions.
    (2) For example, assume that an employer and a welfare benefit fund 
each has a calendar taxable year and during 1985 the fund acquired and 
placed in

[[Page 433]]

service a facility with a fair market value of $100,000 to be used in 
the provision of welfare benefits. Further, during July 1984 the 
employer contributed $150,000 in cash to the fund and, during the 
portion of 1985, before the facility was placed in service by the fund, 
the employer contributed another $75,000 in cash to the fund; during the 
remaining portion of 1985, the employer contributed $125,000 in cash. 
The facility is used in the provision of welfare benefits under the 
fund. Because $25,000 of the employer's 1984 contribution is treated 
under this rule as used for the acquisition of a facility, such $25,000 
is not deductible by the employer for 1984. For purposes of determining 
the employer's deduction for 1985, the employer will be treated as 
having contributed $125,000 in cash and a facility with a fair market 
value of $100,000. The employer's deduction for its 1985 taxable year 
will be determined under the rules relating to the contribution of a 
facility after June 22, 1984, and on or before December 31, 1985.
    (3) For example, assume that an employer and a welfare benefit fund 
each has a calendar taxable year and during 1986 the fund placed in 
service a facility with a fair market value of $100,000 to be used in 
the provision of welfare benefits. During 1985, the employer contributed 
$125,000 in cash to the fund. During the portion of 1986 before the 
facility was placed in service, the employer contributed $60,000 in 
cash, and during the remaining portion of 1986, the employer contributed 
another $75,000 in cash. The facility is used in the provision of 
welfare benefits under the fund. Because $40,000 of its 1985 cash 
contribution is treated under this rule as used for the acquisition of 
the facility, such $40,000 is not deductible by the employer for 1985. 
For purposes of determining the employer's deduction for 1986, the 
employer will be treated as though it had contributed a $40,000 facility 
to the fund at the time the fund placed the facility in service.
    (c) For purposes of calculating the ``existing excess reserve 
amount'' under Q&A-1 of Sec.  1.419A-1T and the ``existing reserves for 
post-retirement medical or life insurance benefits'' under Q&A-4 of 
Sec.  1.512(a)-5T (but not the exempt function income under Q&A-3 of 
Sec.  1.512(a)-5T), the amount set aside as of any applicable date is to 
be reduced to the extent that contributions originally included in such 
amount are subsequently treated under this Q&A as used for the 
acquisition, construction, or improvement of an asset excluded from the 
calculation of the total amount set aside under paragraph (b) of Sec.  
1.512(a)-5T (or would be so treated under this Q&A if it applied to such 
asset). The reduction required under this paragraph applies for purposes 
of calculating the ``existing excess reserve amount'' and the ``existing 
reserves for post-retirement medical or life insurance benefits'' for 
all taxable years of the welfare benefit fund.

[T.D. 8073, 51 FR 4323, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986; 51 FR 
11303, Apr. 2, 1986]



Sec.  1.419A-1T  Qualified asset account limitation of additions to account. 
(Temporary)

    Q-1: What does the transition rule under section 419A(f)(7) provide?
    A-1: Section 419A(f)(7) provides that, in the case of a welfare 
benefit fund that was in existence on July 18, 1984, the account limit 
(as determined under section 419A(c)) for each of the first four taxable 
years of the fund that relate to taxable years of the employer ending 
after December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 
of Sec.  1.419-1T, taxable years of the employer beginning after the 
termination of the last of the collective bargaining agreements pursuant 
to which the plan is maintained) shall be increased by the following 
percentages of the ``existing excess reserve amount'':

 
                                                                 Percent
 
First taxable year............................................        80
Second taxable year...........................................        60
Third taxable year............................................        40
Fourth taxable year...........................................        20
 

    For purposes of this section, the ``existing excess reserve amount'' 
for any taxable year of a fund is the excess of (a) the assets actually 
set aside for purposes described in section 419A(a) at the close of the 
first taxable year of the fund ending after July 18, 1984 (calculated in 
the manner set forth in Q&A-3 of Sec.  1.512(a)-3T, and adjusted under 
paragraph (c) of Q&A-11 of

[[Page 434]]

Sec.  1.419-1T), reduced by employer contributions to the fund before 
the close of such first taxable year to the extent that such 
contributions are not deductible for the taxable year of the employer 
with or within which such taxable year of the fund ends and for any 
prior taxable year of the employer, over (b) the account limit which 
would have applied to the taxable year of the fund for which the excess 
is being computed (without regard to this transition rule). A welfare 
benefit fund is treated as in existence on July 18, 1984, for purposes 
of this transition rule only if amounts were actually set aside in such 
fund on such date to provide welfare benefits enumerated under section 
419A.

[T.D. 8073, 51 FR 4329, Feb. 4, 1986, as amended at 51 FR 11303, Apr. 2, 
1986]



Sec.  1.419A-2T  Qualified asset account limitation 
for collectively bargained funds. (Temporary)

    Q-1: What account limits apply to welfare benefit funds that are 
maintained pursuant to a collective bargaining agreement?
    A-1: Contributions to a welfare benefit fund maintained pursuant to 
one or more collective bargaining agreements and the reserves of such a 
fund generally are subject to the rules of sections 419, 419A, and 512. 
However, neither contributions to nor reserves of such a collectively 
bargained welfare benefit fund shall be treated as exceeding the 
otherwise applicable limits of section 419(b), 419A(b), or 512(a)(3)(E) 
until the earlier of: (i) The date on which the last of the collective 
bargaining agreements relating to the fund in effect on, or ratified on 
or before, the date of issuance of final regulations concerning such 
limits for collectively bargained welfare benefit funds terminates 
(determined without regard to any extension thereof agreed to after the 
date of issuance of such final regulations), or (ii) the date 3 years 
after the issuance of such final regulations.
    Q-2: What is a welfare benefit fund maintained pursuant to a 
collective bargaining agreement for purposes of Q&A-1?
    A-2: (1) For purposes of Q&A-1, a collectively bargained welfare 
benefit fund is a welfare benefit fund that is maintained pursuant to an 
agreement which the Secretary of Labor determines to be a collective 
bargaining agreement and which meets the requirements of the Secretary 
of the Treasury as set forth in paragraph 2 below.
    (2) Notwithstanding a determination by the Secretary of Labor that 
an agreement is a collective bargaining agreement, a welfare benefit 
fund is considered to be maintained pursuant to a collective bargaining 
agreement only if the benefits provided through the fund were the 
subject of arms-length negotiations between employee representatives and 
one or more employers, and if such agreement between employee 
representatives and one or more employers satisfies section 7701(a)(46) 
of the Code. Moreover, the circumstances surrounding a collective 
bargaining agreement must evidence good faith bargaining between adverse 
parties over the welfare benefits to be provided through the fund. 
Finally, a welfare benefit fund is not considered to be maintained 
pursuant to a collective bargaining agreement unless at least 50 percent 
of the employees eligible to receive benefits under the fund are covered 
by the collective bargaining agreement.
    (3) In the case of a collectively bargained welfare benefit fund, 
only the portion of the fund (as determined under allocation rules to be 
provided by the Commissioner) attributable to employees covered by a 
collective bargaining agreement, and from which benefits for such 
employees are provided, is considered to be maintained pursuant to a 
collective bargaining agreement.
    (4) Notwithstanding the preceding paragraphs and pending the 
issuance of regulations setting account limits for collectively 
bargained welfare benefit funds, a welfare benefit fund will not be 
treated as a collectively bargained welfare benefit fund for purposes of 
Q&A-1 if and when, after July 1, 1985, the number of employees who are 
not covered by a collective bargaining agreement and are eligible to 
receive benefits under the fund increases by reason

[[Page 435]]

of an amendment, merger, or other action of the employer or the fund. In 
addition, pending the issuance of such regulations, for purposes of 
applying the 50 percent test of paragraph (2) to a welfare benefit fund 
that is not in existence on July 1, 1985, ``90 percent'' shall be 
substituted for ``50 percent''.

[T.D. 8034, 50 FR 27428, July 3, 1985]



Sec.  1.419A(f)(6)-1  Exception for 10 or more employer plan.

    (a) Requirements--(1) In general. Sections 419 and 419A do not apply 
in the case of a welfare benefit fund that is part of a 10 or more 
employer plan described in section 419A(f)(6). A plan is a 10 or more 
employer plan described in section 419A(f)(6) only if it is a single 
plan--
    (i) To which more than one employer contributes;
    (ii) To which no employer normally contributes more than 10 percent 
of the total contributions contributed under the plan by all employers;
    (iii) That does not maintain an experience-rating arrangement with 
respect to any individual employer; and
    (iv) That satisfies the requirements of paragraph (a)(2) of this 
section.
    (2) Compliance information. A plan satisfies the requirements of 
this paragraph (a)(2) if the plan is maintained pursuant to a written 
document that requires the plan administrator to maintain records 
sufficient for the Commissioner or any participating employer to readily 
verify that the plan satisfies the requirements of section 419A(f)(6) 
and this section and that provides the Commissioner and each 
participating employer (or a person acting on the participating 
employer's behalf) with the right, upon written request to the plan 
administrator, to inspect and copy all such records. See Sec.  1.414(g)-
1 for the definition of plan administrator.
    (3) Application of rules--(i) In general. The requirements described 
in paragraph (a)(1) and (2) of this section must be satisfied both in 
form and in operation.
    (ii) Arrangement is considered in its entirety. The determination of 
whether a plan is a 10 or more employer plan described in section 
419A(f)(6) is based on the totality of the arrangement and all related 
facts and circumstances, including any related insurance contracts. 
Accordingly, all agreements and understandings (including promotional 
materials and policy illustrations) and the terms of any insurance 
contract will be taken into account in determining whether the 
requirements are satisfied in form and in operation.
    (b) Experience-rating arrangements--(1) General rule. A plan 
maintains an experience-rating arrangement with respect to an individual 
employer and thus does not satisfy the requirement of paragraph 
(a)(1)(iii) of this section if, with respect to that employer, there is 
any period for which the relationship of contributions under the plan to 
the benefits or other amounts payable under the plan (the cost of 
coverage) is or can be expected to be based, in whole or in part, on the 
benefits experience or overall experience (or a proxy for either type of 
experience) of that employer or one or more employees of that employer. 
For purposes of this paragraph (b)(1), an employer's contributions 
include all contributions made by or on behalf of the employer or the 
employer's employees. See paragraph (d) of this section for the 
definitions of benefits experience, overall experience, and benefits or 
other amounts payable. The rules of this paragraph (b) apply under all 
circumstances, including employer withdrawals and plan terminations.
    (2) Adjustment of contributions. An example of a plan that maintains 
an experience-rating arrangement with respect to an individual employer 
is a plan that entitles an employer to (or for which the employer can 
expect) a reduction in future contributions if that employer's overall 
experience is positive. Similarly, a plan maintains an experience-rating 
arrangement with respect to an individual employer where an employer can 
expect its future contributions to be increased if the employer's 
overall experience is negative. A plan also maintains an experience-
rating arrangement with respect to an individual employer where an 
employer is entitled to receive (or can expect to receive) a rebate of 
all or a portion of its contributions if that employer's overall 
experience is positive or, conversely, where an employer

[[Page 436]]

is liable to make additional contributions if its overall experience is 
negative.
    (3) Adjustment of benefits. An example of a plan that maintains an 
experience-rating arrangement with respect to an individual employer is 
a plan under which benefits for an employer's employees are (or can be 
expected to be) increased if that employer's overall experience is 
positive or, conversely, under which benefits are (or can be expected to 
be) decreased if that employer's overall experience is negative. A plan 
also maintains an experience-rating arrangement with respect to an 
individual employer if benefits for an employer's employees are limited 
by reference, directly or indirectly, to the overall experience of the 
employer (rather than having all the plan assets available to provide 
the benefits).
    (4) Special rules--(i) Treatment of insurance contracts--(A) In 
general. For purposes of this section, insurance contracts under the 
arrangement will be treated as assets of the fund. Accordingly, the 
value of the insurance contracts (including non-guaranteed elements) is 
included in the value of the fund, and amounts paid between the fund and 
the insurance company are disregarded, except to the extent they 
generate gains or losses as described in paragraph (b)(4)(i)(C) of this 
section.
    (B) Payments to and from an insurance company. Payments from a 
participating employer or its employees to an insurance company pursuant 
to insurance contracts under the arrangement will be treated as 
contributions made to the fund, and amounts paid under the arrangement 
from an insurance company will be treated as payments from the fund.
    (C) Gains and losses from insurance contracts. As of any date, if 
the sum of the benefits paid by the insurer and the value of the 
insurance contract (including non-guaranteed elements) is greater than 
the cumulative premiums paid to the insurer, the excess is treated as a 
gain to the fund. As of any date, if the cumulative premiums paid to the 
insurer are greater than the sum of the benefits paid by the insurer and 
the value of the insurance contract (including non-guaranteed elements), 
the excess is treated as a loss to the fund.
    (ii) Treatment of flexible contribution arrangements. Solely for 
purposes of determining the cost of coverage under a plan, if 
contributions for any period can vary with respect to a benefit package, 
the Commissioner may treat the employer as contributing the minimum 
amount that would maintain the coverage for that period.
    (iii) Experience rating by group of employers or group of employees. 
A plan will not be treated as maintaining an experience-rating 
arrangement with respect to an individual employer merely because the 
cost of coverage under the plan with respect to the employer is based, 
in whole or in part, on the benefits experience or the overall 
experience (or a proxy for either type of experience) of a rating group, 
provided that no employer normally contributes more than 10 percent of 
all contributions with respect to that rating group. For this purpose, a 
rating group means a group of participating employers that includes the 
employer or a group of employees covered under the plan that includes 
one or more employees of the employer.
    (iv) Family members, etc. For purposes of this section, 
contributions with respect to an employee include contributions with 
respect to any other person (e.g., a family member) who may be covered 
by reason of the employee's coverage under the plan and amounts provided 
with respect to an employee include amounts provided with respect to 
such a person.
    (v) Leased employees. In the case of an employer that is the 
recipient of services performed by a leased employee described in 
section 414(n)(2) who participates in the plan, the leased employee is 
treated as an employee of the recipient and contributions made by the 
leasing organization attributable to service performed with the 
recipient are treated as made by the recipient.
    (c) Characteristics indicating a plan is not a 10 or more employer 
plan--(1) In general. The presence of any of the characteristics 
described in paragraphs (c)(2) through (c)(6) of this section generally 
indicates that the plan is not a 10 or more employer plan described in 
section 419A(f)(6). Accordingly, unless established to the satisfaction 
of the Commissioner that the plan satisfies

[[Page 437]]

the requirements of section 419A(f)(6) and this section, a plan having 
any of the following characteristics is not a 10 or more employer plan 
described in section 419A(f)(6). A plan's lack of all the following 
characteristics does not create any inference that the plan is a 10 or 
more employer plan described in section 419A(f)(6).
    (2) Allocation of plan assets. Assets of the plan or fund are 
allocated to a specific employer or employers through separate 
accounting of contributions and expenditures for individual employers, 
or otherwise.
    (3) Differential pricing. The amount charged under the plan is not 
the same for all the participating employers, and those differences are 
not merely reflective of differences in current risk or rating factors 
that are commonly taken into account in manual rates used by insurers 
(such as current age, gender, geographic locale, number of covered 
dependents, and benefit terms) for the particular benefit or benefits 
being provided.
    (4) No fixed welfare benefit package. The plan does not provide for 
fixed welfare benefits for a fixed coverage period for a fixed cost, 
within the meaning of paragraph (d)(5) of this section.
    (5) Unreasonably high cost. The plan provides for fixed welfare 
benefits for a fixed coverage period for a fixed cost, but that cost is 
unreasonably high for the covered risk for the plan as a whole.
    (6) Nonstandard benefit triggers. Benefits or other amounts payable 
can be paid, distributed, transferred, or otherwise provided from a fund 
that is part of the plan by reason of any event other than the illness, 
personal injury, or death of an employee or family member, or the 
employee's involuntary separation from employment. Thus, for example, a 
plan exhibits this characteristic if the plan provides for the payment 
of benefits or the distribution of an insurance contract to an 
employer's employees on the occasion of the employer's withdrawal from 
the plan. A plan will not be treated as having the characteristic 
described in this paragraph merely because, upon cessation of 
participation in the plan, an employee is provided with the right to 
convert coverage under a group life insurance contract to coverage under 
an individual life insurance contract without demonstrating evidence of 
insurability, but only if there is no additional economic value 
associated with the conversion right.
    (d) Definitions. For purposes of this section:
    (1) Benefits or other amounts payable. The term benefits or other 
amounts payable includes all amounts that are payable or distributable 
(or that will be otherwise provided) directly or indirectly to 
employers, to employees or their beneficiaries, or to another fund as a 
result of a spinoff or transfer, and without regard to whether payable 
or distributable as welfare benefits, cash, dividends, rebates of 
contributions, property, promises to pay, or otherwise.
    (2) Benefits experience. The benefits experience of an employer (or 
of an employee or a group of employers or employees) means the benefits 
and other amounts incurred, paid, or distributed (or otherwise provided) 
directly or indirectly, including to another fund as a result of a 
spinoff or transfer, with respect to the employer (or employee or group 
of employers or employees), and without regard to whether provided as 
welfare benefits, cash, dividends, credits, rebates of contributions, 
property, promises to pay, or otherwise.
    (3) Overall experience--(i) Employer's overall experience. The term 
overall experience means, with respect to an employer (or group of 
employers), the balance that would have accumulated in a welfare benefit 
fund if that employer (or those employers) were the only employer (or 
employers) providing welfare benefits under the plan. Thus, the overall 
experience is credited with the sum of the contributions under the plan 
with respect to that employer (or group of employers), less the benefits 
and other amounts paid or distributed (or otherwise provided) with 
respect to that employer (or group of employers) or the employees of 
that employer (or group of employers), and adjusted for gain or loss 
from insurance contracts (as described in paragraph (b)(4)(i) of this 
section), investment return, and expenses. Overall experience as of any 
date may be either a positive or a negative number.

[[Page 438]]

    (ii) Employee's overall experience. The term overall experience 
means, with respect to an employee (or group of employees, whether or 
not employed by the same employer), the balance that would have 
accumulated in a welfare benefit fund if the employee (or group of 
employees) were the only employee (or employees) being provided welfare 
benefits under the plan. Thus, the overall experience is credited with 
the sum of the contributions under the plan with respect to that 
employee (or group of employees), less the benefits and other amounts 
paid or distributed (or otherwise provided) with respect to that 
employee (or group of employees), and adjusted for gain or loss from 
insurance contracts (as described in paragraph (b)(4)(i) of this 
section), investment return, and expenses. Overall experience as of any 
date may be either a positive or a negative number.
    (4) Employer. The term employer means the employer whose employees 
are participating in the plan and those employers required to be 
aggregated with the employer under section 414(b), (c), or (m).
    (5) Fixed welfare benefit package--(i) In general. A plan provides 
for fixed welfare benefits for a fixed coverage period for a fixed cost, 
if it--
    (A) Defines one or more welfare benefits, each of which has a fixed 
amount that does not depend on the amount or type of assets held by the 
fund;
    (B) Specifies fixed contributions to provide for those welfare 
benefits; and
    (C) Specifies a coverage period during which the plan agrees to 
provide specified welfare benefits, subject to the payment of the 
specified contributions by the employer.
    (ii) Treatment of actuarial gains or losses. A plan will not be 
treated as failing to provide for fixed welfare benefits for a fixed 
coverage period for a fixed cost merely because the plan does not pay 
the promised benefits (or requires all participating employers to make 
proportionate additional contributions based on the fund's shortfall) 
when there are insufficient assets under the plan to pay the promised 
benefits. Similarly, a plan will not be treated as failing to provide 
for fixed welfare benefits for a fixed coverage period for a fixed cost 
merely because the plan provides a period of extended coverage after the 
end of the coverage period with respect to employees of all 
participating employers at no cost to the employers (or provides a 
proportionate refund of contributions to all participating employers) 
because of the plan-wide favorable actuarial experience during the 
coverage period.
    (e) Maintenance of records. The plan administrator of a plan that is 
intended to be a 10 or more employer plan described in section 
419A(f)(6) shall maintain permanent records and other documentary 
evidence sufficient to substantiate that the plan satisfies the 
requirements of section 419A(f)(6) and this section. (See Sec.  
1.414(g)-1 for the definition of plan administrator.)
    (f) Examples. The provisions of paragraph (c) of this section and 
the provisions of section 419A(f)(6) and this section relating to 
experience-rating arrangements may be illustrated by the following 
examples. Unless stated otherwise, it should be assumed that any life 
insurance contract described in an example is non-participating and has 
no value other than the value of the policy's current life insurance 
protection plus its cash value, and that no employer normally 
contributes more than 10 percent of the total contributions contributed 
under the plan by all employers. Paragraph (ii) of each example applies 
the characteristics listed in paragraph (c) of this section to the facts 
described in that example. Paragraphs (iii) and (iv) of each example 
analyze the facts described in the example to determine whether the plan 
maintains experience-rating arrangements with respect to individual 
employers. Paragraphs (iii) and (iv) of each example illustrate only the 
meaning of experience-rating arrangements. No inference should be drawn 
from these examples about whether these plans are otherwise described in 
section 419A(f)(6) or about the applicability or nonapplicability of any 
other Internal Revenue Code provision that may limit or deny the 
deduction of contributions to the arrangements. Further, no inference 
should be drawn from the examples concerning the tax treatment of 
employees as a result of

[[Page 439]]

the employer contributions or the provision of the benefits. The 
examples are as follows:

    Example 1. (i) An arrangement provides welfare benefits to employees 
of participating employers. Each year a participating employer is 
required to contribute an amount equal to the claims and other expenses 
expected with respect to that employer for the year (based on current 
age, gender, geographic locale, number of participating employees, 
benefit terms, and other risk or rating factors commonly taken into 
account in manual rates used by insurers for the benefits being 
provided), multiplied by the ratio of actual claims with respect to that 
employer for the previous year over the expected claims with respect to 
that employer for the previous year.
    (ii) This arrangement exhibits at least one of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). Differential pricing exists under this arrangement because 
the amount charged under the plan is not the same for all the 
participating employers, and those differences are not merely reflective 
of differences in current risk or rating factors that are commonly taken 
into account in manual rates used by insurers for the particular benefit 
or benefits being provided.
    (iii) This arrangement does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. Under the 
arrangement, an employer's cost of coverage for each year is based, in 
part, on that employer's benefits experience (i.e., the benefits and 
other amounts provided in the past with respect to one or more employees 
of that employer). Accordingly, pursuant to paragraph (b)(1) of this 
section, the arrangement maintains experience-rating arrangements with 
respect to individual employers.
    Example 2. (i) The facts are the same as in Example 1, except that 
the amount charged to an employer each year is equal to claims and other 
expenses expected with respect to that employer for the year (determined 
the same as in Example 1), multiplied by the ratio of actual claims for 
the previous year (determined on a plan-wide basis) over the expected 
claims for the previous year (determined on a plan-wide basis).
    (ii) Based on the limited facts described above, this arrangement 
exhibits none of the characteristics listed in paragraph (c) of this 
section generally indicating that an arrangement is not a 10 or more 
employer plan described in section 419A(f)(6). Unlike the arrangement 
discussed in Example 1, there is no differential pricing under the 
arrangement because the only differences in the amounts charged to the 
employers are solely reflective of differences in current risk or rating 
factors that are commonly taken into account in manual rates used by 
insurers for the particular benefit or benefits being provided.
    (iii) Nothing in the facts described in this Example 2 indicates 
that the arrangement maintains experience-rating arrangements prohibited 
under section 419A(f)(6) and this section. An employer's cost of 
coverage under the arrangement is based, in part, on the benefits 
experience of that employer (as well as of all the other participating 
employers). However, pursuant to paragraph (b)(4)(iii) of this section, 
the arrangement will not be treated as maintaining experience-rating 
arrangements with respect to the individual employers merely because the 
employers' cost of coverage is based on the benefits experience of a 
group of employees eligible under the plan, provided no employer 
normally contributes more than 10 percent of all contributions with 
respect to the rating group that includes the employees of an individual 
employer. Under the arrangement described in this Example 2, the rating 
group includes all the participating employers (or all of their 
employees), and no employer normally contributes more than 10 percent of 
the contributions made under the arrangement by all the employers. 
Accordingly, absent other facts, the arrangement will not be treated as 
maintaining experience-rating arrangements with respect to individual 
employers.
    Example 3. (i) Arrangement A provides welfare benefits to employees 
of participating employers. Each year an employer is required to 
contribute an amount equal to the claims and other expenses expected 
with respect to that employer for the year (based on current risk or 
rating factors commonly taken into account in manual rates used by 
insurers for the benefits being provided), adjusted based on the 
employer's notional account. An employer's notional account is 
determined as follows. The account is credited with the sum of the 
employer's contributions previously paid under the plan less the benefit 
claims for that employer's employees. The notional account is further 
increased by a fixed five percent investment return (regardless of the 
actual investment return earned on the funds). If an employer's notional 
account is positive, the employer's contributions are reduced by a 
specified percentage of the notional account. If an employer's notional 
account is negative, the employer's contributions are increased by a 
specified percentage of the notional account.
    (ii) Arrangement A exhibits at least two of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). First, assets

[[Page 440]]

under the plan are allocated to specific employers. Second, differential 
pricing exists because the amount charged under the plan is not the same 
for all the participating employers, and those differences are not 
merely reflective of differences in current risk or rating factors that 
are commonly taken into account in manual rates used by insurers for the 
particular benefit or benefits being provided.
    (iii) Arrangement A does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. Under the 
arrangement, a participating employer's cost of coverage for each year 
is based on a proxy for that employer's overall experience. An 
employer's overall experience, as that term is defined in paragraph 
(d)(3) of this section, includes the balance that would have accumulated 
in the fund if that employer's employees were the only employees being 
provided benefits under the plan. Under that definition, the overall 
experience is credited with the sum of the contributions paid under the 
plan by or on behalf of that employer less the benefits or other amounts 
provided to with respect to that employer's employees, and adjusted for 
gain or loss from insurance contracts, expenses, and investment return. 
Under the formula used by the arrangement in this example to determine 
employer contributions, expenses are disregarded and a fixed investment 
return of five percent is used instead of actual investment return. The 
disregard of expenses and substitution of the fixed investment return 
for the actual investment return merely results in an employer's 
notional account that is a proxy for the overall experience of that 
employer. Accordingly, the arrangement maintains experience-rating 
arrangements with respect to individual employers.
    Example 4. (i) Under Arrangement B, death benefits are provided for 
eligible employees of each participating employer. Individual level 
premium whole life insurance policies are purchased to provide the death 
benefits. Each policy has a face amount equal to the death benefit 
payable with respect to the individual employee. Each year, a 
participating employer is charged an amount equal to the level premiums 
payable with respect to the employees of that employer. One 
participating employer, F, has an employee, P, whose coverage under the 
arrangement commenced at the beginning of 2000, when P was age 50. P is 
covered under the arrangement for $1 million of death benefits, and a 
life insurance policy with a face amount of $1 million has been 
purchased on P's life. The level annual premium on the policy is 
$23,000. At the beginning of 2005, when P is age 55, the $23,000 premium 
amount has been paid for five years and the policy, which continues to 
have a face amount of $1 million, has a cash value of $92,000. Another 
employer, G, has an employee, R, who is also 55 years old at the 
beginning of 2005 and is covered under Arrangement B for $1 million, for 
which a level premium life insurance policy with a face amount of $1 
million has been purchased. However, R did not become covered under 
Arrangement B until the beginning of 2005. Because R's coverage began at 
age 55, the level annual premium charged for the policy on R's life is 
$30,000, or $7,000 more than the premiums payable on the policy in 
effect on P's life. Employer F is charged $23,000 and employer G is 
charged $30,000 for the death benefit for employees P and R, 
respectively. Assume that employees P and R are the only covered 
employees of their respective employers and that they are identical with 
respect to current risk and rating factors that are commonly taken into 
account in manual rates used by insurers for death benefits.
    (ii) Arrangement B exhibits at least three of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). First, assets of the plan are effectively allocated to 
specific employers. Second, there is differential pricing under the 
arrangement. That is, the amount charged under the plan during the year 
for a specific amount of death benefit coverage is not the same for all 
the employers (employer F is charged $23,000 each year for $1 million of 
death benefit coverage while employer G is charged $30,000 each year for 
the same coverage), and the difference is not merely reflective of 
differences in current risk or rating factors that are commonly taken 
into account in manual rates used by insurers for the death benefit 
being provided. (The differences in amounts charged are attributable to 
differences in issue age and not to differences in current risk or 
rating factors, as employees P and R are the same age). Third, during 
the early years of the arrangement, the amounts charged are unreasonably 
high for the covered risk for the plan as a whole.
    (iii) Arrangement B does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. Arrangement B 
maintains experience-rating arrangements with respect to individual 
employers because the cost of coverage for each year for any employer 
participating in the arrangement is based on a proxy for the overall 
experience of that employer. Under Arrangement B, employer F's cost of 
coverage for 2005 is $23,000 for $1 million of coverage. The $92,000 
cash value at the beginning of 2005 in the policy insuring P's life is a 
proxy for employer F's overall experience. (The $92,000 is essentially 
the balance that would have accumulated in the fund if employer F were 
the only employer

[[Page 441]]

providing welfare benefits under Arrangement B.) Further, the $23,000 
charged to F for the $1 million of coverage in 2005 is based on the 
$92,000 since, in the absence of the $92,000, employer F would have been 
charged $30,000 for P's $1 million death benefit coverage. (Note that 
the conclusion that the $92,000 balance is the basis for the lower 
premium charged to employer F is consistent with the fact that a $92,000 
balance, if converted to a life annuity using the same actuarial 
assumptions as were used to calculate the cash value amount, would be 
sufficient to provide for annual annuity payments of $7,000 for the life 
of P--an amount equal to the $7,000 difference from the premium charged 
in 2005 to employer G for the $1 million of coverage on employee R's 
life.) Thus, F's cost of coverage for 2005 is based on a proxy for F's 
overall experience. Accordingly, Arrangement B maintains an experience-
rating arrangement with respect to employer F.
    (iv) Arrangement B also maintains an experience-rating arrangement 
with respect to employer G because it can be expected that each year G 
will be charged $30,000 for the $1 million of coverage on R's life. Each 
year, G's cost of coverage will reflect G's prior contributions and 
allocable earnings, so that G's cost of coverage will be based on a 
proxy for G's overall experience. Accordingly, Arrangement B maintains 
an experience-rating arrangement with respect to employer G. Similarly, 
Arrangement B maintains an experience-rating arrangement with respect to 
each other participating employer. Accordingly, Arrangement B maintains 
experience-rating arrangements with respect to individual employers. 
This would also be the result if Arrangement B maintained an experience-
rating arrangement with respect to only one individual employer.
    Example 5. (i) The facts are the same as in Example 4 except that 
the death benefits are provided under 10-year level term life insurance 
policies. One participating employer, H, has an employee, M, whose 
coverage under the arrangement commenced at the beginning of 2000, when 
M was age 35. M is covered under the arrangement for $1 million of death 
benefits, and a 10-year level term life insurance policy with a face 
amount of $1 million has been purchased on M's life. The level annual 
premium on the policy for the first 10 years is $700. At the beginning 
of 2007, when M is age 42, the $700 premium amount has been paid for 
seven years. Another employer, J, has an employee, N, who is also 42 
years old at the beginning of 2007 and is covered under the arrangement 
for $1 million, for which a 10-year level term life insurance policy 
with a face amount of $1 million has been purchased. However, N did not 
become covered under the arrangement until the beginning of 2007. 
Because N's coverage began at age 42, the 10-year level term premium 
charged for the policy on N's life is $1,100, or $400 more than the 
premiums then payable on the policy in effect on M's life. Neither the 
policy on employee M nor the policy on employee N has any cash value at 
any point during its term. Assume that employees M and N are the only 
covered employees of their respective employers and that they are 
identical with respect to any current risk and rating factors that are 
commonly taken into account in manual rates used by insurers for the 
death benefit being provided.
    (ii) Based on the facts described in this Example 5, this 
arrangement exhibits at least two of the characteristics listed in 
paragraph (c) of this section generally indicating that an arrangement 
is not a 10 or more employer plan described in section 419A(f)(6). 
First, for the same reasons as described in paragraph (ii) of Example 4, 
there is differential pricing under the arrangement. Second, assets of 
the plan are effectively allocated to specific employers. This is the 
case even though the insurance policies used by employers H and J have 
no accessible cash value.
    (iii) The facts described in this Example 5 indicate that the 
arrangement does not satisfy the requirements of section 419A(f)(6) and 
this section because, at a minimum, the requirement of paragraph 
(a)(1)(iii) of this section is not satisfied. This arrangement maintains 
experience-rating arrangements with respect to individual employers 
because the cost of coverage for each year for any employer 
participating in the arrangement is based on a proxy for the overall 
experience of that employer. Under this arrangement employer H's cost of 
coverage in 2007 is $700 for $1 million of coverage. Although the policy 
insuring M's life has no cash value accessible to employer H, the 
accumulation of the excesses of the amounts paid by employer H on behalf 
of employee M over each year's underlying mortality and expense charges 
for providing life insurance coverage to employee M provide economic 
value to employer H (i.e., the ability to purchase future coverage on 
M's life at a premium that is less than the underlying mortality and 
expense charges as those underlying charges increase with M's increasing 
age). Thus, H's cost of coverage for 2007 is based on a proxy for H's 
overall experience. Accordingly, this arrangement maintains an 
experience-rating arrangement with respect to employer H.
    (iv) This arrangement also maintains an experience-rating 
arrangement with respect to employer J because it can be expected that 
for each of the next nine years J will be charged $1,100 for the $1 
million of coverage on N's life. Each year, J's cost of coverage will 
reflect J's prior contributions, so that J's cost of coverage will be 
based on a proxy for J's overall experience. Accordingly, this 
arrangement maintains an experience-rating arrangement with respect to 
employer J. Similarly, this arrangement maintains an

[[Page 442]]

experiencing-rating arrangement with respect to each other participating 
employer. Accordingly, this arrangement maintains experience-rating 
arrangements with respect to individual employers. This would also be 
the result if this arrangement maintained an experience-rating 
arrangement with respect to only one individual employer.
    Example 6. (i) Under Arrangement C, death benefits are provided for 
eligible employees of each participating employer. Flexible premium 
universal life insurance policies are purchased to provide the death 
benefits. Each policy has a face amount equal to the death benefit 
payable with respect to the individual employee. Each participating 
employer can make any contributions to the arrangement provided that the 
amount paid for each employee is at least the amount needed to prevent 
the lapse of the policy. The amount needed to prevent the lapse of the 
universal life insurance policy is the excess, if any, of the mortality 
and expense charges for the year over the policy balance. All 
contributions made by an employer are paid as premiums to the universal 
life insurance policies purchased on the lives of the covered employees 
of that employer. Participating employers S and V each have a 50-year-
old employee covered under Arrangement C for death benefits of $1 
million, which is the face amount of the respective universal life 
insurance policies on the lives of the employees. In the first year of 
coverage employer S makes a contribution of $23,000 (the amount of a 
level premium) while employer V contributes only $6,000, which is the 
amount of the mortality and expense charges for the first year. At the 
beginning of year two, the balance in employer S's policy (including 
earnings) is $18,000, but the balance in V's policy is zero. Although S 
is not required to contribute anything in the second year of coverage, S 
contributes an additional $15,000 in the second year. Employer V 
contributes $7,000 in the second year.
    (ii) Arrangement C exhibits at least two of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). First, assets of the plan are effectively allocated to 
specific employers. Second, the arrangement does not provide for fixed 
welfare benefits for a fixed coverage period for a fixed cost.
    (iii) Arrangement C does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. Arrangement C 
maintains experience-rating arrangements with respect to individual 
employers because the cost of coverage of an employer participating in 
the arrangement is based on a proxy for the overall experience of that 
employer. Pursuant to paragraph (b)(4)(ii) of this section (concerning 
treatment of flexible contribution arrangements), solely for purposes of 
determining an employer's cost of coverage, the Commissioner may treat 
an employer as contributing the minimum amount needed to maintain the 
coverage. Applying this treatment, H's cost of coverage for the first 
year of coverage under Arrangement C is $6,000 for $1 million of death 
benefit coverage, but for the second year it is zero for the same amount 
of coverage because that is the minimum amount needed to keep the 
insurance policy from lapsing. Employer H's overall experience at the 
beginning of the second year of coverage is $18,000, because that is the 
balance that would have accumulated in the fund if H were the only 
employer providing benefits under Arrangement C. (The special rule of 
paragraph (b)(4)(ii) of this section only applies to determine cost of 
coverage; it does not apply in determining overall experience.) The 
$18,000 balance in the policy insuring the life of employer H's employee 
is a proxy for H's overall experience. Employer H can choose not to make 
any contributions in the second year of coverage due to the $18,000 
policy balance. Thus, H's cost of coverage for the second year is based 
on a proxy for H's overall experience. Accordingly, Arrangement C 
maintains an experience-rating arrangement with respect to employer H.
    (iv) Arrangement C also maintains an experience-rating arrangement 
with respect to employer J because in each year J can contribute more 
than the amount needed to prevent a lapse of the policy on the life of 
its employee and can expect that its cost of coverage for subsequent 
years will reflect its prior contributions and allocable earnings. 
Accordingly, Arrangement C maintains an experience-rating arrangement 
with respect to employer J.
    Example 7. (i) Arrangement D provides death benefits for eligible 
employees of each participating employer. Each employer can choose to 
provide a death benefit of either one, two, or three times the annual 
compensation of the covered employees. Under Arrangement D, the death 
benefit is payable only if the employee dies while employed by the 
employer. If an employee terminates employment with the employer or if 
the employer withdraws from the arrangement, the death benefit is no 
longer payable, no refund or other credit is payable to the employer or 
to the employees, and no policy or other property is transferrable to 
the employer or the employees. Furthermore, the employees are not 
provided with any right under Arrangement D to coverage under any other 
arrangement, nor with any right to purchase or to convert to an 
individual insurance policy, other than any conversion rights the 
employees may have in accordance with state law (and which provide no 
additional economic benefit). Arrangement D determines the amount 
required to be contributed by each employer for each month of coverage

[[Page 443]]

by aggregating the amount required to be contributed for each covered 
employee of the employer. The amount required to be contributed for each 
covered employee is determined by multiplying the amount of the death 
benefit coverage (in thousands) for the employee by five-year age 
bracket rates in a table specified by the plan, which is used uniformly 
for all covered employees of all participating employers. The rates in 
the specified table do not exceed the rates set forth in Table I of 
Sec.  1.79-3(d)(2), and differences in the rates in the table are merely 
reflective of differences in mortality risk for the various age 
brackets. The rates in the table are not based in whole or in part on 
the experience of the employers participating in Arrangement D. 
Arrangement D uses the amount contributed by each employer to purchase 
one-year term insurance coverage on the lives of the covered employees 
with a face amount equal to the death benefit provided by the plan. No 
employer is entitled to any rebates or refunds provided under the 
insurance contract.
    (ii) Arrangement D does not exhibit any of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). Under Arrangement D, assets are not allocated to a specific 
employer or employers. Differences in the amounts charged to the 
employers are solely reflective of differences in risk or rating factors 
that are commonly taken into account in manual rates used by insurers 
for the particular benefit or benefits being provided. The arrangement 
provides for fixed welfare benefits for a fixed coverage period for a 
fixed cost, within the meaning of paragraph (d)(5) of this section. The 
cost charged under the arrangement is not unreasonably high for the 
covered risk of the plan as a whole. Finally, benefits and other amounts 
payable can be paid, distributed, transferred, or otherwise made 
available only by reason of the death of the employee, so that there is 
no nonstandard benefit trigger under the arrangement.
    (iii) Nothing in the facts of this Example 7 indicates that 
Arrangement D fails to satisfy the requirements of section 419A(f)(6) or 
this section by reason of maintaining experience-rating arrangements 
with respect to individual employers. Based solely on the facts 
described above, Arrangement D does not maintain an experience rating-
arrangement with respect to any individual employer because for each 
participating employer there is no period for which the employer's cost 
of coverage under the arrangement is based, in whole or in part, on 
either the benefits experience or the overall experience (or a proxy for 
either type of experience) of that employer or its employees.
    Example 8. (i) The facts are the same as in Example 7, except that 
under the arrangement, any refund or rebate provided under that year's 
insurance contract is allocated among all the employers participating in 
the arrangement in proportion to their contributions, and is used to 
reduce the employers' contributions for the next year.
    (ii) This arrangement exhibits at least one of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). The arrangement includes nonstandard benefit triggers 
because amounts are made available to an employer by reason of the 
insurer providing a refund or rebate to the plan, an event that is other 
than the illness, personal injury, or death of an employee or family 
member, or an employee's involuntary separation from employment.
    (iii) Based on the limited and specific facts described in this 
Example 8, an employer participating in this arrangement should be able 
to establish to the satisfaction of the Commissioner that the plan does 
not maintain experience-rating arrangements with respect to individual 
employers. A participating employer's cost of coverage is the 
relationship of its contributions to the death benefit coverage or other 
amounts payable with respect to that employer, including the employer's 
portion of the insurance company rebate and refund amounts. The rebate 
and refund amounts are allocated to an employer based on that employer's 
contribution for the prior year. However, even though an employer's 
overall experience includes its past contributions, contributions alone 
are not a proxy for an employer's overall experience under the 
particular facts described in this Example 8. As a result, a 
participating employer's cost of coverage under the arrangement for each 
year (or any other period) is not based on that employer's benefits 
experience or its overall experience (or a proxy for either type of 
experience), except as follows: If the total of the insurance company 
refund or rebate amounts is a proxy for the overall experience of all 
participating employers, a participating employer's cost of coverage 
will be based in part on that employer's overall experience (or a proxy 
therefor) by reason of that employer's overall experience being a 
portion of the overall experience of all participating employers. Under 
the special rule of paragraph (b)(2)(iii) of this section, however, that 
fact alone will not cause the arrangement to be treated as maintaining 
an experience-rating arrangement with respect to an individual employer 
because no employer normally contributes more than 10 percent of the 
total contributions under the plan by all employers (the rating group). 
Accordingly, the arrangement will not be treated as maintaining 
experience-rating arrangements with respect to individual employers.

[[Page 444]]

    Example 9. (i) Arrangement E provides medical benefits for covered 
employees of 90 participating employers. The level of medical benefits 
is determined by a schedule set forth in the trust document and does not 
vary by employer. Other than any rights an employee may have to COBRA 
continuation coverage, the medical benefits cease when an employee 
terminates employment with the employer. If an employer withdraws from 
the arrangement, there is no refund of any contributions and there is no 
transfer of anything of value to employees of the withdrawing employer, 
to the withdrawing employer, or to another plan or arrangement 
maintained by the withdrawing employer. Arrangement E determines the 
amount required to be contributed by each employer for each year of 
coverage, and the aggregate amounts charged are not unreasonably high 
for the covered risk for the plan as a whole. To determine the amount to 
be contributed for each employer, Arrangement E classifies an employer 
based on the employer's location. These geographic areas are not changed 
once established under the arrangement. The amount charged for the 
coverage under the arrangement to the employers in a geographic area is 
determined from a rate-setting manual based on the benefit package and 
geographic area, and differences in the rates in the manual are merely 
reflective of current differences in those risk or rating factors. The 
rates in the rate-setting manual are not based in whole or in part on 
the experience of the employers participating in Arrangement E.
    (ii) Arrangement E does not exhibit any of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). Although the amounts charged under the arrangement to an 
employer in one geographic area can be expected to differ from those 
charged to an employer in another geographic area, the differences are 
merely reflective of differences in current risk or rating factors that 
are commonly taken into account in manual rates used by insurers for 
medical benefits.
    (iii) Nothing in the facts of this Example 9 indicates that 
Arrangement E fails to satisfy the requirements of section 419A(f)(6) or 
this section by reason of maintaining experience-rating arrangements 
with respect to individual employers. Based solely on the facts 
described above, Arrangement E does not maintain an experience rating-
arrangement with respect to any individual employer because for each 
participating employer there is no period for which the employer's cost 
of coverage under the arrangement is based, in whole or in part, on 
either the benefits experience or the overall experience (or a proxy for 
either type of experience) of that employer or its employees.
    Example 10. (i) The facts are the same as in Example 9, except that 
the amount charged for the coverage under the arrangement to the 
employers in a geographic area is initially determined from a rate-
setting manual based on the benefit package and then adjusted to reflect 
the claims experience of the employers in that classification as a 
whole. The arrangement does not have any geographic area classification 
for which one of the employers in the classification normally 
contributes more than 10 percent of the contributions made by all the 
employers in that classification.
    (ii) This arrangement exhibits at least one of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). There is differential pricing under the arrangement because 
the amounts charged to an employer in one geographic area can be 
expected to differ from those charged to an employer in another 
geographic area, and the differences are not merely reflective of 
current risk or rating factors that are commonly taken into account in 
manual rates used by insurers for medical benefits.
    (iii) Based on the facts described in this Example 10, an employer 
participating in this arrangement should be able to establish to the 
satisfaction of the Commissioner that the plan does not maintain 
experience-rating arrangements with respect to individual employers even 
though there is differential pricing. Although an employer's cost of 
coverage for each year is based, in part, on its benefits experience (as 
well as the benefits experience of the other employers in its geographic 
area), that does not result in experience-rating arrangements with 
respect to any individual employer because the employers in each 
geographic area are a rating group and no employer normally contributes 
more than 10 percent of the contributions made by all the employers in 
its rating group. (See paragraph (b)(4)(iii) of this section.)
    Example 11. (i) The facts of Arrangement F are the same as those 
described in Example 10, except that K, an employer in one of 
Arrangement F's geographic areas, normally contributes more than 10 
percent of the contributions made by the employers in that geographic 
area.
    (ii) For the same reasons as described in Example 10, Arrangement F 
results in differential pricing.
    (iii) Arrangement F does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. An employer's 
cost of coverage for each year is based, in part, on its benefits 
experience (as well as the benefits experience of the other employers in 
its geographic

[[Page 445]]

area) and the special rule for experience-rating by a rating group does 
not apply to Arrangement F because employer K normally contributes more 
than 10 percent of the contributions made by the employers in its rating 
group. Accordingly, Arrangement F maintains experience-rating 
arrangements with respect to individual employers.
    Example 12. (i) The facts of Arrangement G are the same as those 
described in Example 10, except for the way that the arrangement 
classifies the employers. Under Arrangement G, the experience of each 
employer for the prior year is reviewed and then the employer is 
assigned to one of three classifications (low cost, intermediate cost, 
or high cost) based on the ratio of actual claims with respect to that 
employer to expected claims with respect to that employer. No employer 
in any classification normally contributes more than 10 percent of the 
contributions of all employers in that classification.
    (ii) For the same reasons as described in Example 10, Arrangement G 
results in differential pricing.
    (iii) Arrangement G does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. The special rule 
in paragraph (b)(4)(iii) of this section for rating groups can prevent a 
plan from being treated as maintaining experience-rating arrangements 
with respect to individual employers if the mere use of a rating group 
is the only reason a plan would be so treated. Under Arrangement G, 
however, an employer's cost of coverage for each year is based on the 
employer's benefits experience in two ways: the employer's benefits 
experience is part of the benefits experience of a rating group that is 
otherwise permitted under the special rule of paragraph (b)(4)(iii) of 
this section, and the employer's benefits experience is considered 
annually in redetermining the rating group to which the employer is 
assigned. Accordingly, Arrangement G maintains experience-rating 
arrangements with respect to individual employers.
    Example 13. (i) Arrangement H provides a death benefit equal to a 
multiple of one, two, or three times compensation as elected by the 
participating employer for all of its covered employees. Universal life 
insurance contracts are purchased on the lives of the covered employees. 
The face amount of each contract is the amount of the death benefit 
payable upon the death of the covered employee. Under the arrangement, 
each employer is charged annually an amount equal to 200 percent of the 
mortality and expense charges under the contracts for that year covering 
the lives of the covered employees of that employer. Arrangement H pays 
the amount charged each employer to the insurance company. Thus, the 
insurance company receives an amount equal to 200 percent of the 
mortality and expense charges under the policies. The excess amounts 
charged and paid to the insurance company increase the policy value of 
the universal life insurance contracts. When an employer ceases to 
participate in Arrangement H, the insurance policies are distributed to 
each of the covered employees of the withdrawing employer.
    (ii) Arrangement H exhibits at least three of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). First, assets are effectively allocated to specific 
employers. Second, because the amount of the withdrawal benefit (i.e., 
the value of the life insurance policies to be distributed) is unknown, 
the arrangement does not provide for fixed welfare benefits for a fixed 
coverage period for a fixed cost. Finally, Arrangement H includes 
nonstandard benefit triggers because amounts can be distributed under 
the arrangement for a reason other than the illness, personal injury, or 
death of an employee or family member, or an employee's involuntary 
separation from employment.
    (iii) Arrangement H does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. Pursuant to 
paragraph (b)(1) of this section, the prohibition against maintaining 
experience-rating arrangements applies under all circumstances, 
including employer withdrawals. Arrangement H maintains experience-
rating arrangements with respect to individual employers because the 
cost of coverage for a participating employer is based on a proxy for 
the overall experience of that employer. Under Arrangement H, the 
contributions of a participating employer are fixed. The benefits or 
other amounts payable with respect to an employer include the value of 
the life insurance policies that are distributable to the employees of 
that employer upon the withdrawal of that employer from the plan. Thus, 
the cost of coverage for any period of an employer's participation in 
Arrangement H is the relationship between the fixed contributions for 
that period and the variable benefits payable under the arrangement. The 
value of those variable benefits depends on the value of the policies 
that would be distributed if the employer were to withdraw at the end of 
the period. (Each year the insurance policies to be distributed to the 
employees in the event of the employer's withdrawal will increase in 
value due to the premium amounts paid on the policy in excess of current 
mortality and expense charges.) For reasons similar to those discussed 
above in Example 6, the aggregate value of the life insurance policies 
on the lives of an employer's employees is a proxy for that employer's 
overall experience. Thus, a participating's employer's cost of coverage

[[Page 446]]

for any period is based on a proxy for the overall experience of that 
employer. Accordingly, Arrangement H maintains experience-rating 
arrangements with respect to individual employers.
    (iv) The result would be the same if, rather than distributing the 
policies, Arrangement H distributed cash amounts equal to the cash 
values of the policies. The result would also be the same if the 
distribution of policies or cash values is triggered by employees 
terminating their employment rather than by employers ceasing to 
participate in the arrangement.
    Example 14. (i)(1) The facts of Arrangement J are the same as those 
described in Example 13 for Arrangement H, except that--
    (A) Arrangement J purchases a special term insurance policy on the 
life of each covered employee with a face amount equal to the death 
benefit payable upon the death of the covered employee; and
    (B) there is no benefit distributable upon an employer's withdrawal.
    (2) The special term policy includes a rider that extends the term 
protection for a period of time beyond the term provided on the policy's 
face. The length of the extended term is not guaranteed, but is based on 
the excess of premiums over mortality and expense charges during the 
period of original term protection, increased by any investment return 
credited to the policies.
    (ii) Arrangement J exhibits two of the characteristics listed in 
paragraph (c) of this section generally indicating that an arrangement 
is not a 10 or more employer plan described in section 419A(f)(6). 
First, assets of the plan are effectively allocated to specific 
employers. Second, the plan does not provide for fixed welfare benefits 
for a fixed coverage period for a fixed cost because the coverage period 
is not fixed.
    (iii) Arrangement J does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. Arrangement J 
maintains experience-rating arrangements with respect to individual 
employers because the cost of coverage for a participating employer is 
based on a proxy for the overall experience of that employer. Under 
Arrangement J, the contributions of a participating employer are fixed. 
The benefits or other amounts payable with respect to an employer are 
the one-, two-, or three-times-compensation death benefit for each 
employee of the employer for the current year, plus the extended term 
protection coverage for future years. Thus, for any period extending to 
or beyond the end of the original term of one or more of the policies on 
the lives of an employer's employees, the employer's cost of coverage is 
the relationship between the fixed contributions for that period and the 
variable benefits payable under the arrangement. The value of those 
variable benefits depends on the aggregate value of the policies 
insuring the employer's employees (i.e., the total of the premiums paid 
on the policies by Arrangement J to the insurance company, reduced by 
the mortality and expense charges that were needed to provide the 
original term protection, and increased by any investment return 
credited to the policies). The aggregate value of the policies insuring 
an employer's employees is, at any time, a proxy for the employer's 
overall experience. Thus, a participating employer's cost of coverage 
for any period described above is based on a proxy for the overall 
experience of that employer. Accordingly, Arrangement J maintains 
experience-rating arrangements with respect to individual employers.
    Example 15. (i) Arrangement K provides a death benefit to employees 
of participating employers equal to a specified multiple of 
compensation. Under the arrangement, a flexible-premium universal life 
insurance policy is purchased on the life of each covered employee in 
the amount of that employee's death benefit. Each policy has a face 
amount equal to the employee's death benefit under the arrangement. Each 
participating employer is charged annually with the aggregate amount (if 
any) needed to maintain the policies covering the lives of its 
employees. However, each employer is permitted to make additional 
contributions to the arrangement and, upon doing so, the additional 
contributions are paid to the insurance company and allocated to one or 
more contracts covering the lives of the employer's employees. In the 
event that any policy covering the life of an employee would lapse in 
the absence of new contributions from that employee's employer, and if 
at the same time there are policies covering the lives of other 
employees of the employer that have cash values in excess of the amounts 
needed to prevent their lapse, the employer has the option of reducing 
its otherwise-required contribution by amounts withdrawn from those 
other policies.
    (ii) Arrangement K exhibits at least two of the characteristics 
listed in paragraph (c) of this section generally indicating that an 
arrangement is not a 10 or more employer plan described in section 
419A(f)(6). First, assets of the plan are allocated to specific 
employers. Second, because the plan allows an employer to choose to 
contribute an amount that is different than that contributed by another 
employer for the same benefit, the amount charged under the plan is not 
the same for all participating employers (and the differences in the 
amounts are not merely reflective of differences in current risk or 
rating factors that are commonly taken into account in manual rates used 
by insurers for the particular benefit or benefits being provided), 
resulting in differential pricing.

[[Page 447]]

    (iii) Arrangement K does not satisfy the requirements of section 
419A(f)(6) and this section because, at a minimum, the requirement of 
paragraph (a)(1)(iii) of this section is not satisfied. Arrangement K 
maintains experience-rating arrangements with respect to individual 
employers because the cost of coverage for any employer participating in 
the arrangement is based on a proxy for the overall experience of that 
employer. Under Arrangement K the benefits with respect to an employer 
for any year are a fixed amount. For purposes of determining the 
employer's cost of coverage for that year, the Commissioner may treat 
the employer's contribution under the special rule of paragraph 
(b)(4)(ii) of this section (concerning treatment of flexible 
contribution/arrangements) as being the minimum contribution amount 
needed to maintain the universal life policies with respect to that 
employer for the death benefit coverage for that year. Because the 
employer has the option to prevent the lapse of one policy by having 
amounts withdrawn from other policies, that minimum contribution amount 
will be based in part on the aggregate value of the policies on the 
lives of that employer's employees. That aggregate value is a proxy for 
the employer's overall experience. Accordingly, Arrangement K maintains 
experience-rating arrangements with respect to individual employers.

    (g) Effective date--(1) In general. Except as set forth in paragraph 
(g)(2) of this section, this section applies to contributions paid or 
incurred in taxable years of an employer beginning on or after July 11, 
2002.
    (2) Compliance information and recordkeeping. Paragraphs (a)(1)(iv), 
(a)(2), and (e) of this section apply for taxable years of a welfare 
benefit fund beginning after July 17, 2003.

[T.D. 9079, 68 FR 42259, July 17, 2003]



Sec.  1.420-1  Significant reduction in retiree health coverage 
during the cost maintenance period.

    (a) In general. Notwithstanding section 420(c)(3)(A), the minimum 
cost requirements of section 420(c)(3) are not met if the employer 
significantly reduces retiree health coverage during the cost 
maintenance period.
    (b) Significant reduction--(1) In general. An employer significantly 
reduces retiree health coverage during the cost maintenance period if, 
for any taxable year beginning on or after January 1, 2002, that is 
included in the cost maintenance period, either--
    (i) The employer-initiated reduction percentage for that taxable 
year exceeds 10 percent; or
    (ii) The sum of the employer-initiated reduction percentages for 
that taxable year and all prior taxable years during the cost 
maintenance period exceeds 20 percent.
    (2) Employer-initiated reduction percentage. The employer-initiated 
reduction percentage for any taxable year is the fraction B/A, expressed 
as a percentage, where:

A = The total number of individuals (retired employees plus their 
          spouses plus their dependents) receiving coverage for 
          applicable health benefits as of the day before the first day 
          of the taxable year.
B = The total number of individuals included in A whose coverage for 
          applicable health benefits ended during the taxable year by 
          reason of employer action.

    (3) Special rules for taxable years beginning before January 1, 
2002. The following rules apply for purposes of computing the amount in 
paragraph (b)(1)(ii) of this section if any portion of the cost 
maintenance period precedes the first day of the first taxable year 
beginning on or after January 1, 2002--
    (i) Aggregation of taxable years. The portion of the cost 
maintenance period that precedes the first day of the first taxable year 
beginning on or after January 1, 2002 (the initial period) is treated as 
a single taxable year and the employer-initiated reduction percentage 
for the initial period is computed as set forth in paragraph (b)(2) of 
this section, except that the words ``initial period'' apply instead of 
``taxable year.''
    (ii) Loss of coverage. If coverage for applicable health benefits 
for an individual ends by reason of employer action at any time during 
the initial period, an employer may treat that coverage as not having 
ended if the employer restores coverage for applicable health benefits 
to that individual by the end of the initial period.
    (4) Employer action--(i) General rule. For purposes of paragraph 
(b)(2) of this section, an individual's coverage for applicable health 
benefits ends during a taxable year by reason of employer action, if on 
any day within the taxable year, the individual's eligibility for 
applicable health benefits ends as a

[[Page 448]]

result of a plan amendment or any other action of the employer (e.g., 
the sale of all or part of the employer's business) that, in conjunction 
with the plan terms, has the effect of ending the individual's 
eligibility. An employer action is taken into account for this purpose 
regardless of when the employer action actually occurs (e.g., the date 
the plan amendment is executed), except that employer actions occurring 
before the later of December 18, 1999, and the date that is 5 years 
before the start of the cost maintenance period are disregarded.
    (ii) Special rule. Notwithstanding paragraph (b)(4)(i) of this 
section, coverage for an individual will not be treated as having ended 
by reason of employer action merely because such coverage ends under the 
terms of the plan if those terms were adopted contemporaneously with the 
provision under which the individual became eligible for retiree health 
coverage. This paragraph (b)(4)(ii) does not apply with respect to plan 
terms adopted contemporaneously with a plan amendment that restores 
coverage for applicable health benefits before the end of the initial 
period in accordance with paragraph (b)(3)(ii) of this section.
    (iii) Sale transactions. If a purchaser provides coverage for 
retiree health benefits to one or more individuals whose coverage ends 
by reason of a sale of all or part of the employer's business, the 
employer may treat the coverage of those individuals as not having ended 
by reason of employer action. In such a case, for the remainder of the 
year of the sale and future taxable years of the cost maintenance 
period--
    (A) For purposes of computing the applicable employer cost under 
section 420(c)(3), those individuals are treated as individuals to whom 
coverage for applicable health benefits was provided (for as long as the 
purchaser provides retiree health coverage to them), and any amounts 
expended by the purchaser of the business to provide for health benefits 
for those individuals are treated as paid by the employer;
    (B) For purposes of determining whether a subsequent termination of 
coverage is by reason of employer action under this paragraph (b)(4), 
the purchaser is treated as the employer. However, the special rule in 
paragraph (b)(4)(ii) of this section applies only to the extent that any 
terms of the plan maintained by the purchaser that have the effect of 
ending retiree health coverage for an individual are the same as terms 
of the plan maintained by the employer that were adopted 
contemporaneously with the provision under which the individual became 
eligible for retiree health coverage under the plan maintained by the 
employer.
    (c) Definitions. The following definitions apply for purposes of 
this section:
    (1) Applicable health benefits. Applicable health benefits means 
applicable health benefits as defined in section 420(e)(1)(C).
    (2) Cost maintenance period. Cost maintenance period means the cost 
maintenance period as defined in section 420(c)(3)(D).
    (3) Sale. A sale of all or part of an employer's business means a 
sale or other transfer in connection with which the employees of a trade 
or business of the employer become employees of another person. In the 
case of such a transfer, the term purchaser means a transferee of the 
trade or business.
    (d) Examples. The following examples illustrate the application of 
this section:

    Example 1. (i) Employer W maintains a defined benefit pension plan 
that includes a 401(h) account and permits qualified transfers that 
satisfy section 420. The number of individuals receiving coverage for 
applicable health benefits as of the day before the first day of Year 1 
is 100. In Year 1, Employer W makes a qualified transfer under section 
420. There is no change in the number of individuals receiving health 
benefits during Year 1. As of the last day of Year 2, applicable health 
benefits are provided to 99 individuals, because 2 individuals became 
eligible for coverage due to retirement and 3 individuals died in Year 
2. During Year 3, Employer W amends its health plan to eliminate 
coverage for 5 individuals, 1 new retiree becomes eligible for coverage 
and an additional 3 individuals are no longer covered due to their own 
decision to drop coverage. Thus, as of the last day of Year 3, 
applicable health benefits are provided to 92 individuals. During Year 
4, Employer W amends its health plan to eliminate coverage under its 
health plan for 8 more individuals, so that as of the last day of Year 
4, applicable health benefits are provided to 84 individuals. During 
Year 5,

[[Page 449]]

Employer W amends its health plan to eliminate coverage for 8 more 
individuals.
    (ii) There is no significant reduction in retiree health coverage in 
either Year 1 or Year 2, because there is no reduction in health 
coverage as a result of employer action in those years.
    (iii) There is no significant reduction in Year 3. The number of 
individuals whose health coverage ended during Year 3 by reason of 
employer action (amendment of the plan) is 5. Since the number of 
individuals receiving coverage for applicable health benefits as of the 
last day of Year 2 is 99, the employer-initiated reduction percentage 
for Year 3 is 5.05 percent (5/99), which is less than the 10 percent 
annual limit.
    (iv) There is no significant reduction in Year 4. The number of 
individuals whose health coverage ended during Year 4 by reason of 
employer action is 8. Since the number of individuals receiving coverage 
for applicable health benefits as of the last day of Year 3 is 92, the 
employer-initiated reduction percentage for Year 4 is 8.70 percent (8/
92), which is less than the 10 percent annual limit. The sum of the 
employer-initiated reduction percentages for Year 3 and Year 4 is 13.75 
percent, which is less than the 20 percent cumulative limit.
    (v) In Year 5, there is a significant reduction under paragraph 
(b)(1)(ii) of this section. The number of individuals whose health 
coverage ended during Year 5 by reason of employer action (amendment of 
the plan) is 8. Since the number of individuals receiving coverage for 
applicable health benefits as of the last day of Year 4 is 84, the 
employer-initiated reduction percentage for Year 5 is 9.52 percent (8/
84), which is less than the 10 percent annual limit. However, the sum of 
the employer-initiated reduction percentages for Year 3, Year 4, and 
Year 5 is 5.05 percent + 8.70 percent + 9.52 percent = 23.27 percent, 
which exceeds the 20 percent cumulative limit.
    Example 2. (i) Employer X, a calendar year taxpayer, maintains a 
defined benefit pension plan that includes a 401(h) account and permits 
qualified transfers that satisfy section 420. X also provides lifetime 
health benefits to employees who retire from Division A as a result of a 
plant shutdown, no health benefits to employees who retire from Division 
B, and lifetime health benefits to all employees who retire from 
Division C. In 2000, X amends its health plan to provide coverage for 
employees who retire from Division B as a result of a plant shutdown, 
but only for the 2-year period coinciding with their severance pay. Also 
in 2000, X amends the health plan to provide that employees who retire 
from Division A as a result of a plant shutdown receive health coverage 
only for the 2-year period coinciding with their severance pay. A plant 
shutdown that affects Division A and Division B employees occurs in 
2000. The number of individuals receiving coverage for applicable health 
benefits as of the last day of 2001 is 200. In 2002, Employer X makes a 
qualified transfer under section 420. As of the last day of 2002, 
applicable health benefits are provided to 170 individuals, because the 
2-year period of benefits ends for 10 employees who retired from 
Division A and 20 employees who retired from Division B as a result of 
the plant shutdown that occurred in 2000.
    (ii) There is no significant reduction in retiree health coverage in 
2002. Coverage for the 10 retirees from Division A who lose coverage as 
a result of the end of the 2-year period is treated as having ended by 
reason of employer action, because coverage for those Division A 
retirees ended by reason of a plan amendment made after December 17, 
1999. However, the terms of the health plan that limit coverage for 
employees who retired from Division B as a result of the 2000 plant 
shutdown (to the 2-year period) were adopted contemporaneously with the 
provision under which those employees became eligible for retiree 
coverage under the health plan. Accordingly, under the rule provided in 
paragraph (b)(4)(ii) of this section, coverage for those 20 retirees 
from Division B is not treated as having ended by reason of employer 
action. Thus, the number of individuals whose health benefits ended by 
reason of employer action in 2002 is 10. Since the number of individuals 
receiving coverage for applicable health benefits as of the last day of 
2001 is 200, the employer-initiated reduction percentage for 2002 is 5 
percent (10/200), which is less than the 10 percent annual limit.

    (e) Regulatory effective date. This section is applicable to 
transfers of excess pension assets occurring on or after December 18, 
1999.

[T.D. 8948, 66 FR 32900, June 19, 2001]

                          Certain Stock Options



Sec.  1.421-1  Meaning and use of certain terms.

    (a) Option. (1) For purposes of this section and Sec. Sec.  1.421-2 
through 1.424-1, the term ``option'' means the right or privilege of an 
individual to purchase stock from a corporation by virtue of an offer of 
the corporation continuing for a stated period of time, whether or not 
irrevocable, to sell such stock at a price determined under paragraph 
(e) of this section, such individual being under no obligation to 
purchase. The individual who has such right or privilege is referred to 
as the optionee and the corporation offering to sell stock

[[Page 450]]

under such an arrangement is referred to as the optionor. While no 
particular form of words is necessary, the option must express, among 
other things, an offer to sell at the option price, the maximum number 
of shares purchasable under the option, and the period of time during 
which the offer remains open. The term option includes a warrant that 
meets the requirements of this paragraph (a)(1).
    (2) An option may be granted as part of or in conjunction with an 
employee stock purchase plan or subscription contract. See section 423.
    (3) An option must be in writing (in paper or electronic form), 
provided that such writing is adequate to establish an option right or 
privilege that is enforceable under applicable law.
    (b) Statutory options. (1) The term statutory option, for purposes 
of this section and Sec. Sec.  1.421-2 through 1.424-1, means an 
incentive stock option, as defined in Sec.  1.422-2(a), or an option 
granted under an employee stock purchase plan, as defined in Sec.  
1.423-2.
    (2) An option qualifies as a statutory option only if the option is 
not transferable (other than by will or by the laws of descent and 
distribution) by the individual to whom the option was granted, and is 
exercisable, during the lifetime of such individual, only by such 
individual. See Sec. Sec.  1.422-2(a)(2)(v) and 1.423-2(j). Accordingly, 
an option which is transferable or transferred by the individual to whom 
the option is granted during such individual's lifetime, or is 
exercisable during such individual's lifetime by another person, is not 
a statutory option. However, if the option or the plan under which the 
option was granted contains a provision permitting the individual to 
designate the person who may exercise the option after such individual's 
death, neither such provision, nor a designation pursuant to such 
provision, disqualifies the option as a statutory option. A pledge of 
the stock purchasable under an option as security for a loan that is 
used to pay the option price does not cause the option to violate the 
nontransferability requirements of this paragraph (b). Also, the 
transfer of an option to a trust does not disqualify the option as a 
statutory option if, under section 671 and applicable State law, the 
individual is considered the sole beneficial owner of the option while 
it is held in the trust. If an option is transferred incident to divorce 
(within the meaning of section 1041) or pursuant to a domestic relations 
order, the option does not qualify as a statutory option as of the day 
of such transfer. For the treatment of nonstatutory options, see Sec.  
1.83-7.
    (3)(i) The determination of whether an option is a statutory option 
is made as of the date such option is granted. An option which is a 
statutory option when granted does not lose its character as such an 
option by reason of subsequent events, and an option which is not a 
statutory option when granted does not become such an option by reason 
of subsequent events. See, however, paragraph (e) of Sec.  1.424-1, 
relating to modification, extension, or renewal of an option. For rules 
concerning options that are not statutory options, see Sec.  1.83-7.
    (ii) The application of this subparagraph may be illustrated by the 
following examples:

    Example 1. X Corporation is a subsidiary of S Corporation which, in 
turn, is a subsidiary of P Corporation. On June 1, 2004, P grants to an 
employee of P a statutory option to purchase a share of stock of X. On 
January 1, 2005, S sells a portion of the X stock which it owns to an 
unrelated corporation and, as of that date, X ceases to be a subsidiary 
of S. Because X was a subsidiary of P on the date of the grant of the 
statutory option, the option does not fail to be a statutory option even 
though X ceases to be a subsidiary of P.
    Example 2. Assume P grants an option to an employee under the same 
facts as in example (1) above, except that on June 1, 2004, X is not a 
subsidiary of either S or P. Such option is not a statutory option on 
June 1, 2004. On January 1, 2005, S purchases from an unrelated 
corporation a sufficient number of shares of X stock to make X, as of 
that date, a subsidiary of S. Because X was not a subsidiary of S or P 
on the date of the grant of the option, the option is not a statutory 
option even though X later becomes a subsidiary of P. See Sec. Sec.  
1.422-2(a)(2) and 1.423-2(b).

    (c) Time and date of granting option. (1) For purposes of this 
section and Sec. Sec.  1.421-2 through 1.424-1, the language ``the date 
of the granting of the option'' and ``the time such option is granted,'' 
and similar phrases refer to the date or time when the granting 
corporation completes the corporate

[[Page 451]]

action constituting an offer of stock for sale to an individual under 
the terms and conditions of a statutory option. Except as set forth in 
Sec.  1.423-2(h)(2), a corporate action constituting an offer of stock 
for sale is not considered complete until the date on which the maximum 
number of shares that can be purchased under the option and the minimum 
option price are fixed or determinable.
    (2) If the corporation imposes conditions on the granting of an 
option (as distinguished from conditions governing the exercise of the 
option), such conditions shall be given effect in accordance with the 
intent of the corporation. However, under section 424(i), if the grant 
of an option is subject to approval by stockholders, the date of grant 
of the option shall be determined as if the option had not been subject 
to such approval. A condition which does not require corporate action, 
such as the approval of, or registration with, some regulatory or 
governmental agency, for example, a stock exchange or the Securities and 
Exchange Commission, is ordinarily considered a condition upon the 
exercise of the option unless the corporate action clearly indicates 
that the option is not to be granted until such condition is satisfied. 
If an option is granted to an individual upon the condition that such 
individual will become an employee of the corporation granting the 
option or of a related corporation, such option is not granted prior to 
the date the individual becomes such an employee.
    (3) In general, conditions imposed upon the exercise of an option 
will not operate to make ineffective the granting of the option. For 
example, on June 1, 2004, the A Corporation grants to X, an employee, an 
option to purchase 5,000 shares of the corporation's stock, exercisable 
by X on or after June 1, 2005, provided he is employed by the 
corporation on June 1, 2005, and provided that A's profits during the 
fiscal year preceding the year of exercise exceed $200,000. Such an 
option is granted to X on June 1, 2004, and will be treated as 
outstanding as of such date.
    (d) Stock and voting stock. (1) For purposes of this section and 
Sec. Sec.  1.421-2 through 1.424-1, the term stock means capital stock 
of any class, including voting or nonvoting common or preferred stock. 
Except as otherwise provided, the term includes both treasury stock and 
stock of original issue. Special classes of stock authorized to be 
issued to and held by employees are within the scope of the term stock 
as used in such sections, provided such stock otherwise possesses the 
rights and characteristics of capital stock.
    (2) For purposes of determining what constitutes voting stock in 
ascertaining whether a plan has been approved by stockholders under 
Sec.  1.422-2(b) or 1.423-2(c) or whether the limitations pertaining to 
voting power contained in Sec. Sec.  1.422-2(f) and 1.423-2(d) have been 
met, stock which does not have voting rights until the happening of an 
event, such as the default in the payment of dividends on preferred 
stock, is not voting stock until the happening of the specified event. 
Generally, stock which does not possess a general voting power, and may 
vote only on particular questions, is not voting stock. However, if such 
stock is entitled to vote on whether a stock option plan may be adopted, 
it is voting stock.
    (3) In general, for purposes of this section and Sec. Sec.  1.421-2 
through 1.424-1, ownership interests other than capital stock are 
considered stock.
    (e) Option price. (1) For purposes of this section and Sec. Sec.  
1.421-2 through 1.424-1, the term option price, price paid under the 
option, or exercise price means the consideration in cash or property 
which, pursuant to the terms of the option, is the price at which the 
stock subject to the option is purchased. The term option price does not 
include any amounts paid as interest under a deferred payment 
arrangement or treated as interest.
    (2) Any reasonable valuation method may be used to determine 
whether, at the time the option is granted, the option price satisfies 
the pricing requirements of sections 422(b)(4), 422(c)(5), 422(c)(7), 
and 423(b)(6) with respect to the stock subject to the option. Such 
methods include, for example, the valuation method described in Sec.  
20.2031-2 of this chapter (Estate Tax Regulations).
    (f) Exercise. For purposes of this section and Sec. Sec.  1.421-2 
through 1,424-1, the term ``exercise'', when used in reference to an 
option, means the act of

[[Page 452]]

acceptance by the optionee of the offer to sell contained in the option. 
In general, the time of exercise is the time when there is a sale or a 
contract to sell between the corporation and the individual. A promise 
to pay the option price does not constitute an exercise of the option 
unless the optionee is subject to personal liability on such promise. An 
agreement or undertaking by the employee to make payments under a stock 
purchase plan does not constitute the exercise of an option to the 
extent the payments made remain subject to withdrawal by or refund to 
the employee.
    (g) Transfer. For purposes of this section and Sec. Sec.  1.421-2 
through 1.424-1, the term ``transfer'', when used in reference to the 
transfer to an individual of a share of stock pursuant to his exercise 
of a statutory option, means the transfer of ownership of such share, or 
the transfer of substantially all the rights of ownership. Such transfer 
must, within a reasonable time, be evidenced on the books of the 
corporation. For purposes of section 422, a transfer may occur even if a 
share of stock is subject to a substantial risk of forfeiture or is not 
otherwise transferable immediately after the date of exercise. See Sec.  
1.422-1(b)(3) Example 2. A transfer does not fail to occur merely 
because, under the terms of the arrangement, the individual may not 
dispose of the share for a specified period of time, or the share is 
subject to a right of first refusal or a right to reacquire the share at 
the share's fair market value at the time of sale.
    (h) Employment relationship. (1) An option is a statutory option 
only if, at the time the option is granted, the optionee is an employee 
of the corporation granting the option, or a related corporation of such 
corporation. If the option has been assumed or a new option has been 
substituted in its place under Sec.  1.424-1(a), the optionee must, at 
the time of such substitution or assumption, be an employee (or a former 
employee within the 3-month period following termination of the 
employment relationship) of the corporation so substituting or assuming 
the option, or a related corporation of such corporation. The 
determination of whether the optionee is an employee at the time the 
option is granted (or at the time of the substitution or assumption 
under Sec.  1.424-1(a)) is made in accordance with section 3401(c) and 
the regulations thereunder. As to the granting of an option conditioned 
upon employment, see paragraph (c)(2) of this section. A statutory 
option must be granted for a reason connected with the individual's 
employment by the corporation or by its related corporation.
    (2) In addition, Sec.  1.421-2(a) is applicable to the transfer of a 
share pursuant to the exercise of the statutory option only if the 
optionee is, at all times during the period beginning with the date of 
the granting of such option and ending on the day 3 months before the 
date of such exercise, an employee of either the corporation granting 
such option, a related corporation of such corporation, or a corporation 
(or a related corporation of such corporation) substituting or assuming 
a stock option in a transaction to which Sec.  1.424-1(a) applies. For 
purposes of the preceding sentence, the employment relationship is 
treated as continuing intact while the individual is on military leave, 
sick leave, or other bona fide leave of absence (such as temporary 
employment by the Government) if the period of such leave does not 
exceed 3 months, or if longer, so long as the individual's right to 
reemployment with the corporation granting the option (or a related 
corporation of such corporation) or a corporation (or a related 
corporation of such corporation) substituting or assuming a stock option 
in a transaction to which Sec.  1.424-1(a) applies, is provided either 
by statute or by contract. If the period of leave exceeds 3 months and 
the individual's right to reemployment is not provided either by statute 
or by contract, the employment relationship is deemed to terminate on 
the first day immediately following such three-month period. Thus, if 
the option is not exercised before such deemed termination of 
employment, Sec.  1.421-2(a) applies to the transfer of a share pursuant 
to an exercise of the option only if the exercise occurs within 3 months 
from the date the employment relationship is deemed terminated.

[[Page 453]]

    (3) For purposes of determining whether an individual meets the 
requirements of this paragraph, the term ``employer corporation'', as 
used in section 424 (e) and (f), shall be read as ``grantor 
corporation'' or ``corporation issuing or assuming a stock option in a 
transaction to which section 424(a) is applicable'', as the case may be. 
For purposes of the employment requirement, a corporation employing an 
optionee is considered a related corporation if it was a parent or 
subsidiary of the corporation granting the option or substituting or 
assuming the option during the entire portion of the requisite period of 
employment during which it was the employer of such optionee.
    (4) The application of this paragraph may be illustrated by the 
following examples:

    Example 1. On June 1, 2004, X Corporation granted a statutory option 
to A, an employee of X Corporation, to purchase a share of X stock. On 
February 1, 2005, X sold the plant where A was employed to M 
Corporation, an unrelated corporation, and A was employed by M. If A 
exercises his statutory option on June 1, 2005, section 421 is not 
applicable to such exercise, because on June 1, 2005, A is not employed 
by the corporation which granted the option or by a related corporation 
of such corporation, nor was he employed by any of such corporations 
within 3 months before June 1, 2005.
    Example 2. Assume the facts to be the same as in example (1), except 
that when A was employed by M Corporation, the option to purchase X 
stock was terminated and was replaced by an option to buy M stock in 
such circumstances that M Corporation is treated as a corporation 
substituting an option under section 424(a). If A exercises the option 
to purchase the share of M stock on June 1, 2005, section 421 is 
applicable to the transfer of the M stock because, at all times during 
the period beginning with the date of grant of the X option and ending 
with the date of exercise of the M option, A was an employee of the 
corporation granting the option or substituting or assuming the option 
under Sec.  1.424-1(a).
    Example 3. E is an employee of P Corporation. On June 1, 2004, P 
grants E a statutory option to purchase a share of P stock. On June 1, 
2005, P acquires 100 percent of the stock of S Corporation; on such date 
S becomes a subsidiary of P. On July 1, 2005, E ceases to be employed by 
P and becomes employed by S. On October 10, 2005, while still employed 
by S, E exercises his option to buy P stock. Since E was at all times 
during the requisite period of employment an employee of either P, the 
corporation granting the option, or S, a subsidiary of the grantor 
during the period in which such corporation was E's employer, section 
421 is applicable to the exercise of the option.
    Example 4. Assume the same facts as in example (3) except assume 
that at the time E became an employee of S Corporation, S assumed E's 
option to purchase P stock under section 424(a). Section 421 is 
applicable to E's exercise of his option to buy P stock.
    Example 5. M Corporation grants a statutory option to E, an employee 
of such corporation. E is an officer in a reserve Air Force unit. E goes 
on military leave with his unit for 3 weeks. Regardless of whether E is 
an employee of M within the meaning of section 3401(c) and the 
regulations thereunder during such 3-week period, E's employment 
relationship with M is treated as uninterrupted during the period of E's 
military leave.
    Example 6. Assume the same facts as in example (5) and assume 
further that E's active duty status is extended indefinitely, but that E 
has a right to reemployment with M or a related corporation on the 
termination of any military duty E may be required to serve. E exercises 
his M option while on active military duty. Irrespective of whether E is 
an employee of M or a related corporation within the meaning of section 
3401(c) and the regulations thereunder at the time of such exercise or 
within 3 months before such exercise, section 421 applies to such 
exercise.
    Example 7. X Corporation grants an incentive option to A, an 
employee of X Corporation, whose employment contract provides that in 
the event of illness, A's right to reemployment with X, or a related 
corporation of X, will continue for 1 year after the time A becomes 
unable to perform his duties for X. A falls ill for 90 days. For 
purposes of section 422(a)(2), A's employment relationship with X will 
be treated as uninterrupted during the 90-day period. If A's incapacity 
extends beyond 90 days, then, for purposes of section 422(a)(2), A's 
employment relationship with X will be treated as continuing 
uninterrupted until A's reemployment rights terminate. Under section 
422(a)(2), A has 3 months in which to exercise an incentive option after 
his employment relationship with X (and related corporations) is deemed 
terminated.

    (i) Additional definitions. (1) Corporation. For purposes of this 
section and Sec. Sec.  1.421-2 through 1.424-1, the term corporation has 
the meaning prescribed by section 7701(a)(3) and Sec.  301.7701-2(b) of 
this chapter. For example, a corporation for purposes of the preceding 
sentence includes an S corporation (as defined in section 1361), a 
foreign corporation (as

[[Page 454]]

defined in section 7701(a)(5)), and a limited liability company that is 
treated as a corporation for all Federal tax purposes.
    (2) Parent corporation and subsidiary corporation. For the 
definition of the terms parent corporation (and parent) and subsidiary 
corporation (and subsidiary), for purposes of this section and 
Sec. Sec.  1.421-2 through 1.424-1, see Sec.  1.424-1(f)(i) and (ii), 
respectively. Related corporation as used in this section and in 
Sec. Sec.  1.421-2 through 1.424-1 means either a parent corporation or 
subsidiary corporation.
    (j) Effective/applicability date--(1) In general. Except for 
paragraph (c)(1) of this section, the regulations under this section are 
effective on August 3, 2004. Paragraph (c)(1) of this section is 
effective on November 17, 2009. Paragraph (c)(1) of this section applies 
to statutory options granted on or after January 1, 2010.
    (2) Reliance and transition period. For statutory options granted on 
or before June 9, 2003, taxpayers may rely on the 1984 proposed 
regulations LR-279-81 (49 FR 4504), the 2003 proposed regulations REG-
122917-02 (68 FR 34344), or this section until the earlier of January 1, 
2006, or the first regularly scheduled stockholders meeting of the 
granting corporation occurring 6 months after August 3, 2004. For 
statutory options granted after June 9, 2003, and before the earlier of 
January 1, 2006, or the first regularly scheduled stockholders meeting 
of the granting corporation occurring at least 6 months after August 3, 
2004, taxpayers may rely on either REG-122917-02 or this section. 
Taxpayers may not rely on LR-279-81 or REG-122917-02 after December 31, 
2005. Reliance on LR-279-81, REG-122917-02, or this section must be in 
its entirety, and all statutory options granted during the reliance 
period must be treated consistently.

[T.D. 6887, 31 FR 8787, June 24, 1966, as amended by T.D. 6975, 33 FR 
14779, Oct. 3, 1968; T.D. 7554, 43 FR 31927, July 24, 1978. Redesignated 
and amended by T.D. 9144, 69 FR 46406, Aug. 3, 2004; 69 FR 61310, Oct. 
18, 2004; 69 FR 70551, Dec. 7, 2004; T.D. 9471, 74 FR 59077, Nov. 17, 
2009]



Sec.  1.421-2  General rules.

    (a) Effect of qualifying transfer. (1) If a share of stock is 
transferred to an individual pursuant to the individual's exercise of a 
statutory option, and if the requirements of Sec.  1.422-1(a) (relating 
to incentive stock options) or Sec.  1.423-1(a) (relating to employee 
stock purchase plans) whichever is applicable, are met, then--
    (i) No income results under section 83 at the time of the transfer 
of such share to the individual upon the exercise of the option with 
respect to such share;
    (ii) No deduction under sections 83(h) or 162 or the regulations 
thereunder (relating to trade or business expenses) is allowable at any 
time with respect to the share so transferred; and
    (iii) No amount other than the price paid under the option is 
considered as received by the employer corporation, a related 
corporation of such corporation, or a corporation substituting or 
assuming a stock option in a transaction to which Sec.  1.424-1(a) 
(relating to corporate reorganizations, liquidations, etc.) applies, for 
the share so transferred.
    (2) For the purpose of this paragraph, each share of stock 
transferred pursuant to a statutory option is treated separately. For 
example, if an individual, while employed by a corporation granting him 
a statutory option, exercises the option with respect to part of the 
stock covered by the option, and if such individual exercises the 
balance of the option more than three months after leaving such 
employment, the application of section 421 to the stock obtained upon 
the earlier exercise of the option is not affected by the fact that the 
income taxes of the employer and the individual with respect to the 
stock obtained upon the later exercise of the option are not determined 
under section 421.
    (b) Effect of disqualifying disposition. (1)(i) The disposition (as 
defined in Sec.  1.424-1(c)) of a share of stock acquired by the 
exercise of a statutory option before the expiration of the applicable 
holding periods as determined under Sec.  1.422-1(a) or 1.423-1(a) is a 
disqualifying disposition and makes paragraph (a) of this section 
inapplicable to the transfer of such share. See section 83(a)

[[Page 455]]

to determine the amount includible on a disqualifying disposition. The 
income attributable to such transfer (determined without reduction for 
any brokerage fees or other costs paid in connection with the 
disposition) is treated by the individual as compensation income 
received in the taxable year in which such disqualifying disposition 
occurs. A deduction attributable to such transfer is allowable, to the 
extent otherwise allowable under section 162, for the taxable year in 
which such disqualifying disposition occurs to the employer corporation, 
or a related corporation of such corporation, or a corporation 
substituting or assuming an option in a transaction to which Sec.  
1.424-1(a) applies. Additionally, the amount allowed as a deduction must 
be determined as if the requirements of section 83(h) and Sec.  1.83-
6(a) apply. No amount is treated as income, and no amount is allowed as 
a deduction, for any taxable year other than the taxable year in which 
the disqualifying disposition occurs. If the amount realized on the 
disposition exceeds (or is less than) the sum of the amount paid for the 
share and the amount of compensation income recognized as a result of 
such disposition, the extent to which the difference is treated as gain 
(or loss) is determined under the rules of section 302 or 1001, as 
applicable.
    (ii) The following examples illustrate the principles of this 
paragraph (b):

    Example 1. On June 1, 2006, X Corporation grants an incentive stock 
option to A, an employee of X, entitling A to purchase 100 shares of X 
stock at $10 per share. On August 1, 2006, A exercises the option when 
the fair market value of X stock is $20 per share, and 100 shares of X 
stock are transferred to A on that date. On December 15, 2007, A sells 
the stock for $20 per share. Because A disposed of the stock before June 
2, 2008, A did not satisfy the holding period requirements of Sec.  
1.422-1(a). Under paragraph (b)(1)(i) of this section, A therefore made 
a disqualifying disposition of the stock. Thus, paragraph (a) of this 
section is inapplicable to the transfer of the shares, and A must 
include the compensation income attributable to the transfer of the 
shares in gross income in the year of the disqualifying disposition. The 
amount of compensation income A must include in income is $1,000 
($2,000, the fair market value of X stock on transfer less $1,000, the 
exercise price per share). If the requirements of Sec.  83(h) and Sec.  
1.83-6(a) are satisfied and otherwise allowable under section162, X is 
allowed a deduction of $1,000 for its taxable year in which the 
disqualifying disposition occurs.
    Example 2. Y Corporation grants an incentive stock option for 100 
shares of its stock to E, an employee of Y. The option has an exercise 
price of $10 per share. E exercises the option and is transferred the 
shares when the fair market value of a share of Y stock is $30. Before 
the applicable holding periods are met, Y redeems the shares for $70 per 
share. Because the holding period requirements of Sec.  1.422-1(a) are 
not met, the redemption of the shares is a disqualifying disposition of 
the shares. Under paragraph (b)(1)(i) of this section, A made a 
disqualifying disposition of the stock. Thus, paragraph (a) of this 
section is inapplicable to the transfer of the shares, and E must 
include the compensation income attributable to the transfer of the 
shares in gross income in the year of the disqualifying disposition. The 
amount of compensation income that E must include in income is $2,000 
($3,000, the fair market value of Y stock on transfer, less $1,000, the 
exercise price paid by E). The character of the additional gain that is 
includible in E's income as a result of the redemption is determined 
under the rules of section 302. If the requirements of Sec.  83(h) and 
Sec.  1.83-6(a) are satisfied and otherwise allowable under section 162, 
Y is allowed a deduction for the taxable year in which the disqualifying 
disposition occurs for the compensation income of $2,000. Y is not 
allowed a deduction for the additional gain includible in E's income as 
a result of the redemption.

    (2) If an optionee transfers stock acquired through the optionee's 
exercise of a statutory option prior to the expiration of the applicable 
holding periods, paragraph (a) of this section continues to apply to the 
transfer of the stock pursuant to the exercise of the option if such 
transfer is not a disposition of the stock as defined in Sec.  1.424-
1(c) (for example, a transfer from a decedent to the decedent's estate 
or a transfer by bequest or inheritance). Similarly, a subsequent 
transfer by the executor, administrator, heir, or legatee is not a 
disqualifying disposition by the decedent. If a statutory option is 
exercised by the estate of the optionee or by a person who acquired the 
option by bequest or inheritance or by reason of the death of such 
optionee, see paragraph (c) of this section. If a statutory option is 
exercised by the individual to whom the option was granted and the 
individual dies before the expiration of the holding periods, see 
paragraph (d) of this section.

[[Page 456]]

    (3) For special rules relating to the disqualifying disposition of a 
share of stock acquired by exercise of an incentive stock option, see 
Sec. Sec.  1.422-5(b)(2) and 1.424-1(c)(3).
    (c) Exercise by estate. (1) If a statutory option is exercised by 
the estate of the individual to whom the option was granted (or by any 
person who acquired such option by bequest or inheritance or by reason 
of the death of such individual), paragraph (a) of this section applies 
to the transfer of stock pursuant to such exercise in the same manner as 
if the option had been exercised by the deceased optionee. Consequently, 
neither the estate nor such person is required to include any amount in 
gross income as a result of a transfer of stock pursuant to the exercise 
of the option. Paragraph (a) of this section applies even if the 
executor, administrator, or such person disposes of the stock so 
acquired before the expiration of the applicable holding periods as 
determined under Sec.  1.422-1(a) or 1.423-1(a). This special rule does 
not affect the applicability of section 423(c), relating to the estate's 
or other qualifying person's recognition of compensation income, or 
section 1222, relating to what constitutes a short-term and long-term 
capital gain or loss. Paragraph (a) of this section also applies even if 
the executor, administrator, or such person does not exercise the option 
within three months after the death of the individual or is not employed 
as described in Sec.  1.421-1(h), either when the option is exercised or 
at any time. However, paragraph (a) of this section does not apply to a 
transfer of shares pursuant to an exercise of the option by the estate 
or by such person unless the individual met the employment requirements 
described in Sec.  1.421-1(h) either at the time of the individual's 
death or within three months before such time (or, if applicable, within 
the period described in Sec.  1.422-1(a)(3)). Additionally, paragraph 
(a) of this section does not apply if the option is exercised by a 
person other than the executor or administrator, or other than a person 
who acquired the option by bequest or inheritance or by reason of the 
death of such deceased individual. For example, if the option is sold by 
the estate, paragraph (a) of this section does not apply to the transfer 
of stock pursuant to an exercise of the option by the buyer, but if the 
option is distributed by the administrator to an heir as part of the 
estate, paragraph (a) of this section applies to the transfer of stock 
pursuant to an exercise of the option by such heir.
    (2) Any transfer by the estate, whether a sale, a distribution of 
assets, or otherwise, of the stock acquired by its exercise of the 
option under this paragraph is a disposition of the stock for purposes 
of section 423(c). Therefore, if section 423(c) is applicable, the 
estate must include an amount as compensation in its gross income. 
Similarly, if section 423(c) is applicable in case of an exercise of the 
option under this paragraph by a person who acquired the option by 
bequest or inheritance or by reason of the death of the individual to 
whom the option was granted, there must be included in the gross income 
of such person an amount as compensation, either when such person 
disposes of the stock, or when he dies owning the stock.
    (3)(i) If, under section 423(c) an amount is required to be included 
in the gross income of the estate or of such person, the estate or such 
person shall be allowed a deduction as a result of the inclusion of the 
value of the option in the estate of the individual to whom the option 
was granted. Such deduction shall be computed under section 691(c) by 
treating the option as an item of gross income in respect of a decedent 
under section 691 and by treating the amount required to be included in 
gross income under section 423(c) as an amount included in gross income 
under section 691 in respect of such item of gross income. No such 
deduction shall be allowable with respect to any amount other than an 
amount includible under section 423(c). For the rules relating to the 
computation of a deduction under section 691(c), see Sec.  1.691(c)-1.
    (ii) The application of subdivision (i) may be illustrated by the 
following example:

    Example. On June 1, 2004, E was granted an option under an employee 
stock purchase plan to purchase for $85 one share of the stock of his 
employer. On such day, the fair market value of such stock was $100 per

[[Page 457]]

share. E died on February 1, 2006, without having exercised such option. 
The option was, however, exercisable by his estate, and for purposes of 
the estate tax was valued at $30. On March 1, 2006, the estate exercised 
the option, and on March 15, 2006, sold for $150 the share of stock so 
acquired. For its taxable year including March 15, 2006, the estate is 
required by sections 421(c)(1)(B) and 423(c) to include in its gross 
income as compensation the amount of $15. During such taxable year, no 
amounts of income were properly paid, credited, or distributable to the 
beneficiaries of the estate. However, under section 421(c)(2), the 
estate is entitled to a deduction determined in the following manner. 
E's estate includes no other items of income in respect of a decedent 
referred to in section 691(a), and no deductions referred to in section 
691(b), so that the value for estate tax purposes of the option, $30, is 
also the net value of all items of income in respect of the decedent. 
The estate tax attributable to the inclusion of the option in the estate 
of E is $10. Since $15, the amount includible in gross income by reason 
of sections 421(c)(1)(B) and 423(c), is less than the value for estate 
tax purposes of the option, only \15/30\ of the estate tax attributable 
to the inclusion of the option in the estate is deductible; that is, 
\15/30\ of $10, or $5. No deduction under section 421(c)(2) is allowable 
with respect to any capital gain.

    (4)(i)(a) In the case of the death of an optionee, the basis of any 
share of stock acquired by the exercise of an option under this 
paragraph (c), determined under section 1011, shall be increased by an 
amount equal to the portion of the basis of the option attributable to 
such share. For example, if a statutory option to acquire 10 shares of 
stock has a basis of $100, the basis of one share acquired by a partial 
exercise of the option, determined under section 1011, would be 
increased by 1/10th of $100, or $10. The option acquires a basis, 
determined under section 1014(a) or under section 1022, if applicable, 
only if the transfer of the share pursuant to the exercise of such 
option qualifies for the special tax treatment provided by section 
421(a). To the extent the option is so exercised, in whole or in part, 
it will acquire a basis equal to its fair market value (or the basis as 
determined under section 1022, if applicable) at the date of the 
employee's death or, if an election is made under section 2032, its 
value at its applicable valuation date. In certain cases, the basis of 
the share is subject to the adjustments provided by paragraphs 
(c)(4)(i)(b) and (c) of this section, but such adjustments are only 
applicable in the case of an option that is subject to section 423(c).
    (b) If the amount which would have been includible in gross income 
under section 423(c) had the employee exercised the option on the date 
of his death and held the share at the time of his death exceeds the 
amount which is includible in gross income under such section, the basis 
of the share, determined under (a) of this subdivision, shall be reduced 
by such excess. For example, if $15 would have been includible in the 
gross income of the employee had he exercised the option and held such 
share at the time of his death, and only $10 is includible under section 
423(c), the basis of the share, determined under (a) of this 
subdivision, would be reduced by $5. For purposes of determining the 
amount which would have been includible in gross income under section 
423(c), if the employee had exercised the option and held such share at 
the time of his death, the amount which would have been paid for the 
share shall be computed as if the option had been exercised on the date 
the employee died.
    (c) If the amount includible in gross income under section 423(c) 
exceeds the portion of the basis of the option attributable to the 
share, the basis of the share, determined under (a) of this subdivision, 
shall be increased by such excess. Thus, if $15 is includible in gross 
income under such section, and the basis of the option with respect to 
the share is $10, the basis of the share, determined under (a) of this 
subdivision, will be increased by $5.
    (ii) If a statutory option is not exercised by the estate of the 
individual to whom the option was granted, or by the person who acquired 
such option by bequest or inheritance or by reason of the death of such 
individual, the option shall be considered to be property that 
constitutes a right to receive an item of income in respect of a 
decedent to which the rules of sections 691 and 1014(c) (or section 
1022(f), if applicable) apply.
    (iii) The application of this subparagraph may be illustrated by the 
following examples:


[[Page 458]]


    Example 1. On June 1, 2005, the X Corporation granted to E, an 
employee, an option under its employee stock purchase plan to purchase a 
share of X Corporation stock for $85. The fair market value of X 
Corporation stock on such date was $100 per share. On June 1, 2006, E 
died. The fair market value of X Corporation stock on such date exceeded 
$100 per share and the fair market value of the option on the applicable 
valuation date was $35. On August 1, 2006, the estate of E exercised the 
option and sold the share of X Corporation stock at a time when the fair 
market value of the share was $120. The basis of the share is $120 (the 
$85 paid for the stock plus the $35 basis of the option). When the share 
is sold for $120, the estate is required to include $15 in its gross 
income as compensation. Since $15 would have been includible in E's 
gross income if he had exercised the option and held such share at the 
time of his death, paragraph (c)(4)(i)(b) of this section does not 
apply. Moreover, since the $15 includible in the gross income of the 
estate does not exceed the basis of the option ($35), paragraph 
(c)(4)(i)(c) of this section does not apply. Since the basis of the 
stock and the sale price are the same, no gain or loss is realized by 
the estate on the disposition of the share.
    Example 2. Assume the same facts as in Example 1, except that the 
fair market value of the share of stock at the time of its sale was $90. 
The basis of the share, determined under paragraph (c)(4)(i)(a) of this 
section, is $120 (the $85 paid for the stock plus the $35 basis of the 
option). When the share is sold for $90, the estate is required to 
include $5 in its gross income as compensation. If the employee had 
exercised the option and held the share at the time of his death, $15 
would have been includible in gross income as compensation for the 
taxable year ending with his death. Since such amount exceeds by $10 the 
amount which the estate is required to include in its gross income, 
paragraph (c)(4)(i)(b) of this section applies, and the basis of the 
share ($120), determined under paragraph (c)(4)(i)(a) of this section is 
reduced by $10. Accordingly, the basis is $110, and a capital loss of 
$20 is realized on the disposition of the share.
    Example 3. Assume the same facts as in Example 1, except that the 
fair market value of the option on the applicable valuation date was $5, 
and that the fair market value of X Corporation stock on the date the 
employee died did not exceed $100. The basis of the share, determined 
under paragraph (c)(4)(i)(a) of this section, is $90 (the $85 paid for 
the stock plus the $5 basis of the option). When the share is sold for 
$120, the estate is required to include $15 in its gross income as 
compensation. Since such amount exceeds by $10 the basis of the option, 
paragraph (c)(4)(i)(c) of this section applies, and the basis of the 
share ($90), determined under paragraph (c)(4)(i)(b) of this section, is 
increased by $10. Accordingly, the basis is $100 and a capital gain of 
$20 is realized on the disposition of the share.
    Example 4. Assume the same facts as in Example 1, except that on 
June 1, 2006, the date the employee died, the fair market value of X 
Corporation stock was $98, and that on June 1, 2007, the alternate 
valuation date, the fair market value of the stock had declined 
substantially, and the fair market value of the option was $5. On August 
1, 2007, the estate of E exercised the option and sold the share when 
its fair market value was $92. The basis of the share, determined under 
paragraph (c)(4)(i)(a) of this section, is $90 (the $85 paid for the 
stock plus the $5 basis of the option). When the share is sold for $92, 
the estate is required to include $7 in its gross income as 
compensation. Since $13 would have been includible in E's gross income 
if he had exercised the option and held such share at the time of his 
death, paragraph (c)(4)(i)(b) of this section applies, and the basis of 
the share ($90), determined under paragraph (c)(4)(i)(a) of this 
section, is reduced by $6 to $84. Furthermore, since the $7 that the 
estate is required to include in its gross income when the share is sold 
for $92 exceeds by $2 the basis of the option, paragraph (c)(4)(i)(c) of 
this section applies, and the basis of the share ($84), determined under 
paragraph (c)(4)(i)(a) of this section and paragraph (c)(4)(i)(b) of 
this section, is increased by $2. Accordingly, the basis is $86 and a 
capital gain of $6 is realized on the disposition of the share.

    (d) Option exercised by the individual to whom the option was 
granted if the individual dies before expiration of the applicable 
holding periods. If a statutory option is exercised by the individual to 
whom the option was granted and such individual dies before the 
expiration of the applicable holding periods as determined under Sec.  
1.422-1(a) or 1.423-1(a), paragraph (a) of this section does not become 
inapplicable if the executor or administrator of the estate of such 
individual, or any person who acquired such stock by bequest or 
inheritance or by reason of the death of such individual, disposes of 
such stock before the expiration of such applicable holding periods. 
This rule does not affect the applicability of section 423(c), relating 
to the individual's recognition of compensation income, or section 1222, 
relating to what constitutes a short-term and long-term capital gain or 
loss.
    (e) Incorporation by reference. Any requirement that an option 
expressly

[[Page 459]]

contain or state a prescribed limitation or term will be considered met 
if such limitation or term is set forth in a statutory option plan and 
is incorporated by reference by the option. Thus, if a statutory option 
plan expressly provides that no option granted thereunder shall be 
exercisable after five years from the date of grant, and if an option 
granted thereunder expressly provides that the option is granted subject 
to the terms and limitations of such plan, the option will be regarded 
as being, by its terms, not exercisable after the expiration of 5 years 
from the date such option is granted.
    (f) Effective/applicability date.--(1) In general. These regulations 
are effective on August 3, 2004.
    (2) Reliance and transition period. For statutory options granted on 
or before June 9, 2003, taxpayers may rely on the 1984 proposed 
regulations LR-279-81 (49 FR 4504), the 2003 proposed regulations REG-
122917-02 (68 FR 34344), or this section until the earlier of January 1, 
2006, or the first regularly scheduled stockholders meeting of the 
granting corporation occurring 6 months after August 3, 2004. For 
statutory options granted after June 9, 2003, and before the earlier of 
January 1, 2006, or the first regularly scheduled stockholders meeting 
of the granting corporation occurring at least 6 months after August 3, 
2004, taxpayers may rely on either REG-122917-02 or this section. 
Taxpayers may not rely on LR-279-81 or REG-122917-02 after December 31, 
2005. Reliance on LR-279-81, REG-122917-02, or this section must be in 
its entirety, and all statutory options granted during the reliance 
period must be treated consistently.
    (3) Application of section 1022. The provisions of paragraph (c) of 
this section relating to section 1022 are effective on and after January 
19, 2017.

[T.D. 6887, 31 FR 8789, June 24, 1966. Redesignated and amended by T.D. 
9144, 69 FR 46406, Aug. 3, 2004; 69 FR 61310, Oct. 18, 2004; 69 FR 
70551, Dec. 7, 2004; T.D. 9811, 82 FR 6238, Jan. 19, 2017]



Sec.  1.422-1  Incentive stock options; general rules.

    (a) Applicability of section 421(a). (1)(i) Section 1.421-2(a) 
applies to the transfer of a share of stock to an individual pursuant to 
the individual's exercise of an incentive stock option if the following 
conditions are satisfied--
    (A) The individual makes no disposition of such share before the 
later of the expiration of the 2-year period from the date of grant of 
the option pursuant to which such share was transferred, or the 
expiration of the 1-year period from the date of transfer of such share 
to the individual; and
    (B) At all times during the period beginning on the date of grant of 
the option and ending on the day 3 months before the date of exercise, 
the individual was an employee of either the corporation granting the 
option, a related corporation of such corporation, or a corporation (or 
a related corporation of such corporation) substituting or assuming a 
stock option in a transaction to which Sec.  1.424-1(a) applies.
    (ii) For rules relating to the disposition of shares of stock 
acquired pursuant to the exercise of a statutory option, see Sec.  
1.424-1(c). For rules relating to the requisite employment relationship, 
see Sec.  1.421-1(h).
    (2)(i) The holding period requirement of section 422(a)(1), 
described in paragraph (a)(1)(i)(A) of this section, does not apply to 
the transfer of shares by an insolvent individual described in this 
paragraph (a)(2). If an insolvent individual holds a share of stock 
acquired pursuant to the individual's exercise of an incentive stock 
option, and if such share is transferred to a trustee, receiver, or 
other similar fiduciary in any proceeding under the Bankruptcy Act or 
any other similar insolvency proceeding, neither such transfer, nor any 
other transfer of such share for the benefit of the individual's 
creditors in such proceeding is a disposition of such share for purposes 
of this paragraph (a). For purposes of this paragraph (a)(2), an 
individual is insolvent only if the individual's liabilities exceed the 
individual's assets or the individual is unable to satisfy the 
individual's liabilities as they become due. See section 422(c)(3).
    (ii) A transfer by the trustee or other fiduciary that is not 
treated as a disposition for purposes of this paragraph (a) may be a 
sale or exchange for purposes of recognizing capital gain or loss with 
respect to the share transferred.

[[Page 460]]

For example, if the trustee transfers the share to a creditor in an 
insolvency proceeding, capital gain or loss must be recognized by the 
insolvent individual to the extent of the difference between the amount 
realized from such transfer and the adjusted basis of such share.
    (iii) If any transfer by the trustee or other fiduciary (other than 
a transfer back to the insolvent individual) is not for the exclusive 
benefit of the creditors in an insolvency proceeding, then whether such 
transfer is a disposition of the share by the individual for purposes of 
this paragraph (a) is determined under Sec.  1.424-1(c). Similarly, if 
the trustee or other fiduciary transfers the share back to the insolvent 
individual, any subsequent transfer of the share by such individual 
which is not made in respect of the insolvency proceeding may be a 
disposition of the share for purposes of this paragraph (a).
    (3) If the employee exercising an option ceased employment because 
of permanent and total disability, within the meaning of section 
22(e)(3), 1 year is used instead of 3 months in the employment period 
requirement of paragraph (a)(1)(i)(B) of this section.
    (b) Failure to satisfy holding period requirements--(1) General 
rule. For general rules concerning a disqualifying disposition of a 
share of stock acquired pursuant to the exercise of an incentive stock 
option, see Sec.  1.421-2(b)(1).
    (2)(i) Special rule. If an individual makes a disqualifying 
disposition of a share of stock acquired by the exercise of an incentive 
stock option, and if such disposition is a sale or exchange with respect 
to which a loss (if sustained) would be recognized to the individual, 
then, under this paragraph (b)(2)(i), the amount includible (determined 
without reduction for brokerage fees or other costs paid in connection 
with the disposition) in the gross income of such individual, and 
deductible from the income of the employer corporation (or a related 
corporation of such corporation, or of a corporation substituting or 
assuming the option in a transaction to which Sec.  1.424-1(a) applies) 
as compensation attributable to the exercise of such option, shall not 
exceed the excess (if any) of the amount realized on such sale or 
exchange over the adjusted basis of such share. Subject to the special 
rule provided by this paragraph (b)(2)(i), the amount of compensation 
attributable to the exercise of the option is determined under section 
83(a); see Sec.  1.421-2(b)(1)(i).
    (ii) Limitation to special rule. The special rule described in 
paragraph (b)(2)(i) of this section does not apply if the disposition is 
a sale or exchange with respect to which a loss (if sustained) would not 
be recognized by the individual. Thus, for example, if a disqualifying 
disposition is a sale described in section 1091 (relating to loss from 
wash sales of stock or securities), a gift (or any other transaction 
which is not at arm's length), or a sale described in section 267(a)(1) 
(relating to sales between related persons), the special rule described 
in paragraph (b)(2)(i) of this section does not apply because a loss 
sustained in any such transaction would not be recognized.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. Disqualifying disposition of vested stock. On June 1, 
2006, X Corporation grants an incentive stock option to A, an employee 
of X Corporation, entitling A to purchase one share of X Corporation 
stock. On August 1, 2006, A exercises the option, and the share of X 
Corporation stock is transferred to A on that date. The option price is 
$100 (the fair market value of a share of X Corporation stock on June 1, 
2006), and the fair market value of a share of X Corporation stock on 
August 1, 2006 (the date of transfer) is $200. The share transferred to 
A is transferable and not subject to a substantial risk of forfeiture. A 
makes a disqualifying disposition by selling the share on June 1, 2007, 
for $250. The amount of compensation attributable to A's exercise is 
$100 (the difference between the fair market value of the share at the 
date of transfer, $200, and the amount paid for the share, $100). 
Because the amount realized ($250) is greater than the value of the 
share at transfer ($200), paragraph (b)(2)(i) of this section does not 
apply and thus does not affect the amount includible as compensation in 
A's gross income and deductible by X. A must include in gross income for 
the taxable year in which the sale occurred $100 as compensation and $50 
as capital gain ($250, the amount realized from the sale, less A's basis 
of $200 (the $100 paid for the share plus the $100 increase in basis 
resulting from the inclusion of that amount in A's gross income as 
compensation attributable to the exercise of the option)). If the 
requirements of section

[[Page 461]]

83(h) and Sec.  1.83-6(a) are satisfied and the deduction is otherwise 
allowable under section 162, for its taxable year in which the 
disqualifying disposition occurs, X Corporation is allowed a deduction 
of $100 for compensation attributable to A's exercise of the incentive 
stock option.
    Example 2.@Disqualifying disposition of unvested stock. Assume the 
same facts as in Example 1, except that the share of X Corporation stock 
received by A is subject to a substantial risk of forfeiture and not 
transferable for a period of six months after such exercise. Assume 
further that the fair market value of X Corporation stock is $225 on 
February 1, 2007, the date on which the six-month restriction lapses. 
Because section 83 does not apply for ordinary income tax purposes on 
the date of exercise, A cannot make an effective section 83(b) election 
at that time (although such an election is permissible for alternative 
minimum tax purposes). Additionally, at the time of the disposition, 
section 422 and Sec.  1.422-1(a) no longer apply, and thus, section 
83(a) is used to measure the consequences of the disposition, and the 
holding period for capital gain purposes begins on the vesting date, six 
months after exercise. The amount of compensation attributable to A's 
exercise of the option and disqualifying disposition of the share is 
$125 (the difference between the fair market value of the share on the 
date that the restriction lapsed, $225, and the amount paid for the 
share, $100). Because the amount realized ($225) is greater than the 
value of the share at transfer ($200), paragraph (b)(2)(i) of this 
section does not apply and thus does not affect the amount includible as 
compensation in A's gross income and deductible by X. A must include 
$125 of compensation income and $25 of capital gain in gross income for 
the taxable year in which the disposition occurs ($250, the amount 
realized from the sale, less A's basis of $225 (the $100 paid for the 
share plus the $125 increase in basis resulting from the inclusion of 
that amount of compensation in A's gross income)). If the requirements 
of section 83(h) and Sec.  1.83-6(a) are satisfied and the deduction is 
otherwise allowable under section 162, for its taxable year in which the 
disqualifying disposition occurs, X Corporation is allowed a deduction 
of $125 for the compensation attributable to A's exercise of the option.
    Example 3. (i) Disqualifying disposition and application of special 
rule. Assume the same facts as in Example 1, except that A sells the 
share for $150 to M.
    (ii) If the sale to M is a disposition that meets the requirements 
of paragraph (b)(2)(i) of this section, instead of $100 which otherwise 
would have been includible as compensation under Sec.  1.83-7, under 
paragraph (b)(2)(i) of this section, A must include only $50 (the excess 
of the amount realized on such sale, $150, over the adjusted basis of 
the share, $100) in gross income as compensation attributable to the 
exercise of the incentive stock option. Because A's basis for the share 
is $150 (the $100 which A paid for the share, plus the $50 increase in 
basis resulting from the inclusion of that amount in A's gross income as 
compensation attributable to the exercise of the option), A realizes no 
capital gain or loss as a result of the sale. If the requirements of 
section 83(h) and Sec.  1.83-6(a) are satisfied and the deduction is 
otherwise allowable under section 162, for its taxable year in which the 
disqualifying disposition occurs, X Corporation is allowed a deduction 
of $50 for the compensation attributable to A's exercise of the option 
and disqualifying disposition of the share.
    (iii) Assume the same facts as in paragraph (i) of this Example 3, 
except that 10 days after the sale to M, A purchases substantially 
identical stock. Because under section 1091(a) a loss (if it were 
sustained on the sale) would not be recognized on the sale, under 
paragraph (b)(2)(ii) of this section, the special rule described in 
paragraph (b)(2)(i) of this section does not apply. A must include $100 
(the difference between the fair market value of the share on the date 
of transfer, $200, and the amount paid for the share, $100) in gross 
income as compensation attributable to the exercise of the option for 
the taxable year in which the disqualifying disposition occurred. A 
recognizes no capital gain or loss on the transaction. If the 
requirements of section 83(h) and Sec.  1.83-6(a) are satisfied and the 
deduction is otherwise allowable under section 162, for its taxable year 
in which the disqualifying disposition occurs X Corporation is allowed a 
$100 deduction for compensation attributable to A's exercise of the 
option and disqualifying disposition of the share.
    (iv) Assume the same facts as in paragraph (ii) of this Example 3, 
except that A sells the share for $50. Under paragraph (b)(2)(i) of this 
section, A is not required to include any amount in gross income as 
compensation attributable to the exercise of the option. A is allowed a 
capital loss of $50 (the difference between the amount realized on the 
sale, $50, and the adjusted basis of the share, $100). X Corporation is 
not allowed any deduction attributable to A's exercise of the option and 
disqualifying disposition of the share.

    (c) Failure to satisfy employment requirement. Section 1.421-2(a) 
does not apply to the transfer of a share of stock pursuant to the 
exercise of an incentive stock option if the employment requirement, as 
determined under paragraph (a)(1)(i)(B) of this section, is not met at 
the time of the exercise of such option. Consequently, the effects of 
such a transfer are determined under the rules of Sec.  1.83-7. For 
rules relating

[[Page 462]]

to the employment relationship, see Sec.  1.421-1(h).

[T.D. 9144, 69 FR 46411, Aug. 3, 2004; 69 FR 61310, Oct. 18, 2004; 69 FR 
70551, Dec. 7, 2004]



Sec.  1.422-2  Incentive stock options defined.

    (a) Incentive stock option defined--(1) In general. The term 
incentive stock option means an option that meets the requirements of 
paragraph (a)(2) of this section on the date of grant. An incentive 
stock option is also subject to the $100,000 limitation described in 
Sec.  1.422-4. An incentive stock option may contain a number of 
permissible provisions that do not affect the status of the option as an 
incentive stock option. See Sec.  1.422-5 for rules relating to 
permissible provisions of an incentive stock option.
    (2) Option requirements. To qualify as an incentive stock option 
under this section, an option must be granted to an individual in 
connection with the individual's employment by the corporation granting 
such option (or by a related corporation as defined in Sec.  1.421-
1(i)(2)), and granted only for stock of any of such corporations. In 
addition, the option must meet all of the following requirements--
    (i) It must be granted pursuant to a plan that meets the 
requirements described in paragraph (b) of this section;
    (ii) It must be granted within 10 years from the date of the 
adoption of the plan or the date such plan is approved by the 
stockholders, whichever is earlier (see paragraph (c) of this section);
    (iii) It must not be exercisable after the expiration of 10 years 
from the date of grant (see paragraph (d) of this section);
    (iv) It must provide that the option price per share is not less 
than the fair market value of the share on the date of grant (see 
paragraph (e) of this section);
    (v) By its terms, it must not be transferrable by the individual to 
whom the option is granted other than by will or the laws of descent and 
distribution, and must be exercisable, during such individual's 
lifetime, only by such individual (see Sec. Sec.  1.421-1(b)(2) and 
1.421-2(c)); and
    (vi) Except as provided in paragraph (f) of this section, it must be 
granted to an individual who, at the time the option is granted, does 
not own stock possessing more than 10 percent of the total combined 
voting power of all classes of stock of the corporation employing such 
individual or of any related corporation of such corporation.
    (3) Amendment of option terms. Except as otherwise provided in Sec.  
1.424-1, the amendment of the terms of an incentive stock option may 
cause it to cease to be an option described in this section. If the 
terms of an option that has lost its status as an incentive stock option 
are subsequently changed with the intent to re-qualify the option as an 
incentive stock option, such change results in the grant of a new option 
on the date of the change. See Sec.  1.424-1(e).
    (4) Terms provide option not an incentive stock option. If the terms 
of an option, when granted, provide that it will not be treated as an 
incentive stock option, such option is not treated as an incentive stock 
option.
    (b) Option plan--(1) In general. An incentive stock option must be 
granted pursuant to a plan that meets the requirements of this paragraph 
(b). The authority to grant other stock options or other stock-based 
awards pursuant to the plan, where the exercise of such other options or 
awards does not affect the exercise of incentive stock options granted 
pursuant to the plan, does not disqualify such incentive stock options. 
The plan must be in writing or electronic form, provided that such 
writing or electronic form is adequate to establish the terms of the 
plan. See Sec.  1.422-5 for rules relating to permissible provisions of 
an incentive stock option.
    (2) Stockholder approval. (i) The plan required by this paragraph 
(b) must be approved by the stockholders of the corporation granting the 
incentive stock option within 12 months before or after the date such 
plan is adopted. Ordinarily, a plan is adopted when it is approved by 
the granting corporation's board of directors, and the date of the 
board's action is the reference point for determining whether 
stockholder approval occurs within the applicable 24-month period. 
However, if the board's action is subject to a condition (such

[[Page 463]]

as stockholder approval) or the happening of a particular event, the 
plan is adopted on the date the condition is met or the event occurs, 
unless the board's resolution fixes the date of approval as the date of 
the board's action.
    (ii) For purposes of paragraph (b)(2)(i) of this section, the 
stockholder approval must comply with the rules described in Sec.  
1.422-3.
    (iii) The provisions relating to the maximum aggregate number of 
shares to be issued under the plan (described in paragraph (b)(3) of 
this section) and the employees (or class or classes of employees) 
eligible to receive options under the plan (described in paragraph 
(b)(4) of this section) are the only provisions of a stock option plan 
that, if changed, must be re-approved by stockholders for purposes of 
section 422(b)(1). Any increase in the maximum aggregate number of 
shares that may be issued under the plan (other than an increase merely 
reflecting a change in the number of outstanding shares, such as a stock 
dividend or stock split), or change in the designation of the employees 
(or class or classes of employees) eligible to receive options under the 
plan is considered the adoption of a new plan requiring stockholder 
approval within the prescribed 24-month period. In addition, a change in 
the granting corporation or the stock available for purchase or award 
under the plan is considered the adoption of a new plan requiring new 
stockholder approval within the prescribed 24-month period. Any other 
changes in the terms of an incentive stock option plan are not 
considered the adoption of a new plan and, thus, do not require 
stockholder approval.
    (3) Maximum aggregate number of shares. (i) The plan required by 
this paragraph (b) must designate the maximum aggregate number of shares 
that may be issued under the plan through incentive stock options. If 
nonstatutory options or other stock-based awards may be granted, the 
plan may separately designate terms for each type of option or other 
stock-based awards and designate the maximum number of shares that may 
be issued under such option or other stock-based awards. Unless 
otherwise specified, all terms of the plan apply to all options and 
other stock-based awards that may be granted under the plan.
    (ii) A plan that merely provides that the number of shares that may 
be issued as incentive stock options under such plan may not exceed a 
stated percentage of the shares outstanding at the time of each offering 
or grant under such plan does not satisfy the requirement that the plan 
state the maximum aggregate number of shares that may be issued under 
the plan. However, the maximum aggregate number of shares that may be 
issued under the plan may be stated in terms of a percentage of the 
authorized, issued, or outstanding shares at the date of the adoption of 
the plan. The plan may specify that the maximum aggregate number of 
shares available for grants under the plan may increase annually by a 
specified percentage of the authorized, issued, or outstanding shares at 
the date of the adoption of the plan. A plan which provides that the 
maximum aggregate number of shares that may be issued as incentive stock 
options under the plan may change based on any other specified 
circumstances satisfies the requirements of this paragraph (b)(3) only 
if the stockholders approve an immediately determinable maximum 
aggregate number of shares that may be issued under the plan in any 
event.
    (iii) It is permissible for the plan to provide that, shares 
purchasable under the plan may be supplied to the plan through 
acquisitions of stock on the open market; shares purchased under the 
plan and forfeited back to the plan; shares surrendered in payment of 
the exercise price of an option; shares withheld for payment of 
applicable employment taxes and/or withholding obligations resulting 
from the exercise of an option.
    (iv) If there is more than one plan under which incentive stock 
options may be granted and stockholders of the granting corporation 
merely approve a maximum aggregate number of shares that are available 
for issuance under such plans, the stockholder approval requirements 
described in paragraph (b)(2) of this section are not satisfied. A 
separate maximum aggregate number

[[Page 464]]

of shares available for issuance pursuant to incentive stock options 
must be approved for each plan.
    (4) Designation of employees. The plan described in this paragraph 
(b), as adopted and approved, must indicate the employees (or class or 
classes of employees) eligible to receive the options or other stock-
based awards to be granted under the plan. This requirement is satisfied 
by a general designation of the employees (or the class or classes of 
employees) eligible to receive options or other stock-based awards under 
the plan. Designations such as ``key employees of the grantor 
corporation''; ``all salaried employees of the grantor corporation and 
its subsidiaries, including subsidiaries which become such after 
adoption of the plan;'' or ``all employees of the corporation'' meet 
this requirement. This requirement is considered satisfied even though 
the board of directors, another group, or an individual is given the 
authority to select the particular employees who are to receive options 
or other stock-based awards from a described class and to determine the 
number of shares to be optioned or granted to each such employee. If 
individuals other than employees may be granted options or other stock-
based awards under the plan, the plan must separately designate the 
employees or classes of employees eligible to receive incentive stock 
options.
    (5) Conflicting option terms. An option on stock available for 
purchase or grant under the plan is treated as having been granted 
pursuant to a plan even if the terms of the option conflict with the 
terms of the plan, unless such option is granted to an employee who is 
ineligible to receive options under the plan, options have been granted 
on stock in excess of the aggregate number of shares which may be issued 
under the plan, or the option provides otherwise.
    (6) The following examples illustrate the principles of this 
paragraph (b):

    Example 1. Stockholder approval. (i) S Corporation is a subsidiary 
of P Corporation, a publicly traded corporation. On January 1, 2006, S 
adopts a plan under which incentive stock options for S stock are 
granted to S employees.
    (ii) To meet the requirements of paragraph (b)(2) of this section, 
the plan must be approved by the stockholders of S (in this case, P) 
within 12 months before or after January 1, 2006.
    (iii) Assume the same facts as in paragraph (i) of this Example 1, 
except that the plan was adopted on January 1, 2010. Assume further that 
the plan was approved by the stockholders of S (in this case, P) on 
March 1, 2010. On January 1, 2012, S changes the plan to provide that 
incentive stock options for P stock will be granted to S employees under 
the plan. Because there is a change in the stock available for grant 
under the plan, the change is considered the adoption of a new plan that 
must be approved by the stockholder of S (in this case, P) within 12 
months before or after January 1, 2012.
    Example 2. Stockholder approval. (i) Assume the same facts as in 
paragraph (i) of Example 1, except that on March 15, 2007, P completely 
disposes of its interest in S. Thereafter, S continues to grant options 
for S stock to S employees under the plan.
    (ii) The new S options are granted under a plan that meets the 
stockholder approval requirements of paragraph (b)(2) of this section 
without regard to whether S seeks approval of the plan from the 
stockholders of S after P disposes of its interest in S.
    (iii) Assume the same facts as in paragraph (i) of this Example 2, 
except that under the plan as adopted on January 1, 2006, only options 
for P stock are granted to S employees. Assume further that after P 
disposes of its interest in S, S changes the plan to provide for the 
grant of options for S stock to S employees. Because there is a change 
in the stock available for purchase or grant under the plan, under 
paragraph (b)(2)(iii) of this section, the stockholders of S must 
approve the plan within 12 months before or after the change to the plan 
to meet the stockholder approval requirements of paragraph (b) of this 
section.
    Example 3. Stockholder approval. (i) Corporation X maintains a plan 
under which incentive stock options may be granted to all eligible 
employees. Corporation Y does not maintain an incentive stock option 
plan. On May 15, 2006, Corporation X and Corporation Y consolidate under 
state law to form one corporation. The new corporation will be named 
Corporation Y. The consolidation agreement describes the Corporation X 
plan, including the maximum aggregate number of shares available for 
issuance pursuant to incentive stock options after the consolidation and 
the employees eligible to receive options under the plan. Additionally, 
the consolidation agreement states that the plan will be continued by 
Corporation Y after the consolidation and incentive stock options will 
be issued by Corporation Y. The consolidation agreement is unanimously 
approved by the shareholders of Corporations X and Y on May 1, 2006. 
Corporation Y assumes the plan formerly maintained by Corporation X and

[[Page 465]]

continues to grant options under the plan to all eligible employees.
    (ii) Because there is a change in the granting corporation (from 
Corporation X to Corporation Y), under paragraph (b)(2)(iii) of this 
section, Corporation Y is considered to have adopted a new plan. Because 
the plan is fully described in the consolidation agreement, including 
the maximum aggregate number of shares available for issuance pursuant 
to incentive stock options and employees eligible to receive options 
under the plan, the approval of the consolidation agreement by the 
shareholders constitutes approval of the plan. Thus, the shareholder 
approval of the consolidation agreement satisfies the shareholder 
approval requirements of paragraph (b)(2) of this section, and the plan 
is considered to be adopted by Corporation Y and approved by its 
shareholders on May 1, 2006.
    Example 4. Maximum aggregate number of shares. X Corporation 
maintains a plan under which statutory options and nonstatutory options 
may be granted. The plan designates the number of shares that may be 
used for incentive stock options. Because the maximum aggregate number 
of shares that will be used for incentive stock options is designated in 
the plan, the requirements of paragraph (b)(3) of this section are 
satisfied.
    Example 5. Maximum aggregate number of shares. Y Corporation adopts 
an incentive stock option plan on November 1, 2006. On that date, there 
are two million outstanding shares of Y Corporation stock. The plan 
provides that the maximum aggregate number of shares that may be issued 
under the plan may not exceed 15% of the outstanding number of shares of 
Y Corporation on November 1, 2006. Because the maximum aggregate number 
of shares that may be issued under the plan is designated in the plan, 
the requirements of paragraph (b)(3) of this section are met.
    Example 6. Maximum aggregate number of shares. (i) B Corporation 
adopts an incentive stock option plan on March 15, 2005. The plan 
provides that the maximum aggregate number of shares available for 
issuance under the plan is 50,000, increased on each anniversary date of 
the adoption of the plan by 5 percent of the then-outstanding shares.
    (ii) Because the maximum aggregate number of shares is not 
designated under the plan, the requirements of paragraph (b)(3) of this 
section are not met.
    (iii) Assume the same facts as in paragraph (i) of this Example 6, 
except that the plan provides that the maximum aggregate number of 
shares available under the plan is the lesser of (a) 50,000 shares, 
increased each anniversary date of the adoption of the plan by 5 percent 
of the then-outstanding shares, or (b) 200,000 shares. Because the 
maximum aggregate number of shares that may be issued under the plan is 
designated as the lesser of one of two numbers, one of which provides an 
immediately determinable maximum aggregate number of shares that may be 
issued under the plan in any event, the requirements of paragraph (b)(3) 
of this section are met.

    (c) Duration of option grants under the plan. An incentive stock 
option must be granted within 10 years from the date that the plan under 
which it is granted is adopted or the date such plan is approved by the 
stockholders, whichever is earlier. To grant incentive stock options 
after the expiration of the 10-year period, a new plan must be adopted 
and approved.
    (d) Period for exercising options. An incentive stock option, by its 
terms, must not be exercisable after the expiration of 10 years from the 
date such option is granted, or 5 years from the date such option is 
granted to an employee described in paragraph (f) of this section. An 
option that does not contain such a provision when granted is not an 
incentive stock option.
    (e) Option price. (1) Except as provided by paragraph (e)(2) of this 
section, the option price of an incentive stock option must not be less 
than the fair market value of the stock subject to the option at the 
time the option is granted. The option price may be determined in any 
reasonable manner, including the valuation methods permitted under Sec.  
20.2031-2 of this chapter, so long as the minimum price possible under 
the terms of the option is not less than the fair market value of the 
stock on the date of grant. For general rules relating to the option 
price, see Sec.  1.421-1(e). For rules relating to the determination of 
when an option is granted, see Sec.  1.421-1(c).
    (2)(i) If a share of stock is transferred to an individual pursuant 
to the exercise of an option which fails to qualify as an incentive 
stock option merely because there was a failure of an attempt, made in 
good faith, to meet the option price requirements of paragraph (e)(1) of 
this section, the requirements of such paragraph are considered to have 
been met. Whether there was a good-faith attempt to set the option price 
at not less than the fair market value of the stock subject to the 
option

[[Page 466]]

at the time the option was granted depends on the relevant facts and 
circumstances.
    (ii) For publicly held stock that is actively traded on an 
established market at the time the option is granted, determining the 
fair market value of such stock by the appropriate method described in 
Sec.  20.2031-2 of this chapter establishes that a good-faith attempt to 
meet the option price requirements of this paragraph (e) was made.
    (iii) For non-publicly traded stock, if it is demonstrated, for 
example, that the fair market value of the stock at the date of grant 
was based upon an average of the fair market values as of such date set 
forth in the opinions of completely independent and well-qualified 
experts, such a demonstration generally establishes that there was a 
good-faith attempt to meet the option price requirements of this 
paragraph (e). The optionee's status as a majority or minority 
stockholder may be taken into consideration.
    (iv) Regardless of whether the stock offered under an option is 
publicly traded, a good-faith attempt to meet the option price 
requirements of this paragraph (e) is not demonstrated unless the fair 
market value of the stock on the date of grant is determined with regard 
to nonlapse restrictions (as defined in Sec.  1.83-3(h)) and without 
regard to lapse restrictions (as defined in Sec.  1.83-3(i)).
    (v) Amounts treated as interest and amounts paid as interest under a 
deferred payment arrangement are not includible as part of the option 
price. See Sec.  1.421-1(e)(1). An attempt to set the option price at 
not less than fair market value is not regarded as made in good faith 
where an adjustment of the option price to reflect amounts treated as 
interest results in the option price being lower than the fair market 
value on which the option price was based.
    (3) Notwithstanding that the option price requirements of paragraphs 
(e)(1) and (2) of this section are satisfied by an option granted to an 
employee whose stock ownership exceeds the limitation provided by 
paragraph (f) of this section, such option is not an incentive stock 
option when granted unless it also complies with paragraph (f) of this 
section. If the option, when granted, does not comply with the 
requirements described in paragraph (f) of this section, such option can 
never become an incentive stock option, even if the employee's stock 
ownership does not exceed the limitation of paragraph (f) of this 
section when such option is exercised.
    (f) Options granted to certain stockholders. (1) If, immediately 
before an option is granted, an individual owns (or is treated as 
owning) stock possessing more than 10 percent of the total combined 
voting power of all classes of stock of the corporation employing the 
optionee or of any related corporation of such corporation, then an 
option granted to such individual cannot qualify as an incentive stock 
option unless the option price is at least 110 percent of the stock's 
fair market value on the date of grant and such option by its terms is 
not exercisable after the expiration of 5 years from the date of grant. 
For purposes of determining the minimum option price for purposes of 
this paragraph (f), the rules described in paragraph (e)(2) of this 
section, relating to the good-faith determination of the option price, 
do not apply.
    (2) For purposes of determining the stock ownership of the optionee, 
the stock attribution rules of Sec.  1.424-1(d) apply. Stock that the 
optionee may purchase under outstanding options is not treated as stock 
owned by the individual. The determination of the percentage of the 
total combined voting power of all classes of stock of the employer 
corporation (or of its related corporations) that is owned by the 
optionee is made with respect to each such corporation in the related 
group by comparing the voting power of the shares owned (or treated as 
owned) by the optionee to the aggregate voting power of all shares of 
each such corporation actually issued and outstanding immediately before 
the grant of the option to the optionee. The aggregate voting power of 
all shares actually issued and outstanding immediately before the grant 
of the option does not include the voting power of treasury shares or 
shares authorized for issue under outstanding options held by the 
individual or any other person.

[[Page 467]]

    (3) Examples. The rules of this paragraph (f) are illustrated by the 
following examples:

    Example 1. (i) E, an employee of M Corporation, owns 15,000 shares 
of M Corporation common stock, which is the only class of stock 
outstanding. M has 100,000 shares of its common stock outstanding. On 
January 1, 2005, when the fair market value of M stock is $100, E is 
granted an option with an option price of $100 and an exercise period of 
10 years from the date of grant.
    (ii) Because E owns stock possessing more than 10 percent of the 
total combined voting power of all classes of M Corporation stock, M 
cannot grant an incentive stock option to E unless the option is granted 
at an option price of at least 110 percent of the fair market value of 
the stock subject to the option and the option, by its terms, expires no 
later than 5 years from its date of grant. The option granted to E fails 
to meet the option-price and term requirements described in paragraph 
(f)(1) of this section and, thus, the option is not an incentive stock 
option.
    (iii) Assume the same facts as in paragraph (i) of this Example 1, 
except that E's father and brother each owns 7,500 shares of M 
Corporation stock, and E owns no M stock in E's own name. Because under 
the attribution rules of Sec.  1.424-1(d), E is treated as owning stock 
held by E's parents and siblings, M cannot grant an incentive stock 
option to E unless the option price is at least 110 percent of the fair 
market value of the stock subject to the option, and the option, by its 
terms, expires no later than 5 years from the date of grant.
    Example 2. Assume the same facts as in paragraph (i) of this Example 
1. Assume further that M is a subsidiary of P Corporation. Regardless of 
whether E owns any P stock and the number of P shares outstanding, if P 
Corporation grants an option to E which purports to be an incentive 
stock option, but which fails to meet the 110-percent-option-price and 
5-year-term requirements, the option is not an incentive stock option 
because E owns more than 10 percent of the total combined voting power 
of all classes of stock of a related corporation of P Corporation (i.e., 
M Corporation). An individual who owns (or is treated as owning) stock 
in excess of the ownership specified in paragraph (f)(1) of this 
section, in any corporation in a group of corporations consisting of the 
employer corporation and its related corporations, cannot be granted an 
incentive stock option by any corporation in the group unless such 
option meets the 110-percent-option-price and 5-year-term requirements 
of paragraph (f)(1) of this section.
    Example 3. (i) F is an employee of R Corporation. R has only one 
class of stock, of which 100,000 shares are issued and outstanding. F 
owns no stock in R Corporation or any related corporation of R 
Corporation. On January 1, 2005, R grants a 10-year incentive stock 
option to F to purchase 50,000 shares of R stock at $3 per share, the 
fair market value of R stock on the date of grant of the option. On 
April 1, 2005, F exercises half of the January option and receives 
25,000 shares of R stock that previously were not outstanding. On July 
1, 2005, R grants a second 50,000 share option to F which purports to be 
an incentive stock option. The terms of the July option are identical to 
the terms of the January option, except that the option price is $3.25 
per share, which is the fair market value of R stock on the date of 
grant of the July option.
    (ii) Because F does not own more than 10% of the total combined 
voting power of all classes of stock of R Corporation or any related 
corporation on the date of the grant of the January option and the 
pricing requirements of paragraph (e) of this section are satisfied on 
the date of grant of such option, the unexercised portion of the January 
option remains an incentive stock option regardless of the changes in 
F's percentage of stock ownership in R after the date of grant. However, 
the July option is not an incentive stock option because, on the date 
that it is granted, F owns 20 percent (25,000 shares owned by F divided 
by 125,000 shares of R stock issued and outstanding) of the total 
combined voting power of all classes of R Corporation stock and, thus 
the pricing requirements of paragraph (f)(1) of this section are not 
met.
    (iii) Assume the same facts as in paragraph (i) of this Example 3 
except that the partial exercise of the January incentive stock option 
on April 1, 2003, is for only 10,000 shares. Under these circumstances, 
the July option is an incentive stock option, because, on the date of 
grant of the July option, F does not own more than 10 percent of the 
total combined voting power (10,000 shares owned by F divided by 110,000 
shares of R issued and outstanding) of all classes of R Corporation 
stock.

[T.D. 9144, 69 FR 46412, Aug. 3, 2004; T.D. 9471, 74 FR 59077, Nov. 17, 
2009]



Sec.  1.422-3  Stockholder approval of incentive stock option plans.

    This section addresses the stockholder approval of incentive stock 
option plans required by section 422(b)(1) of the Internal Revenue Code. 
(Section 422 was added to the Code as section 422A by section 251 of the 
Economic Recovery Tax Act of 1981, and was redesignated as section 422 
by section 11801 of the Omnibus Budget Reconciliation

[[Page 468]]

Act of 1990.) The approval of stockholders must comply with all 
applicable provisions of the corporate charter, bylaws, and applicable 
State law prescribing the method and degree of stockholder approval 
required for the issuance of corporate stock or options. If the 
applicable State law does not prescribe a method and degree of 
stockholder approval in such cases an incentive stock option plan must 
be approved:
    (a) By a majority of the votes cast at a duly held stockholders' 
meeting at which a quorum representing a majority of all outstanding 
voting stock is, either in person or by proxy, present and voting on the 
plan; or
    (b) By a method and in a degree that would be treated as adequate 
under applicable State law in the case of an action requiring 
stockholder approval (i.e., an action on which stockholders would be 
entitled to vote if the action were taken at a duly held stockholders' 
meeting).

[T.D. 8374, 56 FR 61160, Dec. 2, 1991. Redesignated by T.D. 9144, 69 FR 
46415, Aug. 3, 2004]



Sec.  1.422-4  $100,000 limitation for incentive stock options.

    (a) $100,000 per year limitation--(1) General rule. An option that 
otherwise qualifies as an incentive stock option nevertheless fails to 
be an incentive stock option to the extent that the $100,000 limitation 
described in paragraph (a)(2) of this section is exceeded.
    (2) $100,000 per year limitation. To the extent that the aggregate 
fair market value of stock with respect to which an incentive stock 
option (determined without regard to this section) is exercisable for 
the first time by any individual during any calendar year (under all 
plans of the employer corporation and related corporations) exceeds 
$100,000, such option is treated as a nonstatutory option. See Sec.  
1.83-7 for rules applicable to nonstatutory options.
    (b) Application. To determine whether the limitation described in 
paragraph (a)(2) of this section has been exceeded, the following rules 
apply:
    (1) An option that does not meet the requirements of Sec.  1.422-2 
when granted (including an option which, when granted, contains terms 
providing that it will not be treated as an incentive stock option) is 
disregarded. See Sec.  1.422-2(a)(4).
    (2) The fair market value of stock is determined as of the date of 
grant of the option for such stock.
    (3) Except as otherwise provided in paragraph (b)(4) of this 
section, options are taken into account in the order in which they are 
granted.
    (4) For purposes of this section, an option is considered to be 
first exercisable during a calendar year if the option will become 
exercisable at any time during the year assuming that any condition on 
the optionee's ability to exercise the option related to the performance 
of services is satisfied. If the optionee's ability to exercise the 
option in the year is subject to an acceleration provision, then the 
option is considered first exercisable in the calendar year in which the 
acceleration provision is triggered. After an acceleration provision is 
triggered, the options subject to such provision are then taken into 
account in accordance with paragraph (b)(3) of this section for purposes 
of applying the limitation described in paragraph (a)(2) of this section 
to all options first exercisable during a calendar year. However, 
because an acceleration provision is not taken into account prior to its 
triggering, an incentive stock option that becomes exercisable for the 
first time during a calendar year by operation of such a provision does 
not affect the application of the $100,000 limitation with respect to 
any option (or portion thereof) exercised prior to such acceleration. 
For purposes of this paragraph (b)(4), an acceleration provision 
includes, for example, a provision that accelerates the exercisability 
of an option on a change in ownership or control or a provision that 
conditions exercisability on the attainment of a performance goal. See 
paragraph (d), Example 4 of this section.
    (5)(i) An option (or portion thereof) is disregarded if, prior to 
the calendar year during which it would otherwise have become 
exercisable for the first time, the option (or portion thereof) is 
modified and thereafter ceases to be an incentive stock option described 
in Sec.  1.422-2, is canceled, or is transferred in violation of Sec.  
1.421-1(b)(2).

[[Page 469]]

    (ii) If an option (or portion thereof) is modified, canceled, or 
transferred at any other time, such option (or portion thereof) is 
treated as outstanding according to its original terms until the end of 
the calendar year during which it would otherwise have become 
exercisable for the first time.
    (6) A disqualifying disposition has no effect on the determination 
of whether an option exceeds the $100,000 limitation.
    (c) Bifurcation--(1) Options. The application of the rules described 
in paragraph (b) of this section may result in an option being treated, 
in part, as an incentive stock option and, in part, as a nonstatutory 
option. See Sec.  1.83-7 for the treatment of nonstatutory options.
    (2) Stock. A corporation may issue a separate certificate for 
incentive option stock or designate such stock as incentive stock option 
stock in the corporation's transfer records or plan records. In such a 
case, the issuance of separate certificates or designation in the 
corporation's transfer records or plan records is not a modification 
under Sec.  1.424-1(e). In the absence of such an issuance or 
designation, shares are treated as first purchased under an incentive 
stock option to the extent of the $100,000 limitation, and the excess 
shares are treated as purchased under a nonstatutory option. See Sec.  
1.83-7 for the treatment of nonstatutory options.
    (d) Examples. The following examples illustrate the principles of 
this section. In each of the following examples E is an employee of X 
Corporation. The examples are as follows:

    Example 1. General rule. Effective January 1, 2004, X Corporation 
adopts a plan under which incentive stock options may be granted to its 
employees. On January 1, 2004, and each succeeding January 1 through 
January 1, 2013, E is granted immediately exercisable options for X 
Corporation stock with a fair market value of $100,000 determined on the 
date of grant. The options qualify as incentive stock options 
(determined without regard to this section). On January 1, 2014, E 
exercises all of the options. Because the $100,000 limitation has not 
been exceeded during any calendar year, all of the options are treated 
as incentive stock options.
    Example 2. Order of grant. X Corporation is a parent corporation of 
Y Corporation, which is a parent corporation of Z Corporation. Each 
corporation has adopted its own separate plan, under which an employee 
of any member of the corporate group may be granted options for stock of 
any member of the group. On January 1, 2004, X Corporation grants E an 
incentive stock option (determined without regard to this section) for 
stock of Y Corporation with a fair market value of $100,000 on the date 
of grant. On December 31, 2004, Y Corporation grants E an incentive 
stock option (determined without regard to this section) for stock of Z 
Corporation with a fair market value of $75,000 as of the date of grant. 
Both of the options are immediately exercisable. For purposes of this 
section, options are taken into account in the order in which granted 
using the fair market value of stock as of the date on the option is 
granted. During calendar year 2004, the aggregate fair market value of 
stock with respect to which E's options are exercisable for the first 
time exceeds $100,000. Therefore, the option for Y Corporation stock is 
treated as an incentive stock option, and the option for Z Corporation 
stock is treated as a nonstatutory option.
    Example 3. Acceleration provision. (i) In 2004, X Corporation grants 
E three incentive stock options (determined without regard to this 
section) to acquire stock with an aggregate fair market value of 
$150,000 on the date of grant. The dates of grant, the fair market value 
of the stock (as of the applicable date of grant) with respect to which 
the options are exercisable, and the years in which the options are 
first exercisable (without regard to acceleration provisions) are as 
follows:

------------------------------------------------------------------------
                                                Fair market
                                 Date of grant    value of      First
                                                   stock     exercisable
------------------------------------------------------------------------
Option 1......................   April 1, 2004      $60,000         2004
Option 2......................     May 1, 2004       50,000         2006
Option 3......................    June 1, 2004       40,000         2004
------------------------------------------------------------------------

    (ii) In July of 2004, a change in control of X Corporation occurs, 
and, under the terms of its option plan, all outstanding options become 
immediately exercisable. Under the rules of this section, Option 1 is 
treated as an incentive stock option in its entirety; Option 2 exceeds 
the $100,000 aggregate fair market value limitation for calendar year 
2004 by $10,000 (Option 1's $60,000 + Option 2's $50,000 = $110,000) and 
is, therefore, bifurcated into an incentive stock option for stock with 
a fair market value of $40,000 as of the date of grant and a 
nonstatutory option for stock with a fair market value of $10,000 as of 
the date of grant. Option 3 is treated as a nonstatutory option in its 
entirety.
    Example 4. Exercise of option and acceleration provision. (i) In 
2004, X Corporation grants E three incentive stock options (determined 
without regard to this section) to acquire stock with an aggregate fair 
market value of $120,000 on the date of grant. The dates of grant, the 
fair market value of the stock (as of the applicable date of grant) with 
respect

[[Page 470]]

to which the options are exercisable, and the years in which the options 
are first exercisable (without regard to acceleration provisions) are as 
follows:

------------------------------------------------------------------------
                                                Fair market
                                 Date of grant    value of      First
                                                   stock     exercisable
------------------------------------------------------------------------
Option 1......................   April 1, 2004      $60,000         2005
Option 2......................     May 1, 2004       40,000         2006
Option 3......................    June 1, 2004       20,000         2005
------------------------------------------------------------------------

    (ii) On June 1, 2005, E exercises Option 3. At the time of exercise 
of Option 3, the fair market value of X stock (at the time of grant) 
with respect to which options held by E are first exercisable in 2005 
does not exceed $100,000. On September 1, 2005, a change of control of X 
Corporation occurs, and, under the terms of its option plan, Option 2 
becomes immediately exercisable. Under the rules of this section, 
because E's exercise of Option 3 occurs before the change of control and 
the effects of an acceleration provision are not taken into account 
until it is triggered, Option 3 is treated as an incentive stock option 
in its entirety. Option 1 is treated as an incentive stock option in its 
entirety. Option 2 is bifurcated into an incentive stock option for 
stock with a fair market value of $20,000 on the date of grant and a 
nonstatutory option for stock with a fair market value of $20,000 on the 
date of grant because it exceeds the $100,000 limitation for 2003 by 
$20,000 (Option 1 for $60,000 + Option 3 for $20,000 + Option 2 for 
$40,000 = $120,000).
    (iii) Assume the same facts as in paragraph (ii) of this Example 4, 
except that the change of control occurs on May 1, 2005. Because options 
are taken into account in the order in which they are granted, Option 1 
and Option 2 are treated as incentive stock options in their entirety. 
Because the exercise of Option 3 (on June 1, 2005) takes place after the 
acceleration provision is triggered, Option 3 is treated as a 
nonstatutory option in its entirety.
    Example 5. Cancellation of option. (i) In 2004, X Corporation grants 
E three incentive stock options (determined without regard to this 
section) to acquire stock with an aggregate fair market value of 
$140,000 as of the date of grant. The dates of grant, the fair market 
value of the stock (as of the applicable date of grant) with respect to 
which the options are exercisable, and the years in which the options 
are first exercisable (without regard to acceleration provisions) are as 
follows:

------------------------------------------------------------------------
                                                Fair market
                                 Date of grant    value of      First
                                                   stock     exercisable
------------------------------------------------------------------------
Option 1......................   April 1, 2004      $60,000         2005
Option 2......................     May 1, 2004       40,000         2005
Option 3......................    June 1, 2004       40,000         2005
------------------------------------------------------------------------

    (ii) On December 31, 2004, Option 2 is canceled. Because Option 2 is 
canceled before the calendar year during which it would have become 
exercisable for the first time, it is disregarded. As a result, Option 1 
and Option 3 are treated as incentive stock options in their entirety.
    (iii) Assume the same facts as in paragraph (ii) of this Example 5, 
except that Option 2 is canceled on January 1, 2005. Because Option 2 is 
not canceled prior to the calendar year during which it would have 
become exercisable for the first time (2005), it is treated as an 
outstanding option for purposes of determining whether the $100,000 
limitation for 2005 has been exceeded. Because options are taken into 
account in the order in which granted, Option 1 is treated as an 
incentive stock option in its entirety. Because Option 3 exceeds the 
$100,000 limitation by $40,000 (Option 1 for $60,000 + Option 2 for 
$40,000 + Option 3 for $40,000 = $140,000), it is treated as a 
nonstatutory option in its entirety.
    (iv) Assume the same facts as in paragraph (i) of this Example 5, 
except that on January 1, 2005, E exercises Option 2 and immediately 
sells the stock in a disqualifying disposition. A disqualifying 
disposition has no effect on the determination of whether the underlying 
option is considered outstanding during the calendar year during which 
it is first exercisable. Because options are taken into account in the 
order in which granted, Option 1 is treated as an incentive stock option 
in its entirety. Because Option 3 exceeds the $100,000 limitation by 
$40,000 (Option 1 for $60,000 + Option 2 for $40,000 + Option 3 for 
$40,000 = $140,000), it is treated as a nonstatutory option in its 
entirety.
    Example 6. Designation of stock. On January 1, 2004, X grants E an 
immediately exercisable incentive stock option (determined without 
regard to this section) to acquire X stock with a fair market value of 
$150,000 on that date. Under the rules of this section, the option is 
bifurcated and treated as an incentive stock option for X stock with a 
fair market value of $100,000 and a nonstatutory option for X stock with 
a fair market value of $50,000. In these circumstances, X may designate 
the stock that is treated as stock acquired pursuant to the exercise of 
an incentive stock option by issuing a separate certificate (or 
certificates) for $100,000 of stock and identifying such certificates as 
Incentive Stock Option Stock in its transfer records. In the absence of 
such a designation (or a designation in the corporation's transfer 
records or the plan records) shares with a fair market value of $100,000 
are deemed purchased first under an incentive stock option, and shares 
with a fair market value of $50,000 are deemed purchased under a 
nonstatutory option.

[T.D. 9144, 69 FR 46415, Aug. 3, 2004; 69 FR 70551, Dec. 7, 2004]

[[Page 471]]



Sec.  1.422-5  Permissible provisions.

    (a) General rule. An option that otherwise qualifies as an incentive 
stock option does not fail to be an incentive stock option merely 
because such option contains one or more of the provisions described in 
paragraphs (b), (c), and (d) of this section.
    (b) Cashless exercise. (1) An option does not fail to be an 
incentive stock option merely because the optionee may exercise the 
option with previously acquired stock of the corporation that granted 
the option or stock of the corporation whose stock is being offered for 
purchase under the option. For special rules relating to the use of 
statutory option stock to pay the option price of an incentive stock 
option, see Sec.  1.424-1(c)(3).
    (2) All shares acquired through the exercise of an incentive stock 
option are individually subject to the holding period requirements 
described in Sec.  1.422-1(a) and the disqualifying disposition rules of 
Sec.  1.422-1(b), regardless of whether the option is exercised with 
previously acquired stock of the corporation that granted the option or 
stock of the corporation whose stock is being offered for purchase under 
the option. If an incentive stock option is exercised with such shares, 
and the exercise results in the basis allocation described in paragraph 
(b)(3) of this section, the optionee's disqualifying disposition of any 
of the stock acquired through such exercise is treated as a 
disqualifying disposition of the shares with the lowest basis.
    (3) If the exercise of an incentive stock option with previously 
acquired shares is comprised in part of an exchange to which section 
1036 (and so much of section 1031 as relates to section 1036) applies, 
then:
    (i) The optionee's basis in the incentive stock option shares 
received in the section 1036 exchange is the same as the optionee's 
basis in the shares surrendered in the exchange, increased, if 
applicable, by any amount included in gross income as compensation 
pursuant to sections 421 through 424 or section 83. Except for purposes 
of Sec.  1.422-1(a), the holding period of the shares is determined 
under section 1223. For purposes of Sec.  1.422-1 and sections 421(b) 
and 83 and the regulations thereunder, the amount paid for the shares 
purchased under the option is the fair market value of the shares 
surrendered on the date of the exchange.
    (ii) The optionee's basis in the incentive stock option shares not 
received pursuant to the section 1036 exchange is zero. For all 
purposes, the holding period of such shares begins as of the date that 
such shares are transferred to the optionee. For purposes of Sec.  
1.422-1(b) and sections 421(b) and 83 and the regulations thereunder, 
the amount paid for the shares is considered to be zero.
    (c) Additional compensation. An option does not fail to be an 
incentive stock option merely because the optionee has the right to 
receive additional compensation, in cash or property, when the option is 
exercised, provided such additional compensation is includible in income 
under section 61 or section 83. The amount of such additional 
compensation may be determined in any manner, including by reference to 
the fair market value of the stock at the time of exercise or to the 
option price.
    (d) Option subject to a condition. (1) An option does not fail to be 
an incentive stock option merely because the option is subject to a 
condition, or grants a right, that is not inconsistent with the 
requirements of Sec. Sec.  1.422-2 and 1.422-4.
    (2) An option that includes an alternative right is not an incentive 
stock option if the requirements of Sec.  1.422-2 are effectively 
avoided by the exercise of the alternative right. For example, an 
alternative right extending the option term beyond ten years, setting an 
option price below fair market value, or permitting transferability 
prevents an option from qualifying as an incentive stock option. If 
either of two options can be exercised, but not both, each such option 
is a disqualifying alternative right with respect to the other, even 
though one or both options would individually satisfy the requirements 
of Sec. Sec.  1.422-2, 1.422-4, and this section.
    (3) An alternative right to receive a taxable payment of cash and/or 
property in exchange for the cancellation or surrender of the option 
does not disqualify the option as an incentive stock option if the right 
is exercisable only when the then fair market value

[[Page 472]]

of the stock exceeds the exercise price of the option and the option is 
otherwise exercisable, the right is transferable only when the option is 
otherwise transferable, and the exercise of the right has economic and 
tax consequences no more favorable than the exercise of the option 
followed by an immediate sale of the stock. For this purpose, the 
exercise of the alternative right does not have the same economic and 
tax consequences if the payment exceeds the difference between the then 
fair market value of the stock and the exercise price of the option.
    (e) Examples. The principles of this section are illustrated by the 
following examples:

    Example 1. On June 1, 2004, X Corporation grants an incentive stock 
option to A, an employee of X Corporation, entitling A to purchase 100 
shares of X Corporation common stock at $10 per share. The option 
provides that A may exercise the option with previously acquired shares 
of X Corporation common stock. X Corporation has only one class of 
common stock outstanding. Under the rules of section 83, the shares 
transferable to A through the exercise of the option are transferable 
and not subject to a substantial risk of forfeiture. On June 1, 2005, 
when the fair market value of an X Corporation share is $25, A uses 40 
shares of X Corporation common stock, which A had purchased on the open 
market on June 1, 2002, for $5 per share, to pay the full option price. 
After exercising the option, A owns 100 shares of incentive stock option 
stock. Under section 1036 (and so much of section 1031 as relates to 
section 1036), 40 of the shares have a $200 aggregate carryover basis 
(the $5 purchase price x 40 shares) and a three-year holding period for 
purposes of determining capital gain, and 60 of the shares have a zero 
basis and a holding period beginning on June 1, 2005, for purposes of 
determining capital gain. All 100 shares have a holding period beginning 
on June 1, 2005, for purposes of determining whether the holding period 
requirements of Sec.  1.422-1(a) are met.
    Example 2. Assume the same facts as in Example 1. Assume further 
that, on September 1, 2005, A sells 75 of the shares that A acquired 
through exercise of the incentive stock option for $30 per share. 
Because the holding period requirements were not satisfied, A made a 
disqualifying disposition of the 75 shares on September 1, 2005. Under 
the rules of paragraphs (b)(2) and (b)(3) of this section, A has sold 
all 60 of the non-section-1036 shares and 15 of the 40 section-1036 
shares. Therefore, under paragraph (b)(3) of this section and section 
83(a), the amount of compensation attributable to A's exercise of the 
option and subsequent disqualifying disposition of 75 shares is $1,500 
(the difference between the fair market value of the stock on the date 
of transfer, $1,875 (75 shares at $25 per share), and the amount paid 
for the stock, $375 (60 shares at $0 per share plus 15 shares at $25 per 
share)). In addition, A must recognize a capital gain of $675, which 
consists of $375 ($450, the amount realized from the sale of 15 shares, 
less A's basis of $75) plus $300 ($1,800, the amount realized from the 
sale of 60 shares, less A's basis of $1,500 resulting from the inclusion 
of that amount in income as compensation). Accordingly, A must include 
in gross income for the taxable year in which the sale occurs $1,500 as 
compensation and $675 as capital gain. For its taxable year in which the 
disqualifying disposition occurs, if otherwise allowable under section 
162 and if the requirements of Sec.  1.83-6(a) are met, X Corporation is 
allowed a deduction of $1,500 for the compensation paid to A.
    Example 3. Assume the same facts as in Example 2, except that, 
instead of selling the 75 shares of incentive stock option stock on 
September 1, 2005, A uses those shares to exercise a second incentive 
stock option. The second option was granted to A by X Corporation on 
January 1, 2005, entitling A to purchase 100 shares of X Corporation 
common stock at $22.50 per share. As in Example 2, A has made a 
disqualifying disposition of the 75 shares of stock pursuant to Sec.  
1.424-1(c). Under paragraph (b) of this section, A has disposed of all 
60 of the non-section-1036 shares and 15 of the 40 section-1036 shares. 
Therefore, pursuant to paragraph (b)(3) of this section and section 
83(a), the amount of compensation attributable to A's exercise of the 
first option and subsequent disqualifying disposition of 75 shares is 
$1,500 (the difference between the fair market value of the stock on the 
date of transfer, $1,875 (75 shares at $25 per share), and the amount 
paid for the stock, $375 (60 shares at $0 per share plus 15 shares at 
$25 per share)). Unlike Example 2, A does not recognize any capital gain 
as a result of exercising the second option because, for all purposes 
other than the determination of whether the exercise is a disposition 
pursuant to section 424(c), the exercise is considered an exchange to 
which section 1036 applies. Accordingly, A must include in gross income 
for the taxable year in which the disqualifying disposition occurs 
$1,500 as compensation. If the requirements of Sec.  83(h) and Sec.  
1.83-6(a) are satisfied and the deduction is otherwise allowable under 
section 162, for its taxable year in which the disqualifying disposition 
occurs, X Corporation is allowed a deduction of $1,500 for the 
compensation paid to A. After exercising the second option, A owns a 
total of 125 shares of incentive stock option stock. Under section 1036 
(and so much of section 1031 as relates to section 1036), the 100 
``new'' shares of incentive stock

[[Page 473]]

option stock have the following bases and holding periods: 15 shares 
have a $75 carryover basis and a three-year-and-three-month holding 
period for purposes of determining capital gain, 60 shares have a $1,500 
basis resulting from the inclusion of that amount in income as 
compensation and a three-month holding period for purposes of 
determining capital gain, and 25 shares have a zero basis and a holding 
period beginning on September 1, 2005, for purposes of determining 
capital gain. All 100 shares have a holding period beginning on 
September 1, 2005, for purposes of determining whether the holding 
period requirements of Sec.  1.422-1(a) are met.
    Example 4. Assume the same facts as in Example 2, except that, 
instead of selling the 75 shares of incentive stock option stock on 
September 1, 2005, A uses those shares to exercise a nonstatutory 
option. The nonstatutory option was granted to A by X Corporation on 
January 1, 2005, entitling A to purchase 100 shares of X Corporation 
common stock at $22.50 per share. Unlike Example 3, A has not made a 
disqualifying disposition of the 75 shares of stock. After exercising 
the nonstatutory option, A owns a total of 100 shares of incentive stock 
option stock and 25 shares of nonstatutory stock option stock. Under 
section 1036 (and so much of section 1031 as relates to section 1036), 
the 75 new shares of incentive stock option stock have the same basis 
and holding period as the 75 old shares used to exercise the 
nonstatutory option. The additional 25 shares of stock received upon 
exercise of the nonstatutory option are taxed under the rules of section 
83(a). Accordingly, A must include in gross income for the taxable year 
in which the transfer of such shares occurs $750 (25 shares at $30 per 
share) as compensation. A's basis in such shares is the same as the 
amount included in gross income. For its taxable year in which the 
transfer occurs, X Corporation is allowed a deduction of $750 for the 
compensation paid to A to the extent the requirements of section 83(h) 
and Sec.  1.83-6(a) are satisfied and the deduction is otherwise 
allowable under section 162.
    Example 5. Assume the same facts in Example 1, except that the 
shares transferred pursuant to the exercise of the incentive stock 
option are subject to a substantial risk of forfeiture and not 
transferable (substantially nonvested) for a period of six months after 
such transfer. Assume further that the shares that A uses to exercise 
the incentive stock option are similarly restricted. Such shares were 
transferred to A on January 1, 2005, through A's exercise of a 
nonstatutory stock option which was granted to A on January 1, 2004. A 
paid $5 per share for the stock when its fair market value was $22.50 
per share. A did not file a section 83(b) election to include the $700 
spread (the difference between the option price and the fair market 
value of the stock on date of exercise of the nonstatutory option) in 
gross income as compensation. After exercising the incentive stock 
option with the 40 substantially-nonvested shares, A owns 100 shares of 
substantially-nonvested incentive stock option stock. Section 1036 (and 
so much of section 1031 as relates to section 1036) applies to the 40 
shares exchanged in exercise of the incentive stock option. However, 
pursuant to section 83(g), the stock received in such exchange, because 
it is incentive stock option stock, is not subject to restrictions and 
conditions substantially similar to those to which the stock given in 
such exchange was subject. For purposes of section 83(a) and Sec.  1.83-
1(b)(1), therefore, A has disposed of the 40 shares of substantially-
nonvested stock on June 1, 2005, and must include in gross income as 
compensation $800 (the difference between the amount realized upon such 
disposition, $1,000, and the amount paid for the stock, $200). 
Accordingly, 40 shares of the incentive stock option stock have a $1,000 
basis (the $200 original basis plus the $800 included in income as 
compensation) and 60 shares of the incentive stock option stock have a 
zero basis. For its taxable year in which the disposition of the 
substantially-nonvested stock occurs, X Corporation is allowed a 
deduction of $800 for the compensation paid to A, provided the 
requirements of section 83(h) and Sec.  1.83-6(a) are satisfied and the 
deduction is otherwise allowable under section 162.

    (f) Effective/applicability date--(1) In general. Except for Sec.  
1.422-2(b)(6) Example 1 (iii), the regulations under this section are 
effective on August 3, 2004. Section 1.422-2(b)(6) Example 1 (iii) is 
effective on November 17, 2009. Section 1.422-2(b)(6) Example 1 (iii) 
applies to statutory options granted on or after January 1, 2010.
    (2) Reliance and transition period. For statutory options granted on 
or before June 9, 2003, taxpayers may rely on the 1984 proposed 
regulations LR-279-81 (49 FR 4504), the 2003 proposed regulations REG-
122917-02 (68 FR 34344), or this section until the earlier of January 1, 
2006, or the first regularly scheduled stockholders meeting of the 
granting corporation occurring 6 months after August 3, 2004. For 
statutory options granted after June 9, 2003, and before the earlier of 
January 1, 2006, or the first regularly scheduled stockholders meeting 
of the granting corporation occurring at least 6 months after August 3, 
2004, taxpayers may rely on either REG-122917-02 or this section. 
Taxpayers may not rely on LR-279-81 or REG-122917-02 after December 31,

[[Page 474]]

2005. Reliance on LR-279-81, REG-122917-02, or this section must be in 
its entirety, and all statutory options granted during the reliance 
period must be treated consistently.

[T.D. 9144, 69 FR 46417, Aug. 3, 2004; 69 FR 61310, Oct. 18, 2004; 69 FR 
70551, Dec. 7, 2004; T.D. 9471, 74 FR 59078, Nov. 17, 2009]



Sec.  1.423-1  Applicability of section 421(a).

    (a) General rule. Subject to the provisions of section 423(c) and 
Sec.  1.423-2(k), the special rules of income tax treatment provided in 
section 421(a) apply with respect to the transfer of a share of stock to 
an individual pursuant to the individual's exercise of an option granted 
under an employee stock purchase plan, as defined in Sec.  1.423-2, if 
the following conditions are satisfied--
    (1) The individual makes no disposition of such share before the 
later of the expiration of the two-year period from the date of the 
grant of the option pursuant to which such share was transferred or the 
expiration of the one-year period from the date of transfer of such 
share to the individual; and
    (2) At all times during the period beginning on the date of the 
grant of the option and ending on the day three months before the date 
of exercise, the individual was an employee of the corporation granting 
the option, a related corporation, or a corporation (or a related 
corporation) substituting or assuming the stock option in a transaction 
to which section 424(a) applies.
    (b) Cross-references. For rules relating to the requisite employment 
relationship, see Sec.  1.421-1(h). For rules relating to the effect of 
a disqualifying disposition, see section 421(b) and Sec.  1.421-2(b). 
For the definition of the term ``disposition,'' see section 424(c) and 
Sec.  1.424-1(c). For the definition of the term ``related 
corporation,'' see Sec.  1.421-1(i).
    (c) Effective/applicability date. The regulations under this section 
are effective on November 17, 2009. The regulations under this section 
apply to options granted under an employee stock purchase plan on or 
after January 1, 2010.

[T.D. 9471, 74 FR 59078, Nov. 17, 2009]



Sec.  1.423-2  Employee stock purchase plan defined.

    (a) In general--(1) The term ``employee stock purchase plan'' means 
a plan that meets the requirements of paragraphs (a)(2) and (a)(3) of 
this section. If the terms of the plan do not satisfy the requirements 
of paragraph (a)(3) of this section, then such requirements may be 
satisfied by the terms of an offering made under the plan. However, 
where the requirements of paragraph (a)(3) of this section are satisfied 
by the terms of an offering, such requirements will be treated as 
satisfied only with respect to options exercised under that offering. 
One or more offerings may be made under an employee stock purchase plan. 
Offerings may be consecutive or overlapping, and the terms of each 
offering need not be identical provided the terms of the plan and the 
offering together satisfy the requirements of paragraphs (a)(2) and 
(a)(3) of this section. The plan and the terms of an offering must be in 
writing or electronic form, provided that such writing or electronic 
form is adequate to establish the terms of the plan or offering, as 
applicable.
    (2) To satisfy the requirements of this paragraph (a)(2) and Sec.  
1.423-1, the plan must meet both of the following requirements--
    (i) The plan must provide that options can be granted only to 
employees of the employer corporation or of a related corporation (as 
defined in paragraph (i) of Sec.  1.421-1) to purchase stock in any such 
corporation (see paragraph (b) of this section); and
    (ii) The plan must be approved by the stockholders of the granting 
corporation within 12 months before or after the date the plan is 
adopted (see paragraph (c) of this section).
    (3) To satisfy the requirements of this paragraph (a)(3) and Sec.  
1.423-1, the terms of the plan or offering must meet all of the 
following requirements--
    (i) An employee cannot be granted an option if, immediately after 
the option is granted, the employee owns stock possessing 5 percent or 
more of the total combined voting power or value of all classes of stock 
of the employer corporation or of a related corporation (see paragraph 
(d) of this section);

[[Page 475]]

    (ii) Options must be granted to all employees of any corporation 
whose employees are granted any options by reason of their employment by 
the corporation (see paragraph (e) of this section);
    (iii) All employees granted options must have the same rights and 
privileges (see paragraph (f) of this section);
    (iv) The option price cannot be less than the lesser of--
    (A) An amount equal to 85 percent of the fair market value of the 
stock at the time the option is granted, or
    (B) An amount not less than 85 percent of the fair market value of 
the stock at the time the option is exercised (see paragraph (g) of this 
section).
    (v) Options cannot be exercised after the expiration of--
    (A) Five years from the date the option is granted if, under the 
terms of such plan, the option price cannot be less than 85 percent of 
the fair market value of the stock at the time the option is exercised, 
or
    (B) Twenty-seven months from the date the option is granted, if the 
option price is not determined in the manner described in paragraph 
(a)(3)(v)(A) of this section (see paragraph (h) of this section).
    (vi) No employee may be granted an option that permits the 
employee's rights to purchase stock under all employee stock purchase 
plans of the employer corporation and its related corporations to accrue 
at a rate that exceeds $25,000 of fair market value of the stock 
(determined at the time the option is granted) for each calendar year in 
which the option is outstanding at any time (see paragraph (i) of this 
section); and
    (vii) Options are not transferable by the optionee other than by 
will or the laws of descent and distribution, and are exercisable, 
during the lifetime of the optionee, only by the optionee (see paragraph 
(j) of this section).
    (4) The determination of whether a particular option is an option 
granted under an employee stock purchase plan is made at the time the 
option is granted. If the terms of an option are inconsistent with the 
terms of the employee stock purchase plan or the offering under the plan 
pursuant to which the option is granted, the option will not be treated 
as granted under an employee stock purchase plan. If an option with 
terms that are inconsistent with the terms of the plan or an offering 
under the plan is granted to an employee who is entitled to the grant of 
an option under the terms of the plan or offering, and the employee is 
not granted an option under the offering that qualifies as an option 
granted under an employee stock purchase plan, the offering will not 
meet the requirements of paragraph (e) of this section. Accordingly, 
none of the options granted under the offering will be eligible for the 
special tax treatment of section 421. However, if an option with terms 
that are inconsistent with the terms of the plan or an offering under 
the plan is granted to an individual who is not entitled to the grant of 
an option under the terms of the plan or offering, the option will not 
be treated as an option granted under an employee stock purchase plan 
but the grant of the option will not disqualify the options granted 
under the plan or offering. If, at the time of grant, an option 
qualifies as an option granted under an employee stock purchase plan, 
but after the time of grant one or more of the requirements of paragraph 
(a)(3) of this section is not satisfied with respect to the option, the 
option will not be treated as granted under an employee stock purchase 
plan but this failure to comply with the terms of the option will not 
disqualify the other options granted under the plan or offering.
    (5) Examples. The following examples illustrate the principles of 
paragraph (a):

    Example 1. Corporation A operates an employee stock purchase plan 
under which options for A stock are granted to employees of A. The terms 
of an offering provide that the option price will be 90 percent of the 
fair market value of A stock on the date of exercise. A grants an option 
under the offering to Employee Z, an employee of A. The terms of the 
option provide that the option price will be 85 percent of the fair 
market value of A stock on the date of exercise. Because the terms of 
Z's option are inconsistent with the terms of the offering, the option 
granted to Z will not be treated as an option granted under the employee 
stock purchase plan. Further, unless Z is granted an option under the 
offering that qualifies as an option granted under the employee stock 
purchase

[[Page 476]]

plan, the offering will not meet the requirements of paragraph (e) of 
this section and none of the options granted under the offering will be 
eligible for the special tax treatment of section 421.
    Example 2. Corporation B operates an employee stock purchase plan 
that provides that options for B stock may only be granted to employees 
of B. Under the terms of the plan, options may not be granted to 
consultants and other non-employees. B grants an option to Consultant Y, 
a consultant of B. Because Y is ineligible to receive an option under 
the plan because Y is not an employee, the grant of the option to Y is 
inconsistent with the terms of the plan and the option granted to Y will 
not be treated as an option granted under the employee stock purchase 
plan. However, the grant of the option to Y will not disqualify the 
options granted under the plan or any offering because Y was not 
entitled to the grant of an option under the plan.
    Example 3. Corporation C operates an employee stock purchase plan 
under which options for C stock are granted to employees of C. C grants 
an option pursuant to an offering under the plan to Employee X, an 
employee of C who is a highly compensated employee. The terms of the 
employee stock purchase plan exclude highly compensated employees from 
participation in the plan. Because X is ineligible to receive an option 
under the plan by reason of X's exclusion from participation in the 
plan, the option granted to X will not be treated as an option granted 
under the employee stock purchase plan. However, the grant of the option 
to X will not disqualify the options granted under the plan or offering 
because X was not entitled to the grant of an option under the plan.
    Example 4. Corporation D operates an employee stock purchase plan 
under which options for D stock are granted to employees of D. D grants 
an option pursuant to an offering under the plan to Employee W, an 
employee of D. The terms of the option provide that the option price 
will be 90 percent of the fair market value of D stock on the date of 
exercise. On the date of exercise, W pays only 85 percent of the fair 
market value of D stock. Because the terms of W's option are not 
satisfied, the option granted to W will not be treated as an option 
granted under the employee stock purchase plan. However, the failure to 
comply with the terms of the option granted to W will not disqualify the 
options granted under the plan or offering.

    (b) Options restricted to employees. An employee stock purchase plan 
must provide that options can be granted only to employees of the 
employer corporation (or employees of its related corporations) to 
purchase stock in the employer corporation (or one of its related 
corporations). If such a provision is not included in the terms of the 
plan, the plan will not be an employee stock purchase plan and options 
granted under the plan will not qualify for the special tax treatment of 
section 421. For rules relating to the employment requirement, see Sec.  
1.421-1(h).
    (c) Stockholder approval--(1) An employee stock purchase plan must 
be approved by the stockholders of the granting corporation within 12 
months before or after the date such plan is adopted. The approval of 
the stockholders must comply with all applicable provisions of the 
corporate charter and bylaws and of applicable State law prescribing the 
method and degree of stockholder approval required for the issuance of 
corporate stock or options. If the applicable State law does not 
prescribe a method and degree of stockholder approval, then an employee 
stock purchase plan must be approved--
    (i) By a majority of the votes cast at a duly held stockholder's 
meeting at which a quorum representing a majority of all outstanding 
voting stock is, either in person or by proxy, present and voting on the 
plan; or
    (ii) By a method and in a degree that would be treated as adequate 
under applicable State law in the case of an action requiring 
stockholder approval (such as, an action on which stockholders would be 
entitled to vote if the action were taken at a duly held stockholders' 
meeting).
    (2) For purposes of the stockholder approval required by this 
paragraph (c), ordinarily, a plan is adopted when it is approved by the 
granting corporation's board of directors, and the date of the board's 
action is the reference point for determining whether stockholder 
approval occurs within the applicable 24-month period. However, if the 
board's action is subject to a condition (such as stockholder approval) 
or the happening of a particular event, the plan is adopted on the date 
the condition is met or the event occurs, unless the board's resolution 
fixes the date of adoption as the date of the board's action.
    (3) An employee stock purchase plan, as adopted and approved, must 
designate the maximum aggregate number

[[Page 477]]

of shares that may be issued under the plan, and the corporations or 
class of corporations whose employees may be offered options under the 
plan. A plan that merely provides that the number of shares that may be 
issued under the plan may not exceed a stated percentage of the shares 
outstanding at the time of each offering or grant under the plan does 
not satisfy the requirements of this paragraph (c)(3). However, the 
maximum aggregate number of shares that may be issued under the plan may 
be stated in terms of a percentage of the authorized, issued, or 
outstanding shares on the date of the adoption of the plan. The plan may 
specify that the maximum aggregate number of shares available for grants 
under the plan may increase annually by a specified percentage of the 
authorized, issued, or outstanding shares on the date of the adoption of 
the plan. A plan that provides that the maximum aggregate number of 
shares that may be issued as options under the plan may change based on 
any other specific circumstances satisfies the requirements of this 
paragraph only if the stockholders approve an immediately determinable 
maximum number of shares that may be issued under the plan in any event. 
If there is more than one employee stock purchase plan under which 
options may be granted and stockholders of the granting corporation 
merely approve a maximum aggregate number of shares that are available 
for issuance under the plans, the stockholder approval requirements 
described in paragraph (c)(1) of this section are not satisfied. A 
separate maximum aggregate number of shares available for issuance 
pursuant to options must be specified and approved for each plan.
    (4) Once an employee stock purchase plan is approved by the 
stockholders of the granting corporation, the plan need not be 
reapproved by the stockholders of the granting corporation unless the 
plan is amended or changed in a manner that is considered the adoption 
of a new plan, in which case the plan must be reapproved within the 
prescribed 24-month period. Any increase in the aggregate number of 
shares that may be issued under the plan (other than an increase merely 
reflecting a change in the number of outstanding shares, such as a stock 
dividend or stock split) will be considered the adoption of a new plan 
requiring stockholder approval within the prescribed 24-month period. 
Similarly, a change in the designation of corporations whose employees 
may be offered options under the plan will be considered the adoption of 
a new plan requiring stockholder approval within the prescribed 24-month 
period unless the plan provides that designations of participating 
corporations may be made from time to time from among a group consisting 
of the granting corporation and its related corporations. The group from 
among which such changes and designations are permitted without 
additional stockholder approval may include corporations having become 
parents or subsidiaries of the granting corporation after the adoption 
and approval of the plan. In addition, a change in the granting 
corporation or the stock available for purchase under the plan will be 
considered the adoption of a new plan requiring stockholder approval 
within the prescribed 24-month period. Any other changes in the terms of 
an employee stock purchase plan are not considered the adoption of a new 
plan and, thus, do not require stockholder approval.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (c):

    Example 1. (i) Corporation E is a subsidiary of Corporation F, a 
publicly traded corporation. On January 1, 2010, E adopts an employee 
stock purchase plan under which options for E stock are granted to E 
employees.
    (ii) To meet the requirements of paragraph (c)(1) of this section, 
the plan must be approved by the stockholders of E (in this case, F) 
within 12 months before or after January 1, 2010.
    (iii) Assume the same facts as in paragraph (i) of this Example 1, 
except that the plan was approved by the stockholders of E (in this 
case, F) on March 1, 2010. On January 1, 2012, E changes the plan to 
provide that options for F stock will be granted to E employees under 
the plan. Because there is a change in the stock available for grant 
under the plan, under paragraph (c)(4) of this section, the change is 
considered the adoption of a new plan that must be approved by the 
stockholders of E (in this case, F) within 12 months before or after 
January 1, 2012.
    Example 2. (i) Assume the same facts as in paragraph (i) of Example 
1, except that on March 15, 2011, F completely disposes of its

[[Page 478]]

interest in E. Thereafter, E continues to grant options for E stock to E 
employees under the plan.
    (ii) The new E options are granted under a plan that meets the 
stockholder approval requirements of paragraph (c)(1) of this section 
without regard to whether E seeks approval of the plan from the 
stockholders of E after F disposes of its interest in E.
    (iii) Assume the same facts as in paragraph (i) of this Example 2, 
except that under the plan as adopted on January 1, 2010, only options 
for F stock are granted to E employees. Assume further that, after F 
disposes of its interest in E, E changes the plan to provide for the 
grant of options for E stock to E employees. Because there is a change 
in the stock available for purchase or grant under the plan, under 
paragraph (c)(4) of this section, the stockholders of E must approve the 
plan within 12 months before or after the change to the plan to meet the 
stockholder approval requirements of paragraph (c) of this section.
    Example 3. (i) Corporation G maintains an employee stock purchase 
plan providing options for G stock. Corporation H does not maintain an 
employee stock purchase plan. On May 15, 2010, G and H consolidate under 
State law to form one corporation. The new corporation is named 
Corporation H. The consolidation agreement describes the G plan, 
including the maximum aggregate number of shares available for issuance 
under the plan after the consolidation. Additionally, the consolidation 
agreement states that the plan will be continued by H after the 
consolidation. The consolidation agreement is approved by the 
stockholders of G and H on May 1, 2010. H assumes the plan formerly 
maintained by G and continues to grant options under the plan to all 
eligible employees, but the options are for H stock.
    (ii) Because there is a change in the granting corporation (from G 
to H) and the stock available for purchase, under paragraph (c)(4) of 
this section, H is considered to have adopted a new plan. Because the 
plan is fully described in the consolidation agreement, including the 
maximum aggregate number of shares available for issuance under the 
plan, the approval of the consolidation agreement by the stockholders 
constitutes approval of the plan. Thus, the stockholder approval of the 
consolidation agreement satisfies the stockholder approval requirements 
of paragraph (c)(1) of this section, and the plan is considered to be 
adopted by H and approved by its stockholders on May 1, 2010.
    Example 4. Corporation I adopts an employee stock purchase plan on 
November 1, 2010. On that date, there are two million shares of I stock 
outstanding. The plan provides that the maximum aggregate number of 
shares that may be issued under the plan may not exceed 15 percent of 
the number of shares of I stock outstanding on November 1, 2010. Because 
the maximum aggregate number of shares that may be issued under the plan 
is designated in the plan, the requirements of paragraph (c)(3) of this 
section are met.
    Example 5. (i) Corporation J adopts an employee stock purchase plan 
on March 15, 2010. The plan provides that the maximum aggregate number 
of shares of J stock available for issuance under the plan is 50,000, 
increased on each anniversary date of the adoption of the plan by 5 
percent of the then outstanding shares. Because the maximum aggregate 
number of shares is not designated under the plan, the requirements of 
paragraph (c)(3) of this section are not met.
    (ii) Assume the same facts as in paragraph (i) of this Example 5, 
except that the plan provides that the maximum aggregate number of 
shares available under the plan is the lesser of (a) 50,000 shares, 
increased each anniversary date of the adoption of the plan by 5 percent 
of the then-outstanding shares, or (b) 200,000 shares. Because the 
maximum aggregate number of shares that may be issued under the plan is 
designated as the lesser of two numbers, one of which provides an 
immediately determinable maximum aggregate number of shares that may be 
issued under the plan in any event, the requirements of paragraph (c)(3) 
of this section are met.

    (d) Options granted to certain shareholders--(1) An employee stock 
purchase plan or offering must, by its terms, provide that an employee 
cannot be granted an option if the employee, immediately after the 
option is granted, owns stock possessing 5 percent or more of the total 
combined voting power or value of all classes of stock of the employer 
corporation or a related corporation. In determining whether the stock 
ownership of an employee equals or exceeds this 5 percent limit, the 
rules of section 424(d) (relating to attribution of stock ownership) 
shall apply, and stock that the employee may purchase under outstanding 
options (whether or not the options qualify for the special tax 
treatment afforded by section 421(a)) shall be treated as stock owned by 
the employee. An option is outstanding for purposes of this paragraph 
(d) although under its terms it may be exercised only in installments or 
after the expiration of a fixed period of time. If an option is granted 
to an employee whose stock ownership (as determined under this paragraph 
(d)) exceeds the limitation set forth in this paragraph (d), no portion 
of the option will be treated as

[[Page 479]]

having been granted under an employee stock purchase plan.
    (2) The determination of the percentage of the total combined voting 
power or value of all classes of stock of the employer corporation (or a 
related corporation) that is owned by the employee is made by comparing 
the voting power or value of the shares owned (or treated as owned) by 
the employee to the aggregate voting power or value of all shares 
actually issued and outstanding immediately after the grant of the 
option to the employee. The aggregate voting power or value of all 
shares actually issued and outstanding immediately after the grant of 
the option does not include the voting power or value of treasury shares 
or shares authorized for issue under outstanding options held by the 
employee or any other person.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (d):

    Example 1. Employee V, an employee of Corporation K, owns 6,000 
shares of K common stock, the only class of K stock outstanding. K has 
100,000 shares of its common stock outstanding. Because V owns 6 percent 
of the combined voting power or value of all classes of K stock, K 
cannot grant an option to V under K's employee stock purchase plan. If 
V's father and brother each owned 3,000 shares of K stock and V did not 
own any K stock, then the result would be the same because, under 
section 424(d), an individual is treated as owning stock held by the 
person's father and brother. Similarly, the result would be the same if, 
instead of actually owning 6,000 shares, V merely held an option on 
6,000 shares of K stock, irrespective of whether the transfer of stock 
under the option could qualify for the special tax treatment of section 
421, because this paragraph (d) provides that stock the employee may 
purchase under outstanding options is treated as stock owned by such 
employee.
    Example 2. Assume the same facts as in Example 1, except that K is a 
50 percent subsidiary corporation of Corporation L. Irrespective of 
whether V owns any L stock, V cannot receive an option from L under L's 
employee stock purchase plan because he owns 5 percent of the total 
combined voting power of all classes of stock of a subsidiary of L, in 
this example, K. An employee who owns (or is treated as owning) stock in 
excess of the limitation of this paragraph (d), in any corporation in a 
group of related corporations, consisting of a parent and its subsidiary 
corporations, cannot receive an option under an employee stock purchase 
plan from any corporation in the group.
    Example 3. Employee U is an employee of Corporation M. M has only 
one class of stock, of which 100,000 shares are issued and outstanding. 
Assuming U does not own (and is not treated as owning) any stock in M or 
in any related corporation of M, M may grant an option to U under its 
employee stock purchase plan for 4,999 shares, because immediately after 
the grant of the option, U would not own 5 percent or more of the 
combined voting power or value of all classes of M stock actually issued 
and outstanding at such time. The 4,999 shares that U would be treated 
as owning under this paragraph (d) would not be added to the 100,000 
shares actually issued and outstanding immediately after the grant for 
purposes of determining whether U's stock ownership exceeds the 
limitation of this paragraph (d).
    Example 4. Assume the same facts as in Example 3 but instead of an 
option for 4,999 shares, M grants U an option, purportedly under its 
employee stock purchase plan, for 5,000 shares. No portion of this 
option will be treated as granted under an employee stock purchase plan 
because U's stock ownership exceeds the limitation of this paragraph 
(d).

    (e) Employees covered by plan--(1) Subject to the provisions of this 
paragraph (e) and the limitations of paragraphs (d), (f) and (i) of this 
section, an employee stock purchase plan or offering must, by its terms, 
provide that options are to be granted to all employees of any 
corporation whose employees are granted any of such options by reason of 
their employment by that corporation, except that one or more of the 
following categories of employees may be excluded from the coverage of 
the plan or offering--
    (i) Employees who have been employed less than two years;
    (ii) Employees whose customary employment is 20 hours or less per 
week;
    (iii) Employees whose customary employment is for not more than five 
months in any calendar year; and
    (iv) Highly compensated employees (within the meaning of section 
414(q)).
    (2) A plan or offering does not fail to satisfy the coverage 
provision of paragraph (e)(1) of this section in the following 
circumstances--
    (i) The plan or offering excludes employees who have completed a 
shorter period of service or whose customary employment is for fewer 
hours per week or fewer months in a calendar year than is specified in 
paragraphs

[[Page 480]]

(e)(1)(i), (ii) and (iii) of this section, provided the exclusion is 
applied in an identical manner to all employees of every corporation 
whose employees are granted options under the plan or offering.
    (ii) The plan or offering excludes highly compensated employees 
(within the meaning of section 414(q)) with compensation above a certain 
level or who are officers or subject to the disclosure requirements of 
section 16(a) of the Securities Exchange Act of 1934, provided the 
exclusion is applied in an identical manner to all highly compensated 
employees of every corporation whose employees are granted options under 
the plan or offering.
    (3) Notwithstanding paragraph (e)(1) of this section, employees who 
are citizens or residents of a foreign jurisdiction (without regard to 
whether they are also citizens of the United States or resident aliens 
(within the meaning of section 7701(b)(1)(A))) may be excluded from the 
coverage of an employee stock purchase plan or offering under the 
following circumstances--
    (i) The grant of an option under the plan or offering to a citizen 
or resident of the foreign jurisdiction is prohibited under the laws of 
such jurisdiction; or
    (ii) Compliance with the laws of the foreign jurisdiction would 
cause the plan or offering to violate the requirements of section 423.
    (4) No option granted under a plan or offering that excludes from 
participation any employees, other than those who may be excluded under 
this paragraph (e), and those barred from participation by reason of 
paragraphs (d), (f) and (i) of this section, can be regarded as having 
been granted under an employee stock purchase plan. If an option is not 
granted to any employee who is entitled to the grant of an option under 
the terms of the plan or offering, none of the options granted under 
such offering will be treated as having been granted under an employee 
stock purchase plan. However, a plan that, by its terms, permits all 
eligible employees to elect to participate in an offering will not 
violate the requirements of this paragraph solely because eligible 
employees who elect not to participate in the offering are not granted 
options pursuant to such offering.
    (5) For purposes of this paragraph (e), the existence of the 
employment relationship between an individual and the corporation 
participating under the plan will be determined under Sec.  1.421-1(h).
    (6) Examples. The following examples illustrate the principles of 
this paragraph (e):

    Example 1. Corporation N has a stock purchase plan that meets all 
the requirements of paragraphs (a)(2) and (a)(3) of this section except 
that options are not required to be granted to employees whose weekly 
rate of pay is less than $1,000. As a matter of corporate practice, 
however, N grants options under its plan to all employees, irrespective 
of their weekly rate of pay. Even though N's plan is operated in 
compliance with the requirements of this paragraph (e), N's plan is not 
an employee stock purchase plan because the terms of the plan exclude a 
category of employees that is not permitted under this paragraph (e).
    Example 2. Assume the same facts as in Example 1, except that the 
first offering under N's plan provides that options will be granted to 
all employees of N. The terms of the first offering will be treated as 
part of the terms of N's plan, but only for purposes of the first 
offering. Because the terms of the first offering satisfy the 
requirements of this paragraph (e), stock transferred pursuant to 
options exercised under the first offering will be treated as stock 
transferred pursuant to the exercise of options granted under an 
employee stock purchase plan for purposes of section 421.
    Example 3. Corporation O has a stock purchase plan that excludes 
from participation all employees who have been employed less than one 
year. Assuming all other requirements of paragraphs (a)(2) and (a)(3) of 
this section are satisfied, O's plan qualifies as an employee stock 
purchase plan under section 423.
    Example 4. Corporation P has a stock purchase plan that excludes 
from participation clerical employees who have been employed less than 
two years. However, non-clerical employees with less than two years of 
service are permitted to participate in the plan. P's plan is not an 
employee stock purchase plan because the exclusion of employees who have 
been employed less than two years applies only to certain employees of P 
and is not applied in an identical manner to all employees of P. If, 
instead, P's plan excludes from participation all employees (both 
clerical and non-clerical) who have been employed less than two years, 
then P's plan would qualify as an employee stock purchase

[[Page 481]]

plan under section 423 assuming all other requirements of paragraphs 
(a)(2) and (a)(3) of this section are satisfied.
    Example 5. Corporation Q has a stock purchase plan that excludes 
from participation all officers who are highly compensated employees 
(within the meaning of section 414(q)). Assuming all other requirements 
of paragraphs (a)(2) and (a)(3) of this section are satisfied, Q's plan 
qualifies as an employee stock purchase plan under section 423.
    Example 6. Corporation R maintains an employee stock purchase plan 
that excludes from participation all highly compensated employees 
(within the meaning of section 414(q)), except highly compensated 
employees who are officers of R. R's plan is not an employee stock 
purchase plan because the exclusion of all highly compensated employees 
except highly compensated employees who are officers of R is not a 
permissible exclusion under paragraph (e)(2)(ii) of this section.
    Example 7. Corporation S is the parent corporation of Subsidiary YY 
and Subsidiary ZZ. S maintains an employee stock purchase plan with both 
YY and ZZ participating in the same offering under the plan. Under the 
terms of the offering under the plan, all employees of YY and ZZ are 
permitted to participate in the plan with the exception of ZZ's highly 
compensated employees with annual compensation greater than $300,000. 
None of the options granted under the offering will be considered 
granted under an employee stock purchase plan because the exclusion of 
highly compensated employees with annual compensation greater than 
$300,000 is not applied in an identical manner to all employees of YY 
and ZZ granted options in the same offering.
    Example 8. Assume the same facts as in Example 7, except that 
Corporation S establishes separate offerings under the plan for YY and 
ZZ. Under the terms of the separate offering for YY, all employees of YY 
are permitted to participate in the plan. Under the terms of the 
separate offering established for ZZ, all employees of ZZ are permitted 
to participate in the plan with the exception of ZZ's highly compensated 
employees with annual compensation greater than $300,000. The options 
granted under the separate offering for YY will be considered granted 
under an employee stock purchase plan. Further, the options granted 
under the separate offering for ZZ will be considered granted under an 
employee stock purchase plan because the exclusion of highly compensated 
employees with annual compensation greater than $300,000 is applied in 
an identical manner to all employees of ZZ granted options in the same 
offering.
    Example 9. The laws of Country A require that options granted to 
residents of Country A be transferable during the lifetime of the option 
recipient. Corporation T has a stock purchase plan that excludes 
residents of Country A from participation in the plan. Because 
compliance with the laws of Country A would cause options granted to 
residents of Country A to violate paragraph (j) of this section, T may 
exclude residents of Country A from participation in the plan. Assuming 
all other requirements of paragraph (a)(2) of this section are 
satisfied, T's plan qualifies as an employee stock purchase plan under 
section 423.

    (f) Equal rights and privileges--(1) Except as otherwise provided in 
paragraphs (f)(2) through (f)(6) of this section, an employee stock 
purchase plan or offering must, by its terms, provide that all employees 
granted options under the plan or offering shall have the same rights 
and privileges. Thus, the provisions applying to one option under an 
offering (such as the provisions relating to the method of payment for 
the stock and the determination of the purchase price per share) must 
apply to all other options under the offering in the same manner. If all 
the options granted under a plan or offering do not, by their terms, 
give the respective optionees the same rights and privileges, none of 
the options will be treated as having been granted under an employee 
stock purchase plan for purposes of section 421.
    (2) The requirements of this paragraph (f) do not prevent the 
maximum amount of stock that an employee may purchase from being 
determined on the basis of a uniform relationship to the total 
compensation, or the basic or regular rate of compensation, of all 
employees.
    (3) A plan or offering will not fail to satisfy the requirements of 
this paragraph (f) because the plan or offering provides that no 
employee may purchase more than a maximum amount of stock fixed under 
the plan or offering.
    (4) A plan or offering will not fail to satisfy the requirements of 
this paragraph (f) if, in order to comply with the laws of a foreign 
jurisdiction, the terms of an option granted under a plan or offering to 
citizens or residents of such foreign jurisdiction (without regard to 
whether they are also citizens of the United States or resident aliens 
(within the meaning of section 7701(b)(1)(A))) are less favorable than 
the terms of options granted under the

[[Page 482]]

same plan or offering to employees resident in the United States.
    (5)(i) Except as provided in this paragraph and paragraph (f)(5)(ii) 
of this section, a plan or offering permitting one or more employees to 
carry forward amounts that were withheld but not applied toward the 
purchase of stock under an earlier plan or offering and apply the 
amounts towards the purchase of additional stock under a subsequent plan 
or offering will be a violation of the equal rights and privileges under 
paragraph (f)(1) of this section. However, the carry forward of amounts 
withheld but not applied toward the purchase of stock under an earlier 
plan or offering will not violate the equal rights and privileges 
requirement of paragraph (f)(1) of this section, if all other employees 
participating in the current plan or offering are permitted to make 
direct payments toward the purchase of shares under a subsequent plan or 
offering in an amount equal to the excess of the greatest amount which 
any employee is allowed to carry forward from an earlier plan or 
offering over the amount, if any, the employee will carry forward from 
an earlier plan or offering.
    (ii) A plan or offering will not fail to satisfy the requirements of 
this section merely because employees are permitted to carry forward 
amounts representing a fractional share, that were withheld but not 
applied toward the purchase of stock under an earlier plan or offering 
and apply the amounts toward the purchase of additional stock under a 
subsequent plan or offering.
    (6) Paragraph (f) does not prohibit the delaying of the grant of an 
option to any employee who is barred from being granted an option solely 
by reason of the employee's failing to meet a minimum service 
requirement set forth in paragraph (e)(1) of this section until the 
employee meets such requirement.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (f):

    Example 1. Corporation U has an employee stock purchase plan that 
provides that the maximum amount of stock that each employee may 
purchase under the offering is one share for each $100 of annual gross 
pay. The plan meets the requirements of this paragraph (f).
    Example 2. Corporation V has an employee stock purchase plan that 
provides that the maximum amount of stock that each employee may 
purchase under the offering is one share for each $100 of annual gross 
pay up to and including $10,000, and two shares for each $100 of annual 
gross pay in excess of $10,000. The plan will not meet the requirements 
of this paragraph (f) because the amount of stock that may be purchased 
under the plan is not based on a uniform relationship to the total 
compensation of all employees.
    Example 3. Corporation W has an employee stock purchase plan that 
provides that options to purchase stock in an amount equal to ten 
percent of an employee's annual salary at a price equal to 85 percent of 
the fair market value on the first day of the offering will be granted 
to all employees other than those who have been employed less than 18 
months. In addition, the plan provides that employees who have not yet 
met the minimum service requirements on the first day of the offering 
will be granted similar options on the date the 18 month service 
requirement has been attained. The plan meets the requirements of this 
paragraph (f).
    Example 4. Corporation X is the parent corporation of Subsidiary AA, 
Subsidiary BB and Subsidiary CC. X maintains an employee stock purchase 
plan with AA, BB and CC participating in the same offering under the 
plan. Under the terms of the offering under the plan, options to 
purchase stock at a price equal to 90 percent of the fair market value 
at the time the option is exercised will be granted to all employees. 
Certain employees of AA are residents of Country B. The laws of Country 
B provide that options granted to employees who are residents of Country 
B must have a purchase price not less than 95 percent of the fair market 
value at the time the option is exercised. The plan will not fail to 
satisfy the requirements of this paragraph (f) merely because the 
residents of Country B are granted options under the plan to purchase 
stock at a price equal to 95 percent of the fair market value at the 
time the option is exercised.
    Example 5. Assume the same facts as in Example 4, except that 
Corporation X establishes two separate offerings under the plan: A 
separate offering for the employees of AA and a separate offering for 
the employees of BB and CC. Under the separate offering for the 
employees of BB and CC, options are granted to all employees with an 
exercise price equal to 90 percent of the fair market value at the time 
the option is exercised. Under the separate offering for the employees 
of AA, options are granted to all employees with an exercise price equal 
to 95 percent of the fair market value at the time the option is 
exercised. The plan does not violate

[[Page 483]]

the equal rights and privileges requirement of this paragraph (f) merely 
because the exercise price of options granted under one offering is less 
than the exercise price of options granted under a separate offering.
    Example 6. Corporation Y maintains an employee stock purchase plan. 
Employee T is employed by Y. T is granted an option under the current 
offering to purchase a maximum of 100 shares of Y stock at an option 
price equal to 85 percent of the fair market value of the stock at 
exercise. The plan permits the carry forward of withheld but unused 
amounts from an earlier offering. Prior to the exercise date, $2000 of 
T's salary has been withheld and is available to be applied toward the 
purchase of Y stock. On the exercise date, the fair market value of Y 
stock is $20 per share. T is able to purchase 100 shares of Y stock at 
$17 per share for an aggregate purchase price of $1700. T can carry 
forward $300 to the subsequent offering. Each employee in the subsequent 
offering other than T will be permitted to make direct payments toward 
the purchase of shares under the subsequent offering in a maximum amount 
of $300 less any amount the employee has carried forward from an earlier 
offering. The plan does not violate the equal rights and privileges 
requirement of this paragraph (f).

    (g) Option price--(1) An employee stock purchase plan or offering 
must, by its terms, provide that the option price will not be less than 
the lesser of--
    (i) An amount equal to 85 percent of the fair market value of the 
stock at the time the option is granted, or
    (ii) An amount that under the terms of the option may not be less 
than 85 percent of the fair market value of the stock at the time the 
option is exercised.
    (2) For purposes of determining the option price, the fair market 
value of the stock may be determined in any reasonable manner, including 
the valuation methods permitted under Sec.  20.2031-2. However, the 
option price must meet the minimum pricing requirements of this 
paragraph (g). For general rules relating to the option price, see Sec.  
1.421-1(e). For rules relating to the determination of when an option is 
granted, see Sec. Sec.  1.421-1(c) and 1.423-2(h)(2). Any option that 
does not meet the minimum pricing requirements of this paragraph (g) 
will not be treated as an option granted under an employee stock 
purchase plan irrespective of whether the plan or offering satisfies 
those requirements. If an option that does not meet the minimum pricing 
requirements is granted to an employee who is entitled to the grant of 
an option under the terms of the plan or offering, and the employee is 
not granted an option under such offering that qualifies as an option 
granted under an employee stock purchase plan, the offering will not 
meet the requirements of paragraph (e) of this section. Accordingly, 
none of the options granted under the offering will be eligible for the 
special tax treatment of section 421.
    (3) The option price may be stated either as a percentage or as a 
dollar amount. If the option price is stated as a dollar amount, then 
the requirement of this paragraph (g) can only be met by a plan or 
offering in which the price is fixed at not less than 85 percent of the 
fair market value of the stock at the time the option is granted. If the 
fixed price is less than 85 percent of the fair market value of the 
stock at grant, then the option cannot meet the requirement of this 
paragraph (g) even if a decline in the fair market value of the stock 
results in such fixed price being not less than 85 percent of the fair 
market value of the stock at the time the option is exercised, because 
that result was not certain to occur under the terms of the option.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (g):

    Example 1. Corporation Z has an employee stock purchase plan that 
provides that the option price will be 85 percent of the fair market 
value of the stock on the first day of the offering (which is the date 
of grant in this case), or 85 percent of the fair market value of the 
stock at exercise, whichever amount is the lesser. Upon the exercise of 
an option issued under Z's plan, Z agrees to accept an option price that 
is less than the minimum amount allowable under the terms of such plan. 
Notwithstanding that the option was issued under an employee stock 
purchase plan, the transfer of stock pursuant to the exercise of such 
option does not satisfy the requirement of this paragraph (g) and cannot 
qualify for the special tax treatment of section 421.
    Example 2. Corporation AA has an employee stock purchase plan that 
provides that the option price is set at 85 percent of the fair market 
value of AA stock at exercise, but not less than $80 per share. On the 
first day of the offering (which is the date of

[[Page 484]]

grant in this case), the fair market value of AA stock is $100 per 
share. The option satisfies the requirement of this paragraph (g), and 
can qualify for the special tax treatment of section 421.
    Example 3. Assume the same facts as in Example 2, except that the 
option price is set at 85 percent of the fair market value of AA stock 
at exercise, but not more than $80 per share. This option cannot satisfy 
the requirement of this paragraph (g) irrespective of whether, at the 
time the option is exercised, 85 percent of the fair market value of AA 
stock is $80 or less.

    (h) Option period--(1) An employee stock purchase plan or offering 
must, by its terms, provide that options granted under the plan cannot 
be exercised after the expiration of 27 months from the date of grant 
unless, under the terms of the plan or offering, the option price is not 
less than 85 percent of the fair market value of the stock at the time 
of the exercise of the option. If the option price is not less than 85 
percent of the fair market value of the stock at the time the option is 
exercised, then the option period provided under the plan must not 
exceed five years from the date of grant. If the requirements of this 
paragraph (h) are not met by the terms of the plan or offering, then 
options issued under such plan or offering will not be treated as 
options granted under an employee stock purchase plan irrespective of 
whether the options, by their terms, are exercisable beyond the period 
allowable under this paragraph (h). An option that provides that the 
option price is not less than 85 percent of the fair market value of the 
stock at exercise may have an option period of 5 years irrespective of 
whether the fair market value of the stock at exercise is more or less 
than the fair market value of the stock at grant. However, if the option 
provides that the option price is 85 percent of the fair market value of 
the stock at exercise, but not more than some other fixed amount 
determined in accordance with the provisions of paragraph (g) of this 
section, then irrespective of the price paid on exercise, the option 
period must not be more than 27 months.
    (2) Section 1.421-1(c) provides that, for purposes of Sec. Sec.  
1.421-1 through 1.424-1, the language ``the date of the granting of the 
option'' and the ``time such option is granted,'' and similar phrases 
refer to the date or time when the granting corporation completes the 
corporate action constituting an offer of stock for sale to an 
individual under the terms and conditions of a statutory option. With 
respect to options granted under an employee stock purchase plan, the 
principles of Sec.  1.421-1(c) shall be applied without regard to the 
requirement that the minimum option price must be fixed or determinable 
in order for the corporate action constituting an offer of stock to be 
considered complete.
    (3) The date of grant will be the first day of an offering if the 
terms of an employee stock purchase plan or offering designate a maximum 
number of shares that may be purchased by each employee during the 
offering. Similarly, the date of grant will be the first day of an 
offering if the terms of the plan or offering require the application of 
a formula to establish, on the first day of the offering, the maximum 
number of shares that may be purchased by each employee during the 
offering. It is not required that an employee stock purchase plan or 
offering designate a maximum number of shares that may be purchased by 
each employee during the offering or incorporate a formula to establish 
a maximum number of shares that may be purchased by each employee during 
the offering. If the maximum number of shares that can be purchased 
under an option is not fixed or determinable until the date the option 
is exercised, then the date of exercise will be the date of grant of the 
option.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (h):

    Example 1. (i) Corporation BB has an employee stock purchase plan 
that provides that the option price will be the lesser of 85 percent of 
the fair market value of the stock on the first day of an offering or 85 
percent of the fair market value of the stock on the last day of the 
offering. Options are exercised on the last day of the offering. One 
million shares of BB stock are reserved for issuance under the plan. The 
plan provides that no employee may be permitted to purchase stock under 
the plan at a rate that exceeds $25,000 in fair market value of the BB 
stock (determined on the date of grant) for each calendar year during 
which an option

[[Page 485]]

granted to the employee is outstanding. The terms of each option granted 
under an offering provide that a maximum of 500 shares may be purchased 
by the option recipient during the offering. Because the maximum number 
of shares that can be purchased under the option is fixed and 
determinable on the first day of the offering, the date of grant for the 
option is the first day of the offering.
    (ii) Assume the same facts as in paragraph (i) of Example 1, except 
that BB's plan excludes all employees who have been employed less than 
18 months. The plan provides that employees who have not yet met the 
minimum service requirements on the first day of an offering will be 
granted an option on the date the 18-month service requirement has been 
attained. With respect to those employees who have been employed less 
than 18 months on the first day of an offering, the date of grant for 
the option is the date the 18-month service requirement has been 
attained.
    Example 2. Assume the same facts as in paragraph (i) of Example 1, 
except that the terms of each option granted do not provide that a 
maximum of 500 shares may be purchased by the option recipient during 
the offering. Notwithstanding the fixed number of shares reserved for 
issuance under the plan and the $25,000 limitation set forth in the 
plan, the maximum number of shares that can be purchased under the 
option is not fixed or determinable until the last day of the offering 
when the option is exercised. Therefore the date of grant for the option 
is the last day of the offering when the option is exercised.
    Example 3. Corporation CC has an employee stock purchase plan that 
provides that the option price will be 85 percent of the fair market 
value of the stock on the last day of the offering. Options are 
exercised on the last day of the offering. Each offering under the plan 
begins on January 1 and ends on December 31 of the same calendar year. 
The terms of each option granted under an offering provide that the 
maximum number of shares that may be purchased by any employee during 
the offering equals $25,000 divided by the fair market value of the 
stock on the first day of the offering. The maximum number of shares 
that can be purchased under the option is fixed and determinable on the 
first day of the offering and therefore the date of grant for the option 
is the first day of the offering.
    Example 4. Assume the same facts as in Example 3 except that the 
terms of each option granted under an offering provide that the maximum 
number of shares that may be purchased by any employee during the 
offering equals 10 percent of the employee's annual salary (determined 
as of January 1 of the year in which the offering commences) divided by 
the fair market value of the stock on the first day of the offering. The 
maximum number of shares that can be purchased under the option is fixed 
and determinable on the first day of the offering and therefore the date 
of grant for the option is the first day of the offering.

    (i) Annual $25,000 limitation--(1) An employee stock purchase plan 
or offering must, by its terms, provide that no employee may be 
permitted to purchase stock under all the employee stock purchase plans 
of the employer corporation and its related corporations at a rate that 
exceeds $25,000 in fair market value of the stock (determined at the 
time the option is granted) for each calendar year in which any option 
granted to the employee is outstanding at any time. In applying the 
foregoing limitation--
    (i) The right to purchase stock under an option accrues when the 
option (or any portion thereof) first becomes exercisable during the 
calendar year;
    (ii) The right to purchase stock under an option accrues at the rate 
provided in the option, but in no case may such rate exceed $25,000 of 
fair market value of such stock (determined at the time such option is 
granted) for any one calendar year; and
    (iii) A right to purchase stock that has accrued under one option 
granted pursuant to the plan may not be carried over to any other 
option.
    (2) If an option is granted under an employee stock purchase plan 
that satisfies the requirement of this paragraph (i), but the option 
gives the optionee the right to buy stock in excess of the maximum rate 
allowable under this paragraph (i), then no portion of the option will 
be treated as having been granted under an employee stock purchase plan. 
Furthermore, if the option was granted to an employee entitled to the 
grant of an option under the terms of the plan or offering, and the 
employee is not granted an option under the offering that qualifies as 
an option granted under an employee stock purchase plan, then the 
offering will not meet the requirements of paragraph (e) of this 
section. Accordingly, none of the options granted under the offering 
will be eligible for the special tax treatment of section 421.
    (3) The limitation of this paragraph (i) applies only to options 
granted

[[Page 486]]

under employee stock purchase plans and does not limit the amount of 
stock that an employee may purchase under incentive stock options (as 
defined in section 422(b)) or any other stock options except those to 
which section 423 applies. Stock purchased under options to which 
section 423 does not apply will not limit the amount that an employee 
may purchase under an employee stock purchase plan, except for purposes 
of the 5-percent stock ownership provision of paragraph (d) of this 
section.
    (4) Under the limitation of this paragraph (i), an employee may 
purchase up to $25,000 of stock (based on the fair market value of the 
stock at the time the option was granted) in each calendar year during 
which an option granted to the employee under an employee stock purchase 
plan is outstanding. Alternatively, an employee may purchase more than 
$25,000 of stock (based on the fair market value of such stock at the 
time the option was granted) in a calendar year, so long as the total 
amount of stock that the employee purchases does not exceed $25,000 in 
fair market value of the stock (determined at the time the option was 
granted) for each calendar year in which any option was outstanding. If, 
in any calendar year, the employee holds two or more outstanding options 
granted under employee stock purchase plans of the employer corporation, 
or a related corporation, then the employee's purchases of stock 
attributable to that year under all options granted under employee stock 
purchase plans must not exceed $25,000 in fair market value of the stock 
(determined at the time the options were granted). Under an employee 
stock purchase plan, an employee may not purchase stock in anticipation 
that the option will be outstanding in some future year. Thus, the 
employee may purchase only the amount of stock that does not exceed the 
limitation of this paragraph (i) for the year of the purchase and for 
preceding years during which the option was outstanding. Thus, the 
amount of stock that may be purchased under an option depends on the 
number of years in which the option is actually outstanding. The amount 
of stock that may be purchased under an employee stock purchase plan may 
not be increased by reason of the failure to grant an option in an 
earlier year under such plan, or by reason of the failure to exercise an 
earlier option. For example, if an option is granted to an individual 
and expires without having been exercised at all, then the failure to 
exercise the option does not increase the amount of stock which such 
individual may be permitted to purchase under an option granted in a 
year following the year of such expiration. If an option granted under 
an employee stock purchase plan is outstanding in more than one calendar 
year, then stock purchased pursuant to the exercise of such an option 
will be applied first, to the extent allowable under this paragraph (i), 
against the $25,000 limitation for the earliest year in which the option 
was outstanding, then, against the $25,000 limitation for each 
succeeding year, in order.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (i):

    Example 1. Assume that Corporation DD maintains an employee stock 
purchase plan and that Employee S is employed by DD. On June 1, 2010, DD 
grants S an option under the plan to purchase a total of 750 shares of 
DD stock at $85 per share. On that date, the fair market value of DD 
stock is $100 per share. The option provides that it may be exercised at 
any time but cannot be exercised after May 31, 2012. Under this 
paragraph (i), the option must not permit S to purchase more than 250 
shares of DD stock during the calendar year 2010, because 250 shares are 
equal to $25,000 in fair market value of DD stock determined at the time 
of grant. During the calendar year 2011, S may purchase under the option 
an amount of DD stock equal to the difference between $50,000 in fair 
market value of DD stock (determined at the time the option was granted) 
and the fair market value of DD stock (determined at the time of grant 
of the option) purchased during the year 2010. During the calendar year 
2012, S may purchase an amount of DD stock equal to the difference 
between $75,000 in fair market value of the stock (determined at the 
time of grant of the option) and the total amount of the fair market 
value of the stock (determined at the time of grant of the option) 
purchased under the option during the calendar years 2010 and 2011. S 
may purchase $25,000 of stock for the year 2010, and $25,000 of stock 
for the year 2012, although the option was outstanding for only a part 
of each of such years. However, S may not be granted another option 
under an employee stock

[[Page 487]]

purchase plan of DD or a related corporation to purchase stock of DD or 
a related corporation during the calendar years 2010, 2011, and 2012, so 
long as the option granted June 1, 2010, is outstanding.
    Example 2. Assume the same facts as in Example 1, except that the 
option granted to S in 2010 is terminated in 2011 without any part of 
the option having been exercised, and that subsequent to the termination 
and during 2011, S is granted another option under DD's employee stock 
purchase plan. Under that option, S may be permitted to purchase $25,000 
of stock for 2011. The failure of S to exercise the option granted to S 
in 2010, does not increase the amount of stock that S may be permitted 
to purchase under the option granted to S in 2011.
    Example 3. Assume the same facts as in Example 1, except that, on 
May 31, 2012, S exercised the option granted to S in 2010, and purchased 
600 shares of DD stock. Five hundred shares, the maximum amount of stock 
that could have been purchased in 2011, under the option, are treated as 
having been purchased for the years 2010 and 2011. Only 100 shares of 
the stock are treated as having been purchased for 2012. After S's 
exercise of the option on May 31, 2012, S is granted another option 
under DD's employee stock purchase plan. S may be permitted under the 
new option to purchase for 2012 stock having a fair market value of no 
more than $15,000 at the time the new option is granted.
    Example 4. Corporation EE maintains an employee stock purchase plan 
and Employee R is employed by EE. On August 1, 2010, EE grants R an 
option under the plan to purchase 150 shares of EE stock at $85 per 
share during each of the calendar years 2010, 2011, and 2012. On that 
date, the fair market value of EE stock is $100 per share. The option 
provides that it may be exercised at any time during years 2010, 2011, 
and 2012. Because this option permits R to purchase only $15,000 of EE's 
stock for each year the option is outstanding, R could be granted 
another option by EE, or by a related corporation, in year 2010, 
permitting R to purchase an additional $10,000 of stock during each of 
the calendar years 2010, 2011, and 2012.
    Example 5. Corporation FF maintains an employee stock purchase plan 
and Employee Q is employed by FF. On September 1, 2010, FF grants Q an 
option under the plan that will be automatically exercised on August 31, 
2011, and August 31, 2012. The terms of the option provide that no more 
than 150 shares may be purchased on each date that the option is 
automatically exercised. On August 31, 2011, Q may purchase under the 
option an amount of FF stock equal to $50,000 in fair market value of FF 
stock (determined at the time the option was granted). On August 31, 
2012, Q may purchase under the option an amount of FF stock equal to the 
difference between $75,000 in fair market value of FF stock (determined 
at the time the option was granted) and the fair market value of FF 
stock (determined at the time of grant of the option) purchased during 
year 2011.

    (j) Restriction on transferability. An employee stock purchase plan 
or offering must, by its terms, provide that options granted under the 
plan are not transferable by the optionee other than by will or the laws 
of descent and distribution, and must be exercisable, during the 
optionee's lifetime, only by the optionee. For general rules relating to 
the restriction on transferability required by this paragraph (j), see 
Sec.  1.421-1(b)(2). For a limited exception to the requirement of this 
paragraph (j), see section 424(h)(3).
    (k) Special rule where option price is between 85 percent and 100 
percent of value of stock--(1)(i) If all the conditions necessary for 
the application of section 421(a) exist, this paragraph (k) provides 
additional rules that are applicable in cases where, at the time the 
option is granted, the option price per share is less than 100 percent 
(but not less than 85 percent) of the fair market value of the share. In 
that case, upon the disposition of the share by the employee after the 
expiration of the two-year and the one-year holding periods, or upon the 
employee's death while owning the share (whether occurring before or 
after the expiration of such periods), there shall be included in the 
employee's gross income as compensation (and not as gain upon the sale 
or exchange of a capital asset) the lesser of--
    (A) The amount, if any, by which the price paid under the option was 
exceeded by the fair market value of the share at the time the option 
was granted, or
    (B) The amount, if any, by which the price paid under the option was 
exceeded by the fair market value of the share at the time of such 
disposition or death.
    (ii) For purposes of applying the rules of this paragraph (k), if 
the option price is not fixed or determinable at the time the option is 
granted, the option price will be computed as if the option had been 
exercised at such time. The amount of compensation resulting from the 
application of this paragraph (k) shall be included in the employee's

[[Page 488]]

gross income for the taxable year in which the disposition occurs, or 
for the taxable year closing with the employee's death, whichever event 
results in the application of this paragraph (k).
    (iii) The application of the special rules provided in this 
paragraph (k) shall not affect the rules provided in section 421(a) with 
respect to the employee exercising the option, the employer corporation, 
or a related corporation. Thus, notwithstanding the inclusion of an 
amount as compensation in the gross income of an employee, as provided 
in this paragraph (k), no income results to the employee at the time the 
stock is transferred to the employee, and no deduction under section 162 
is allowable at any time to the employer corporation or a related 
corporation with respect to such amount.
    (iv) If, during the employee's lifetime, the employee exercises an 
option granted under an employee stock purchase plan, but the employee 
dies before the stock is transferred to the employee pursuant to the 
exercise of the option, then for the purpose of sections 421 and 423, on 
the employee's death, the stock is deemed to be transferred immediately 
to the employee, and immediately thereafter, the employee is deemed to 
have transferred the stock to the employee's executor, administrator, 
trustee, beneficiary by operation of law, heir, or legatee, as the case 
may be.
    (2) If the special rules provided in this paragraph (k) are 
applicable to the disposition of a share of stock by an employee, then 
the basis of the share in the employee's hands at the time of the 
disposition, determined under section 1011, shall be increased by an 
amount equal to the amount includible as compensation in the employee's 
gross income under this paragraph (k). However, the basis of a share of 
stock acquired after the death of an employee by the exercise of an 
option granted to the employee under an employee stock purchase plan 
shall be determined in accordance with the rules of section 421(c) and 
Sec.  1.421-2(c). If the special rules provided in this paragraph (k) 
are applicable to a share of stock upon the death of an employee, then 
the basis of the share in the hands of the estate or the person 
receiving the stock by bequest or inheritance shall be determined under 
section 1014 or under section 1022, if applicable, and shall not be 
increased by reason of the inclusion upon the decedent's death of any 
amount in the decedent's gross income under this paragraph (k). See 
Example (9) of this paragraph (k) with respect to the determination of 
basis of the share in the hands of a surviving joint owner.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (k):

    Example 1. On June 1, 2010, Corporation GG grants to Employee P, an 
employee of GG, an option under GG's employee stock purchase plan to 
purchase a share of GG stock for $85. The fair market value of GG stock 
on such date is $100 per share. On June 1, 2011, P exercises the option 
and on that date GG transfers the share of stock to P. On January 1, 
2013, P sells the share for $150, its fair market value on that date. 
P's income tax return is filed on the basis of the calendar year. The 
income tax consequences to P and GG are as follows--
    (i) Compensation in the amount of $15 is includible in P's gross 
income for the year 2013, the year of the disposition of the share. The 
$15 represents the difference between the option price ($85) and the 
fair market value of the share on the date the option was granted 
($100), because the value is less than the fair market value of the 
share on the date of disposition ($150). For the purpose of computing 
P's gain or loss on the sale of the share, P's cost basis of $85 is 
increased by $15, the amount includible in P's gross income as 
compensation. Thus, P's basis for the share is $100. Because the share 
was sold for $150, P realizes a gain of $50, which is treated as long-
term capital gain; and
    (ii) GG is not entitled to any deduction under section 162 at any 
time with respect to the share transferred to P.
    Example 2. Assume the same facts as in Example 1, except that P 
sells the share of GG stock on January 1, 2014, for $75, its fair market 
value on that date. Because $75 is less than the option price ($85), no 
amount in respect of the sale is includible as compensation in P's gross 
income for the year 2014. P's basis for determining gain or loss on the 
sale is $85. Because P sold the share for $75, P realized a loss of $10 
on the sale that is treated as a long-term capital loss.
    Example 3. Assume the same facts as in Example 1, except that the 
option provides that the option price shall be 90 percent of the fair 
market value of the stock on the day the option is exercised. On June 1, 
2011, when the option is exercised, the fair market value of

[[Page 489]]

the stock is $120 per share so that P pays $108 for the share of the 
stock. Compensation in the amount of $10 is includible in P's gross 
income for the year 2013, the year of the disposition of the share. This 
is determined in the following manner: The excess of the fair market 
value of the stock at the time of the disposition ($150) over the price 
paid for the share ($108) is $42; and the excess of the fair market 
value of the stock at the time the option was granted ($100) over the 
option price, computed as if the option had been exercised at such time 
($90), is $10. Accordingly, $10, the lesser, is includible in gross 
income. In this situation, P's cost basis of $108 is increased by $10, 
the amount includible in P's gross income as compensation. Thus, P's 
basis for the share is $118. Because the share was sold for $150, P 
realizes a gain of $32 that is treated as long-term capital gain.
    Example 4. Assume the same facts as in Example 1, except that the 
option provides that the option price shall be the lesser of 95 percent 
of the fair market value of the stock on the first day of the offering 
period and 95 percent of the fair market value of the stock on the day 
the option is exercised. On June 1, 2011, when the option is exercised, 
the fair market value of the stock is $120 per share. P pays $95 for the 
share of the stock. Compensation in the amount of $5 is includible in 
P's gross income for the year 2013, the year of the disposition of the 
share. This is determined in the following manner: The excess of the 
fair market value of the stock at the time of the disposition ($150) 
over the price paid for the share ($95) is $55; and the excess of the 
fair market value of the stock at the time the option was granted ($100) 
over the option price, computed as if the option had been exercised at 
such time ($95), is $5. Accordingly, $5, the lesser, is includible in 
gross income. In this situation, P's cost basis of $95 is increased by 
$5, the amount includible in P's gross income as compensation. Thus, P's 
basis for the share is $100. Because the share was sold for $150, P 
realizes a gain of $50 that is treated as long-term capital gain.
    Example 5. Assume the same facts as in Example 1, except that 
instead of selling the share on January 1, 2013, P makes a gift of the 
share on that day. In that case $15 is includible as compensation in P's 
gross income for 2013. P's cost basis of $85 is increased by $15, the 
amount includible in P's gross income as compensation. Thus, P's basis 
for the share is $100, which becomes the donee's basis, as of the time 
of the gift, for determining gain or loss.
    Example 6. Assume the same facts as in Example 2, except that 
instead of selling the share on January 1, 2014, P makes a gift of the 
share on that date. Because the fair market value of the share on that 
day ($75) is less than the option price ($85), no amount in respect of 
the disposition by way of gift is includible as compensation in P's 
gross income for 2014. P's basis for the share is $85, which becomes the 
donee's basis, as of the time of the gift, for the purpose of 
determining gain. The donee's basis for the purpose of determining loss, 
determined under section 1015(a), is $75 (fair market value of the share 
at the date of gift).
    Example 7. Assume the same facts as in Example 1, except that after 
acquiring the share of stock on June 1, 2011, P dies on August 1, 2012, 
at which time the share has a fair market value of $150. Compensation in 
the amount of $15 is includible in P's gross income for the taxable year 
closing with P's death, $15 being the difference between the option 
price ($85) and the fair market value of the share when the option was 
granted ($100), because such value is less than the fair market value at 
date of death ($150). The basis of the share in the hands of P's estate 
is determined under section 1014 without regard to the $15 includible in 
the decedent's gross income.
    Example 8. Assume the same facts as in Example 7, except that P dies 
on August 1, 2011, at which time the share has a fair market value of 
$150. Although P's death occurred within one year after the transfer of 
the share to P, the income tax consequences are the same as in Example 
7.
    Example 9. Assume the same facts as in Example 1, except that the 
share of stock was issued in the names of P and P's spouse jointly with 
right of survivorship, and that P and P's spouse sold the share on June 
15, 2012, for $150, its fair market value on that date. Compensation in 
the amount of $15 is includible in P's gross income for the year 2012, 
the year of the disposition of the share. The basis of the share in the 
hands of P and P's spouse for the purpose of determining gain or loss on 
the sale is $100, that is, the cost of $85 increased by the amount of 
$15 includible as compensation in P's gross income. The gain of $50 on 
the sale is treated as long-term capital gain, and is divided equally 
between P and P's spouse.
    Example 10. Assume the same facts as in Example 1, except that the 
share of stock was issued in the names of P and P's spouse jointly with 
right of survivorship, and that P predeceased P's spouse on August 1, 
2012, at which time the share had a fair market value of $150. 
Compensation in the amount of $15 is includible in P's gross income for 
the taxable year closing with his death. See Example 7. The basis of the 
share in the hands of P's spouse as survivor is determined under section 
1014 without regard to the $15 includible in the decedent's gross 
income.
    Example 11. Assume the same facts as in Example 10, except that P's 
spouse predeceased P on July 1, 2012. Section 423(c) does not apply in 
respect of the death of P's spouse. Upon the subsequent death of P on

[[Page 490]]

August 1, 2012, the income tax consequences in respect of P's taxable 
year closing with the date of P's death, and in respect of the basis of 
the share in the hands of P's estate, are the same as in Example 7. If P 
had sold the share on July 15, 2012 (after the death of P's spouse), for 
$150, its fair market value at that time, the income tax consequences 
would be the same as in Example 1.

    (l) Effective/applicability date. The regulations under this section 
are effective on November 17, 2009. The regulations under this section 
apply to options granted under an employee stock purchase plan on or 
after January 1, 2010. The provisions of this section relating to 
section 1022 are effective on and after January 19, 2017.

[T.D. 9471, 74 FR 59078, Nov. 17, 2009; 74 FR 67973, Dec. 22, 2009; T.D. 
9811, 82 FR 6238, Jan. 19, 2017]



Sec.  1.424-1  Definitions and special rules applicable to statutory options.

    (a) Substitutions and assumptions of options--(1) In general. (i) 
This paragraph (a) provides rules under which an eligible corporation 
(as defined in paragraph (a)(2) of this section) may, by reason of a 
corporate transaction (as defined in paragraph (a)(3) of this section), 
substitute a new statutory option (new option) for an outstanding 
statutory option (old option) or assume an old option without such 
substitution or assumption being considered a modification of the old 
option. For the definition of modification, see paragraph (e) of this 
section.
    (ii) For purposes of Sec. Sec.  1.421-1 through 1.424-1, the phrase 
``substituting or assuming a stock option in a transaction to which 
section 424 applies,'' ``substituting or assuming a stock option in a 
transaction to which Sec.  1.424-1(a) applies,'' and similar phrases 
means a substitution of a new option for an old option or an assumption 
of an old option that meets the requirements of this paragraph (a). For 
a substitution or assumption to qualify under this paragraph (a), the 
substitution or assumption must meet all of the requirements described 
in paragraphs (a)(4) and (a)(5) of this section.
    (2) Eligible corporation. For purposes of this paragraph (a), the 
term eligible corporation means a corporation that is the employer of 
the optionee or a related corporation of such corporation. For purposes 
of this paragraph (a), the determination of whether a corporation is the 
employer of the optionee or a related corporation of such corporation is 
based upon all of the relevant facts and circumstances existing 
immediately after the corporate transaction. See Sec.  1.421-1(h) for 
rules concerning the employment relationship.
    (3) Corporate transaction. For purposes of this paragraph (a), the 
term corporate transaction includes--
    (i) A corporate merger, consolidation, acquisition of property or 
stock, separation, reorganization, or liquidation;
    (ii) A distribution (excluding an ordinary dividend or a stock split 
or stock dividend described in Sec.  1.424-1(e)(4)(v)) or change in the 
terms or number of outstanding shares of such corporation; and
    (iii) Such other corporate events prescribed by the Commissioner in 
published guidance.
    (4) By reason of. (i) For a change in an option or issuance of a new 
option to qualify as a substitution or assumption under this paragraph 
(a), the change must be made by an eligible corporation (as defined in 
paragraph (a)(2) of this section) and occur by reason of a corporate 
transaction (as defined in paragraph (a)(3) of this section).
    (ii) Generally, a change in an option or issuance of a new option is 
considered to be by reason of a corporate transaction, unless the 
relevant facts and circumstances demonstrate that such change or 
issuance is made for reasons unrelated to such corporate transaction. 
For example, a change in an option or issuance of a new option will be 
considered to be made for reasons unrelated to a corporate transaction 
if there is an unreasonable delay between the corporate transaction and 
such change in the option or issuance of a new option, or if the 
corporate transaction serves no substantial corporate business purpose 
independent of the change in options. Similarly, a change in the number 
or price of shares purchasable under an option merely to reflect market 
fluctuations in the price of the stock purchasable under an option is 
not by reason of a corporate transaction.
    (iii) A change in an option or issuance of a new option is by reason 
of

[[Page 491]]

a distribution or change in the terms or number of the outstanding 
shares of a corporation (as described in paragraph (a)(3)(ii) of this 
section) only if the option as changed, or the new option issued, is an 
option on the same stock as under the old option (or if such class of 
stock is eliminated in the change in capital structure, on other stock 
of the same corporation).
    (5) Other requirements. For a change in an option or issuance of a 
new option to qualify as a substitution or assumption under this 
paragraph (a), all of the requirements described in this paragraph 
(a)(5) must be met.
    (i) In the case of an issuance of a new option (or a portion 
thereof) in exchange for an old option (or portion thereof), the 
optionee's rights under the old option (or portion thereof) must be 
canceled, and the optionee must lose all rights under the old option (or 
portion thereof). There cannot be a substitution of a new option for an 
old option within the meaning of this paragraph (a) if the optionee may 
exercise both the old option and the new option. It is not necessary to 
have a complete substitution of a new option for the old option. 
However, any portion of such option which is not substituted or assumed 
in a transaction to which this paragraph (a) applies is an outstanding 
option to purchase stock or, to the extent paragraph (e) of this section 
applies, a modified option.
    (ii) The excess of the aggregate fair market value of the shares 
subject to the new or assumed option immediately after the change in the 
option or issuance of a new option over the aggregate option price of 
such shares must not exceed the excess of the aggregate fair market 
value of all shares subject to the old option (or portion thereof) 
immediately before the change in the option or issuance of a new option 
over the aggregate option price of such shares.
    (iii) On a share by share comparison, the ratio of the option price 
to the fair market value of the shares subject to the option immediately 
after the change in the option or issuance of a new option must not be 
more favorable to the optionee than the ratio of the option price to the 
fair market value of the stock subject to the old option (or portion 
thereof) immediately before the change in the option or issuance of a 
new option. The number of shares subject to the new or assumed option 
may be adjusted to compensate for any change in the aggregate spread 
between the aggregate option price and the aggregate fair market value 
of the shares subject to the option immediately after the change in the 
option or issuance of the new option as compared to the aggregate spread 
between the option price and the aggregate fair market value of the 
shares subject to the option immediately before the change in the option 
or issuance of the new option.
    (iv) The new or assumed option must contain all terms of the old 
option, except to the extent such terms are rendered inoperative by 
reason of the corporate transaction.
    (v) The new option or assumed option must not give the optionee 
additional benefits that the optionee did not have under the old option.
    (6) Obligation to substitute or assume not necessary. For a change 
in the option or issuance of a new option to meet the requirements of 
this paragraph (a), it is not necessary to show that the corporation 
changing an option or issuing a new option is under any obligation to do 
so. In fact, this paragraph (a) may apply even when the option that is 
being replaced or assumed expressly provides that it will terminate upon 
the occurrence of certain corporate transactions. However, this 
paragraph (a) cannot be applied to revive a statutory option which, for 
reasons not related to the corporate transaction, expires before it can 
properly be replaced or assumed under this paragraph (a).
    (7) Issuance of stock without meeting the requirements of this 
paragraph (a). A change in the terms of an option resulting in a 
modification of such option occurs if an optionee's new employer (or a 
related corporation of the new employer) issues its stock (or stock of a 
related corporation) upon exercise of such option without satisfying all 
of the requirements described in paragraphs (a)(4) and (5) of this 
section.
    (8) Date of grant. For purposes of applying the rules of this 
paragraph (a), a

[[Page 492]]

substitution or assumption is considered to occur on the date that the 
optionee would, but for this paragraph (a), be considered to have been 
granted the option that the eligible corporation is substituting or 
assuming. A substitution or an assumption that occurs by reason of a 
corporate transaction may occur before or after the corporate 
transaction.
    (9) Any reasonable methods may be used to determine the fair market 
value of the stock subject to the option immediately before the 
assumption or substitution and the fair market value of the stock 
subject to the option immediately after the assumption or substitution. 
Such methods include the valuation methods described in Sec.  20.2031-2 
of this chapter (the Estate Tax Regulations). In the case of stock 
listed on a stock exchange, the fair market value may be based on the 
last sale before and the first sale after the assumption or substitution 
if such sales clearly reflect the fair market value of the stock, or may 
be based upon an average selling price during a longer period, such as 
the day or week before, and the day or week after, the assumption or 
substitution. If the stocks are not listed, or if they are newly issued, 
it will be reasonable to base the determination on experience over even 
longer periods. In the case of a merger, consolidation, or other 
reorganization which is arrived at by arm's-length negotiations, the 
fair market value of the stocks subject to the option before and after 
the assumption or substitution may be based upon the values assigned to 
the stock for purposes of the reorganization. For example, if in the 
case of a merger the parties treat each share of the merged company as 
being equal in value to a share of the surviving company, it will be 
reasonable to assume that the stocks are of equal value so that the 
substituted option may permit the employee to purchase at the same price 
one share of the surviving company for each share he could have 
purchased of the merged company.
    (10) Examples. The principles of this paragraph (a) are illustrated 
by the following examples:

    Example 1. Eligible corporation. X Corporation acquires a new 
subsidiary, Y Corporation, and transfers some of its employees to Y. Y 
Corporation wishes to grant to its new employees and to the employees of 
X Corporation new options for Y shares in exchange for old options for X 
shares that were previously granted by X Corporation. Because Y 
Corporation is an employer with respect to its own employees and a 
related corporation of X Corporation, Y Corporation is an eligible 
corporation under paragraph (a)(2) of this section with respect to both 
the employees of X and Y Corporations.
    Example 2. Corporate transaction. (i) On January 1, 2004, Z 
Corporation grants E, an employee of Z, an option to acquire 100 shares 
of Z common stock. At the time of grant, the fair market value of Z 
common stock is $200 per share. E's option price is $200 per share. On 
July 1, 2005, when the fair market value of Z common stock is $400, Z 
declares a stock dividend of preferred stock distributed on common stock 
that causes the fair market value of Z common stock to decrease to $200 
per share. On the same day, Z grants to E a new option to acquire 200 
shares of Z common stock in exchange for E's old option. The new option 
has an exercise price of $100 per share.
    (ii) A stock dividend other than that described in Sec.  1.424-
1(e)(4)(v) is a corporate transaction under paragraph (a)(3)(ii) of this 
section. Generally, the issuance of a new option is considered to be by 
reason of a corporate transaction. None of the facts in this Example 2 
indicate that the new option is not issued by reason of the stock 
dividend. In addition, the new option is issued on the same stock as the 
old option. Thus, the substitution occurs by reason of the corporate 
transaction. Assuming the other requirements of this section are met, 
the issuance of the new option is a substitution that meets the 
requirements of this paragraph (a) and is not a modification of the 
option.
    (iii) Assume the same facts as in paragraph (i) of this Example 2. 
Assume further that on December 1, 2005, Z declares an ordinary cash 
dividend. On the same day, Z grants E a new option to acquire Z stock in 
substitution for E's old option. Under paragraph (a)(3)(ii) of this 
section, an ordinary cash dividend is not a corporate transaction. Thus, 
the exchange of the new option for the old option does not meet the 
requirements of this paragraph (a) and is a modification of the option.
    Example 3. Corporate transaction. On March 15, 2004, A Corporation 
grants E, an employee of A, an option to acquire 100 shares of A stock 
at $50 per share, the fair market value of A stock on the date of grant. 
On May 2, 2005, A Corporation transfers several employees, including E, 
to B Corporation, a related corporation. B Corporation arranges to 
purchase some assets from A on the same day as E's transfer to B. Such 
purchase is without a substantial business purpose independent of making 
the exchange of E's old options for

[[Page 493]]

the new options appear to be by reason of a corporate transaction. The 
following day, B Corporation grants to E, one of its new employees, an 
option to acquire shares of B stock in exchange for the old option held 
by E to acquire A stock. Under paragraph (a)(3)(i) of this section, the 
purchase of assets is a corporate transaction. Generally, the 
substitution of an option is considered to occur by reason of a 
corporate transaction. However, in this case, the relevant facts and 
circumstances demonstrate that the issuance of the new option in 
exchange for the old option occurred by reason of the change in E's 
employer rather than a corporate transaction and that the sale of assets 
is without a substantial corporate business purpose independent of the 
change in the options. Thus, the exchange of the new option for the old 
option is not by reason of a corporate transaction that meets the 
requirements of this paragraph (a) and is a modification of the old 
option.
    Example 4. Corporate transaction. (i) E, an employee of Corporation 
A, holds an option to acquire 100 shares of Corporation A stock. On 
September 1, 2006, Corporation A has one class of stock outstanding and 
declares a stock dividend of one share of common stock for each 
outstanding share of common stock. The rights associated with the common 
stock issued as a dividend are the same as the rights under existing 
shares of stock. In connection with the stock dividend, E's option is 
exchanged for an option to acquire 200 shares of Corporation A stock. 
The per-share exercise price is equal to one half of the per-share 
exercise price of the original option. The stock dividend merely changes 
the number of shares of Corporation A outstanding and effects no other 
change to the stock of Corporation A. The option is proportionally 
adjusted and the aggregate exercise price remains the same and therefore 
satisfies the requirements described in Sec.  1.424-1(e)(4)(v).
    (ii) The stock dividend is not a corporate transaction under 
paragraph (a)(3) of this section, and the declaration of the stock 
dividend is not a modification of the old option under paragraph (a) of 
this section. Pursuant to Sec.  1.424-1(e)(4)(v), the exercise price of 
the old option may be adjusted proportionally with the change in the 
number of outstanding shares of Corporation A such that the ratio of the 
aggregate exercise price of the option to the number of shares covered 
by the option is the same both before and after the stock dividend. The 
adjustment of E's option is not treated as a modification of the option.
    Example 5. Additional benefit. On June 1, 2004, P Corporation 
acquires 100 percent of the shares of S Corporation and issues a new 
option to purchase P shares in exchange for an old option to purchase S 
shares that is held by E, an employee of S. On the date of the exchange, 
E's old option is exercisable for 3 more years, and, after the exchange, 
E's new option is exercisable for 5 years. Because the new option is 
exercisable for an additional period of time beyond the time allowed 
under the old option, the effect of the exchange of the new option for 
the old option is to give E an additional benefit that E did not enjoy 
under the old option. Thus, the requirements of paragraph (a)(5) of this 
section are not met, and this paragraph (a) does not apply to the 
exchange of the new option for the old option. Therefore, the exchange 
is a modification of the old options.
    Example 6. Spread and ratio tests. E is an employee of S 
Corporation. E holds an old option that was granted to E by S to 
purchase 60 shares of S at $12 per share. On June 1, 2005, S Corporation 
is merged into P Corporation, and on such date P issues a new option to 
purchase P shares in exchange for E's old option to purchase S shares. 
Immediately before the exchange, the fair market value of an S share is 
$32; immediately after the exchange, the fair market value of a P share 
is $24. The new option entitles E to buy P shares at $9 per share. 
Because, on a share-by-share comparison, the ratio of the new option 
price ($9 per share) to the fair market value of a P share immediately 
after the exchange ($24 per share) is not more favorable to E than the 
ratio of the old option price ($12 per share) to the fair market value 
of an S share immediately before the exchange ($32 per share) (\9/24\ = 
\12/32\), the requirements of paragraph (a)(5)(iii) of this section are 
met. The number of shares subject to E's option to purchase P stock is 
set at 80. Because the excess of the aggregate fair market value over 
the aggregate option price of the shares subject to E's new option to 
purchase P stock, $1,200 (80 x $24 minus 80 x $9), is not greater than 
the excess of the aggregate fair market value over the aggregate option 
price of the shares subject to E's old option to purchase S stock, 
$1,200 (60 x $32 minus 60 x $12), the requirements of paragraph 
(a)(5)(ii) of this section are met.
    Example 7. Ratio test and partial substitution. Assume the same 
facts as in Example 6, except that the fair market value of an S share 
immediately before the exchange of the new option for the old option is 
$8, that the option price is $10 per share, and that the fair market 
value of a P share immediately after the exchange is $12. P sets the new 
option price at $15 per share. Because, on a share-by-share comparison, 
the ratio of the new option price ($15 per share) to the fair market 
value of a P share immediately after the exchange ($12) is not more 
favorable to E than the ratio of the old option price ($10 per share) to 
the fair market value of an S share immediately before the substitution 
($8 per share) (\15/12\ = \10/8\), the requirements of paragraph 
(a)(5)(iii) of this section are met. Assume further that the number of 
shares subject to E's P option is set at 20, as compared

[[Page 494]]

to 60 shares under E's old option to buy S stock. Immediately after the 
exchange, 2 shares of P are worth $24, which is what 3 shares of S were 
worth immediately before the exchange (2 x $12 = 3 x $8). Thus, to 
achieve a complete substitution of a new option for E's old option, E 
would need to receive a new option to purchase 40 shares of P (i.e., 2 
shares of P for each 3 shares of S that E could have purchased under the 
old option (\2/3\ = \40/60\)). Because E's new option is for only 20 
shares of P, P has replaced only \1/2\ of E's old option, and the other 
\1/2\ is still outstanding.
    Example 8. Partial substitution. X Corporation forms a new 
corporation, Y Corporation, by a transfer of certain assets and, in a 
spin-off, distributes the shares of Y Corporation to the stockholders of 
X Corporation. E, an employee of X Corporation, is thereafter an 
employee of Y. Y wishes to substitute a new option to purchase some of 
its stock for E's old option to purchase 100 shares of X. E's old option 
to purchase shares of X, at $50 a share, was granted when the fair 
market value of an X share was $50, and an X share was worth $100 just 
before the distribution of the Y shares to X's stockholders. Immediately 
after the spin-off, which is also the time of the substitution, each 
share of X and each share of Y is worth $50. Based on these facts, a new 
option to purchase 200 shares of Y at an option price of $25 per share 
could be granted to E in complete substitution of E's old option. In the 
alternative, it would also be permissible in connection with the spin 
off, to grant E a new option to purchase 100 shares of Y, at an option 
price of $25 per share, and for E to retain an option to purchase 100 
shares of X under the old option, with the option price adjusted to $25. 
However, because X is no longer a related corporation with respect to Y, 
E must exercise the option for 100 shares of X within three months from 
the date of the spin off for the option to be treated as a statutory 
option. See Sec.  1.421-1(h). It would also be permissible to grant E a 
new option to purchase 100 shares of Y, at an option price of $25 per 
share, in substitution for E's right to purchase 50 of the shares under 
the old option.
    Example 9. Stockholder approval requirements. (i) X Corporation, a 
publicly traded corporation, adopts an incentive stock option plan that 
meets the requirements of Sec.  1.422-2. Under the plan, options to 
acquire X stock are granted to X employees. X Corporation is acquired by 
Y Corporation and becomes a subsidiary corporation of Y Corporation. 
After the acquisition, X employees remain employees of X. In connection 
with the acquisition, Y Corporation substitutes new options to acquire Y 
stock for the old options to acquire X stock previously granted to the 
employees of X. As a result of this substitution, on exercise of the new 
options, X employees receive Y Corporation stock.
    (ii) Because the requirements of Sec.  1.422-2 were met on the date 
of grant, the substitution of the new Y options for the old X options 
does not require new stockholder approval. If the other requirements of 
paragraphs (a)(4) and (5) of this section are met, the issuance of new 
options for Y stock in exchange for the old options for X stock meets 
the requirements of this paragraph (a) and is not a modification of the 
old options.
    (iii) Assume the same facts as in paragraphs (i) and (ii) of this 
Example 9. Assume further that as part of the acquisition, X amends its 
plan to allow future grants under the plan to be grants to acquire Y 
stock. Because the amendment of the plan to allow options on a different 
stock is considered the adoption of a new plan under Sec.  1.422-
2(b)(2)(iii), the stockholders of X (in this case, Y) must approve the 
plan within 12 months before or after the date of the amendment of the 
plan. If the stockholders of X (in this case, Y) timely approve the 
plan, the future grants to acquire Y stock will be incentive stock 
options (assuming the other requirements of Sec.  1.422-2 have been 
met).
    Example 10. Modification. X Corporation merges into Y Corporation. Y 
Corporation retains employees of X who hold old options to acquire X 
Corporation stock. When the former employees of X exercise the old 
options, Y Corporation issues Y stock to the former employees of X. 
Under paragraph (a)(7) of this section, because Y issues its stock on 
exercise of the old options for X stock, there is a change in the terms 
of the old options for X stock. Thus, the issuance of Y stock on 
exercise of the old options is a modification of the old options.
    Example 11. Eligible corporation. (i) D Corporation grants an option 
to acquire 100 shares of D Corporation stock to E, an employee of D 
Corporation. S Corporation is a subsidiary of D Corporation. On March 1, 
2005, D Corporation spins off S Corporation. E remains an employee of D 
Corporation. In connection with the spin off, D Corporation substitutes 
a new option to acquire D Corporation stock and a new option to acquire 
S Corporation stock for the old option in a manner that meets the 
requirements of paragraph (a) of this section.
    (ii) The substitution of the new option to acquire S and D stock for 
the old option to acquire D stock is not a modification of the old 
option. However, because S is no longer a related corporation with 
respect to D Corporation, E must exercise the option for S stock within 
three months from March 1, 2005, for the option to be treated as a 
statutory option. See Sec.  1.421-1(h).
    (iii) Assume the same facts as in paragraph (i) of this Example 11 
except that E's employment with D Corporation is terminated on February 
20, 2005. The substitution of the new option to acquire S and D stock 
for the

[[Page 495]]

old option to acquire D stock is not a modification of the old option. 
However, because the employment relationship between E and D Corporation 
terminated on February 20, 2005, E must exercise the option for the D 
and S stock within three months from February 20, 2005, for the option 
to be treated as a statutory option. See Sec.  1.421-1(h).

    (b) Acquisition of new stock. (1) Section 424(b) provides that the 
rules provided by sections 421 through 424 which are applicable with 
respect to stock transferred to an individual upon his exercise of an 
option, shall likewise be applicable with respect to stock acquired by a 
distribution or an exchange to which section 305, 354, 355, 356, or 1036 
(or so much of section 1031 as relates to section 1036) applies. Stock 
so acquired shall, for purposes of sections 421 through 424, be 
considered as having been transferred to the individual upon his 
exercise of the option. A similar rule shall be applied in the case of a 
series of such acquisitions. With respect to such acquisitions, section 
424(b) does not make inapplicable any of the provisions of section 305, 
354, 355, 356, or 1036 (or so much of section 1031 as relates to section 
1036).
    (2) The application of this paragraph may be illustrated by the 
following example:

    Example. If, with respect to stock transferred pursuant to the 
timely exercise of a statutory option, there is a distribution of new 
stock to which section 305(a) is applicable, and if there is a 
disposition of such new stock before the expiration of the applicable 
holding period required with respect to the stock originally acquired 
pursuant to the exercise of such option, such disposition makes section 
421 inapplicable to the transfer of the original stock pursuant to the 
exercise of the option to the extent that the disposition effects a 
reduction of the individual's total interest in the old and new stock. 
However, if the new stock, as well as the old stock, is not disposed of 
before the expiration of the holding period required with respect to the 
original stock acquired pursuant to the exercise of the option, the 
special tax treatment provided by section 421 is applicable to both the 
original shares and the shares acquired by virtue of the distribution to 
which section 305(a) applies.

    (c) Disposition of stock. (1) For purposes of sections 421 through 
424, the term ``disposition of stock'' includes a sale, exchange, gift, 
or any transfer of legal title, but does not include--
    (i) A transfer from a decedent to his estate or a transfer by 
bequest or inheritance; or
    (ii) An exchange to which is applicable section 354, 355, 356, or 
1036 (or so much of section 1031 as relates to section 1036); or
    (iii) A mere pledge or hypothecation. However, a disposition of the 
stock pursuant to a pledge or hypothecation is a disposition by the 
individual, even though the making of the pledge or hypothecation is not 
such a disposition.
    (iv) A transfer between spouses or incident to divorce (described in 
section 1041(a)). The special tax treatment of Sec.  1.421-2(a) with 
respect to the transferred stock applies to the transferee. However, see 
Sec.  1.421-1(b)(2) for the treatment of the transfer of a statutory 
option incident to divorce.
    (2) A share of stock acquired by an individual pursuant to the 
exercise of a statutory option is not considered disposed of by the 
individual if such share is taken in the name of the individual and 
another person jointly with right of survivorship, or is subsequently 
transferred into such joint ownership, or is retransferred from such 
joint ownership to the sole ownership of the individual. However, any 
termination of such joint ownership (other than a termination effected 
by the death of a joint owner) is a disposition of such share, except to 
the extent the individual reacquires ownership of the share. For 
example, if such individual and his joint owner transfer such share to 
another person, the individual has made a disposition of such share. 
Likewise, if a share of stock held in the joint names of such individual 
and another person is transferred to the name of such other person, 
there is a disposition of such share by the individual. If an individual 
exercises a statutory option and a share of stock is transferred to 
another or is transferred to such individual in his name as trustee for 
another, the individual has made a disposition of such share. However, a 
termination of joint ownership resulting from the death of one of the 
owners is not a disposition of such share. For determination of basis in 
the hands of the survivor where joint ownership is terminated by the 
death of one of the

[[Page 496]]

owners, see section 1014 or section 1022, if applicable.
    (3) If an optionee exercises an incentive stock option with 
statutory option stock and the applicable holding period requirements 
(under Sec.  1.422-1(a) or Sec.  1.423-1(a)) with respect to such 
statutory option stock are not met before such transfer, then sections 
354, 355, 356, or 1036 (or so much of 1031 as relates to 1036) do not 
apply to determine whether there is a disposition of those shares. 
Therefore, there is a disposition of the statutory option stock, and the 
special tax treatment of Sec.  1.421-2(a) does not apply to such stock.
    (4) The application of this paragraph may be illustrated by the 
following examples:

    Example 1. On June 1, 2004, the X Corporation grants to E, an 
employee, a statutory option to purchase 100 shares of X Corporation 
stock at $100 per share, the fair market value of X Corporation stock on 
that date. On June 1, 2005, while employed by X Corporation, E exercises 
the option in full and pays X Corporation $10,000, and on that day X 
Corporation transfers to E 100 shares of its stock having a fair market 
value of $12,000. Before June 1, 2006, E makes no disposition of the 100 
shares so purchased. E realizes no income on June 1, 2005, with respect 
to the transfer to him of the 100 shares of X Corporation stock. X 
Corporation is not entitled to any deduction at any time with respect to 
its transfer to E of the stock. E's basis for such 100 shares is 
$10,000.
    Example 2. Assume the same facts as in example (1), except assume 
that on August 1, 2006, three years and two months after the transfer of 
the shares to him, E sells the 100 shares of X Corporation stock for 
$13,000 which is the fair market value of the stock on that date. For 
the taxable year in which the sale occurs, E realizes a gain of $3,000 
($13,000 minus E's basis of $10,000), which is treated as capital gain.
    Example 3. Assume the same facts as in example (2), except assume 
that on August 1, 2006, E makes a gift of the 100 shares of Y 
Corporation stock to his son. Such disposition results in no realization 
of gain to E either for the taxable year in which the option is 
exercised or the taxable year in which the gift is made. E's basis of 
$10,000 becomes the donee's basis for determining gain or loss.
    Example 4. Assume the same facts as in example (1), except assume 
that on May 1, 2006, E sells the 100 shares of X Corporation stock for 
$13,000. The special rules of section 421(a) are not applicable to the 
transfer of the stock by X Corporation to E, because disposition of the 
stock was made by E within two years from the date the options were 
granted and within one year of the date that the shares were transferred 
to him.
    Example 5. Assume the same facts as in example (1), except assume 
that E dies on September 1, 2005, owning the 100 shares of X Corporation 
stock acquired by him pursuant to his exercise on June 1, 2005, of the 
statutory option. On the date of death, the fair market value of the 
stock is $12,500. No income is realized by E by reason of the transfer 
of the 100 shares to his estate. If the stock is valued as of the date 
of E's death for estate tax purposes, the basis of the 100 shares in the 
hands of the executor is $12,500.
    Example 6. Assume the same facts as in example (1), except assume 
that on June 1, 2005, when the option is exercised by E the 100 shares 
are transferred by X to E and his wife W, as joint owners with right of 
survivorship, and that E dies on July 1, 2005. Neither the transfer into 
joint ownership nor the termination of such joint ownership by E's death 
is a disposition. Because E has made no disqualifying disposition of the 
shares, section 421(a) is applicable and E realizes no compensation 
income at death with respect to the shares even though he held the stock 
less than 2 years after the transfer of the shares to him pursuant to 
his exercise of the option. See Sec.  1.421-2(b)(2).
    Example 7. On January 1, 2004, X Corporation grants to E, an 
employee of X Corporation, an incentive stock option to purchase 100 
shares of X Corporation stock at $100 per share (the fair market value 
of an X Corporation share on that date). On January 1, 2005, when the 
fair market value of a share of X Corporation stock is $200, E exercises 
half of the option, pays X Corporation $5,000 in cash, and is 
transferred 50 shares of X Corporation stock with an aggregate fair 
market value of $10,000. E makes no disposition of the shares before 
January 2, 2006. Under Sec.  1.421-2(a), no income is recognized by E on 
the transfer of shares pursuant to the exercise of the incentive stock 
option, and X Corporation is not entitled to any deduction at any time 
with respect to its transfer of the shares to E. E's basis in the shares 
is $5,000.
    Example 8. Assume the same facts as in Example 7, except that on 
December 1, 2005, one year and 11 months after the grant of the option 
and 11 months after the transfer of the 50 shares to E, E uses 25 of 
those shares, with a fair market value of $5,000, to pay for the 
remaining 50 shares purchasable under the option. On that day, X 
Corporation transfers 50 of its shares, with an aggregate fair market 
value of $10,000, to E. Because E disposed of the 25 shares before the 
expiration of the applicable holding periods, Sec.  1.421-2(a) does not 
apply to the January 1, 2005, transfer of the 25 shares used by E to 
exercise the remainder of the option. As a result of the disqualifying 
disposition of the 25 shares, E recognizes compensation income under the 
rules of Sec.  1.421-2(b).

[[Page 497]]

    Example 9. On January 1, 2005, X Corporation grants an incentive 
stock option to E, an employee of X Corporation. The exercise price of 
the option is $10 per share. On June 1, 2005, when the fair market value 
of an X Corporation share is $20, E exercises the option and purchases 5 
shares with an aggregate fair market value of $100. On January 1, 2006, 
when the fair market value of an X Corporation share is $50, X 
Corporation is acquired by Y Corporation in a section 368(a)(1)(A) 
reorganization. As part of the acquisition, all X Corporation shares are 
converted into Y Corporation shares. After the conversion, if an 
optionee holds a fractional share of Y Corporation stock, Y Corporation 
will purchase the fractional share for cash equal to its fair market 
value. After applying the conversion formula to the shares held by E, E 
has 10 \1/2\ Y Corporation shares. Y Corporation purchases E's one-half 
share for $25, the fair market value of one-half of a Y Corporation 
share on the conversion date. Because E sells the one-half share prior 
to expiration of the holding periods described in Sec.  1.422-1(a), the 
sale is a disqualifying disposition of the one-half share. Thus, in 
2006, E must recognize compensation income of $5 (one-half of the fair 
market value of an X Corporation share on the date of exercise of the 
option, or $10, less one-half of the exercise price per share, or $5). 
For purposes of computing any additional gain, E's basis in the one-half 
share increases to $10 (reflecting the $5 included in income as 
compensation). E recognizes an additional gain of $15 ($25, the fair 
market value of the one-half share, less $10, the basis in such share). 
The extent to which the additional $15 of gain is treated as a 
redemption of Y Corporation stock is determined under section 302.

    (d) Attribution of stock ownership. To determine the amount of stock 
owned by an individual for purposes of applying the percentage 
limitations relating to certain stockholders described in Sec. Sec.  
1.422-2(f) and 1.423-2(d), shares of the employer corporation or of a 
related corporation that are owned (directly or indirectly) by or for 
the individual's brothers and sisters (whether by the whole or half 
blood), spouse, ancestors, and lineal descendants, are considered to be 
owned by the individual. Also, for such purposes, if a domestic or 
foreign corporation, partnership, estate, or trust owns (directly or 
indirectly) shares of the employer corporation or of a related 
corporation, the shares are considered to be owned proportionately by or 
for the stockholders, partners, or beneficiaries of the corporation, 
partnership, estate, or trust. The extent to which stock held by the 
optionee as a trustee of a voting trust is considered owned by the 
optionee is determined under all of the facts and circumstances.
    (e) Modification, extension, or renewal of option. (1) This 
paragraph (e) provides rules for determining whether a share of stock 
transferred to an individual upon the individual's exercise of an option 
after the terms of the option have been changed is transferred pursuant 
to the exercise of a statutory option.
    (2) Any modification, extension, or renewal of the terms of an 
option to purchase shares is considered the granting of a new option. 
The new option may or may not be a statutory option. To determine the 
date of grant of the new option for purposes of section 422 or 423, see 
Sec.  1.421-1(c).
    (3) If section 423(c) applies to an option then, in case of a 
modification, extension, or renewal of an option, the highest of the 
following values shall be considered to be the fair market value of the 
stock at the time of the granting of such option for purposes of 
applying the rules of sections 423(b)(6)--
    (i) The fair market value on the date of the original granting of 
the option,
    (ii) The fair market value on the date of the making of such 
modification, extension, or renewal, or
    (iii) The fair market value at the time of the making of any 
intervening modification, extension, or renewal.
    (4)(i) For purposes of Sec. Sec.  1.421-1 through 1.424-1 the term 
modification means any change in the terms of the option (or change in 
the terms of the plan pursuant to which the option was granted or in the 
terms of any other agreement governing the arrangement) that gives the 
optionee additional benefits under the option regardless of whether the 
optionee in fact benefits from the change in terms. In contrast, for 
example, a change in the terms of the option shortening the period 
during which the option is exercisable is not a modification. However, a 
change providing an extension of the period during which an option may 
be exercised (such as after termination of employment) or a change 
providing an alternative to the exercise of the option (such as a stock 
appreciation right) is

[[Page 498]]

a modification regardless of whether the optionee in fact benefits from 
such extension or alternative right. Similarly, a change providing an 
additional benefit upon exercise of the option (such as the payment of a 
cash bonus) or a change providing more favorable terms for payment for 
the stock purchased under the option (such as the right to tender 
previously acquired stock) is a modification.
    (ii) If an option is not immediately exercisable in full, a change 
in the terms of the option to accelerate the time at which the option 
(or any portion thereof) may be exercised is not a modification for 
purposes of this section. Additionally, no modification occurs if a 
provision accelerating the time when an option may first be exercised is 
removed prior to the year in which it would otherwise be triggered. For 
example, if an acceleration provision is timely removed to avoid 
exceeding the $100,000 limitation described in Sec.  1.422-4, a 
modification of the option does not occur.
    (iii) A change to an option which provides, either by its terms or 
in substance, that the optionee may receive an additional benefit under 
the option at the future discretion of the grantor, is a modification at 
the time that the option is changed to provide such discretion. In 
addition, the exercise of discretion to provide an additional benefit is 
a modification of the option. However, it is not a modification for the 
grantor to exercise discretion specifically reserved under an option 
with respect to the payment of a cash bonus at the time of exercise, the 
availability of a loan at exercise, the right to tender previously 
acquired stock for the stock purchasable under the option, or the 
payment of employment taxes and/or required withholding taxes resulting 
from the exercise of a statutory option. An option is not modified 
merely because an optionee is offered a change in the terms of an option 
if the change to the option is not made. An offer to change the terms of 
an option that remains open less than 30 days is not a modification of 
the option. However, if an offer to change the terms of an option 
remains outstanding for 30 days or more, there is a modification of the 
option as of the date the offer to change the option is made.
    (iv) A change in the terms of the stock purchasable under the option 
that increases the value of the stock is a modification of such option, 
except to the extent that a new option is substituted for such option by 
reason of the change in the terms of the stock in accordance with 
paragraph (a) of this section.
    (v) If an option is amended solely to increase the number of shares 
subject to the option, the increase is not considered a modification of 
the option but is treated as the grant of a new option for the 
additional shares. Notwithstanding the previous sentence, if the 
exercise price and number of shares subject to an option are 
proportionally adjusted to reflect a stock split (including a reverse 
stock split) or stock dividend, and the only effect of the stock split 
or stock dividend is to increase (or decrease) on a pro rata basis the 
number of shares owned by each shareholder of the class of stock subject 
to the option, then the option is not modified if it is proportionally 
adjusted to reflect the stock split or stock dividend and the aggregate 
exercise price of the option is not less than the aggregate exercise 
price before the stock split or stock dividend.
    (vi) Any change in the terms of an option made in an attempt to 
qualify the option as a statutory option grants additional benefits to 
the optionee and is, therefore, a modification. However, if the terms of 
an option are changed to provide that the optionee cannot transfer the 
option except by will or by the laws of descent and distribution in 
order to meet the requirements of section 422(b)(5) or 423(b)(9) such 
change is not a modicication.
    (vii) An extension of an option refers to the granting by the 
corporation to the optionee of an additional period of time within which 
to exercise the option beyond the time originally prescribed. A renewal 
of an option is the granting by the corporation of the same rights or 
privileges contained in the original option on the same terms and 
conditions. The rules of this paragraph apply as well to successive 
modifications, extensions, and renewals.

[[Page 499]]

    (viii) Any inadvertent change to the terms of an option (or change 
in the terms of the plan pursuant to which the option was granted or in 
the terms of any other agreement governing the arrangement) that is 
treated as a modification under this paragraph (e) is not considered a 
modification of the option to the extent the change in the terms of the 
option is removed by the earlier of the date the option is exercised or 
the last day of the calendar year during which such change occurred. 
Thus, for example, if the terms of an option are inadvertently changed 
on March 1 to extend the exercise period and the change is removed on 
November, then if the option is not exercised prior to November 1, the 
option is not considered modified under this paragraph (e).
    (5) A statutory option may, as a result of a modification, 
extension, or renewal, thereafter cease to be a statutory option, or any 
option may, by modification, extension, or renewal, thereafter become a 
statutory option.
    (6) [Reserved]
    (7) The application of this paragraph may be illustrated by the 
following examples:

    Example 1. On June 1, 2004, the X Corporation grants to an employee 
an option under X's employee stock purchase plan to purchase 100 shares 
of the stock of X Corporation at $90 per share, such option to be 
exercised on or before June 1, 2006. At the time the option is granted, 
the fair market value of the X Corporation stock is $100 per share. On 
February 1, 2005, before the employee exercises the option, X 
Corporation modifies the option to provide that the price at which the 
employee may purchase the stock shall be $80 per share. On February 1, 
2005, the fair market value of the X Corporation stock is $90 per share. 
Under section 424(h), the X Corporation is deemed to have granted an 
option to the employee on February 1, 2005. Such option shall be treated 
as an option to purchase at $80 per share 100 shares of stock having a 
fair market value of $100 per share, that is, the higher of the fair 
market value of the stock on June 1, 2004, or on February 1, 1965. 
Because the requirements of Sec.  1.424-1(e)(3) and Sec.  1.423-2(g) 
have not been met, the exercise of such option by the employee after 
February 1, 2005, is not the exercise of a statutory option.
    Example 2. On June 1, 2004, the X Corporation grants to an employee 
an option under X's employee stock purchase plan to purchase 100 shares 
of X Corporation stock at $90 per share, exercisable after December 31, 
2005, and on or before June 1, 2006. On June 1, 2004, the fair market 
value of X Corporation's stock is $100 per share. On February 1, 2005, X 
Corporation modifies the option to provide that the option shall be 
exercisable on or before September 1, 2006. On February 1, 2005, the 
fair market value of X Corporation stock is $110 per share. Under 
section 424(h), X Corporation is deemed to have granted an option to the 
employee on February 1, 2005, to purchase at $90 per share 100 shares of 
stock having a fair market value of $110 per share, that is, the higher 
of the fair market value of the stock on June 1, 2004, or on February 1, 
2005. Because the requirements of Sec.  1.424-1(e)(3) and Sec.  1.423-
2(g) have not been met, the exercise of such option by the employee is 
not the exercise of a statutory option.
    Example 3. The facts are the same as in example (1), except that the 
employee exercised the option to the extent of 50 shares on January 15, 
2005, before the date of the modification of the option. Any exercise of 
the option after February 1, 2005, the date of the modification, is not 
the exercise of a statutory option. See example (1) in this 
subparagraph. The exercise of the option on January 15, 2005, pursuant 
to which 50 shares were acquired, is the exercise of a statutory option.

    (f) Definitions. The following definitions apply for purposes of 
Sec. Sec.  1.421-1 through 1.424-1:
    (1) Parent corporation. The term parent corporation, or parent, 
means any corporation (other than the employer corporation) in an 
unbroken chain of corporations ending with the employer corporation if, 
at the time of the granting of the option, each of the corporations 
other than the employer corporation owns stock possessing 50 percent or 
more of the total combined voting power of all classes of stock in one 
of the other corporations in such chain.
    (2) Subsidiary corporation. The term subsidiary corporation, or 
subsidiary, means any corporation (other than the employer corporation) 
in an unbroken chain of corporations beginning with the employer 
corporation if, at the time of the granting of the option, each of the 
corporations other than the last corporation in an unbroken chain owns 
stock possessing 50 percent or more of the total combined voting power 
of all classes of stock in one of the other corporations in such chain.
    (g) Effective/applicability date--(1) In general. Except for Sec.  
1.424-1(a)(10) Example 9 (iii), the regulations under this section are 
effective on August 3, 2004.

[[Page 500]]

Section 1.424-1(a)(10) Example 9 (iii) is effective on November 17, 
2009. Section 1.424-1(a)(10) Example 9 (iii) applies to statutory 
options granted on or after January 1, 2010.
    (2) Reliance and transition period. For statutory options granted on 
or before June 9, 2003, taxpayers may rely on the 1984 proposed 
regulations LR-279-81 (49 FR 4504), the 2003 proposed regulations REG-
122917-02 (68 FR 34344), or this section until the earlier of January 1, 
2006, or the first regularly scheduled stockholders meeting of the 
granting corporation occurring 6 months after August 3, 2004. For 
statutory options granted after June 9, 2003, and before the earlier of 
January 1, 2006, or the first regularly scheduled stockholders meeting 
of the granting corporation occurring at least 6 months after August 3, 
2004, taxpayers may rely on either REG-122917-02 or this section. 
Taxpayers may not rely on LR-279-81 or REG-122917-02 after December 31, 
2005. Reliance on LR-279-81, REG-122917-02, or this section must be in 
its entirety, and all statutory options granted during the reliance 
period must be treated consistently.
    (3) Application of section 1022. The provisions of paragraph (c)(2) 
of this section relating to section 1022 are effective on and after 
January 19, 2017.

[T.D. 6887, 31 FR 8808, June 24, 1966, as amended by T.D. 9144, 69 FR 
46419, Aug. 3, 2004; 69 FR 61310, 61311, Oct. 18, 2004; 69 FR 70551, 
Dec. 7, 2004; T.D. 9471, 74 FR 59087, Nov. 17, 2009; T.D. 9811, 82 FR 
6238, Jan. 19, 2017]



Sec. Sec.  1.425-1.429  [Reserved]



Sec.  1.430(a)-1  Determination of minimum required contribution.

    (a) In general--(1) Overview. This section sets forth rules for 
determining a plan's minimum required contribution for a plan year under 
section 430(a). Section 430 and this section apply to single-employer 
defined benefit plans (including multiple employer plans as defined in 
section 413(c)) that are subject to section 412 but do not apply to 
multiemployer plans (as defined in section 414(f)). Paragraph (b) of 
this section defines a plan's minimum required contribution for a plan 
year. Paragraph (c) of this section provides rules for determining 
shortfall amortization installments. Paragraph (d) of this section 
provides rules for determining waiver amortization installments. 
Paragraph (e) of this section provides for early deemed amortization of 
shortfall and waiver amortization bases for fully funded plans. 
Paragraph (f) of this section provides definitions that apply for 
purposes of this section. Paragraph (g) of this section provides 
examples that illustrate the application of this section. Paragraph (h) 
of this section provides effective/applicability dates and transition 
rules.
    (2) Special rules for multiple employer plans--(i) In general. In 
the case of a multiple employer plan to which section 413(c)(4)(A) 
applies, the rules of section 430 and this section are applied 
separately for each employer under the plan, as if each employer 
maintained a separate plan. Thus, the minimum required contribution is 
computed separately for each employer under such a multiple employer 
plan. In the case of a multiple employer plan to which section 
413(c)(4)(A) does not apply (that is, a plan described in section 
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to 
apply), the rules of section 430 and this section are applied as if all 
participants in the plan were employed by a single employer.
    (ii) CSEC plans. A CSEC plan (that is, a plan that fits within the 
definition of a CSEC plan in section 414(y) for plan years beginning on 
or after January 1, 2014 and for which the election under section 
414(y)(3)(A) has not been made) is not subject to the rules of section 
430. See section 433 for the minimum funding rules that apply to CSEC 
plans.
    (b) Definition of minimum required contribution--(1) In general. In 
the case of a defined benefit plan that is subject to section 430, 
except as offset under section 430(f) and Sec.  1.430(f) 1, the minimum 
required contribution for a plan year is determined as the applicable 
amount determined under paragraph (b)(2) of this section or paragraph 
(b)(3) of this section, reduced by the amount of any funding waiver 
under section 412(c) that is granted for the plan year. See paragraph 
(b)(4) of this section for special rules for a plan maintained by a 
commercial passenger airline (or other

[[Page 501]]

eligible employer) for which an election under section 402 of the 
Pension Protection Act of 2006, Public Law 109-280 (120 Stat. 780), as 
amended (PPA '06), has been made, and see section 430(j) and Sec.  
1.430(j) 1(b) for rules regarding the required interest adjustment for a 
contribution that is paid on a date other than the valuation date for 
the plan year. See also Sec.  1.430(j)-1(d)(3)(iv)(B) for rules 
regarding an increase to the minimum required contribution in certain 
circumstances for a plan with an unpaid liquidity amount.
    (2) Plan assets less than funding target--(i) General rule. For any 
plan year in which the value of plan assets (as reduced to reflect the 
subtraction of certain funding balances as provided under Sec.  
1.430(f)-1(c), but not below zero) is less than the funding target for 
the plan year, the minimum required contribution for that plan year is 
equal to the sum of--
    (A) The target normal cost for the plan year;
    (B) The total (not less than zero) of the shortfall amortization 
installments as described in paragraph (c) of this section determined 
with respect to any shortfall amortization base for the plan year and 
for each preceding plan year for which the shortfall amortization base 
has not been fully taken into account (generally, the 6 preceding plan 
years); and
    (C) The total of the waiver amortization installments as described 
in paragraph (d) of this section determined with respect to any waiver 
amortization base for all preceding plan years for which the waiver 
amortization base has not been fully taken into account (generally, the 
5 preceding plan years).
    (ii) Special rule for short plan years--(A) Proration of 
amortization installments. In determining the minimum required 
contribution in the case of a plan year that is shorter than 12 months 
(and is not a 52-week plan year of a plan that uses a 52-53 week plan 
year), the shortfall amortization installments and waiver amortization 
installments that are taken into account under paragraphs (b)(2)(i)(B) 
and (C) of this section are determined by multiplying the amount of 
those installments that would be taken into account for a 12-month plan 
year by a fraction, the numerator of which is the duration of the short 
plan year and the denominator of which is 1 year.
    (B) Effect on subsequent years. In plan years after the short plan 
year, installments with respect to a shortfall amortization base or 
waiver amortization base continue to be taken into account under 
paragraphs (b)(2)(i)(B) and (C) of this section until the total amount 
of those installments, as originally determined when the base was 
established, has been taken into account. Thus, in the case of a plan 
that has a short plan year, an additional partial installment will be 
taken into account under paragraphs (b)(2)(i)(B) and (C) of this section 
for the plan year that ends after the end of the original amortization 
period (generally 7 years for shortfall amortization bases and 5 years 
for waiver amortization bases) in an amount determined so that the total 
of the amortization installments (including the prorated installment 
payable for the short plan year and the additional partial installment) 
is equal to the total of the amortization installments as originally 
determined.
    (3) Plan assets equal or exceed funding target. For any plan year in 
which the value of plan assets (as reduced to reflect the subtraction of 
certain funding balances as provided under Sec.  1.430(f)-1(c), but not 
below zero) equals or exceeds the funding target for the plan year, the 
minimum required contribution for that plan year is equal to the target 
normal cost for the plan year reduced (but not below zero) by that 
excess.
    (4) Special rules for commercial passenger airlines--(i) In general. 
This paragraph (b)(4) provides special rules for a plan maintained by a 
commercial passenger airline (or an employer whose principal business is 
providing catering services to a commercial passenger airline) for which 
an election under section 402(a)(1) of PPA '06 has been made. See 
paragraph (c)(4) of this section for special rules for a plan maintained 
by a commercial passenger airline (or an employer whose principal 
business is providing catering services to a commercial passenger 
airline) for which an election under section 402(a)(2) of PPA '06 has 
been made.

[[Page 502]]

    (ii) Determinations during 17-year amortization period. If an 
election described in section 402(a)(1) of PPA '06 applies for the plan 
year with respect to an eligible plan described in section 402(c)(1) of 
PPA '06, then the plan's minimum required contribution for purposes of 
section 430 of the Internal Revenue Code (Code) for the plan year is 
equal to the amount necessary to amortize (at an interest rate of 8.85 
percent) the unfunded liability of the plan in equal installments over 
the remaining amortization period. For this purpose, the unfunded 
liability means the excess of the accrued liability under the plan 
determined using the unit credit funding method and an interest rate of 
8.85 percent over the value of assets (as determined under section 
430(g)(3) and Sec.  1.430(g)-1(c)), and the remaining amortization 
period is the 17-plan-year period beginning with the first plan year for 
which the election was made, reduced by 1 year for each plan year after 
the first plan year for which the election was made. In addition, the 
section 430(f)(3) election to apply funding balances against the minimum 
required contribution does not apply to a plan to which the election 
described in section 402(a)(1) of PPA '06 applies for the plan year.
    (iii) Determinations following the election period. If an election 
described in section 402(a)(1) of PPA '06 applied to the plan for any 
preceding plan year but does not apply for the current plan year, then 
the plan's minimum required contribution for purposes of section 430 of 
the Code for the plan year is determined without regard to that 
election. For the first plan year for which that election no longer 
applies to the plan, any prefunding balance or funding standard 
carryover balance is reduced to zero.
    (5) Terminated plans--(i) Short plan year. If a plan's termination 
date occurs during a plan year but before the last day of a plan year, 
then, for purposes of section 430, the plan is treated as having a short 
plan year that ends on the termination date.
    (ii) Valuation date. If a plan's termination date is before the date 
that would otherwise have been the valuation date for a plan year, then 
the valuation date for the plan year must be changed so that it falls 
within the short plan year pursuant to Sec.  1.430(g)-1(b)(2)(i). See 
Sec.  1.430(g)-1(b)(2)(iv) for a rule providing automatic approval of 
changes in the valuation date that are required by section 430.
    (c) Shortfall amortization installments--(1) In general. Except as 
otherwise provided in paragraphs (c)(3) and (4) of this section, the 
shortfall amortization installments with respect to a shortfall 
amortization base established for a plan year are the annual amounts 
necessary to amortize that shortfall amortization base in level annual 
installments over the 7-year period beginning with that plan year. See 
Sec.  1.430(h)(2)-1(e) and (f) for rules regarding interest rates used 
for determining shortfall amortization installments and the date within 
each plan year on which the installments are assumed to be paid. The 
shortfall amortization installments are determined using the interest 
rates that apply for the plan year for which the shortfall amortization 
base is established and are not redetermined in subsequent plan years to 
reflect any changes in the valuation date or changes in interest rates 
under section 430(h)(2) for those subsequent plan years.
    (2) Shortfall amortization base--(i) In general. Unless the value of 
plan assets (as reduced to reflect the subtraction of certain funding 
balances as provided under Sec.  1.430(f)-1(c)(2), but not below zero) 
is equal to or greater than the funding target for the plan year, a 
shortfall amortization base is established for the plan year equal to--
    (A) The funding shortfall for the plan year; minus
    (B) The amount attributable to future installments determined under 
paragraph (c)(2)(ii) of this section.
    (ii) Amount attributable to future installments. The amount 
attributable to future installments is equal to the sum of the present 
values (determined in accordance with Sec.  1.430(h)(2)-1(e) and (f) 
using the interest rates that apply for the current plan year) of--
    (A) The shortfall amortization installments that have been 
determined for the plan year and any succeeding plan year with respect 
to the shortfall amortization bases for any plan year preceding the plan 
year; and

[[Page 503]]

    (B) The waiver amortization installments that have been determined 
for the plan year and any succeeding plan year with respect to the 
waiver amortization bases for any plan year preceding the plan year.
    (iii) Timing assumption for installments after change in valuation 
date. For purposes of determining the present value in paragraph 
(c)(2)(ii) of this section, the shortfall amortization installments and 
waiver amortization installments are assumed to be paid on the valuation 
date for the current plan year and anniversaries thereof even if the 
valuation date for a subsequent plan year is not the same as the 
valuation date for the plan year for which a shortfall amortization base 
or waiver amortization base was established. For example, assume that a 
plan has a July 1 to June 30 plan year and a valuation date that is the 
first day of the plan year, and that the plan year for the plan is 
changed to the calendar year, so that the plan has a short plan year 
beginning July 1, 2017 and ending December 31, 2017 and a calendar plan 
year thereafter. In this case--
    (A) For the July 1, 2017 actuarial valuation, the shortfall 
amortization payments with respect to shortfall amortization bases 
established for all prior plan years are assumed to be paid on July 1, 
2017 and anniversaries thereof; and
    (B) For the January 1, 2018 actuarial valuation, the shortfall 
amortization payments with respect to shortfall amortization bases 
established for all prior plan years are assumed to be paid on January 
1, 2018 and anniversaries thereof.
    (iv) Transition rule. See paragraph (h)(4) of this section for a 
transition rule under which only a portion of the funding target is 
taken into account in determining whether a shortfall amortization base 
is established under this paragraph (c)(2).
    (3) Election of funding relief for certain plans--(i) Funding relief 
under the Preservation of Access to Care for Medicare Beneficiaries and 
Pension Relief Act of 2010. See section 430(c)(2)(D) and section 
430(c)(7) for special rules that apply to determine the amount of 
shortfall amortization installments with respect to shortfall 
amortization bases established for plan years ending on or after October 
10, 2009 and beginning before January 1, 2012, for which the relief 
under section 430(c)(2)(D) is elected.
    (ii) Funding relief related to eligible charity plans. See section 
104(d)(3)(B) through (F) of PPA '06, which reflects amendments made by 
section 103(b)(2) of the Cooperative and Small Employer Charity Pension 
Flexibility Act of 2014, Public Law 113-97 (128 Stat. 1137), for special 
rules that apply to determine the amount of shortfall amortization 
installments with respect to plan years beginning on or after January 1, 
2014, in the case of an eligible charity plan for which the relief under 
section 104(d)(3)(A) of PPA '06 is elected.
    (iii) Election by commercial passenger airline under section 
402(a)(2) of PPA '06. If an election described in section 402(a)(2) of 
PPA '06 has been made for an eligible plan described in section 
402(c)(1) of PPA '06, then the minimum required contribution for 
purposes of section 430 is determined under generally applicable rules, 
except that the shortfall amortization base for the first plan year for 
which section 430 applies to the plan is amortized over 10 years (rather 
than over 7 years as provided in paragraph (c)(1) of this section) in 
accordance with Sec.  1.430(h)(2)-1(e) and (f) using the interest rates 
that apply for purposes of determining the target normal cost for the 
first plan year for which section 430 applies to the plan. In such a 
case, the shortfall amortization installments with respect to the 
shortfall amortization base for that plan year will continue to be 
included in determining the minimum required contribution for 10 years 
rather than 7 years. See also Sec.  1.430(h)(2)-1(b)(6) for a special 
rule for determining the funding target in the case of a plan for which 
an election under section 402(a)(2) of PPA '06 has been made.
    (d) Waiver amortization installments--(1) In general. For purposes 
of this section, the waiver amortization installments with respect to a 
waiver amortization base established for a plan year are the annual 
amounts necessary to amortize that waiver amortization base in level 
annual installments over the 5-year period beginning with the following 
plan year. See Sec.  1.430(h)(2)-

[[Page 504]]

1(e) and (f) for rules regarding interest rates used for determining 
waiver amortization installments and the date within each plan year on 
which the installments are assumed to be paid. The waiver amortization 
installments established with respect to a waiver amortization base are 
determined using the interest rates that apply for the plan year for 
which the waiver is granted (even though the first installment with 
respect to the waiver amortization base is not due until the subsequent 
plan year) and are not redetermined in subsequent plan years to reflect 
any changes in the valuation date or changes in interest rates under 
section 430(h)(2) for those subsequent plan years.
    (2) Waiver amortization base--(i) In general. For purposes of this 
section, a waiver amortization base is established for each plan year 
for which a waiver of the minimum funding standard has been granted in 
accordance with section 412(c). The amount of the waiver amortization 
base is equal to the waived funding deficiency under section 412(c)(3) 
for the plan year.
    (ii) Transition rule. See paragraph (h)(3) of this section for the 
treatment of funding waivers granted for plan years beginning before 
2008.
    (e) Early deemed amortization upon attainment of funding target. In 
any case in which the funding shortfall for a plan year is zero, for 
purposes of determining the minimum required contribution for that plan 
year and subsequent plan years--
    (1) The shortfall amortization bases for all preceding plan years 
(and all shortfall amortization installments determined with respect to 
those bases) are reduced to zero; and
    (2) The waiver amortization bases for all preceding plan years (and 
all waiver amortization installments determined with respect to those 
bases) are reduced to zero.
    (f) Definitions--(1) In general. The definitions set forth in this 
paragraph (f) apply for purposes of this section.
    (2) Funding shortfall. The term funding shortfall means the excess 
(if any) of--
    (i) The funding target for a plan year; over
    (ii) The value of plan assets for the plan year (as reduced to 
reflect the subtraction of the funding standard carryover balance and 
prefunding balance to the extent provided under Sec.  1.430(f)-1(c), but 
not below zero).
    (3) Funding target. The term funding target means the plan's funding 
target for a plan year determined under Sec.  1.430(d)-1(b)(2), Sec.  
1.430(i)-1(c), or Sec.  1.430(i)-1(e)(1), whichever applies to the plan 
for the plan year.
    (4) Target normal cost. The term target normal cost means the plan's 
target normal cost for a plan year determined under Sec.  1.430(d)-
1(b)(1), Sec.  1.430(i)-1(d), or Sec.  1.430(i)-1(e)(2), whichever 
applies to the plan for the plan year.
    (5) Termination date--(i) Plans subject to Title IV of ERISA. In the 
case of a plan subject to Title IV of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA), the termination date means the 
plan's termination date established under section 4048(a) of ERISA.
    (ii) Other plans--(A) In general. In the case of a plan not subject 
to Title IV of ERISA, the termination date means the plan's termination 
date established by the plan administrator, provided that the 
termination date may be no earlier than the date on which all actions 
necessary to effect the plan termination (other than the distribution of 
plan assets) are taken.
    (B) Requirement for prompt distribution. A plan is not treated as 
terminated on the applicable date described in paragraph (f)(5)(ii)(A) 
of this section if the assets are not distributed as soon as 
administratively feasible after that date. Whether distribution of plan 
assets is made as soon as administratively feasible is to be determined 
under all the relevant facts and circumstances. In general, distribution 
of plan assets is deemed to have been made as soon as administratively 
feasible to the extent that any delay in distribution was because of 
circumstances outside the control of the plan administrator. However, 
distribution of plan assets that was delayed merely for the purpose of 
obtaining a higher value than current market value is generally not 
deemed to have been made as soon as administratively feasible.

[[Page 505]]

    (C) Presumption applicable to prompt distribution requirement. 
Except as provided in paragraph (f)(5)(ii)(D) of this section, 
distribution of plan assets which is not completed within one year 
following the applicable date described in paragraph (f)(5)(ii)(A) of 
this section is presumed not to have been made as soon as 
administratively feasible.
    (D) Exception to prompt distribution presumption for obtaining 
determination letter from Commissioner. A plan is not treated as failing 
to meet the requirement to distribute plan assets as soon as 
administratively feasible after the proposed termination date if the 
delay is attributable to the period of time necessary to obtain a 
determination letter from the Commissioner on the plan's qualified 
status upon its termination, provided that the request for a 
determination letter is timely and the distribution of plan assets is 
made as soon as administratively feasible after the letter is obtained.
    (6) Transition funding shortfall--(i) In general. The term 
transition funding shortfall means the excess, if any, of--
    (A) The applicable percentage of the funding target for a plan year; 
over
    (B) The value of plan assets for the plan year (as reduced to 
reflect the subtraction of the funding standard carryover balance and 
prefunding balance to the extent provided under Sec.  1.430(f)-1(c), but 
not below zero).
    (ii) Applicable percentage. For purposes of this paragraph (f)(6), 
the applicable percentage is determined in accordance with the following 
table:

------------------------------------------------------------------------
                                                              Applicable
        Calendar year in which the plan year begins           percentage
------------------------------------------------------------------------
2008.......................................................           92
2009.......................................................           94
2010.......................................................           96
------------------------------------------------------------------------

    (g) Examples. The following examples illustrate the rules of this 
section. Unless otherwise indicated, these examples are based on the 
following assumptions: Section 430 applies to determine the minimum 
required contribution for plan years beginning on or after January 1, 
2008; the plan year is the calendar year; the valuation date is January 
1; the plan's prefunding balance and funding standard carryover balance 
are equal to $0; the plan sponsor did not elect any funding relief under 
section 430(c)(2)(D) for any plan year; and the plan has not received 
any funding waivers for any relevant time periods.

    Example 1. (i) Plan A has a funding target of $2,500,000 and assets 
totaling $1,800,000 as of January 1, 2016. For purposes of this example, 
the segment interest rates used for the January 1, 2016 valuation are 
assumed to be 5.26% for the first segment interest rate and 5.82% for 
the second segment interest rate. No shortfall or waiver amortization 
bases have been established for prior plan years.
    (ii) A $700,000 shortfall amortization base is established for 2016, 
which is equal to the $2,500,000 funding target less $1,800,000 of 
assets.
    (iii) With respect to the new shortfall amortization base of 
$700,000, there is a shortfall amortization installment of $116,852 
(which is the amount necessary to amortize the $700,000 shortfall 
amortization base over 7 years) for each year from 2016 through 2022. 
The amount of this shortfall amortization installment is determined by 
discounting the first five installments using the first segment interest 
rate of 5.26%, and by discounting the sixth and seventh installments 
using the second segment rate of 5.82%.
    Example 2. (i) The facts are the same as in Example 1, except that 
the plan was granted a funding waiver for 2014, resulting in five annual 
waiver amortization installments of $70,000 each, beginning with the 
2015 plan year.
    (ii) As of January 1, 2016, the present value of the remaining 
waiver amortization installments is $259,702, which is determined by 
discounting the remaining four waiver amortization installments of 
$70,000 each to January 1, 2016, using the first segment rate of 5.26%. 
See paragraph (c)(2)(ii) of this section.
    (iii) A $440,298 shortfall amortization base is established for 
2016, which is equal to the $2,500,000 funding target, less $1,800,000 
of assets, less $259,702 (which is the present value of the remaining 
four waiver amortization installments).
    (iv) With respect to this shortfall amortization base of $440,298, 
there is a shortfall amortization installment of $73,500 (which is equal 
to the $440,298 shortfall amortization base amortized over 7 years) for 
each year from 2016 through 2022.
    Example 3. (i) The facts are the same as in Example 2. Plan A has a 
$100,000 target normal cost for the 2016 plan year and was granted a 
funding waiver for 2016 to the largest extent permitted under section 
412(c).
    (ii) If the funding waiver for 2016 had not been granted, the 
minimum required contribution for 2016 would have been $243,500. This is 
equal to the $100,000 target normal cost, plus the $70,000 waiver 
amortization installment from the 2014 waiver, plus the

[[Page 506]]

$73,500 January 1, 2016 shortfall amortization installment.
    (iii) In accordance with section 412(c)(1)(C), the portion of the 
minimum required contribution attributable to the amortization of the 
2014 funding waiver cannot be waived. Therefore, the maximum amount of 
the January 1, 2016 minimum required contribution that can be waived is 
$173,500.
    (iv) In accordance with paragraph (d) of this section, a waiver 
amortization base of $173,500 is established as of January 1, 2016 to be 
amortized over 5 years beginning with the 2017 plan year. Although the 
waiver amortization installments for the 2016 funding waiver are not 
included in the minimum required contribution until 2017, the amount of 
those installments is determined based on the interest rates used for 
the 2016 plan year.
    (v) The waiver amortization installments with respect to the 2016 
funding waiver are calculated using the first segment interest rate of 
5.26% for the first four installments (calculated as of January 1, 2017 
through January 1, 2020) and the second segment interest rate of 5.82% 
for the final installment payable as of January 1, 2021. Accordingly, 
the waiver amortization installments with respect to the 2016 funding 
waiver are $40,554 each, payable beginning January 1, 2017.
    Example 4. (i) The facts are the same as in Example 3. As of January 
1, 2017, Plan A has a funding target of $2,750,000 and assets totaling 
$1,900,000. For purposes of this example, the first segment rate used 
for the 2017 valuation is assumed to be 5.50%, the second segment rate 
is assumed to be 6.00%, and the third segment rate is assumed to be 
6.50%.
    (ii) As of January 1, 2017, the present value of the remaining three 
waiver amortization installments with respect to the 2014 waiver is 
$199,242, which is determined using the first segment rate of 5.50%.
    (iii) As of January 1, 2017, the present value of the remaining five 
waiver amortization installments with respect to the 2016 waiver is 
$182,701, which is determined using the first segment rate of 5.50%.
    (iv) As of January 1, 2017, the present value of the remaining six 
shortfall amortization installments with respect to the 2016 shortfall 
amortization base is $386,052, which is determined using the first 
segment rate of 5.50% for the first five installments and the second 
segment rate of 6.00% for the sixth installment.
    (v) A shortfall amortization base of $82,005 is established for 
2017, which is equal to the $2,750,000 funding target, reduced by the 
sum of $1,900,000 of assets, $199,242 (the present value of the 
remaining waiver amortization installments with respect to the 2014 
waiver), $182,701 (the present value of the remaining waiver 
amortization installments with respect to the 2016 waiver), and $386,052 
(the present value of the remaining installments with respect to the 
2016 shortfall amortization base).
    (vi) With respect to this shortfall amortization base of $82,005, 
there is a shortfall amortization installment of $13,766 (which is the 
amount necessary to amortize the $82,005 shortfall amortization base 
over 7 years) for each year from 2017 through 2023.
    Example 5. (i) As of January 1, 2016, a plan has a funding target of 
$2,500,000, a target normal cost of $175,000, and assets totaling 
$2,450,000. As of January 1, 2016, there are six remaining installments 
of $60,000 each with respect to the only shortfall amortization base for 
the plan, which was established for the 2015 plan year. Also as of 
January 1, 2016, there are five remaining installments of $25,000 each 
with respect to the only waiver amortization base for the plan, which 
was established for the 2015 plan year. For purposes of this example, 
the segment interest rates used for the January 1, 2016, valuation are 
assumed to be 5.26% for the first segment interest rate and 5.82% for 
the second segment interest rate.
    (ii) A shortfall amortization base of -$379,812 is established for 
2016, which is equal to the $2,500,000 funding target, reduced by the 
sum of $2,450,000 of assets, $316,696 (the present value of the 
remaining installments with respect to the 2015 shortfall amortization 
base) and $113,116 (the present value of the remaining installments with 
respect to the 2015 funding waiver).
    (iii) The shortfall amortization installment for the 2016 shortfall 
amortization base is -$63,403, which is the amount necessary to amortize 
the -$379,812 shortfall amortization base over seven years. The first 
five shortfall amortization installments are discounted using the first 
segment rate of 5.26% and the sixth and seventh shortfall amortization 
installments are discounted using the second segment rate of 5.82%.
    (iv) The sum of the shortfall amortization installments is equal to 
-$3,403 ($60,000 plus -$63,403). However, in accordance with paragraph 
(b)(2)(i)(B) of this section, for purposes of determining the minimum 
required contribution for a plan year, the total of the shortfall 
amortization installments for a plan year is limited so that it is not 
less than zero.
    (v) The minimum required contribution as of January 1, 2016 is 
$200,000. This is equal to the sum of the target normal cost of 
$175,000, the total of the shortfall amortization installments (as 
limited) of $0, and the waiver amortization installment of $25,000.
    (vi) The shortfall amortization bases are not set to zero as of 
January 1, 2016, even though the sum of the shortfall amortization 
installments was set to zero for the 2016 plan year. Therefore, as of 
January 1, 2017 (unless the plan has a funding shortfall of zero as of 
that date), the shortfall amortization base established as of January 1, 
2015 will have

[[Page 507]]

five remaining installments of $60,000 each and the shortfall 
amortization base established as of January 1, 2016 will have six 
remaining installments of -$ 63,403 each. Similarly, the waiver 
amortization base will have four remaining installments of $25,000 each.
    Example 6. (i) The facts are the same as in Example 5, except that 
Plan A has assets totaling $2,550,000 as of January 1, 2016.
    (ii) Because the assets of $2,550,000 exceed the funding target of 
$2,500,000, no new shortfall amortization base is established under 
paragraph (c)(2) of this section.
    (iii) Furthermore, under paragraph (e) of this section, all 
shortfall amortization bases and waiver amortization bases (and all 
shortfall amortization installments and waiver amortization installments 
associated with those bases) are reduced to zero as of January 1, 2016.
    (iv) The minimum required contribution for the 2016 plan year is 
$125,000, which is equal to the $175,000 target normal cost less the 
excess of the assets over the funding target ($2,550,000 minus 
$2,500,000).
    Example 7. (i) The actuarial valuation for Plan B as of January 1, 
2016, based on a 12-month plan year, results in a target normal cost of 
$110,000 and a shortfall amortization installment for 2016 of $185,000, 
attributable to a shortfall amortization base established January 1, 
2016. There are no other shortfall or waiver amortization bases for Plan 
B as of January 1, 2016. The plan year for Plan B is changed to April 1 
through March 31, effective April 1, 2016, resulting in a short plan 
year beginning January 1, 2016 and ending March 31, 2016.
    (ii) The target normal cost for the short plan year is redetermined 
in order to reflect the fact that there is a short plan year. An 
actuarial valuation shows that the target normal cost is $25,000 for the 
short plan year based on the accruals for that short plan year 
(determined in accordance with 29 CFR 2530.204-2(e)).
    (iii) In accordance with paragraph (b)(2)(ii)(A) of this section, 
the shortfall amortization base is prorated to reflect the three months 
covered by the short plan year. Accordingly, the shortfall amortization 
installment for the short plan year is $46,250 (that is, $185,000 
multiplied by 3/12).
    (iv) The total minimum required contribution for the short plan year 
is $71,250 (that is, the sum of the target normal cost of $25,000 plus 
the shortfall amortization installment of $46,250).
    Example 8. (i) The facts are the same as in Example 7. For purposes 
of this example, assume that the first segment rate for the plan year 
beginning April 1, 2016 is 5.30%, and the second segment rate is 5.80%.
    (ii) The present value of the remaining shortfall amortization 
installments with respect to the January 1, 2016 shortfall amortization 
base is equal to $1,074,937. This is determined by discounting the 
remaining installments (6 full-year installments of $185,000 each due 
April 1, 2016 through April 1, 2021, and a final 9-month installment of 
$138,750 due April 1, 2022) using the first segment rate of 5.30% for 
the first five installments and the second segment rate of 5.80% for the 
remaining installments.
    Example 9. (i) As of January 1, 2016, Plan C has a funding target of 
$1,100,000, a target normal cost of $20,000, and an actuarial value of 
assets of $1,150,000. Prior to establishing any shortfall amortization 
base for 2016, the total of the shortfall amortization installments for 
2016 is $30,000 and the present value of the remaining shortfall 
amortization installments (including installments for the 2016 plan 
year) is $150,000. Based on the segment rates used for the 2016 plan 
year, the 7-year amortization factor for any shortfall amortization base 
established for 2016 is 5.9887. The funding standard carryover balance 
as of January 1, 2016 is $40,000 and the prefunding balance is $60,000. 
The plan sponsor intends to use both balances to offset the minimum 
required contribution for 2016.
    (ii) In accordance with sections 430(c) and 430(f)(4)(A), the test 
to determine whether Plan C is exempt from establishing a new shortfall 
amortization base for 2016 is initially applied based on assets reduced 
by the prefunding balance, because the plan sponsor intends to use the 
prefunding balance to offset the minimum required contribution. 
Therefore, the actuarial value of assets used for this purpose is 
$1,150,000 minus $60,000, or $1,090,000. This is less than the funding 
target of $1,100,000, so a new shortfall amortization base is 
established for 2016.
    (iii) The funding shortfall as of January 1, 2016 is the difference 
between the funding target and the actuarial value of assets, where the 
actuarial value of assets is reduced by both the funding standard 
carryover balance and the prefunding balance. Accordingly, the value of 
assets used for this calculation is $1,050,000 (that is, $1,150,000 - 
$40,000 - $60,000), and the funding shortfall is $50,000 (that is, 
$1,100,000 - $1,050,000).
    (iv) The shortfall amortization base established as of January 1, 
2016 is the difference between the funding shortfall of $50,000 and the 
$150,000 present value of remaining shortfall amortization installments 
for bases established in prior years (that is, -$100,000). The shortfall 
amortization installment attributable to this base is -$100,000 / 
5.9887, or -$16,698.
    (v) The preliminary minimum required contribution is the sum of the 
target normal cost, the shortfall amortization installments for bases 
established prior to 2016, and the shortfall amortization installment 
for the new base established for 2016, or $33,302 (that is, $20,000 + 
$30,000-$16,698). However, this amount is less than the funding standard

[[Page 508]]

carryover balance. Because section 430(f)(3)(B) and Sec.  1.430(f)-
1(d)(2) require that the funding standard carryover balance be used 
before using the prefunding balance, this means that the full minimum 
required contribution will be offset without using the prefunding 
balance. Accordingly, the plan sponsor will not be electing to use any 
portion of the prefunding balance to offset the minimum required 
contribution for 2016.
    (vi) Because the plan sponsor is not using the prefunding balance to 
offset the minimum required contribution, the test to determine whether 
Plan C is exempt from establishing a new shortfall amortization base for 
2016 must be applied without subtracting the prefunding balance from the 
actuarial value of plan assets. Because the full actuarial value of 
assets of $1,150,000 is higher than the funding target of $1,100,000, 
the plan is exempt from establishing a new shortfall amortization base 
for 2016. However, the actuarial value of plan assets is reduced by both 
balances when determining the funding shortfall, which is used to 
determine whether the shortfall amortization bases established prior to 
2016 are reduced to zero. Because the funding shortfall is greater than 
zero as of January 1, 2016 (as calculated in paragraph (iii) of this 
Example 9), the shortfall amortization bases established before the 2016 
plan year are retained.
    (vii) The minimum required contribution for 2016 is the sum of the 
target normal cost and the shortfall amortization installments, or 
$50,000 ($20,000 + $30,000). Because this is larger than the funding 
standard account carryover balance of $40,000, the plan sponsor can only 
offset $40,000 of the minimum required contribution and must contribute 
$10,000 to meet the minimum funding requirements. The prefunding balance 
cannot be used to offset the remaining $10,000 minimum funding 
requirement because doing so would require recalculating the minimum 
required contribution as illustrated in paragraphs (ii) through (v) of 
this Example 9 and the minimum required contribution would be too small 
to use the prefunding balance.
    Example 10. (i) The facts are the same as in Example 9, except that, 
in lieu of making the cash contribution required in Example 9, the plan 
sponsor elects to reduce the funding standard carryover balance by 
$9,000.
    (ii) Because the plan sponsor intends to use the prefunding balance 
to offset the minimum required contribution, the test to determine 
whether Plan C is exempt from establishing a shortfall amortization base 
for 2016 is based on the actuarial value of assets reduced by the 
prefunding balance. The actuarial value of assets reduced for the 
prefunding balance ($1,090,000) is less than the funding target 
($1,100,000), so a new shortfall amortization base is established for 
2016.
    (iii) The remaining funding standard carryover balance is $31,000 
(that is, $40,000 minus the elected reduction of $9,000). The funding 
shortfall as of January 1, 2016 is the difference between the funding 
target and the actuarial value of assets, where the actuarial value of 
assets is reduced by both the remaining funding standard carryover 
balance and the prefunding balance. Accordingly, the value of assets 
used for this calculation is $1,059,000 (that is, $1,150,000-$31,000-
$60,000), and the funding shortfall is $41,000 (that is, $1,100,000-
$1,059,000).
    (iv) The shortfall amortization base established as of January 1, 
2016 is the difference between the funding shortfall of $41,000 and the 
$150,000 present value of remaining shortfall amortization installments 
for bases established in prior years (that is, -$109,000). The shortfall 
amortization installment attributable to this base is -$109,000 / 
5.9887, or -$18,201.
    (v) The minimum required contribution is the sum of the target 
normal cost, the shortfall amortization installments for bases 
established prior to 2016, and the shortfall amortization installment 
for the new base established for 2016, or $31,799 (that is, $20,000 + 
$30,000-$18,201). This amount is larger than the remaining funding 
standard carryover balance of $31,000. Therefore, the plan sponsor can 
offset the full minimum required contribution using the remaining 
$31,000 of the funding standard carryover balance and $799 of the 
prefunding balance. Because a portion of the prefunding balance is used 
to offset the minimum required contribution, the test under section 
430(c)(5) is applied by subtracting the prefunding balance from the 
actuarial value of assets as illustrated in paragraph (ii) of this 
Example 10, and no further adjustments are required to the minimum 
required contribution.
    Example 11. (i) An amendment to Plan D was adopted during 2015, 
scheduled to be effective February 1, 2016. The actuary determines that, 
as of January 1, 2016, the amendment would increase Plan D's funding 
target by $300,000, if the amendment is permitted to take effect. As of 
February 1, 2016, prior to taking into account the amendment, the 
presumed adjusted funding target attainment percentage (AFTAP) for Plan 
D is less than 80% but not less than 60%. Plan D's sponsor makes a 
section 436 contribution (under section 436(c)(2)(A)) of $300,000, 
adjusted for interest as required under Sec.  1.436-1(f)(2)(i)(A)(2), to 
allow the amendment to take effect.
    (ii) Because the plan amendment was adopted prior to the valuation 
date for 2016 and becomes effective during the 2016 plan year, under 
Sec.  1.430(d)-1(d)(1)(i), the plan amendment must be taken into account 
in the funding target as of January 1, 2016. However, because the 
section 436 contribution is made for the 2016 plan year, it is not

[[Page 509]]

included in Plan D's actuarial value of assets as of January 1, 2016.
    (iii) The funding shortfall as of January 1, 2016 is calculated as 
the amount of the funding target (taking into account the plan 
amendment) minus the actuarial value of assets, where the value of 
assets is reduced by any funding standard carryover balance and 
prefunding balance as of that date. Because the funding target takes 
into account the increase of $300,000 attributable to the plan amendment 
but the actuarial value of assets does not include the section 436 
contribution, the funding shortfall is $300,000 higher than it would 
have been had the plan amendment not been allowed to take effect.
    (iv) The funding shortfall as of January 1, 2017 will reflect both 
the cost of the plan amendment and the value of the section 436 
contribution made during 2016. Therefore, in the absence of any other 
factors affecting the shortfall amortization base, it is expected that a 
negative shortfall amortization base will be established as of January 
1, 2017 as a result of the section 436 contribution made during 2016.
    Example 12. (i) Plan E has a calendar year plan year and in 2015 had 
97 participants. Plan E has a valuation date of July 1. A shortfall 
amortization base of $300,000 was established with the July 1, 2016 
valuation. The plan had no other shortfall or waiver amortization bases. 
For purposes of this example, assume that the first segment rate for the 
2016 plan year is 5.50% and the second segment rate is 6.00%. 
Accordingly, the shortfall amortization installments are determined as 
seven annual installments of $50,358 each, payable as of each July 1 
beginning July 1, 2016.
    (ii) Sometime after January 1, 2016, the number of participants in 
Plan E increased to over 100 during 2016, and therefore the valuation 
date was changed to January 1 effective with the 2017 plan year. As of 
January 1, 2017, Plan E has a funding target of $2,000,000, plan assets 
of $1,600,000, and a zero funding standard carryover balance and 
prefunding balance. For purposes of this example, assume that as of 
January 1, 2017, the first segment rate is 5.75% and the second segment 
rate is 6.25%.
    (iii) In accordance with paragraph (c)(1) of this section, the 
amount of the shortfall amortization installments for the base 
established July 1, 2016 is not adjusted for the change in valuation 
date. As of January 1, 2017, the outstanding balance of the shortfall 
amortization base established as of July 1, 2016 is $263,047, determined 
as the present value of the remaining shortfall amortization 
installments, calculated as if the shortfall amortization installments 
of $50,358 are payable annually on January 1 instead of July 1.
    (iv) A new shortfall amortization base of $136,953 is established 
effective January 1, 2017 equal to the difference between the funding 
shortfall of $400,000 and the outstanding balance of the shortfall 
amortization base established as of July 1, 2016 ($263,047). The 
shortfall amortization installment for this base is calculated as 
$23,139.
    (v) The total shortfall amortization installment for the 2017 plan 
year is $73,497, equal to the sum of the installments for the shortfall 
amortization base established July 1, 2016 ($50,358) and the base 
established January 1, 2017 ($23,139). The total amortization 
installment is determined as an amount payable as of January 1 
regardless of the fact that the installment for the first base was 
initially calculated as an amount payable on July 1.
    Example 13. (i) A funding waiver of $300,000 was granted for Plan F 
for the 2006 plan year. The valuation interest rate for the January 1, 
2007 actuarial valuation is 8.50% (which exceeds 150% of the applicable 
federal mid-term rate). The first segment rate for the January 1, 2008 
valuation of Plan F is 5.26%.
    (ii) The waiver amortization charge for the plan year beginning 
January 1, 2007 is $70,166, which is equal to the $300,000 funding 
waiver base amortized over 5 years at the valuation interest rate of 
8.50%.
    (iii) The annual waiver amortization installment for 2008 and later 
years is equal to the amortization charge for the 2007 plan year, or 
$70,166. As of January 1, 2008, the present value of the remaining 
waiver amortization installments is $260,318, which is determined by 
discounting the remaining four waiver amortization installments of 
$70,166 to January 1, 2008, using the first segment rate of 5.26%.
    Example 14. (i) As of January 1, 2008, Plan G has a funding target 
of $2,500,000, plan assets of $1,800,000 and a funding standard 
carryover balance of $100,000. Plan G has not received a funding waiver 
for any past plan year. Plan G was in existence during 2007, and in the 
2007 plan year was not subject to the deficit reduction contribution in 
section 412(l) of the Code as it existed prior to PPA '06.
    (ii) Plan G qualifies for the transition rule in section 430(c)(5) 
of the Code (as in effect prior to amendments made by the Tax Increase 
Prevention Act of 2014, Public Law 113-295, 128 Stat. 4010) and 
paragraph (h)(4) of this section. Because Plan G's assets are less than 
92% of its funding target, a shortfall amortization base must be 
established as of January 1, 2008.
    (iii) Under the transition rule in paragraph (h)(4) of this section, 
the shortfall amortization base for 2008 is determined using only 92% of 
Plan G's funding target, or $2,300,000. For purposes of this 
calculation, the value of assets is reduced by the funding standard 
carryover balance for a net asset figure of $1,700,000 (that is, 
$1,800,000 minus $100,000).

[[Page 510]]

Accordingly, the shortfall amortization base as of January 1, 2008 is 
equal to $600,000.

    (h) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date. Section 430 generally 
applies to plan years beginning on or after January 1, 2008. The 
applicability of section 430 for purposes of determining the minimum 
required contribution is delayed for certain plans in accordance with 
sections 104 through 106 of PPA '06.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2016. For plan 
years beginning before January 1, 2016, plans are permitted to rely on 
the provisions set forth in this section for purposes of satisfying the 
requirements of section 430(a).
    (3) Treatment of pre-PPA '06 funding waivers. In the case of a plan 
that has received a funding waiver under section 412 for a plan year for 
which section 430 was not yet effective with respect to the plan for 
purposes of determining the minimum required contribution, the waiver is 
treated as giving rise to a waiver amortization base and the 
amortization charges with respect to that funding waiver are treated as 
waiver amortization installments as described in paragraph (d) of this 
section. With respect to such a pre-existing funding waiver, the amount 
of the waiver amortization installment is equal to the amortization 
charge with respect to that waiver determined using the interest rate or 
rates that applied for the pre-effective plan year.
    (4) Transition rule for determining shortfall amortization base--(i) 
In general. Except as provided in paragraph (h)(4)(ii) of this section, 
in the case of plan years beginning after December 31, 2007 and before 
January 1, 2011, for purposes of applying the rules of paragraph (c)(2) 
of this section--
    (A) The applicable percentage (as described in paragraph (f)(6)(ii) 
of this section) of the funding target is substituted for the funding 
target; and
    (B) The transition funding shortfall is substituted for the funding 
shortfall.
    (ii) Transition rule not available for new plans or deficit 
reduction plans. The transition rule of paragraph (h)(4)(i) of this 
section does not apply to a plan--
    (A) That was not in effect for a plan year beginning in 2007; or
    (B) That was subject to section 412(l) for the last plan year 
beginning during 2007, determined after the application of sections 
412(l)(6) and (9) (regardless of whether the deficit reduction 
contribution for that plan year was equal to zero).
    (5) Pre-effective plan year--(i) In general. For purposes of this 
section, the pre-effective plan year for a plan is the last plan year 
beginning before section 430 applies to the plan to determine the 
minimum required contribution. Thus, except for plans with a delayed 
effective date as described in paragraph (h)(1) of this section, the 
pre-effective plan year for a plan is the last plan year beginning 
before January 1, 2008.
    (ii) Eligible charity plans. An eligible charity plan (as described 
in section 104(d) of PPA '06, which reflects amendments made by section 
202(b)(2) of PRA 2010, Public Law 111-192, 124 Stat. 1280 (June 25, 
2010)) that applies section 430 to the first plan year beginning on or 
after January 1, 2008 has a pre-effective plan year that is the last 
plan year beginning before January 1, 2008 and a second pre-effective 
plan year that is the last plan year that precedes the plan year for 
which section 430 again applies to the plan. (Section 430 does not apply 
to such a plan for plan years beginning on or after January 1, 2009 and 
before January 1, 2017, unless the plan ceases to be an eligible charity 
plan, or an election under section 104(d)(2) or 104(d)(4) of PPA '06 is 
made for the plan not to be treated as an eligible charity plan, as of 
an earlier date.)

[T.D. 9732, 80 FR 54383, Sept. 9, 2015]



Sec.  1.430(d)-1  Determination of target normal cost and funding target.

    (a) In general--(1) Overview. This section sets forth rules for 
determining a plan's target normal cost and funding target under 
sections 430(b) and 430(d), including guidance relating to the rules 
regarding actuarial assumptions under sections 430(h)(1), 430(h)(4), and 
430(h)(5). Section 430 and this section apply to single employer defined 
benefit plans (including multiple employer plans as defined in section 
413(c)) that are subject to section 412, but do not

[[Page 511]]

apply to multiemployer plans (as defined in section 414(f)). For further 
guidance on actuarial assumptions, see Sec.  1.430(h)(2)-1 (relating to 
interest rates) and Sec. Sec.  1.430(h)(3)-1 and 1.430(h)(3)-2 (relating 
to mortality tables). See also Sec.  1.430(i)-1 for the determination of 
the funding target and the target normal cost for a plan that is in at-
risk status.
    (2) Organization of regulation. Paragraph (b) of this section sets 
forth certain definitions that apply for purposes of section 430. 
Paragraph (c) of this section provides rules regarding which benefits 
are taken into account in determining a plan's target normal cost and 
funding target. Paragraph (d) of this section sets forth the rules 
regarding the plan provisions that are taken into account in making 
these determinations, and paragraph (e) of this section provides rules 
on the plan population that is taken into account for this purpose. 
Paragraph (f) of this section provides rules relating to the actuarial 
assumptions and the plan's funding method that are used to determine 
present values. Paragraph (g) of this section contains effective/
applicability dates and transition rules.
    (3) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section 430 and this section are applied separately for each employer 
under the plan, as if each employer maintained a separate plan. Thus, 
the plan's funding target and target normal cost are computed separately 
for each employer under such a multiple employer plan. In the case of a 
multiple employer plan to which section 413(c)(4)(A) does not apply 
(that is, a plan described in section 413(c)(4)(B) that has not made the 
election for section 413(c)(4)(A) to apply), the rules of section 430 
and this section are applied as if all participants in the plan were 
employed by a single employer.
    (b) Definitions--(1) Target normal cost--(i) In general. For a plan 
that is not in at-risk status under section 430(i) for a plan year, 
subject to the adjustments described in paragraph (b)(1)(iii) of this 
section, the target normal cost of the plan for the plan year is the 
present value (determined as of the valuation date) of all benefits 
under the plan that accrue during, are earned during, or are otherwise 
allocated to service for the plan year under the applicable rules of 
this section, including paragraph (c)(1)(ii)(B), (C), or (D) of this 
section. See Sec.  1.430(i)-1(d) and (e)(2) for the determination of the 
target normal cost for a plan that is in at-risk status.
    (ii) Benefits allocated to a plan year. The benefits that accrue, 
are earned, or are otherwise allocated to service for the plan year are 
based on the actual benefits accrued, earned, or otherwise allocated to 
service for the plan year through the valuation date and benefits 
expected to accrue, be earned, or be otherwise allocated to service for 
the plan year for the period from the valuation date through the end of 
the plan year. The benefits that are allocated to the plan year under 
the rules of paragraph (c) of this section include any increase in 
benefits during the plan year that is attributable to increases in 
compensation for the current plan year even if that increase in benefits 
is with respect to benefits attributable to service performed in a 
preceding plan year. In addition, the benefits that are allocated to the 
plan year under the rules of paragraph (c) of this section include any 
increase in benefits during the plan year that arises on account of 
mandatory employee contributions (within the meaning of Sec.  1.411(c)-
1(c)(4)) that are made during the plan year.
    (iii) Special adjustments--(A) In general. The target normal cost of 
the plan for the plan year (determined under paragraph (b)(1)(i) of this 
section) is adjusted (not below zero) by adding the amount of plan-
related expenses expected to be paid from plan assets during the plan 
year and subtracting the amount of mandatory employee contributions 
(within the meaning of Sec.  1.411(c)-1(c)(4)) that are expected to be 
made during the plan year.
    (B) Plan-related expenses. [Reserved]
    (2) Funding target. For a plan that is not in at-risk status under 
section 430(i) for a plan year, the funding target of the plan for the 
plan year is the present value (determined as of the valuation date) of 
all benefits under the plan that have been accrued, earned, or otherwise 
allocated to years

[[Page 512]]

of service prior to the first day of the plan year under the applicable 
rules of this section, including paragraph (c)(1)(ii)(B), (C), or (D) of 
this section. See Sec.  1.430(i)-1(c) and (e)(1) for the determination 
of the funding target for a plan that is in at-risk status.
    (3) Funding target attainment percentage--(i) In general. Except as 
otherwise provided in this paragraph (b)(3), the funding target 
attainment percentage of a plan for a plan year is a fraction (expressed 
as a percentage)--
    (A) The numerator of which is the value of plan assets for the plan 
year (determined under the rules of Sec.  1.430(g)-1) after subtraction 
of the prefunding balance and the funding standard carryover balance 
under section 430(f)(4)(B) and Sec.  1.430(f)-1(c); and
    (B) The denominator of which is the funding target of the plan for 
the plan year (determined without regard to the at-risk rules of section 
430(i) and Sec.  1.430(i)-1).
    (ii) Determination of funding target attainment percentage for plans 
with delayed effective dates. If section 430 does not apply for purposes 
of determining the plan's minimum required contribution for a plan year 
that begins on or after January 1, 2008 (as is the case for a plan 
described in section 104, 105, or 106 of the Pension Protection Act of 
2006 (PPA '06), Public Law 109-280 (120 Stat. 780)), then the funding 
target attainment percentage is determined for that plan year in 
accordance with the rules of paragraph (b)(3)(i) of this section in the 
same manner as for a plan to which section 430 applies to determine the 
plan's minimum required contribution, except that the value of plan 
assets that forms the numerator under paragraph (b)(3)(i)(A) of this 
section is determined without subtraction of the funding standard 
carryover balance or the credit balance under the funding standard 
account.
    (iii) Special rule for plans with zero funding target. If the 
funding target of the plan is equal to zero for a plan year, then the 
funding target attainment percentage under this paragraph (b)(3) is 
equal to 100 percent for the plan year.
    (4) Present value. The present value of a benefit (including a 
portion of a benefit) with respect to a participant that is taken into 
account under the rules of paragraph (c) of this section is determined 
as of the valuation date by multiplying the amount of that benefit by 
the probability that the benefit will be paid at a future date and then 
discounting the resulting product using the appropriate interest rate 
under Sec.  1.430(h)(2)-1. The probability that the benefit will be paid 
with respect to the participant at such future date is determined using 
the actuarial assumptions that satisfy the standards of paragraph (f) of 
this section as to the probability of future service, advancement in 
age, and other events (such as death, disability, termination of 
employment, and selection of optional form of benefit) that affect 
whether the participant or beneficiary will be eligible for the benefit 
and whether the benefit will be paid at that future date.
    (c) Benefits taken into account--(1) In general--(i) Benefits earned 
or accrued. The benefits taken into account in determining the target 
normal cost and the funding target under paragraph (b) of this section 
are all benefits earned or accrued under the plan that have not yet been 
paid as of the valuation date, including retirement-type and ancillary 
benefits (within the meaning of Sec.  1.411(d)-3(g)). The benefits taken 
into account are based on the participant's or beneficiary's status 
(such as active employee, vested or partially vested terminated 
employee, or disabled participant) as of the valuation date, and those 
benefits are allocated to the funding target or the target normal cost 
under paragraph (c)(1)(ii) of this section.
    (ii) Allocation of benefits--(A) In general. To the extent that the 
amount of a participant's benefit that is expected to be paid is a 
function of the accrued benefit, the allocation of the benefit for 
purposes of determining the funding target and the target normal cost is 
made using the rules of paragraph (c)(1)(ii)(B) of this section. To the 
extent that the amount of a participant's benefit that is expected to be 
paid is not a function of the accrued benefit, but is a function of the 
participant's years of service (or is the excess of a function of the 
participant's years of service over a function of the participant's 
accrued benefit), the allocation

[[Page 513]]

of the benefit for purposes of determining the funding target and the 
target normal cost is made using the rules of paragraph (c)(1)(ii)(C) of 
this section. To the extent that the amount of a participant's benefit 
that is expected to be paid is not allocated under the rules of 
paragraph (c)(1)(ii)(B) or (C) of this section, the allocation of the 
benefit for purposes of determining the funding target and the target 
normal cost is made using the rules of paragraph (c)(1)(ii)(D) of this 
section.
    (B) Benefits that are based on accrued benefits. If the allocation 
of the benefit for purposes of determining the funding target and the 
target normal cost is made under this paragraph (c)(1)(ii)(B), then the 
portion of a participant's benefit that is taken into account in the 
funding target for a plan year is determined by applying the function to 
the accrued benefit as of the first day of the plan year, and the 
portion of the benefit that is taken into account in determining the 
target normal cost for the plan year is determined by applying that 
function to the increase in the accrued benefit during the plan year. 
For example, a benefit that is assumed to be payable at a particular 
early retirement age in the amount of 90 percent of the accrued benefit 
is taken into account in the funding target in the amount of 90 percent 
of the accrued benefit as of the beginning of the plan year, and that 
benefit is taken into account in the target normal cost in the amount of 
90 percent of the increase in the accrued benefit during the plan year.
    (C) Benefits that are based on service. If the allocation of the 
benefit for purposes of determining the funding target and the target 
normal cost is made under this paragraph (c)(1)(ii)(C), then the portion 
of a participant's benefit that is taken into account in determining the 
funding target for a plan year is determined by applying the function to 
the participant's years of service as of the first day of the plan year, 
and the portion of the benefit that is taken into account in determining 
the target normal cost for the plan year is determined by applying that 
function to the increase in the participant's years of service during 
the plan year. For example, if a plan provides a post-retirement death 
benefit of $500 per year of service, then the funding target is 
determined based on a death benefit of $500 multiplied by a 
participant's years of service at the beginning of the year, and if the 
participant earns or is expected to earn a full year of service during 
the plan year, the target normal cost is based on the additional $500 in 
death benefits attributable to that additional year of service.
    (D) Other benefits. If the allocation of the benefit for purposes of 
determining the funding target and the target normal cost is made under 
this paragraph (c)(1)(ii)(D), then the portion of a participant's 
benefit that is taken into account in determining the funding target for 
a plan year is equal to the total benefit multiplied by the ratio of the 
participant's years of service as of the first day of the plan year to 
the years of service the participant will have at the time of the event 
that causes the benefit to be payable (whether the benefit is expected 
to be paid at the time of that decrement or at a future time), and the 
portion of the benefit that is taken into account in determining the 
target normal cost for the plan year is the increase in the 
proportionate benefit attributable to the increase in the participant's 
years of service during the plan year. For example, if a plan provides a 
Social Security supplement for a participant who retires after 30 years 
of service that is equal to a participant's Social Security benefit, the 
funding target with respect to the benefit payable beginning at a 
particular age (which reflects the probability of retirement at that 
age) is determined based on the projected Social Security benefit 
payable at the particular age multiplied by a fraction, the numerator of 
which is the participant's years of service as of the first day of the 
plan year and the denominator of which is the participant's projected 
years of service at the particular age. In such a case, if the 
participant earns or is expected to earn a full year of service during 
the plan year, the target normal cost is determined based on the 
projected Social Security benefit payable at the particular age 
multiplied by a fraction, the numerator of which is one and the 
denominator of which is the

[[Page 514]]

participant's projected years of service at the particular age.
    (iii) Application of section 436 limitations to funding target and 
target normal cost determination--(A) Effect of limitation on 
unpredictable contingent event benefits. The determination of the 
funding target and the target normal cost of a plan for a plan year must 
take into account any limitation on unpredictable contingent event 
benefits under section 436(b) with respect to unpredictable contingent 
events which occurred before the valuation date, but must not take into 
account anticipated funding-based limitations on unpredictable 
contingent event benefits under section 436(b) with respect to 
unpredictable contingent events which are expected to occur on or after 
the valuation date.
    (B) Effect of limitation on applicability of plan amendments. See 
paragraph (d) of this section for rules regarding the treatment of plan 
amendments that take effect during the plan year taking into account the 
restrictions under section 436(c).
    (C) Effect of limitation on prohibited payments. The determination 
of the funding target and the target normal cost of a plan for a plan 
year must take into account any limitation on prohibited payments under 
section 436(d) with respect to any annuity starting date that was before 
the valuation date, but must not take into account any limitation on 
prohibited payments under section 436(d) for any annuity starting date 
on or after the valuation date (however, the determination must take 
into account benefit distributions under plan provisions that allow new 
annuity starting dates with respect to distributions that were limited 
under section 436(d)).
    (D) Effect of limitation on benefit accruals. Except as otherwise 
provided in this paragraph (c)(1)(iii)(D), the determination of the 
funding target of a plan for a plan year must take into account any 
limitation on benefit accruals under section 436(e) applicable before 
the valuation date. However, if the plan terms provide for the automatic 
restoration of benefit accruals as permitted under Sec.  1.436-
1(a)(4)(ii)(B), and the restoration of benefits as of the valuation date 
will not be treated as resulting from a plan amendment under the rules 
of Sec.  1.436-1(c)(3) (because the period of limitation as of the 
valuation date does not exceed 12 months and the adjusted funding target 
attainment percentage for the plan would not be less than 60 percent 
taking into account the restored benefit accruals), then the 
determination of the funding target of a plan for a plan year must not 
take into account the limitation on benefit accruals under section 
436(e) for that period. The determination of the target normal cost of a 
plan for a plan year must not take into account any limitation on 
benefit accruals under section 436(e). Thus, if an employer wishes to 
take a plan freeze into account in determining the target normal cost, 
the plan must be specifically amended to cease accruals.
    (iv) Effect of other limitations of benefits--(A) Liquidity 
shortfalls. The determination of the funding target and the target 
normal cost of a plan for a plan year must take into account any 
restrictions on payments under section 401(a)(32) on account of a 
liquidity shortfall (as defined in section 430(j)(4)) for periods 
preceding the valuation date. The determination of the funding target 
and the target normal cost must not take into account any restrictions 
on payments under section 401(a)(32) on account of a liquidity shortfall 
or possible liquidity shortfall for any period on or after the valuation 
date.
    (B) High 25 limitation. The determination of the funding target and 
the target normal cost of a plan for a plan year must take into account 
any restrictions on payments under Sec.  1.401(a)(4)-5(b) to highly 
compensated employees to the extent that benefits were not paid or will 
not be paid because of a limitation that applied prior to the valuation 
date. If a benefit that was otherwise restricted was paid prior to the 
valuation date but with suitable security (such as an escrow account) 
provided to the plan in the event of a plan termination, the benefit is 
treated as distributed for purposes of section 430 and this section. 
Accordingly, the funding target does not include any liability for the 
benefit and the plan assets do not include the security. The 
determination of the funding target and the target normal cost of a plan 
for

[[Page 515]]

a plan year must not take into account any restrictions on payments 
under Sec.  1.401(a)(4)-5(b) to highly compensated employees that are 
anticipated with respect to annuity starting dates on or after the 
valuation date on account of the funded status of the plan.
    (2) Benefits provided by insurance--(i) General rule. A plan 
generally is required to reflect in the plan's funding target and target 
normal cost the liability for benefits that are funded through insurance 
contracts held by the plan, and to include the corresponding insurance 
contracts in plan assets. Paragraph (c)(2)(ii) of this section sets 
forth an alternative to this general approach. A plan's treatment of 
benefits funded through insurance contracts pursuant to this paragraph 
(c)(2) is part of the plan's funding method. Accordingly, that treatment 
can be changed only with the consent of the Commissioner.
    (ii) Separate funding of insured benefits. As an alternative to the 
treatment described in paragraph (c)(2)(i) of this section, in the case 
of benefits that are funded through insurance contracts, the liability 
for benefits provided under such contracts is permitted to be excluded 
from the plan's funding target and target normal cost, provided that the 
corresponding insurance contracts are excluded from plan assets. This 
treatment is only available with respect to insurance purchased from an 
insurance company licensed under the laws of a State and only to the 
extent that a participant's or beneficiary's right to receive those 
benefits is an irrevocable contractual right under the insurance 
contracts, based on premiums paid to the insurance company prior to the 
valuation date. For example, in the case of a retired participant 
receiving benefits from an annuity contract in pay status under which no 
premiums are required on or after the valuation date, the liability for 
benefits provided by the contract is permitted to be excluded from the 
plan's funding target provided that the value of the contract is also 
excluded from the value of plan assets. Similarly, in the case of an 
active or deferred vested participant whose benefits are funded by a 
life insurance or annuity contract under which further premiums are 
required on or after the valuation date, the liability for benefits, if 
any, that would be paid from the contract if no further premiums were to 
be paid (for example, if the contract were to go on reduced paid-up 
status) is permitted to be excluded from the plan's funding target and 
target normal cost, provided that the value of the contract is excluded 
from the value of plan assets. By contrast, if the plan trustee can 
surrender a contract to the insurer for its cash value, then the 
participant's or beneficiary's right to receive those benefits is not an 
irrevocable contractual right and, therefore, the liability for benefits 
provided under the contract must be taken into account in determining 
the plan's funding target and target normal cost and the contracts 
cannot be excluded from plan assets.
    (d) Plan provisions taken into account--(1) General rule--(i) Plan 
provisions adopted by valuation date. Except as otherwise provided in 
this paragraph (d), a plan's funding target and target normal cost for a 
plan year are determined based on plan provisions that are adopted no 
later than the valuation date for the plan year and that take effect on 
or before the last day of the plan year. For example, in the case of a 
plan amendment adopted on or before the valuation date for the plan year 
that has an effective date occurring in the current plan year, the plan 
amendment is taken into account in determining the funding target and 
the target normal cost for the current plan year if it is permitted to 
take effect under the rules of section 436(c) for the current plan year, 
but the amendment is not taken into account for the current plan year if 
it does not take effect until a future plan year.
    (ii) Plan provisions adopted after valuation date. If a plan 
administrator makes the election described in section 412(d)(2) with 
respect to a plan amendment, then the plan amendment is treated as 
having been adopted on the first day of the plan year for purposes of 
this paragraph (d). Section 412(d)(2) applies to any plan amendment 
adopted no later than 2\1/2\ months after the close of the plan year, 
including an amendment adopted during the plan year. Thus, if an 
amendment is adopted

[[Page 516]]

after the valuation date for a plan year (and no later than 2\1/2\ 
months after the close of the plan year), but takes effect by the last 
day of the plan year, the amendment is taken into account in determining 
the plan's funding target and target normal cost for the plan year if 
the plan administrator makes the election described in section 412(d)(2) 
with respect to such amendment.
    (iii) Determination of when an amendment takes effect. For purposes 
of this paragraph (d)(1), the determination of whether an amendment that 
increases benefits takes effect and when it takes effect is determined 
in accordance with the rules of section 436(c) and Sec.  1.436-1(c)(5). 
For purposes of this paragraph (d)(1), in the case of an amendment that 
decreases benefits, the amendment takes effect under a plan on the first 
date on which the benefits of any individual who is or could be a 
participant or beneficiary under the plan would be less than those 
benefits would be under the pre-amendment plan provisions if the 
individual were on that date to satisfy the applicable conditions for 
the benefits. In either case, the determination of when an amendment 
takes effect is unaffected by an election under section 412(d)(2).
    (2) Special rule for certain amendments increasing liabilities. In 
the case of a plan amendment that is not required to be taken into 
account under the rules of paragraph (d)(1) of this section because it 
is adopted after the valuation date for the plan year, the plan 
amendment must be taken into account in determining a plan's funding 
target and target normal cost for the plan year if the plan amendment--
    (i) Takes effect by the last day of the plan year;
    (ii) Increases the liabilities of the plan by reason of increases in 
benefits, establishment of new benefits, changing the rate of benefit 
accrual, or changing the rate at which benefits become nonforfeitable; 
and
    (iii) Would not be permitted to take effect under the rules of 
section 436(c) if those rules were applied--
    (A) By treating the increase in the target normal cost for the plan 
year attributable to the amendment (and all other amendments that must 
be taken into account solely because of the application of the rules in 
this paragraph (d)(2)) as if the increase were an increase in the 
funding target for the plan year; and
    (B) By taking into account all unpredictable contingent event 
benefits permitted to be paid for unpredictable contingent events that 
occurred during the current plan year and all plan amendments that took 
effect in the current plan year (including all amendments to which this 
paragraph (d)(2) applies for the plan year).
    (3) Allocation of benefits attributable to plan amendments. If a 
plan amendment is taken into account for a plan year under the rules of 
this paragraph (d), then the allocation of benefits that is used to 
determine the funding target and the target normal cost for that plan 
year is based on the plan as amended. Thus, if an amendment that is 
taken into account for a plan year increases a participant's accrued 
benefit for service prior to the beginning of the plan year, then the 
present value of that increase is included in the funding target for the 
plan year.
    (e) Plan population taken into account--(1) In general. In making 
any determination of the funding target or target normal cost under 
paragraph (b) of this section, the plan population is determined as of 
the valuation date. The plan population must include three classes of 
individuals--
    (i) Participants currently employed in the service of the employer;
    (ii) Participants who are retired under the plan or who are 
otherwise no longer employed in the service of the employer; and
    (iii) All other individuals currently entitled to benefits under the 
plan.
    (2) Assumption regarding rehiring of former employees--(i) Special 
exclusion for ``rule of parity'' cases. Certain individuals may be 
excluded from the class of individuals described in paragraph (e)(1)(ii) 
of this section. The excludable individuals are those former employees 
who, prior to the valuation date for the plan year, 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

[[Page 517]]

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 paragraph (e)(2) would be 
unreasonable, then no such exclusion is permitted.
    (ii) Application to partially vested participants. Whether former 
employees who are terminated with partially vested benefits are assumed 
to return to service is determined under the same rules that apply to 
former employees without vested benefits under paragraph (e)(2)(i) of 
this section.
    (3) Anticipated future participants. In making any determination of 
the funding target or target normal cost under paragraph (b) of this 
section, the actuarial assumptions and funding method used for the plan 
must not anticipate the affiliation with the plan of future participants 
not employed in the service of the employer on the plan's valuation 
date. However, any such determination may anticipate the affiliation 
with the plan of current employees who have not yet satisfied the 
participation (age and service) requirements of the plan as of the 
valuation date.
    (f) Actuarial assumptions and funding method used in determination 
of present value--(1) Selection of actuarial assumptions and funding 
method--(i) General rules. The determination of any present value or 
other computation under section 430 and this section must be made on the 
basis of actuarial assumptions and a funding method. Except as otherwise 
specifically provided (for example, in Sec.  1.430(h)(2)-1(b)(6) or 
section 4006(a)(3)(E)(iv) of the Employee Retirement Income Security Act 
of 1974, as amended (ERISA)), the same actuarial assumptions and funding 
method must be used for all computations under sections 430 and 436. For 
example, the actuarial assumptions and the funding method used in making 
a certification of the adjusted funding target attainment percentage for 
a plan year must be the same as those disclosed on the actuarial report 
under section 6059 (Schedule SB, ``Single-Employer Defined Benefit Plan 
Actuarial Information'' of Form 5500, ``Annual Return/Report of Employee 
Benefit Plan'').
    (ii) Changes in actuarial assumptions and funding method. Actuarial 
assumptions established for a plan year cannot subsequently be changed 
for that plan year unless the Commissioner determines that the 
assumptions that were used are unreasonable. Similarly, a funding method 
established for a plan year cannot subsequently be changed for that plan 
year unless the Commissioner determines that the use of that funding 
method for that plan year is impermissible.
    (iii) Procedures for establishing actuarial assumptions and funding 
method. For purposes of this paragraph (f)(1), in the case of a plan for 
which an actuarial report under section 6059 (Schedule SB of Form 5500) 
is required to be filed for a plan year, actuarial assumptions and the 
funding method are established by the filing of the actuarial report if 
it is filed no later than the due date (with extensions) for the report. 
In the case of a plan for which an actuarial report for a plan year is 
not required to be filed, actuarial assumptions and the funding method 
are established by the delivery of the completed report to the employer 
if it is delivered no later than what would be the due date (with 
extensions) for filing the actuarial report were such a filing required. 
If the actuarial report is not filed or delivered by the applicable date 
described in the two preceding sentences, then the same actuarial 
assumptions (such as the same interest rate and mortality table 
elections) and funding method as were used for the preceding plan year 
apply for all computations under sections 430 and 436 for the current 
plan year, unless the Commissioner permits or requires other actuarial 
assumptions or another funding method permitted under section 430 to be 
used for the current plan year.
    (iv) Scope of funding method. A plan's funding method 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

[[Page 518]]

a part of the funding method. The assumed earnings rate used for 
purposes of determining the actuarial value of assets under section 
430(g)(3)(B) is treated as an actuarial assumption, rather than as part 
of the funding method.
    (2) Interest and mortality rates. Section 430(h)(2) and Sec.  
1.430(h)(2)-1 set forth the interest rates, and section 430(h)(3) and 
Sec. Sec.  1.430(h)(3)-1 and 1.430(h)(3)-2 set forth the mortality 
tables, that must be used for purposes of determining any present value 
under this section. However, notwithstanding the requirement to use the 
mortality tables, in the case of a plan which has fewer than 100 
participants and beneficiaries who are not in pay status, the actuarial 
assumptions may assume no pre-retirement mortality, but only if that 
assumption would be a reasonable assumption.
    (3) Other assumptions. In the case of actuarial assumptions other 
than those specified in sections 430(h)(2), 430(h)(3), and 430(i), each 
of those actuarial assumptions must be reasonable (taking into account 
the experience of the plan and reasonable expectations). In addition, 
the actuarial assumptions (other than those specified in sections 
430(h)(2), 430(h)(3), and 430(i)) must, in combination, offer the plan's 
enrolled actuary's best estimate of anticipated experience under the 
plan based on information determined as of the valuation date. See 
paragraph (f)(4)(iii) of this section for special rules for determining 
the present value of a single-sum and similar distributions.
    (4) Probability of benefit payments in single sum or other optional 
forms--(i) In general. This paragraph (f)(4) provides rules relating to 
the probability that benefit payments will be paid as single sums or 
other optional forms under a plan and the impact of that probability on 
the determination of the present value of those benefit payments under 
section 430.
    (ii) General rules of application. Any determination of present 
value or any other computation under this section must take into 
account--
    (A) The probability that future benefit payments under the plan will 
be made in the form of any optional form of benefit provided under the 
plan (including single-sum distributions), determined on the basis of 
the plan's experience and other related assumptions, in accordance with 
paragraph (f)(3) of this section; and
    (B) Any difference in the present value of future benefit payments 
that results from the use of actuarial assumptions in determining the 
amount of benefit payments in any such optional form of benefit that are 
different from those prescribed by section 430(h).
    (iii) Single-sum and similar distributions--(A) Distributions using 
section 417(e) assumptions. In the case of a distribution that is 
subject to section 417(e)(3) and that is determined using the applicable 
interest rates and applicable mortality table under section 417(e)(3), 
for purposes of applying paragraph (f)(4)(ii) of this section, the 
computation of the present value of that distribution is treated as 
having taken into account any difference in present value that results 
from the use of actuarial assumptions that are different from those 
prescribed by section 430(h) (as required under paragraph (f)(4)(ii)(B) 
of this section) if and only if the present value of the distribution is 
determined in accordance with this paragraph (f)(4)(iii).
    (B) Substitution of annuity form. Except as otherwise provided in 
this paragraph (f)(4)(iii), the present value of a distribution is 
determined in accordance with this paragraph (f)(4)(iii) if that present 
value is determined as the present value, using special actuarial 
assumptions, of the annuity (either the deferred or immediate annuity) 
which is used under the plan to determine the amount of the 
distribution. Under these special assumptions, for the period beginning 
with the expected annuity starting date for the distribution, the 
current applicable mortality table under section 417(e)(3) that would 
apply to a distribution with an annuity starting date occurring on the 
valuation date is substituted for the mortality table under section 
430(h)(3) that would otherwise be used. In addition, under these special 
assumptions, the valuation interest rates under section 430(h)(2) are 
used for purposes of discounting the projected annuity payments from 
their expected payment dates to the valuation date (as opposed to the 
interest rates under section

[[Page 519]]

417(e)(3) which the plan uses to determine the amount of the benefit).
    (C) Optional application of generational mortality and phase-in of 
interest rates. In determining the present value of a distribution under 
this paragraph (f)(4)(iii), if a plan uses the generational mortality 
tables under Sec.  1.430(h)(3)-1(a)(4) or Sec.  1.430(h)(3)-2, the plan 
is permitted to use a 50-50 male-female blend of the annuitant mortality 
rates under the Sec.  1.430(h)(3)-1(a)(4) generational mortality tables 
in lieu of the applicable mortality table under section 417(e)(3) that 
would apply to a distribution with an annuity starting date occurring on 
the valuation date. Similarly, a plan is permitted to make adjustments 
to the interest rates in order to reflect differences between the phase-
in of the section 430(h)(2) segment rates under section 430(h)(2)(G) and 
the adjustments to the segment rates under section 417(e)(3)(D)(iii).
    (D) Distributions subject to section 417(e)(3) using other 
assumptions. In the case of a distribution that is subject to section 
417(e)(3) but that is determined on a basis other than using the 
applicable interest rates and the applicable mortality table under 
section 417(e)(3), for purposes of applying paragraph (f)(4)(ii)(B) of 
this section, the computation of present value must take into account 
the extent to which the present value of the distribution is different 
from the present value determined using the rules of paragraph 
(f)(4)(iii)(B) of this section, based on actuarial assumptions that 
satisfy the requirements of paragraph (f)(3) of this section. If the 
plan provides that the amount of the benefit is based on a comparison of 
the section 417(e)(3) benefit (that is, the benefit determined using the 
applicable interest rates and the applicable mortality table under 
section 417(e)(3)) with another benefit determined using some other 
basis, then paragraph (f)(4)(ii)(B) of this section is applied as of the 
valuation date by comparing the present value of the section 417(e)(3) 
benefit determined under the rules of paragraph (f)(4)(iii)(B) of this 
section with the present value of the other benefit. The rule of this 
paragraph (f)(4)(iii)(D) applies, for example, where a distribution that 
is subject to section 417(e)(3) is determined as the greater of the 
benefit determined using the applicable interest rates and the 
applicable mortality table under section 417(e)(3) and the benefit 
determined using some other basis, or where the amount of a distribution 
that is subject to section 417(e)(3) is determined using an interest 
rate other than the applicable interest rates as required under section 
415(b)(2)(E)(ii) (see Sec.  1.417(e)-1(d)(1)).
    (5) Distributions from applicable defined benefit plans under 
section 411(a)(13)(C)--(i) In general. In the case of an applicable 
defined benefit plan described in section 411(a)(13)(C), if the amount 
of a future distribution is based on an interest adjustment applied to 
the current accumulated benefit, then the amount of that distribution is 
determined by projecting the future interest credits or equivalent 
amount under the plan's interest crediting rules using actuarial 
assumptions that satisfy the requirements of paragraph (f)(3) of this 
section. Thus, if a plan provides for a single-sum distribution equal to 
the balance of a participant's hypothetical account under a cash balance 
plan, then the amount of that future distribution is equal to the 
projected account balance at the expected date of payment determined 
using actuarial assumptions that satisfy the requirements of paragraph 
(f)(3) of this section.
    (ii) Annuity distributions--(A) General rule. In the case of an 
applicable defined benefit plan described in section 411(a)(13)(C), if 
the amount of an annuity distribution is based on either the balance of 
a hypothetical account maintained for a participant or the accumulated 
percentage of a participant's final average compensation, then the 
amount of that annuity distribution is calculated by converting the 
projected account balance (or accumulated percentage of final average 
compensation), in accordance with paragraph (f)(5)(i) of this section, 
to an annuity by applying the plan's annuity conversion provisions using 
the rules of this paragraph (f)(5)(ii).
    (B) Use of current annuity factors. Except as otherwise provided in 
paragraph (f)(5)(ii)(C) of this section, if the

[[Page 520]]

plan bases the conversion of the projected account balance (or 
accumulated percentage of final average compensation) to an annuity 
using the applicable interest rates and applicable mortality table under 
section 417(e)(3), then the amount of the annuity distribution is 
determined by dividing the projected account balance (or accumulated 
percentage of final average compensation) by an annuity factor 
corresponding to the assumed form of payment using, for the period 
beginning with the annuity starting date, the current applicable 
mortality table under section 417(e)(3) that would apply to a 
distribution with an annuity starting date occurring on the valuation 
date (in lieu of the mortality table under section 430(h)(3) that would 
otherwise be used) and the valuation interest rates under section 
430(h)(2) (as opposed to the interest rates under section 417(e)(3) 
which the plan uses to determine the amount of the annuity).
    (C) Optional application of generational mortality and phase-in of 
segment rates. In determining the amount of an annuity distribution 
under paragraph (f)(5)(ii)(B) of this section, a plan is permitted to 
apply the options described in paragraph (f)(4)(iii)(C) of this section.
    (D) Distributions using assumptions other than assumptions under 
section 417(e)(3). In applying this paragraph (f)(5)(ii), in the case of 
a plan that determines an annuity using a basis other than the 
applicable interest rates and applicable mortality table under section 
417(e)(3), the amount of the annuity distribution must be based on 
actuarial assumptions that satisfy the requirements of paragraph (f)(3) 
of this section.
    (6) Unpredictable contingent event benefits. Any determination of 
present value or any other computation under this section must take into 
account, based on information as of the valuation date, the probability 
that future benefits (or increased benefits) will become payable under 
the plan due to the occurrence of an unpredictable contingent event (as 
described in Sec.  1.436-1(j)(9)). For this purpose, this probability 
with respect to an unpredictable contingent event may be assumed to be 
zero if there is not more than a de minimis likelihood that the 
unpredictable contingent event will occur.
    (7) Reasonable techniques permitted--(i) Determination of benefits 
to be paid during the plan year. Any reasonable technique can be used to 
determine the present value of the benefits expected to be paid during a 
plan year, based on the interest rates and mortality assumptions 
applicable for the plan year. For example, the present value of a 
monthly retirement annuity payable at the beginning of each month can be 
determined--
    (A) Using the standard actuarial approximation that reflects 13/
24ths of the discounted expected payments for the year as of the 
beginning of the year and 11/24ths of the discounted expected payments 
for the year as of the end of the year;
    (B) By assuming a uniform distribution of death during the year; or
    (C) By assuming that the payment is made in the middle of the year.
    (ii) Determination of target normal cost. In the case of a 
participant for whom there is a less than 100 percent probability that 
the participant will terminate employment during the plan year, for 
purposes of determining the benefits expected to accrue, be earned, or 
otherwise allocated to service during the plan year which are used to 
determine the target normal cost, it is permissible to assume the 
participant will not terminate during the plan year, unless using this 
method of calculation would be unreasonable.
    (8) Approval of significant changes in actuarial assumptions for 
large plans--(i) In general. Except as otherwise provided in paragraph 
(f)(8)(iii) of this section, any actuarial assumptions used to determine 
the funding target of a plan for a plan year during which the plan is 
described in paragraph (f)(8)(ii) of this section cannot be changed from 
the actuarial assumptions that were used for the preceding plan year 
without the approval of the Commissioner if the changes in assumptions 
result in a decrease in the plan's funding shortfall (within the meaning 
of section 430(c)(4)) for the current plan year (disregarding the effect 
on the plan's funding shortfall resulting from changes in interest and 
mortality assumptions under sections 430(h)(2) and (h)(3)) that

[[Page 521]]

either exceeds $50,000,000, or exceeds $5,000,000 and is 5 percent or 
more of the funding target of the plan before such change.
    (ii) Affected plans. A plan is described in this paragraph 
(f)(8)(ii) for a plan year if--
    (A) The plan is a defined benefit plan (other than a multiemployer 
plan) to which title IV of ERISA applies; and
    (B) The aggregate unfunded vested benefits used to determine 
variable-rate premiums for the plan year (as determined under section 
4006(a)(3)(E)(iii) of ERISA) of the plan and all other plans maintained 
by the contributing sponsors (as defined in section 4001(a)(13) of 
ERISA) and members of such sponsors' controlled groups (as defined in 
section 4001(a)(14) of ERISA) which are covered by title IV of ERISA 
(disregarding multiemployer plans and disregarding plans with no 
unfunded vested benefits) exceed $50,000,000.
    (iii) Automatic approval to resume use of previously used 
assumptions upon exiting at-risk status during phase-in. A plan that is 
not in at-risk status for the current plan year and that was in at-risk 
status for the prior plan year (but not for a period of 5 or more 
consecutive plan years) is granted automatic approval to use the 
actuarial assumptions that were applied before the plan entered at-risk 
status and that were used in combination with the required at-risk 
assumptions during the period the plan was in at-risk status.
    (9) Examples. The following examples illustrate the rules of this 
section. Unless otherwise indicated, these examples are based on the 
following assumptions: The normal retirement age is 65, the minimum 
required contribution for the plan is determined under the rules of 
section 430 starting in 2008, the plan year is the calendar year, the 
valuation date is January 1, no plan-related expenses are paid or 
expected to be paid from plan assets, and the plan does not provide for 
mandatory employee contributions. The examples are as follows:

    Example 1. (i) Plan P provides an accrued benefit equal to 1.0% of a 
participant's highest 3-year average compensation for each year of 
service. Plan P provides that an early retirement benefit can be 
received at age 60 equal to the participant's accrued benefit reduced by 
0.5% per month for early commencement. On January 1, 2010, Participant A 
is age 60 and has 12 years of past service. Participant A's compensation 
for the years 2007 through 2009 was $47,000, $50,000, and $52,000, 
respectively. Participant A's rate of compensation at December 31, 2009, 
is $54,000 and A's rate of compensation for 2010 is assumed not to 
increase at any point during 2010. Decrements are applied at the 
beginning of the plan year.
    (ii) Participant A's annual accrued benefit as of January 1, 2010, 
is $5,960 [0.01 x 12 x ($47,000 + $50,000 + $52,000) / 3]. Participant 
A's expected benefit accrual for 2010 is $800 [0.01 x 13 x ($50,000 + 
$52,000 + $54,000) / 3 - $5,960], to the extent that Participant A is 
expected to continue in employment for the full 2010 plan year.
    (iii) Because the early retirement benefit is a function of the 
participant's accrued benefit, the allocation of the benefit for 
purposes of determining the target normal cost and funding target is 
made under paragraph (c)(1)(ii)(B) of this section. Accordingly, for 
Participant A, the early retirement benefit that is taken into account 
with respect to the decrement at age 60 when determining the 2010 
funding target is $4,172 [$5,960 accrued benefit x (1 - 0.005 x 60 
months)]. The expected accrual of the early retirement benefit during 
2010 that is taken into account for Participant A with respect to the 
decrement at age 60 when determining the 2010 target normal cost is 
zero, because in this example the age-60 decrement would be applied as 
of January 1, 2010, before Participant A would earn any additional 
benefits. (But see paragraph (f)(7)(ii) of this section for an 
alternative approach for determining the expected accrual with respect 
to the decrement at age 60.)
    (iv) The early retirement benefit for Participant A with respect to 
the decrement at age 61 that is taken into account in determining the 
funding target for the 2010 plan year is $4,529.60 [$5,960 accrued 
benefit x (1 - 0.005 x 48 months)]. The portion of the early retirement 
benefit that is taken into account for Participant A with respect to the 
decrement at age 61 that is taken into account in determining the target 
normal cost for the 2010 plan year is $608 [$800 expected annual accrual 
x (1 - 0.005 x 48 months)].
    Example 2. (i) The facts are the same as in Example 1. In addition, 
the plan offers a $500 temporary monthly supplement to participants who 
complete 15 years of service and retire from active employment after 
attaining age 60. The temporary supplement is payable until the 
participant turns age 62. In addition, the supplement is limited so that 
it does not exceed the participant's Social Security benefit payable at 
age 62. On January 1, 2010, Participant B is age 55 and has 20 years of 
past service, and Participant C is age 60 and has 14 years of past 
service. For Participants B and C, the projected Social

[[Page 522]]

Security benefit is greater than $500 per month.
    (ii) Because the temporary supplement is not a function of the 
participant's accrued benefit or service, the allocation of the benefit 
for purposes of determining the target normal cost and funding target is 
made under paragraph (c)(1)(ii)(D) of this section. The portion of the 
annual temporary supplement for Participant B with respect to the early 
retirement decrement occurring at age 60 that is taken into account in 
determining the funding target for the 2010 plan year is $4,800 [($500 x 
12 months) x 20 years of past service / 25 years of service at assumed 
early retirement age]. The portion of the annual temporary supplement 
for Participant B with respect to the early retirement decrement 
occurring at age 61 that is taken into account in determining the 
funding target for the 2010 plan year is $4,615 [($500 x 12 months) x 20 
years of past service / 26 years of service at assumed early retirement 
age]. In each case, the allocable portion of the benefit is assumed to 
be payable until age 62 (or the participant's death, if earlier).
    (iii) For Participant B, the portion of the annual temporary 
supplement with respect to the early retirement decrement occurring at 
age 60 that is taken into account in determining the target normal cost 
for the 2010 plan year is $240 [($500 x 12 months) x 1 year of service 
expected to be earned during the plan year / 25 years of service at 
assumed early retirement age]. The portion of the annual temporary 
supplement with respect to the early retirement decrement occurring at 
age 61 that is taken into account in determining the target normal cost 
for the 2010 plan year is $230.77 [($500 x 12 months) x 1 year of 
service expected to be earned during the plan year / 26 years of service 
at assumed early retirement age]. The present value of these amounts 
reflects a payment period beginning with the decrement at age 60 or 61, 
as applicable, until age 62 (or assumed death, if earlier).
    (iv) For Participant C, the portion of the annual temporary 
supplement with respect to the early retirement decrement occurring at 
age 61 (when the participant is first eligible for the benefit) that is 
taken into account in determining the funding target for the 2010 plan 
year is $5,600 [($500 x 12 months) x 14 years of past service / 15 years 
of service at assumed early retirement age]. The present value of this 
amount reflects a payment period beginning with the decrement at age 61 
until age 62 (or death if earlier).
    Example 3. (i) The facts are the same as in Example 1. The plan also 
provides a single-sum death benefit (in addition to the qualified pre-
retirement spouse's benefit) equal to the greater of the participant's 
annual accrued benefit at the time of death, or $10,000. The benefit is 
limited as necessary to ensure that the plan meets the incidental death 
benefit requirements of section 401(a).
    (ii) The determination of the portion of the death benefit that is 
taken into account in determining the target normal cost and funding 
target is made under paragraph (c)(1)(ii)(B) of this section to the 
extent that it is a function of the participant's accrued benefit and 
under paragraph (c)(1)(ii)(D) of this section to the extent that it 
relates to the part of the death benefit that is not a function of the 
participant's accrued benefit.
    (iii) The portion of the single-sum death benefit corresponding to 
the accrued benefit, or $5,960, is taken into account when determining 
the 2010 funding target for Participant A.
    (iv) The excess of the death benefit over Participant A's accrued 
benefit is $4,040 (that is, $10,000 - $5,960). Because this part of the 
death benefit is not a function of the participant's accrued benefit nor 
is it a function of service, the determination of the corresponding 
portion of the death benefit taken into account in determining the 
target normal cost and funding target for 2010 is made under paragraph 
(c)(1)(ii)(D) of this section. For example, for Participant A, the 
portion of this benefit with respect to the death decrement occurring at 
age 64 that is taken into account for purposes of determining the 
funding target for the 2010 plan year is $3,030 ($4,040 x 12 years of 
past service / 16 years of service at assumed age of death).
    (v) The total single-sum death benefit for Participant A with 
respect to the death decrement at age 64 that is taken into account in 
determining the funding target for the 2010 plan year is $8,990 ($5,960 
+ $3,030).
    (vi) Similarly, the portion of the single-sum death benefit for 
Participant A that is taken into account in determining the target 
normal cost for the 2010 plan year is equal to the sum of the expected 
increase in the accrued benefit during 2010, and the expected change in 
the allocable portion of the excess death benefit attributable to 
service during 2010 as determined in accordance with paragraph 
(c)(1)(ii)(D) of this section. As described in Example 1, the expected 
increase in Participant A's accrued benefit during 2010 is $800, to the 
extent that Participant A is expected to continue in employment for the 
full 2010 plan year.
    (vii) At the end of 2010, Participant A's accrued benefit is 
expected to be $6,760 ($5,960 + $800). The excess portion of the single-
sum death benefit to be allocated in accordance with paragraph 
(c)(1)(ii)(D) of this section is $3,240 ($10,000 - $6,760), and the 
allocable portion of the excess benefit for Participant A as of December 
31, 2010, with respect to the death decrement at age 64, is $2,632.50 
($3,240 x 13 years of service as of December 31, 2010 / 16 years of 
service at assumed age of death). The change in the allocable portion

[[Page 523]]

of Participant A's excess death benefit due to an additional year of 
service, with respect to the death decrement at age 64, is a decrease of 
$397.50. Therefore, the target normal cost for the 2010 plan year 
attributable to Participant A, with respect to the death decrement at 
age 64, will reflect a single-sum death benefit of $402.50 ($800 
expected increase in Participant A's accrued benefit minus a $397.50 
expected decrease in the allocable portion of the death benefit in 
excess of the accrued benefit).
    Example 4. (i) The facts are the same as in Example 3, except that 
the plan provides a single-sum death benefit equal to the greater of the 
present value of the qualified pre-retirement survivor annuity or 100 
times the amount of the participant's monthly retirement benefit with 
service projected to normal retirement age. The valuation is based on 
the assumption that all surviving spouses choose to receive their 
benefit in the form of a single sum. For Participant A, the value of the 
qualified pre-retirement survivor annuity is less than 100 times 
Participant A's projected monthly retirement benefit.
    (ii) The allocation of the death benefit that is a function of 
Participant A's accrued benefit is based on service and compensation to 
the first day of the plan year for purposes of determining the funding 
target, and the allocation of the death benefit that is a function of 
the increase in Participant A's accrued benefit during the plan year for 
purposes of determining the target normal cost is made in accordance 
with paragraph (c)(1)(ii)(B) of this section. As described in Example 1, 
Participant A's accrued benefit based on service and compensation as of 
January 1, 2010, is $5,960, or $496.67 per month. Accordingly, the 
portion of the single-sum death benefit corresponding to the accrued 
benefit, or $49,667 (100 times $496.67), is taken into account when 
determining the 2010 funding target for Participant A.
    (iii) In addition, the funding target and the target normal cost 
reflect a portion of Participant A's death benefit in excess of the 
amount based on Participant A's accrued benefit. Based on Participant 
A's average compensation as of the first day of the plan year, 
Participant A's accrued benefit with service projected to normal 
retirement is $8,443 [.01 x 17 years of service at age 65 x ($47,000 + 
$50,000 + $52,000) / 3], or $703.61 per month. The corresponding death 
benefit is $70,361.
    (iv) The excess of the death benefit over Participant A's accrued 
benefit as of January 1, 2010, is $20,694 (that is, $70,361 - $49,667). 
Because this part of the death benefit is not a function of Participant 
A's accrued benefit or service, the portion that is taken into account 
in determining the funding target is determined under paragraph 
(c)(1)(ii)(D) of this section. For Participant A, the portion of this 
benefit with respect to the death decrement occurring at age 64 that is 
taken into account when determining the funding target for the 2010 plan 
year is $15,521 ($20,694 x 12 years of past service / 16 years of 
service at assumed age of death). The total single-sum death benefit for 
Participant A with respect to the death decrement at age 64 reflected in 
the funding target for the 2010 plan year is $65,188 ($49,667 + 
$15,521).
    (v) Similarly, the portion of the single-sum death benefit for 
Participant A that is taken into account when determining the target 
normal cost for 2010 is equal to the sum of the death benefit based on 
the expected increase in the accrued benefit during 2010 and the 
expected change in the allocable portion of the excess death benefit 
attributable to service during 2010 as determined in accordance with 
paragraph (c)(1)(ii)(D) of this section.
    (vi) At the end of 2010, Participant A's accrued benefit is expected 
to be $6,760 ($5,960 + $800), or $563.33 per month, and the associated 
death benefit is $56,333. The expected increase in the amount of the 
death benefit attributable to the increase in Participant A's accrued 
benefit is therefore $6,666 ($56,333 - $49,667).
    (vii) Participant A's projected accrued benefit at normal retirement 
based on average compensation as of the end of 2010 is $8,840 [.01 x 17 
years of service at age 65 x ($50,000 + $52,000 + $54,000) / 3], or 
$736.67 per month. The corresponding death benefit is $73,667. The 
excess portion of the single-sum death benefit to be allocated in 
accordance with paragraph (c)(1)(ii)(D) of this section is $17,334 
($73,667 - $56,333), and the allocable portion of the excess benefit for 
Participant A as of December 31, 2010, with respect to the death 
decrement at age 64, is $14,084 ($17,334 x 13 years of service as of 
December 31, 2010 / 16 years of service at assumed age of death).
    (viii) The change in the allocable portion of Participant A's excess 
death benefit during 2010, with respect to the death decrement at age 
64, is a decrease of $1,437 ($14,084 - $15,521). Therefore, the target 
normal cost for the 2010 plan year attributable to Participant A, with 
respect to the death decrement at age 64, will reflect a single-sum 
death benefit of $5,229 ($6,666 expected increase in Participant A's 
death benefit based on the expected increase in the accrued benefit, 
minus an expected decrease of $1,437 in the amount of the death benefit 
in excess of the amount attributable to the accrued benefit).
    Example 5. (i) The facts are the same as in Example 1. In addition, 
the plan provides a disability benefit to participants who become 
disabled after completing 15 years of service. The disability benefit is 
payable at normal retirement age or an earlier date if

[[Page 524]]

elected by a participant. For purposes of calculating the disability 
benefit, service continues to accrue until normal retirement age (unless 
recovery or commencement of retirement benefits occurs earlier). 
Further, compensation is deemed to continue at the same rate as when the 
disability began.
    (ii) Participant A will be eligible for the disability benefit at 
age 63 after completion of 15 years of service. Participant A's annual 
disability benefit at normal retirement age is $9,180 (that is, 1% of 
highest 3-year average compensation of $54,000 multiplied by 17 years of 
deemed service at normal retirement age).
    (iii) The portion of the disability benefit based on the 
participant's accrued benefit as of the valuation date that is taken 
into account in determining the target normal cost and funding target is 
determined in accordance with paragraph (c)(1)(ii)(B) of this section. 
Accordingly, the portion of the disability benefit corresponding to 
Participant A's accrued benefit as of January 1, 2010, or $5,960, is 
taken into account when determining the 2010 funding target.
    (iv) The excess of Participant A's disability benefit over the 
accrued benefit as of January 1, 2010, is $3,220 ($9,180 - $5,960). 
Because this portion of the disability benefit is not based on 
Participant A's accrued benefit or service, the portion that is taken 
into account in determining the funding target is determined under 
paragraph (c)(1)(ii)(D) of this section. The portion of Participant A's 
excess disability benefit with respect to the disability decrement 
occurring at age 63 that is taken into account when determining the 2010 
funding target is $2,576 [$3,220 x (12 years of past service / 15 years 
of service at assumed date of disability)]. The total disability benefit 
for Participant A, with respect to the disability decrement occurring at 
age 63, that is taken into account in determining the funding target for 
the 2010 plan year is $8,536 ($5,960 + $2,576).
    (v) The portion of Participant A's disability benefit with respect 
to the disability decrement occurring at age 64 that is taken into 
account when determining the 2010 funding target is $8,375 [$5,960 + 
$3,220 x (12 years of past service / 16 years of service at assumed date 
of disability)].
    (vi) If in fact Participant A becomes disabled at age 63, the 
funding target will reflect the full disability benefit to which 
Participant A will be entitled at normal retirement age, based on 
service projected to normal retirement age (17 years) and final average 
compensation reflecting compensation projected to normal retirement age 
at the rate Participant A was earning at the time of disablement.
    Example 6. (i) The facts are the same as in Example 5, except that 
the disability benefit is based on the accrued benefit calculated using 
service and compensation earned to the date of disability.
    (ii) Because the disability benefit is a function of the 
participant's accrued benefit, the portion of Participant A's disability 
benefit that is taken into account when determining the funding target 
for the 2010 plan year is Participant A's annual accrued benefit as of 
January 1, 2010, or $5,960, as determined in Example 1. This amount is 
taken into account for both the disability decrement occurring at age 63 
and the disability decrement occurring at age 64.
    (iii) Similarly, the benefit accrual for Participant A with respect 
to the disability decrements occurring at age 63 and age 64 that is 
taken into account when determining the target normal cost for the 2010 
plan year is equal to Participant A's expected benefit accrual for 2010 
determined in Example 1, or $800.
    Example 7. (i) Retiree D, a participant in Plan P, is a male age 72 
and is receiving a $100 monthly straight life annuity. The 2009 
actuarial valuation is performed using the segment rates applicable for 
September 2008 (determined without regard to the transition rule of 
section 430(h)(2)(G)), and the 2009 annuitant and nonannuitant (male and 
female) mortality tables (published in Notice 2008-85). See Sec.  
601.601(d)(2) relating to objectives and standards for publishing 
regulations, revenue rulings and revenue procedures in the Internal 
Revenue Bulletin.
    (ii) The present value of Retiree D's straight life annuity on the 
valuation date is $10,535.79. This is equal to the sum of: $5,029.99, 
which is the present value of payments expected to be made during the 
first 5 years, using the first segment interest rate of 5.07%; 
$5,322.26, which is the present value of payments expected to be made 
during the next 15 years, using the second segment interest rate of 
6.09%; and $183.54, which is the present value of payments expected to 
be made after 20 years, using the third segment interest rate of 6.56%.
    Example 8. (i) The facts are the same as in Example 7. Plan P does 
not provide for early retirement benefits or single-sum distributions. 
The actuary assumes that no participants terminate employment prior to 
age 50 (other than by death), there is a 5% probability of withdrawal at 
age 50, and that those participants who withdraw receive a deferred 
annuity starting at age 65. Participant E is a male age 46 on January 1, 
2009, and has an annual accrued benefit of $23,000 beginning at age 65.
    (ii) Before taking into account the 5% probability of withdrawal, 
the funding target associated with Participant E's assumed age 50 
withdrawal benefit in the 2009 actuarial valuation is $68,396.75. This 
is equal to the sum of: $6,925.29, which is the present value of 
payments expected to be made during the year the participant turns age 
65 (the 20th

[[Page 525]]

year after the valuation date), using the second segment interest rate 
of 6.09%; and $61,471.46, which is the present value of payments 
expected to be made after the 20th year, using the third segment 
interest rate of 6.56%.
    (iii) Taking the 5% probability of withdrawal into account, the 
funding target for the 2009 plan year associated with Participant E's 
assumed age 50 withdrawal benefit is $3,419.84 ($68,396.75 x 5%).
    Example 9. (i) The facts are the same as in Example 8, except the 
plan offers a single-sum distribution payable at normal retirement age 
(age 65) determined based on the applicable interest rates and the 
applicable mortality table under section 417(e)(3). The actuary assumes 
that 70% of the participants will elect a single sum upon retirement and 
the remaining 30% will elect a straight life annuity.
    (ii) Before taking into account the 5% probability of withdrawal or 
the 70% probability of electing a single-sum payment, the portion of the 
2009 funding target that is attributable to Participant E's assumed 
single-sum payment, deferred to age 65, is $70,052.30. This is 
calculated in the same manner as the present value of annuity payments, 
except that, for the period after the annuity starting date, the 2009 
applicable mortality rates are substituted for the 2009 male annuitant 
mortality rates. This portion of the funding target for the 2009 plan 
year is equal to the sum of: $6,929.00, which is the present value of 
annuity payments expected to be made between age 65 and 66 (during the 
20th year after the valuation date), using the second segment interest 
rate of 6.09%; and $63,123.30, which is the present value of annuity 
payments expected to be made after the 20th year following the valuation 
date, using the third segment interest rate of 6.56%. These present 
value amounts reflect the 2009 male nonannuitant mortality rates prior 
to the assumed commencement of benefits at age 65 and the 100% 
probability of retiring at age 65.
    (iii) Taking the 5% probability of withdrawal and the 70% 
probability of electing a single-sum payment into account, the portion 
of the 2009 funding target attributable to Participant E's assumed 
single-sum payment based on withdrawal at age 50 is $2,451.83 
($70,052.30 x 5% x 70%). After taking into account the 5% probability of 
withdrawal and the 30% probability of electing a straight life annuity, 
the portion of the 2009 funding target that is attributable to 
Participant E's assumed straight life annuity (based on assumed 
withdrawal at age 50), deferred to age 65, is equal to 30% of the result 
obtained in Example 8.
    Example 10. (i) The facts are the same as in Example 9, except the 
plan offers an immediate single sum upon withdrawal at age 50 determined 
based on the applicable interest rates and the applicable mortality 
table under section 417(e)(3). The actuary assumes that 70% of the 
participants will elect to receive a single-sum distribution upon 
withdrawal.
    (ii) Before taking into account the 5% probability of withdrawal and 
the 70% probability of electing a single-sum payment, the portion of the 
funding target for the 2009 plan year that is attributable to 
Participant E's assumed single-sum payment based on withdrawal at age 50 
is $68,908.39. This is calculated in the same manner as the present 
value of annuity payments, except that the 2009 applicable mortality 
rates are substituted for the 2009 male annuitant and nonannuitant 
mortality rates after the annuity starting date. This portion of the 
2009 funding target is equal to the sum of $6,815.85, which is the 
present value of annuity payments expected to be made between age 65 and 
66 (during the 20th year after the valuation date), using the second 
segment interest rate of 6.09%, and $62,092.54, which is the present 
value of annuity payments expected to be made after the 20th year 
following the valuation date, using the third segment interest rate of 
6.56%. These present value amounts reflect the 2009 male nonannuitant 
mortality rates prior to the assumed single-sum distribution age of 50.
    (iii) Applying the 5% probability of withdrawal at age 50 and the 
70% probability of electing a single-sum payment, the portion of the 
funding target for the 2009 plan year that is attributable to 
Participant E's assumed single-sum payment (based on withdrawal at age 
50) is $2,411.79 ($68,908.39 x 5% x 70%).
    Example 11. (i) The facts are the same as in Example 8, except that 
the plan sponsor elects under section 430(h)(2)(D)(ii) to use the 
monthly corporate bond yield curve instead of segment rates. The 
enrolled actuary assumes payments are made monthly throughout the year 
and uses the interest rate from the middle of the monthly corporate bond 
yield curve because this mid-year yield rate most closely matches the 
average timing of benefits paid. In accordance with Sec.  1.430(h)(2)-
1(e)(4), the applicable monthly corporate bond yield curve is the yield 
curve derived from December 2008 rates.
    (ii) Before taking into account the 5% probability of withdrawal, 
the funding target associated with Participant E's assumed age 50 
withdrawal benefit in the 2009 actuarial valuation is $67,394.12. This 
reflects the sum of each year's expected payments, discounted at the 
yield rates described in paragraph (i) of this Example 11, as shown 
below:

[[Page 526]]



----------------------------------------------------------------------------------------------------------------
                  Age                             Maturity                   Yield rate           Present value
----------------------------------------------------------------------------------------------------------------
65.....................................  19.5......................  6.97%.....................        $5,897.88
66.....................................  20.5......................  6.90%.....................         5,524.69
67.....................................  21.5......................  6.84%.....................         5,164.63
68 and over............................  Varies....................  Varies....................        50,806.92
                                                                                                ----------------
    Total..............................  ..........................  ..........................        67,394.12
----------------------------------------------------------------------------------------------------------------

    (iii) Applying the 5% probability of withdrawal, the portion of the 
funding target for the 2009 plan year attributable to Participant E's 
assumed withdrawal at age 50 is $3,369.71 ($67,394.12 x 5%).
    Example 12. (i) The facts are the same as in Example 10, except that 
the plan determines the amount of the immediate single-sum distribution 
upon withdrawal at age 50 based on the applicable interest rates under 
section 417(e)(3) or an interest rate of 6.25%, whichever produces the 
higher amount. The applicable mortality table under section 417(e)(3) is 
used for both calculations.
    (ii) Before taking into account the 5% probability of withdrawal and 
the 70% probability of electing a single-sum payment, the present value 
of Participant E's single-sum distribution as of January 1, 2009, using 
an interest rate of 6.25%, based on withdrawal at age 50, is $77,391.88. 
This amount is determined by calculating the projected single-sum 
distribution at age 50 using the applicable mortality rate under section 
417(e)(3) and an interest rate of 6.25%, or $94,789.10, and discounting 
the result to the January 1, 2009, valuation date using the first 
segment rate of 5.07% (because the single-sum distribution is assumed to 
be paid 4 years after the valuation date) and the male non-annuitant 
mortality rates for 2009.
    (iii) Before taking into account the 5% probability of withdrawal 
and the 70% probability of electing a single-sum payment, the present 
value as of January 1, 2009, of Participant E's age-50 single-sum 
distribution using the applicable interest rates and applicable 
mortality table under section 417(e)(3) is $68,908.39, as developed in 
Example 10. Corresponding to plan provisions, the present value 
reflected in the funding target is the larger of this amount or the 
present value of the amount based on a 6.25% interest rate, or 
$77,391.88.
    (iv) Applying the 5% probability of withdrawal at age 50 and the 70% 
probability of electing a single-sum payment, the portion of the funding 
target for the 2009 plan year that is attributable to Participant E's 
assumed single-sum payment (based on withdrawal at age 50) is $2,708.72 
($77,391.88 x 5% x 70%).
    Example 13. (i) Plan Q is a cash balance plan that permits an 
immediate payment of a single sum equal to the participant's 
hypothetical account balance upon termination of employment. Plan Q's 
terms provide that the hypothetical account is credited with interest at 
a market-related rate, based on a specified index. The January 1, 2009, 
actuarial valuation is performed using the 24-month average segment 
rates applicable for September 2008 (determined without regard to the 
transition rule of section 430(h)(2)(G)). Participant F is a male age 61 
on January 1, 2009, and has a hypothetical account balance equal to 
$150,000 on that date. In the 2009 actuarial valuation, the enrolled 
actuary assumes that the hypothetical account balances will increase 
with annual interest credits of 7% until the participant commences 
receiving his or her benefit, corresponding to the actuary's best 
estimate of future interest rates credited under the terms of the plan. 
The actuary also assumes that all participants will retire on the first 
day of the plan year in which they attain age 65 (that is, no 
participant will terminate employment prior to age 65 other than by 
death), and that 100% of participants will elect a single sum upon 
retirement.
    (ii) Participant F's hypothetical account balance projected to 
January 1, 2013 (the plan year in which F attains age 65) is $196,619.40 
based on the assumed annual interest crediting rate of 7%. The funding 
target for the 2009 plan year attributable to Participant F's benefit at 
age 65 is $158,525.81, which is calculated by discounting the projected 
hypothetical account balance of $196,619.40 using the first segment rate 
of 5.07% and the male non-annuitant mortality rates.
    Example 14. (i) The facts are the same as in Example 13, except that 
the actuary assumes that 10% of the participants will choose to collect 
their benefits in the form of a straight life annuity. The plan provides 
that the participant's account balance at retirement is converted to an 
annuity using the applicable interest rates and applicable mortality 
table under section 417(e)(3).
    (ii) Participant F's hypothetical account balance projected to 
January 1, 2013 (the plan year in which F attains age 65) is 
$196,619.40, as outlined in Example 13. This amount is converted to an 
annuity payable commencing at age 65 by dividing the projected account 
balance by an annuity factor based on the applicable mortality table for 
2009 under section 417(e)(3) (corresponding to the valuation date) and 
the interest rates used for the valuation. The resulting annuity

[[Page 527]]

factor is 10.8321, reflecting one year of interest at the first segment 
rate (5.07%) corresponding to the first year of the expected annuity 
payments (the fifth year after the valuation date), 15 years of interest 
at the second segment rate (6.09%) and all remaining years at the third 
segment rate (6.56%). The projected future annuity is therefore 
$196,619.40 divided by 10.8321, or $18,151.55 per year.
    (iii) Before taking into account the 10% probability that the 
participant will elect to take the distribution in the form of a 
lifetime annuity, the funding target associated with the future annuity 
payout for Participant F is $149,120.41. This is equal to the sum of 
$14,242.79, which is the present value of the annuity payment expected 
to made during the year the participant turns age 65 (the 5th year after 
the valuation date), using the first segment interest rate of 5.07%; 
$116,321.72, which is the present value of payments expected to be made 
during the 6th through the 20th years following the valuation date, 
using the second segment interest rate of 6.09%; and $18,555.90, which 
is the present value of payments expected to be made after the 20th year 
following the valuation date, using the third segment interest rate of 
6.56%.
    (iv) Applying the 10% probability of electing a lifetime annuity, 
the portion of the 2009 funding target attributable to Participant F's 
assumed lifetime annuity payable at age 65 is $14,912.04. The portion of 
the 2009 funding target attributable to Participant F's assumed single-
sum payment is 90% of the result obtained in Example 13.
    Example 15. (i) Plan H provides a monthly benefit of $50 times 
service for all participants. Plan H has a funding target of $1,000,000 
and an actuarial value of assets of $810,000 as of January 1, 2010. No 
annuity contracts have been purchased, and Plan H has no funding 
standard carryover balance or prefunding balance as of January 1, 2010. 
The enrolled actuary certifies that the January 1, 2010, AFTAP is 81%. 
Effective July 1, 2010, Plan H is amended on June 14, 2010, to increase 
the plan's monthly benefit to $55 for years of service earned on or 
after July 1, 2010. The present value of the increase in plan benefits 
during 2010 (reflecting benefit accruals attributable to the six months 
between July 1, 2010, and December 31, 2010) is $25,000.
    (ii) The amendment increases benefits for future service only, and 
so the funding target is unaffected. Since section 436(c) only restricts 
plan amendments that increase plan liabilities, the plan amendment can 
take effect.
    (iii) If the $25,000 present value of the increase in plan benefits 
during 2010 were included in Plan H's funding target of $1,000,000, the 
total would be $1,025,000, and the AFTAP would be 79.02% (that is, 
$810,000/$1,025,000). Since this is less than 80%, the amendment would 
not have been permitted to take effect if the 2010 increase were 
included in the funding target instead of target normal cost.
    (iv) Because the amendment was adopted after the January 1, 2010, 
valuation date, the plan sponsor would generally have the option of 
deciding whether to reflect this amendment in the January 1, 2010, 
valuation or defer recognition of the amendment to the January 1, 2011, 
valuation. However, under paragraph (d)(2) of this section, because the 
plan amendment would not have been permitted to take effect under the 
provisions of section 436 if the increase in the target normal cost for 
the plan year had been taken into account in the funding target, the 
actuary must take into account the amendment in the January 1, 2010, 
valuation for purposes of section 430. Thus, the target normal cost for 
the plan year includes the $25,000 that results from the plan amendment.

    (g) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date--(i) In general. Section 430 
generally applies to plan years beginning on or after January 1, 2008. 
The applicability of section 430 for purposes of determining the minimum 
required contribution is delayed for certain plans in accordance with 
sections 104 through 106 of PPA '06.
    (ii) Applicability of special adjustments. The special adjustments 
of paragraph (b)(1)(iii) of this section (relating to adjustments to the 
target normal cost for plan-related expenses and mandatory employee 
contributions) apply to plan years beginning after December 31, 2008. In 
addition, a plan sponsor may elect to make the special adjustments of 
paragraph (b)(1)(iii) of this section for a plan year beginning in 2008. 
This election must take into account both adjustments described in 
paragraph (b)(1)(iii) of this section. This election is subject to the 
same rules that apply to an election to add an amount to the plan's 
prefunding balance pursuant to Sec.  1.430(f)-1(f), and it must be made 
in the same manner as the election made under Sec.  1.430(f)-1(f). Thus, 
the election can be made no later than the last day for making the 
minimum required contribution for the plan year to which the election 
relates.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010, regardless 
of whether section 430

[[Page 528]]

applies to determine the minimum required contribution for the plan 
year. For plan years beginning before January 1, 2010, plans are 
permitted to rely on the provisions set forth in this section for 
purposes of satisfying the requirements of section 430.
    (3) Approval for changes in funding method--(i) 2008 plan year. Any 
changes in a plan's funding method that are made for the first plan year 
beginning in 2008 that are not inconsistent with the requirements of 
section 430 are treated as having been approved by the Commissioner and 
do not require the Commissioner's specific prior approval.
    (ii) Application of this section--(A) First plan year for which 
regulations are effective. Except as otherwise provided in paragraph 
(g)(3)(ii)(B) of this section, any change in a plan's funding method for 
the first plan year that begins on or after January 1, 2010, is treated 
as having been approved by the Commissioner and does not require the 
Commissioner's specific prior approval.
    (B) Optional earlier application of regulations. For the first plan 
year that a plan applies all the provisions of this section, Sec. Sec.  
1.430(f)-1, 1.430(g)-1, 1.430(i)-1, and 1.436-1, any change in a plan's 
funding method for that plan year is treated as having been approved by 
the Commissioner and does not require the Commissioner's specific prior 
approval. For example, if the change in funding method includes a change 
in the valuation software, the change in the valuation software is 
treated as having been approved by the Commissioner and does not require 
the Commissioner's specific prior approval. If that plan year begins 
before January 1, 2010, the automatic approval for a change in funding 
method under paragraph (g)(3)(ii)(A) of this section does not apply to 
the plan.
    (C) Special rule for changes in allocation. Any change in a plan's 
funding method for a plan year earlier than the first plan year 
beginning on or after January 1, 2010, that is necessary to apply the 
rules of paragraph (c)(1)(ii) of this section is treated as having been 
approved by the Commissioner and does not require the Commissioner's 
specific prior approval.
    (iii) First plan year for which section 430 applies to determine 
minimum funding. For a plan for which the minimum required contribution 
is not determined under section 430 for the first plan year that begins 
on or after January 1, 2008, pursuant to sections 104 through 106 of PPA 
'06, any change in a plan's funding method for the first plan year to 
which section 430 applies to determine the plan's minimum required 
contribution is treated as having been approved by the Commissioner and 
does not require the Commissioner's specific prior approval.
    (4) Approval for changes in actuarial assumptions. The 
Commissioner's specific prior approval is not required with respect to 
any actuarial assumptions that are adopted for the first plan year for 
which section 430 applies to determine the minimum required contribution 
for the plan and that are not inconsistent with the requirements of 
section 430.
    (5) Transition rule for determining funding target attainment 
percentage for the 2007 plan year--(i) In general. For purposes of the 
first plan year beginning on or after January 1, 2008, the funding 
target attainment percentage for the plan's prior plan year (the 2007 
plan year) is determined as the fraction (expressed as a percentage), 
the numerator of which is the value of plan assets determined under 
paragraph (g)(5)(ii) of this section, and the denominator of which is 
the plan's current liability determined pursuant to section 412(l)(7) 
(as in effect prior to amendment by PPA '06) as of the valuation date 
for the 2007 plan year.
    (ii) Determination of value of plan assets--(A) In general. The 
value of plan assets for the 2007 plan year under this paragraph 
(g)(5)(ii)(A) is determined as the value of plan assets as described in 
paragraph (g)(5)(ii)(B) of this section, reduced by the plan's funding 
standard account credit balance for the 2007 plan year as described in 
paragraph (g)(5)(iii)(A) of this section except to the extent provided 
in paragraph (g)(5)(iii)(B) of this section.
    (B) Value of plan assets. The value of plan assets for the 2007 plan 
year under this paragraph (g)(5)(ii)(B) is determined under section 
412(c)(2) as in effect for the 2007 plan year, except that the value of 
plan assets prior to subtracting the plan's funding standard

[[Page 529]]

account credit balance described in paragraph (g)(5)(iii)(A) of this 
section must be adjusted so that it is neither less than 90 percent of 
the fair market value of plan assets nor greater than 110 percent of the 
fair market value of plan assets on the valuation date for that plan 
year. If the value of plan assets prior to adjustment under this 
paragraph (g)(5)(ii)(B) is less than 90 percent of the fair market value 
of plan assets on the valuation date, then the value of plan assets 
under this paragraph (g)(5)(ii)(B) is equal to 90 percent of the fair 
market value of plan assets. If the value of plan assets determined 
under this paragraph (g)(5)(ii)(B) is greater than 110 percent of the 
fair market value of plan assets on the valuation date, then the value 
of plan assets under this paragraph (g)(5)(ii)(B) is equal to 110 
percent of the fair market value of plan assets.
    (iii) Subtraction of credit balance--(A) In general. If a plan has a 
funding standard account credit balance as of the valuation date for the 
2007 plan year, then, except as described in paragraph (g)(5)(iii)(B) of 
this section, that balance is subtracted from the value of plan assets 
described in paragraph (g)(5)(ii)(B) of this section as of that 
valuation date to determine the value of plan assets for the 2007 plan 
year. However, the value of plan assets is not reduced below zero.
    (B) Effect of funding standard carryover balance reduction for the 
2008 plan year. Notwithstanding the rules of paragraph (g)(5)(iii)(A) of 
this section, for the first plan year beginning in 2008, if the employer 
has made an election to reduce some or all of the funding standard 
carryover balance as of the first day of that year in accordance with 
Sec.  1.430(f)-1(e), then the present value (determined as of the 
valuation date for the 2007 plan year using the valuation interest rate 
for that 2007 plan year) of the amount so reduced is not treated as part 
of the funding standard account credit balance when that balance is 
subtracted from the value of plan assets pursuant to paragraph 
(g)(5)(iii)(A) of this section.

[T.D. 9467, 74 FR 53035, Oct. 15, 2009]



Sec.  1.430(f)-1  Effect of prefunding balance and funding 
standard carryover balance.

    (a) In general--(1) Overview. This section provides rules relating 
to the application of prefunding and funding standard carryover balances 
under section 430(f). Section 430 and this section apply to single 
employer defined benefit plans (including multiple employer plans) that 
are subject to section 412, but do not apply to multiemployer plans (as 
defined in section 414(f)). Paragraph (b) of this section sets forth 
rules regarding a plan's prefunding balance and a plan sponsor's 
election to maintain a funding standard carryover balance. Paragraph (c) 
of this section provides rules under which those balances must be 
subtracted from plan assets. Paragraph (d) of this section describes a 
plan sponsor's election to use those balances to offset the minimum 
required contribution. Paragraph (e) of this section describes a plan 
sponsor's election to reduce those balances (which will affect the 
determination of the value of plan assets for purposes of sections 430 
and 436). Paragraph (f) of this section sets forth rules regarding 
elections under this section. Paragraph (g) of this section contains 
examples. Paragraph (h) of this section contains effective/applicability 
dates and transition rules.
    (2) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of this section are applied separately for each employer under the plan, 
as if each employer maintained a separate plan. Thus, each employer 
under such a multiple employer plan may have a separate funding standard 
carryover balance and a prefunding balance for the plan. In the case of 
a multiple employer plan to which section 413(c)(4)(A) does not apply 
(that is, a plan described in section 413(c)(4)(B) that has not made the 
election for section 413(c)(4)(A) to apply), the rules of this section 
are applied as if all participants in the plan were employed by a single 
employer.
    (b) Maintenance of balances--(1) Prefunding balance--(i) In general. 
A plan sponsor is permitted to elect to maintain a prefunding balance 
for a

[[Page 530]]

plan. A prefunding balance maintained for a plan consists of a beginning 
balance of zero, increased by the amount of excess contributions to the 
extent the employer elects to do so as described in paragraph (b)(1)(ii) 
of this section, and decreased to the extent provided in paragraph 
(b)(1)(iii) of this section. The plan sponsor's initial election to add 
to the prefunding balance under paragraph (b)(1)(ii) of this section 
constitutes an election to maintain a prefunding balance. The prefunding 
balance is adjusted further for investment return and interest as 
provided in paragraphs (b)(3) and (b)(4) of this section.
    (ii) Increases--(A) In general. If the plan sponsor of a plan elects 
to add to the plan's prefunding balance, as of the first day of a plan 
year following the first effective plan year for the plan, the 
prefunding balance is increased by the amount so elected by the plan 
sponsor for the plan year. The amount added to the prefunding balance 
cannot exceed the present value of the excess contributions for the 
preceding plan year determined under paragraph (b)(1)(ii)(B) of this 
section, increased for interest in accordance with paragraph 
(b)(1)(iv)(A) of this section.
    (B) Present value of excess contribution. The present value of the 
excess contribution for the preceding plan year is the excess, if any, 
of--
    (1) The present value (determined under the rules of paragraph 
(b)(1)(iv)(B) of this section) of the employer contributions (other than 
contributions to avoid or terminate benefit limitations described in 
Sec.  1.436-1(f)(2)) to the plan for such preceding plan year; over
    (2) The minimum required contribution for such preceding plan year.
    (C) Treatment of unpaid minimum required contributions. For purposes 
of this paragraph (b)(1)(ii), a contribution made during a plan year to 
correct an unpaid minimum required contribution (within the meaning of 
section 4971(c)(4)) for a prior plan year is not treated as a 
contribution for the current plan year.
    (iii) Decreases. As of the first day of each plan year, the 
prefunding balance of a plan is decreased (but not below zero) by the 
sum of--
    (A) Any amount of the prefunding balance that was used under 
paragraph (d) of this section to offset the minimum required 
contribution of the plan for the preceding plan year; and
    (B) Any reduction in the prefunding balance under paragraph (e) of 
this section for the plan year.
    (iv) Adjustments for interest--(A) Adjustment of excess 
contribution. The present value of the excess contribution for the 
preceding year (as determined under paragraph (b)(1)(ii)(B) of this 
section) is increased for interest accruing for the period between the 
valuation date for the preceding plan year and the first day of the 
current plan year. For this purpose, interest is determined by using the 
plan's effective interest rate under section 430(h)(2)(A) for the 
preceding plan year, except to the extent provided in paragraph 
(b)(3)(iii) of this section.
    (B) Determination of present value. The present value of the 
contributions described in paragraph (b)(1)(ii)(B)(1) of this section is 
determined as of the valuation date for the preceding plan year, using 
the plan's effective interest rate under section 430(h)(2)(A) for the 
preceding plan year.
    (2) Funding standard carryover balance--(i) In general. A funding 
standard carryover balance is automatically established for a plan that 
had a positive balance in the funding standard account under section 
412(b) (as in effect prior to amendment by the Pension Protection Act of 
2006 (PPA '06), Public Law 109-280 (120 Stat. 780)) as of the end of the 
pre-effective plan year for the plan. The funding standard carryover 
balance as of the beginning of the first effective plan year for the 
plan is the positive balance in the funding standard account under 
section 412(b) (as in effect prior to amendment by PPA '06) as of the 
end of the pre-effective plan year for the plan. After that date, the 
funding standard carryover balance is decreased to the extent provided 
in paragraph (b)(2)(ii) of this section and adjusted further for 
investment return and interest as provided in paragraphs (b)(3) and 
(b)(4) of this section.
    (ii) Decreases. As of the first day of each plan year, the funding 
standard

[[Page 531]]

carryover balance of a plan is decreased (but not below zero) by the sum 
of--
    (A) Any amount of the funding standard carryover balance that was 
used under paragraph (d) of this section to offset the minimum required 
contribution of the plan for the preceding plan year; and
    (B) Any reduction in the funding standard carryover balance under 
paragraph (e) of this section for the plan year.
    (3) Adjustments for investment experience--(i) In general. A plan's 
prefunding balance under paragraph (b)(1) of this section and a plan's 
funding standard carryover balance under paragraph (b)(2) of this 
section as of the first day of a plan year must be adjusted to reflect 
the actual rate of return on plan assets for the preceding plan year. 
For this purpose, the actual rate of return on plan assets for the 
preceding plan year is determined on the basis of fair market value and 
must take into account the amount and timing of all contributions, 
distributions, and other plan payments made during that period.
    (ii) Ordering rules for adjustments. In general, the adjustment for 
actual rate of return on plan assets is applied to the balance after any 
reduction of prefunding and funding standard carryover balances for that 
preceding plan year under paragraph (e) of this section and after 
subtracting amounts used to offset the minimum required contribution for 
the preceding plan year pursuant to paragraph (d) of this section. 
However, see paragraph (d)(1)(ii)(D) of this section for a special 
ordering rule when adjusting for investment experience.
    (iii) Special rule for excess contributions attributable to use of 
funding balances. Notwithstanding paragraph (b)(1)(iv)(A) of this 
section, to the extent that a contribution is included in the present 
value of excess contributions solely because the minimum required 
contribution has been offset under paragraph (d) of this section, the 
contribution is adjusted for investment experience under the rules of 
this paragraph (b)(3).
    (4) Valuation date other than the first day of the plan year--(i) In 
general. If a plan's valuation date is not the first day of the plan 
year, then, solely for purposes of applying paragraphs (c), (d), and (e) 
of this section, the plan's prefunding and funding standard carryover 
balances (if any) determined under this paragraph (b) are increased from 
the first day of the plan year to the valuation date using the plan's 
effective interest rate under section 430(h)(2)(A) for the plan year.
    (ii) Special rule for adjustments for investment experience. In the 
case of a plan with a valuation date that is not the first day of the 
plan year, for purposes of applying the subtraction under paragraph 
(b)(3)(ii) of this section for amounts used to offset the minimum 
required contribution for the preceding plan year and the decreases 
under paragraphs (b)(1)(iii) and (b)(2)(ii) of this section, the amount 
of the prefunding balance or funding standard carryover balance that is 
used to offset the minimum required contribution under paragraph (d) of 
this section or reduced under paragraph (e) of this section is 
discounted from the valuation date to the first day of the plan year 
using the effective interest rate under section 430(h)(2)(A) for the 
plan year.
    (5) Special rule for quarterly contributions. For purposes of 
applying a prefunding balance or funding standard carryover balance to 
required installments described in section 430(j)(3), the respective 
balances are increased from the beginning of the year to the date of the 
election (using the plan's effective interest rate for the plan year) to 
determine the amount available to offset the required quarterly 
installment. The amounts used to offset required quarterly installments 
are then discounted from that date to the first day of the plan year for 
purposes of the subtraction under paragraph (b)(3)(ii) of this section 
and the decreases under paragraphs (b)(1)(iii) and (b)(2)(ii) of this 
section, using the effective interest rate for the plan year. However, 
see paragraph (d)(1)(i)(B) of this section for a special rule regarding 
late quarterly installments when determining the amount that is used to 
offset the minimum required contribution for the plan year.
    (c) Effect of balances on the value of plan assets--(1) In general. 
In the case of

[[Page 532]]

any plan with a prefunding balance or a funding standard carryover 
balance, the amount of those balances is subtracted from the value of 
plan assets for purposes of sections 430 and 436, except as otherwise 
provided in paragraphs (c)(2), (c)(3), and (d)(3) of this section and 
Sec.  1.436-1(j)(1)(ii)(B).
    (2) Subtraction of balances in determining new shortfall 
amortization base--(i) Prefunding balance. For purposes of determining 
whether a plan is exempt from the requirement to establish a new 
shortfall amortization base under section 430(c)(5), the amount of the 
prefunding balance is subtracted from the value of plan assets only if 
an election under paragraph (d) of this section to use the prefunding 
balance to offset the minimum required contribution is made for the plan 
year.
    (ii) Funding standard carryover balance. For purposes of determining 
whether a plan is exempt from the requirement to establish a new 
shortfall amortization base under section 430(c)(5), the funding 
standard carryover balance is not subtracted from the value of plan 
assets regardless of whether any portion of either the funding standard 
carryover balance or the prefunding balance is used to offset the 
minimum required contribution for the plan year under paragraph (d) of 
this section.
    (3) Special rule for certain binding agreements with PBGC. If there 
is in effect for a plan year a binding written agreement with the 
Pension Benefit Guaranty Corporation (PBGC) which provides that all or a 
portion of the prefunding balance or funding standard carryover balance 
(or both balances) is not available to offset the minimum required 
contribution for a plan year, that specified amount is not subtracted 
from the value of plan assets for purposes of determining the funding 
shortfall under section 430(c)(4). For example, if a plan has no 
prefunding balance and a $20 million funding standard carryover balance, 
a PBGC agreement provides that $5 million of a plan's funding standard 
carryover balance is unavailable to offset the minimum required 
contribution for a plan year, and the plan's assets are $100 million, 
then the value of plan assets for purposes of determining the funding 
shortfall under section 430(c)(4) is reduced by $15 million ($20 million 
less $5 million) to $85 million. For purposes of this paragraph (c)(3), 
an agreement with the PBGC is taken into account with respect to a plan 
year only if the agreement was executed prior to the valuation date for 
the plan year.
    (d) Election to apply balances against minimum required 
contribution--(1) In general--(i) Amount of offset to minimum required 
contribution--(A) Effect of use of balances. Subject to the limitations 
provided in this paragraph (d), in the case of any plan year with 
respect to which the plan sponsor elects to use all or a portion of the 
prefunding balance or the funding standard carryover balance to offset 
the minimum required contribution for the plan year, the minimum 
required contribution for the plan year (determined after taking into 
account any waiver under section 412(c)) is offset as of the valuation 
date for the plan year by the amount so used.
    (B) Special rule for late election with respect to quarterly 
contributions. Notwithstanding paragraph (d)(1)(i)(A) of this section, 
if the plan sponsor elects to use all or a portion of the prefunding 
balance or the funding standard carryover balance to satisfy a required 
installment under section 430(j)(3), the amount used to offset the 
minimum required contribution for the plan year is the portion of the 
balance so used, adjusted in accordance with the rules of paragraph 
(b)(5) of this section, unless the date of the election is after the due 
date of the required installment. If the election to use all or a 
portion of the prefunding balance or the funding standard carryover 
balance to satisfy the required installments under section 430(j)(3) is 
made after the due date for the required installment, then the amount 
used to offset the minimum required contribution for the plan year is 
the portion of the balance so used, discounted from the date of the 
election to the due date of the required installment at the effective 
interest rate plus 5 percentage points, and then further adjusted from 
the installment due date to the valuation date at the effective interest 
rate. For example, if a quarterly installment of $20,250 is due on April 
15 for a calendar year plan with a

[[Page 533]]

valuation date on January 1 and an effective interest rate of 6 percent, 
and the installment is satisfied by an election to apply the funding 
standard carryover balance that is made on July 1 (2\1/2\; months after 
the April 15 due date), then the amount used to offset the minimum 
required contribution under this paragraph (d)(1)(i) is $19,481 (that 
is, $20,250 / 1.11(\2.5/12\) / 1.06(\3.5/12\). However, the amount by 
which the funding standard carryover balance is reduced under paragraph 
(b)(2)(ii) of this section is $19,669 (that is, $20,250 / 1.06(\6/12\).
    (ii) Maximum amount of available balances and coordination of 
elections--(A) General requirement to follow chronology. In general, the 
amount of prefunding and funding standard carryover balances that may be 
used to offset the minimum required contribution for a plan year must 
take into account any decrease in those balances which results from a 
prior election either to use the prefunding balance or funding standard 
carryover balance under section 430(f)(3) and this paragraph (d) or to 
reduce those balances under section 430(f)(5) and paragraph (e) of this 
section (including deemed elections under section 436(f)(3) and Sec.  
1.436-1(a)(5)). For example, for a calendar plan year with a January 1 
valuation date, a deemed election under section 436(f)(3) and Sec.  
1.436-1(a)(5) on April 1, 2010 (the first day of the 4th month of the 
plan year) will reduce the available prefunding balance or funding 
standard carryover balance that can be used with respect to an election 
made after April 1, 2010.
    (B) Exception to chronological rule. Notwithstanding the general 
rule of paragraph (d)(1)(ii)(A) of this section, all elections under 
section 430(f)(5) and paragraph (e) of this section to reduce the 
prefunding balance or funding standard carryover balance for the current 
plan year (including deemed elections under section 436(f)(3) and Sec.  
1.436-1(a)(5)) are deemed to occur on the valuation date for the plan 
year and before any election under section 430(f)(3) and this paragraph 
(d) to offset the minimum required contribution for the current plan 
year. Accordingly, if an election to use the prefunding balance or 
funding standard carryover balance to offset the minimum required 
contribution for the plan year (including an election to satisfy the 
quarterly contribution requirement) has been made prior to the election 
to reduce the prefunding balance or funding standard carryover balance, 
then the amount available for use to offset the otherwise applicable 
minimum required contribution for the plan year under this paragraph (d) 
will be retroactively reduced. However, an election to reduce a 
prefunding balance or funding standard carryover balance for a plan year 
does not affect a prior election to use a prefunding balance or funding 
standard carryover balance to offset a minimum required contribution for 
a prior plan year.
    (C) Investment experience. In addition to reflecting any decrease in 
the prefunding balance or the funding standard carryover balance which 
results from a prior election for the previous year either to use the 
prefunding balance or funding standard carryover balance under section 
430(f)(3) and this paragraph (d) to offset the minimum required 
contribution for such prior plan year or to reduce those balances under 
section 430(f)(5) and paragraph (e) of this section (including deemed 
elections under section 436(f)(3) and Sec.  1.436-1(a)(5)), the prior 
plan year's prefunding and funding standard carryover balances must be 
adjusted under the rules of paragraph (b)(3) of this section for 
investment experience for that prior plan year before determining the 
amount of those balances available for such an election for the current 
plan year.
    (D) Special rule for current year elections that are made before 
prior year elections. This paragraph (d)(1)(ii)(D) sets forth a special 
rule that applies if, for the current plan year, a plan sponsor makes an 
election under this paragraph (d) or paragraph (e) of this section 
(including a deemed election under section 436(f)(3) and Sec.  1.436-
1(a)(5)), and then subsequently makes an election under this paragraph 
(d) to offset the minimum required contribution for the prior plan year. 
This special rule applies solely for purposes of determining the amount 
of prefunding and funding standard carryover balances available for that 
subsequent election. Under this special rule, in

[[Page 534]]

lieu of decreasing the funding standard carryover balance or prefunding 
balance as of the valuation date for the current year to take into 
account the current year election, the funding standard carryover 
balance or prefunding balance as of the valuation date for the prior 
plan year is decreased by the amount of the prior year equivalent of the 
current year election. The prior year equivalent of the current year 
election is determined by dividing the amount of the current year 
election (as of the first day of the current plan year) by a number 
equal to 1 plus the rate of investment return for the prior plan year 
determined under paragraph (b)(3) of this section. If this paragraph 
(d)(1)(ii)(D) applies for a plan year, then the funding standard 
carryover balance and prefunding balance are nonetheless adjusted in 
accordance with the rules of paragraph (b) of this section, after the 
application of the rules of this paragraph (d)(1)(ii)(D). Thus, the 
amount used to offset the minimum required contribution for the earlier 
plan year is subtracted from the prefunding balance or funding standard 
carryover balance as of the valuation date for that year prior to the 
adjustment for investment return under paragraph (b)(3) of this section 
for that plan year, and the amount by which the prefunding balance or 
funding standard carryover balance is decreased for the second year is 
based on the elections made for the second year.
    (2) Requirement to use funding standard carryover balance before 
prefunding balance. To the extent that a plan has a funding standard 
carryover balance greater than zero, no amount of the plan's prefunding 
balance may be used to offset the minimum required contribution. Thus, a 
plan's funding standard carryover balance must be exhausted before the 
plan's prefunding balance may be applied under paragraph (d)(1) of this 
section to offset the minimum required contribution.
    (3) Limitation for underfunded plans--(i) In general. An election to 
use the prefunding balance or funding standard carryover balance to 
offset the minimum required contribution under this paragraph (d) is not 
available for a plan year if the plan's prior plan year funding ratio is 
less than 80 percent. For purposes of this paragraph (d)(3), except as 
otherwise provided in this paragraph (d)(3) or paragraph (h)(3) of this 
section, the plan's prior plan year funding ratio is the fraction 
(expressed as a percentage)--
    (A) The numerator of which is the value of plan assets on the 
valuation date for the preceding plan year, reduced by the amount of any 
prefunding balance (but not the amount of any funding standard carryover 
balance); and
    (B) The denominator of which is the funding target of the plan for 
the preceding plan year (determined without regard to the at-risk rules 
of section 430(i)(1)).
    (ii) Special rule for second year of a new plan with no past 
service. In the case of a new plan that was neither the result of a 
merger nor involved in a spinoff, if the prior plan year was the first 
year of the plan and the funding target for the prior plan year was 
zero, then the plan's prior plan year funding ratio is deemed to be 80 
percent for purposes of this paragraph (d)(3).
    (iii) Special rule for plans that are the result of a merger. 
[Reserved]
    (iv) Special rules for plans that are involved in a spinoff. 
[Reserved]
    (e) Election to reduce balances--(1) In general. A plan sponsor may 
make an election for a plan year to reduce any portion of a plan's 
prefunding and funding standard carryover balances under this paragraph 
(e). If such an election is made, the amount of those balances that must 
be subtracted from the value of plan assets pursuant to paragraph (c)(1) 
of this section will be smaller and, accordingly, the value of plan 
assets taken into account for purposes of sections 430 and 436 will be 
larger. Thus, this election to reduce a plan's prefunding and funding 
standard carryover balances is taken into account in the determination 
of the value of plan assets for the plan year and applies for all 
purposes under sections 430 and 436, including for purposes of 
determining the plan's prior plan year funding ratio under paragraph 
(d)(3) of this section for the following plan year. See also section 
436(f)(3) and Sec.  1.436-1(a)(5) for a rule under which the plan 
sponsor is deemed to make the election described

[[Page 535]]

in this paragraph (e). The rules of paragraph (d)(1)(ii) of this section 
also apply for purposes of determining the maximum amount of prefunding 
balance or funding standard carryover balance that is available for an 
election under this paragraph (e).
    (2) Requirement to reduce funding standard carryover balance before 
prefunding balance. To the extent that a plan has a funding standard 
carryover balance greater than zero, no election under paragraph (e)(1) 
of this section is permitted to be made that reduces the plan's 
prefunding balance. Thus, a plan must exhaust its funding standard 
carryover balance before it is permitted to make an election under 
paragraph (e)(1) of this section with respect to its prefunding balance.
    (f) Elections--(1) Method of making elections--(i) In general. Any 
election under this section by the plan sponsor must be made by 
providing written notification of the election to the plan's enrolled 
actuary and the plan administrator. The written notification must set 
forth the relevant details of the election, including the specific 
dollar amount involved in the election (except as provided in this 
paragraph (f)(1). Thus, except as provided in this paragraph (f)(1), a 
conditional or formula-based election generally does not satisfy the 
requirements of this paragraph (f).
    (ii) Standing elections to increase or use balances. A plan sponsor 
may provide a standing election in writing to the plan's enrolled 
actuary to use the funding standard carryover balance and the prefunding 
balance to offset the minimum required contribution for the plan year to 
the extent needed to avoid an unpaid minimum required contribution under 
section 4971(c)(4) taking into account any contributions that are or are 
not made. In addition, a plan sponsor may provide a standing election in 
writing to the plan's enrolled actuary to add the maximum amount 
possible each year to the prefunding balance. Any election made pursuant 
to a standing election under this paragraph (f)(1)(ii) is deemed to 
occur on the last day available to make the election for the plan year 
as provided under paragraph (f)(2)(i) of this section. Any standing 
election under this paragraph (f)(1)(ii) remains in effect for the plan 
with respect to the enrolled actuary named in the election, unless--
    (A) The standing election is revoked under the rules of paragraph 
(f)(3) of this section; or
    (B) The enrolled actuary who signs the actuarial report under 
section 6059 (Schedule SB, ``Single-Employer Defined Benefit Plan 
Actuarial Information'' of Form 5500, ``Annual Return/Report of Employee 
Benefit Plan'') for the plan for the plan year is not the enrolled 
actuary named in the standing election.
    (iii) Standing election to satisfy installments through use of 
funding balances--(A) In general. A plan sponsor may provide a standing 
election in writing to the plan's enrolled actuary to use (to the extent 
available) the funding standard carryover balance and the prefunding 
balance to satisfy any otherwise unpaid portion of a required 
installment under section 430(j)(3). Any use pursuant to a standing 
election under this paragraph (f)(1)(iii) is deemed to occur on the 
later of the last date for making the required installment and the date 
the standing election is provided to the enrolled actuary.
    (B) Otherwise unpaid portion of a required installment. For purposes 
of paragraph (f)(1)(iii)(A) of this section, the otherwise unpaid 
portion of a required installment equals the amount necessary to satisfy 
the required installment rules under section 430(j) based on the 
installment amounts determined as if the required annual payment were 
the amount described in Sec.  1.430(j)-1(c)(5)(ii)(B). Thus, the amount 
of the prefunding and funding standard carryover balances used under a 
standing election is the amount that is needed to satisfy an installment 
in the amount of 25 percent of the minimum required contribution for the 
prior plan year, plus installments in that amount with respect to all 
earlier required installment due dates for the plan year, taking into 
account prior contributions for the plan year and prior elections to use 
the funding standard carryover balance and prefunding balance for the 
plan year.
    (C) Duration of standing election. Generally, any standing election 
under this

[[Page 536]]

paragraph (f)(1)(iii) remains in effect for the plan with respect to the 
enrolled actuary named in the election, unless either of the events 
described in paragraph (f)(1)(ii)(A) or (B) of this section occurs with 
respect to the standing election. However, a plan sponsor may suspend 
application of a standing election for the remaining installments with 
respect to a plan year by providing, in writing to the plan's enrolled 
actuary, notice that the standing election is not to apply for the 
remainder of the plan year. In addition, once the current year's minimum 
required contribution has been determined, a plan sponsor may modify 
application of a standing election for the remaining installments with 
respect to a plan year by providing, in writing to the plan's enrolled 
actuary, a replacement formula election to use the funding standard 
carryover balance and prefunding balance (to the extent available) so 
that the otherwise unpaid portions of the remaining required 
installments satisfy the required installment rules under section 
430(j), taking into account the determination of the current year's 
minimum required contribution pursuant to Sec.  1.430(j)-1(c)(5)(ii)(A), 
prior contributions for the plan year and prior elections to use the 
prefunding and funding standard carryover balances.
    (2) Timing of elections--(i) General rule. Except as otherwise 
provided in paragraph (f)(2)(ii) or (iii) of this section, any election 
under this section with respect to a plan year must be made no later 
than the last date for making the minimum required contribution for the 
plan year as described in section 430(j)(1), or such later date as 
prescribed in guidance published in the Internal Revenue Bulletin. For 
this purpose, an election to add to the prefunding balance relates to 
the plan year for which excess contributions were made. For example, an 
election to add to the prefunding balance as of the first day of the 
plan year that begins on January 1, 2010 (in an amount not in excess of 
the present value of the excess contribution as of the valuation date in 
2009, adjusted for interest under the rules of paragraph (b)(1)(ii) of 
this section), must be made no later than September 15, 2010, even 
though the election is reported on the 2010 Schedule SB of Form 5500, 
which is not due until 2011. Except for the standing elections covered 
by paragraph (f)(1)(ii) of this section, an election under this section 
may not be made prior to the first day of the plan year to which the 
election relates.
    (ii) Special rule for standing election revoked by a change in 
enrolled actuary. If there is a change in enrolled actuary for the plan 
year which would result in a revocation of the standing election under 
the rule of paragraph (f)(1)(ii)(B) of this section, then the plan 
sponsor may reinstate the revoked standing election by providing a 
replacement to the new enrolled actuary by the due date of the Schedule 
SB of Form 5500.
    (iii) Election to reduce balances. Any election under paragraph (e) 
of this section to reduce the prefunding balance or funding standard 
carryover balance for a plan year (for example, in order to avoid or 
terminate a benefit restriction under section 436) must be made by the 
end of the plan year to which the election relates.
    (iv) Earlier elections. This paragraph (f)(2) sets forth the latest 
date that an election can be made. A plan sponsor is permitted to make 
an earlier election, and in certain circumstances may need to make such 
an election in order to timely satisfy a quarterly contribution 
requirement under section 430(j)(3).
    (3) Irrevocability of elections--(i) In general. Except as otherwise 
provided in this paragraph (f)(3) or in guidance published in the 
Internal Revenue Bulletin, a plan sponsor's election under this section 
with respect to the plan's prefunding balance or funding standard 
carryover balance is irrevocable (and must be unconditional). A standing 
election by the plan sponsor may be revoked by providing written 
notification of the revocation to the plan's enrolled actuary and the 
plan administrator on or before the date the corresponding election is 
deemed to occur pursuant to paragraph (f)(1)(ii) of this section.
    (ii) Exception for certain elections. An election to use the 
prefunding balance or funding standard carryover balance to offset the 
minimum required contribution for a plan year (including an

[[Page 537]]

election to satisfy the quarterly contribution requirements for a plan 
year) is permitted to be revoked to the extent the amount the plan 
sponsor elected to use to offset the minimum contribution requirements 
(including an election used to satisfy the quarterly contribution 
requirements) exceeds the minimum required contribution for a plan year 
(determined without regard to the election under paragraph (d) of this 
section) if and only if the election is revoked by providing written 
notification of the revocation to the plan's enrolled actuary and the 
plan administrator by the deadline set forth in paragraph (f)(3)(iii) of 
this section. If no such revocation is made, then, under paragraph (b) 
of this section, the funding standard carryover balance or prefunding 
balance is decreased by the entire amount that the plan sponsor elected 
to use to offset the minimum required contribution for a plan year 
(including an election to satisfy the quarterly contribution 
requirements for a plan year).
    (iii) Deadline for revoking election. The deadline for revoking the 
election described in paragraph (f)(3)(ii) of this section is generally 
the end of the plan year. However, for plans with a valuation date other 
than the first day of the plan year, the deadline for the revocation is 
the deadline for contributions for the plan year as described in section 
430(j)(1). In addition, for the first plan year beginning in 2008, the 
deadline for the revocation for all plans is deferred to the due date 
(including extensions) of the Schedule SB, ``Single-Employer Defined 
Benefit Plan Actuarial Information'' of Form 5500, ``Annual Return/
Report of Employee Benefit Plan''.
    (4) Plan sponsor--(i) In general. For purposes of the elections 
described in this section, except as otherwise provided in paragraph 
(f)(4)(ii) of this section, any reference to the plan sponsor means the 
employer or employers responsible for making contributions to or under 
the plan.
    (ii) Certain multiple employer plans. For purposes of the elections 
described in this section, in the case of plans that are multiple 
employer plans to which section 413(c)(4)(A) does not apply, any 
reference to the plan sponsor means the plan administrator within the 
meaning of section 414(g).
    (g) Examples. The following examples illustrate the rules of this 
section:

    Example 1. (i) Plan P is a defined benefit plan with a plan year 
that is the calendar year and a valuation date of January 1. The funding 
standard carryover balance of Plan P is $25,000 and the prefunding 
balance is zero as of the beginning of the 2010 plan year. The sponsor 
of Plan P, Sponsor S, does not elect to use any portion of the balance 
to offset the minimum required contribution for 2010 pursuant to 
paragraph (d)(1) of this section, or to reduce any portion of the 
funding standard carryover balance prior to the determination of the 
value of plan assets for 2010, pursuant to paragraph (e)(1) of this 
section. The actual rate of return on Plan P's assets for 2010 is 2%. 
Plan P's effective interest rate for 2010 is 6%. The minimum required 
contribution for Plan P under section 430 for 2010 is $100,000, and no 
quarterly installments are required for Plan P for the 2010 plan year. 
As of January 1, 2010, the value of plan assets is $1,100,000 and the 
funding target is $1,000,000. Therefore, the prior plan year funding 
ratio for Plan P for 2010, as determined under paragraph (d)(3) of this 
section, is 110%.
    (ii) Sponsor S makes a contribution to Plan P of $150,000 on 
December 1, 2010, for the 2010 plan year and makes no other 
contributions for the 2010 plan year. Because this contribution was made 
on a date other than the valuation date for the 2010 plan year, the 
contribution must be adjusted to reflect interest that would otherwise 
have accrued between the valuation date and the date of the 
contribution, at the effective interest rate for the 2010 plan year. The 
amount of the contribution after adjustment is $142,198, determined as 
$150,000 discounted for 11 months of compound interest at an effective 
annual interest rate of 6%.
    (iii) The excess of employer contributions for 2010 over the minimum 
required contribution for 2010, as of the valuation date, is $42,198 
($142,198 less $100,000). Accordingly, the increase in Plan P's 
prefunding balance as of January 1, 2011, cannot exceed $44,730 (which 
is the present value of the excess contribution of $42,198 adjusted for 
12 months of interest at an effective interest rate of 6%).
    (iv) Plan P's funding standard carryover balance as of January 1, 
2011, is $25,500 (which is the funding standard carryover balance as of 
January 1, 2010, adjusted for investment experience during 2010 at a 
rate of 2%).
    Example 2. (i) The facts are the same as in Example 1, except that 
the contribution of $150,000 is made on February 1, 2011, for the 2010 
plan year.
    (ii) The amount of the contribution after adjustment is $140,824, 
which is determined

[[Page 538]]

as $150,000 discounted for 13 months of interest at an effective 
interest rate of 6%. Accordingly, the increase in Plan P's prefunding 
balance as of January 1, 2011, cannot exceed $43,273 (which is the 
present value of the excess contribution of $40,824 adjusted for 12 
months of interest at an effective interest rate of 6%).
    (iii) Plan P's funding standard carryover balance as of January 1, 
2011, is $25,500, as developed in Example 1 of this section. If Sponsor 
S elects to increase the prefunding balance as of January 1, 2011, by 
the present value of the excess contribution adjusted for interest, or 
$43,273, the total of the funding standard carryover balance and 
prefunding balance as of January 1, 2011, is $68,773.
    Example 3. (i) The facts are the same as in Example 1, except that 
Sponsor S contributes $90,539 to Plan P on February 1, 2011, for the 
2010 plan year and makes no other contributions to Plan P for the 2010 
plan year. In addition, on February 1, 2011, Sponsor S elects to use 
$15,000 of the funding standard carryover balance to offset P's minimum 
required contribution for 2010, pursuant to paragraph (d)(1) of this 
section. This is permitted because Plan P's prior-year funding ratio 
determined under paragraph (d)(3) of this section is 110%, and is 
therefore not less than 80%.
    (ii) Because the contribution was made on a date other than the 
valuation date for the 2010 plan year, the contribution must be adjusted 
to reflect interest that would otherwise have accrued between the 
valuation date and the date of the contribution, at the effective 
interest rate for the 2010 plan year. The amount of the contribution 
after adjustment is $85,000, determined as $90,539 discounted for 13 
months of compound interest at an effective interest rate of 6%. The 
adjusted contribution of $85,000 plus the $15,000 of the funding 
standard carryover balance used to offset the minimum required 
contribution equals the minimum required contribution for the 2010 plan 
year of $100,000. Therefore, no excess contributions are available to 
increase the prefunding balance, and the prefunding balance as of 
January 1, 2011, remains zero.
    (iii) The funding standard carryover balance as of January 1, 2011, 
is adjusted for investment experience during the 2010 plan year, in 
accordance with paragraph (b)(3) of this section. The amount of the 
adjustment is $200, determined as the actual rate of return on plan 
assets for 2010 as applied to the 2010 funding standard carryover 
balance after reduction for the amount of that balance used under 
paragraph (d)(1) of this section (that is, $25,000 less $15,000, 
multiplied by the actual rate of return of 2%).
    (iv) The funding standard carryover balance, as of January 1, 2011, 
is $10,200, determined as the 2010 funding standard carryover balance 
less the amount used to offset the 2010 minimum required contribution, 
adjusted for investment experience during the 2010 year ($25,000 less 
$15,000 plus $200).
    Example 4. (i) The facts are the same as in Example 3, except that 
Sponsor S contributes $150,000 (instead of $90,539) to Plan P on 
February 1, 2011, for the 2010 plan year.
    (ii) Because the contribution was made on a date other than the 
valuation date for the 2010 plan year, the contribution must be adjusted 
to reflect interest that would otherwise have accrued between the 
valuation date and the date of the contribution, at the effective 
interest rate for the 2010 plan year. The amount of the contribution 
after adjustment is $140,824, determined as $150,000 discounted for 13 
months of interest at an effective interest rate of 6%.
    (iii) Because Sponsor S elected to use $15,000 of the funding 
standard carryover balance to offset the minimum required contribution 
for 2010 of $100,000, the cash contribution requirement for 2010, 
adjusted with interest to January 1, 2010, is $85,000. The adjusted 
contribution of $140,824 exceeds this amount by $55,824. Of this amount, 
$15,000 exceeds the minimum required contribution only because of 
Sponsor S's election to use the funding standard carryover balance to 
offset the minimum required contribution as provided in paragraph (d)(1) 
of this section. The remaining $40,824 ($140,824 minus $100,000) results 
from cash contributions made in excess of the minimum required 
contribution before offset by the funding standard carryover balance.
    (iv) The portion of the excess contribution resulting solely because 
the minimum required contribution was offset by a portion of the funding 
standard carryover balance is adjusted for investment experience during 
2009, pursuant to paragraph (b)(3)(iii) of this section. Accordingly, 
this portion of the present value of the excess contribution adjusted 
for interest as of January 1, 2011, is $15,300 ($15,000 adjusted for 
investment experience during 2010 at a rate of 2%).
    (v) The excess contribution resulting from cash contributions in 
excess of the minimum required contribution before offset by the funding 
standard carryover balance is adjusted for interest at the effective 
interest rate for 2010, pursuant to paragraph (b)(1)(iv)(A) of this 
section. Accordingly, this portion of the present value of the excess 
contribution adjusted for interest as of January 1, 2011, is $43,273 
($40,824 increased by the effective interest rate of 6%). The increase 
in Plan P's prefunding balance as of January 1, 2011, cannot exceed the 
total present value of the excess contribution adjusted for interest of 
$58, 573 ($15,300 plus $43,273).
    (vi) The funding standard carryover balance as of January 1, 2011, 
is $10,200, determined as the 2010 funding standard carryover balance 
less the $15,000 used to offset the 2010 minimum required contribution, 
adjusted for

[[Page 539]]

investment experience during the 2010 plan year as developed in Example 
3 ($25,000 less $15,000 plus $200).
    (vii) Sponsor S elects to increase the prefunding balance by the 
maximum amount of the present value of the excess contribution adjusted 
for interest of $58,573, resulting in a total of the funding standard 
carryover balance and the prefunding balance as of January 1, 2011, of 
$68,773, the same amount as that developed in Example 2.
    Example 5. (i) Plan Q is a defined benefit plan with a plan year 
that is the calendar year and a valuation date of July 1. The funding 
standard carryover balance of Plan Q is $50,000 as of January 1, 2010, 
the beginning of the 2010 plan year. The prefunding balance of Plan Q as 
of the beginning of the 2010 plan year is $0. The actual rate of return 
on Plan Q's assets for 2010 is 10%. Plan Q's effective interest rate for 
2010 is 6.25%. The funding ratio for Plan Q for 2009 (the prior plan 
year funding ratio with respect to 2010, as determined under paragraph 
(d)(3) of this section) is 85%, which is not less than 80%. The minimum 
required contribution for Plan Q for 2010 is $200,000. Sponsor T makes a 
contribution to Plan Q of $190,000 on July 1, 2010, for the 2010 plan 
year, and makes no other contributions for the 2010 plan year. Sponsor T 
elects to use $10,000 of the funding standard carryover balance to 
offset Plan Q's minimum required contribution in 2010.
    (ii) Pursuant to paragraph (b)(4) of this section, the funding 
standard carryover balance is increased to $51,539 as of July 1, 2010 
(that is, an increase to reflect 6 months of interest at an effective 
interest rate of 6.25%) for the purpose of adjusting plan assets under 
paragraph (c) of this section, and for applying any election to use or 
reduce Plan Q's funding standard carryover balance under paragraph (d) 
or (e) of this section. However, Sponsor T does not elect in 2010 to 
reduce any portion of the funding standard carryover balance pursuant to 
paragraph (e) of this section. The funding standard carryover balance 
($51,539) is subtracted from the value of plan assets, as of July 1, 
2010, prior to the determination of the minimum funding contribution, 
and $51,539 is the maximum amount that may applied against the minimum 
required contribution.
    (iii) The value of the funding standard carryover balance as of 
January 1, 2011, is determined by first discounting the amount used to 
offset the minimum required contribution for 2010 from July 1, 2010, to 
January 1, 2010, using the effective interest rate of 6.25%, and 
subtracting the discounted amount from the January 1, 2010, funding 
standard carryover balance. The resulting amount is adjusted for 
investment experience to January 1, 2011, using a rate equal to the 
actual rate of return on plan assets of 10% during 2010. Thus, the 
$10,000 used to offset Plan Q's minimum required contribution as of July 
1, 2010, is discounted for 6 months of interest, at an effective 
interest rate of 6.25%, to obtain an amount of $9,701 as of January 1, 
2010. The remaining funding standard carryover balance as of January 1, 
2010, solely for purposes of determining the adjustment for investment 
experience during 2010, is $40,299 ($50,000--$9,701), and the adjustment 
for investment experience is $4,030 ($40,299 x 10%). The value of the 
funding standard carryover balance as of January 1, 2011, is $44,329 
(that is, $50,000 - $9,701 + $4,030).
    Example 6. (i) The facts are the same as in Example 5, except that 
Sponsor T contributes $200,000 on July 1, 2010, for the 2010 plan year.
    (ii) The cash contribution required for 2010, after offsetting the 
minimum required contribution by $10,000 of the funding standard 
carryover balance in accordance with T's election, is $190,000. The 
difference, or $10,000, must be adjusted to January 1, 2011, to 
determine the maximum amount that can be added to the prefunding balance 
as of that date.
    (iii) The excess contribution is first adjusted to January 1, 2010, 
by discounting for 6 months of interest using the effective interest 
rate for 2010 of 6.25%. This results in an excess contribution of $9,701 
($10,000 / 1.0625 \0.5\). Because this amount is an excess contribution 
solely because of Sponsor T's election to offset the minimum required 
contribution for 2010 by a portion of the funding standard carryover 
balance, the amount is then adjusted for investment experience during 
2010 at a rate of 10%, in accordance with paragraph (b)(3)(iii) of this 
section, for a present value of the excess contribution adjusted for 
interest of $10,671 ($9,701 x 1.10) as of January 1, 2011.
    Example 7. (i) The facts are the same as in Example 4. Plan P's 
effective interest rate for 2011 is 6.5%, and the rate of return on 
investments during 2011 is 7%. All required quarterly installments for 
the 2011 plan year were made by the applicable due dates. On February 1, 
2012, Sponsor S elects to use $50,000 of Plan P's prefunding and funding 
standard carryover balances to offset the minimum required contribution 
for the 2011 plan year. On April 15, 2012, Sponsor S elects to use Plan 
P's prefunding and funding standard carryover balances to offset the 
2012 minimum required contribution by $20,000, in accordance with 
paragraph (d) of this section, in order to offset the required quarterly 
installment then due.
    (ii) When adjusting Plan P's prefunding and funding standard 
carryover balances to reflect Sponsor S's election to use them to offset 
the 2011 minimum required contribution, the remaining $10,200 in the 
funding standard carryover balance as of January 1, 2011, must be used 
before any portion of the prefunding balance. The prefunding balance is 
reduced by the remaining $39,800 ($50,000

[[Page 540]]

total election minus $10,200 from the funding standard carryover 
balance).
    (iii) The amount available for Sponsor S's election to use Plan P's 
prefunding and funding standard carryover balances to offset the 2012 
minimum required contribution is determined by reducing the January 1, 
2011, prefunding and funding standard carryover balances to reflect the 
election to use the prefunding and funding standard carryover balances 
to offset the 2011 minimum required contribution, and by adjusting the 
resulting amount to January 1, 2012, using the rate of investment return 
for Plan P during 2011. Accordingly, the available amount in Plan P's 
funding standard carryover balance as of January 1, 2012, is zero. The 
available amount in Plan P's prefunding balance as of January 1, 2012, 
is $20,087 ($58,573 minus $39,800, increased by 7%). Therefore, Sponsor 
S has $20,087 available to offset the minimum required contribution for 
the 2012 plan year.
    Example 8. (i) The facts are the same as in Example 7, except that 
based on the enrolled actuary's certification of the AFTAP on July 1, 
2012, Sponsor S is deemed to elect to reduce the January 1, 2012, 
prefunding balance by $15,000 under section 436(f)(3).
    (ii) In accordance with paragraph (d)(1)(ii)(B) of this section, the 
deemed election to reduce the prefunding balance is deemed to occur on 
the first day of the plan year, and before the date of any election to 
offset the minimum required contribution for the 2012 plan year. The 
deemed election does not affect Sponsor S's election to offset the 2011 
minimum contribution because that election was made on February 1, 2012, 
before the date of the deemed election, July 1, 2012.
    (iii) As shown in Example 7, the available prefunding balance as of 
January 1, 2012, after reflecting the February 1, 2012, election to 
offset the 2011 minimum required contribution but before reflecting the 
April 15, 2012, election to offset the 2012 minimum required 
contribution, is $20,087. Adjusting this amount to reflect the deemed 
election to reduce the prefunding balance by $15,000 leaves a balance of 
$5,087 available to offset the minimum required contribution for 2012.
    (iv) The portion of the quarterly installment due April 15, 2012 
that was not covered by the remaining $5,087 prefunding balance is 
considered unpaid retroactive to April 15, 2012.
    Example 9. (i) The facts are the same as in Example 8, except that 
Sponsor S does not make the election to offset the 2011 minimum required 
contribution until August 1, 2012, and the deemed election as of July 1, 
2012, reduces Plan P's prefunding and funding standard carryover 
balances as of January 1, 2012, by $68,500. Sponsor S does not elect to 
use Plan P's prefunding and funding standard carryover balances to 
offset the 2012 minimum contribution.
    (ii) In accordance with paragraph (d)(1)(ii)(A) of this section, the 
July 1, 2012, deemed election to reduce Plan P's prefunding and funding 
standard carryover balances must be taken into account before 
determining the amount available to offset the 2011 minimum required 
contribution because the election to offset the 2011 minimum required 
contribution was made after the date of the deemed election, July 1, 
2012.
    (iii) Pursuant to paragraph (d)(1)(ii)(C) of this section, the 
January 1, 2011, prefunding and funding standard carryover balances are 
adjusted to January 1, 2012, using Plan P's rate of investment return 
for 2011 of 7%. This results in an available funding standard carryover 
balance of $10,914 ($10,200 x 1.07) and an available prefunding balance 
of $62,673 (58,573 x 1.07) as of January 1, 2012.
    (iv) Paragraph (d)(2) of this section requires that the funding 
standard carryover balance must be used before reducing Plan P's 
prefunding balance. Accordingly, the funding standard carryover balance 
is eliminated, and the prefunding balance is reduced by the remaining 
$57,586 ($68,500 - $10,914), resulting in an available prefunding 
balance of $5,087 ($62,673 - $57,586) as of January 1, 2012.
    (v) In accordance with paragraph (d)(1)(ii)(D) of this section, the 
remaining balance is adjusted to January 1, 2011, to determine the 
amount available to offset the 2011 minimum required contribution. This 
adjustment is done by dividing the remaining balance by 1 plus the rate 
of investment return for 2011. Accordingly, the amount available to 
offset the 2011 minimum required contribution is $4,754 ($5,087 / 1.07).
    (vi) If the plan sponsor elects to use the $4,754 available balance 
to offset the 2011 minimum required contribution, the funding standard 
carryover balance as of January 1, 2012 (prior to the deemed reduction 
under section 436(f)(3)) is $5,827 ($10,200 less $4,754, plus $381 for 
investment experience at a rate of 7%). The prefunding balance as of 
January 1, 2012 (prior to the deemed reduction under section 436(f)(3)) 
is $62,673 (that is, $58,573 x 1.07). The deemed election to reduce Plan 
P's balance is first applied to eliminate the funding standard carryover 
balance, and the remaining $62,673 ($68,500 less $5,827) reduces the 
January 1, 2012, prefunding balance to zero.
    Example 10. (i) Plan V is a defined benefit plan with a plan year 
that is the calendar year and a valuation date of December 31. The 
valuation is based on the fair market value of plan assets, which 
amounts to $1,000,000 as of December 31, 2010, before any adjustments. 
As of January 1, 2010, Plan V's funding standard carryover balance is $0 
and its prefunding balance is $125,000. Plan V's effective interest rate 
for 2010 is 5.5%. The enrolled actuary's certification of AFTAP for

[[Page 541]]

2010 on March 31, 2010, results in a deemed reduction of $15,000 in the 
plan's prefunding balance as of January 1, 2010. Plan V's sponsor 
elected to use the prefunding balance to offset any portion of the 
minimum required contribution for 2010 not covered by cash 
contributions.
    (ii) In accordance with paragraph (b)(4)(i) of this section, the 
amount of the prefunding balance subtracted from plan assets is 
increased from the first day of the plan year to the valuation date 
using the effective interest rate of 5.5% for 2009. Accordingly, the 
prefunding balance used for this purpose is $116,050 [($125,000 - 
$15,000 deemed reduction) x 1.055].
    (iii) The fair market value of plan assets used for the December 31, 
2010, valuation is $883,950 ($1,000,000 - $116,050).
    Example 11. (i) The facts are the same as in Example 10. The minimum 
contribution for Plan V for the 2010 plan year is $45,000; no quarterly 
installments are required for Plan V for 2010. Plan V's sponsor makes a 
contribution of $20,000 for the 2010 plan year on July 1, 2011. The 
actual rate of return on assets for Plan V during 2010 is 10%.
    (ii) The contribution of $20,000 is discounted to December 31, 2010, 
using the effective interest rate of 5.5% to determine the remaining 
balance of the 2010 minimum required contribution. Accordingly, the 
contribution is adjusted to $19,472 ($20,000 / 1.055 \0.5\) as of 
December 31, 2010, and the balance of the minimum required contribution 
is $25,528 ($45,000 - $19,472). This balance will be covered by the plan 
sponsor's election to use the prefunding balance to offset any portion 
of the minimum required contribution not covered by cash contributions.
    (iii) Under section (b)(4)(ii) of this section, the amount used to 
offset the 2010 minimum required contribution for the purpose of 
adjusting the prefunding balance is discounted to January 1, 2010, using 
the effective interest rate for 2010. This amount is calculated as 
$24,197 ($25,528 / 1.055).
    (iv) The prefunding balance as of January 1, 2011, is reduced by the 
deemed election of $15,000 and the discounted amount used to offset the 
2010 minimum required contribution ($24,197), and adjusted for 
investment experience for 2010 using the actual rate of return of 10%. 
Accordingly, the prefunding balance as of January 1, 2011 is $94,383 
[($125,000 - $15,000 - $24,197) x 1.10].
    Example 12. (i) The facts are the same as in Example 11, except that 
the enrolled actuary's certification of the AFTAP as of March 31, 2011, 
results in a deemed reduction of the prefunding balance as of January 1, 
2011, of $75,000.
    (ii) Under paragraph (d)(1)(ii) of this section, the deemed 
reduction of the prefunding balance is applied before the election to 
use the prefunding balance to offset the balance of the minimum required 
contribution for 2010. To determine the amount of the prefunding balance 
available to cover the remaining minimum required contribution for 2010, 
the deemed reduction is adjusted for investment experience to January 1, 
2010, using the actual rate of return of 10% for 2010. Accordingly, the 
adjusted deemed reduction is $68,182 ($75,000 / 1.10) and the available 
prefunding balance as of January 1, 2010, is $41,818 ($125,000 - $15,000 
adjusted deemed reduction for 2010 - $68,182 adjusted deemed reduction 
for 2011).
    (iii) This amount is then adjusted to December 31, 2010, using the 
effective interest rate of 5.5%. The amount of the prefunding balance 
available to offset the 2009 minimum required contribution as of 
December 31, 2010, is $44,118 ($41,818 x 1.055). This amount is larger 
than the election made by Plan V's sponsor to offset the minimum 
required contribution for 2010 ($25,528) and so the election remains 
valid.

    (h) Effective/applicability date and transition rules--(1) Statutory 
effective date/applicability date. Section 430 generally applies to plan 
years beginning on or after January 1, 2008. The applicability of 
section 430 for purposes of determining the minimum required 
contribution is delayed for certain plans in accordance with sections 
104 through 106 of PPA '06.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010. For plan 
years beginning before January 1, 2010, plans are permitted to rely on 
the provisions set forth in this section for purposes of satisfying the 
requirements of section 430.
    (3) Special lookback rule for 2007 plan year's funding ratio--(i) 
Plan assets. For purposes of determining a plan's prior plan year 
funding ratio under paragraph (d)(3) of this section with respect to the 
first plan year beginning on or after January 1, 2008, the value of plan 
assets on the valuation date of the preceding plan year (the ``2007 plan 
year'') is determined under section 412(c)(2) as in effect for the 2007 
plan year, except that, for this purpose--
    (A) If the value of plan assets is less than 90 percent of the fair 
market value of plan assets for the 2007 plan year on that date, such 
value is considered to be 90 percent of the fair market value; and
    (B) If the value of plan assets is greater than 110 percent of the 
fair market value of plan assets for the 2007

[[Page 542]]

plan year on that date, such value is considered to be 110 percent of 
the fair market value.
    (ii) Funding target. For purposes of determining a plan's prior plan 
year funding ratio under paragraph (d)(3) of this section with respect 
to the first plan year beginning on or after January 1, 2008, the 
funding target of the plan for the preceding plan year is equal to the 
plan's current liability under section 412(l)(7) (as in effect prior to 
amendment by PPA '06) on the valuation date for the 2007 plan year.
    (iii) Special rules for new plans, mergers, and spinoffs. In the 
case of a plan described in paragraph (d)(3)(ii), (d)(3)(iii), or 
(d)(3)(iv) of this section, the plan's prior plan year funding ratio 
with respect to the first plan year beginning on or after January 1, 
2008 is determined using rules similar to the rules of paragraphs 
(d)(3)(ii), (d)(3)(iii), and (d)(3)(iv) of this section.
    (4) First effective plan year. For purposes of this section, the 
term first effective plan year means the first plan year beginning on or 
after the date section 430 applies for purposes of determining the 
minimum required contribution for the plan.
    (5) Pre-effective plan year. For purposes of this section, the term 
pre-effective plan year means the plan year immediately preceding the 
first effective plan year.

[T.D. 9467, 74 FR 54046, Oct. 15, 2009, as amended by T.D. 9732, 80 FR 
54389, Sept. 9, 2015]



Sec.  1.430(g)-1  Valuation date and valuation of plan assets.

    (a) In general--(1) Overview. This section provides rules relating 
to a plan's valuation date and the valuation of a plan's assets for a 
plan year under section 430(g). Section 430 and this section apply to 
single employer defined benefit plans (including multiple employer plans 
as defined in section 413(c)) that are subject to the rules of section 
412, but do not apply to multiemployer plans (as defined in section 
414(f)). Paragraph (b) of this section describes valuation date rules. 
Paragraph (c) of this section describes rules regarding the 
determination of the asset value for purposes of a plan's actuarial 
valuation. Paragraph (d) of this section contains rules for taking 
employer contributions into account in the determination of the value of 
plan assets. Paragraph (e) of this section contains examples. Paragraph 
(f) of this section sets forth effective/applicability dates and 
transition rules.
    (2) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section 430 and this section are applied separately for each employer 
under the plan as if each employer maintained a separate plan. Thus, in 
such a case, the value of plan assets is determined separately for each 
employer under the plan. In the case of a multiple employer plan to 
which section 413(c)(4)(A) does not apply (that is, a plan described in 
section 413(c)(4)(B) that has not made the election for section 
413(c)(4)(A) to apply), the rules of section 430 and this section are 
applied as if all participants in the plan were employed by a single 
employer.
    (b) Valuation date--(1) In general. The determination of the funding 
target, target normal cost, and value of plan assets for a plan year is 
made as of the valuation date for that plan year. Except as otherwise 
provided in paragraph (b)(2) of this section, the valuation date for any 
plan year is the first day of the plan year.
    (2) Exception for small plans--(i) In general. If, on each day 
during the preceding plan year, a plan had 100 or fewer participants 
determined by applying the rules of Sec.  1.430(d)-1(e)(1) and (2) 
(including active and inactive participants and all other individuals 
entitled to future benefits), then the plan may designate any day during 
the plan year as its valuation date for that plan year and succeeding 
plan years. For purposes of this paragraph (b)(2)(i), all defined 
benefit plans (other than multiemployer plans as defined in section 
414(f)) maintained by an employer are treated as one plan, but only 
participants with respect to that employer are taken into account.
    (ii) Employer determination. For purposes of this paragraph (b)(2), 
the employer includes all members of the employer's controlled group 
determined pursuant to section 414(b), (c), (m), and (o) and includes 
any predecessor of the

[[Page 543]]

employer that, during the prior year, employed any employees of the 
employer who are covered by the plan.
    (iii) Application of exception in first plan year. In the case of 
the first plan year of any plan, the exception for small plans under 
paragraph (b)(2)(i) of this section is applied by taking into account 
the number of participants that the plan is reasonably expected to have 
on each day during the first plan year.
    (iv) Valuation date is part of funding method. The selection of a 
plan's valuation date is part of the plan's funding method and, 
accordingly, may only be changed with the consent of the Commissioner. A 
change of a plan's valuation date that is required by section 430 is 
treated as having been approved by the Commissioner and does not require 
the Commissioner's prior specific approval. Thus, if a plan that ceases 
to be eligible for the small plan exception under this paragraph (b)(2) 
for a plan year because the number of participants exceeded 100 in the 
prior plan year, then the resulting change in the valuation date to the 
first day of the plan year is automatically approved by the 
Commissioner.
    (c) Determination of asset value--(1) In general--(i) General use of 
fair market value. Except as otherwise provided in this paragraph (c), 
the value of plan assets for purposes of section 430 is equal to the 
fair market value of plan assets on the valuation date. Prior year 
contributions made after the valuation date and current year 
contributions made before the valuation date are taken into account to 
the extent provided in paragraph (d) of this section.
    (ii) Fair market value. The fair market value of an asset is 
determined as the price at which the asset 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. 
Except as otherwise provided by the Commissioner, any guidance on the 
valuation of insurance contracts under Subchapter D of Chapter 1 the 
Internal Revenue Code applies for purposes of this paragraph (c)(1)(ii).
    (2) Averaging of fair market values--(i) In general. Subject to the 
plan asset corridor rules of paragraph (c)(2)(iii) of this section, a 
plan is permitted to determine the value of plan assets on the valuation 
date as the average of the fair market value of assets on the valuation 
date and the adjusted fair market value of assets determined for one or 
more earlier determination dates (adjusted using the method described in 
paragraph (c)(2)(ii) of this section). The method of determining the 
value of assets is part of the plan's funding method and, accordingly, 
may only be changed with the consent of the Commissioner.
    (ii) Adjusted fair market value--(A) Determination dates. The period 
of time between each determination date (treating the valuation date as 
a determination date) must be equal and that period of time cannot 
exceed 12 months. In addition, the earliest determination date with 
respect to a plan year cannot be earlier than the last day of the 25th 
month before the valuation date of the plan year (or a similar period in 
the case of a valuation date that is not the first day of a month). In a 
typical situation, the earlier determination dates will be the two 
immediately preceding valuation dates. However, these rules also permit 
the use of more frequent determination dates. For example, monthly or 
quarterly determination dates may be used.
    (B) Adjustments for contributions and distributions. The adjusted 
fair market value of plan assets for a prior determination date is the 
fair market value of plan assets on that date, increased for 
contributions included in the plan's asset balance on the valuation date 
that were not included in the plan's asset balance on the earlier 
determination date, reduced for benefits and all other amounts paid from 
plan assets during the period beginning with the prior determination 
date and ending immediately before the valuation date, and adjusted for 
expected earnings as described in paragraph (c)(2)(ii)(D) of this 
section. For this purpose, the fair market value of assets as of a 
determination date includes any contribution for a plan year that ends 
with or prior to the determination date that is receivable as of the 
determination date (but only if the contribution is actually made within 
8\1/2\ months after the end of the applicable plan year). If the

[[Page 544]]

contribution that is receivable as of the determination date is for a 
plan year beginning on or after January 1, 2008, then only the present 
value as of the determination date (determined using the effective 
interest rate under section 430(h)(2)(A) for the plan year for which the 
contribution is made) is included in the fair market value of assets.
    (C) Treatment of spin-offs and plan-to-plan transfers. For purposes 
of determining the adjusted fair market value of plan assets, assets 
spun-off from a plan as a result of a spin-off described in Sec.  
1.414(l)-1(b)(4) are treated as an amount paid from plan assets. Except 
as otherwise provided by the Commissioner, for purposes of determining 
the adjusted fair market value of plan assets, assets that are added to 
a plan as a result of a plan-to-plan transfer described in Sec.  
1.414(l)-1(b)(3) are treated in the same manner as contributions.
    (D) Adjustments for expected earnings. [Reserved]
    (E) Assumed rate of return. [Reserved]
    (F) Limitation on the assumed rate of return for periods within plan 
years for which the three segment rates were used. [Reserved]
    (G) Limitation on the assumed rate of return for periods within plan 
years for which the full yield curve was used. [Reserved]
    (iii) Restriction to 90-110 percent corridor--(A) In general. This 
paragraph (c)(2)(iii) provides rules for applying the 90 to 110 percent 
corridor set forth in section 430(g)(3)(B)(iii). The rules for 
accounting for contribution receipts under paragraphs (d)(1) and (d)(2) 
of this section are applied prior to the application of the 90 to 110 
percent corridor under this paragraph (c)(2)(iii).
    (B) Asset value less than 90 percent of fair market value. If the 
value of plan assets determined under paragraph (c)(2)(i) of this 
section is less than 90 percent of the fair market value of plan assets, 
then the value of plan assets under this paragraph (c)(2) is equal to 90 
percent of the fair market value of plan assets.
    (C) Asset value greater than 110 percent of fair market value. If 
the value of plan assets determined under paragraph (c)(2)(i) of this 
section is greater than 110 percent of the fair market value of plan 
assets, then the value of plan assets under this paragraph (c)(2) is 
equal to 110 percent of the fair market value of plan assets.
    (3) Qualified transfers to health benefit accounts. In the case of a 
qualified transfer (as defined in section 420), any assets so 
transferred are not treated as plan assets for purposes of section 430 
and this section.
    (d) Accounting for contribution receipts--(1) Prior year 
contributions--(i) In general. For purposes of determining the value of 
plan assets under paragraph (c) of this section, if an employer makes a 
contribution to the plan after the valuation date for the current plan 
year and the contribution is for an earlier plan year, then the present 
value of the contribution determined as of that valuation date is taken 
into account as an asset of the plan as of the valuation date, but only 
if the contribution is made before the deadline for contributions as 
described in section 430(j)(1) for the plan year immediately preceding 
the current plan year. For this purpose, the present value is determined 
using the effective interest rate under section 430(h)(2)(A) for the 
plan year for which the contribution is made.
    (ii) Special rule for contributions for the 2007 plan year--(A) 
Timely contributions. Notwithstanding paragraph (d)(1)(i) of this 
section, if the employer makes a contribution to the plan after the 
valuation date for the first plan year that begins on or after January 
1, 2008, and the contribution is for the immediately preceding plan year 
and is made by the deadline for contributions for that preceding plan 
year under section 412(c)(10) (as in effect before amendment by the 
Pension Protection Act of 2006 (PPA '06), Public Law 109-280 (120 Stat. 
780)), then the contribution is taken into account as a plan asset under 
paragraph (d)(1)(i) of this section without applying any present value 
discount.
    (B) Late contributions. If a contribution is for the plan year that 
immediately precedes the first plan year that begins on or after January 
1, 2008, and is not described in paragraph (d)(1)(ii)(A) of this 
section, then the rules of paragraph (d)(1)(i) apply to the contribution 
except that the present

[[Page 545]]

value is determined using the valuation interest rate under section 
412(c)(2) for that plan year.
    (iii) Ordering rules. For purposes of this paragraph (d)(1), the 
ordering rules of section 4971(c)(4)(B) apply for purposes of 
determining the plan year for which a contribution is made.
    (2) Current year contributions made before valuation date. In the 
case of a plan with a valuation date that is not the first day of the 
plan year, for purposes of determining the value of plan assets under 
paragraph (c) of this section, if an employer makes a contribution for a 
plan year before that year's valuation date, that contribution (and any 
interest on the contribution for the period between the contribution 
date and the valuation date, determined using the effective interest 
rate under section 430(h)(2)(A) for the plan year) must be subtracted 
from plan assets in determining the value of plan assets as of the 
valuation date. If the result of this subtraction is a number less than 
zero, the value of plan assets as of the valuation date is equal to 
zero.
    (e) Examples. [Reserved]
    (f) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date. Section 430 generally 
applies to plan years beginning on or after January 1, 2008. The 
applicability of section 430 for purposes of determining the minimum 
required contribution is delayed for certain plans in accordance with 
sections 104 through 106 of PPA '06.
    (2) Effective date/applicability date of regulations--(i) In 
general. This section applies to plan years beginning on or after 
January 1, 2010, regardless of whether section 430 applies to determine 
the minimum required contribution for the plan year. For plan years 
beginning before January 1, 2010, plans are permitted to rely on the 
provisions set forth in this section for purposes of satisfying the 
requirements of section 430.
    (ii) Permission to use averaging for 2008. For purposes of 
determining the actuarial value of assets for a plan year beginning 
during 2008 using the averaging rules of paragraph (c)(2) of this 
section, a plan is permitted to apply an assumed earnings rate of zero 
under paragraph (c)(2)(ii)(E) of this section (even if zero is not the 
actuary's best estimate of the anticipated annual rate of return on plan 
assets).
    (3) Approval for changes in the valuation date and valuation method. 
Any change in a plan's valuation date or asset valuation method that 
satisfies the rules of this section and is made for either the first 
plan year beginning in 2008, the first plan year beginning in 2009, or 
the first plan year beginning in 2010 is treated as having been approved 
by the Commissioner and does not require the Commissioner's specific 
prior approval. In addition, a change in a plan's valuation date or 
asset valuation method for the first plan year to which section 430 
applies to determine the plan's minimum required contribution (even if 
that plan year begins after December 31, 2010) that satisfies the rules 
of this section is treated as having been approved by the Commissioner 
and does not require the Commissioner's specific prior approval.

[T.D. 9467, 74 FR 53053, Oct. 15, 2009]



Sec.  1.430(h)(2)-1  Interest rates used to determine present value.

    (a) In general--(1) Overview. This section provides rules relating 
to the interest rates to be applied for a plan year under section 
430(h)(2). Section 430(h)(2) and this section apply to single employer 
defined benefit plans (including multiple employer plans as defined in 
section 413(c)) that are subject to section 412 but do not apply to 
multiemployer plans (as defined in section 414(f)). Paragraph (b) of 
this section describes how the segment interest rates are used for a 
plan year. Paragraph (c) of this section describes those segment rates. 
Paragraph (d) of this section describes the monthly corporate bond yield 
curve that is used to develop the segment rates. Paragraph (e) of this 
section describes certain elections that are permitted to be made under 
this section. Paragraph (f) of this section describes other rules 
related to interest rates. Paragraph (g) of this section contains 
examples. Paragraph (h) of this section contains effective/applicability 
dates and transition rules.
    (2) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section

[[Page 546]]

430 and this section are applied separately for each employer under the 
plan as if each employer maintained a separate plan. Thus, each employer 
under such a multiple employer plan may make elections with respect to 
the interest rate rules under this section that are independent of the 
elections of other employers under the plan. In the case of a multiple 
employer plan to which section 413(c)(4)(A) does not apply (that is, a 
plan described in section 413(c)(4)(B) that has not made the election 
for section 413(c)(4)(A) to apply), the rules of section 430 and this 
section are applied as if all participants in the plan were employed by 
a single employer.
    (b) Interest rates for determining plan liabilities--(1) In general. 
The interest rates used in determining the present value of the benefits 
that are included in the target normal cost and the funding target for 
the plan for a plan year are determined as set forth in this paragraph 
(b).
    (2) Benefits payable within 5 years--(i) In general. In the case of 
benefits expected to be payable during the 5-year period beginning on 
the valuation date for the plan year, the interest rate used in 
determining the present value of the benefits that are included in the 
target normal cost and the funding target for the plan is the first 
segment rate with respect to the applicable month, as described in 
paragraph (c)(2)(i) of this section.
    (ii) Special rule for plan years beginning before January 1, 2014. 
With respect to a plan year beginning before January 1, 2014, for a plan 
with a valuation date other than the first day of the plan year, the 5-
year period beginning on the first day of the plan year is permitted to 
be used in lieu of the 5-year period beginning on the valuation date for 
the plan year under paragraph (b)(2)(i) of this section.
    (3) Benefits payable after 5 years and within 20 years. In the case 
of benefits expected to be payable during the 15-year period beginning 
after the end of the period described in paragraph (b)(2) of this 
section, the interest rate used in determining the present value of the 
benefits that are included in the target normal cost and the funding 
target for the plan is the second segment rate with respect to the 
applicable month, as described in paragraph (c)(2)(ii) of this section.
    (4) Benefits payable after 20 years. In the case of benefits 
expected to be payable after the period described in paragraph (b)(3) of 
this section, the interest rate used in determining the present value of 
the benefits that are included in the target normal cost and the funding 
target for the plan is the third segment rate with respect to the 
applicable month, as described in paragraph (c)(2)(iii) of this section.
    (5) Applicable month. Except as otherwise provided in paragraph (e) 
of this section, the term applicable month for purposes of this 
paragraph (b) means the month that includes the valuation date of the 
plan for the plan year.
    (6) Special rule for certain airlines--(i) In general. Pursuant to 
section 6615 of the U.S. Troop Readiness, Veterans' Care, Katrina 
Recovery, and Iraq Accountability Appropriations Act, 2007, Public Law 
110-28 (121 Stat. 112), for a plan sponsor that makes the election 
described in section 402(a)(2) of the Pension Protection Act of 2006 
(PPA '06), Public Law 109-280 (120 Stat. 780), the interest rate 
required to be used to determine the plan's funding target for each of 
the 10 years under that election is 8.25 percent (rather than the 
segment rates otherwise described in this paragraph (b) or the full 
yield curve as permitted under paragraph (e)(4) of this section).
    (ii) Special interest rate not applicable for other purposes. The 
special interest rate described in paragraph (b)(6)(i) of this section 
does not apply for other purposes such as the determination of the 
plan's target normal cost.
    (c) Segment rates--(1) Overview. This paragraph (c) sets forth rules 
for determining the first, second, and third segment rates for purposes 
of paragraph (b) of this section. The first, second, and third segment 
rates are set forth in revenue rulings, notices, or other guidance 
published in the Internal Revenue Bulletin. See Sec.  601.601(d)(2) 
relating to objectives and standards for publishing regulations, revenue 
rulings and revenue procedures in the Internal Revenue Bulletin. See 
paragraph (h)(4) of this section for a transition rule under which the 
definition of the segment

[[Page 547]]

rates is modified for plan years beginning in 2008 and 2009.
    (2) Definition of segment rates--(i) First segment rate. For 
purposes of this section, except as otherwise provided under the 
transition rule of paragraph (h)(4) of this section, the first segment 
rate is, with respect to any month, the single rate of interest 
determined by the Commissioner on the basis of the average of the 
monthly corporate bond yield curves (described in paragraph (d) of this 
section) for the 24-month period ending with the month preceding that 
month, taking into account only the first 5 years of each of those yield 
curves.
    (ii) Second segment rate. For purposes of this section, except as 
otherwise provided under the transition rule of paragraph (h)(4) of this 
section, the second segment rate is, with respect to any month, the 
single rate of interest determined by the Commissioner on the basis of 
the average of the monthly corporate bond yield curves (described in 
paragraph (d) of this section) for the 24-month period ending with the 
month preceding that month, taking into account only the portion of each 
of those yield curves corresponding to the 15-year period that follows 
the end of the 5-year period described in paragraph (c)(2)(i) of this 
section.
    (iii) Third segment rate. For purposes of this section, except as 
otherwise provided under the transition rule of paragraph (h)(4) of this 
section, the third segment rate is, with respect to any month, the 
single rate of interest determined by the Commissioner on the basis of 
the average of the monthly corporate bond yield curves (described in 
paragraph (d) of this section) for the 24-month period ending with the 
month preceding that month, taking into account only the portion of each 
of those yield curves corresponding to the 40-year period that follows 
the end of the 15-year period described in paragraph (c)(2)(ii) of this 
section.
    (d) Monthly corporate bond yield curve--(1) In general. For purposes 
of this section, the monthly corporate bond yield curve is, with respect 
to any month, a yield curve that is prescribed by the Commissioner for 
that month based on yields for that month on investment grade corporate 
bonds with varying maturities that are in the top three quality levels 
available.
    (2) Determination and publication of yield curve. A description of 
the methodology for determining the monthly corporate bond yield curve 
is provided in guidance issued by the Commissioner that is published in 
the Internal Revenue Bulletin. The yield curve for a month will be set 
forth in revenue rulings, notices, or other guidance published in the 
Internal Revenue Bulletin. See Sec.  601.601(d)(2) relating to 
objectives and standards for publishing regulations, revenue rulings and 
revenue procedures in the Internal Revenue Bulletin.
    (e) Elections--(1) In general. This paragraph (e) describes 
elections for a plan year that a plan sponsor can make to use 
alternative interest rates under this section. Any election under this 
paragraph (e) must be made by providing written notification of the 
election to the plan's enrolled actuary. Any election in this paragraph 
(e) may be adopted for a plan year without obtaining the consent of the 
Commissioner, but, once adopted, that election will apply for that plan 
year and all future plan years and may be changed only with the consent 
of the Commissioner.
    (2) Election for alternative applicable month. As an alternative to 
defining the applicable month as the month that includes the valuation 
date for the plan year, a plan sponsor that is using segment rates as 
provided under paragraph (b) of this section may elect to use one of the 
4 months preceding that month as the applicable month.
    (3) Election not to apply transition rule. The plan sponsor may 
elect not to apply the transition rule in paragraph (h)(4) of this 
section.
    (4) Election to use full yield curve--(i) In general. For purposes 
of determining the plan's funding target and target normal cost, and for 
all other purposes under section 430 (including the determination of 
shortfall amortization installments, waiver installments, and the 
present values of those installments as described in paragraph (f)(2) of 
this section), the plan sponsor may elect to use interest rates under 
the monthly corporate bond yield curve described in paragraph (d) of 
this section

[[Page 548]]

for the month preceding the month that includes the valuation date in 
lieu of the segment rates determined under paragraph (c) of this 
section. In order to address the timing of benefit payments during a 
year, reasonable approximations are permitted to be used to value 
benefit payments that are expected to be made during a plan year.
    (ii) Reasonable techniques permitted. In the case of a plan sponsor 
using the monthly corporate bond yield curve under this paragraph 
(e)(4), if with respect to a decrement the benefit is only expected to 
be paid for one-half of a year (because the decrement was assumed to 
occur in the middle of the year), the interest rate for that year can be 
determined as if the benefit were being paid for the entire year. See 
Sec.  1.430(d)-1(f)(7) for additional reasonable techniques that can be 
used in determining present value.
    (5) Plan sponsor. For purposes of the elections described in this 
section, any reference to the plan sponsor generally means the employer 
or employers responsible for making contributions to or under the plan. 
In the case of plans that are multiple employer plans to which section 
413(c)(4)(A) does not apply, any reference to the plan sponsor means the 
plan administrator within the meaning of section 414(g).
    (f) Interest rates used for other purposes--(1) Effective interest 
rate--(i) In general. Except as otherwise provided in paragraph (f)(2) 
of this section, the effective interest rate determined under section 
430(h)(2)(A) for the plan year is the single interest rate that, if used 
to determine the present value of the benefits that are taken into 
account in determining the plan's funding target for the plan year, 
would result in an amount equal to the plan's funding target determined 
for the plan year under section 430(d) as described in Sec.  1.430(d)-
1(b)(2) (without regard to calculations for plans in at-risk status 
under section 430(i)).
    (ii) Zero funding target. If, for the plan year, the plan's funding 
target is equal to zero, then the effective interest rate determined 
under section 430(h)(2)(A) for the plan year is the single interest rate 
that, if used to determine the present value of the benefits that are 
taken into account in determining the plan's target normal cost for the 
plan year, would result in an amount equal to the plan's target normal 
cost determined for the plan year under section 430(b) as described in 
Sec.  1.430(d)-1(b)(1) (without regard to calculations for plans in at-
risk status under section 430(i)).
    (2) Interest rates used for determining shortfall amortization 
installments and waiver amortization installments. The interest rates 
used to determine the amount of shortfall amortization installments and 
waiver amortization installments and the present value of those 
installments are determined based on the dates those installments are 
assumed to be paid, using the same timing rules that apply in 
determining target normal cost as described in paragraph (b) of this 
section. Thus, for a plan that uses the segment rates described in 
paragraph (c) of this section, the first segment rate applies to the 
installments assumed to be paid during the first 5-year period beginning 
on the valuation date for the plan year, and the second segment rate 
applies to the installments assumed to be paid during the subsequent 15-
year period. For purposes of this paragraph (f)(2), the shortfall 
amortization installments for a plan year are assumed to be paid on the 
valuation date for that plan year. For example, for a plan that uses the 
segment rates described in paragraph (c) of this section, the shortfall 
amortization installment for the fifth plan year following the current 
plan year (the sixth installment) is assumed to be paid on the valuation 
date for that year so that such shortfall amortization installment will 
be determined using the second segment rate.
    (g) Examples. The following examples illustrate the rules of this 
section:

    Example 1. (i) The January 1, 2009, valuation of Plan P is performed 
using the segment rates applicable for September 2008 (determined 
without regard to the transition rule of section 430(h)(2)(G)), and the 
2009 annuitant and nonannuitant (male and female) mortality tables as 
published in Notice 2008-85. See Sec.  601.601(d)(2) relating to 
objectives and standards for publishing regulations, revenue rulings and 
revenue procedures in the Internal Revenue Bulletin. Plan P provides for 
early retirement benefits as early as age 50, and offers a single-sum 
distribution payable immediately at retirement. The

[[Page 549]]

single-sum payment is equal to the present value of the participant's 
accrued benefit, based on the applicable interest rates and the 
applicable mortality table under section 417(e)(3). Participant E is the 
only participant in the plan, and is a male age 46 as of January 1, 
2009, with an annual accrued benefit of $23,000 payable beginning at age 
65. The actuary assumes a 100% probability that Participant E will 
terminate at age 50 and will elect to receive his benefit in the form of 
a single-sum payment.
    (ii) Plan P's funding target is $68,908 as of January 1, 2009. This 
figure is based on the male nonannuitant rates for ages prior to age 50, 
the applicable mortality rates under section 417(e)(3) for ages 50 and 
later, and segment interest rates of 5.07% for the first 5 years after 
the valuation date, 6.09% for the next 15 years, and 6.56% for periods 
more than 20 years after the valuation date. (See Sec.  1.430(d)-
1(f)(9), Example 10, for additional details.)
    (iii) The present value of Participant E's benefits as of January 1, 
2009, is $68,908 if a single interest rate of 6.52805% is substituted 
for the segment interest rates but all other assumptions remain the 
same. Thus (rounded), the effective interest rate for Plan P is 6.53% 
for 2009.
    Example 2. (i) The facts are the same as for Example 1, except that 
Plan P offers a single-sum distribution equal to the present value of 
the accrued benefit based on the applicable interest rates under section 
417(e)(3) or an interest rate of 6.25%, whichever produces the higher 
amount. The applicable mortality table under section 417(e)(3) is used 
for both calculations.
    (ii) The present value of Participant E's age-50 single-sum 
distribution as of January 1, 2009 (when Participant E is age 46) is 
$77,392. This amount is determined by calculating the projected single-
sum distribution at age 50 using the applicable mortality table under 
section 417(e)(3) and an interest rate of 6.25%, and discounting the 
result to January 1, 2009, using the first segment rate of 5.07% and 
male nonannuitant mortality rates for 2009. Because this amount is 
larger than the present value of Participant E's single-sum payment 
based on the applicable interest rates under section 417(e)(3) (that is, 
$68,908), the funding target for Plan P is $77,392 as of January 1, 
2009. (See Sec.  1.430(d)-1(f)(9), Example 12 for additional details.)
    (iii) The effective interest rate is the single interest rate that 
will produce the same funding target if substituted for the segment 
interest rates keeping all other assumptions the same, including the 
fixed interest rate used by the plan to determine single-sum payments. 
The only segment interest rate used to develop the funding target of 
$77,392 was the first segment rate of 5.07%. Therefore, considering only 
this calculation, the single interest rate that would produce the same 
funding target would be 5.07%.
    (iv) However, the effective interest rate must also reflect the fact 
that the single-sum payment under Plan P is equal to the greater of the 
present value of Participant E's accrued benefit based on the fixed rate 
of 6.25% or the applicable interest rates under section 417(e)(3). If 
the single rate of 5.07% is substituted for the segment rates used to 
calculate the present value of the single-sum payment based on the 
applicable interest rates, the resulting funding target would be higher 
than $77,392.
    (v) Using a single interest rate of 6.0771%, the January 1, 2009, 
present value of Participant E's single-sum payment based on the 
applicable interest rates is $77,392, and the present value of 
Participant E's single sum payment based on the plan's interest rate of 
6.25% is $74,494. Plan P's funding target is the larger of the two, or 
$77,392, which is the same as the funding target based on the segment 
interest rates used for the 2009 valuation. Therefore, Plan P's 
effective interest rate for 2009 (rounded) is 6.08%.

    (h) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date. Section 430 generally 
applies to plan years beginning on or after January 1, 2008. The 
applicability of section 430 for purposes of determining the minimum 
required contribution is delayed for certain plans in accordance with 
sections 104 through 106 of PPA'06.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010, regardless 
of whether section 430 applies to determine the minimum required 
contribution for the plan year. For plan years beginning before January 
1, 2010, plans are permitted to rely on the provisions set forth in this 
section for purposes of satisfying the requirements of section 430.
    (3) Approval for changes in interest rate. Any change to an election 
under paragraph (e) of this section that is made for the first plan year 
beginning in 2009 or the first plan year beginning in 2010 is treated as 
having been approved by the Commissioner and does not require the 
Commissioner's specific prior approval.
    (4) Transition rule--(i) In general. Notwithstanding the general 
rules for determination of segment rates under paragraph (c)(2) of this 
section, for plan years beginning in 2008 or 2009, the first, second, or 
third segment rate for

[[Page 550]]

a plan with respect to any month is equal to the sum of--
    (A) The product of that rate for that month determined without 
regard to this paragraph (h)(4), multiplied by the applicable 
percentage; and
    (B) The product of the weighted average interest rate determined 
under the rules of paragraph (h)(4)(iii) of this section, multiplied by 
a percentage equal to 100 percent minus the applicable percentage.
    (ii) Applicable percentage. For purposes of this paragraph (h)(4), 
the applicable percentage is 33\1/3\ percent for plan years beginning in 
2008 and 66\2/3\ percent for plan years beginning in 2009.
    (iii) Weighted average interest rate. The weighted average interest 
rate for purposes of paragraph (h)(4)(i)(B) of this section is the 
weighted average interest rate under section 412(b)(5)(B)(ii)(II) (as 
that provision was in effect for plan years beginning in 2007) as of--
    (A) The month which contains the first day of the plan year;
    (B) The month which contains the valuation date (if the applicable 
month is determined under paragraph (b)(5) of this section); or
    (C) The applicable month (if the applicable month is determined 
under paragraph (e)(2) of this section).
    (iv) New plans ineligible. The transition rule of this paragraph 
(h)(4) does not apply if the first plan year of the plan begins on or 
after January 1, 2008.

[T.D. 9467, 74 FR 53055, Oct. 15, 2009; T.D. 9732, 80 FR 54390, Sept. 9, 
2015]



Sec.  1.430(h)(3)-1  Mortality tables used to determine present value.

    (a) Basis for mortality tables--(1) In general. Pursuant to section 
430(h)(3)(A), this section provides generally applicable mortality 
tables that are used to determine present value for purposes of section 
430, and rules regarding the use of those mortality tables. Either the 
generational mortality tables under paragraph (a)(2) of this section or 
the static mortality tables under paragraph (a)(3) of this section may 
be used for a plan. In lieu of using the mortality tables provided under 
this section, 77plan-specific substitute mortality tables may be used 
pursuant to section 430(h)(3)(C), provided that the requirements of 
Sec.  1.430(h)(3)-2 are satisfied. Mortality tables that may be used 
with respect to disabled individuals are provided in guidance published 
in the Internal Revenue Bulletin. See Sec.  601.601(d)(2)(ii)(b) of this 
chapter.
    (2) Generational mortality tables--(i) In general--(A) Use of 
generational mortality tables. The generational mortality tables that 
are permitted to be used under section 430(h)(3)(A) and paragraph (a)(1) 
of this section are determined using the base mortality tables described 
in paragraph (a)(2)(i)(B) of this section and the mortality improvement 
rates described in paragraph (a)(2)(i)(C) of this section.
    (B) Base mortality tables. The base mortality tables are set forth 
in paragraph (d) of this section. The base year for those tables is 
2006.
    (C) Mortality improvement rates. The mortality improvement rates for 
valuation dates occurring during 2018 are the mortality improvement 
rates contained in the Mortality Improvement Scale MP-2016 Report 
(issued by the Retirement Plans Experience Committee (RPEC) of the 
Society of Actuaries and available at www.soa.org/Research/Experience-
Study/Pension/research-2016-mp.aspx). For later years, updated mortality 
improvement rates that take into account new data for mortality 
improvement trends of the general population will be provided in 
guidance published in the Internal Revenue Bulletin. See Sec.  
601.601(d)(2)(ii)(b) of this chapter.
    (D) Application of mortality improvement rates. Under the 
generational mortality tables described in this paragraph (a)(2), the 
probability of an individual's death at a particular age in the future 
is determined as the individual's base mortality rate that applies at 
that age (that is, the applicable mortality rate from the table set 
forth in paragraph (d) of this section for that age, gender, and status 
as an annuitant or a nonannuitant) multiplied by the cumulative 
mortality improvement factor for the individual's gender and for that 
age for the period from 2006 through the calendar year in which the 
individual is projected to reach the particular age. Paragraph 
(a)(2)(ii) of

[[Page 551]]

this section shows how the base mortality tables in paragraph (d) of 
this section and the mortality improvement rates for valuation dates 
occurring during 2018 are combined to determine projected mortality 
rates.
    (E) Cumulative mortality improvement factor. The cumulative 
mortality improvement factor for an age and gender for a period is the 
product of the annual mortality improvement factors for that age and 
gender for each year within that period.
    (F) Annual mortality improvement factor. The annual mortality 
improvement factor for an age and gender for a year is 1 minus the 
mortality improvement rate that applies for that age and gender for that 
year.
    (ii) Example of calculation--(A) Calculation of mortality rate. The 
mortality rate for 2018 that is applied to male annuitants who are age 
66 in 2018 is equal to the product of the mortality rate for 2006 that 
applied to male annuitants who were age 66 in 2006 (0.013855) and the 
cumulative mortality improvement factor for age 66 males from 2006 to 
2018. The cumulative mortality improvement factor for age 66 males for 
the period from 2006 to 2018 is 0.8929, and the mortality rate for 2018 
for male annuitants who are age 66 in that year would be 0.012371, as 
shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                                      Annual
                                                   Scale MP-2016     mortality      Cumulative
                                                     mortality      improvement      mortality
                  Calendar year                     improvement     factor  (1-     improvement   Mortality rate
                                                       rate        scale MP-2016      factor
                                                                       rate)
----------------------------------------------------------------------------------------------------------------
2006............................................             n/a             n/a             n/a        0.013855
2007............................................          0.0237          0.9763          0.9763
2008............................................          0.0211          0.9789          0.9557
2009............................................          0.0180          0.9820          0.9385
2010............................................          0.0142          0.9858          0.9252
2011............................................          0.0099          0.9901          0.9160
2012............................................          0.0053          0.9947          0.9112
2013............................................          0.0043          0.9957          0.9072
2014............................................          0.0035          0.9965          0.9041
2015............................................          0.0030          0.9970          0.9014
2016............................................          0.0028          0.9972          0.8988
2017............................................          0.0030          0.9970          0.8961
2018............................................          0.0036          0.9964          0.8929        0.012371
----------------------------------------------------------------------------------------------------------------

    (B) Probability of survival for an individual. After the projected 
mortality rates are derived for each age for each year, the rates are 
used to calculate the present value of a benefit stream that depends on 
the probability of survival year-by-year. For example, for purposes of 
calculating the present value (for a 2018 valuation date) of future 
payments in a benefit stream payable for a male annuitant who is age 66 
in 2018, the probability of survival for the annuitant is based on the 
mortality rate for a male annuitant who is age 66 in 2018 (0.012371), 
and the projected mortality rate for a male annuitant who will be age 67 
in 2019 (0.013302), age 68 in 2020 (0.014321), and so on.
    (3) Static mortality tables. The static mortality tables that are 
permitted to be used under section 430(h)(3)(A) and paragraph (a)(1) of 
this section are updated annually by the IRS according to the 
methodology described in paragraph (c)(2) of this section. Paragraph (e) 
of this section sets forth static tables that are permitted to be used 
for valuation dates in 2018. For valuation dates in later years, static 
mortality tables will be provided in guidance published in the Internal 
Revenue Bulletin. See Sec.  601.601(d)(2)(ii)(b) of this chapter.
    (b) Use of the tables--(1) Separate tables for annuitants and 
nonannuitants--(i) In general. Separate tables are provided for use for 
annuitants and nonannuitants. The nonannuitant mortality table is 
applied to determine the probability of survival for a nonannuitant for 
the period before the nonannuitant is projected to commence receiving 
benefits. The annuitant mortality table is applied to determine the

[[Page 552]]

present value of benefits for each annuitant. In addition, the annuitant 
mortality table is applied for each nonannuitant with respect to each 
assumed commencement of benefits for the period beginning with that 
assumed commencement. For purposes of this section, an annuitant means a 
plan participant who has commenced receiving benefits, and a 
nonannuitant means a plan participant who has not yet commenced 
receiving benefits (for example, an active employee or a terminated 
vested participant). A participant whose benefit has partially commenced 
is treated as an annuitant with respect to the portion of the benefit 
that has commenced and treated as a nonannuitant with respect to the 
balance of the benefit. In addition, with respect to a beneficiary of a 
participant, the annuitant mortality table applies for the period 
beginning with each assumed commencement of benefits for the 
participant. If the participant has died (or to the extent the 
participant is assumed to die before commencing benefits), the annuitant 
mortality table applies with respect to the beneficiary for the period 
beginning with each assumed commencement of benefits for the 
beneficiary.
    (ii) Examples of calculation using separate annuitant and 
nonannuitant tables. With respect to a 45-year-old active participant 
who is projected to commence receiving an annuity at age 55, the funding 
target is determined using the nonannuitant mortality table for the 
period before the participant attains age 55 (so that, if the static 
mortality tables are used pursuant to paragraph (a)(3) of this section, 
the probability of an active male participant living from age 45 to age 
55 using the table that applies for a valuation date in 2018 is 
0.988857) and using the annuitant mortality table for the period ages 55 
and above. Similarly, for a 45-year-old terminated vested participant 
who is projected to commence an annuity at age 65, the funding target is 
determined using the nonannuitant mortality table for the period before 
the participant attains age 65 and using the annuitant mortality table 
for ages 65 and above.
    (2) Small plan tables. If static mortality tables are used pursuant 
to paragraph (a)(3) of this section, as an alternative to the separate 
static tables specified for annuitants and nonannuitants pursuant to 
paragraph (b)(1) of this section, combined static tables that apply the 
same mortality rates to both annuitants and nonannuitants are permitted 
to be used for a small plan. For this purpose, a small plan is defined 
as a plan with 500 or fewer total participants (including both active 
and inactive participants and beneficiaries of deceased participants) on 
the valuation date. The combined static tables that are permitted to be 
used for small plans pursuant to this paragraph (b)(2) are constructed 
from the separate nonannuitant and annuitant static mortality tables 
using the weighting factors for small plans that are set forth in 
paragraph (d) of this section. The weighting factors are applied to 
develop these combined static tables using the following equation: 
Combined mortality rate = [nonannuitant rate * (1 - weighting factor)] + 
[annuitant rate * weighting factor].
    (c) Static tables--(1) Source of rates. The static mortality tables 
that are used pursuant to paragraph (a)(3) of this section are 
determined using the base mortality tables described in paragraph 
(a)(2)(i)(B) of this section taking into account the mortality 
improvement rates described in paragraph (a)(2)(i)(C) of this section, 
in accordance with the rules of paragraph (c)(3) of this section.
    (2) Selection of static tables. The static mortality tables that are 
used for a valuation date are the static mortality tables for the 
calendar year that contains the valuation date.
    (3) Projection of mortality improvements--(i) General rule. Except 
as provided in paragraph (c)(3)(iii) of this section, the static 
mortality tables for a calendar year are determined by multiplying the 
applicable mortality rate for each age from the base mortality tables by 
both--
    (A) The cumulative mortality improvement factor (determined under 
the rules of paragraph (a)(2) of this section) for the period from 2006 
through that calendar year; and
    (B) The cumulative mortality improvement factor (determined under

[[Page 553]]

the rules of paragraph (a)(2) of this section) for the period beginning 
in that calendar year and continuing beyond that calendar year for the 
number of years in the projection period described in paragraph 
(c)(3)(ii) of this section.
    (ii) Projection period for static mortality tables--(A) In general. 
The projection period is 8 years for males and 9 years for females, as 
adjusted based on age as provided in paragraph (c)(3)(ii)(B) of this 
section.
    (B) Age adjustment. For ages below 80, the projection period is 
increased by 1 year for each year below age 80. For ages above 80, the 
projection period is reduced (but not below zero) by \1/3\ year for each 
year above 80.
    (iii) Fractional projection periods. If for an age the number of 
years in the projection period determined under this paragraph (c)(3) is 
not a whole number, then the mortality rate for that age is determined 
by using linear interpolation between--
    (A) The mortality rate for that age that would be determined under 
paragraph (c)(3)(i) of this section if the number of years in the 
projection period were the next lower whole number; and
    (B) The mortality rate for that age that would be determined under 
paragraph (c)(3)(i) of this section if the number of years in the 
projection period were the next higher whole number.
    (iv) Example. The following example illustrates how the mortality 
rates in the static mortality tables issued under the provisions of this 
paragraph (c) are calculated:

    Example. At age 85, the projection period for a male is 6\1/3\ years 
(8 years minus \1/3\ year for each of the 5 years above age 80). For a 
valuation date in 2018, the mortality rate in the static mortality table 
for an 85-year-old male is based on a projection of mortality 
improvement for 6\1/3\ years beyond 2018. Under paragraph (c)(3)(iii) of 
this section, the mortality rate for an 85-year-old male annuitant in 
the static mortality table for 2018 is \2/3\ times the projected 
mortality rate for a male annuitant that age in 2024 plus \1/3\ times 
the projected mortality rate for a male annuitant that age in 2025. 
Accordingly, the mortality rate for an 85-year-old male annuitant in the 
static mortality table for 2018 is 0.075196 (\2/3\ times the projected 
mortality rate for an 85-year old male annuitant in 2024 (0.075447) plus 
\1/3\ times the projected mortality rate for an 85-year old male 
annuitant in 2025 (0.074693)).

    (d) Base mortality tables. The following are the base mortality 
tables. The base year for these tables is 2006.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Males                                          Females
                                                         -----------------------------------------------------------------------------------------------
                           Age                                                               Weighting                                       Weighting
                                                           Non-annuitant     Annuitant      factor for     Non-annuitant     Annuitant      factor for
                                                                                            small plans                                     small plans
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................        0.008878        0.008878               0        0.007278        0.007278               0
1.......................................................        0.000515        0.000515               0        0.000451        0.000451               0
2.......................................................        0.000348        0.000348               0        0.000295        0.000295               0
3.......................................................        0.000289        0.000289               0        0.000220        0.000220               0
4.......................................................        0.000225        0.000225               0        0.000165        0.000165               0
5.......................................................        0.000197        0.000197               0        0.000149        0.000149               0
6.......................................................        0.000177        0.000177               0        0.000137        0.000137               0
7.......................................................        0.000156        0.000156               0        0.000127        0.000127               0
8.......................................................        0.000132        0.000132               0        0.000117        0.000117               0
9.......................................................        0.000107        0.000107               0        0.000109        0.000109               0
10......................................................        0.000090        0.000090               0        0.000102        0.000102               0
11......................................................        0.000095        0.000095               0        0.000105        0.000105               0
12......................................................        0.000142        0.000142               0        0.000121        0.000121               0
13......................................................        0.000187        0.000187               0        0.000137        0.000137               0
14......................................................        0.000230        0.000230               0        0.000151        0.000151               0
15......................................................        0.000274        0.000274               0        0.000165        0.000165               0
16......................................................        0.000318        0.000318               0        0.000177        0.000177               0
17......................................................        0.000364        0.000364               0        0.000187        0.000187               0
18......................................................        0.000412        0.000412               0        0.000196        0.000196               0
19......................................................        0.000463        0.000463               0        0.000202        0.000202               0
20......................................................        0.000510        0.000510               0        0.000202        0.000202               0
21......................................................        0.000552        0.000552               0        0.000197        0.000197               0
22......................................................        0.000587        0.000587               0        0.000191        0.000191               0
23......................................................        0.000599        0.000599               0        0.000190        0.000190               0
24......................................................        0.000594        0.000594               0        0.000188        0.000188               0
25......................................................        0.000545        0.000545               0        0.000186        0.000186               0
26......................................................        0.000510        0.000510               0        0.000186        0.000186               0
27......................................................        0.000486        0.000486               0        0.000188        0.000188               0

[[Page 554]]

 
28......................................................        0.000472        0.000472               0        0.000192        0.000192               0
29......................................................        0.000468        0.000468               0        0.000198        0.000198               0
30......................................................        0.000470        0.000470               0        0.000209        0.000209               0
31......................................................        0.000480        0.000480               0        0.000222        0.000222               0
32......................................................        0.000495        0.000495               0        0.000238        0.000238               0
33......................................................        0.000514        0.000514               0        0.000257        0.000257               0
34......................................................        0.000534        0.000534               0        0.000278        0.000278               0
35......................................................        0.000557        0.000557               0        0.000301        0.000301               0
36......................................................        0.000581        0.000581               0        0.000325        0.000325               0
37......................................................        0.000611        0.000611               0        0.000355        0.000355               0
38......................................................        0.000648        0.000648               0        0.000389        0.000389               0
39......................................................        0.000694        0.000694               0        0.000428        0.000428               0
40......................................................        0.000750        0.000750               0        0.000471        0.000471               0
41......................................................        0.000814        0.000823           .0045        0.000518        0.000515               0
42......................................................        0.000890        0.000969           .0091        0.000570        0.000603               0
43......................................................        0.000982        0.001188           .0136        0.000628        0.000735               0
44......................................................        0.001088        0.001480           .0181        0.000691        0.000911               0
45......................................................        0.001207        0.001846           .0226        0.000758        0.001131           .0084
46......................................................        0.001342        0.002285           .0272        0.000831        0.001395           .0167
47......................................................        0.001487        0.002797           .0317        0.000908        0.001703           .0251
48......................................................        0.001643        0.003382           .0362        0.000986        0.002055           .0335
49......................................................        0.001807        0.004040           .0407        0.001065        0.002451           .0419
50......................................................        0.001979        0.004771           .0453        0.001151        0.002891           .0502
51......................................................        0.002159        0.005059           .0498        0.001242        0.002993           .0586
52......................................................        0.002351        0.005343           .0686        0.001344        0.003124           .0744
53......................................................        0.002539        0.005592           .0953        0.001458        0.003291           .0947
54......................................................        0.002741        0.005839           .1288        0.001588        0.003499           .1189
55......................................................        0.002967        0.006102           .2066        0.001735        0.003755           .1897
56......................................................        0.003231        0.006399           .3173        0.001902        0.004065           .2857
57......................................................        0.003548        0.006746           .3780        0.002091        0.004435           .3403
58......................................................        0.003932        0.007155           .4401        0.002302        0.004869           .3878
59......................................................        0.004396        0.007639           .4986        0.002537        0.005373           .4360
60......................................................        0.004954        0.008211           .5633        0.002795        0.005942           .4954
61......................................................        0.005616        0.008878           .6338        0.003080        0.006581           .5805
62......................................................        0.006392        0.009646           .7103        0.003388        0.007283           .6598
63......................................................        0.007291        0.010523           .7902        0.003724        0.008043           .7520
64......................................................        0.008320        0.011514           .8355        0.004089        0.008870           .8043
65......................................................        0.009486        0.012621           .8832        0.004482        0.009760           .8552
66......................................................        0.010668        0.013855           .9321        0.005004        0.010731           .9118
67......................................................        0.011973        0.015221           .9510        0.005575        0.011790           .9367
68......................................................        0.013414        0.016736           .9639        0.006205        0.012952           .9523
69......................................................        0.015006        0.018421           .9714        0.006898        0.014226           .9627
70......................................................        0.016761        0.020288           .9740        0.007662        0.015628           .9661
71......................................................        0.018690        0.022348           .9766        0.008507        0.017170           .9695
72......................................................        0.020824        0.024638           .9792        0.009438        0.018861           .9729
73......................................................        0.023176        0.027176           .9818        0.010470        0.020723           .9763
74......................................................        0.025770        0.029992           .9844        0.011615        0.022780           .9797
75......................................................        0.028623        0.033113           .9870        0.012887        0.025057           .9830
76......................................................        0.031761        0.036585           .9896        0.014301        0.027590           .9864
77......................................................        0.035214        0.040457           .9922        0.015885        0.030438           .9898
78......................................................        0.039007        0.044778           .9948        0.017656        0.033653           .9932
79......................................................        0.043169        0.049605           .9974        0.019639        0.037296           .9966
80......................................................        0.047750        0.055022             1.0        0.021859        0.041440             1.0
81......................................................        0.049804        0.061087             1.0        0.023791        0.046181             1.0
82......................................................        0.053911        0.067902             1.0        0.027655        0.051564             1.0
83......................................................        0.060072        0.075550             1.0        0.033451        0.057714             1.0
84......................................................        0.068286        0.084162             1.0        0.041179        0.064709             1.0
85......................................................        0.078554        0.093775             1.0        0.050838        0.072601             1.0
86......................................................        0.090876        0.104507             1.0        0.062429        0.081490             1.0
87......................................................        0.105251        0.116487             1.0        0.075952        0.091444             1.0
88......................................................        0.121680        0.129770             1.0        0.091407        0.102470             1.0
89......................................................        0.140162        0.144470             1.0        0.108794        0.114635             1.0
90......................................................        0.160698        0.160698             1.0        0.128113        0.128113             1.0
91......................................................        0.177741        0.177741             1.0        0.142619        0.142619             1.0
92......................................................        0.195154        0.195154             1.0        0.157939        0.157939             1.0
93......................................................        0.212642        0.212642             1.0        0.173886        0.173886             1.0
94......................................................        0.230055        0.230055             1.0        0.190319        0.190319             1.0
95......................................................        0.247257        0.247257             1.0        0.207191        0.207191             1.0
96......................................................        0.265940        0.265940             1.0        0.225057        0.225057             1.0
97......................................................        0.284940        0.284940             1.0        0.243507        0.243507             1.0
98......................................................        0.304432        0.304432             1.0        0.262587        0.262587             1.0

[[Page 555]]

 
99......................................................        0.324272        0.324272             1.0        0.282171        0.282171             1.0
100.....................................................        0.344364        0.344364             1.0        0.302162        0.302162             1.0
101.....................................................        0.364420        0.364420             1.0        0.322282        0.322282             1.0
102.....................................................        0.384058        0.384058             1.0        0.342371        0.342371             1.0
103.....................................................        0.403188        0.403188             1.0        0.362210        0.362210             1.0
104.....................................................        0.421533        0.421533             1.0        0.381534        0.381534             1.0
105.....................................................        0.438903        0.438903             1.0        0.400321        0.400321             1.0
106.....................................................        0.455492        0.455492             1.0        0.418418        0.418418             1.0
107.....................................................        0.470810        0.470810             1.0        0.435390        0.435390             1.0
108.....................................................        0.484965        0.484965             1.0        0.451459        0.451459             1.0
109.....................................................        0.498023        0.498023             1.0        0.466408        0.466408             1.0
110.....................................................        0.509768        0.509768             1.0        0.480123        0.480123             1.0
111.....................................................        0.512472        0.512472             1.0        0.492664        0.492664             1.0
112.....................................................        0.509296        0.509296             1.0        0.503970        0.503970             1.0
113.....................................................        0.506193        0.506193             1.0        0.507361        0.507361             1.0
114.....................................................        0.503061        0.503061             1.0        0.503564        0.503564             1.0
115.....................................................        0.500000        0.500000             1.0        0.500000        0.500000             1.0
116.....................................................        0.500000        0.500000             1.0        0.500000        0.500000             1.0
117.....................................................        0.500000        0.500000             1.0        0.500000        0.500000             1.0
118.....................................................        0.500000        0.500000             1.0        0.500000        0.500000             1.0
119.....................................................        0.500000        0.500000             1.0        0.500000        0.500000             1.0
120.....................................................        1.000000        1.000000             1.0        1.000000        1.000000             1.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (e) Static tables for 2018. The following static mortality tables 
are used pursuant to paragraph (a)(3) of this section for determining 
present value or making any computation under section 430 with respect 
to valuation dates occurring during 2018.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Males                                          Females
                                                         -----------------------------------------------------------------------------------------------
                                                                                             Optional                                        Optional
                           Age                                                               combined                                        combined
                                                           Non-annuitant     Annuitant       table for     Non-annuitant     Annuitant       table for
                                                                                            small plans                                     small plans
--------------------------------------------------------------------------------------------------------------------------------------------------------
0.......................................................        0.002420        0.002420        0.002420        0.002234        0.002234        0.002234
1.......................................................        0.000142        0.000142        0.000142        0.000140        0.000140        0.000140
2.......................................................        0.000097        0.000097        0.000097        0.000092        0.000092        0.000092
3.......................................................        0.000081        0.000081        0.000081        0.000070        0.000070        0.000070
4.......................................................        0.000064        0.000064        0.000064        0.000053        0.000053        0.000053
5.......................................................        0.000056        0.000056        0.000056        0.000048        0.000048        0.000048
6.......................................................        0.000051        0.000051        0.000051        0.000045        0.000045        0.000045
7.......................................................        0.000046        0.000046        0.000046        0.000042        0.000042        0.000042
8.......................................................        0.000039        0.000039        0.000039        0.000039        0.000039        0.000039
9.......................................................        0.000032        0.000032        0.000032        0.000037        0.000037        0.000037
10......................................................        0.000027        0.000027        0.000027        0.000035        0.000035        0.000035
11......................................................        0.000029        0.000029        0.000029        0.000036        0.000036        0.000036
12......................................................        0.000044        0.000044        0.000044        0.000042        0.000042        0.000042
13......................................................        0.000058        0.000058        0.000058        0.000048        0.000048        0.000048
14......................................................        0.000072        0.000072        0.000072        0.000053        0.000053        0.000053
15......................................................        0.000087        0.000087        0.000087        0.000059        0.000059        0.000059
16......................................................        0.000102        0.000102        0.000102        0.000064        0.000064        0.000064
17......................................................        0.000118        0.000118        0.000118        0.000068        0.000068        0.000068
18......................................................        0.000135        0.000135        0.000135        0.000072        0.000072        0.000072
19......................................................        0.000153        0.000153        0.000153        0.000075        0.000075        0.000075
20......................................................        0.000170        0.000170        0.000170        0.000076        0.000076        0.000076
21......................................................        0.000192        0.000192        0.000192        0.000078        0.000078        0.000078
22......................................................        0.000214        0.000214        0.000214        0.000080        0.000080        0.000080
23......................................................        0.000229        0.000229        0.000229        0.000084        0.000084        0.000084
24......................................................        0.000238        0.000238        0.000238        0.000087        0.000087        0.000087
25......................................................        0.000230        0.000230        0.000230        0.000090        0.000090        0.000090
26......................................................        0.000226        0.000226        0.000226        0.000094        0.000094        0.000094
27......................................................        0.000226        0.000226        0.000226        0.000099        0.000099        0.000099
28......................................................        0.000230        0.000230        0.000230        0.000105        0.000105        0.000105
29......................................................        0.000238        0.000238        0.000238        0.000111        0.000111        0.000111
30......................................................        0.000249        0.000249        0.000249        0.000120        0.000120        0.000120
31......................................................        0.000263        0.000263        0.000263        0.000130        0.000130        0.000130
32......................................................        0.000278        0.000278        0.000278        0.000142        0.000142        0.000142

[[Page 556]]

 
33......................................................        0.000294        0.000294        0.000294        0.000155        0.000155        0.000155
34......................................................        0.000309        0.000309        0.000309        0.000168        0.000168        0.000168
35......................................................        0.000323        0.000323        0.000323        0.000182        0.000182        0.000182
36......................................................        0.000336        0.000336        0.000336        0.000196        0.000196        0.000196
37......................................................        0.000350        0.000350        0.000350        0.000213        0.000213        0.000213
38......................................................        0.000366        0.000366        0.000366        0.000231        0.000231        0.000231
39......................................................        0.000385        0.000385        0.000385        0.000251        0.000251        0.000251
40......................................................        0.000410        0.000410        0.000410        0.000273        0.000273        0.000273
41......................................................        0.000438        0.000443        0.000438        0.000298        0.000296        0.000298
42......................................................        0.000474        0.000516        0.000474        0.000326        0.000344        0.000326
43......................................................        0.000518        0.000627        0.000519        0.000358        0.000419        0.000358
44......................................................        0.000573        0.000779        0.000577        0.000395        0.000520        0.000395
45......................................................        0.000636        0.000973        0.000644        0.000436        0.000651        0.000438
46......................................................        0.000712        0.001213        0.000726        0.000484        0.000813        0.000489
47......................................................        0.000798        0.001502        0.000820        0.000538        0.001010        0.000550
48......................................................        0.000896        0.001844        0.000930        0.000597        0.001245        0.000619
49......................................................        0.001005        0.002248        0.001056        0.000661        0.001522        0.000697
50......................................................        0.001128        0.002719        0.001200        0.000734        0.001844        0.000790
51......................................................        0.001265        0.002963        0.001350        0.000814        0.001961        0.000881
52......................................................        0.001418        0.003224        0.001542        0.000903        0.002099        0.000992
53......................................................        0.001580        0.003481        0.001761        0.001003        0.002263        0.001122
54......................................................        0.001761        0.003751        0.002017        0.001114        0.002454        0.001273
55......................................................        0.001964        0.004040        0.002393        0.001235        0.002673        0.001508
56......................................................        0.002200        0.004357        0.002884        0.001367        0.002921        0.001811
57......................................................        0.002474        0.004704        0.003317        0.001509        0.003200        0.002084
58......................................................        0.002796        0.005088        0.003805        0.001661        0.003512        0.002379
59......................................................        0.003174        0.005515        0.004341        0.001823        0.003860        0.002711
60......................................................        0.003613        0.005989        0.004951        0.001994        0.004238        0.003106
61......................................................        0.004122        0.006516        0.005639        0.002181        0.004659        0.003619
62......................................................        0.004705        0.007100        0.006406        0.002381        0.005119        0.004188
63......................................................        0.005364        0.007742        0.007243        0.002600        0.005616        0.004868
64......................................................        0.006111        0.008457        0.008071        0.002842        0.006165        0.005515
65......................................................        0.006940        0.009234        0.008966        0.003107        0.006766        0.006236
66......................................................        0.007779        0.010103        0.009945        0.003465        0.007430        0.007080
67......................................................        0.008697        0.011056        0.010940        0.003863        0.008170        0.007897
68......................................................        0.009709        0.012114        0.012027        0.004308        0.008993        0.008770
69......................................................        0.010836        0.013302        0.013231        0.004806        0.009912        0.009722
70......................................................        0.012093        0.014637        0.014571        0.005366        0.010945        0.010756
71......................................................        0.013486        0.016126        0.016064        0.006001        0.012111        0.011925
72......................................................        0.015044        0.017799        0.017742        0.006711        0.013412        0.013230
73......................................................        0.016794        0.019693        0.019640        0.007521        0.014886        0.014711
74......................................................        0.018751        0.021823        0.021775        0.008439        0.016552        0.016387
75......................................................        0.020950        0.024237        0.024194        0.009485        0.018443        0.018291
76......................................................        0.023428        0.026986        0.026949        0.010678        0.020600        0.020465
77......................................................        0.026183        0.030081        0.030051        0.012035        0.023061        0.022949
78......................................................        0.029308        0.033645        0.033622        0.013582        0.025888        0.025804
79......................................................        0.032774        0.037661        0.037648        0.015347        0.029144        0.029097
80......................................................        0.036705        0.042295        0.042295        0.017347        0.032886        0.032886
81......................................................        0.038556        0.047291        0.047291        0.019058        0.036992        0.036992
82......................................................        0.042087        0.053009        0.053009        0.022345        0.041662        0.041662
83......................................................        0.047283        0.059466        0.059466        0.027251        0.047017        0.047017
84......................................................        0.054248        0.066860        0.066860        0.033811        0.053130        0.053130
85......................................................        0.062990        0.075196        0.075196        0.042053        0.060056        0.060056
86......................................................        0.073605        0.084646        0.084646        0.052009        0.067888        0.067888
87......................................................        0.086115        0.095308        0.095308        0.063725        0.076724        0.076724
88......................................................        0.100513        0.107196        0.107196        0.077205        0.086549        0.086549
89......................................................        0.116840        0.120431        0.120431        0.092462        0.097426        0.097426
90......................................................        0.135087        0.135087        0.135087        0.109484        0.109484        0.109484
91......................................................        0.150610        0.150610        0.150610        0.122541        0.122541        0.122541
92......................................................        0.166534        0.166534        0.166534        0.136397        0.136397        0.136397
93......................................................        0.182546        0.182546        0.182546        0.150811        0.150811        0.150811
94......................................................        0.198598        0.198598        0.198598        0.165818        0.165818        0.165818
95......................................................        0.214442        0.214442        0.214442        0.181360        0.181360        0.181360
96......................................................        0.232944        0.232944        0.232944        0.198746        0.198746        0.198746
97......................................................        0.251903        0.251903        0.251903        0.216930        0.216930        0.216930
98......................................................        0.271612        0.271612        0.271612        0.235921        0.235921        0.235921
99......................................................        0.291889        0.291889        0.291889        0.255617        0.255617        0.255617
100.....................................................        0.312680        0.312680        0.312680        0.275938        0.275938        0.275938
101.....................................................        0.333720        0.333720        0.333720        0.296628        0.296628        0.296628
102.....................................................        0.354570        0.354570        0.354570        0.317471        0.317471        0.317471

[[Page 557]]

 
103.....................................................        0.375136        0.375136        0.375136        0.338385        0.338385        0.338385
104.....................................................        0.395172        0.395172        0.395172        0.358868        0.358868        0.358868
105.....................................................        0.413945        0.413945        0.413945        0.379183        0.379183        0.379183
106.....................................................        0.432145        0.432145        0.432145        0.398878        0.398878        0.398878
107.....................................................        0.449197        0.449197        0.449197        0.417703        0.417703        0.417703
108.....................................................        0.465497        0.465497        0.465497        0.435384        0.435384        0.435384
109.....................................................        0.480869        0.480869        0.480869        0.452108        0.452108        0.452108
110.....................................................        0.495080        0.495080        0.495080        0.467928        0.467928        0.467928
111.....................................................        0.500557        0.500557        0.500557        0.482562        0.482562        0.482562
112.....................................................        0.500454        0.500454        0.500454        0.496164        0.496164        0.496164
113.....................................................        0.500352        0.500352        0.500352        0.502110        0.502110        0.502110
114.....................................................        0.500201        0.500201        0.500201        0.500952        0.500952        0.500952
115.....................................................        0.500000        0.500000        0.500000        0.500000        0.500000        0.500000
116.....................................................        0.500000        0.500000        0.500000        0.500000        0.500000        0.500000
117.....................................................        0.500000        0.500000        0.500000        0.500000        0.500000        0.500000
118.....................................................        0.500000        0.500000        0.500000        0.500000        0.500000        0.500000
119.....................................................        0.500000        0.500000        0.500000        0.500000        0.500000        0.500000
120.....................................................        1.000000        1.000000        1.000000        1.000000        1.000000        1.000000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (f) Effective/applicability date--(1) In general. Except as provided 
in paragraph (f)(2) of this section, this section applies to plan years 
beginning or after January 1, 2018.
    (2) Option to apply prior regulations in certain circumstances. For 
a plan for which substitute mortality tables are not used pursuant to 
Sec.  1.430(h)(3)-2 for a plan year beginning during 2018, mortality 
tables determined in accordance with Sec.  1.430(h)(3)-1 as in effect on 
December 31, 2017 (as contained in 26 CFR part 1 revised April 1, 2017) 
may be used for purposes of applying the rules of section 430 for a 
valuation date occurring during 2018 if the plan sponsor--
    (i) Concludes that the use of mortality tables determined in 
accordance with this section for the plan year would be administratively 
impracticable or would result in an adverse business impact that is 
greater than de minimis; and
    (ii) Informs the actuary of the intent to apply the option under 
this paragraph (f)(2).

[T.D. 9826, 82 FR 46398, Oct. 5, 2017]



Sec.  1.430(h)(3)-2  Plan-specific substitute mortality tables 
used to determine present value.

    (a) In general. This section provides rules for the use of 
substitute mortality tables under section 430(h)(3)(C) in determining 
any present value or making any computation under section 430 in 
accordance with Sec.  1.430(h)(3)-1(a)(1). To use substitute mortality 
tables for a plan, a plan sponsor must first obtain approval to use the 
tables in accordance with the procedures described in paragraph (b) of 
this section. Paragraph (c) of this section provides rules for the 
development of substitute mortality tables, including guidelines 
providing that a plan must have either fully or partially credible 
mortality information in order to use substitute mortality tables. 
Paragraph (d) of this section describes the requirements for full 
credibility. Paragraph (e) of this section describes the requirements 
for partial credibility. Paragraph (f) of this section provides special 
rules for newly-affiliated plans. Paragraph (g) of this section 
specifies the effective date and applicability date of this section. The 
Commissioner may, in revenue rulings and procedures, notices, or other 
guidance published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter), provide additional guidance 
regarding approval and use of substitute mortality tables under section 
430(h)(3)(C) and related matters.
    (b) Procedures for obtaining approval to use substitute mortality 
tables--(1) Written request for approval to use substitute mortality 
tables--(i) General requirements. To use substitute mortality tables, a 
plan sponsor must first submit a written request to the Commissioner 
demonstrating that those substitute

[[Page 558]]

mortality tables meet the requirements of section 430(h)(3)(C) and this 
section. This request must specify the first plan year, and the term of 
years (not more than 10), for which the tables are to apply.
    (ii) Time for written request. Substitute mortality tables may not 
be used for a plan year unless the plan sponsor submits the written 
request described in paragraph (b)(1)(i) of this section at least 7 
months before the first day of the first plan year for which the 
substitute mortality tables are to apply.
    (2) Commissioner's review of request--(i) In general. During the 
180-day period that begins on the date the plan sponsor submits a 
request for approval to use substitute mortality tables for a plan 
pursuant to this section, the Commissioner will determine whether the 
request for approval to use substitute mortality tables satisfies the 
requirements of this section (including any published guidance issued 
pursuant to paragraph (a) of this section), and will either approve or 
deny the request. The Commissioner will deny a request if the request 
fails to meet the requirements of this section or if the Commissioner 
determines that a substitute mortality table does not reflect the actual 
mortality experience of the applicable population.
    (ii) Request for additional information. The Commissioner may 
request additional information with respect to the submission and deny a 
request to use substitute mortality tables if the additional information 
is not provided in a timely manner.
    (iii) Deemed approval. Except as provided in paragraph (b)(2)(iv) of 
this section, if the Commissioner does not issue a denial within the 
180-day review period, the request is deemed to have been approved.
    (iv) Extension of time permitted. The Commissioner and a plan 
sponsor may, before the expiration of the 180-day review period, agree 
in writing to extend that period.
    (c) Development of substitute mortality tables--(1) Substitute 
mortality tables must be used for all plans in controlled group--(i) 
General rule. Except as otherwise provided in this paragraph (c), 
substitute mortality tables are permitted to be used for a plan for a 
plan year only if, for that plan year (or any portion of that plan 
year), substitute mortality tables are also approved and used for each 
other pension plan subject to the requirements of section 430 that is 
maintained by the plan sponsor and by each member of the plan sponsor's 
controlled group. For purposes of this section, the term controlled 
group means any group that is treated as a single employer under 
paragraph (b), (c), (m), or (o) of section 414. See paragraph (c)(7) of 
this section for special rules applicable to multiple-employer plans.
    (ii) Treatment of plans without credible mortality information. The 
rule of paragraph (c)(1)(i) of this section does not prohibit use of 
substitute mortality tables for one plan for a plan year if the only 
other plan or plans maintained by the plan sponsor (or by a member of 
the plan sponsor's controlled group) for which substitute mortality 
tables are not used are too small to have fully or partially credible 
mortality information for the plan year. For this purpose, the 
demonstration that neither males nor females under a plan have credible 
mortality information for a plan year must be made by analyzing the 
actual number of deaths over a period that is the same length as the 
longest experience study period used for any plan within the controlled 
group and that ends less than three years before the first day of the 
plan year.
    (2) Mortality experience requirements--(i) In general. Substitute 
mortality tables must reflect the actual mortality experience of the 
pension plan for which the tables will be used, and that mortality 
experience must consist of credible mortality information as described 
in paragraph (c)(2)(ii) of this section. Separate substitute mortality 
tables must be established for each gender and, except as provided in 
paragraph (d)(6) of this section, a substitute mortality table is 
permitted to be established for a gender only if the plan has credible 
mortality information for that gender. See paragraph (d)(5) of this 
section for rules permitting the use of substitute mortality tables for 
separate populations within a gender in certain circumstances.

[[Page 559]]

    (ii) Credible mortality information--(A) In general. A plan has 
credible mortality information for a gender if and only if the mortality 
experience with respect to that gender satisfies the requirement for 
either full credibility (as described in paragraph (d) of this section) 
or partial credibility (as described in paragraph (e) of this section).
    (B) Simplified rule. Whether there is credible mortality information 
for a gender may be determined by only taking into account people who 
are at least age 50 and less than age 100. If there is credible 
mortality information for a gender using this simplified rule, the 
entire gender (not just those who are at least age 50 and less than age 
100) has credible mortality information.
    (iii) Gender without credible mortality information--(A) In general. 
If, for the first plan year substitute mortality tables will be used for 
a plan, one gender has credible mortality information but the other 
gender does not have credible mortality information, then substitute 
mortality tables are established for the gender that has credible 
mortality information, and the mortality tables under Sec.  1.430(h)(3)-
1 are used for the gender that does not have credible mortality 
information. For a subsequent plan year, the plan sponsor may continue 
to use substitute mortality tables for the gender with credible 
mortality information without using substitute mortality tables for the 
other gender only if the other gender continues to lack credible 
mortality information for that subsequent plan year.
    (B) Demonstration of lack of credible mortality information for a 
gender. The demonstration that a gender does not have credible mortality 
information (that is, the individuals of that gender had fewer than the 
minimum number of actual deaths to have partial credibility, as 
described in paragraph (e)(1) of this section) for a plan year must be 
made by analyzing the actual number of deaths over a period that is the 
same length as the period for the experience study on which the 
substitute mortality tables are based and that ends less than three 
years before the first day of the plan year.
    (3) Determination of substitute mortality tables--(i) Requirement to 
use generational mortality table. A plan's substitute mortality tables 
must be generational mortality tables. A plan's substitute mortality 
tables are determined using the plan's base substitute mortality tables 
developed pursuant to paragraph (d) or (e) of this section and the 
mortality improvement factors described in paragraph (c)(3)(ii) of this 
section.
    (ii) Determination of mortality improvement factors. The mortality 
improvement factor for an age and gender is the cumulative mortality 
improvement factor determined under Sec.  1.430(h)(3)-1(a)(2)(i)(E) for 
that age and gender for the applicable period. The applicable period is 
the period beginning with the base year for the base substitute 
mortality table determined under paragraph (d) or (e) of this section 
and ending in the calendar year in which the individual attains the age 
for which the probability of death is being determined. The base year 
for the base substitute mortality table is the calendar year that 
contains the day before the midpoint of the experience study period.
    (4) Disabled individuals. Under section 430(h)(3)(D), separate 
mortality tables are permitted to be used for certain disabled 
individuals. If the separate mortality tables issued under section 
430(h)(3)(D) for certain disabled individuals are used, then those 
disabled individuals are disregarded for all purposes under this 
section. Thus, if the mortality tables under section 430(h)(3)(D) are 
used for disabled individuals under a plan, mortality experience with 
respect to those individuals must be excluded in developing mortality 
rates for substitute mortality tables under this section.
    (5) Aggregation--(i) Permissive aggregation of plans. A plan sponsor 
may use the same substitute mortality tables for two or more of its 
plans provided that the rules of this section are applied by treating 
those plans as a single plan. In such a case, the substitute mortality 
tables must be based on data collected with respect to those aggregated 
plans.
    (ii) Required aggregation of plans. In general, plans are not 
required to be

[[Page 560]]

aggregated for purposes of applying the rules of this section. However, 
for purposes of this section, a plan is required to be aggregated with 
any plan that was previously spun off from that plan if a purpose of the 
spinoff is to avoid the use of substitute mortality tables for any of 
the plans that were involved in the spinoff.
    (iii) Special rule regarding experience study if aggregated plans 
have different plan years. If two or more plans are aggregated pursuant 
to this paragraph (c)(5) and not all of the plans have the same plan 
year, then the experience study period may be a period that is not a 
multiple of 12 months, provided that--
    (A) The period over which mortality experience is collected for each 
plan (the data study period) is a multiple of 12 months and is based on 
the plan year for that plan;
    (B) The data study periods for all of the plans consist of the same 
number of years;
    (C) The data study periods for all of the plans satisfy the 
experience study period requirements of paragraph (d)(2)(ii) of this 
section; and
    (D) The data study periods for all of the plans have been selected 
to minimize the total period of time covered by the experience study 
period by overlapping (to the greatest extent possible) those data study 
periods.
    (6) Duration of use of tables--(i) General rule. Except as provided 
in this paragraph (c)(6), substitute mortality tables are used for a 
plan for the term of consecutive plan years specified in the plan 
sponsor's written request for approval to use such tables under 
paragraph (b)(1) of this section and approved by the Commissioner, or a 
shorter period prescribed by the Commissioner in the approval to use 
substitute mortality tables. Following the end of the approved term of 
use, or following any early termination of use described in this 
paragraph (c)(6), the mortality tables specified in Sec.  1.430(h)(3)-1 
must be used for the plan unless approval under paragraph (b)(1) of this 
section has been received by the plan sponsor to use substitute 
mortality tables based on an updated experience study for a further 
term.
    (ii) Early termination of use of tables. A plan's substitute 
mortality tables must not be used beginning with the earliest of--
    (A) For a plan using a substitute mortality table for only one 
gender because of a lack of credible mortality information with respect 
to the other gender, the first plan year for which there is credible 
mortality information with respect to the gender that had lacked 
credible mortality information (unless an approved substitute mortality 
table is used for that gender);
    (B) The first plan year for which the plan fails to satisfy the 
requirements of paragraph (c)(1) of this section (regarding use of 
substitute mortality tables for all plans in the controlled group), 
taking into account the rules of paragraph (f)(3) of this section 
(regarding the transition period for newly-affiliated plans);
    (C) The second plan year following the plan year for which there is 
a significant change in individuals covered by the plan as described in 
paragraph (c)(6)(iii) of this section;
    (D) The first plan year following the plan year for which a 
substitute mortality table used for a population is no longer accurately 
predictive of future mortality of that population, as determined by the 
Commissioner or as certified by the plan's actuary to the satisfaction 
of the Commissioner; or
    (E) The date specified in guidance published in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter) in conjunction 
with a replacement of mortality tables specified under section 
430(h)(3)(A) and Sec.  1.430(h)(3)-1 (other than annual updates to the 
static mortality tables issued pursuant to Sec.  1.430(h)(3)-1(a)(3) or 
changes to the mortality improvement rates pursuant to Sec.  
1.430(h)(3)-1(a)(2)(i)(C)).
    (iii) Significant change in coverage--(A) Change in coverage from 
time of experience study. For purposes of applying the rules of 
paragraph (c)(6)(ii)(C) of this section, a significant change in the 
individuals covered by a substitute mortality table for a plan year 
occurs if the number of individuals covered by the substitute mortality 
table for the plan year is less than 80 percent or more than 120 percent 
of the average

[[Page 561]]

number of individuals in that population over the years covered by the 
experience study on which the substitute mortality tables are based. 
However, a change in coverage is not treated as significant if the 
plan's actuary certifies in writing to the satisfaction of the 
Commissioner that the substitute mortality tables used for the 
population continue to be accurately predictive of future mortality of 
that population (taking into account the effect of the change in the 
population).
    (B) Change in coverage from time of certification. For purposes of 
applying the rules of paragraph (c)(6)(ii)(C) of this section, a 
significant change in the individuals covered by a substitute mortality 
table for a plan year occurs if the number of individuals covered by the 
substitute mortality table for the plan year is less than 80 percent or 
more than 120 percent of the number of individuals covered by the 
substitute mortality table in a plan year for which a certification 
described in paragraph (c)(6)(iii)(A) of this section was made on 
account of a prior change in coverage. However, a change in coverage is 
not treated as significant if the plan's actuary certifies in writing to 
the satisfaction of the Commissioner that the substitute mortality 
tables used by the plan with respect to the covered population continue 
to be accurately predictive of future mortality of that population 
(taking into account the effect of the change in the population).
    (7) Multiple-employer plans--(i) General rule. In the case of a 
multiple-employer plan described in section 413(c), the plan 
administrator (as described in section 414(g)) is treated as the plan 
sponsor for purposes of this section. If approval is received to use 
substitute mortality tables by a plan, those tables must apply on a 
plan-wide basis (even if the plan is subject to the rules of section 
413(c)(4)(A)).
    (ii) Application of controlled group consistency rules. In the case 
of an employer that participates in a multiple-employer plan, if the 
proportion of the plan's funding target attributable to the employees 
and former employees of the employer and members of its controlled group 
represents more than 50 percent of the plan's funding target, then the 
employer is treated as maintaining the plan for purposes of paragraph 
(c)(1) of this section. Thus, for a multiple-employer plan with credible 
mortality information that is treated as maintained by an employer under 
this paragraph (c)(7), unless substitute mortality tables are used for 
that plan, substitute mortality tables may not be used for any plan 
maintained by that employer or a member of its controlled group (and if 
substitute mortality tables are used for any other plan maintained by 
any member of the employer's controlled group, they must be used for the 
multiple-employer plan). By contrast, if the proportion of the plan's 
funding target attributable to the employees and former employees of the 
employer and members of its controlled group represents 50 percent or 
less of the funding target for a multiple-employer plan in which it 
participates, then the employer is not treated as maintaining the plan 
for purposes of paragraph (c)(1) of this section. Accordingly, whether 
substitute mortality tables may be used for other plans in such an 
employer's controlled group is independent of whether substitute 
mortality tables are used for the multiple-employer plan.
    (d) Full credibility--(1) In general. The mortality experience with 
respect to a gender or other population within a plan has full 
credibility if the actual number of deaths for that population during 
the experience study period described in paragraph (d)(2) of this 
section is at least the full credibility threshold described in 
paragraph (d)(3) of this section. Paragraph (d)(4) of this section 
provides rules for the creation of a base substitute mortality table 
from the experience study, which apply if the mortality experience for 
the population has full credibility. Paragraph (d)(5) of this section 
provides rules regarding the use of separate substitute mortality tables 
for plan populations within a gender. Paragraph (d)(6) of this section 
provides an option to use the combined mortality experience of both 
genders to determine the existence and extent of credible mortality 
information and to develop a single mortality ratio for use in 
constructing substitute mortality tables.

[[Page 562]]

    (2) Experience study period requirements--(i) General rule. The base 
substitute mortality table for a gender or other population must be 
developed from an experience study of the mortality experience of that 
population that is collected over an experience study period. The 
experience study period must consist of 2, 3, 4, or 5 consecutive 12-
month periods, and must be the same period for all populations except as 
provided in paragraph (c)(5)(iii) of this section.
    (ii) Requirement to use recent experience data--(A) General rule. 
Except as provided in paragraph (d)(2)(ii)(B) of this section, the last 
day of the experience study period must be less than 3 years before the 
first day of the first plan year for which the substitute mortality 
tables are to apply. For example, if January 1, 2019, is the first day 
of the first plan year for which the substitute mortality tables will be 
used, then an experience study using calendar year data generally must 
include data collected for a period that ends no earlier than December 
31, 2016.
    (B) Exception for submission between 1 and 2 years before effective 
date of table. If the plan sponsor submits a request for approval to use 
of substitute mortality tables more than 1 year (and less than 2 years) 
before the first day of the first plan year for which the substitute 
mortality tables are to apply, then the experience study is not treated 
as failing to satisfy the rule in paragraph (d)(2)(ii)(A) of this 
section if the last day of the final year reflected in the experience 
data is less than 2 years before the date of submission. For example, if 
an application for approval to use of substitute mortality tables that 
would apply for plan years beginning on or after January 1, 2019 year is 
submitted in 2017, then an experience study using calendar year data may 
be based on data collected for a period that ends as early as December 
31, 2015.
    (iii) Experience study based on benefit amount. As provided in 
paragraph (d)(4)(i) of this section, the mortality rates under the base 
substitute mortality tables are amounts-weighted mortality rates that 
are derived from the experience study. An individual's benefit amount 
(which is used to determine amounts-weighted mortality rates and for 
other purposes under this paragraph (d)) is the individual's accrued 
benefit expressed in the form of an annual benefit commencing at normal 
retirement age (or at the current age, if later) if an individual has 
not commenced benefits and the individual's annual payment if the 
individual has commenced benefits. Because amounts-weighted mortality 
rates for a plan are determined using benefit amounts, the experience 
study used to develop a base substitute mortality table may not include 
periods before the plan was established.
    (3) Full credibility threshold--(i) Threshold number of deaths. The 
full credibility threshold for a gender or other population is the 
product of 1,082 and the population's benefit dispersion factor. In 
calculating the population's benefit dispersion factor, for purposes of 
paragraphs (d)(3)(iii), (iv), and (v) of this section, the population is 
adjusted, as appropriate, for individuals who leave the population on 
account of a reason other than death.
    (ii) Population's benefit dispersion factor. The population's 
benefit dispersion factor is equal to--
    (A) The number of expected deaths for the population during the 
experience study period (as defined in paragraph (d)(3)(iii) of this 
section); multiplied by
    (B) The sum of the mortality-weighted squares of the benefits (as 
defined in paragraph (d)(3)(iv) of this section); divided by
    (C) The square of the sum of the mortality-weighted benefits (as 
defined in paragraph (d)(3)(v) of this section).
    (iii) Number of expected deaths. For a population, the number of 
expected deaths during the experience study period is equal to the sum, 
for all years in the experience study period, of the expected number of 
deaths in the population during the year using the mortality rates from 
the standard mortality tables determined under paragraph (d)(4)(iii) of 
this section. This amount is equal to:

[[Page 563]]

[GRAPHIC] [TIFF OMITTED] TR05OC17.000


Where E is equal to the number of years in the experience study period, 
t represents each year during the experience study period, x represents 
an individual in the population during year t, qxt is the 
mortality rate for that individual's age and gender for the calendar 
year in which year t begins under the applicable standard mortality 
table determined under paragraph (d)(4)(iii) of this section, and 
Nt is equal to the number of individuals in the population in 
year t.
    (iv) Sum of the mortality-weighted squares of the benefits--(A) 
Determination. For a population, the sum of the mortality-weighted 
squares of the benefits is the sum, for all years in the experience 
study period, for all individuals in the population at the beginning of 
the year, of the product of--
    (1) The probability of death for the individual using the mortality 
rate for the individual's age and gender from the standard mortality 
table determined under paragraph (d)(4)(iii) of this section; and
    (2) The square of the benefit amount for the individual.
    (B) Expression as formula. The sum of the mortality-weighted squares 
of the benefits for a population determined pursuant to paragraph 
(d)(3)(iv)(A) of this section is equal to:
[GRAPHIC] [TIFF OMITTED] TR05OC17.001


Where E is equal to the number of years in the experience study period, 
t represents each year during the experience study period, x represents 
an individual in the population during year t, qxt is the 
mortality rate for that individual's age and gender for the calendar 
year in which year t begins under the applicable standard mortality 
table determined under paragraph (d)(4)(iii) of this section, 
bxt is equal to the benefit amount for that individual for 
year t, and Nt is equal to the number of individuals in the 
population in year t.
    (v) Square of the sum of the mortality-weighted benefits--(A) 
Determination. For a population, the square of the sum of the mortality-
weighted benefits is equal to the square of the sum, for all years in 
the experience study period, for all individuals in the population at 
the beginning of the year, of the product of--
    (1) The probability of death of the individual using the mortality 
rate for the individual's age and gender from the standard mortality 
table determined under paragraph (d)(4)(iii) of this section; and
    (2) The benefit amount for the individual.
    (B) Expression as formula. The square of the sum of the mortality-
weighted benefits for a population determined pursuant to paragraph 
(d)(3)(v)(A) of this section is equal to:
[GRAPHIC] [TIFF OMITTED] TR05OC17.002


Where E is equal to the number of years in the experience study period, 
t represents each year during the experience study period, x represents 
an individual in the population during year t, qxt is the 
mortality rate for that individual's age and gender for the calendar 
year in which t begins under the applicable standard mortality table 
determined under paragraph (d)(4)(iii) of this section, bxt 
is equal to the benefit amount for that individual for year t, and 
Nt is equal to the number of individuals in the population in 
year t.
    (4) Development of mortality rates--(i) In general. The mortality 
rates under the base substitute mortality tables must be amounts-
weighted mortality rates that are derived from the experience study. 
Except as provided in paragraph (d)(4)(iv) of this section, the 
mortality rate for an age and gender is determined by multiplying the 
mortality rate for that age and gender from the standard mortality table 
determined

[[Page 564]]

under paragraph (d)(4)(iii) of this section by the mortality ratio 
determined under paragraph (d)(4)(ii) of this section. If the simplified 
rule of paragraph (c)(2)(ii)(B) of this section is used for the 
population, then the mortality ratio is determined only taking into 
account people who are at least 50 years old and less than 100 years 
old, but the mortality ratio is applied to all ages.
    (ii) Mortality ratio--(A) In general. Except as provided in 
paragraph (d)(6) of this section, a mortality ratio is determined for a 
gender or other population within a gender, and is equal to the quotient 
determined by dividing--
    (1) The sum, for all years in the experience study period, of the 
benefit amount for all individuals in the population at the beginning of 
the year who died during the year, by
    (2) The sum, for all years in the experience study period, for all 
individuals in the population at the beginning of the year (adjusted, as 
appropriate, for individuals who leave on account of reason other than 
death), of the product of--
    (i) The probability of death of the individual using the mortality 
rate for the individual's age and gender from the standard mortality 
table determined under paragraph (d)(4)(iii) of this section; and
    (ii) The benefit amount for the individual.
    (B) Expression as formula. For purposes of determining a mortality 
ratio as described in paragraph (d)(4)(ii)(A) of this section, the 
amount described in paragraph (d)(4)(ii)(A)(2) of this section is equal 
to:
[GRAPHIC] [TIFF OMITTED] TR05OC17.003


Where E is equal to the number of years in the experience study period, 
t represents each year during the experience study period, x represents 
an individual in the population during year t, qxt is the 
mortality rate for that individual's age and gender for the calendar 
year in which t begins under the applicable standard mortality table 
determined under paragraph (d)(4)(iii) of this section, bxt 
is equal to the benefit amount for that individual for year t, and 
Nt is equal to the number of individuals in the population in 
year t.
    (iii) Standard mortality table--(A) Projection of base table. The 
standard mortality table for a year is the mortality table determined by 
applying cumulative mortality improvement factors determined under Sec.  
1.430(h)(3)-1(a)(2)(i)(E) to the base mortality table under Sec.  
1.430(h)(3)-1(d) for the period beginning with 2006 and ending in the 
base year for the base substitute mortality table determined under 
paragraph (c)(3)(ii) of this section. For purposes of the previous 
sentence, the cumulative mortality improvement factors are determined 
using the mortality improvement rates described in Sec.  1.430(h)(3)-
1(a)(2)(i)(C) that apply for the calendar year during which the plan 
sponsor submits the request for approval to use substitute mortality 
tables. If the plan sponsor submits such a request during 2017, then the 
cumulative mortality improvement factors are determined using the 
mortality improvement rates contained in the Mortality Improvement Scale 
MP-2016 Report (issued by the Retirement Plans Experience Committee 
(RPEC) of the Society of Actuaries and available at www.soa.org/
Research/Experience-Study/Pension/research-2016-mp.aspx).
    (B) Selection of base table. If the population consists solely of 
annuitants, the annuitant base mortality table set forth in Sec.  
1.430(h)(3)-1(d) must be used for purposes of paragraph (d)(4)(iii)(A) 
of this section. If the population consists solely of nonannuitants, the 
nonannuitant base mortality table set forth in Sec.  1.430(h)(3)-1(d) 
must be used for that purpose. If the population includes both 
annuitants and nonannuitants, a combination of the annuitant and 
nonannuitant base tables set forth in Sec.  1.430(h)(3)-1(d) must be 
used for that purpose. The combined table is constructed using the 
weighting factors for small plans that are set forth

[[Page 565]]

in Sec.  1.430(h)(3)-1(d). The weighting factors are applied to develop 
the combined table using the following equation: Combined mortality rate 
= [nonannuitant rate * (1 - weighting factor)] + [annuitant rate * 
weighting factor].
    (iv) Modification for ages 96 and older. Mortality rates for ages 96 
and older under the base substitute mortality table are determined using 
the rules of paragraph (d)(4)(i) of this section but substituting a 
modified mortality ratio for the mortality ratio determined under 
paragraph (d)(4)(ii) of this section. The modified mortality ratio is 
determined as follows--
    (A) For ages 96 through 109, if the mortality ratio is greater than 
1.0, the modified mortality ratio is equal to the mortality ratio for 
the population reduced by 1/15th of the excess of the mortality ratio 
over 1.0 for each year that the age exceeds 95.
    (B) For ages 96 through 109, if the mortality ratio is less than 
1.0, the modified mortality ratio is equal to the mortality ratio for 
the population increased by 1/15th of the excess of 1.0 over the 
mortality ratio for each year that the age exceeds 95.
    (C) For ages 110 and older, the modified mortality ratio is equal to 
1.0.
    (v) Change in number of individuals covered by table. Experience 
data may not be used to develop a base table if the number of 
individuals in the population covered by the table (for example, the 
male annuitant population) as of the last day of the plan year before 
the year the request for approval to use the substitute mortality table 
is made is less than 80 percent or more than 120 percent of the average 
number of individuals in that population over the years covered by the 
experience study on which the substitute mortality tables are based, 
unless it is demonstrated to the satisfaction of the Commissioner that 
the experience data is accurately predictive of future mortality of that 
population (taking into account the effect of the change in individuals) 
after appropriate adjustments to the data are made (for example, 
excluding data from individuals with respect to a spun-off portion of 
the plan). For this purpose, a reasonable estimate of the number of 
individuals in the population covered by the table may be used.
    (5) Separate tables for specified populations--(i) In general. 
Except as provided in this paragraph (d)(5), separate substitute 
mortality tables are permitted to be used for separate populations 
within a gender only if--
    (A) All individuals of that gender are divided into separate 
populations;
    (B) Each separate population has mortality experience that has full 
credibility as determined under the rules of paragraph (d)(5)(iii) of 
this section; and
    (C) The separate base substitute mortality table for each separate 
population is developed applying the rules of paragraphs (d)(1) through 
(4) of this section using an experience study that takes into account 
solely members of that population.
    (ii) Annuitant and nonannuitant separate populations. 
Notwithstanding paragraph (d)(5)(i)(B) of this section, a gender may be 
separated into separate populations of annuitants and nonannuitants for 
the purpose of developing and using substitute mortality tables, even if 
only one of those separate populations has credible mortality 
information. Similarly, if separate populations that satisfy paragraph 
(d)(5)(i)(B) of this section are established, then any of those 
populations may be further subdivided into separate annuitant and 
nonannuitant subpopulations, provided that at least one of the two 
resulting subpopulations has credible mortality information. The 
standard mortality tables under Sec.  1.430(h)(3)-1 are used for a 
resulting subpopulation that does not have credible mortality 
information. For example, if the male hourly and salaried populations 
under a plan each have mortality experience with full credibility and 
the male salaried annuitant population has credible mortality 
information, then substitute mortality tables may be used for the plan 
with respect to the male salaried annuitant population even if the 
standard mortality tables under Sec.  1.430(h)(3)-1 are used with 
respect to the male salaried nonannuitant population (because that 
nonannuitant population does not have credible mortality information).

[[Page 566]]

    (iii) Credible mortality information for separate populations. In 
determining whether the mortality experience for a separate population 
within a gender has full credibility, the rules of paragraph (d)(1) of 
this section must be applied to that separate population. In 
demonstrating that an annuitant (or nonannuitant) population within a 
gender or within a separate population does not have credible mortality 
information, the rules of paragraph (c)(2)(iii)(B) of this section are 
applied by substituting the annuitant (or nonannuitant) population for 
the gender.
    (6) Option to determine a single mortality ratio for both genders. 
Base substitute mortality tables for a plan may be constructed by 
developing and applying a single mortality ratio for both genders, but 
only if the substitute mortality tables used for all plans maintained by 
members of the plan sponsor's controlled group (except for plans for 
which both the male and female populations, considered separately, have 
mortality experience with full credibility) are constructed in this 
manner. If the option under this paragraph (d)(6) is applied for a plan 
then, for all plans maintained by members of the plan sponsor's 
controlled group, whether both the male and female populations within 
the plan have credible mortality information (and, if that combined 
population's mortality experience does not have full credibility, the 
partial credibility weighting factor for the plan) is determined using 
the combined mortality experience for both genders.
    (e) Partial credibility--(1) In general. The mortality experience 
with respect to a population has partial credibility if the actual 
number of deaths for that population during the experience study period 
described in paragraph (d)(2) of this section is at least equal to 100 
and is less than the full credibility threshold described for the 
population in paragraph (d)(3) of this section. If the mortality 
experience for the population has partial credibility, then in lieu of 
creating a base substitute mortality table as described in paragraph (d) 
of this section, the base substitute mortality table is created as the 
sum of--
    (i) The product of--
    (A) The partial credibility weighting factor determined under 
paragraph (e)(2) of this section; and
    (B) The mortality rates that are derived from the experience study 
determined under paragraph (d)(4)(i) of this section, and
    (ii) The product of--
    (A) One minus the partial credibility weighting factor described in 
paragraph (e)(2) of this section; and
    (B) The mortality rate from the standard mortality tables described 
in paragraph (d)(4)(iii) of this section.
    (2) Partial credibility weighting factor. The partial credibility 
weighting factor is equal to the square root of the fraction--
    (i) The numerator of which is the actual number of deaths for the 
population during the experience study period, and
    (ii) The denominator of which is the full credibility threshold for 
the population described in paragraph (d)(3) of this section.
    (f) Special rules for newly-affiliated plans--(1) In general. This 
paragraph (f) provides special rules that provide temporary relief from 
certain rules in this section in the case of a controlled group that 
includes a newly-affiliated plan (as defined in paragraph (f)(2) of this 
section). Paragraph (f)(3) of this section provides a transition period 
during which the requirement in paragraph (c)(1) of this section (that 
is, the requirement that all plans within the controlled group that have 
credible mortality information must use substitute mortality tables) is 
not applicable. Paragraph (f)(4) of this section provides special rules 
that permit the use of a shorter experience study period in the case of 
a newly-affiliated plan that excludes the mortality experience data for 
the period before the date the plan becomes a newly-affiliated plan.
    (2) Definition of newly-affiliated plan. For purposes of this 
paragraph (f), a plan is a newly-affiliated plan if the plan sponsor 
becomes a member of the new controlled group in connection with a 
merger, acquisition, or similar transaction described in Sec.  1.410(b)-
2(f). A plan also is treated as a newly-affiliated plan for purposes of 
this section if the plan is established in connection with a transfer of 
assets and liabilities

[[Page 567]]

from another employer's plan in connection with a merger, acquisition, 
or similar transaction described in Sec.  1.410(b)-2(f).
    (3) Transition period for newly-affiliated plans. The use of 
substitute mortality tables for a plan within a controlled group is not 
prohibited merely because, during the transition period, substitute 
mortality tables are not used for a newly-affiliated plan that fails to 
demonstrate a lack of credible mortality information during that period. 
Similarly, during the transition period, the use of substitute mortality 
tables for a newly-affiliated plan is not prohibited merely because 
substitute mortality tables are not used for another plan within the 
controlled group that fails to demonstrate a lack of credible mortality 
information during that period. The transition period begins on the date 
of the transaction that results in the plan becoming a newly-affiliated 
plan and ends on the last day of the plan year that immediately follows 
the latest ending period described in section 410(b)(6)(C)(ii) with 
respect to that transaction for any of the plans in the controlled 
group.
    (4) Experience study period for newly-affiliated plan--(i) In 
general. The mortality experience data for a newly-affiliated plan may 
either include or exclude mortality experience data for the period 
before the date the plan becomes a newly-affiliated plan. If a plan 
sponsor excludes mortality experience data for the period before the 
date the plan becomes a newly-affiliated plan, the exclusion must apply 
for all populations within the plan.
    (ii) Demonstration relating to lack of credible mortality 
information. If the experience study for a newly-affiliated plan 
excludes mortality experience data for the period prior to the date the 
plan becomes a newly-affiliated plan, then the demonstration that the 
plan does not have credible mortality information for a plan year that 
begins after the transition period can be made using a shorter 
experience study period than would otherwise be permitted under 
paragraph (c)(2)(iii)(B) of this section, provided that the experience 
study period begins with the date the plan becomes a newly-affiliated 
plan and ends not more than one year and one day before the first day of 
the plan year.
    (iii) Demonstration relating to credible mortality information. If 
the experience study for a newly-affiliated plan excludes mortality 
experience data for the period before the date the plan becomes a newly-
affiliated plan and the plan fails to demonstrate that it does not have 
credible mortality information for the plan year under the rules of 
paragraph (f)(4)(ii) of this section, then other plans within the 
controlled group may continue to use substitute mortality tables only if 
substitute mortality tables are used for the newly-affiliated plan for 
the plan year. In such a case, the experience study period for the 
newly-affiliated plan may consist of a 12-month period.
    (g) Effective/applicability date--(1) General rule. This section 
applies for plan years beginning on or after January 1, 2018. Except as 
provided in paragraph (g)(2) of this section, the substitute mortality 
table used for a plan for such a plan year must comply with the rules of 
paragraphs (a) through (f) of this section.
    (2) Transition rule for previously approved substitute mortality 
tables--(i) Applicability for 2018. If a plan sponsor has received 
approval from the Commissioner to use substitute mortality tables for a 
plan year beginning in 2017, then that previous approval applies to a 
plan year beginning in 2018 provided that--
    (A) The previous approval period had not ended;
    (B) Substitute mortality tables are used for all plans in the plan 
sponsor's controlled group in accordance with the terms of that 
approval; and
    (C) The projection factors provided in Projection Scale AA, as set 
forth in Sec.  1.430(h)(3)-1(d) as in effect on December 31, 2017 (as 
contained in 26 CFR part 1 revised April 1, 2017) are applied to the 
base substitute mortality table.
    (ii) Applicability for later plan years. If a plan sponsor is 
described in paragraph (g)(2)(i) of this section, then that previous 
approval applies to a later plan year provided that--
    (A) The previous approval period had not ended;
    (B) Substitute mortality tables are used for all plans in the plan 
sponsor's

[[Page 568]]

controlled group that have credible mortality information within the 
meaning of paragraph (c)(2)(ii) of this section; and
    (C) The mortality improvement factors described in paragraph 
(c)(3)(ii) of this section are applied to the base substitute mortality 
table.
    (3) Transition rule for requests for approval to use substitute 
mortality tables. A written request described in paragraph (b)(1)(i) of 
this section to use substitute mortality tables for a plan year that 
begins during 2018 does not fail to satisfy the timing requirement of 
paragraph (b)(1)(ii) of this section if it is submitted no later than 
February 28, 2018, provided that the plan sponsor agrees to a 90-day 
extension of the 180-day review period in accordance with paragraph 
(b)(2)(iv) of this section.

[T.D. 9826, 82 FR 46404, Oct. 5, 2017]



Sec.  1.430(i)-1  Special rules for plans in at-risk status.

    (a) In general--(1) Overview. This section provides special rules 
related to determining the funding target and making other computations 
for certain defined benefit plans that are in at-risk status for the 
plan year. Section 430(i) and this section apply to single employer 
defined benefit plans (including multiple employer plans) but do not 
apply to multiemployer plans (as defined in section 414(f)). Paragraph 
(b) of this section describes rules for determining whether a plan is in 
at-risk status for a plan year, including the determination of a plan's 
funding target attainment percentage and at-risk funding target 
attainment percentage. Paragraph (c) of this section describes the 
funding target for a plan in at-risk status. Paragraph (d) of this 
section describes the target normal cost for a plan in at-risk status. 
Paragraph (e) of this section describes rules regarding how the funding 
target and the target normal cost are determined for a plan that has 
been in at-risk status for fewer than 5 consecutive plan years. 
Paragraph (f) of this section sets forth effective/applicability dates 
and transition rules.
    (2) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section 430 and this section are applied separately for each employer 
under the plan, as if each employer maintained a separate plan. For 
example, at-risk status is determined separately for each employer under 
such a multiple employer plan. In the case of a multiple employer plan 
to which section 413(c)(4)(A) does not apply (that is, a plan described 
in section 413(c)(4)(B) that has not made the election for section 
413(c)(4)(A) to apply), the rules of section 430 and this section are 
applied as if all participants in the plan were employed by a single 
employer.
    (b) Determination of at-risk status of a plan--(1) General rule. 
Except as otherwise provided in this section, a plan is in at-risk 
status for a plan year if--
    (i) The funding target attainment percentage for the preceding plan 
year (determined under paragraph (b)(3) of this section) is less than 80 
percent; and
    (ii) The at-risk funding target attainment percentage for the 
preceding plan year (determined under paragraph (b)(4) of this section) 
is less than 70 percent.
    (2) Small plan exception. If, on each day during the preceding plan 
year, a plan had 500 or fewer participants (including both active and 
inactive participants), determined in accordance with the same rules 
that apply for purposes of Sec.  1.430(g)-1(b)(2)(ii), then the plan is 
not treated as being in at-risk status for the plan year.
    (3) Funding target attainment percentage. For purposes of this 
section, except as otherwise provided in paragraph (b)(5) of this 
section, the funding target attainment percentage of a plan for a plan 
year is the funding target attainment percentage as defined in Sec.  
1.430(d)-1(b)(3).
    (4) At-risk funding target attainment percentage. Except as 
otherwise provided in paragraph (b)(5) of this section, the at-risk 
funding target attainment percentage of a plan for a plan year is a 
fraction (expressed as a percentage)--
    (i) The numerator of which is the value of plan assets for the plan 
year after subtraction of the prefunding balance and the funding 
standard carryover balance under section 430(f)(4)(B); and

[[Page 569]]

    (ii) The denominator of which is the at-risk funding target of the 
plan for the plan year (determined under paragraph (c) of this section, 
but without regard to the loading factor imposed under paragraph 
(c)(2)(ii) of this section).
    (5) Special rules--(i) Special rule for new plans. Except as 
otherwise provided in paragraph (b)(5)(iii) of this section, in the case 
of a new plan that was neither the result of a merger nor involved in a 
spinoff, the funding target attainment percentage under paragraph (b)(3) 
of this section and the at-risk funding target attainment percentage 
under paragraph (b)(4) of this section are equal to 100 percent for 
years before the plan exists.
    (ii) Special rule for plans with zero funding target. Except as 
otherwise provided in paragraph (b)(5)(iii) of this section, if the 
funding target of the plan is equal to zero for a plan year, then the 
funding target attainment percentage under paragraph (b)(3) of this 
section and the at-risk funding target attainment percentage under 
paragraph (b)(4) of this section are equal to 100 percent for that plan 
year.
    (iii) Exception when plan has predecessor plan that was in at-risk 
status. [Reserved]
    (iv) Special rules for plans that are the result of a merger. 
[Reserved]
    (v) Special rules for plans that are involved in a spinoff. 
[Reserved]
    (6) Special rule for determining at-risk status of plans of 
specified automobile manufacturers. See section 430(i)(4)(C) for special 
rules for determining the at-risk status of plans of specified 
automobile and automobile parts manufacturers.
    (c) Funding target for plans in at-risk status--(1) In general. If 
the plan has been in at-risk status for 5 consecutive years, including 
the current plan year, then the funding target for the plan is the at-
risk funding target determined under paragraph (c)(2) of this section. 
See paragraph (e) of this section for the determination of the funding 
target where the plan is in at-risk status for the plan year but was not 
in at-risk status for one or more of the 4 preceding plan years.
    (2) At-risk funding target--(i) Use of modified actuarial 
assumptions. Except as otherwise provided in this paragraph (c)(2), the 
at-risk funding target of the plan under this paragraph (c)(2) for the 
plan year is equal to the present value of all benefits accrued or 
earned under the plan as of the beginning of the plan year, as 
determined in accordance with Sec.  1.430(d)-1 but using the additional 
actuarial assumptions described in paragraph (c)(3) of this section.
    (ii) Funding target includes load. The at-risk funding target is 
increased by the sum of--
    (A) $700 multiplied by the number of participants in the plan 
(including active participants, inactive participants, and 
beneficiaries); plus
    (B) Four percent of the funding target (determined under Sec.  
1.430(d)-1(b)(2) as if the plan was not in at-risk status) of the plan 
for the plan year.
    (iii) Minimum amount. Notwithstanding any otherwise applicable 
provisions of this section, the at-risk funding target of a plan for a 
plan year is not less than the plan's funding target for the plan year 
determined without regard to this section.
    (3) Additional actuarial assumptions--(i) In general. The actuarial 
assumptions used to determine a plan's at-risk funding target for a plan 
year are the actuarial assumptions that are applied under section 430, 
with the modifications described in this paragraph (c)(3).
    (ii) Special retirement age assumption--(A) Participants eligible to 
retire and collect benefits within 11 years. Subject to paragraph 
(c)(3)(ii)(B) of this section, if a participant would be eligible to 
commence an immediate distribution by the end of the 10th plan year 
after the current plan year (that is, the end of the 11th plan year 
beginning with the current plan year), that participant is assumed to 
commence an immediate distribution at the earliest retirement age under 
the plan, or, if later, at the end of the current plan year. The rule of 
this paragraph (c)(3)(ii)(A) does not affect the application of plan 
assumptions regarding an employee's termination of employment prior to 
the employee's earliest retirement age.
    (B) Participants otherwise assumed to retire immediately. The 
special retirement age assumption of paragraph (c)(3)(ii)(A) of this 
section does not apply to a participant to the extent the

[[Page 570]]

participant is otherwise assumed to commence benefits during the current 
plan year under the actuarial assumptions for the plan. For example, if 
generally applicable retirement assumptions would provide for a 25 
percent probability that a participant will commence benefits during the 
current plan year, the special retirement age assumption of paragraph 
(c)(3)(ii)(A) of this section requires the plan's enrolled actuary to 
assume a 75 percent probability that the participant will commence 
benefits at the end of the plan year.
    (C) Definition of earliest retirement date. For purposes of this 
paragraph (c)(3)(ii), a plan's earliest retirement date for an employee 
is the earliest date on which the employee can commence receiving an 
immediate distribution of a fully vested benefit under the plan. See 
Sec.  1.401(a)-20, Q&A-17(b).
    (iii) Requirement to assume most valuable benefit. All participants 
and beneficiaries who are assumed to retire on a particular date are 
assumed to elect the optional form of benefit available under the plan 
that would result in the highest present value of benefits commencing at 
that date.
    (iv) Reasonable techniques permitted. The plan's actuary is 
permitted to use reasonable techniques in determining the actuarial 
assumptions that are required to be used pursuant to this paragraph 
(c)(3). For example, the plan's actuary is permitted to use reasonable 
assumptions in determining the optional form of benefit under the plan 
that would result in the highest present value of benefits for this 
purpose.
    (d) Target normal cost of plans in at-risk status--(1) General rule. 
If the plan has been in at-risk status for 5 consecutive years, 
including the current plan year, then the target normal cost for the 
plan is the at-risk target normal cost determined under paragraph (d)(2) 
of this section. See paragraph (e) of this section for the determination 
of the target normal cost where the plan is in at-risk status for the 
plan year but was not in at-risk status for one or more of the 4 
preceding plan years.
    (2) At-risk target normal cost--(i) Use of modified actuarial 
assumptions--(A) In general. Except as otherwise provided in this 
paragraph (d)(2), the at-risk target normal cost of a plan for the plan 
year is equal to the present value (determined as of the valuation date) 
of all benefits that accrue during, are earned during, or are otherwise 
allocated to service in the plan year, as determined in accordance with 
Sec.  1.430(d)-1 but using the additional actuarial assumptions 
described in paragraph (c)(3) of this section.
    (B) Special adjustments. The target normal cost of the plan for the 
plan year (determined under paragraph (d)(2)(i)(A) of this section) is 
adjusted (not below zero) by adding the amount of plan-related expenses 
expected to be paid from plan assets during the plan year and 
subtracting the amount of any mandatory employee contributions expected 
to be made during the plan year.
    (C) Plan-related expenses. For purposes of this paragraph (d)(2), 
plan-related expenses are determined using the rules of Sec.  1.430(d)-
1(b)(1)(iii)(B).
    (ii) Loading factor. The at-risk target normal cost is increased by 
a loading factor equal to 4 percent of the present value (determined as 
of the valuation date) of all benefits under the plan that accrue, are 
earned, or are otherwise allocated to service for the plan year under 
the applicable rules of Sec.  1.430(d)-1(c)(1)(ii)(B), (C), or (D), 
determined as if the plan were not in at-risk status.
    (iii) Minimum amount. The at-risk target normal cost of a plan for a 
plan year is not less than the plan's target normal cost determined 
without regard to section 430(i) and this section.
    (e) Transition between applicable funding targets and applicable 
target normal costs--(1) Funding target. If a plan that is in at-risk 
status for the plan year has not been in at-risk status for one or more 
of the preceding 4 plan years, the plan's funding target for the plan 
year is determined as the sum of--
    (i) The funding target determined without regard to section 430(i) 
and this section; plus
    (ii) The phase-in percentage for the plan year multiplied by the 
excess of--
    (A) The at-risk funding target determined under paragraph (c)(2) of 
this

[[Page 571]]

section (determined taking into account paragraph (e)(4) of this 
section); over
    (B) The funding target determined without regard to section 430(i) 
and this section.
    (2) Target normal cost. If a plan that is in at-risk status for the 
plan year has not been in at-risk status for one or more of the 
preceding 4 plan years, the plan's target normal cost for the plan year 
is determined as the sum of--
    (i) The target normal cost determined without regard to section 
430(i) and this section; plus
    (ii) The phase-in percentage for the plan year multiplied by the 
excess of--
    (A) The at-risk target normal cost determined under paragraph (d)(2) 
of this section (determined taking into account paragraph (e)(4) of this 
section); over
    (B) The target normal cost determined without regard to section 
430(i) and this section.
    (3) Phase-in percentage. For purposes of this paragraph (e), the 
phase-in percentage is 20 percent multiplied by the number of 
consecutive plan years that the plan has been in at-risk status 
(including the current plan year) and not taking into account years 
before the first effective plan year for a plan.
    (4) Transition funding target and target normal cost determined 
without load. Notwithstanding paragraph (c)(2)(ii) of this section, if a 
plan has not been in at-risk status for 2 or more of the preceding 4 
plan years (not taking into account years before the first effective 
plan year for a plan), then the plan's at-risk funding target that is 
used for purposes of paragraph (e)(1)(ii)(A) of this section (to 
calculate the plan's funding target where the plan has been in at-risk 
status for fewer than 5 plan years) is determined without regard to the 
loading factor set forth in paragraph (c)(2)(ii) of this section. 
Similarly, if a plan has not been in at-risk status for 2 or more of the 
preceding 4 plan years (not taking into account years before the first 
effective plan year for a plan), then the plan's at-risk target normal 
cost that is used for purposes of paragraph (e)(2)(ii)(A) of this 
section (to calculate the plan's target normal cost where the plan has 
been in at-risk status for fewer than 5 plan years) is determined 
without regard to the loading factor set forth in paragraph (d)(2)(ii) 
of this section.
    (f) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date--(i) General rule. Section 
430 generally applies to plan years beginning on or after January 1, 
2008. The applicability of section 430 for purposes of determining the 
minimum required contribution is delayed for certain plans in accordance 
with sections 104 through 106 of the Pension Protection Act of 2006 (PPA 
'06), Public Law 109-280 (120 Stat. 780).
    (ii) Applicability of special adjustments to target normal cost. The 
special adjustments of paragraph (d)(2)(i)(B) of this section (relating 
to adjustments to the target normal cost for plan-related expenses and 
mandatory employee contributions) apply to plan years beginning after 
December 31, 2008. In addition, a plan sponsor may elect to make the 
special adjustments of paragraph (d)(2)(i)(B) of this section for plan 
years beginning in 2008. This election is made in the same manner and is 
subject to the same rules as an election to add an amount to the plan's 
prefunding balance pursuant to Sec.  1.430(f)-1(f). Thus, the election 
can be made no later than the last day for making the minimum required 
contribution for the plan year to which the election relates.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010. For plan 
years beginning before January 1, 2010, plans are permitted to rely on 
the provisions set forth in this section for purposes of satisfying the 
requirements of section 430.
    (3) First effective plan year. For purposes of this section, the 
first effective plan year for a plan is the first plan year to which 
section 430 applies to the plan for purposes of determining the minimum 
required contribution.
    (4) Transition rule for determining at-risk status. In the case of 
plan years beginning in 2008, 2009, and 2010, paragraph (b)(1)(i) of 
this section is applied by substituting the following percentages for 
``80 percent''--
    (i) 65 percent in the case of 2008;
    (ii) 70 percent in the case of 2009; and
    (iii) 75 percent in the case of 2010.

[T.D. 9467, 74 FR 53058, Oct. 15, 2009]

[[Page 572]]



Sec.  1.430(j)-1  Payment of minimum required contributions.

    (a) In general--(1) Overview. This section provides rules related to 
the payment of minimum required contributions, including the payment of 
required installments. Section 430(j) and this section apply to single-
employer defined benefit plans (including multiple employer plans as 
defined in section 413(c)) but do not apply to multiemployer plans (as 
defined in section 414(f)). Paragraph (b) of this section describes the 
general timing requirement for minimum required contributions. Paragraph 
(c) of this section describes the accelerated required installment 
schedule for plans with a funding shortfall in the preceding plan year. 
Paragraph (d) of this section provides rules regarding liquidity 
requirements. Paragraph (e) of this section provides definitions. 
Paragraph (f) of this section provides examples that illustrate the 
rules of this section. Paragraph (g) of this section sets forth 
effective/applicability dates and transition rules.
    (2) Special rules for multiple employer plans--(i) In general. In 
the case of a multiple employer plan to which section 413(c)(4)(A) 
applies, the rules of section 430 and this section are applied 
separately for each employer under the plan, as if each employer 
maintained a separate plan. Thus, for example, required installments are 
determined separately for each employer under such a multiple employer 
plan. In the case of a multiple employer plan to which section 
413(c)(4)(A) does not apply (that is, a plan described in section 
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to 
apply), the rules of section 430 and this section are applied as if all 
participants in the plan were employed by a single employer.
    (ii) CSEC plans. A CSEC plan (that is, a plan that fits within the 
definition of a CSEC plan in section 414(y) for plan years beginning on 
or after January 1, 2014 and for which the election under section 
414(y)(3)(A) has not been made) is not subject to the rules of section 
430. See section 433 for the minimum funding rules that apply to CSEC 
plans.
    (3) Applicability of section 430(j) to plans of commercial passenger 
airlines--(i) In general. Except as otherwise provided in this section, 
the rules of section 430(j) and this section apply to a plan for which 
an election described in section 402 of the Pension Protection Act of 
2006, Public Law 109-280 (120 Stat. 780 (2006)), as amended (PPA '06), 
has been made in the same manner as those rules apply to any other plan 
subject to section 430.
    (ii) Special rules for plans for which election was made pursuant to 
section 402(a)(1) of PPA '06. For purposes of applying the rules of 
section 430(j) and this section to a plan with respect to which the 
election under section 402(a)(1) of PPA '06 has been made, the effective 
interest rate for the plan is deemed to be 8.85 percent during the 
period for which the election applies. In addition, see paragraph 
(e)(4)(ii) of this section for a special determination of the funding 
shortfall for a plan for which the election in section 402(a)(1) of PPA 
'06 has been made.
    (b) General timing requirement for minimum required contributions--
(1) Earliest date for contributions. A payment made before the first day 
of the plan year cannot be applied toward the minimum required 
contribution under section 430 for that plan year.
    (2) Deadline for contributions. The deadline for any payment of any 
minimum required contribution for a plan year is 8\1/2\ months after the 
close of the plan year. See section 4971 and the regulations thereunder 
regarding an excise tax that applies with respect to minimum required 
contributions not paid by this deadline. For additional rules that may 
apply in the case of a failure to pay minimum required contributions by 
this deadline, see also section 430(k) of the Code and sections 101(d) 
and 4043 of the Employee Retirement Income Security Act of 1974, as 
amended (ERISA).
    (3) Allocation of contribution to a plan year--(i) Plans with unpaid 
minimum required contributions that have not been corrected. If a plan 
has unpaid minimum required contributions within the meaning of Sec.  
54.4971(c)-1(c) of this chapter that have not yet been corrected within 
the meaning of Sec.  54.4971(c)-1(d)(2) of this chapter at the time a 
contribution is made, then the

[[Page 573]]

contribution is treated as a late contribution for the earliest plan 
year for which there is an unpaid minimum required contribution (to the 
extent necessary to correct that unpaid minimum required contribution). 
To the extent the contribution exceeds the amount necessary to correct 
the earlier unpaid minimum required contribution, the excess is treated 
as a late contribution for the next earliest plan year for which there 
is an unpaid minimum required contribution (to the extent necessary to 
correct that next earliest unpaid minimum required contribution). The 
allocation of the contribution under the preceding sentence is repeated 
until all unpaid minimum required contributions have been corrected, or 
until the entire contribution is allocated, whichever comes first.
    (ii) Plans without unpaid minimum required contributions. If a 
contribution is made during the current plan year but before the 
deadline under paragraph (b)(2) of this section for contributions for a 
prior plan year, and the plan has no unpaid minimum required 
contribution for any plan year at the time the contribution is made, 
then the contribution may be designated as a contribution for either 
that prior plan year or the current plan year. Similarly, if a 
contribution made during the current plan year but before the deadline 
under paragraph (b)(2) of this section for contributions for a prior 
plan year is more than enough to correct a plan's unpaid minimum 
required contributions for all plan years, the portion of a contribution 
that was not used to correct unpaid minimum required contributions may 
be designated as a contribution for either that prior plan year or the 
current plan year.
    (iii) Method of allocating contributions--(A) Reporting for 
contributions to correct unpaid minimum required contributions. The 
allocation of a contribution under the rules of paragraph (b)(3)(i) of 
this section to correct unpaid minimum required contributions is 
automatic and must be shown on the actuarial report (Schedule SB, 
``Single-Employer Defined Benefit Plan Actuarial Information'' of Form 
5500, ``Annual Return/Report of Employee Benefit Plan'') for the 
earliest plan year with respect to which, as of the date of the 
contribution, the deadline for making contributions under paragraph 
(b)(2) of this section has not passed. See Sec.  1.430(g)-1(d)(1) for 
the rules for determining the plan year for which these contributions 
are taken into account in determining the value of plan assets.
    (B) Designation of plan year if no unpaid minimum contribution. In 
the case of a contribution described in paragraph (b)(3)(ii) of this 
section, the designation is established by the completion (and filing, 
if required) of the actuarial report (Schedule SB, ``Single-Employer 
Defined Benefit Plan Actuarial Information'' of Form 5500, ``Annual 
Return/Report of Employee Benefit Plan'') for the plan year for which 
the contribution is designated and cannot be changed after the actuarial 
report that reflects the contribution is completed (and filed, if 
required) except as provided in guidance published in the Internal 
Revenue Bulletin. Thus, a contribution that has been designated for a 
plan year on an actuarial report pursuant to this paragraph 
(b)(3)(iii)(B) generally cannot be redesignated as a contribution for 
either an earlier or later plan year.
    (4) Adjustment for interest--(i) In general. Except as provided in 
this paragraph (b)(4), any payment toward the minimum required 
contribution under section 430 for a plan year that is paid on a date 
other than the valuation date for that plan year is adjusted for 
interest for the period between the valuation date and the payment date, 
at the plan's effective interest rate for that plan year determined 
pursuant to Sec.  1.430(h)(2)-1(f)(1). The direction of the adjustment 
depends on whether the contribution is paid before or after the 
valuation date for the plan year. If the contribution is paid after the 
valuation date for the plan year, the contribution is discounted to the 
valuation date using the plan's effective interest rate. By contrast, if 
the contribution is paid before the valuation date for the plan year 
(which could only occur in the case of a small plan described in section 
430(g)(2)(B)), the contribution is increased for interest using the 
plan's effective interest rate.
    (ii) Interest adjustment for late quarterly installments. In the 
case of a plan

[[Page 574]]

that must make required installments under the rules of paragraph (c) of 
this section, to the extent a contribution for a plan year constitutes a 
late required installment, the adjustment for interest for the period 
between the valuation date and the payment date is made in two steps. In 
the first step, the portion of the contribution that constitutes a late 
required installment is adjusted for interest from the date of the 
contribution to the due date for the installment by discounting it using 
the plan's effective interest rate for that plan year determined 
pursuant to Sec.  1.430(h)(2)-1(f)(1) plus 5 percentage points. In the 
second step, this discounted amount is treated as if it were contributed 
on the installment due date for purposes of the interest adjustment 
under paragraph (b)(4)(i) of this section. However, a contribution made 
toward the unpaid liquidity amount (as defined in paragraph (d)(3) of 
this section) that is made before the close of the quarter in which it 
is due is adjusted under paragraph (b)(4)(iii) of this section.
    (iii) Interest adjustment for unpaid liquidity amounts. In the case 
of a plan that is subject to the liquidity requirement rules of 
paragraph (d) of this section, to the extent a contribution made during 
a quarter constitutes a payment of the unpaid liquidity amount for that 
quarter as described in paragraph (d)(3) of this section, the adjustment 
for interest for the period between the valuation date and the payment 
date is made in two steps. In the first step, the portion of the 
contribution that constitutes a payment of the unpaid liquidity amount 
is increased for interest from the date of the contribution to the last 
day of the quarter, at the plan's effective interest rate for that plan 
year determined pursuant to Sec.  1.430(h)(2)-1(f)(1). In the second 
step, this adjusted amount is treated as if it were contributed on the 
last day of that quarter for purposes of the interest adjustment for 
late required installments under the rules of paragraph (b)(4)(ii) of 
this section. See paragraph (d)(3)(iv)(B) of this section for an 
increase to the minimum required contribution that gives effect to this 
interest adjustment for unpaid liquidity amounts in the event a portion 
of the required installment is no longer treated as unpaid after the 
close of the quarter under paragraph (d)(3)(iv)(A) of this section.
    (c) Accelerated quarterly installments required for underfunded 
plans--(1) Plans subject to quarterly installment requirement. The plan 
sponsor of a plan that has a funding shortfall for the preceding plan 
year is required to pay the installments described in paragraph (c)(5) 
of this section by the due dates described in paragraph (c)(6) of this 
section. See paragraph (b)(4)(ii) of this section, section 430(k) of the 
Internal Revenue Code (Code) (regarding the imposition of a lien), and 
sections 101(d) and 4043 of ERISA (regarding notice to participants and 
beneficiaries and to the Pension Benefit Guaranty Corporation) for 
examples of consequences that generally apply following a failure to 
make required installments.
    (2) Satisfaction of quarterly installment requirement. A plan 
sponsor may satisfy the requirement to pay an installment under 
paragraph (c)(1) of this section by one or a combination of the 
following--
    (i) Making a contribution for the plan year which is allocated among 
the required installments under the rules of paragraph (c)(3) of this 
section; and
    (ii) Making an election to use some or all of the plan's prefunding 
balance or funding standard carryover balance in accordance with the 
rules of paragraph (c)(4) of this section.
    (3) Satisfaction of quarterly installment requirement with 
contributions--(i) Contributions allocated to earliest quarterly 
installments. For purposes of this section, a contribution for a plan 
year is allocated among the required installments for the plan year 
under the rules of paragraph (c)(3)(ii) or (iii) of this section, 
whichever is applicable. Which rule applies depends on whether, at the 
time the contribution is made, the plan sponsor has unpaid required 
installments (that is, the plan sponsor has not fully satisfied all 
required installments for which the due date has passed, taking into 
account the special rule with respect to the unpaid liquidity amounts in 
paragraph (d)(3)(iv)(A) of this section).

[[Page 575]]

    (ii) Early contributions increased with interest. If a plan has no 
unpaid required installments for a plan year at the time a contribution 
for the plan year is made, then the contribution is allocated to the 
required installments (if any) for the plan year due on or after the 
date of the contribution under the rules of this paragraph (c)(3)(ii). 
The contribution is allocated in the order in which those installments 
occur, and the amount allocated to each required installment is limited 
to the amount necessary to satisfy the required installment (including 
satisfaction of the liquidity requirement under paragraph (d)(1) of this 
section, taking into account the special rule with respect to the unpaid 
liquidity amounts in paragraph (d)(3)(iv)(A) of this section) taking 
into account any interest as described in the next sentence. If the 
contribution is made before the due date of the installment to which it 
is allocated, then the amount credited toward the installment includes 
interest on the contribution from the date of the contribution to the 
due date of the required installment (except as provided in paragraph 
(d)(2) of this section). This interest adjustment is made using an 
interest rate equal to the plan's effective interest rate under Sec.  
1.430(h)(2)-1(f)(1) for the plan year.
    (iii) Allocation of contributions to late required installments 
without interest--(A) In general. If a plan has any unpaid required 
installments for a plan year at the time a contribution for the plan 
year is made, then the contribution is allocated to those unpaid 
required installments under the rules of this paragraph (c)(3)(iii). The 
contribution is allocated in the order in which those unpaid required 
installments occur, and the amount allocated to each required 
installment is limited to the amount that satisfies the required 
installment without any adjustment for interest. If a contribution is 
allocated to an unpaid required installment under this paragraph 
(c)(3)(iii), then that contribution is adjusted for interest under the 
rules of paragraph (b)(4) of this section (regarding interest 
adjustments for late quarterly installments) for purposes of determining 
the extent to which that contribution satisfies the minimum required 
contribution for the plan year.
    (B) Bifurcation of contributions that exceed unpaid required 
installments. Any amount of a contribution described in paragraph 
(c)(3)(iii)(A) of this section that is not used to satisfy the unpaid 
required installments for the plan year is allocated toward any 
remaining required installments for the plan year under the rules of 
paragraph (c)(3)(ii) of this section.
    (4) Satisfaction of quarterly installment requirements through use 
of funding balances. A plan sponsor may satisfy the requirement to pay 
an installment under paragraph (c)(1) of this section by making an 
election to use some or all of the plan's prefunding balance or funding 
standard carryover balance under section 430(f). Such an election is 
subject to the rules of Sec.  1.430(f)-1 and cannot exceed the available 
amount of the plan's prefunding balance and funding standard carryover 
balance determined under Sec.  1.430(f)-1(d)(1)(ii) as of the date of 
the election. The amount elected is allocated toward satisfaction of the 
required installments in the same manner as a contribution made on the 
date of the election. Thus, the amount of an election to use the plan's 
prefunding balance or funding standard carryover balance is increased 
with interest under the rules of paragraph (c)(3)(ii) of this section or 
is credited against the earliest unpaid required installment under the 
rules of paragraph (c)(3)(iii) of this section. See Sec.  1.430(f)-
1(f)(1)(iii) for rules permitting the use of a standing election for 
purposes of satisfying required installments through use of funding 
balances. See Sec.  1.430(f)-1(d)(1)(i)(B) for rules relating to late 
elections to use the funding standard carryover balance or prefunding 
balance to satisfy the required installment rules.
    (5) Amount of required installment--(i) In general. For purposes of 
this section, the amount of any required installment due for a plan year 
is equal to 25 percent of the required annual payment for the plan year 
as described in paragraph (c)(5)(ii) of this section.
    (ii) Required annual payment. The required annual payment for a plan 
year is equal to the lesser of--

[[Page 576]]

    (A) 90 percent of the minimum required contribution under section 
430 for the plan year; or
    (B) 100 percent of the minimum required contribution under section 
430 (determined without regard to any funding waiver under section 412) 
for the preceding plan year.
    (iii) Treatment of funding balances. For purposes of paragraph 
(c)(5)(ii) of this section, the minimum required contribution for a plan 
year is determined without regard to the use of the prefunding balance 
or funding standard carryover balance for the current year or the prior 
year. However, see paragraph (c)(4) of this section regarding a plan 
sponsor's election to use the plan's prefunding balance or funding 
standard carryover balance for the current year in order to satisfy the 
requirement to pay an installment.
    (iv) Disregard of certain amounts. For purposes of paragraph 
(c)(5)(ii) of this section, the minimum required contribution for a plan 
year is determined without regard to the installment acceleration amount 
for the plan year determined under section 430(c)(7) or any increase to 
the minimum required contribution under paragraph (d)(3)(iv)(B) of this 
section (relating to an unpaid liquidity amount).
    (6) Due dates for installments. For purposes of this section, there 
is a required installment for each quarter of the plan year, and the due 
dates for the required installments with respect to a full plan year are 
set forth in the following table:

------------------------------------------------------------------------
                Installment                           Due date
------------------------------------------------------------------------
First required installment................  15th day of 4th plan month.
Second required installment...............  15th day of 7th plan month.
Third required installment................  15th day of 10th plan month.
Fourth required installment...............  15th day after the end of
                                             the plan year.
------------------------------------------------------------------------

    (7) Special rules for short plan years--(i) In general. In the case 
of a short plan year, the rules of this paragraph (c) are modified as 
provided in this paragraph (c)(7).
    (ii) Current plan year is short plan year--(A) Amount of required 
annual payment. In determining the required annual payment pursuant to 
paragraph (c)(5)(ii) of this section for a short plan year, the amount 
otherwise determined under paragraph (c)(5)(ii)(B) of this section 
(based on the prior year's minimum required contribution) is multiplied 
by a fraction, the numerator of which is the duration of the short plan 
year and the denominator of which is 1 year. This rule applies to the 
year that contains the plan's termination date if that date is before 
the date that would otherwise be the end of the plan year (because the 
plan is treated as having a short plan year for purposes of section 430 
pursuant to Sec.  1.430(a)-1(b)(5)).
    (B) Number and due dates of installments. If the plan has a short 
plan year, then an installment is due 15 days after the end of that 
short plan year. In addition, an installment is required for each due 
date determined under paragraph (c)(6) of this section that falls within 
the short plan year. Thus, for example, if the short plan year ends 
before the 15th day of the 4th plan month of the plan year, there will 
be only one installment for that short plan year, and that installment 
will be due on the 15th day after the end of the short plan year.
    (C) Amount of installments. The amount of each installment required 
to be paid for the short plan year is equal to the required annual 
payment determined pursuant to paragraph (c)(5)(ii) of this section (as 
modified by paragraph (c)(7)(ii)(A) of this section) divided by the 
number of installments determined pursuant to paragraph (c)(7)(ii)(B) of 
this section.
    (D) No increase in prior required installments. If a plan is amended 
to have a short plan year (including as a result of plan termination) 
and the required installments determined under paragraph (c)(7)(ii)(C) 
of this section are greater than the required installments determined 
without regard to the amendment, then--
    (1) The required installments for which the due dates occur before 
the end of the short plan year are determined without regard to the 
amendment, and
    (2) The required installment due on the 15th day after the end of 
the short plan year is increased to the extent necessary so that the 
total of the required installments for the year is the required annual 
payment determined under paragraph (c)(5)(ii) of this section, 
determined taking into account

[[Page 577]]

the rules of paragraph (c)(7)(ii)(A) of this section.
    (iii) Prior plan year is short plan year. If the prior plan year is 
a short plan year, the amount otherwise determined under paragraph 
(c)(5)(ii)(B) of this section (based on the prior year's minimum 
required contribution) is multiplied by a fraction, the numerator of 
which is 1 year and the denominator of which is the duration of the 
short plan year.
    (d) Liquidity requirement in connection with quarterly 
installments--(1) In general--(i) Additional requirement with respect to 
quarterly installments. Except as provided in this paragraph (d)(1), if 
a plan sponsor is required to pay the installments described in 
paragraph (c) of this section, then the plan sponsor is treated as 
failing to pay the full amount of the required installment for a quarter 
to the extent that the value of the liquid assets paid in the required 
installment after the end of that quarter and on or before the due date 
for the installment is less than the liquidity shortfall for that 
quarter. If the amount of any required installment is increased by 
reason of this paragraph (d)(1)(i), in no event shall this increase 
exceed the amount which, when added to the current required installment 
(determined without regard to the increase) and prior required 
installments for the plan year (not including any portion of a required 
installment that is no longer treated as unpaid under paragraph 
(d)(3)(iv)(A) of this section), is necessary to increase the funding 
target attainment percentage for the plan year to 100 percent (taking 
into account the expected increase in the funding target due to benefits 
accruing or earned during the plan year).
    (ii) Small plan exception. The liquidity requirement of this 
paragraph (d) does not apply to a plan for any plan year for which the 
plan is a small plan described in Sec.  1.430(g)-1(b)(2).
    (2) Satisfaction of liquidity requirement. The additional 
requirement with respect to a required installment under paragraph 
(d)(1) of this section can be satisfied only with an actual contribution 
of liquid assets that, after application of paragraph (c)(3) of this 
section, is allocated to satisfy the required installment for the 
quarter. The liquidity requirement cannot be satisfied through the use 
of funding balances, and satisfaction of this requirement is determined 
without taking into account the increase for interest for early 
contributions set forth in paragraph (c)(3)(ii) of this section. Any 
contribution of liquid assets that is allocated to satisfy the required 
installment for a quarter applies for purposes of determining whether 
the requirements of paragraph (d)(1) of this section are satisfied, even 
if the contribution is less than the total amount needed to satisfy the 
requirements of paragraph (c) of this section for the quarter (taking 
into account any increase in the required installment under this 
paragraph (d)).
    (3) Failure to satisfy liquidity requirement--(i) Treatment as 
failure to satisfy quarterly installment. If an employer fails to 
satisfy the additional requirement with respect to a required 
installment for a quarter under paragraph (d)(1) of this section, the 
portion of that required installment that is treated as not paid by 
reason of paragraph (d)(1) of this section (the unpaid liquidity amount 
for that quarter) is treated as an underpayment of the required 
installment. See paragraph (c)(1) of this section for examples of 
consequences of underpayment of a required installment.
    (ii) Late satisfaction of liquidity requirement. The rules of 
paragraph (d)(2) of this section apply to determine whether a 
contribution made after the deadline for a required installment 
satisfies the liquidity requirement of paragraph (d)(1) of this section. 
However, pursuant to section 430(j)(4)(C), the unpaid liquidity amount 
is treated as unpaid until the end of the quarter in which the due date 
for that installment occurs, even if liquid assets in that amount are 
contributed during that quarter (but after the due date for the 
installment). See paragraph (b)(4)(iii) of this section for the 
application of this rule for purposes of applying the additional 
interest for late required installments.
    (iii) Additional consequences of failure to pay liquidity shortfall. 
See section 206(e) of ERISA and section 401(a)(32) of the Code 
(regarding suspension of accelerated distributions for a plan with

[[Page 578]]

an unpaid liquidity amount). See also section 4971(f) regarding an 
excise tax imposed in the event of a failure to pay a liquidity 
shortfall.
    (iv) Treatment in subsequent quarter--(A) Adjustment to required 
installment. After the close of the quarter in which the due date of a 
required installment occurs, any portion of the installment that was 
treated as unpaid solely by reason of paragraph (d)(1) of this section, 
and that was not satisfied with a contribution of liquid assets during 
that quarter, is no longer treated as unpaid (but any portion of the 
installment that would be treated as unpaid without regard to paragraph 
(d)(1) of this section must be satisfied in accordance with the rules of 
paragraph (c) of this section).
    (B) Increase to minimum required contribution for additional 
interest. If a portion of the required installment is no longer treated 
as unpaid by reason of paragraph (d)(3)(iv)(A) of this section, then the 
minimum required contribution for the plan year for which the 
installment was due is increased by an amount equal to--
    (1) The portion of the required installment that is no longer 
treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this section, 
discounted for interest for the period from the last day of the quarter 
that includes the due date of the required installment to the valuation 
date, using the plan's effective interest rate for the plan year 
(determined pursuant to Sec.  1.430(h)(2)-1(f)(1)); minus
    (2) The portion of the required installment that is no longer 
treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this section, 
discounted for interest for the period from the last day of the quarter 
that includes the due date of the required installment to the due date 
of the installment, using the plan's effective interest rate for the 
plan year plus 5 percentage points, and further discounted for interest 
for the period from the due date of the required installment to the 
valuation date using the plan's effective interest rate for the plan 
year.
    (e) Definitions--(1) In general. The definitions set forth in this 
paragraph (e) apply for purposes of this section.
    (2) Adjusted disbursements--(i) In general. The term adjusted 
disbursements means, with respect to a time period, the amount described 
in paragraph (e)(2)(ii) of this section if the time period is within a 
single plan year, or the amount described in paragraph (e)(2)(iii) of 
this section if the time period spans more than one plan year.
    (ii) Period within a single plan year. With respect to a period 
within a plan year, the adjusted disbursements are the disbursements 
from the plan during that period reduced by the product of--
    (A) The plan's funding target attainment percentage determined under 
section 430(d)(2) for the plan year that contains that period; and
    (B) The sum of the purchases of annuities and payments of single 
sums for that period.
    (iii) Period spanning more than one plan year. With respect to a 
period of time that spans more than one plan year, the adjusted 
disbursements are the sum of the adjusted disbursements determined 
separately under paragraph (e)(2)(ii) of this section for each portion 
of a plan year that is included in the time period for which adjusted 
disbursements are determined.
    (3) Disbursements from the plan. The term disbursements from the 
plan means all disbursements from the plan's trust, including purchases 
of annuities, payments of single sums and other benefits, and payments 
of administrative expenses.
    (4) Funding shortfall--(i) In general. Except as otherwise provided 
in this paragraph (e)(4), the term funding shortfall has the same 
meaning as under Sec.  1.430(a)-1(f)(2).
    (ii) Special rule for plans of commercial passenger airlines. In the 
case of a plan year for which an election described in section 402(a)(1) 
of PPA '06 is in effect, the term funding shortfall means the unfunded 
liability for that plan year determined under Sec.  1.430(a)-
1(b)(4)(ii).
    (iii) Special rule for first effective plan year. See paragraph 
(g)(5)(ii) of this section for a calculation of the funding shortfall 
for the plan's pre-effective plan year.
    (iv) Special rule for plan spinoffs and mergers. [Reserved]

[[Page 579]]

    (5) Liquid assets--(i) In general. The term liquid assets means 
cash, marketable securities, and other assets described in this 
paragraph (e)(5)(i). For this purpose, marketable securities include 
financial instruments such as stocks and other equity interests, 
evidences of indebtedness (including certificates of deposit), options, 
futures contracts, and other derivatives, for which there is a liquid 
financial market, and other interests in entities (such as partnerships, 
trusts, or regulated investment companies) for which there is a liquid 
financial market. For purposes of the preceding sentence, a liquid 
financial market is an established financial market described in Sec.  
1.1092(d)-1(b) (other than an interbank market or an interdealer market 
described in Sec.  1.1092(d)-1(b)(1)(v) and (vi), respectively). Any 
security that is issued or guaranteed by the government of the United 
States or an agency or instrumentality thereof for which there is an 
established financial market described in Sec.  1.1092(d)-1(b) is a 
marketable security. Finally, any financial instrument or other interest 
in an entity that, under its terms, contains a right by which the 
instrument or other interest may immediately be redeemed, exchanged, or 
converted into cash or a marketable security, is a marketable security, 
provided there are no restrictions on the exercise of that right.
    (ii) Insurance and annuity contracts. Other assets that are treated 
as liquid assets of a plan are insurance, annuity, or other contracts 
issued by an insurance company that is licensed to do business under the 
laws of any State, but only if the insurance, annuity, or other 
contract--
    (A) Contains an unrestricted right by which the insurance, annuity 
or other contract may immediately be redeemed, exchanged, or converted 
into cash or a marketable security;
    (B) Provides for substantially equal monthly disbursements to the 
extent provided in paragraph (e)(5)(iii) of this section; or
    (C) Is benefit responsive within the meaning of paragraph (e)(5)(iv) 
of this section.
    (iii) Insurance and annuity contracts providing for substantially 
equal periodic payments. If the contract provides for substantially 
equal monthly disbursements (for example, an annuity contract in pay 
status), the only portion of the contract that may be treated as liquid 
assets for a quarter is the amount equal to 36 times the monthly 
disbursement (in the month containing the last day of the quarter) which 
is available under the terms of the contract, provided there are no 
restrictions on the right to disbursements.
    (iv) Benefit responsive insurance and annuity contracts. A contract 
is considered benefit responsive if, under applicable law and 
contractual provisions, the plan has the right to receive disbursements 
from the contract in order to pay plan benefits for any participant in 
the plan, without restrictions on that right.
    (v) Restrictions. For purposes of this paragraph (e)(5), a 
restriction on a redemption, exchange, or conversion right, or a 
restriction on a right to receive a disbursement, may result not only 
from applicable law or contractual provisions, but also from 
rehabilitation, conservatorship, receivership, insolvency, bankruptcy, 
or similar proceedings.
    (6) Liquidity shortfall--(i) In general. Except as modified in 
paragraph (e)(6)(iii) of this section with respect to multiple employer 
plans, the term liquidity shortfall means, with respect to any required 
installment, an amount equal to the excess (as of the last day of the 
quarter for which that installment is due) of--
    (A) The base amount with respect to the quarter, over
    (B) The value (as of the last day of the quarter) of the plan's 
liquid assets.
    (ii) Base amount--(A) In general. For purposes of this paragraph 
(e)(6), the term base amount means, with respect to any quarter, an 
amount equal to 3 times the sum of the adjusted disbursements from the 
plan for the 12 months ending on the last day of that quarter.
    (B) Special rule. If the generally applicable base amount for a 
quarter (as determined under paragraph (e)(6)(ii)(A) of this section) 
exceeds an amount equal to 2 times the sum of the adjusted disbursements 
from the plan for the 36 months ending on the last day of the quarter 
and the enrolled actuary

[[Page 580]]

for the plan certifies to the satisfaction of the Commissioner that such 
excess is the result of nonrecurring circumstances, then the base amount 
with respect to that quarter is determined without regard to amounts 
related to those nonrecurring circumstances.
    (iii) Multiple employer plans--(A) Satisfaction of liquidity 
requirement as if plan were not a multiple employer plan. For a multiple 
employer plan to which section 413(c)(4)(A) applies, the liquidity 
requirement of paragraph (d)(1)(i) of this section is satisfied if the 
liquidity requirement would be satisfied if the plan were a single-
employer plan that is not a multiple employer plan to which section 
413(c)(4)(A) applies.
    (B) Failure to satisfy the liquidity requirement on a plan-wide 
basis. For a multiple employer plan to which section 413(c)(4)(A) 
applies, if the plan does not satisfy the liquidity requirement in 
accordance with paragraph (e)(6)(iii)(A) of this section, then the 
liquidity requirement must be applied separately for each employer under 
the plan, as if each employer maintained a separate plan. Thus, the 
value of plan assets as of the end of each quarter under such a multiple 
employer plan must be allocated among the employers sponsoring the plan, 
and the liquidity shortfall must be determined for each employer based 
on that allocation. See section 413(c)(7)(B) and paragraph (a)(2) of 
this section.
    (7) Plan month--(i) Plan year begins on the first day of a calendar 
month. For a plan year that begins with the first day of a calendar 
month, the term plan month means any calendar month that begins during 
the plan year.
    (ii) Plan year begins on a date other than the first day of a 
calendar month. For a plan year that begins on a date other than the 
first day of a calendar month, the first day of each plan month is the 
day of the calendar month that corresponds to the day of the calendar 
month that is the first day of the plan year. Thus, for example, if the 
first day of a plan year is January 15, then a plan month starts on the 
15th of each calendar month. However, if a calendar month does not 
contain a day that corresponds to the day of the calendar month that is 
the first day of the plan year (for example, if a calendar month has 
only 30 days and the first day of the plan year is the 31st day of a 
calendar month), then the first day of the plan month that begins during 
that calendar month is the last day of that calendar month.
    (8) Quarter. The term quarter means, with respect to any required 
installment, the 3-plan-month period preceding the plan month in which 
the due date for that installment occurs.
    (9) Short plan year. The term short plan year means a plan year that 
is shorter than 12 months (and is not a 52-week plan year of a plan that 
uses a 52-53 week plan year).
    (f) Examples. The following examples illustrate the rules of this 
section. Unless otherwise indicated, these examples are based on the 
following assumptions: section 430 applies to determine the minimum 
required contribution for plan years beginning on or after January 1, 
2008; the plan year is the calendar year; the valuation date is January 
1; the plan sponsor is required to pay the installments described in 
paragraph (c) of this section; the plan does not have a liquidity 
shortfall; and the plan sponsor has not elected any funding relief under 
section 430(c)(2)(D) for any plan year. In addition, these examples 
assume that, under the funding method used for the plan, interest 
adjustments are calculated to the nearest half month (rather than days) 
for transactions that occur on the 1st and 15th of a calendar month.

    Example 1. (i) Plan A has a funding standard carryover balance of 
$15,000 and a prefunding balance of zero as of January 1, 2016, and the 
plan's funding ratio for 2015 (determined under Sec.  1.430(f)-1(d)(3)) 
was over 80%. The minimum required contribution for Plan A (determined 
prior to any offset for the funding standard carryover balance) is 
$100,000 for 2016 and is $125,000 for 2017. The effective interest rate 
for the 2017 plan year is 5.90%.
    (ii) The required annual payment for 2017 is equal to the lesser of 
(a) 100% of the 2016 minimum required contribution ($100,000) or (b) 90% 
of the 2017 minimum required contribution (90% of $125,000, or 
$112,500). Therefore, each required installment for 2017 is 25% of 
$100,000, or $25,000.
    (iii) Installments of $25,000 each are due by April 15, 2017, July 
15, 2017, October 15, 2017, and January 15, 2018. The final contribution 
for the 2017 plan year is due by September 15,

[[Page 581]]

2018. The amount of this final contribution is equal to $125,000, less 
the contributions made prior to that date, with all contributions 
adjusted to the valuation date using the effective interest rate for the 
2017 plan year. If the plan sponsor makes each required installment on 
the date due, the remaining amount due is determined as follows:
    (A) The contribution paid April 15, 2017 is adjusted by discounting 
the contribution amount for 3\1/2\ months at the effective interest rate 
($25,000 / 1.0590(3.5/12) = $24,585).
    (B) The contribution paid July 15, 2017 is discounted for 6\1/2\ 
months at the effective interest rate ($25,000 / 
1.0590(6.5/12) = $24,236).
    (C) The contribution paid October 15, 2017 is discounted for 9\1/2\ 
months at the effective interest rate ($25,000 / 
1.0590(9.5/12) = $23,891).
    (D) The contribution paid January 15, 2018 is discounted for 12\1/2\ 
months at the effective interest rate ($25,000 / 
1.0590(12.5/12) = $23,551).
    (E) The sum of the above contributions for the 2017 plan year paid 
through January 15, 2018, adjusted for interest to the valuation date, 
is $96,263. The remaining amount due for the 2017 plan year is $125,000 
minus $96,263, or $28,737, as of January 1, 2017.
    (iv) If the final contribution is made on September 15, 2018, the 
remaining amount due must be increased for interest at the plan's 
effective interest rate for the 20\1/2\ months between January 1, 2017 
and September 15, 2018 (so that, when it is discounted with interest for 
those 20\1/2\ months, the resulting amount will equal $28,737). 
Therefore, the remaining contribution due on September 15, 2018 is 
$28,737 x 1.0590(20.5/12) = $31,694.
    Example 2. (i) The facts are the same as in Example 1, except that 
the plan sponsor elects to use the $15,000 funding standard carryover 
balance as of January 1, 2016, to offset the minimum required 
contribution for the 2016 plan year. The plan sponsor makes a 
contribution on January 1, 2016 of $85,000, which satisfies the minimum 
contribution requirement for 2016.
    (ii) The required installments for 2017 are unaffected by the plan 
sponsor's election to offset the minimum required contribution by the 
funding standard carryover balance for 2016. Therefore, the required 
annual payment for 2017 is $100,000 (determined as the lesser of (a) 
100% of $100,000 or (b) 90% of $125,000) and the amount of each required 
installment for the 2017 plan year is 25% of the required annual 
payment, or $25,000.
    Example 3. (i) The facts are the same as in Example 1. Plan A's 
funding standard carryover balance has increased to $17,000 as of 
January 1, 2017, based on the actual rate of return of plan assets 
during the 2016 plan year. Plan A's funding ratio for 2016 (determined 
under Sec.  1.430(f)-1(d)(3)) is over 80%. On March 15, 2017, the plan 
sponsor elects to use the entire amount of the funding standard 
carryover balance to offset the minimum required contribution for 2017.
    (ii) The plan sponsor's election to use the funding standard 
carryover balance to offset the minimum required contribution is treated 
as satisfying the requirement to make a required installment to the 
extent of the amount elected, adjusted with interest for the period from 
the beginning of the plan year to the due date of the installment using 
the plan's effective interest rate for the 2017 plan year. This 
adjustment is made for the 2.5-month period from the beginning of the 
plan year to the date of the election as provided in Sec.  1.430(f)-
1(b)(5), and for the one-month period from the date of the election to 
the due date for the installment, as provided in paragraphs (c)(3)(ii) 
and (c)(4) of this section. Therefore, the $17,000 funding standard 
carryover balance as of January 1, 2017 offsets $17,000 x 
1.0590(2.5/12) x 1.0590(1/12) or $17,287 of the 
$25,000 required installment due April 15, 2017, and the remaining 
contribution due on April 15, 2017 is $25,000 minus $17,287, or $7,713.
    (iii) The interest adjustments in paragraph (ii) of this Example 3 
are based on the effective interest rate even if that rate is not 
determined by the time that the required installment is due. If the 
plan's effective interest rate for the plan year has not been determined 
at the time that the required installment is due, the actual amount of 
the required installment satisfied by the use of the funding standard 
carryover balance is determined after the effective interest rate is 
determined. If the extent to which the funding standard carryover 
balance satisfies the required installment is overestimated and the 
result is that the full amount of the required installment is not paid 
by the due date, the plan is subject to the consequences for late or 
unpaid required installments as described in paragraph (c)(1) of this 
section.
    Example 4. (i) The facts are the same as in Example 3. The plan 
sponsor makes a contribution of $7,713 (which is equal to the remaining 
portion of the first required installment) on April 15, 2017. For the 
2017 plan year, the plan sponsor makes another contribution of $200,000 
on June 30, 2017. No further contributions are made for the 2017 plan 
year.
    (ii) The contributions made for the 2017 plan year are adjusted to 
the valuation date using the plan's effective interest rate for the 2017 
plan year. The contribution paid April 15, 2017 is discounted for the 
3\1/2\ months between January 1, 2017 and the date of payment, using the 
effective interest rate of 5.90% ($7,713 / 1.0590(3.5/12) = 
$7,585). The contribution paid June 30, 2017 is discounted for 6 months 
using the effective interest rate ($200,000 / 1.0590(6/12) = 
$194,349), for a total interest-adjusted contribution of $201,934.

[[Page 582]]

    (iii) The present value of the excess contribution for 2017 is based 
on the net contribution required for that year, which is the minimum 
required contribution minus the offset for the funding standard 
carryover balance, or $108,000 (that is, $125,000 minus $17,000). 
Accordingly, the present value of the excess contribution for 2017 is 
$201,934 minus $108,000, or $93,934. All or a portion of this amount may 
be credited to the prefunding balance at the election of the plan 
sponsor.
    Example 5. (i) The facts are the same as in Example 3. The plan 
sponsor pays the required installment of $7,713 on April 15, 2017 and 
installments of $25,000 each on July 15, 2017 and October 15, 2017. 
However, only $10,000 of the installment due on January 15, 2018 is 
paid. No additional contributions are made until the final contribution 
for the plan year of $55,000 is paid on September 15, 2018.
    (ii) The 2017 Schedule SB shows that the contributions for the plan 
year exceed the minimum required contribution. This is determined by 
comparing the net contribution requirement of $108,000 (equal to the 
minimum required contribution of $125,000 offset by $17,000 for the 
amount of funding standard carryover balance used) and the interest-
adjusted contributions made for the 2017 plan year, developed as shown:
    (A) The contribution paid April 15, 2017 is adjusted by discounting 
the contribution amount for 3\1/2\ months at the effective interest rate 
($7,713 / 1.0590(3.5/12) = $7,585).
    (B) The contribution paid July 15, 2017 is discounted for 6\1/2\ 
months at the effective interest rate ($25,000 / 
1.0590(6.5/12) = $24,236).
    (C) The contribution paid October 15, 2017 is discounted for 9\1/2\ 
months at the effective interest rate ($25,000 / 
1.0590(9.5/12) = $23,891).
    (D) The contribution paid January 15, 2018 is discounted for 12\1/2\ 
months at the effective interest rate ($10,000 / 
1.0590(12.5/12) = $9,420).
    (E) Pursuant to paragraph (b)(4)(ii) of this section, the interest 
rate used to adjust the $15,000 underpayment of the required installment 
due January 15, 2018 is increased by 5 percentage points for the 8-month 
period of underpayment (January 15, 2018 through September 15, 2018). 
Accordingly, $15,000 of the contribution paid on September 15, 2018 is 
discounted using a rate of 10.90% for 8 months to the due date of 
January 15, 2018, and is then further adjusted using the 5.90% effective 
interest rate for the 12\1/2\ months between the required installment 
due date of January 15, 2018 and the valuation date of January 1, 2017. 
This portion of the September 15, 2018 contribution results in an 
adjusted amount of $13,189 as of January 1, 2017 ($15,000 / 
1.1090(8/12) / 1.0590(12.5/12)).
    (F) The remaining $40,000 of the contribution paid on September 15, 
2018 is discounted using the effective interest rate of 5.90% for the 
20\1/2\-month period between the date of payment and the valuation date. 
This portion of the payment is therefore adjusted to $36,268 as of the 
valuation date (that is, $40,000 / 1.0590(20.5/12)).
    (G) The sum of the contributions (as calculated in paragraphs 
(ii)(A) through (F) of this Example 5) for the 2017 plan year paid 
through September 15, 2018, adjusted for interest to the valuation date, 
is $114,589. This is greater than the net contribution required for the 
2017 plan year of $108,000.
    Example 6. (i) The facts are the same as in Example 5, except that 
the plan sponsor does not make the contribution on September 15, 2018.
    (ii) The 2017 Schedule SB shows an unpaid minimum required 
contribution of $42,868 as of January 1, 2017. This is equal to the 
difference between the net contribution required for 2017 of $108,000 
(the minimum required contribution of $125,000, offset by $17,000 for 
the amount of the funding standard carryover balance used) and $65,132 
(the interest-adjusted contributions made for the 2017 plan year before 
the 8\1/2\ month deadline, as illustrated in paragraphs (ii)(A) through 
(ii)(D) of Example 5).
    Example 7. (i) The facts are the same as in Example 1, except that 
the plan year is changed to an August 1-July 31 plan year effective 
August 1, 2017. This results in a short plan year beginning January 1, 
2017 and ending July 31, 2017. The minimum required contribution for the 
7-month period covered by the plan year is calculated as $72,917 in 
accordance with Sec.  1.430(a)-1(b)(2)(ii).
    (ii) As provided in paragraph (c)(7) of this section, a required 
installment is due 15 days after the end of the short plan year (August 
15, 2017), and required installments are also due on the regularly 
scheduled due dates for required installments that occur within the 
short plan year (April 15, 2017 and July 15, 2017).
    (iii) The required installments are determined based on the lesser 
of (a) 90% of the minimum required contribution for the short plan year 
ending July 31, 2017 (90% of $72,917, or $65,625) or (b) 7/12 of 100% of 
the 2016 minimum required contribution ($100,000 x 7/12, or $58,333). 
The required installments are thus based on $58,333 because that is the 
smaller amount.
    (iv) The amount of each required installment is determined by 
dividing the amount determined in paragraph (iii) of this Example 7 by 
the number of required installments for the short plan year. This 
calculation results in required installments of $19,444 each (that is, 
$58,333 divided by 3 installments).
    (v) The deadline for the remaining payment is 8\1/2\ months after 
the end of the short plan year, or April 15, 2018. If the plan sponsor 
pays the minimum required amount at each installment date, does not 
elect to offset any amounts by any funding standard carryover or 
prefunding balance, and makes

[[Page 583]]

a final payment on April 15, 2018, then the remaining payment is 
$17,429, determined as follows:
    (A) The contribution paid April 15, 2017 is adjusted by discounting 
the contribution amount for 3\1/2\ months at the effective interest rate 
($19,444 / 1.0590(3.5/12) = $19,122).
    (B) The contribution paid July 15, 2017 is discounted for 6\1/2\ 
months at the effective interest rate ($19,444 / 
1.0590(6.5/12) = $18,850).
    (C) The contribution paid August 15, 2017 is discounted for 7\1/2\ 
months at the effective interest rate ($19,444 / 
1.0590(7.5/12) = $18,760).
    (D) The sum of the contributions for the 2017 plan year paid through 
August 15, 2017, adjusted for interest to the valuation date, is 
$56,732. The remaining amount paid April 15, 2018 for the 2017 plan year 
is ($72,917-$56,732) x 1.059(15.5/12) = $17,429.
    Example 8. (i) Plan B has an August 10 to August 9 plan year.
    (ii) For the plan year that begins on August 10, 2017, a plan month 
begins on the 10th day of each calendar month. Accordingly, the due 
dates for the required installments for that plan year are November 24, 
2017, February 24, 2018, May 24, 2018 and August 24, 2018. The deadline 
for the final contribution for the plan year is April 24, 2019.
    Example 9. (i) Plan C has a funding standard carryover balance of $0 
and a prefunding balance of $65,000 as of January 1, 2017. Plan C's 
funding ratio for 2016 (determined under Sec.  1.430(f)-1(d)(3)) was 
over 80%. The minimum required contribution for Plan C (determined prior 
to any offset for the funding standard carryover balance) is $120,000 
for 2016. Required installments for the 2016 plan year were made timely, 
and the final installment of the minimum required contribution for the 
2016 plan year is due on September 15, 2017 in the amount of $40,000.
    (ii) Prior to April 15, 2017, the plan sponsor makes a standing 
election to use Plan C's funding balances to offset any otherwise unpaid 
required installments and any otherwise unpaid minimum required 
contribution. On June 1, 2017, the actuary completes the 2017 valuation 
and notifies the plan sponsor that the minimum required contribution for 
the 2017 plan year is $100,000. The effective interest rate for the 2017 
plan year is 5.90%. No contributions are made for the 2017 plan year 
until September 15, 2018.
    (iii) The first required installment for the 2017 plan year is due 
on April 15, 2017. Under Sec.  1.430(f)-1(f)(1)(iii)(B), the amount of 
the prefunding balance used as of April 15, 2017 pursuant to the 
standing election is 25% of the $120,000 required annual payment for the 
2016 plan year ($30,000). The prefunding balance is reduced by this 
amount, adjusted for the 3\1/2\-month period between the January 1, 2017 
valuation date and the April 15, 2017 due date, using the effective rate 
for Plan C for 2017 ($30,000 / 1.0590(3.5/12), or $29,503). 
The prefunding balance is available to offset the April 15, 2017 
required installment even though the minimum required contribution for 
the 2016 plan year has not yet been made, because the standing election 
to use Plan C's balances to offset the minimum required contribution for 
the 2016 plan year does not take effect until the due date for that 
contribution, or September 15, 2017. Therefore, as of April 15, 2017, 
the prefunding balance still exists and may be used to offset the 
required installment due as of that date.
    (iv) The second required installment for the 2017 plan year is due 
on July 15, 2017, after the actuary determined the minimum required 
contribution for the 2017 plan year. The required annual payment for 
2017 is equal to the lesser of (a) 100% of the 2017 minimum required 
contribution ($120,000) or (b) 90% of the 2017 minimum required 
contribution (90% of $100,000, or $90,000). Therefore, each required 
installment for 2017 is 25% of $90,000, or $22,500.
    (v) Although the amount of the required installments for 2017 
($22,500) is smaller than the amount based on the 2016 minimum required 
contribution ($30,000), under Sec.  1.430(f)-1(f)(1)(iii)(B), the amount 
of the prefunding balance used under the standing election continues to 
be the $30,000 based on the minimum required contribution for the 2016 
plan year. Alternatively, the plan sponsor can make a replacement 
formula election to use the prefunding balance to cover the remaining 
required installments for the 2017 plan year as described in Sec.  
1.430(f)-1(f)(1)(iii)(C), based on required installments of $22,500 
each.
    (vi) The use of $30,000 of the prefunding balance as of April 15, 
2017 pursuant to the standing election is irrevocable, and therefore the 
prefunding balance is not adjusted to reflect the fact that the first 
required installment for the 2017 plan year (based on the actual 2017 
minimum required contribution) is lower than $30,000.
    (vii) However, the excess of the $30,000 of prefunding balance used 
on April 15, 2017 over the first required installment is allocated 
toward the second required installment. In addition, if the plan sponsor 
makes a replacement formula election in accordance with Sec.  1.430(f)-
1(f)(1)(iii)(C), the amount of prefunding balance used pursuant to that 
election takes into account the actual required installment. In this 
case, the amount of the prefunding balance used to satisfy the July 15, 
2017 required installment is $14,437. This amount is determined by (1) 
calculating the excess of the amount of the prefunding balance used on 
April 15, 2017 over the amount of the required installment due on that 
date ($30,000 - $22,500 = $7,500), and adjusting it for the 3 months 
from April 15, 2017 to July 15, 2017, using the effective interest rate 
($7,500 x 1.0590(3/12) = $7,608), (2) deducting that amount 
from the required installment due July 15, 2017, to determine the net

[[Page 584]]

amount due as of that date ($22,500 - $7,608 = $14,892), and (3) 
adjusting the net amount to the valuation date of January 1, 2017 for 
the 6\1/2\-month period between the valuation date and the due date for 
the required installment, using the effective interest rate for Plan C 
for 2017 ($14,892 / 1.0590(6.5/12) = $14,437).
    Example 10. (i) The facts are the same as in Example 9, except that 
Plan C's prefunding balance as of January 1, 2017 is only $20,000, and 
Plan C's sponsor makes a contribution larger than the minimum required 
contribution for the 2016 plan year on March 1, 2017.
    (ii) The amount of the April 15, 2017 required installment that is 
satisfied by the plan sponsor's election to offset the prefunding 
balance is calculated by increasing the January 1, 2017 prefunding 
balance with interest for 3\1/2\ months to April 15, 2017, using the 
effective interest rate for Plan C for 2017. This results in an offset 
of $20,337 ($20,000 x 1.0590(3.5/12)). A cash contribution of 
$2,163 ($22,500 - $20,337) is needed to satisfy the required installment 
on that date.
    (iii) The excess contribution made for the 2016 plan year cannot be 
used to offset the remainder of the April 15, 2017 required installment 
even though it was contributed prior to the date the installment is due, 
because the sponsor had not yet elected to credit the excess 
contribution to the prefunding balance. If the plan sponsor elects at a 
later date to credit the excess contribution to the prefunding balance, 
the amount can be used to offset required installments due on or after 
the date of that election. However, note that if Plan C's actuary 
reflected the excess contribution for 2016 in certifying the 2017 
adjusted funding target attainment percentage (AFTAP) used to apply 
benefit restrictions under section 436, a later election to credit the 
excess contribution to the prefunding balance would reduce the AFTAP and 
could cause Plan C to violate section 436.
    Example 11. (i) Plan D is not a small plan described in Sec.  
1.430(g)-1(b)(2). The valuation date for Plan D is January 1, and Plan 
D's funding target attainment percentage (FTAP) was 82% as of January 1, 
2016 and is 90% as of January 1, 2017. The amount needed to increase the 
plan's FTAP for the 2017 plan year to 100% (including the expected 
increase in the funding target due to benefits accruing or earned during 
the plan year) is $500,000. Before taking the liquidity requirement of 
paragraph (d) of this section into account, the plan sponsor of Plan D 
is required to pay installments for the 2017 plan year in the amount of 
$50,000 each. During the 12-month period ending March 31, 2017, periodic 
annuity payments of $425,000 and single sum payments of $200,000 were 
made by Plan D. Of the single sum payments, $125,000 were made during 
the 2016 plan year and $75,000 were made during the 2017 plan year. None 
of these payments were due to nonrecurring circumstances. In addition, 
administrative expenses of $25,000 were paid from the plan trust during 
the 12-month period ending March 31, 2017. As of March 31, 2017, the 
reported value of Plan D's assets is $1,500,000, and the fair market 
value of Plan D's liquid assets is $1,300,000.
    (ii) The amount of the adjusted disbursements from Plan D for the 
12-month period ending March 31, 2017 is calculated as the sum of the 
annuity benefits, single sum payments, and administrative expenses paid 
during the 12-month period, reduced by the product of the plan's FTAP 
and the sum of the single sum payments and any payments for annuities 
purchased during the plan year. This results in adjusted disbursements 
for the period of $480,000 (that is, $425,000 plus $200,000 plus 
$25,000, reduced by 82% of $125,000 in single sum payments during 2016 
and 90% of $75,000 in single sum payments during 2017).
    (iii) The base amount is calculated in accordance with paragraph 
(e)(6)(ii) of this section as three times the adjusted disbursements 
determined in paragraph (ii) of this Example 11, or $1,440,000.
    (iv) The liquidity shortfall is the difference between the base 
amount of $1,440,000 determined in paragraph (iii) of this Example 11 
and the $1,300,000 in liquid assets as of March 31, 2017, or $140,000. 
The required installment due on April 15, 2017 is therefore $140,000, 
since this amount is larger than the $50,000 installment otherwise 
required, but less than the $500,000 needed to increase the plan's FTAP 
(including the expected increase in the funding target due to benefits 
accruing or earned during the plan year) to 100%.
    (v) Note that any contributions of liquid assets made through March 
31, 2017 are reflected for purposes of determining the fair market value 
of Plan D's liquid assets as of March 31, 2017 and are not applied 
toward satisfying the liquidity requirement as of April 15, 2017. 
Similarly, any funding standard carryover balance or prefunding balance 
as of January 1, 2017 cannot be applied to offset the liquidity 
requirement. Only contributions made in cash or other liquid assets made 
after March 31, 2017 and by April 15, 2017 can be used to timely satisfy 
this requirement.
    Example 12. (i) The facts are the same as in Example 11. The plan 
sponsor makes a cash contribution for the 2017 plan year of $30,000 on 
April 15, 2017, and makes an additional cash contribution for the 2017 
plan year of $110,000 on April 30, 2017. The effective interest rate for 
Plan D for the 2017 plan year is 5.90%.
    (ii) Under paragraph (d)(3)(i) of this section, the underpayment of 
the required installment due April 15, 2017 is $110,000 (that is, 
$140,000 minus $30,000).

[[Page 585]]

    (iii) Because the $110,000 contribution was made after the due date 
for the required installment (which reflects an unpaid liquidity amount) 
but during the quarter in which the installment was due, and because 
that contribution does not exceed the unpaid liquidity amount for the 
quarter, the special interest adjustment under paragraph (b)(4)(iii) of 
this section applies to the entire amount of the contribution. 
Accordingly, the contribution is adjusted for interest in two steps for 
the purpose of determining the portion of the minimum required 
contribution that is satisfied by the contribution. In the first step, 
the contribution is adjusted using the effective interest rate for the 
2-month period from the payment date of April 30, 2017 to June 30, 2017, 
the last day of the quarter during which the liquidity requirement was 
due ($110,000 x 1.0590(2/12) = $111,056). In the second step, 
this amount is adjusted as if that amount had been paid on June 30, 
2017. Accordingly, this amount ($111,056) is discounted for interest at 
a rate of 10.90% (the effective interest rate for the 2017 plan year of 
5.90%, increased by 5 percentage points) for the 2\1/2\-month period 
from June 30, 2017 to the April 15, 2017 due date for the installment, 
and is further discounted using the effective interest rate of 5.90% for 
the 3\1/2\-month period between April 15, 2017 and the valuation date of 
January 1, 2017. Therefore, the April 30, 2017 contribution is adjusted 
to $106,886 as of January 1, 2017 ($111,056 / 1.1090(2.5/12) 
/ 1.0590(3.5/12)).
    (iv) The $140,000 contributed during April 2017 is needed to satisfy 
the required installment due April 15, 2017 (determined taking into 
account the liquidity shortfall as of March 31, 2017), and so the full 
amount is applied to satisfy that installment. No portion of those 
contributions is applied to the required installments for subsequent 
quarters, and no additional payments are needed to satisfy the required 
installment due April 15, 2017 (because the $110,000 payment satisfies 
both the unpaid liquidity amount and the remaining amount of the 
required installment described under paragraph (c)(5) of this section).
    Example 13. (i) The facts are the same as in Example 12, except that 
the plan sponsor does not make the second cash contribution of $110,000 
on April 30, 2017, but instead makes a second cash contribution of 
$75,000 for the 2017 plan year on July 15, 2017. The base amount as of 
June 30, 2017 calculated in accordance with paragraph (e)(6)(ii) of this 
section is $1,500,000, and the fair market value of liquid assets as of 
that date is $1,400,000.
    (ii) Under paragraph (d)(3)(i) of this section, the underpayment of 
the required installment due April 15, 2017 is $110,000 (that is, 
$140,000 minus $30,000).
    (iii) As of June 30, 2017, no portion of the $110,000 underpayment 
of the required installment due April 15, 2017 has been satisfied. Under 
paragraph (d)(3)(iv)(A) of this section, to the extent that the amount 
due April 15, 2017 solely because of the liquidity requirement under 
paragraph (d)(1) of this section is not satisfied with a contribution of 
liquid assets during the quarter, this amount is no longer considered 
unpaid. Of the $110,000 underpayment of the required installment that 
was due on April 15, 2017, $20,000 would have been due without regard to 
the liquidity requirement under paragraph (d)(1) of this section and 
$90,000 was due solely because of that liquidity requirement. 
Accordingly, as of July 1, 2017, $90,000 of the required installment due 
on April 15, 2017 is no longer treated as unpaid and $20,000 of that 
required installment continues to be treated as unpaid.
    (iv) Under paragraph (d)(3)(iv)(B) of this section, the interest 
adjustment in paragraph (b)(4)(iii) of this section for the $90,000 
portion of the installment due April 15, 2017 that is no longer treated 
as unpaid is given effect through an increase in the minimum required 
contribution. This increase to the minimum required contribution is 
$837, which is determined as the difference between:
    (A) The $90,000 portion of the required installment that is no 
longer treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this 
section, discounted for the 6-month period between June 30, 2017 (the 
last day of the quarter in which the liquidity amount was due) to 
January 1, 2017 (the valuation date) using the plan's effective interest 
rate for 2017 (5.90%), resulting in $87,457 (that is, $90,000 / 
1.0590(6/12)), and
    (B) The $90,000 portion of the required installment that is no 
longer treated as unpaid by reason of paragraph (d)(3)(iv)(A) of this 
section, discounted for the 2\1/2\-month period between June 30, 2017 
and the April 15, 2017 due date using the plan's effective interest rate 
increased by 5 percentage points (10.90%), and further discounted for 
the 3\1/2\-month period between April 15, 2017 and January 1, 2017 
valuation date using the plan's effective interest rate, for a result of 
$86,620 (that is, $90,000 / 1.1090(2.5/12) / 
1.0590(3.5/12)).
    (v) The remainder of the required installment that was due on April 
15, 2017 without regard to the liquidity requirement ($20,000) remains 
unpaid until the July 15, 2017 contribution is made. Under paragraph (c) 
of this section, $20,000 of the July 15, 2017 contribution must be 
allocated to the required installment due on April 15, 2017. The 
interest adjustment under paragraph (b)(4)(ii) of this section applies 
to that $20,000 portion of the contribution because it is a late payment 
of a required installment. Accordingly, $20,000 of the July 15, 2017 
contribution is adjusted to April 15, 2017, using an interest rate of 
10.90% for the 3-month period between July 15, 2017 and the April 15, 
2017 due date,

[[Page 586]]

and further adjusted using the effective interest rate of 5.90% for 3\1/
2\ months between April 15, 2017 and the January 1, 2017 valuation date. 
Therefore, the portion of the July 15, 2017 contribution attributable to 
the April 15, 2017 required installment is adjusted to $19,166 as of 
January 1, 2017 ($20,000 / 1.1090(3/12) / 
1.0590(3.5/12)).
    (vi) The liquidity shortfall is recalculated as of June 30, 2017 as 
$100,000 (that is, the base amount of $1,500,000 minus the value of 
liquid assets of $1,400,000). This amount is larger than the $50,000 
required installment otherwise applicable, and so the amount of the 
required installment due on July 15, 2017 is $100,000. Of the $75,000 
contribution made on July 15, 2017, $20,000 is applied to satisfy the 
remainder of the required installment due April 15, 2017, and the 
remaining $55,000 is applied toward the required installment due July 
15, 2017. An additional contribution of $45,000 in liquid assets is 
needed to satisfy the required installment due July 15, 2017.
    (vii) If instead there were no liquidity shortfall as of June 30, 
2017, the required installment due July 15, 2017 would be $50,000. Of 
the $75,000 contribution made on July 15, 2017, $20,000 would be applied 
to satisfy the remainder of the required installment due April 15, 2017, 
$50,000 would be applied to satisfy the required installment due on July 
15, 2017, and the remaining $5,000 would be applied toward the next 
required installment.
    Example 14. (i) Plan E, which is a small plan described in section 
430(g)(2)(B), has a calendar year plan year and a valuation date of 
December 31. The required installments for the 2017 plan year are 
$30,000 each and each of the required installments is paid on the due 
date. The effective interest rate for Plan E for the 2017 plan year is 
5.90%.
    (ii) The total contributions made for the plan year and before the 
valuation date, adjusted with interest to the valuation date, equal 
$92,402. This is developed as shown below:
    (A) The contribution paid April 15, 2017 is adjusted by increasing 
the contribution amount for 8\1/2\ months at the effective interest rate 
($30,000 x 1.0590(8.5/12) = $31,243).
    (B) The contribution paid July 15, 2017 is increased for 5\1/2\ 
months at the effective interest rate ($30,000 x 1.0590 
(5.5/12) = $30,799).
    (C) The contribution paid October 15, 2017 is increased for 2\1/2\ 
months at the effective interest rate ($30,000 x 
1.0590(2.5/12) = $30,360).
    (iii) Pursuant to Sec.  1.430(g)-1(d)(2), the interest-adjusted 
value of the contributions for the 2017 plan year that are made before 
the valuation date is subtracted from the December 31, 2017 plan assets 
in determining the value of plan assets for the December 31, 2017 
actuarial valuation.
    Example 15. (i) The facts are the same as in Example 14, except that 
the first contribution for the 2017 plan year is made on May 15, 2017 in 
the amount of $40,000. The remaining amount of each required installment 
is paid on the date it is due.
    (ii) In accordance with paragraph (c)(3)(iii) of this section, the 
amount of the required installment due on April 15, 2017 remains at 
$30,000, even though the associated contribution was not paid until May 
15, 2017. Therefore, $30,000 of the payment is allocated to the April 
15, 2017 required installment and the remaining $10,000 is allocated to 
the installment due on July 15, 2017.
    (iii) Under paragraph (c)(3)(ii) of this section, the portion of the 
May 15, 2017 contribution allocated to the July 15, 2017 required 
installment is increased for interest for the 2 months between the date 
of the contribution and the due date, using the effective interest rate 
for 2017. Therefore, the amount allocated to the July 15, 2017 
installment is $10,096 (that is, $10,000 x 1.0590(2/12)). The 
remaining installment due July 15, 2017 is $30,000 minus $10,096, or 
$19,904.
    (iv) The total amount credited against the minimum required 
contribution is $122,062 as of December 31, 2017. This amount is 
calculated as shown below:
    (A) The portion of the May 15, 2017 contribution allocated to the 
April 15, 2017 required installment is first adjusted for the 1 month 
between the due date and the payment date using the effective interest 
rate plus 5% ($30,000 / 1.1090(1/12) = $29,742). This amount 
is then adjusted using the effective interest rate, for the 8\1/2\ 
months between the due date of April 15, 2017 and the valuation date of 
December 31, 2017 ($29,742 x 1.0590(8.5/12) = $30,975).
    (B) The remaining portion of the May 15, 2017 contribution ($10,000) 
is increased for the 7\1/2\ months between the date of the contribution 
and the valuation date at the effective interest rate ($10,000 x 
1.0590(7.5/12) = $10,365).
    (C) The contribution paid July 15, 2017 is increased for 5\1/2\ 
months at the effective interest rate ($19,904 x 
1.0590(5.5/12) = $20,434).
    (D) The contribution paid October 15, 2017 is increased for 2\1/2\ 
months at the effective interest rate ($30,000 x 
1.0590(2.5/12) = $30,360).
    (E) The contribution paid January 15, 2018 is discounted for \1/2\ 
month at the effective interest rate ($30,000 / 
1.0590(0.5/12) = $29,928).
    (v) The amount deducted from valuation assets as of December 31, 
2017 for contributions made before the valuation date is determined 
without regard to the special interest adjustment for late payment of 
the required installment due April 15, 2017 (and without regard to the 
contribution paid on January 15, 2018).
    Example 16. (i) Plan F has a required installment of $10,000 per 
quarter for the 2016 plan year. The plan sponsor makes a contribution of 
$9,993 on April 10, 2016. The effective interest rate for Plan F for the 
2016 plan year is 5.90%.
    (ii) In accordance with paragraph (c)(3)(ii) of this section, the 
contribution is increased

[[Page 587]]

for interest at the effective interest rate, for the 5 days between the 
contribution date and the due date for the required installment. 
Therefore, the amount credited against the required installment due 
April 15, 2016 is $10,001 ($9,993 x 1.0590(5/365)), and the 
required installment is satisfied.
    Example 17. (i) The facts are the same as in Example 16, except that 
a contribution of $8,000 is made on April 20, 2016.
    (ii) In accordance with paragraph (c)(3)(iii) of this section, the 
amount of the required installment due on April 15, 2016 remains at 
$10,000, even though the associated contribution was not paid until 
after the due date, and so $2,000 ($10,000 - $8,000) of the required 
installment remains unpaid as of April 20, 2016.
    (iii) The amount of the April 20, 2016 contribution credited against 
the minimum required contribution for 2016 is $7,858. This amount is 
determined by first adjusting the contribution for the 5 days between 
the due date for the required installment and the date of the 
contribution using the effective interest rate for Plan F for the 2016 
plan year, plus 5% ($8,000 / 1.1090(5/365) = $7,989). The 
result is further adjusted for the 105 days from the due date for the 
required installment to the valuation date of January 1, 2016 using the 
effective interest rate of 5.90% ($7,989 / 1.0590(105/365) = 
$7,858).
    (iv) Alternatively, the amount of the April 20, 2016 contribution 
credited against the minimum required contribution for 2016 could be 
determined using 3\1/2\ months between the due date for the required 
installment and the January 1, 2016 valuation date, as long as the 
calculation is done consistently for each contribution and for each plan 
year. Using this approach, the amount adjusted to the April 15, 2016 due 
date (using the effective interest rate for Plan F for the 2016 plan 
year plus 5%) is adjusted to January 1, 2016 for 3\1/2\ months at the 
effective interest rate for Plan F for the 2016 plan year. Under this 
approach, the amount credited against the minimum required contribution 
is $7,856 ($8,000 / 1.1090(5/365) / 
1.0590(3.5/12)).
    Example 18. (i) Plan G has a funding standard carryover balance of 
$15,000 and a prefunding balance of $50,000 as of January 1, 2016. Plan 
G's required installments are $25,000 each for the 2017 plan year, and 
the final installment of the minimum required contribution for the 2016 
plan year is due on September 15, 2017, in the amount of $40,000. Plan 
G's funding ratios for both 2015 and 2016 (determined under Sec.  
1.430(f)-1(d)(3)) were over 80%. No elections were made to reduce or use 
Plan G's funding balances during 2016. The effective interest rate for 
Plan G for the 2016 and 2017 plan years are 5.40% and 5.90%, 
respectively.
    (ii) On April 15, 2017, Plan G's sponsor elected to use the balances 
to offset the required installment due on that date. The amount of the 
required installment is adjusted to January 1, 2017, using the effective 
interest rate for 2017 to determine the amount by which the balances are 
reduced. Accordingly, this election results in a reduction of $24,585 
($25,000 / 1.0590(3.5/12) in the funding balances as of 
January 1, 2017.
    (iii) On September 15, 2017, Plan G's sponsor elected to use the 
balances to offset the remaining minimum required contribution for the 
2016 plan year due on that date. This amount is adjusted to January 1, 
2016, using the effective interest rate for 2016 to determine the amount 
by which the balances are reduced. Accordingly, this election results in 
a reduction of $36,563 ($40,000 / 1.0540(20.5/12) in Plan G's 
funding balances as of January 1, 2016.
    (iv) Section 430(f)(3)(B) and Sec.  1.430(f)-1(d)(2) require that 
the funding standard carryover balance be exhausted before the 
prefunding balance is used to offset required contribution amounts. 
Although the due date for the April 15, 2017 required installment occurs 
earlier than the due date for the 2016 minimum required contribution, 
for this purpose contributions for the 2016 plan year are deemed to 
occur before those for the 2017 plan year. Therefore, the election to 
offset the 2016 minimum required contribution will eliminate Plan G's 
funding standard carryover balance, and the 2017 required installment 
due April 15, 2017 will be offset by the prefunding balance.

    (g) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date. Section 430 generally 
applies to plan years beginning on or after January 1, 2008. The 
applicability of section 430 for purposes of determining the minimum 
required contribution is delayed for certain plans in accordance with 
sections 104 through 106 of PPA '06.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2016. For plan 
years beginning before January 1, 2016, plans are permitted to rely on 
the provisions set forth in this section for purposes of satisfying the 
requirements of section 430(j).
    (3) First effective plan year. For purposes of this section, the 
first effective plan year for a plan is the first plan year after the 
pre-effective plan year.
    (4) Pre-effective plan year. For purposes of this section, the pre-
effective plan year is the plan year described in Sec.  1.430(a)-
1(h)(5).

[[Page 588]]

    (5) Special rules relating to first effective plan year--(i) 
Determination of minimum required contribution for pre-effective plan 
year. In the case of the plan's first effective plan year, the minimum 
required contribution for the preceding plan year for purposes of 
paragraph (c)(5)(ii)(B) of this section is equal to the minimum required 
contribution under section 412 for the pre-effective plan year 
(determined without regard to any funding waiver under section 412), 
determined as of the last day of the pre-effective plan year and without 
regard to the plan's credit balance.
    (ii) Determination of funding shortfall for pre-effective plan 
year--(A) First effective plan year that begins during 2008. In general, 
in the case of a plan with a first effective plan year that begins 
during 2008, the funding shortfall for the pre-effective plan year that 
precedes it is determined pursuant to paragraph (e)(4) of this section. 
However, for this purpose, the plan's current liability for the pre-
effective plan year under section 412(l)(7) (as in effect for the pre-
effective plan year) is permitted to be used in place of the plan's 
funding target for the pre-effective plan year. In addition, for this 
purpose, the value of plan assets that was used for the pre-effective 
plan year is permitted to be used in place of the value of plan assets 
computed pursuant to Sec.  1.430(g)-1(c) for the pre-effective plan 
year, provided that the value of plan assets that was used for the pre-
effective plan year was not less than 90 percent nor more than 110 
percent of the value of plan assets computed pursuant to Sec.  1.430(g)-
1(c). If the value of plan assets that was used for the pre-effective 
plan year was less than 90 percent of the value of plan assets computed 
pursuant to Sec.  1.430(g)-1(c), then 90 percent of the value of plan 
assets computed pursuant to Sec.  1.430(g)-1(c) is permitted to be used 
as the value of plan assets for the pre-effective plan year. If the 
value of plan assets that was used for the pre-effective plan year was 
more than 110 percent of the value of plan assets computed pursuant to 
Sec.  1.430(g)-1(c), then 110 percent of the value of plan assets 
computed pursuant to Sec.  1.430(g)-1(c) is permitted to be used as the 
value of plan assets for the pre-effective plan year. Finally, for this 
purpose, the value of plan assets is permitted to be determined without 
subtraction for the plan's credit balance for the pre-effective plan 
year.
    (B) First effective plan year begins after 2008. In the case of a 
plan with a first effective plan year that begins after December 31, 
2008, the determination of the funding shortfall for the pre-effective 
plan year that immediately precedes it is made in accordance with 
paragraph (e)(4)(i) of this section. Thus, the funding shortfall for the 
pre-effective plan year is based on the funding target for the pre-
effective plan year and the value of plan assets is determined under 
Sec.  1.430(g)-1(c) for the pre-effective plan year, even though section 
430(g) did not apply to the plan for purposes of determining the minimum 
required contribution for the pre-effective plan year.

[T.D. 9732, 80 FR 54390, Sept. 9, 2015]



Sec.  1.431(c)(6)-1  Mortality tables used to determine current liability.

    (a) Mortality tables used to determine current liability. The 
mortality assumptions that apply to a defined benefit plan for the plan 
year pursuant to section 430(h)(3)(A) and Sec.  1.430(h)(3)-1(a) are 
used to determine a multiemployer plan's current liability for purposes 
of applying the rules of section 431(c)(6). Either the generational 
mortality tables used pursuant to Sec.  1.430(h)(3)-1(a)(2) or the 
static mortality tables used pursuant to Sec.  1.430(h)(3)-1(a)(3) may 
be used for a multiemployer plan for this purpose. However, for this 
purpose, substitute mortality tables under Sec.  1.430(h)(3)-2 may not 
be used for a multiemployer plan.
    (b) Effective/applicability date. This section applies for plan 
years beginning on or after January 1, 2018. For rules that apply to 
plan years beginning before January 1, 2018 and on or after January 1, 
2008, see Sec.  1.431(c)(6)-1 (as contained in 26 CFR part 1 revised 
April 1, 2015).

[T.D. 9826, 82 FR 46410, Oct. 5, 2017]

[[Page 589]]



Sec.  1.432  [Reserved]



Sec.  1.432(e)(9)-1  Benefit suspensions for multiemployer plans 
in critical and declining status.

    (a) General rules on suspension of benefits--(1) General rule. 
Subject to section 432(e)(9)(B) through (I) and this section, the plan 
sponsor of a multiemployer plan that is in critical and declining status 
(within the meaning of section 432(b)(6)) for a plan year may, by plan 
amendment adopted in the plan year, implement a suspension of benefits 
that the plan sponsor deems appropriate. Such an amendment is permitted 
notwithstanding the anti-cutback provisions of section 411(d)(6). As 
amended, the terms of the plan must satisfy the requirements of section 
401(a).
    (2) Adoption of plan terms inconsistent with suspension 
requirements--(i) General rule. A plan may implement (or continue to 
implement) a reduction of benefits pursuant to a suspension of benefits 
only if the terms of the plan are consistent with the requirements of 
section 432(e)(9) and this section.
    (ii) Changes in level of suspension--(A) Phased-in suspension. A 
plan's terms are consistent with the requirements of section 432(e)(9) 
even if the plan provides that, instead of a suspension of benefits 
occurring in full on a specified effective date, the amount of a 
suspension will phase in or otherwise change in a definite, pre-
determined manner as of a specified future effective date or dates.
    (B) Level of suspension contingent on future events. Except as 
otherwise provided in this paragraph (a)(2)(ii), a plan's terms are 
inconsistent with the requirements of section 432(e)(9) if they provide 
that the amount of a suspension will change contingent upon the 
occurrence of any other specified future event, condition, or 
development. For example, a plan is not permitted to provide that an 
additional or larger suspension of benefits is triggered if the plan's 
funded status deteriorates. Similarly, a plan is not permitted to 
provide that a suspension of benefits is decreased if the plan's funded 
status improves (except upon a failure to satisfy the annual plan 
sponsor determinations requirement of paragraph (c)(4) of this section).
    (C) Level of suspension contingent on future status of individual. A 
plan's terms are not inconsistent with the requirements of section 
432(e)(9) merely because they provide that, for a participant who has 
not commenced benefits before the effective date of the suspension, the 
amount of the suspension will change upon the occurrence of a specified 
future event, condition or development (such as retirement, death, or 
disability) with respect to the participant.
    (3) Organization of the regulation. This paragraph (a) contains 
definitions and general rules relating to a suspension of benefits by a 
multiemployer plan under section 432(e)(9). Paragraph (b) of this 
section defines a suspension of benefits and describes the length of a 
suspension, the treatment of beneficiaries and alternate payees under 
this section, and the requirement to select a retiree representative. 
Paragraph (c) of this section prescribes certain rules for the actuarial 
certification and plan sponsor determinations that must be made in order 
for a plan to suspend benefits. Paragraph (d) of this section describes 
certain limitations on suspensions of benefits. Paragraph (e) of this 
section prescribes rules relating to benefit improvements. Paragraph (f) 
of this section describes the requirement to provide notice in 
connection with an application to suspend benefits. Paragraph (g) of 
this section describes certain requirements with respect to the approval 
or denial of an application for a suspension of benefits. Paragraph (h) 
of this section contains certain rules relating to the vote on an 
approved suspension, systemically important plans, and the issuance of a 
final authorization to suspend benefits. Paragraph (j) of this section 
provides the effective/applicability date of this section.
    (4) Definitions. The following definitions apply for purposes of 
this section--
    (i) Pay status. A person is in pay status under a multiemployer plan 
if, as described in section 432(j)(6), at any time during the current 
plan year, the person is a participant, beneficiary, or alternate payee 
under the plan and is

[[Page 590]]

paid an early, late, normal, or disability retirement benefit under the 
plan (or a death benefit under the plan related to a retirement 
benefit).
    (ii) Plan sponsor. The term plan sponsor means the association, 
committee, joint board of trustees, or other similar group of 
representatives of the parties that establishes or maintains the 
multiemployer plan. However, in the case of a plan described in section 
404(c), or a continuation of such a plan, the term plan sponsor means 
the association of employers that is the employer settlor of the plan.
    (iii) Effective date of suspension of benefits--(A) Individuals who 
are receiving benefits. In the case of a suspension affecting an 
individual who is receiving benefits when the suspension is implemented, 
the effective date of a suspension of benefits is the first date as of 
which any portion of the individual's benefits are not paid as a result 
of the suspension.
    (B) Individuals who are not receiving benefits. In the case of a 
suspension affecting individuals other than individuals described in 
paragraph (a)(4)(iii)(A) of this section, the effective date of the 
suspension is the first date as of which the individual's entitlement to 
benefits is reduced as a result of the implementation of the suspension, 
regardless of whether the individual is eligible to commence benefits at 
that date.
    (C) Phased-in suspension. If a suspension of benefits provides for 
more than one reduction in benefits over time, such that benefits are 
scheduled to be reduced by an additional amount after benefits are first 
reduced pursuant to the suspension, then each date as of which benefits 
are reduced is treated as a separate effective date of the suspension. 
However, if the effective date of the final scheduled reduction in 
benefits in a series of reductions pursuant to a suspension is less than 
three years later than the effective date of the first reduction, then 
the effective date of the first reduction will be treated as the 
effective date of all subsequent reductions pursuant to that suspension.
    (D) Effective date may not be retroactive. The effective date of a 
suspension may not precede the date on which a final authorization to 
suspend benefits is issued pursuant to paragraph (h)(6) of this section.
    (b) Definition of suspension of benefits and related rules--(1) In 
general--(i) Definition. For purposes of this section, the term 
suspension of benefits means the temporary or permanent reduction, 
pursuant to the terms of the plan, of any current or future payment 
obligation of the plan with respect to any plan participant. A 
suspension of benefits may apply with respect to a plan participant 
regardless of whether the participant, beneficiary, or alternate payee 
commenced receiving benefits before the effective date of the suspension 
of benefits.
    (ii) Plan not liable for suspended benefits. If a plan pays a 
reduced level of benefits pursuant to a suspension of benefits that 
complies with the requirements of section 432(e)(9) and this section, 
then the plan is not liable for any benefits not paid as a result of the 
suspension.
    (2) Length of suspension--(i) In general. A suspension of benefits 
may be of indefinite duration or may expire as of a date that is 
specified in the plan amendment implementing the suspension.
    (ii) Effect of a benefit improvement. A plan sponsor may amend the 
plan to eliminate some or all of a suspension of benefits, provided that 
the amendment satisfies the requirements that apply to a benefit 
improvement under section 432(e)(9)(E), in accordance with the rules of 
paragraph (e) of this section.
    (3) Treatment of beneficiaries and alternate payees. Except as 
otherwise specified in this section, all references to suspensions of 
benefits, increases in benefits, or resumptions of suspended benefits 
with respect to participants also apply with respect to benefits of 
beneficiaries or alternate payees (as defined in section 414(p)(8)) of 
participants.
    (4) Retiree representative--(i) In general--(A) Requirement to 
select retiree representative. The plan sponsor of a plan that intends 
to submit an application for a suspension of benefits and that has 
reported a total of 10,000 or more participants as of the end of the 
plan year for the most recently filed Form 5500, Annual Return/Report of 
Employee Benefit Plan, must select a

[[Page 591]]

retiree representative. The plan sponsor must select the retiree 
representative at least 60 days before the date the plan sponsor submits 
an application to suspend benefits. The retiree representative must be a 
plan participant who is in pay status. The retiree representative may or 
may not be a plan trustee.
    (B) Role of retiree representative. The role of the retiree 
representative is to advocate for the interests of the retired and 
deferred vested participants and beneficiaries of the plan, beginning 
when the retiree representative is selected and continuing throughout 
the suspension approval process. In the discretion of the plan sponsor, 
the retiree representative may continue in this role throughout the 
period of the benefit suspension.
    (ii) Reasonable expenses from plan. The plan must pay reasonable 
expenses incurred by the retiree representative, including reasonable 
expenses for legal and actuarial support and communication with retired 
and deferred vested participants and beneficiaries, commensurate with 
the plan's size and funded status.
    (iii) Disclosure of information. Upon request, the plan sponsor must 
promptly provide the retiree representative with relevant information, 
such as plan documents and data, that is reasonably necessary to enable 
the retiree representative to perform the role described in paragraph 
(b)(4)(i)(B) of this section.
    (iv) Special rules relating to fiduciary status. See section 
432(e)(9)(B)(v)(III) for rules relating to the fiduciary status of a 
retiree representative.
    (v) Retiree representative for other plans. The plan sponsor of a 
plan that has reported fewer than 10,000 participants as of the end of 
the plan year for the most recently filed Form 5500, Annual Return/
Report of Employee Benefit Plan is permitted to select a retiree 
representative. The rules in this paragraph (b)(4) (other than the rules 
in the first two sentences of paragraph (b)(4)(i)(A) of this section 
concerning the size of the plan and the timing of the appointment of the 
retiree representative) apply to such a representative.
    (c) Conditions for suspension--(1) In general--(i) Actuarial 
certification and initial plan sponsor determinations. The plan sponsor 
of a plan in critical and declining status for a plan year may suspend 
benefits only if the actuarial certification requirement in paragraph 
(c)(2) of this section and the initial plan sponsor determinations 
requirement in paragraph (c)(3) of this section are met.
    (ii) Annual requirement to make plan sponsor determinations. As 
provided in paragraph (c)(5) of this section, the suspension will 
continue only if the plan sponsor continues to make the annual plan 
sponsor determinations described in paragraph (c)(4) of this section.
    (2) Actuarial certification. A plan satisfies the actuarial 
certification requirement of this paragraph (c)(2) if, taking into 
account the proposed suspension of benefits (and, if applicable, a 
proposed partition of the plan under section 4233 of the Employee 
Retirement Income Security Act of 1974, Public Law 93-406 (88 Stat. 829 
(1974)), as amended (ERISA)), the plan's actuary certifies that the plan 
is projected to avoid insolvency within the meaning of section 418E, 
assuming the suspension of benefits continues until it expires by its 
own terms or if no such expiration date is set, indefinitely.
    (3) Initial plan sponsor determinations--(i) General rule. A plan 
satisfies the initial plan sponsor determinations requirement of this 
paragraph (c)(3) only if the plan sponsor determines that--
    (A) All reasonable measures to avoid insolvency, within the meaning 
of section 418E, have been taken; and
    (B) The plan would not be projected to avoid insolvency (determined 
using the standards described in paragraphs (d)(5)(ii), (iv), and (v) of 
this section) if no suspension of benefits were applied under the plan.
    (ii) Factors. In making its determination that all reasonable 
measures to avoid insolvency, within the meaning of section 418E, have 
been taken, the plan sponsor may take into account the following non-
exclusive list of factors--
    (A) Current and past contribution levels;
    (B) Levels of benefit accruals (including any prior reductions in 
the rate of benefit accruals);

[[Page 592]]

    (C) Prior reductions (if any) of adjustable benefits;
    (D) Prior suspensions (if any) of benefits under this section;
    (E) The impact on plan solvency of the subsidies and ancillary 
benefits available to active participants;
    (F) Compensation levels of active participants relative to employees 
in the participants' industry generally;
    (G) Competitive and other economic factors facing contributing 
employers;
    (H) The impact of benefit and contribution levels on retaining 
active participants and bargaining groups under the plan;
    (I) The impact of past and anticipated contribution increases under 
the plan on employer attrition and retention levels; and
    (J) Measures undertaken by the plan sponsor to retain or attract 
contributing employers.
    (iii) Reliance on certification of critical and declining status. 
For purposes of the insolvency projection under paragraph (c)(3)(i)(B) 
of this section, a plan sponsor may rely on the actuarial certification 
made pursuant to section 432(b)(3)(A)(i) that the plan is in critical 
and declining status for the plan year in making the determination that 
the plan is projected to become insolvent unless benefits are suspended.
    (4) Annual plan sponsor determinations--(i) General rule. A plan 
satisfies the annual plan sponsor determinations requirement of this 
paragraph (c)(4) for a plan year only if the plan sponsor determines, no 
later than the last day of the plan year, that--
    (A) All reasonable measures to avoid insolvency have been and 
continue to be taken; and
    (B) The plan would not be projected to avoid insolvency (determined 
using the standards described in paragraphs (d)(5)(ii), (iv), and (v) of 
this section, substituting the current plan year for the plan year that 
includes the effective date of the suspension) if no suspension of 
benefits were applied under the plan.
    (ii) Factors. In making its determination that all reasonable 
measures to avoid insolvency have been and continue to be taken, the 
plan sponsor may take into account the non-exclusive list of factors in 
paragraph (c)(3)(ii) of this section.
    (iii) Requirement to maintain written record. The plan sponsor must 
maintain a written record of the annual plan sponsor determinations made 
under this paragraph (c)(4). The written record must be included in an 
update to the rehabilitation plan, whether or not there is otherwise an 
update for that year (or, if the plan is no longer in critical status, 
must be included in the documents under which the plain is maintained). 
The written record of the determinations must describe the plan 
sponsor's consideration of factors, as described in paragraph (c)(4)(ii) 
of this section.
    (5) Failure to make annual plan sponsor determinations. If a plan 
sponsor fails to satisfy the annual plan sponsor determinations 
requirement of paragraph (c)(4) of this section for a plan year 
(including maintaining the written record described in paragraph 
(c)(4)(iii) of this section), then the suspension of benefits will cease 
to be in effect beginning as of the first day of the next plan year.
    (d) Limitations on suspension--(1) In general. Any suspension of 
benefits with respect to a participant made by a plan sponsor pursuant 
to this section is subject to the individual limitations of sections 
432(e)(9)(D)(i) through (iii) and paragraphs (d)(2) through (d)(4) of 
this section. After applying those provisions, the overall size and 
distribution of the suspension is subject to the aggregate limitations 
of sections 432(e)(9)(D)(iv) and (vi) and paragraphs (d)(5) and (d)(6) 
of this section. See section 432(e)(9)(D)(vii) and paragraph (d)(8) of 
this section for additional rules applicable to certain plans.
    (2) Guarantee-based limitation--(i) General rule. The reduction with 
respect to a participant under a suspension of benefits must be limited 
so that, on and after the effective date of the suspension, the monthly 
benefit is not less than the guarantee-based limitation. The guarantee-
based limitation is 110 percent of the monthly benefit payable to a 
participant, beneficiary, or alternate payee that would be guaranteed by 
the Pension Benefit Guaranty Corporation (PBGC) under section 4022A of

[[Page 593]]

ERISA if the plan were to become insolvent as of the effective date of 
the suspension.
    (ii) PBGC guarantee. Under section 4022A of ERISA, the monthly 
benefit of a participant or beneficiary that would be guaranteed by PBGC 
with respect to a plan if the plan were to become insolvent as of the 
effective date of the suspension is generally based on section 
4022A(c)(1) of ERISA. Under that section, the monthly benefit that would 
be guaranteed if the plan were to become insolvent as of the date as of 
which the guarantee is determined is the product of--
    (A) 100 percent of the accrual rate up to $11, plus 75 percent of 
the lesser of--
    (1) $33; or
    (2) The accrual rate, if any, in excess of $11; and
    (B) The number of the participant's years and months of credited 
service as of that date.
    (iii) Calculation of accrual rate. The accrual rate, as defined in 
section 4022A(c)(2) of ERISA, is calculated by dividing--
    (A) The participant's or beneficiary's monthly benefit, described in 
section 4022A(c)(2)(A) of ERISA; by
    (B) The participant's years of credited service, described in 
section 4022A(c)(3) of ERISA, as of the effective date of the 
suspension.
    (iv) Special rule for non-vested participants. For purposes of this 
paragraph (d)(2), a participant's nonforfeitable benefits under section 
4022A(a) of ERISA include benefits that are forfeitable as of the 
effective date of the suspension, provided that the participant would 
have a nonforfeitable right to those benefits if the participant 
continued to earn vesting service following that date.
    (v) Examples. The following examples illustrate the limitation on a 
suspension of benefits under this paragraph (d)(2). Unless otherwise 
stated, the amount of guarantee payable by PBGC in these examples is 
based on section 4022A(c) of ERISA, and the rules under section 4022A(d) 
of ERISA (guarantee for benefits reduced under section 411(a)(3)(E)), 
section 4022A(e) of ERISA (benefits ineligible for guarantee), and 
section 4022A(h) of ERISA (guarantee for benefits accrued as of July 30, 
1980) do not apply. In these examples, unless otherwise stated, the 
monthly benefits are nonforfeitable, are based on benefits that have 
been in effect for at least 60 months as of the effective date of the 
suspension, and are no greater than the monthly benefit that would be 
payable at normal retirement age in the form of a single life annuity.

    Example 1. (i) Facts. A participant is receiving a benefit of $1,500 
per month immediately prior to the effective date of the suspension. The 
participant has 30 years of credited service under the plan.
    (ii) Calculation of accrual rate. The participant's accrual rate is 
$50, calculated by dividing the participant's monthly benefit payment 
($1,500) by the participant's years of credited service (30).
    (iii) Calculation of monthly PBGC-guaranteed benefit. The first $11 
of the accrual rate is fully guaranteed, and the next $33 of the accrual 
rate is 75% guaranteed ($33 x .75 = $24.75). The participant's monthly 
guaranteed benefit per year of credited service is $35.75 ($11 + $24.75 
= $35.75). The PBGC guarantee formula is then applied to produce the 
amount of guarantee payable by PBGC, which is $1,072.50 ($35.75 x 30 
years = $1,072.50).
    (iv) Calculation of guarantee-based limitation. A suspension of 
benefits may not reduce the participant's benefits, determined on and 
after the effective date of the suspension, below the guarantee-based 
limitation, which is equal to 110% of the amount of guarantee payable by 
PBGC. That monthly amount is $1,179.75 ($1,072.50 x 1.1 = $1,179.75).
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that the participant is deceased and, immediately prior to the effective 
date of the suspension, the participant's beneficiary is receiving a 
monthly benefit of $750 under a 50% joint and survivor annuity.
    (ii) Calculation of accrual rate. The beneficiary's accrual rate is 
$25, calculated by dividing the beneficiary's monthly benefit payment 
($750) by the participant's years of credited service (30).
    (iii) Calculation of monthly PBGC-guaranteed benefit. The first $11 
of the accrual rate is fully guaranteed, and the next $14 ($25-$11 = 
$14) of the accrual rate is 75% guaranteed ($14 x .75 = $10.50). The 
beneficiary's monthly guaranteed benefit is $21.50 per year of credited 
service ($11 + $10.50 = $21.50). The PBGC guarantee formula is then 
applied to produce the amount of guarantee payable by PBGC, which is 
$645 ($21.50 x 30 years = $645).
    (iv) Calculation of guarantee-based limitation. A suspension of 
benefits may not reduce the beneficiary's benefits, determined on and 
after the effective date of the suspension, below the guarantee-based 
limitation, which is equal to 110% of the monthly amount of

[[Page 594]]

guarantee payable by PBGC. That monthly guarantee-based limitation 
amount is $709.50 ($645 x 1.1 = $709.50).
    Example 3. (i) Facts. A participant would be eligible for a monthly 
benefit of $1,000 payable as a single life annuity at normal retirement 
age, based on the participant's 25 years of credited service. The plan 
also permits a participant to receive a benefit on an unreduced basis as 
a single life annuity at a particular early retirement age and permits 
participants to receive an early retirement benefit beginning at that 
age in the form of a social security level income option. The 
participant has elected the social security level income option under 
which the participant receives a monthly benefit of $1,600 prior to 
normal retirement age (which is the plan's assumed social security 
retirement age) and $900 after normal retirement age.
    (ii) Calculation of accrual rate. For purposes of calculating the 
accrual rate, the monthly benefit that is used to calculate the PBGC 
guarantee does not exceed the monthly benefit of $1,000 that would be 
payable at normal retirement age. In calculating the accrual rate, the 
amount of guarantee payable by PBGC would be based on a monthly benefit 
of $1,000 prior to normal retirement age and $900 after normal 
retirement age. Before normal retirement age, the participant's accrual 
rate is $40, determined by dividing the participant's monthly benefit 
payment ($1,000) by years of credited service (25). After normal 
retirement age, the participant's accrual rate is $36, calculated by 
dividing the participant's monthly benefit payment ($900) by the 
participant's years of credited service (25).
    (iii) Calculation of monthly PBGC-guaranteed benefit. Before normal 
retirement age, the first $11 of the accrual rate is fully guaranteed, 
and the next $29 of the accrual rate is 75% guaranteed ($29 x .75 = 
$21.75). The participant's monthly guaranteed benefit per year of 
credited service is $32.75 ($11 + $21.75 = $32.75). The PBGC guarantee 
formula is then applied to produce the amount of guarantee payable by 
PBGC, which is $818.75 ($32.75 x 25 years = $818.75). After normal 
retirement age, the first $11 of the accrual rate is fully guaranteed, 
and the next $25 of the accrual rate is 75% guaranteed ($25 x .75 = 
$18.75). The participant's monthly guaranteed benefit per year of 
credited service is $29.75 ($11 + $18.75 = $29.75). The PBGC guarantee 
formula is then applied to produce the amount of guarantee payable by 
PBGC, which is $743.75 after normal retirement age ($29.75 x 25 years = 
$743.75).
    (iv) Calculation of guarantee-based limitation. A suspension of 
benefits may not reduce the participant's benefits, determined on and 
after the effective date of the suspension, below the guarantee-based 
limitation, which is equal to 110% of the monthly amount of guarantee 
payable by PBGC. That monthly guarantee-based limitation amount is 
$900.63 ($818.75 x 1.1 = $900.63) before normal retirement age and 
$818.13 ($743.75 x 1.1 = $818.13) after normal retirement age.
    Example 4. (i) Facts. A participant would be eligible for a monthly 
benefit of $1,000 payable as a single life annuity at normal retirement 
age, based on the participant's 20 years of credited service. The plan 
provides an actuarial increase for delaying benefits until after normal 
retirement age. The participant delays commencement of benefits until 
after normal retirement age and the monthly benefit the participant is 
receiving immediately before the effective date of the suspension is 
$1,200 instead of $1,000.
    (ii) Calculation of accrual rate. For purposes of calculating the 
accrual rate, the monthly benefit that is used to calculate the PBGC 
guarantee does not exceed the monthly benefit of $1,000 that would be 
payable at normal retirement age. Thus, in determining the accrual rate, 
the PBGC guarantee would be based on a monthly benefit of $1,000, 
whether benefits are paid at or after normal retirement age. The 
participant's accrual rate is $50, calculated by dividing the 
participant's monthly benefit payment ($1,000) by the participant's 
years of credited service (20).
    (iii) Calculation of monthly PBGC-guaranteed benefit. The first $11 
of the accrual rate is fully guaranteed, and the next $33 of the accrual 
rate is 75% guaranteed ($33 x .75 = $24.75). The participant's monthly 
guaranteed benefit per year of credited service is $35.75 ($11 + $24.75 
= $35.75). The PBGC guarantee formula is then applied to produce the 
amount of guarantee payable by PBGC, which is $715 ($35.75 x 20 years = 
$715).
    (iv) Calculation of guarantee-based limitation. A suspension of 
benefits may not reduce the participant's benefits, determined on and 
after the effective date of the suspension, below the guarantee-based 
limitation, which is equal to 110% of the monthly amount of guarantee 
payable by PBGC. That monthly guarantee-based limitation amount is 
$786.50 ($715 x 1.1 = $786.50).
    Example 5. (i) Facts. A plan provides that a participant who has 
completed at least five years of service will have a nonforfeitable 
right to 100% of an accrued benefit (and will not have a nonforfeitable 
right to any portion of the accrued benefit prior to completing five 
years of service). The plan implements a suspension of benefits on 
January 1, 2017. As of that date, a participant has three years of 
vesting service, and none of the participant's benefits are 
nonforfeitable under the terms of the plan.
    (ii) Calculation of nonforfeitable benefits. For purposes of 
applying the guarantee-based limitation, the participant is considered 
to have a nonforfeitable right to 100% of the accrued benefit under the 
plan as of January 1, 2017.


[[Page 595]]


    (3) Age-based limitation--(i) No suspension for participants or 
beneficiaries who are age 80 and older. Pursuant to the age-based 
limitation of this paragraph (d)(3), no suspension of benefits is 
permitted to apply to a participant or beneficiary who--
    (A) Has commenced benefits as of the effective date of the 
suspension; and
    (B) Has attained 80 years of age no later than the end of the month 
that includes the effective date of the suspension.
    (ii) Limited suspension for participants and beneficiaries between 
ages 75 and 80. Pursuant to the age-based limitation of this paragraph 
(d)(3), no more than the applicable percentage of the maximum 
suspendable benefit may be suspended for a participant or beneficiary 
who--
    (A) Has commenced benefits as of the effective date of the 
suspension; and
    (B) Has attained 75 years of age no later than the end of the month 
that includes the effective date of the suspension.
    (iii) Maximum suspendable benefit--(A) In general. For purposes of 
this paragraph (d)(3), the maximum suspendable benefit with respect to a 
participant, beneficiary, or alternate payee is the portion of the 
individual's benefits that would otherwise be suspended pursuant to this 
section (that is, the amount that would be suspended without regard to 
the limitation of this paragraph (d)(3)).
    (B) Coordination of limitations. An individual's maximum suspendable 
benefit is calculated after the application of the guarantee-based 
limitation under paragraph (d)(2) of this section and the disability-
based limitation under paragraph (d)(4) of this section.
    (iv) Applicable percentage. For purposes of this paragraph (d)(3), 
the applicable percentage is the percentage obtained by dividing--
    (A) The number of months during the period beginning with the month 
after the month in which the suspension of benefits is effective and 
ending with the month during which the participant or beneficiary 
attains the age of 80, by
    (B) 60.
    (v) Applicability of age-based limitation to benefits paid to 
beneficiaries. If the age-based limitation of this paragraph (d)(3) 
applies to a participant on the effective date of the suspension, then 
the age-based limitation also applies to the beneficiary of the 
participant, based on the age of the participant as of the end of the 
month that includes the effective date of the suspension.
    (vi) Rule for benefits that have not commenced at the time of the 
suspension. If benefits have not commenced to either a participant or 
beneficiary as of the effective date of the suspension, then in applying 
this paragraph (d)(3)--
    (A) If the participant is alive on the effective date of the 
suspension, the participant is treated as having commenced benefits on 
that date; and
    (B) If the participant dies before the effective date of the 
suspension, the beneficiary is treated as having commenced benefits on 
that date.
    (vii) Rules for alternate payees. The age-based limitation of this 
paragraph (d)(3) applies to a suspension of benefits in which an 
alternate payee has an interest, whether or not the alternate payee has 
commenced benefits as of the effective date of the suspension. For 
purposes of this paragraph (d)(3), the applicable percentage for an 
alternate payee is calculated by--
    (A) Using the participant's age as of the end of the month that 
includes the effective date of the suspension, if the alternate payee's 
right to the suspended benefits derives from a qualified domestic 
relations order within the meaning of section 414(p)(1)(A) (QDRO) under 
which the alternate payee shares in each benefit payment but the 
participant retains the right to choose the time and form of payment 
with respect to the benefit to which the suspension applies (shared 
payment QDRO); or
    (B) Substituting the alternate payee's age as of the end of the 
month that includes the effective date of the suspension for the 
participant's age, if the alternate payee's right to the suspended 
benefits derives from a QDRO under which the alternate payee has a 
separate right to receive a portion of the participant's retirement 
benefit to be paid at a time and in a form different from that chosen by 
the participant (separate interest QDRO).

[[Page 596]]

    (viii) Examples. The following examples illustrate the rules of this 
paragraph (d)(3):

    Example 1. (i) Facts. The plan sponsor of a plan in critical and 
declining status is implementing a suspension of benefits, effective 
December 1, 2017, that generally would reduce all benefit payments under 
the plan by 30%. On that date, a retiree is receiving a monthly benefit 
of $1,500 (which is not a benefit based on disability) and has 28 years 
of credited service under the plan. If none of the limitations in 
section 432(e)(9)(D)(i), (ii), and (iii) were to apply, a 30% suspension 
would reduce the retiree's monthly benefit by $450, to $1,050. Under the 
guarantee-based limitation in section 432(e)(9)(D)(i), the retiree's 
monthly benefit could not be reduced by more than $398.90, to $1,101.10 
(1.1 x (28 x ($11 + (.75 x $33)))). The retiree is 77 years old on the 
effective date of the suspension, turns 78 on December 10, 2017, and 
turns 80 on December 10, 2019.
    (ii) Maximum suspendable benefit. Because the retiree is not 
receiving a benefit based on disability under section 432(e)(9)(D)(iii), 
the retiree's maximum suspendable benefit is $398.90 (which is equal to 
the lesser of the amount of reduction that would apply pursuant to the 
30% suspension ($450) or the amount of reduction that would be permitted 
under the guarantee-based limitation ($398.90)).
    (iii) Applicable percentage. Because the retiree is between ages 75 
and 80 on the effective date of the suspension, the reduction is not 
permitted to exceed the applicable percentage of the retiree's maximum 
suspendable benefit. The number of months during the period beginning 
with January 2018 (the month after the month that includes the effective 
date of the suspension) and ending with December 2019 (the month in 
which the retiree turns 80) is 24. The applicable percentage is equal to 
40% (24 months divided by 60).
    (iv) Age-based limitation. The retiree's maximum suspendable benefit 
is $398.90 and the applicable percentage is 40%. Thus, under the age-
based limitation, the retiree's benefit may not be reduced by more than 
$159.56 ($398.90 x .40 = $159.56). Because the retiree was receiving a 
monthly benefit of $1,500, the suspension of benefits may not reduce the 
retiree's monthly benefit below $1,340.44 ($1,500-$159.56 = $1,340.44).
    Example 2. (i) Facts. The facts are the same as Example 1, except 
that the retiree is 79 years old on December 1, 2017, and turns 80 on 
December 20, 2017.
    (ii) Age-based limitation. The suspension is not permitted to apply 
to the retiree because the retiree will turn 80 by the end of the month 
(December 2017) in which the suspension is effective.
    Example 3. (i) Facts. The facts are the same as Example 1, but on 
the effective date of the suspension, the retiree is receiving a benefit 
in the form of a 50% joint and survivor annuity for himself and a 
contingent beneficiary who is age 71. The retiree dies in October 2018.
    (ii) Application of age-based limitation to contingent beneficiary. 
Because the retiree had attained age 78 in the month that included the 
effective date of the suspension, the age-based limitation on the 
suspension of benefits for a 78-year-old individual applies to the 
retiree. The age-based limitation also applies to the contingent 
beneficiary, even though the contingent beneficiary had not commenced 
benefits under the plan as of the effective date of the suspension and 
had not attained age 75 by the end of the month containing the effective 
date of the suspension.
    (iii) Maximum suspendable benefit. The contingent beneficiary's 
amount of guarantee payable by PBGC is based on the benefit the 
beneficiary would have received from the plan before the suspension 
($750). The beneficiary's accrual rate is $26.7857 (calculated by 
dividing the monthly benefit payment ($750) by years of credited service 
(28)) and the beneficiary's amount of guarantee payable by PBGC is 
$639.50 (28 x ($11 + (.75 x $15.7857))). The beneficiary's maximum 
suspendable benefit is $46.55 (which is equal to the lesser of the 
amount of reduction that would apply pursuant to the 30% suspension 
($225) or the amount of reduction that would be permitted under the 
guarantee-based limitation ($46.55, which is equal to ($750-1.1 x 
$639.50)).
    (iv) Applicable percentage. The applicable percentage for the 
beneficiary is based on the retiree's age of 78 as of the end of the 
month that includes the effective date of the suspension. Accordingly, 
the applicable percentage for the beneficiary is 40%.
    (v) Age-based limitation. The beneficiary's maximum suspendable 
benefit is $46.55 and the applicable percentage is 40%. Thus, under the 
age-based limitation, the beneficiary's benefit may not be reduced by 
more than $18.62 ($46.55 x .40 = $18.62). Therefore, as a result of the 
retiree's age-based limitation, the suspension of benefits may not 
reduce the beneficiary's monthly benefit below $731.38 ($750-$18.62 = 
$731.38).
    Example 4. (i) Facts. The facts are the same as Example 3, except 
that on the effective date of the suspension the retiree is age 71 and 
the retiree's contingent beneficiary is age 77.
    (ii) Application of age-based limitation to contingent beneficiary. 
Because the retiree had not reached age 75 as of the end of the month 
that includes the effective date of the suspension, the age-based 
limitation on the suspension of benefits does not apply to the retiree. 
The age-based limitation also does not apply to the retiree's contingent 
beneficiary,

[[Page 597]]

even though the contingent beneficiary had attained age 77 as of the end 
of the month that includes the effective date of the suspension, because 
the contingent beneficiary had not yet commenced benefits on that date. 
The beneficiary's post-suspension benefit may not be less than the 
minimum benefit payable pursuant to the guarantee-based limitation, 
which is $703.45 ($639.50 x 1.1 = $703.45).
    Example 5. (i) Facts. The facts are the same as in Example 4, except 
that the retiree died in October 2017, prior to the December 1, 2017 
effective date of the suspension of benefits. The retiree's beneficiary 
commenced benefits on November 1, 2017.
    (ii) Application of age-based limitation to contingent beneficiary. 
Because the retiree's beneficiary had commenced benefits before the 
effective date of the suspension and had reached age 75 as of the end of 
the month that includes the effective date of the suspension, the age-
based limitation applies to the beneficiary based on the beneficiary's 
age as of the end of the month that includes the effective date of the 
suspension.

    (4) Disability-based limitation--(i) General rule. Pursuant to the 
disability-based limitation of this paragraph (d)(4), benefits based on 
disability (as defined under the plan) may not be suspended.
    (ii) Benefits based on disability--(A) In general. For purposes of 
this section, benefits based on disability means the entire amount paid 
to a participant pursuant to the participant becoming disabled, without 
regard to whether a portion of that amount would have been paid if the 
participant had not become disabled.
    (B) Rule for auxiliary or other temporary disability benefits. If a 
participant begins receiving an auxiliary or other temporary disability 
benefit and the sole reason the participant ceases receiving that 
benefit is commencement of retirement benefits, then the benefit based 
on disability after commencement of retirement benefits is the lesser 
of--
    (1) The periodic payment the participant was receiving immediately 
before the participant's retirement benefits commenced; or
    (2) The periodic payment to the participant of retirement benefits 
under the plan.
    (C) Examples. The following examples illustrate the disability-based 
limitation on a suspension of benefits under this paragraph (d)(4):

    Example 1. (i) Facts. A participant with a vested accrued benefit of 
$1,000 per month, payable at age 65, becomes disabled at age 55. The 
plan applies a reduction to the monthly benefit for early commencement 
if the participant commences benefits before age 65. For a participant 
who commences receiving benefits at age 55, the actuarially adjusted 
early retirement benefit is 60% of the accrued benefit. However, the 
plan also provides that if a participant becomes entitled to an early 
retirement benefit on account of disability, as defined in the plan, the 
benefit is not reduced. On account of a disability, the participant 
commences an unreduced early retirement benefit of $1,000 per month at 
age 55 (instead of the $600 monthly benefit the participant would 
receive if the participant were not disabled). The participant continues 
to receive $1,000 per month after reaching age 65.
    (ii) Conclusion. The participant's disability benefit payment of 
$1,000 per month commencing at age 55 is a benefit based on disability, 
even though the participant would have received a portion of these 
benefits at retirement regardless of the disability. Thus, both before 
and after attaining age 65, the participant's entire monthly payment 
amount ($1,000) is a benefit based on disability. A suspension of 
benefits is not permitted to apply to any portion of the participant's 
benefit at any time.
    Example 2. (i) Facts. The facts are the same as Example 1, except 
that the terms of the plan provide that when a disabled participant 
reaches age 65, the disability pension is discontinued by reason of 
reaching age 65, and the retirement benefits commence. In this case, the 
amount of the participant's retirement benefits is the same as the 
amount that the participant was receiving immediately before commencing 
retirement benefits, or $1,000.
    (ii) Conclusion. Before age 65, the participant's disability benefit 
payment of $1,000 per month commencing at age 55 is a benefit based on 
disability. After age 65, the periodic retirement benefit of $1,000 per 
month is a benefit based on disability because it does not exceed the 
benefit based on disability that the participant was receiving 
immediately before commencing retirement benefits. Thus, both before and 
after attaining age 65, the participant's entire monthly payment amount 
($1,000) is a benefit based on disability. A suspension of benefits is 
not permitted to apply to any portion of the participant's benefit at 
any time.
    Example 3. (i) Facts. The facts are the same as Example 2, except 
that upon reaching age 65, the participant elects to commence payment of 
retirement benefits not in the form of a single life annuity payable in 
the amount of $1,000 per month but instead in the form of an actuarially 
equivalent joint

[[Page 598]]

and survivor annuity payable in the amount of $850 per month.
    (ii) Conclusion. Before age 65, the participant's benefit based on 
disability is $1,000 per month. After age 65, the participant's entire 
retirement benefit of $850 per month is a benefit based on disability 
because it does not exceed the benefit based on disability that the 
participant was receiving immediately before commencing retirement 
benefits. Thus, a suspension of benefits is not permitted to apply to 
any portion of those benefits at any time.
    Example 4. (i) Facts. A participant's disability pension is a 
specified amount unrelated to the participant's accrued benefit. The 
participant's disability benefit commencing at age 55 is $750 per month. 
Upon reaching age 65, the participant's disability pension is 
discontinued by reason of reaching age 65 and the participant elects to 
receive an accrued benefit payable in the amount of $1,000 per month.
    (ii) Conclusion. Before age 65, the participant's benefit based on 
disability is $750 per month. After age 65, the participant's benefit 
based on disability continues to be $750 per month (even though the 
participant's payment is $1,000 per month), because the benefit based on 
disability is the lesser of the periodic disability pension the 
participant was receiving immediately before retirement benefits 
commenced ($750) and the periodic payment of retirement benefits to the 
participant under the plan determined without regard to the suspension 
($1,000). Thus, a suspension of benefits is not permitted to reduce the 
participant's benefit based on disability ($750 per month) at any time.
    Example 5. (i) Facts. The facts are the same as Example 2, except 
that when the participant attains age 65, the participant's monthly 
benefit payment increases from $1,000 to $1,300 as a result of the plan 
providing additional accruals during the period of disability, as if the 
participant were not disabled.
    (ii) Conclusion. As in Example 2, before age 65, the participant's 
benefit payment of $1,000 per month commencing at age 55 is a benefit 
based on disability. After age 65, the participant's benefit payment of 
$1,300 per month is a benefit based on disability because the $1,300 is 
payable based on additional accruals earned pursuant to the participant 
becoming disabled. Thus, both before and after attaining age 65, the 
participant's entire monthly payment amount is a benefit based on 
disability. A suspension of benefits is not permitted to apply to any 
portion of the participant's benefit at any time.
    Example 6. (i) Facts. The facts are the same as Example 3 of 
paragraph (d)(2)(v) of this section, except that the social security 
level income option is only available to a participant who incurs a 
disability as defined in the plan.
    (ii) Conclusion. Before normal retirement age, the participant's 
benefit payment of $1,600 per month is a benefit based on disability. 
After normal retirement age, the participant's benefit based on 
disability is $900, which is the lesser of the $1,600 periodic payment 
that the participant was receiving immediately before the participant's 
normal retirement benefit commenced and the participant's $900 periodic 
payment of retirement benefits determined without regard to the 
suspension. Thus, a suspension of benefits is not permitted to apply to 
any portion of those benefits ($1,600 per month before and $900 per 
month after normal retirement age) at any time.
    Example 7. (i) Facts. A plan applies a reduction to the monthly 
benefit for early commencement if a participant commences benefits 
before age 65. The plan also provides that if a participant becomes 
disabled, as defined in the plan, the benefit that is paid before normal 
retirement age is not reduced for early retirement. Under the plan, when 
a disabled participant reaches age 65, the disability pension is 
discontinued by reason of reaching age 65 and the retirement benefits 
commence. A participant with a vested accrued benefit of $1,000 per 
month, payable at age 65, becomes disabled at age 55. On account of the 
disability, the participant commences benefits at age 55 in the amount 
of $1,000 per month (instead of the $600 monthly benefit the participant 
could have received at that age if the participant were not disabled). 
The participant recovers from the disability at age 60, and the 
participant's disability benefits cease. At age 60, the participant 
immediately elects to begin an early retirement benefit of $800.
    (ii) Conclusion. The participant's disability benefit payment of 
$1,000 per month commencing at age 55 is a benefit based on disability, 
even though the participant would have received a portion of these 
benefits at retirement regardless of the disability. Because the 
participant ceased receiving disability benefits on account of the 
participant no longer being disabled (and not solely on account of 
commencing retirement benefits), the participant's early retirement 
benefit of $800 per month that began after the disability benefit ended 
is not a benefit based on disability.

    (5) Limitation on aggregate size of suspension--(i) General rule. 
Any suspension of benefits (considered, if applicable, in combination 
with a partition of the plan under section 4233 of ERISA (partition)) 
must be at a level that is reasonably estimated to--
    (A) Enable the plan to avoid insolvency; and

[[Page 599]]

    (B) Not materially exceed the level that is necessary to enable the 
plan to avoid insolvency.
    (ii) Suspension sufficient to avoid insolvency--(A) General rule. A 
suspension of benefits (considered, if applicable, in combination with a 
partition of the plan) will satisfy the requirement that it is at a 
level that is reasonably estimated to enable the plan to avoid 
insolvency if--
    (1) For each plan year throughout an extended period (as described 
in paragraph (d)(5)(ii)(C) of this section) beginning on the first day 
of the plan year that includes the effective date of the suspension, the 
plan's solvency ratio is projected on a deterministic basis to be at 
least 1.0;
    (2) Based on stochastic projections reflecting variance in 
investment return, the probability that the plan will avoid insolvency 
throughout the extended period is more than 50 percent; and
    (3) Unless the plan's projected funded percentage (within the 
meaning of section 432(j)(2)) at the end of the extended period using 
the deterministic projection described in paragraph (d)(5)(ii)(A)(1) of 
this section exceeds 100 percent, that projection shows that, during 
each of the last five plan years of that period, neither the plan's 
solvency ratio nor its available resources (as defined in section 
418E(b)(3)) is projected to decrease.
    (B) Solvency ratio. For purposes of this section, a plan's solvency 
ratio for a plan year means the ratio of--
    (1) The plan's available resources (as defined in section 
418E(b)(3)) for the plan year; to
    (2) The scheduled benefit payments under the plan for the plan year.
    (C) Extended period. For purposes of this section, an extended 
period means a period of at least 30 plan years. However, in the case of 
a temporary suspension of benefits that is scheduled to cease as of a 
date that is more than 25 years after the effective date, the extended 
period must be lengthened so that it ends no earlier than five plan 
years after the cessation of the suspension.
    (iii) Suspension not materially in excess of level necessary to 
avoid insolvency--(A) General rule. A suspension of benefits will 
satisfy the requirement under paragraph (d)(5)(i)(B) of this section 
that the suspension be at a level that is reasonably estimated to not 
materially exceed the level necessary for the plan to avoid insolvency 
only if an alternative, similar but smaller suspension of benefits would 
not be sufficient to enable the plan to satisfy the requirement to avoid 
insolvency under paragraph (d)(5)(i)(A) of this section (determined 
using an extended period that is no shorter than the extended period 
used to satisfy the requirements of paragraph (d)(5)(i)(A) of this 
section). The alternative suspension of benefits that is used for this 
purpose is a suspension of benefits under which, for each participant or 
beneficiary, the amount of the reduction in the periodic payment 
(determined after application of the individual limitations) is equal to 
the amount of the reduction proposed for that participant or beneficiary 
in the application submitted pursuant to paragraph (g) of this section, 
decreased (but not below zero) by the greater of--
    (1) Five percent of the amount of the reduction in the periodic 
payment proposed for that participant or beneficiary; or
    (2) Two percent of the amount of the participant's or beneficiary's 
periodic payment determined without regard to the reduction proposed in 
the application.
    (B) Special rule for partitions. If PBGC issues an order 
partitioning the plan, then a suspension of benefits with respect to the 
plan will be deemed to satisfy the requirement under paragraph 
(d)(5)(i)(B) of this section that the suspension be at a level that is 
reasonably estimated to not materially exceed the level necessary for 
the plan to avoid insolvency.
    (iv) Actuarial basis for projections--(A) In general. This paragraph 
(d)(5)(iv) sets forth rules for the actuarial projections that are 
required under this paragraph (d)(5). The projections must reflect the 
assumption that the suspension of benefits continues indefinitely (or, 
if the suspension expires on a specified date by its own terms, until 
that date).

[[Page 600]]

    (B) Reasonable actuarial assumptions and methods. Each of the 
actuarial assumptions and methods used for the actuarial projections 
that are required under this paragraph (d)(5), and the combination of 
those actuarial assumptions and methods, must be reasonable, taking into 
account the experience of the plan and reasonable expectations. To be 
reasonable, the actuarial assumptions and methods must also be 
appropriate for the purpose of the measurement (this means that factors 
specific to the measurements must be taken into account). The actuary's 
selection of assumptions about future covered employment and 
contribution levels (including contribution base units and average 
contribution rate) may be based on information provided by the plan 
sponsor, which must act in good faith in providing the information. In 
addition, to the extent that an actuarial assumption used for the 
deterministic projection in paragraph (d)(5)(ii)(A)(1) of this section 
differs from that used to certify whether the plan is in critical and 
declining status pursuant to section 432(b)(3)(B)(iv), an explanation of 
the information and analysis that led to the selection of that different 
assumption must be provided. Similarly, to the extent that an actuarial 
assumption used for the stochastic projection in paragraph 
(d)(5)(ii)(A)(2) of this section differs from that used for the 
deterministic projection, an explanation of the information and analysis 
that led to the selection of that different assumption must be provided.
    (C) Initial value of plan assets and cash flow projections. Except 
as provided in paragraph (d)(5)(iv)(D) of this section, the cash flow 
projections must be based on--
    (1) The fair market value of plan assets as of the end of the 
calendar quarter immediately preceding the date the application is 
submitted;
    (2) Projected benefit payments that are consistent with the 
projected benefit payments under the most recent actuarial valuation; 
and
    (3) Appropriate adjustments to projected benefit payments to include 
benefits for new hires who are reflected in the projected contribution 
amounts.
    (D) Requirement to reflect significant events. The projected cash 
flows relating to contributions, withdrawal liability payments, and 
benefit payments must also be adjusted to reflect significant events 
that occurred after the most recent actuarial valuation. Significant 
events include--
    (1) A plan merger or transfer;
    (2) The withdrawal or the addition of employers that changed 
projected cash flows relating to contributions, withdrawal liability 
payments, or benefit payments by more than five percent;
    (3) A plan amendment, a change in a collective bargaining agreement, 
or a change in a rehabilitation plan that changed projected cash flows 
relating to contributions, withdrawal liability payments, or benefit 
payments by more than five percent; or
    (4) Any other event or trend that resulted in a material change in 
those projected cash flows.
    (v) Simplified determination for smaller plans. In the case of a 
plan that is not large enough to be required to select a retiree 
representative under paragraph (b)(4) of this section, the determination 
of whether the benefit suspension (or a benefit suspension in 
combination with a partition of the plan) will satisfy the requirement 
that it is at a level that is reasonably estimated to enable the plan to 
avoid insolvency is permitted to be made without regard to paragraph 
(d)(5)(ii)(A)(2) of this section.
    (vi) Additional disclosure--(A) Disclosure of past experience for 
critical assumptions. The application for suspension must include a 
disclosure of the total contributions, total contribution base units and 
average contribution rate, withdrawal liability payments, and the rate 
of return on plan assets for each of the 10 plan years preceding the 
plan year in which the application is submitted.
    (B) Sensitivity of results to investment return assumptions. The 
application must include deterministic projections of the plan's 
solvency ratio over the extended period using two alternative 
assumptions for the plan's rate of return. These alternatives are that 
the plan's future rate of return will be lower than the assumed rate of 
return used under paragraph (d)(5)(iv)(B) of this section by--

[[Page 601]]

    (1) One percentage point; and
    (2) Two percentage points.
    (C) Sensitivity of results to industry level assumptions. The 
application must include deterministic projections of the plan's 
solvency ratio over the extended period using two alternative 
assumptions for future contribution base units. These alternatives are 
that future contribution base units--
    (1) Continue under the same trend as the plan experienced over the 
past 10 years; and
    (2) Continue under the trend identified in paragraph 
(d)(5)(vi)(C)(1) of this section reduced by one percentage point.
    (D) Projection of funded percentage. The application must include an 
illustration, prepared on a deterministic basis, of the projected value 
of plan assets, the accrued liability of the plan (calculated using the 
unit credit funding method), and the funded percentage for each year in 
the extended period.
    (E) Permitted simplification of certain projections. It is 
permissible for the projections described in paragraph (d)(5)(vi)(C) of 
this section to be made without reflecting any adjustments to the 
projected benefit payments that result from the alternative assumptions 
regarding future contribution base units.
    (6) Equitable distribution--(i) In general. Any suspension of 
benefits must be equitably distributed across the participant and 
beneficiary population, taking into account factors, with respect to 
participants and beneficiaries and their benefits, that may include one 
or more of the factors described in paragraph (d)(6)(ii) of this 
section. If a suspension of benefits provides for different treatment 
for different participants and beneficiaries (other than as a result of 
application of the individual limitations), then the suspension of 
benefits is equitably distributed across the participant and beneficiary 
population only if--
    (A) Under the suspension, the participants and beneficiaries are 
divided into separate categories or groups that are defined by the 
consistent treatment of individuals within each separate category or 
group;
    (B) Any difference in treatment under the suspension of benefits 
among the different categories or groups is based on relevant factors 
reasonably selected by the plan sponsor, such as the factors described 
in paragraph (d)(6)(ii) of this section; and
    (C) Any such difference in treatment is based on a reasonable 
application of those relevant factors.
    (ii) Factors that may be considered--(A) In general. In accordance 
with paragraph (d)(6)(i)(B) and (C) of this section, if, under the 
suspension, there is any difference between the treatment of one 
category or group of participants and beneficiaries and another category 
or group of participants and beneficiaries, that difference must be 
based on a reasonable application of relevant statutory factors 
described in paragraph (d)(6)(ii)(B) of this section and any other 
factors reasonably selected by the plan sponsor. For example, it would 
be reasonable for a plan sponsor to conclude that the statutory factor 
described in paragraph (d)(6)(ii)(B)(3) of this section (amount of 
benefit) is a factor that should be taken into account as justifying a 
lesser benefit reduction for participants or beneficiaries whose 
benefits are closer to the level of the PBGC guarantee than for others. 
In addition, it would be reasonable for a plan sponsor to conclude that 
the presumed financial vulnerability of certain participants or 
beneficiaries who are reasonably deemed to be in greater need of 
protection than other participants or beneficiaries is a factor that 
should be taken into account as justifying a lesser benefit reduction 
(as a percentage or otherwise) for those participants or beneficiaries 
than for others.
    (B) Statutory factors. Factors that may be selected as a basis for 
differences in treatment under a suspension of benefits include, when 
reasonable under the circumstances, the following statutory factors:
    (1) The age and life expectancy of the participant or beneficiary;
    (2) The length of time that benefits have been in pay status;
    (3) The amount of benefits;
    (4) The type of benefit, such as survivor benefit, normal retirement 
benefit, or early retirement benefit;

[[Page 602]]

    (5) The extent to which a participant or beneficiary is receiving a 
subsidized benefit;
    (6) The extent to which a participant or beneficiary has received 
post-retirement benefit increases;
    (7) The history of benefit increases and reductions for participants 
and beneficiaries;
    (8) The number of years to retirement for active employees;
    (9) Any differences between active and retiree benefits;
    (10) The extent to which active participants are reasonably likely 
to withdraw support for the plan, accelerating employer withdrawals from 
the plan and increasing the risk of additional benefit reductions for 
participants in and out of pay status; and
    (11) The extent to which a participant's or beneficiary's benefits 
are attributable to service with an employer that failed to pay its full 
withdrawal liability.
    (iii) Reasonable application of factors. An application of a factor 
referred to in paragraph (d)(6)(ii) of this section is unreasonable if 
it is inconsistent with the protections provided by the individual 
limitations described in paragraphs (d)(2) through (d)(4) of this 
section. For example, it would constitute an unreasonable application of 
the factor described in paragraph (d)(6)(ii)(B)(3) of this section 
(amount of benefit) if that factor were used to justify a larger 
suspension for participants whose benefits are closer to the guarantee-
based limitation. Similarly, it would constitute an unreasonable 
application of the factors described in paragraph (d)(6)(ii)(B)(1) of 
this section (age and life expectancy of the participant or beneficiary) 
if those factors were used to justify a greater suspension for older 
participants.
    (iv) Special rule for identification of categories or groups--(A) 
New post-suspension benefit formula. This paragraph (d)(6)(iv) applies 
in the case of a proposed suspension of benefits under which an 
individual's benefits after suspension are calculated under a new 
benefit formula (rather than by reference to the individual's benefits 
before suspension). In this case, the evaluation of whether the proposed 
suspension is equitably distributed across the participant and 
beneficiary population is based on a comparison of an individual's pre-
suspension benefit to the individual's post-suspension benefit 
(determined without regard to the application of the individual 
limitations). Accordingly, all individuals whose pre-suspension benefits 
are determined under a uniform pre-suspension benefit formula and whose 
post-suspension benefits are determined under a different uniform post-
suspension benefit formula are treated as a single group.
    (B) Blended pre-suspension benefit formula. If a plan applies 
different pre-suspension benefit formulas with respect to different plan 
years, then all individuals to whom more than one such formula applied 
may be treated as having a uniform pre-suspension benefit formula for 
purposes of paragraph (d)(6)(iv)(A) of this section (even though those 
individuals have different proportions of their pre-suspension benefits 
calculated under the different benefit formulas).
    (C) Changes in early retirement factors. For purposes of paragraph 
(d)(6)(iv)(A) of this section, two individuals are not treated as having 
different pre-suspension or post-suspension benefit formulas merely 
because, as a result of the application of a uniform set of early 
retirement factors, their benefits differ because of retirement at 
different ages.
    (v) Examples. The following examples illustrate the rules on 
equitable distribution of a suspension of benefits of this paragraph 
(d)(6). As a simplifying assumption for purposes of these examples, it 
is assumed that the facts of each example describe all of the factors 
that are included in the application discussed in the example (provided, 
however, that, in the case of a plan described in section 
432(e)(9)(D)(vii), the examples are not intended to illustrate the 
application of section 432(e)(9)(D)(vii) or its effect on the analysis 
or conclusions in the examples).

    Example 1. (i) Facts. The plan sponsor applies for approval of a 
suspension of benefits on March 15, 2017. Under the plan terms 
applicable prior to the suspension, one group of participants benefitted 
only under Benefit Formula A and the remaining participants benefitted 
only under Benefit Formula B. Each of these benefit formulas is uniform.

[[Page 603]]

Under the suspension of benefits, subject to the individual limitations 
on benefit suspensions, benefits for all participants are reduced so 
that a uniform post-suspension benefit formula (Benefit Formula C) 
applies to all participants.
    (ii) Conclusion. Because the reduction in benefits under the 
suspension formula is different for participants who benefitted only 
under Benefit Formula A than for participants who benefitted only under 
Benefit Formula B, the suspension of benefits provides for different 
treatment for different participants and beneficiaries (other than as a 
result of application of the individual limitations). In addition, the 
suspension of benefits provides for consistent treatment of participants 
within the following two categories: (1) Participants who benefitted 
only under Benefit Formula A; and (2) participants who benefitted only 
under Benefit Formula B. Therefore, pursuant to paragraph (d)(6)(iv)(A) 
of this section, these two categories of participants are each treated 
as a single group for purposes of evaluating whether the proposed 
suspension is equitably distributed across the participant and 
beneficiary population. In order to demonstrate that the distribution of 
the suspension satisfies the equitable distribution requirement, the 
plan sponsor must reasonably select and apply factors that are the basis 
for the different treatment of these two groups of participants.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that the plan terms applicable prior to the suspension did not provide 
for different benefit formulas for different groups of participants at 
any given time. Instead, the plan terms provided that different uniform 
benefit formulas applied for service prior to January 1, 2000, and for 
service on or after January 1, 2000.
    (ii) Conclusion. The reduction in benefits under the suspension 
formula is different for participants who had service only prior to 
January 1, 2000, participants who had service only after January 1, 
2000, and participants who had service during both of those periods. The 
suspension of benefits provides for different treatment for different 
participants and beneficiaries (other than as a result of application of 
the individual limitations). In addition, the suspension of benefits 
provides for consistent treatment of participants within the following 
three categories of participants: (1) Participants whose entire service 
was prior to January 1, 2000, (2) participants whose entire service was 
on or after January 1, 2000, and (3) participants who have some service 
before January 1, 2000 and some service on or after January 1, 2000. 
Therefore, pursuant to paragraph (d)(6)(iv)(A) of this section, the two 
categories of participants whose entire service was either before or on 
or after January 1, 2000 are each treated as a single group for purposes 
of evaluating whether the proposed suspension is equitably distributed 
across the participant and beneficiary population. In addition, pursuant 
to paragraph (d)(6)(iv)(B) of this section, the category of participants 
with some service before January 1, 2000 and some service on or after 
January 1, 2000 is treated as a single group for purposes of this 
evaluation. In order to demonstrate that the distribution of the 
suspension satisfies the equitable distribution requirement, the plan 
sponsor must reasonably select and apply factors that are the basis for 
the different treatment of these three categories of participants.
    Example 3. (i) Facts. The plan sponsor applies for approval of a 
suspension of benefits. Under the suspension of benefits, subject to the 
individual limitations on benefit suspensions, benefits for all 
participants and beneficiaries are reduced by the same percentage, and 
the suspension application indicates the rationale for this reduction.
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations.
    Example 4. (i) Facts. The plan sponsor applies for approval of a 
suspension of benefits. Under the suspension of benefits, subject to the 
age-based and disability-based limitations of section 432(e)(9)(D)(ii) 
and (iii), the portion of each participant's and beneficiary's benefit 
that exceeds the guarantee-based limitation of section 432(e)(9)(D)(i) 
is reduced by the same percentage, and the suspension application 
indicates the rationale for this reduction.
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations. The result would be 
the same if, instead, the suspension of benefits applies only to 
benefits that exceed a multiple (in excess of 100%) of the guarantee-
based limitation.
    Example 5. (i) Facts. A plan was previously amended to provide an ad 
hoc 15% increase to the benefits of all participants and beneficiaries 
(including participants who, at the time, were no longer earning service 
under the plan, which therefore included retirees and deferred vested 
participants). The plan sponsor applies for approval of a suspension of 
benefits. Under the suspension of benefits, subject to the individual 
limitations on benefit suspensions, benefits for all participants and 
beneficiaries who were no longer earning service under the plan at the 
time of the ad hoc amendment are reduced by eliminating the amendment 
for those individuals. The suspension application indicates why the 
benefit reduction is based on the statutory factors in paragraph 
(d)(6)(ii)(B)(6) of this section (the extent to which a participant or 
beneficiary has received post-retirement benefit increases), including 
application of the reduction to those who, at the time of

[[Page 604]]

the previous benefit increase, were either retired participants or 
deferred vested participants, and in paragraph (d)(6)(ii)(B)(7) of this 
section (the history of benefit increases and reductions), and why it is 
reasonable to apply the factors in this manner.
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations. This is because the 
difference in treatment between the two groups of participants is based 
on whether a participant has received post-retirement benefit increases 
(in this case, whether a participant was earning service under the plan 
at the time of the benefit increase amendment), which under these facts 
is a relevant factor that may be reasonably selected by the plan 
sponsor, and the difference in treatment between the two groups of 
participants (eliminating the amendment only for benefits with respect 
to participants who were no longer earning service at the time of the 
amendment) is based on a reasonable application of that factor.
    Example 6. (i) Facts. A plan contains a provision that provides a 
``thirteenth check'' in plan years for which the investment return is 
greater than 7% (which was the assumed rate of return under the plan's 
actuarial valuation). The plan sponsor applies for approval of a 
suspension of benefits. Under the suspension of benefits, subject to the 
individual limitations on benefit suspensions, benefits for all 
participants and beneficiaries are reduced by eliminating the 
``thirteenth check'' for all of those individuals. The suspension 
application indicates why the benefit reduction is based on the 
statutory factors in paragraph (d)(6)(ii)(B)(6) of this section (the 
extent to which a participant or beneficiary has received post-
retirement benefit increases) and in paragraph (d)(6)(ii)(B)(7) of this 
section (the history of benefit increases and reductions), and why it is 
reasonable to apply the factors in this manner.
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations.
    Example 7. (i) Facts. A plan was previously amended to reduce future 
accruals from $60 per year of service to $50 per year of service. The 
plan sponsor applies for approval of a suspension of benefits. Under the 
suspension of benefits, subject to the individual limitations on benefit 
suspensions, the accrued benefits for all participants and beneficiaries 
are reduced to $50 per year of service (and the plan's generally 
applicable adjustments for early retirement and form of benefit apply). 
The suspension application indicates why the benefit reduction is based 
on the statutory factor in paragraph (d)(6)(ii)(B)(7) of this section 
(the history of benefit increases and reductions), and why it is 
reasonable to apply the factors in this manner.
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations. This is because the 
difference in treatment among the different groups of participants is 
based on the history of benefit reductions and a discrepancy between 
active and retiree benefits, which under these facts are relevant 
factors that may be reasonably selected by the plan sponsor, and the 
difference in treatment between the three groups of participants 
(reducing the $60 benefit multiplier to $50 per year of service for two 
groups of participants--those who had accrued all of their benefits 
under the $60 multiplier and those who had accrued some of their 
benefits under the $60 multiplier--and not reducing benefits for the 
group of participants who had accrued all of their benefits under the 
$50 multiplier) is based on a reasonable application of those factors.
    Example 8. (i) Facts. The facts are the same as in Example 7, except 
that no plan amendments have previously reduced future accruals or other 
benefits for active participants. Under the suspension of benefits, 
subject to the individual limitations on benefit suspensions, benefits 
for deferred vested participants, retirees, and beneficiaries who have 
commenced benefits are reduced, but no reduction applies to active 
participants. The suspension of benefits is not accompanied by any 
reductions in future accruals or other benefits for active participants.
    (ii) Conclusion. The suspension of benefits is not equitably 
distributed across the participant and beneficiary populations. This is 
because, under these facts, no relevant factor (such as a previous 
reduction in benefits applicable only to active participants) has been 
reasonably selected by the plan sponsor to justify the proposed 
difference in treatment among the categories.
    Example 9. (i) Facts. The facts are the same as in Example 8, except 
that the suspension of benefits provides for a reduction that applies to 
both active and inactive participants. However, the reduction that 
applies to active participants is smaller than the reduction that 
applies to inactive participants because the plan sponsor concludes, as 
explained and supported in the application for suspension, that active 
participants are reasonably likely to withdraw support for the plan if 
any larger reduction is applied.
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations. This is because the 
difference in treatment between the different groups of participants is 
based on the extent to which active participants are reasonably likely 
to withdraw support for the plan, which under these facts is a relevant 
factor that may reasonably be selected by the plan sponsor, and the 
difference in

[[Page 605]]

treatment between the two groups of participants (applying a greater 
suspension to inactive than to active participants) is based on a 
reasonable application of that factor.
    Example 10. (i) Facts. The plan sponsor applies for approval of a 
suspension of benefits. Under the suspension of benefits, subject to the 
individual limitations on benefit suspensions, the benefits for 
participants and beneficiaries attributable to service with an employer 
that failed to pay its full withdrawal liability are reduced by 50%. As 
indicated in the suspension application, the present value of the 
benefit reduction with respect to the former employees of one such 
employer is significantly greater than the unpaid withdrawal liability 
for that employer. Benefits for participants and beneficiaries 
attributable to service with all other employers are reduced by 10%.
    (ii) Conclusion. The suspension of benefits is not equitably 
distributed across the participant and beneficiary populations. This is 
because, although the difference in treatment between the different 
groups of participants is based on a relevant factor that may reasonably 
be selected by the plan sponsor, the difference in treatment between the 
groups of participants is not based on a reasonable application of that 
factor.
    Example 11. (i) Facts. The plan sponsor applies for approval of a 
suspension of benefits. Under the suspension of benefits, subject to the 
individual limitations on benefit suspensions, the benefits for all 
participants and beneficiaries are reduced by the same percentage, 
except that the fbenefits for employees and former employees of a 
particular employer that is actively represented on the plan's Board of 
Trustees are reduced by a specified lesser percentage.
    (ii) Conclusion. The suspension of benefits is not equitably 
distributed across the participant and beneficiary populations. This is 
because, under these facts, no relevant factor has been reasonably 
selected by the plan sponsor to justify the difference in treatment 
between the two groups of participants.
    Example 12. (i) Facts. The facts are the same as in Example 11, 
except that the particular employer whose employees and former employees 
are subject to the lesser benefit reduction is the union that also 
participates in the plan.
    (ii) Conclusion. The suspension of benefits is not equitably 
distributed across the participant and beneficiary populations. This is 
because, under these facts, no relevant factor has been reasonably 
selected by the plan sponsor to justify the difference in treatment 
between the two groups of participants.
    Example 13. (i) Facts. The plan sponsor applies for approval of a 
suspension of benefits. Under the suspension of benefits, subject to the 
individual limitations on benefit suspensions, the monthly benefit of 
all participants and beneficiaries is reduced to 110% of the monthly 
benefit that is guaranteed by PBGC under section 4022A of ERISA. As 
indicated in the suspension application, this is because the plan 
sponsor is applying to PBGC for a partition of the plan, which requires 
the plan sponsor to have implemented the maximum benefit suspensions 
under section 432(e)(9).
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations.
    Example 14. (i) Facts. The plan sponsor applies for approval of a 
suspension of benefits. Under the suspension of benefits, subject to the 
individual limitations on benefit suspensions, benefits for all 
participants and beneficiaries are reduced by the same percentage, 
except that the protection for benefits based on disability goes beyond 
the required disability-based limitations and also includes payments to 
a beneficiary of a participant who had been receiving benefits based on 
disability at the time of death. The suspension application indicates 
the rationale for this protection from reduction.
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations because this 
suspension design is a reasonable application of the statutory factor in 
paragraph (d)(6)(ii)(B)(4) of this section (type of benefit).
    Example 15. (i) Facts. The facts are the same as in Example 3, 
except that the plan does not provide for benefits based on disability. 
Under the suspension of benefits, less of a reduction is applied to a 
participant who has become disabled within the meaning of title II of 
the Social Security Act than to otherwise similarly situated 
participants and the suspension application indicates the rationale for 
this reduction.
    (ii) Conclusion. The suspension of benefits is equitably distributed 
across the participant and beneficiary populations because a 
participant's disability within the meaning of title II of the Social 
Security Act is a factor that can reasonably be taken into account in 
designing a suspension of benefits and applying less of a reduction to 
an individual in this group is a reasonable application of that factor.

    (7) Effective date of suspension made in combination with partition. 
In any case in which a suspension of benefits with respect to a plan is 
made in combination with a partition of the plan, the suspension of 
benefits may not take effect prior to the effective date of the 
partition. This requirement will not be satisfied if the partition order 
under section 4233 of ERISA has not been provided to the Secretary of 
the Treasury

[[Page 606]]

by the last day of the 225-day period described in paragraph (g)(3)(i) 
of this section. For purposes of the preceding sentence, a conditional 
approval by PBGC (within the meaning of 29 CFR 4233.12(c)) of a 
partition application that is conditioned only on the Secretary's 
issuing a final authorization to suspend is treated as a partition 
order.
    (8) Additional rules for plans described in section 
432(e)(9)(D)(vii)--(i) In general. In the case of a plan that includes 
the benefits described in paragraph (d)(8)(i)(C) of this section, any 
suspension of benefits under this section shall--
    (A) First, be applied to the maximum extent permissible to benefits 
attributable to a participant's service for an employer that withdrew 
from the plan and failed to pay (or is delinquent with respect to 
paying) the full amount of its withdrawal liability under section 
4201(b)(1) of ERISA or an agreement with the plan;
    (B) Second, except as provided by paragraph (d)(8)(i)(C) of this 
section, be applied to all other benefits that may be suspended under 
this section; and
    (C) Third, be applied to benefits under a plan that are directly 
attributable to a participant's service with any employer that has, 
prior to December 16, 2014--
    (1) Withdrawn from the plan in a complete withdrawal under section 
4203 of ERISA and paid the full amount of the employer's withdrawal 
liability under section 4201(b)(1) of ERISA or an agreement with the 
plan; and
    (2) Pursuant to a collective bargaining agreement, assumed liability 
for providing benefits to participants and beneficiaries of the plan 
under a separate, single-employer plan sponsored by the employer, in an 
amount equal to any amount of benefits for such participants and 
beneficiaries reduced as a result of the financial status of the plan.
    (ii) Application of suspensions to benefits that are directly 
attributable to a participant's service with certain employers--(A) 
Greater reduction in certain benefits not permitted. A suspension of 
benefits under this section must not be applied to provide for a greater 
reduction in benefits described in paragraph (d)(8)(i)(C) of this 
section than the reduction that is applied to benefits described in 
paragraph (d)(8)(i)(B) of this section. The requirement in the preceding 
sentence is satisfied if no individual's benefits that are directly 
attributable to service with an employer described in paragraph 
(d)(8)(i)(C) of this section are reduced more than that individual's 
benefits would have been reduced if, holding the benefit formula, work 
history, and all other relevant factors used to compute benefits 
constant, those benefits were attributable to service with an employer 
that is not described in paragraph (d)(8)(i)(C) of this section.
    (B) Application of limitation to benefits of participants with 
respect to which the employer has not assumed liability. Benefits 
described in paragraph (d)(8)(i)(C) of this section include all benefits 
of a participant or beneficiary that are directly attributable to 
service with an employer described in paragraph (d)(8)(i)(C) of this 
section without regard to whether the employer has assumed liability for 
providing benefits to that participant or beneficiary that are reduced 
as a result of the financial status of the plan as described in 
paragraph (d)(8)(i)(C)(2) of this section. Thus, the rule of paragraph 
(d)(8)(ii)(A) of this section limits the amount by which a suspension of 
benefits is permitted to reduce benefits under a plan that are directly 
attributable to a participant's service with such an employer, even if 
the employer has not, pursuant to a collective bargaining agreement that 
satisfies the requirements of paragraph (d)(8)(i)(C)(2) of this section, 
assumed liability with respect to that participant's benefits.
    (e) Benefit improvements--(1) Limitations on benefit improvements. 
This paragraph (e) sets forth rules for the application of section 
432(e)(9)(E). A plan satisfies the criteria in section 432(e)(9)(E) only 
if, during the period that any suspension of benefits remains in effect, 
the plan sponsor does not implement any benefit improvement with respect 
to the plan except as provided in this paragraph (e). Paragraph (e)(2) 
of this section describes limitations on a benefit improvement for 
participants and beneficiaries who are not yet in pay status. Paragraph

[[Page 607]]

(e)(3) of this section describes limitations on a benefit improvement 
for participants and beneficiaries who are in pay status. Paragraph 
(e)(4) of this section provides that the limitations of this paragraph 
(e) generally apply in addition to other limitations on benefit 
increases that apply to a plan. Paragraph (e)(5) of this section defines 
benefit improvement.
    (2) Limitations on benefit improvements for those not in pay 
status--(i) Equitable distribution for those in pay status and solvency 
projection. During the period that any suspension of benefits under a 
plan remains in effect, the plan sponsor may not increase the 
liabilities of the plan by reason of any benefit improvement for any 
participant or beneficiary who was not in pay status by the first day of 
the plan year for which the benefit improvement takes effect, unless--
    (A) The present value of the total liabilities for a benefit 
improvement for participants and beneficiaries whose benefit 
commencement dates were before the first day of the plan year for which 
the benefit improvement takes effect is not less than the present value 
of the total liabilities for a benefit improvement for participants and 
beneficiaries who were not in pay status by that date;
    (B) The plan sponsor equitably distributes the benefit improvement 
among the participants and beneficiaries whose benefit commencement 
dates were before the first day of the plan year in which the benefit 
improvement is proposed to take effect; and
    (C) The plan actuary certifies that after taking into account the 
benefit improvement, the plan is projected to avoid insolvency 
indefinitely.
    (ii) Rules of application--(A) Present value determination--(1) 
Actuarial assumptions and methods. For purposes of paragraph 
(e)(2)(i)(A) of this section, the present value of the total liabilities 
for a benefit improvement is the present value as of the first day of 
the plan year in which the benefit improvement is proposed to take 
effect. The actuarial assumptions and methods used for the calculation 
for present values and the actuarial projections that are required under 
this paragraph (e)(2) must each be reasonable, and the combination of 
the actuarial assumptions and methods must be reasonable, taking into 
account the experience of the plan and reasonable expectations.
    (2) Increase in future accrual rate. In the case of a benefit 
improvement that is an increase in the rate of future accrual, the 
present value determined under paragraph (e)(2)(i)(A) of this section 
must take into account the increase in accruals for participants and 
beneficiaries not yet in pay status for all future years.
    (B) Factors relevant to equitable distribution. The evaluation of 
whether a benefit improvement is equitably distributed for purposes of 
paragraph (e)(2)(i)(B) of this section must take into account the 
relevant factors described in paragraph (d)(6)(ii)(B) of this section 
and the extent to which the benefits of the participants and 
beneficiaries were suspended.
    (C) Actuarial certification. The certification in paragraph 
(e)(2)(i)(C) of this section must be made using the standards described 
in paragraphs (d)(5)(ii), (iv), and (v) of this section, substituting 
the plan year that includes the effective date of the benefit 
improvement for the plan year that includes the effective date of the 
suspension.
    (iii) Special rule for certain benefit increases. The limitations of 
this paragraph (e) do not apply to a resumption of suspended benefits or 
plan amendment that increases liabilities with respect to participants 
and beneficiaries not in pay status by the first day of the plan year in 
which the benefit improvement took effect that--
    (A) The Secretary of the Treasury, in consultation with PBGC and the 
Secretary of Labor, determines to be reasonable and which provides for 
only de minimis increases in the liabilities of the plan; or
    (B) Is required as a condition of qualification under section 401 or 
to comply with other applicable law, as determined by the Secretary of 
the Treasury.
    (3) Limitation on resumption of suspended benefits only for those in 
pay status. The plan sponsor may increase liabilities of the plan by 
eliminating some or all of the suspension that applies solely to 
participants and beneficiaries in pay status at the time of

[[Page 608]]

the resumption, provided that the plan sponsor equitably distributes the 
value of those resumed benefits among participants and beneficiaries in 
pay status, taking into account the relevant factors described in 
paragraph (d)(6)(ii)(B) of this section. A resumption of benefits that 
is described in this paragraph (e)(3) is not subject to the limitations 
on a benefit improvement under section 432(f) (relating to restrictions 
on benefit increases for plans in critical status).
    (4) Additional limitations. Except as provided in paragraph (e)(3) 
of this section, the limitations on a benefit improvement under this 
paragraph (e) are in addition to the limitations in section 432(f) and 
any other applicable limitations on increases in benefits imposed on a 
plan.
    (5) Definition of benefit improvement--(i) In general. For purposes 
of this paragraph (e), the term benefit improvement means, with respect 
to a plan, a resumption of suspended benefits, an increase in benefits, 
an increase in the rate at which benefits accrue, or an increase in the 
rate at which benefits become nonforfeitable, under the plan.
    (ii) Effect of expiration of suspension. In the case of a suspension 
of benefits that expires as of a date that is specified in the plan 
amendment implementing the suspension, the resumption of benefits solely 
from the expiration of that period is not treated as a benefit 
improvement.
    (f) Notice requirements--(1) In general. No suspension of benefits 
may be made pursuant to this section unless notice of the proposed 
suspension has been given by the plan sponsor to--
    (i) All participants, beneficiaries of deceased participants, and 
alternate payees under the plan (regardless of whether their benefits 
are proposed to be suspended), except those who cannot be contacted by 
reasonable efforts;
    (ii) Each employer who has an obligation to contribute (within the 
meaning of section 4212(a) of ERISA) under the plan; and
    (iii) Each employee organization which, for purposes of collective 
bargaining, represents plan participants employed by an employer 
described in paragraph (f)(1)(ii) of this section.
    (2) Content of notice--(i) In general. The notice described under 
paragraph (f)(1) of this section must contain--
    (A) Sufficient information to enable a participant or beneficiary to 
understand the effect of any suspension of benefits, including an 
individualized estimate (on an annual or monthly basis) of the effect on 
that participant or beneficiary;
    (B) A description of the factors considered by the plan sponsor in 
designing the benefit suspension;
    (C) A statement that the application for approval of any suspension 
of benefits will be available on the Web site of the Department of the 
Treasury and that comments on the application will be accepted;
    (D) Information as to the rights and remedies of plan participants 
and beneficiaries;
    (E) If applicable, a statement describing the appointment of a 
retiree representative, the date of appointment of the representative, 
the role and responsibilities of the retiree representative, identifying 
information about the retiree representative (including whether the 
representative is a plan trustee), and how to contact the retiree 
representative; and
    (F) Information on how to contact the Department of the Treasury for 
further information and assistance where appropriate.
    (ii) Description of suspension of benefits. The notice described 
under paragraph (f)(1) of this section will not satisfy the requirements 
of paragraph (f)(2)(i) of this section unless it includes the 
following--
    (A) To the extent that it is not possible to provide an 
individualized estimate on an annual or monthly basis of the 
quantitative effect of the suspension on a participant or beneficiary, 
such as in the case of a suspension that affects the payment of any 
future cost-of-living adjustment, that effect may be reflected in a 
narrative description;
    (B) A statement that the plan sponsor has determined that the plan 
will become insolvent unless the proposed suspension takes effect, and 
the year in which insolvency is projected to occur without a suspension 
of benefits;
    (C) A statement that insolvency of the plan could result in benefits 
lower

[[Page 609]]

than benefits paid under the proposed suspension and a description of 
the projected benefit payments upon insolvency;
    (D) A description of the proposed suspension and its effect, 
including a description of the different categories or groups affected 
by the suspension, how those categories or groups are defined, and the 
formula that is used to calculate the amount of the proposed suspension 
for individuals in each category or group;
    (E) A description of the effect of the proposed suspension on the 
plan's projected insolvency;
    (F) A description of whether the suspension will remain in effect 
indefinitely, or the date the suspension expires if it expires by its 
own terms; and
    (G) A statement describing the right to vote on the suspension 
application.
    (iii) Readability requirement. A notice given under paragraph (f)(1) 
of this section must be written in a manner so as to be understood by 
the average plan participant.
    (iv) Model notice. The Secretary of the Treasury will provide a 
model notice. The use of the model notice will satisfy the content and 
readability requirements of this paragraph (f)(2) with respect to the 
language provided in the model.
    (3) Form and manner--(i) Timing--(A) In general. A notice under 
paragraph (f)(1) of this section must be given no earlier than four 
business days before the date on which an application is submitted and 
no later than two business days after the Secretary of the Treasury 
notifies the plan sponsor that it has submitted a complete application, 
as described in paragraph (g)(1)(ii) of this section.
    (B) Timing for lost participants. If additional individuals who are 
entitled to notice are located after the time period in paragraph 
(f)(3)(i)(A) of this section has elapsed, then the plan sponsor must 
give notice to these individuals as soon as practicable thereafter.
    (ii) Method of delivery of notice--(A) Written or electronic 
delivery. A notice given under paragraph (f)(1) of this section may be 
provided in writing. It may also be provided in electronic form to the 
extent that the form is reasonably accessible to persons to whom the 
notice is required to be provided. Permissible electronic methods 
include those permitted under regulations of the Department of Labor at 
29 CFR 2520.104b-1(c) and those described at Sec.  54.4980F-1, Q&A-13(c) 
of the Excise Tax Regulations.
    (B) No alternative method of delivery. A notice under this paragraph 
(f) must be provided in written or electronic form.
    (iii) Additional information in notice. A notice given under 
paragraph (f)(1) of this section is permitted to include information in 
addition to the information that is required under paragraph (f)(2) of 
this section, including, if applicable, information relating to an 
application for partition under section 4233 of ERISA (such as the model 
notice at Appendix A of 29 CFR part 4233), provided that the 
requirements of paragraph (f)(3)(iv) of this section are satisfied.
    (iv) No false or misleading information. A notice given under 
paragraph (f)(1) of this section may not include false or misleading 
information (or omit information in a manner that causes the information 
provided to be misleading).
    (4) Other notice requirement. Any notice given under paragraph 
(f)(1) of this section satisfies the requirement for notice of a 
significant reduction in benefits described in section 4980F that would 
otherwise be required as a result of that suspension of benefits. To the 
extent that there are other reductions that accompany a suspension of 
benefits, such as a reduction in the future accrual rate described in 
section 4980F for active participants or a reduction in adjustable 
benefits under section 432(e)(8), notice that satisfies the requirements 
(including the applicable timing requirements) of section 4980F or 
section 432(e)(8), as applicable, must be provided.
    (5) Examples. The following examples illustrate the requirement in 
paragraph (f)(1)(i) of this section to give notice to all participants, 
beneficiaries of deceased participants, and alternate payees, except 
those who cannot be contacted by reasonable efforts.

    Example 1. (i) Facts. A plan sponsor distributes notice of a 
proposed suspension of benefits to plan participants, beneficiaries of 
deceased participants, and alternate payees by

[[Page 610]]

mailing the notice to their last known mailing addresses, using the same 
information that it used to send the most recent annual funding notice. 
Of 5,000 such notices, 300 were returned as undeliverable. The plan 
sponsor takes no additional steps to contact the individuals for whom 
the notice was returned as undeliverable.
    (ii) Conclusion. The plan sponsor did not make any effort beyond the 
initial mailing to locate the 300 individuals for whom the notice was 
returned as undeliverable. Therefore, the plan sponsor did not satisfy 
the requirement to provide notice to all participants, beneficiaries of 
deceased participants, and alternate payees under the plan (regardless 
of whether their benefits are proposed to be suspended), except those 
who cannot be contacted by reasonable efforts.
    Example 2.-- (i) Facts. The facts are the same as Example 1, but the 
plan sponsor contacts the bargaining parties for the plan and the plan 
administrators of any other employee benefit plans that the plan sponsor 
reasonably believes may have information useful for locating the missing 
individuals, and the plan sponsor requests contact information for the 
missing individuals. The plan sponsor then uses an Internet search tool, 
a credit reporting agency, and a commercial locator service to search 
for individuals for whom it was not able to obtain updated information 
from bargaining parties. Through these efforts, the plan sponsor locates 
the updated addresses of 250 of the 300 individuals whom it previously 
failed to contact. The plan sponsor mails notices to those individuals 
within one week of locating them.
    (ii) Conclusion. By using effective search methods to find the 
previously missing individuals and promptly mailing the notice of 
suspension to them, the plan sponsor has satisfied the requirement to 
provide notice to all participants, beneficiaries of deceased 
participants, and alternate payees under the plan (regardless of whether 
their benefits are proposed to be suspended), except those who cannot be 
contacted by reasonable efforts.

    (g) Approval or denial of an application for suspension of 
benefits--(1) Application--(i) In general. The plan sponsor of a plan in 
critical and declining status for a plan year that seeks to suspend 
benefits must submit an application for approval of the proposed 
suspension of benefits to the Secretary of the Treasury. The Secretary 
of the Treasury, in consultation with PBGC and the Secretary of Labor, 
will approve a complete application described in paragraph (g)(1)(ii) of 
this section upon finding that--
    (A) The plan is eligible for the proposed suspension described in 
the application;
    (B) The plan actuary and plan sponsor satisfy the requirements of 
section 432(e)(9)(C) in accordance with the rules of paragraph (c) of 
this section;
    (C) The design of the proposed suspension described in the 
application satisfies the criteria of section 432(e)(9)(D) in accordance 
with the rules of paragraphs (d) of this section; and
    (D) The plan sponsor satisfies the requirements of section 
432(e)(9)(E) and (F) in accordance with the rules of paragraphs (e) and 
(f) of this section.
    (ii) Complete application. After receiving a submission, the plan 
sponsor will be notified within two business days whether the submission 
constitutes a complete application. A complete application will be 
treated as submitted on the date that it was originally submitted to the 
Secretary of the Treasury. If a submission is incomplete, the 
notification will inform the plan sponsor of the information that is 
needed to complete the submission and give the plan sponsor a reasonable 
opportunity to submit a complete application. In such a case, the 
complete application will be treated as submitted on the date on which 
the additional information needed to complete the application is 
submitted to the Secretary of the Treasury.
    (iii) Submission of application. An application described in this 
paragraph (g)(1) must be submitted electronically in a searchable 
format.
    (iv) Requirements for application. Additional guidance that may be 
necessary or appropriate with respect to applications described in this 
paragraph (g)(1), including procedures for submitting applications and 
the information required to be included in a complete application, may 
be published in the form of revenue procedures, notices, or other 
guidance in the Internal Revenue Bulletin.
    (v) Requirement to provide adequate time to process application--(A) 
General rule. An application for suspension that is not submitted in 
combination with an application to PBGC for a plan partition under 
section 4233 of ERISA generally will not be accepted unless the

[[Page 611]]

proposed effective date of the suspension is at least nine months from 
the date on which the application is submitted.
    (B) Earlier effective date in appropriate circumstances. 
Nothwithstanding paragraph (g)(1)(v)(A) of this section, in appropriate 
circumstances the Secretary of the Treasury, in consultation with PBGC 
and the Secretary of Labor, may permit a proposed suspension to have an 
earlier effective date.
    (vi) Plan sponsors that also apply for partition. See part 4233 of 
the PBGC regulations for a coordinated application process that applies 
in the case of a plan sponsor that is submitting an application for 
suspension in combination with an application to PBGC for a plan 
partition under section 4233 of ERISA.
    (2) Solicitation of comments--(i) In general. Not later than 30 days 
after receipt of a complete application described in paragraph (g)(1) of 
this section--
    (A) The application for approval of the suspension of benefits will 
be published on the Web site of the Department of the Treasury; and
    (B) The Secretary of the Treasury will publish a notice in the 
Federal Register soliciting comments from contributing employers, 
employee organizations, and participants and beneficiaries of the plan 
for which an application was made, and other interested parties.
    (ii) Public comments. The notice described in paragraph (g)(2)(i)(B) 
of this section will generally request that comments be submitted no 
later than 45 days after publication of that notice in the Federal 
Register, but the notice may specify a different deadline for comments 
in appropriate circumstances. Comments received in response to this 
notice will be made publicly available.
    (3) Special rules in the case of revision to proposed suspension--
(i) Resubmission review available in certain circumstances. The 
Secretary of the Treasury (in consultation with PBGC and the Secretary 
of Labor) has the discretion, in appropriate circumstances, to permit 
the plan sponsor to submit a revision of a proposed suspension that had 
been withdrawn for resubmission review. With respect to an application 
that is accepted for resubmission review--
    (A) The rules of paragraph (g)(1)(v)(B) of this section will apply;
    (B) The limitations of paragraph (d) of this section with respect to 
the revised proposed suspension may be applied using the same actuarial 
data (including the same fair market value of the plan assets) as was 
used in the initial application;
    (C) The revision to the proposed suspension will be published, and 
comments solicited, in accordance with paragraph (g)(2) of this section; 
and
    (D) The plan sponsor must provide notice of the revised proposed 
suspension in accordance with the requirements of paragraph (g)(3)(ii) 
of this section.
    (ii) Requirement to provide updated notice to affected 
participants--(A) General rule. Except as provided in paragraph 
(g)(3)(ii)(B) of this section, a plan sponsor that revises a proposed 
suspension in accordance with this paragraph (g)(3) must provide notice 
of the suspension in accordance with the rules of paragraph (f) of this 
section.
    (B) Treatment of participants who are not affected by the revision. 
If the revision to the proposed suspension changes neither the amount of 
the suspension as initially proposed nor the effective date of the 
proposed suspension for an affected individual, then the Secretary of 
the Treasury (in consultation with PBGC and the Secretary of Labor) may 
permit the plan sponsor to provide a simplified version of the notice of 
the suspension to that individual. For this purpose, the effective date 
of a suspension is determined without taking into account the second 
sentence of paragraph (a)(4)(iii)(C) of this section.
    (4) Approval or denial--(i) Deemed approval. A complete application 
described in paragraph (g)(1)(ii) of this section will be deemed 
approved unless, within 225 days following the date that the complete 
application is submitted, the Secretary of the Treasury notifies the 
plan sponsor that its application does not satisfy one or more of the 
requirements described in this paragraph (g).
    (ii) Notice of denial. If the Secretary of the Treasury denies a 
plan sponsor's

[[Page 612]]

application, the notification of the denial will detail the specific 
reasons for the denial, including reference to the specific requirement 
not satisfied.
    (iii) Special rules for systemically important plans. If the 
Secretary of the Treasury approves a plan sponsor's application and the 
Secretary expects that the plan is or may be a systemically important 
plan (as defined in paragraph (h)(5)(iv) of this section), the Secretary 
will so notify the plan sponsor. In that case, and in the event of a 
vote to reject the suspension (as described in paragraph (h)(4) of this 
section), the plan sponsor may be required to supply individual 
participant data and any actuarial analyses that the Secretary may 
request, in order to assist the Secretary in determining whether to 
permit the implementation of the suspension that was approved by the 
Secretary but rejected by a majority of the eligible voters or the 
implementation of a modification of that suspension.
    (iv) Agreement to stay 225-day period. The Secretary of the Treasury 
and the plan sponsor may mutually agree in writing to stay the 225-day 
period described in paragraph (g)(3)(i) of this section.
    (5) Consideration of certain factors. In evaluating whether the plan 
sponsor has satisfied the requirement of paragraph (c)(3)(i)(A) of this 
section, the Secretary of the Treasury, in consultation with PBGC and 
the Secretary of Labor, will review the plan sponsor's consideration of 
each of the factors under paragraph (c)(3)(ii) of this section (and any 
other factor that the plan sponsor considered).
    (6) Standard for accepting plan sponsor determinations. In 
evaluating the plan sponsor's application, the Secretary of the Treasury 
will accept the plan sponsor's determinations in paragraph (c)(3) of 
this section unless the Secretary concludes, in consultation with PBGC 
and the Secretary of Labor, that the determinations were clearly 
erroneous.
    (7) Plan sponsor certifications with respect to plan amendments. The 
plan sponsor will not satisfy the requirements of paragraph (g)(1)(i)(B) 
and (D) of this section unless the plan sponsor certifies that if the 
plan sponsor receives final authorization to suspend as described in 
paragraph (h)(6) of this section with respect to the proposed benefit 
suspension (or, in the case of a systemically important plan, a proposed 
or modified benefit suspension), the plan sponsor chooses to implement 
the suspension, and the plan sponsor adopts the amendment described in 
paragraph (a)(1) of this section, then it will timely amend the plan to 
provide that--
    (i) If the plan sponsor fails to make the annual determinations 
under section 432(e)(9)(C)(ii), then the suspension of benefits will 
cease as of the first day of the first plan year following the plan year 
in which the plan sponsor fails to make the annual plan sponsor 
determinations in paragraph (c)(4) of this section; and
    (ii) Any future benefit improvement must satisfy the requirements of 
section 432(e)(9)(E).
    (8) Special Master. The Secretary of the Treasury may appoint a 
Special Master for purposes of this section. If a Special Master is 
appointed, the Special Master will coordinate the implementation of this 
section and the review of applications for the suspension of benefits 
and other appropriate documents, and will provide recommendations to the 
Secretary of the Treasury with respect to decisions required under this 
section.
    (h) Participant vote on proposed benefit reduction--(1) Requirement 
for vote--(i) In general. If an application for suspension is approved 
under paragraph (g) of this section, then the Secretary of the Treasury, 
in consultation with PBGC and the Secretary of Labor, will administer a 
vote as described in section 432(e)(9)(H) and this paragraph (h). A 
suspension of benefits may not take effect before the vote and may only 
take effect after a final authorization to suspend benefits under 
paragraph (h)(6) of this section.
    (ii) Communication by plan sponsor. The plan sponsor must take 
reasonable steps to inform eligible voters about the proposed 
suspension. This includes all eligible voters who may be contacted by 
reasonable efforts in accordance with paragraph (f)(1) of this section. 
Any eligible voter whom the plan sponsor has been able to locate through 
these means (or who has otherwise

[[Page 613]]

been located by the plan sponsor) must be--
    (A) Included on the voting roster described in paragraph 
(h)(3)(iii)(B) of this section; and
    (B) Sent a ballot described in paragraph (h)(3) of this section.
    (iii) Eligible voters--(A) General definition. For purpose of this 
paragraph (h), the term ``eligible voters'' means all plan participants 
(that is, active plan participants, deferred vested participants, and 
retirees) and beneficiaries of deceased participants.
    (B) Voting roster. The voting roster includes those eligible voters 
to whom the notices described in paragraph (f) of this section were 
sent. If there is a plan participant or beneficiary who did not receive 
a notice but who is subsequently located by the plan sponsor, that 
individual must be included on the roster. Similarly, if an individual 
becomes a plan participant after the date the notices were sent, then 
the individual must be included on the roster. If a plan sponsor learns 
after the date the notices described in paragraph (f) of this section 
were sent that an eligible voter has died, then that deceased individual 
must not be included on the roster (but if that participant has a 
beneficiary entitled to benefits under the plan, the beneficiary must be 
added to the roster).
    (2) Participant vote--(i) In general. The participant vote described 
in paragraph (h)(1)(i) of this section requires completion of the 
following steps--
    (A) Distribution of the ballot package described in paragraph 
(h)(2)(iii) of this section to the eligible voters;
    (B) Voting by eligible voters and collection and tabulation of the 
votes, as described in paragraph (h)(2)(iv) of this section; and
    (C) Determination of whether a majority of the eligible voters has 
voted to reject the suspension, as described in paragraph (h)(2)(v) of 
this section.
    (ii) Designation of service provider for limited functions. The 
Secretary of the Treasury is permitted to designate one or more service 
providers to perform, under the supervision of the Secretary, any of the 
functions of the Secretary described in paragraphs (h)(2)(i)(A) and (B) 
of this section. If the Secretary designates a service provider to 
perform these functions then the service provider will provide the 
Secretary with a written report of the results of the vote, including 
(as applicable)--
    (A) The number of ballot packages distributed to eligible voters;
    (B) The number of eligible voters to whom ballot packages have not 
been provided (because the individuals could not be located);
    (C) The number of eligible voters who voted (specifying the number 
of affirmative votes and the number of negative votes cast); and
    (D) Any other information that the Secretary requires.
    (iii) Distribution of the ballot package to the eligible voters--(A) 
Ballot package. The ballot package distributed to each eligible voter 
consists of--
    (1) A ballot, approved under paragraph (h)(3)(iii) of this section, 
which contains the items described in section 432(e)(9)(H)(iii) and 
paragraph (h)(3)(i) of this section; and
    (2) A voter identification code assigned to the eligible voter for 
use in voting.
    (B) Plan sponsor responsibilities--(1) In general. This paragraph 
(h)(2)(iii)(B) sets forth the responsibilities of the plan sponsor with 
respect to the distribution of the ballot package to the eligible 
voters.
    (2) Furnish information regarding eligible voters. No later than 7 
days following the date the Secretary of the Treasury has approved an 
application for a suspension of benefits under paragraph (g) of this 
section, the plan sponsor must furnish the following--
    (i) The voting roster described in paragraph (h)(1)(iii)(B) of this 
section;
    (ii) Plan information (such as participant identification codes used 
by the plan) to enable the Secretary of the Treasury to verify the 
identity of each eligible voter;
    (iii) For each eligible voter on the voting roster, the last known 
mailing address (or, if the plan sponsor has been unable to locate that 
individual using the standards that apply for purposes of paragraph 
(f)(1)(i) of this section, an indication that the individual could not 
be located through reasonable efforts);

[[Page 614]]

    (iv) Current electronic mailing addresses for those eligible voters 
identified in paragraph (h)(2)(iii)(B)(4) of this section; and
    (v) The individualized estimates described in paragraph (f)(2)(i)(A) 
of this section (or, if an individualized estimate is no longer accurate 
for an eligible voter, a corrected version of that estimate).
    (3) Communication with eligible voters. In accordance with section 
432(e)(9)(H)(iv) and paragraph (h)(1)(ii) of this section, the plan 
sponsor is responsible for communicating with eligible voters, which 
includes--
    (i) Notifying the eligible voters described in paragraph 
(h)(2)(iii)(B)(4) of this section that a ballot package will be mailed 
to them by first-class U.S. mail; and
    (ii) Making reasonable efforts (using the standards that apply for 
purposes of paragraph (f)(1)(i) of this section) as necessary to locate 
eligible voters for whom the plan sponsor has received notification that 
the mailed ballot packages are returned as undeliverable (so that ballot 
packages can be sent to those eligible voters).
    (4) Eligible voters to receive electronic notification. Those 
eligible voters whom the plan sponsor must notify electronically are--
    (i) Eligible voters who previously received the notice described in 
paragraph (f) of this section in electronic form (as permitted under 
paragraph (f)(3)(ii) of this section), and
    (ii) Any other eligible voters who regularly receive plan-related 
communications from the plan sponsor in electronic form.
    (5) Method of notifying certain eligible voters. The notification 
described in paragraph (h)(2)(iii)(B)(3)(i) of this section for an 
eligible voter must be made using the electronic form normally used to 
send plan-related communications to that voter (or the form used to 
provide the notice in paragraph (f) of this section, if different). The 
plan sponsor must send this notification promptly after being informed 
of the ballot distribution date (within the meaning of paragraph 
(h)(2)(iii)(D) of this section) and the notification must include the 
ballot distribution date.
    (6) Pay costs associated with distribution. The plan sponsor is 
responsible for paying all costs associated with printing, assembling, 
and distributing the ballot package, including postage.
    (C) Required method of distributing ballot package. Ballot packages 
must be distributed to eligible voters by first-class U.S. mail. A 
supplemental copy of the mailed ballot package may also be sent by an 
electronic communication to an eligible voter who has consented to 
receive electronic communications.
    (D) Timing. Ballot packages will be distributed to eligible voters 
no later than 30 days after the Secretary of the Treasury has approved 
an application for a suspension of benefits under paragraph (g) of this 
section. The date on which the ballot packages are mailed to the 
eligible voters is referred to as the ballot distribution date.
    (iv) Collection and tabulation of votes cast by eligible voters--(A) 
Voting period. The voting period is the period during which a vote 
received from an eligible voter will be counted. The voting period 
begins on the ballot distribution date. The voting period generally 
remains open until the 30th day following the date the Secretary of the 
Treasury has approved an application for a suspension of benefits under 
paragraph (g) of this section. However, the voting period will not close 
earlier than 21 days after the ballot distribution date. In addition, 
the Secretary (in consultation with PBGC and the Secretary of Labor) may 
specify a later date to end the voting period in appropriate 
circumstances.
    (B) Automated voting system must be provided. An automated voting 
system that meets the requirements of paragraph (h)(2)(iv)(C) of this 
section must be made available to voters for casting their votes. In 
appropriate circumstances, the Secretary may, in consultation with PBGC 
and the Secretary of Labor, allow voters to cast votes by mail in lieu 
of using the automated voting system.
    (C) Automated voting system. An automated voting system meets the 
requirements of this paragraph (h)(2)(iv)(C) only if the system--
    (1) Collects votes cast by eligible voters both electronically 
(through a Web site) and telephonically (through a

[[Page 615]]

toll-free number allowing voters to cast their votes using both a touch-
tone voting system and an interactive voice response system); and
    (2) Accepts only votes cast during the voting period by an eligible 
voter who provides the eligible voter's identification code described in 
paragraph (h)(2)(iii)(A)(2) of this section.
    (D) Policies and procedures. The Secretary of the Treasury (in 
consultation with PBGC and the Secretary of Labor) may establish such 
policies and procedures as may be necessary to facilitate the 
administration of the vote under this paragraph (h)(2). These policies 
and procedures may include, but are not limited to, establishing a 
process for an eligible voter to challenge the vote.
    (v) Determination of whether a majority of the eligible voters has 
voted to reject the suspension. Within 7 calendar days after the end of 
the voting period, the Secretary of the Treasury (in consultation with 
PBGC and the Secretary of Labor) will--
    (A) Certify that a majority of all eligible voters has voted to 
reject the suspension that was approved under paragraph (g) of this 
section, or
    (B) Issue a final authorization to suspend as described in paragraph 
(h)(6) of this section.
    (3) Ballots--(i) In general. The plan sponsor must provide a ballot 
for the vote that includes the following--
    (A) A description of the proposed suspension and its effect, 
including the effect of the suspension on each category or group of 
individuals affected by the suspension and the extent to which they are 
affected;
    (B) A description of the factors considered by the plan sponsor in 
designing the benefit suspension, including but not limited to the 
factors in paragraph (d)(6)(ii) of this section;
    (C) A description of whether the suspension will remain in effect 
indefinitely or will expire by its own terms (and, if it will expire by 
its own terms, when that will occur);
    (D) A statement from the plan sponsor in support of the proposed 
suspension;
    (E) A statement in opposition to the proposed suspension compiled 
from comments received pursuant to the solicitation of comments pursuant 
to paragraph (g)(2) of this section;
    (F) A statement that the proposed suspension has been approved by 
the Secretary of the Treasury, in consultation with PBGC and the 
Secretary of Labor;
    (G) A statement that the plan sponsor has determined that the plan 
will become insolvent unless the proposed suspension takes effect 
(including the year in which insolvency is projected to occur without a 
suspension of benefits), and an accompanying statement that this 
determination is subject to uncertainty;
    (H) A statement that insolvency of the plan could result in benefits 
lower than benefits paid under the proposed suspension and a description 
of the projected benefit payments in the event of plan insolvency;
    (I) A statement that insolvency of PBGC would result in benefits 
lower than benefits otherwise paid in the case of plan insolvency;
    (J) A statement that the plan's actuary has certified that the plan 
is projected to avoid insolvency, taking into account the proposed 
suspension of benefits (and, if applicable, a proposed partition of the 
plan), and an accompanying statement that the actuary's projection is 
subject to uncertainty;
    (K) A statement that the suspension will go into effect unless a 
majority of all eligible voters vote to reject the suspension and that, 
therefore, a failure to vote has the same effect on the outcome of the 
vote as a vote in favor of the suspension;
    (L) A copy of the individualized estimate described in paragraph 
(f)(2)(i)(A) of this section (or, if that individualized estimate is no 
longer accurate, a corrected version of that estimate); and
    (M) A description of the voting procedures, including the deadline 
for voting.
    (ii) Additional rules--(A) Readability requirement. A ballot 
provided under section 432(e)(9)(H)(iii), in accordance with the rules 
of paragraph (h)(3)(i) of this section, must be written in a manner that 
is readily understandable by the average plan participant.
    (B) No false or misleading information. A ballot provided under 
section

[[Page 616]]

432(e)(9)(H)(iii), in accordance with the rules of paragraph (h)(3)(i) 
of this section, may not include false or misleading information (or 
omit information in a manner that causes the information provided to be 
misleading).
    (iii) Ballot must be approved. Any ballot provided under section 
432(e)(9)(H)(iii), in accordance with the rules of paragraph (h)(3)(i) 
of this section, must be approved by the Secretary of the Treasury, in 
consultation with PBGC and the Secretary of Labor, before it is 
provided.
    (iv) Statement in opposition to the proposed suspension. The 
statement in opposition to the proposed suspension that is prepared from 
comments received on the application, as required under section 
432(e)(9)(H)(iii)(II), will be compiled by the Secretary of Labor and 
will be written in accordance with the rules of paragraph (h)(3)(ii) of 
this section. If no comments in opposition are received, the statement 
in opposition to the proposed suspension will include a statement 
indicating that there were no such comments.
    (v) Model ballot. Model language for use in the ballot may be 
published in the Internal Revenue Bulletin.
    (4) Implementing suspension following vote--(i) In general. Unless a 
majority of all eligible voters vote to reject the suspension that was 
approved under paragraph (g) of this section, the suspension will be 
permitted to take effect. If a majority of all eligible voters vote to 
reject the suspension that was approved under paragraph (g) of this 
section, a suspension of benefits will not be permitted to take effect 
except as provided under paragraph (h)(5)(iii) of this section relating 
to the implementation of a suspension for a systemically important plan 
(as defined in paragraph (h)(5)(iv) of this section).
    (ii) Effect of not sending ballot. Any eligible voters to whom 
ballots have not been provided (because the individuals could not be 
located) will be treated as voting to reject the suspension at the same 
rate (in other words, in the same percentage) as those to whom ballots 
have been provided.
    (5) Systemically important plans--(i) In general. If a majority of 
all eligible voters vote to reject the suspension that was approved 
under paragraph (g) of this section, the Secretary of the Treasury will 
consult with PBGC and the Secretary of Labor to determine if the plan is 
a systemically important plan. This determination will be made no later 
than 14 days after the results of the vote are certified.
    (ii) Recommendations from Participant and Plan Sponsor Advocate. If 
the plan is determined to be a systemically important plan, then, no 
later than 44 days after the results of the vote are certified, the 
Participant and Plan Sponsor Advocate selected under section 4004 of 
ERISA may submit recommendations to the Secretary of the Treasury with 
respect to the suspension that was approved under paragraph (g) of this 
section or any modifications to the suspension.
    (iii) Implementation of original or modified suspension by 
systemically important plans. If a plan is a systemically important plan 
for which a majority of all eligible voters vote to reject the 
suspension that was approved under paragraph (g) of this section, then 
the Secretary of the Treasury must determine whether to permit the 
implementation of the suspension that was approved under paragraph (g) 
of this section or whether to permit the implementation of a 
modification of that suspension. Under any such modification, the plan 
must be projected to avoid insolvency in accordance with section 
432(e)(9)(D)(iv). No later than 60 days after the results of a vote to 
reject a suspension are certified, the Secretary of the Treasury will 
notify the plan sponsor that the suspension or modified suspension is 
permitted to be implemented.
    (iv) Systemically important plan defined--(A) In general. For 
purposes of this paragraph (h)(5), a systemically important plan is a 
plan with respect to which PBGC projects that the present value of its 
financial assistance payments will exceed $1.0 billion (adjusted in 
accordance with paragraph (h)(5)(iv)(B) of this section to the calendar 
year in which the application is submitted) if the suspension is not 
implemented.
    (B) Indexing. For calendar years beginning after 2015, the dollar 
amount specified in paragraph (h)(5)(iv)(A) of this section will be 
replaced with an

[[Page 617]]

amount equal to the product of the dollar amount and a fraction, the 
numerator of which is the contribution and benefit base (determined 
under section 230 of the Social Security Act) for the preceding calendar 
year and the denominator of which is the contribution and benefit base 
for calendar year 2014. If the amount otherwise determined under this 
paragraph (h)(5)(iv)(B) is not a multiple of $1.0 million, the amount 
will be rounded to the next lowest multiple of $1.0 million.
    (6) Final authorization to suspend--(i) In general. In any case in 
which a suspension is permitted to take effect following a vote pursuant 
to section 432(e)(9)(H)(ii) and paragraph (h)(4) of this section, the 
Secretary of the Treasury, in consultation with PBGC and the Secretary 
of Labor, will issue a final authorization to suspend with respect to 
the suspension not later than seven days after the vote.
    (ii) Systemically important plans. In any case in which a suspension 
is permitted to take effect following a determination under paragraph 
(h)(5) of this section that the plan is a systemically important plan, 
the Secretary of the Treasury, in consultation with PBGC and the 
Secretary of Labor, will issue a final authorization to suspend, at a 
time sufficient to allow the implementation of the suspension prior to 
the end of the 90-day period beginning on the date the results of the 
vote are certified.
    (iii) Plan partitions. Notwithstanding any other provision of this 
section, in any case in which a suspension of benefits with respect to a 
plan is made in combination with a partition of the plan, the suspension 
of benefits is not permitted to take effect prior to the effective date 
of the partition.
    (i) [Reserved].
    (j) Effective/applicability date. This section applies with respect 
to suspensions for which the approval or denial is issued on or after 
April 26, 2016 and, in the case of a systemically important plan, any 
modification described in paragraph (h)(5)(iii) of this section that is 
implemented on or after April 26, 2016.

[T.D. 9765, 81 FR 25557, Apr. 28, 2016, as amended by T.D. 9767, 81 FR 
27015, May 5, 2016]



Sec.  1.433(h)(3)-1  Mortality tables used to determine current liability.

    (a) Mortality tables used to determine current liability. In 
accordance with section 433(h)(3)(B), the mortality assumptions that 
apply to a defined benefit plan for the plan year pursuant to section 
430(h)(3)(A) and Sec.  1.430(h)(3)-1(a) are used to determine a CSEC 
plan's current liability for purposes of applying the rules of section 
433(c)(7)(C). Either the static mortality tables used pursuant to Sec.  
1.430(h)(3)-1(a)(3) or generational mortality tables used pursuant to 
Sec.  1.430(h)(3)-1(a)(2) may be used for a CSEC plan for this purpose, 
but substitute mortality tables under Sec.  1.430(h)(3)-2 may not be 
used for this purpose.
    (b) Effective/applicability date. This section applies for plan 
years beginning on or after January 1, 2018.

[T.D.9826, 82 FR 46410, Oct. 5, 2017]



Sec. Sec.  1.434-1.435  [Reserved]



Sec.  1.436-0  Table of contents.

    This section contains a listing of the major headings of Sec.  
1.436-1.

   Sec.  1.436-1 Limits on benefits and benefit accruals under single 
                     employer defined benefit plans.

    (a) General rules.
    (1) Qualification requirement.
    (2) Organization of the regulation.
    (3) Special rules for certain plans.
    (4) Treatment of plan as of close of prohibited or cessation period.
    (5) Deemed election to reduce funding balances.
    (b) Limitation on shutdown benefits and other unpredictable 
contingent event benefits.
    (1) In general.
    (2) Exemption if section 436 contribution is made.
    (3) Rules of application.
    (4) Prior unpredictable contingent event.
    (c) Limitations on plan amendments increasing liability for 
benefits.
    (1) In general.
    (2) Exemption if section 436 contribution is made.
    (3) Rules of application regarding pre-existing plan provisions.
    (4) Exceptions.
    (5) Rule for determining when an amendment takes effect.
    (6) Treatment of mergers, consolidations, and transfers of plan 
assets into a plan. [Reserved]

[[Page 618]]

    (d) Limitations on prohibited payments.
    (1) AFTAP less than 60 percent.
    (2) Bankruptcy.
    (3) Limited payment if AFTAP at least 60 percent but less than 80 
percent.
    (4) Exception for cessation of benefit accruals.
    (5) Right to delay commencement.
    (6) Plan alternative for special optional forms.
    (7) Exception for distributions permitted without consent of the 
participant under section 411(a)(11).
    (e) Limitation on benefit accruals for plans with severe funding 
shortfalls.
    (1) In general.
    (2) Exemption if section 436 contribution is made.
    (3) Special rule under section 203 of the Worker, Retiree, and 
Employer Recovery Act of 2008. [Reserved]
    (f) Methods to avoid or terminate benefit limitations.
    (1) In general.
    (2) Current year contributions to avoid or terminate benefit 
limitations.
    (3) Security to increase adjusted funding target attainment 
percentage.
    (4) Examples.
    (g) Rules of operation for periods prior to and after certification.
    (1) In general.
    (2) Periods prior to certification during which a presumption 
applies.
    (3) Periods prior to certification during which no presumption 
applies.
    (4) Modification of the presumed AFTAP.
    (5) Periods after certification of AFTAP.
    (6) Examples.
    (h) Presumed underfunding for purposes of benefit limitations.
    (1) Presumption of continued underfunding.
    (2) Presumption of underfunding beginning on first day of 4th month 
for certain underfunded plans.
    (3) Presumption of underfunding beginning on first day of 10th 
month.
    (4) Certification of AFTAP.
    (5) Examples of rules of paragraphs (h)(1), (h)(2), and (h)(3) of 
this section.
    (6) Examples of application of paragraph (h)(4) of this section.
    (i) [Reserved]
    (j) Definitions.
    (1) Adjusted funding target attainment percentage.
    (2) Annuity starting date.
    (3) First effective plan year.
    (4) Funding target.
    (5) Prior year adjusted funding target attainment percentage.
    (6) Prohibited payment.
    (7) Section 436 contributions.
    (8) Section 436 measurement date.
    (9) Unpredictable contingent event.
    (10) Examples.
    (k) Effective/applicability dates.
    (1) Statutory effective date.
    (2) Collectively bargained plan exception.
    (3) Effective date/applicability date of regulations.

[T.D. 9467, 74 FR 53060, Oct. 15, 2009]



Sec.  1.436-1  Limits on benefits and benefit accruals under single employer 
defined benefit plans.

    (a) General rules--(1) Qualification requirement. Section 401(a)(29) 
provides that a defined benefit pension plan that is subject to section 
412 and that is not a multiemployer plan (within the meaning of section 
414(f)) is a qualified plan only if it satisfies the requirements of 
section 436. This section provides rules relating to funding-based 
limitations on certain benefits under section 436, and the requirements 
of section 436 are satisfied only if the plan meets the requirements of 
this section beginning with the plan's first effective plan year. This 
section applies to single employer defined benefit plans (including 
multiple employer plans), but does not apply to multiemployer plans.
    (2) Organization of the regulation. Paragraph (b) of this section 
describes limitations on shutdown benefits and other unpredictable 
contingent event benefits. Paragraph (c) of this section describes 
limitations on plan amendments increasing liabilities. Paragraph (d) of 
this section describes limitations on prohibited payments. Paragraph (e) 
of this section describes limitations on benefit accruals. Paragraph (f) 
of this section provides rules relating to methods to avoid or terminate 
benefit limitations. Paragraph (g) of this section provides rules for 
the operation of the plan in relation to benefit limitations under 
section 436. Paragraph (h) of this section describes related 
presumptions regarding underfunding that apply for purposes of the 
benefit limitations under section 436 and requirements relating to 
certifications. Paragraph (j) of this section contains definitions. 
Paragraph (k) of this section contains effective/applicability date 
provisions.
    (3) Special rules for certain plans--(i) New plans. The limitations 
described in paragraphs (b), (c), and (e) of this section do not apply 
to a plan for the first 5 plan years of the plan. Except as otherwise 
provided by the Commissioner in guidance of general applicability,

[[Page 619]]

plan years of the plan include the following (in addition to plan years 
during which the plan was maintained by the employer or plan sponsor):
    (A) Plan years when the plan was maintained by a predecessor 
employer within the meaning of Sec.  1.415(f)-1(c)(1).
    (B) Plan years of another defined benefit plan maintained by a 
predecessor employer within the meaning of Sec.  1.415(f)-1(c)(2) within 
the preceding five years if any participants in the plan participated in 
that other defined benefit plan (even if the plan maintained by the 
employer is not the plan that was maintained by the predecessor 
employer).
    (C) Plan years of another defined benefit plan maintained by the 
employer within the preceding five years if any participants in the plan 
participated in that other defined benefit plan.
    (ii) Application of section 436 after termination of a plan--(A) In 
general. Except as otherwise provided in paragraph (a)(3)(ii)(B) of this 
section, any section 436 limitations in effect immediately before the 
termination of a plan do not cease to apply thereafter.
    (B) Exception for payments pursuant to plan termination. The 
limitations under section 436(d) and paragraph (d) of this section do 
not apply to prohibited payments (within the meaning of paragraph (j)(6) 
of this section) that are made to carry out the termination of a plan in 
accordance with applicable law. For example, a plan sponsor's purchase 
of an irrevocable commitment from an insurer to pay benefit liabilities 
in connection with the standard termination of a plan in accordance with 
section 4041(b)(3) of the Employee Retirement Income Security Act of 
1974, as amended (ERISA), and in accordance with 29 CFR 4041.28, does 
not violate section 436(d) or this section.
    (iii) Multiple employer plans. In the case of a multiple employer 
plan to which section 413(c)(4)(A) applies, this section applies 
separately with respect to each employer under the plan, as if each 
employer maintained a separate plan. Thus, the benefit limitations under 
section 436 and this section could apply differently to participants who 
are employees of different employers under such a multiple employer 
plan. In the case of a multiple employer plan to which section 
413(c)(4)(A) does not apply (that is, a plan described in section 
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to 
apply), this section applies as if all participants in the plan were 
employed by a single employer.
    (4) Treatment of plan as of close of prohibited or cessation 
period--(i) Application to prohibited payments and accruals--(A) 
Resumption of prohibited payments. If a limitation on prohibited 
payments under paragraph (d) of this section applied to a plan as of a 
section 436 measurement date (as defined in paragraph (j)(8) of this 
section), but that limit no longer applies to the plan as of a later 
section 436 measurement date, then the limitation on prohibited payments 
under the plan does not apply to benefits with annuity starting dates 
(as defined in paragraph (j)(2) of this section) that are on or after 
that later section 436 measurement date. Any amendment to eliminate an 
optional form of benefit that contains a prohibited payment with respect 
to an annuity starting date during a period in which the limitations of 
section 436(d) and paragraph (d) of this section do not apply to the 
plan is subject to the rules of section 411(d)(6).
    (B) Resumption of benefit accruals. If a limitation on benefit 
accruals under paragraph (e) of this section applied to a plan as of a 
section 436 measurement date, but that limit no longer applies to the 
plan as of a later section 436 measurement date, then that limitation 
does not apply to benefit accruals that are based on service on or after 
that later section 436 measurement date, except to the extent that the 
plan provides that benefit accruals will not resume when the limitation 
ceases to apply. The plan must comply with the rules relating to partial 
years of participation and the prohibition on double proration under 
Department of Labor regulation 29 CFR 2530.204-2(c) and (d).
    (ii) Restoration of options and missed benefit accruals--(A) Option 
to amend plan. A plan is permitted to be amended to provide participants 
who had an annuity starting date within a period during which a 
limitation under paragraph (d) of this section applied to the plan with 
the opportunity to make a

[[Page 620]]

new election under which the form of benefit previously elected is 
modified, subject to applicable qualification requirements. A 
participant who makes such a new election is treated as having a new 
annuity starting date under sections 415 and 417. Similarly, a plan is 
permitted to be amended to provide that any benefit accruals which were 
limited under the rules of paragraph (e) of this section are credited 
under the plan when the limitation no longer applies, subject to 
applicable qualification requirements. Any such plan amendment with 
respect to a new annuity starting date or crediting of benefit accruals 
is subject to the requirements of section 436(c) and paragraph (c) of 
this section.
    (B) Automatic plan provisions. A plan is permitted to provide that 
participants who had an annuity starting date within a period during 
which a limitation under paragraph (d) of this section applied to the 
plan will be provided with the opportunity to have a new annuity 
starting date (which would constitute a new annuity starting date under 
sections 415 and 417) under which the form of benefit previously elected 
may be modified, subject to applicable qualification requirements, once 
the limitations of paragraph (d) of this section cease to apply. In 
addition, subject to the rules of paragraph (c)(3) of this section, a 
plan is permitted to provide for the automatic restoration of benefit 
accruals that had been limited under section 436(e) as of the section 
436 measurement date that the limitation ceases to apply.
    (iii) Shutdown and other unpredictable contingent event benefits. If 
unpredictable contingent event benefits with respect to an unpredictable 
contingent event that occurs during the plan year are not permitted to 
be paid after the occurrence of the event because of the limitations of 
section 436(b) and paragraph (b) of this section, but are permitted to 
be paid later in the plan year as a result of additional contributions 
under paragraph (f)(2) of this section or pursuant to the enrolled 
actuary's certification of the adjusted funding target attainment 
percentage for the plan year that meets the requirements of paragraph 
(g)(5)(ii)(B) of this section, then those unpredictable contingent event 
benefits must automatically become payable, retroactive to the period 
those benefits would have been payable under the terms of the plan 
(other than plan terms implementing the requirements of section 436(b)). 
If the benefits do not become payable during the plan year in accordance 
with the preceding sentence, then the plan is treated as if it does not 
provide for those benefits. However, all or any portion of those 
benefits can be restored pursuant to a plan amendment that meets the 
requirements of section 436(c) and paragraph (c) of this section and 
other applicable qualification requirements.
    (iv) Treatment of plan amendments that do not take effect. If a plan 
amendment does not take effect as of the effective date of the amendment 
because of the limitations of section 436(c) and paragraph (c) of this 
section, but is permitted to take effect later in the plan year as a 
result of additional contributions under paragraph (f)(2) of this 
section or pursuant to the enrolled actuary's certification of the 
adjusted funding target attainment percentage for the plan year that 
meets the requirements of paragraph (g)(5)(ii)(C) of this section, then 
the plan amendment must automatically take effect as of the first day of 
the plan year (or, if later, the original effective date of the 
amendment). If the plan amendment cannot take effect during the plan 
year, then it must be treated as if it were never adopted, unless the 
plan amendment provides otherwise.
    (v) Example. The following example illustrates the rules of this 
paragraph (a)(4):

    Example. (i) Plan T is a non-collectively bargained defined benefit 
plan with a plan year that is the calendar year and a valuation date of 
January 1. As of January 1, 2011, Plan T does not have a funding 
standard carryover balance or a prefunding balance. Plan T's sponsor is 
not in bankruptcy. Beginning January 1, 2011, Plan T is subject to the 
restriction on prohibited payments under paragraph (d)(3) of this 
section based on a presumed adjusted funding target attainment 
percentage (AFTAP) of 75%.
    (ii) U is a participant in Plan T. Participant U retires on February 
1, 2011, and elects to receive benefits in the form of a single sum. 
Plan T may pay only a portion (generally, 50%) of the prohibited 
payment. Accordingly, U elects in accordance with paragraph (d)(3)(ii) 
of this section to receive 50%

[[Page 621]]

of U's benefit in a single sum (up to the 2011 PBGC maximum benefit 
guarantee amount described in paragraph (d)(3)(iii)(C) of this section) 
and the remainder as an immediately commencing straight life annuity.
    (iii) On March 1, 2011, the enrolled actuary for the Plan certifies 
that the AFTAP for 2011 is 80%. Accordingly, beginning March 1, 2011, 
Plan T is no longer subject to the restriction under paragraph (d)(3) of 
this section.
    (iv) Effective March 1, 2011, Plan T is amended to provide that a 
participant whose benefits were restricted under paragraph (d)(3) of 
this section with respect to an annuity starting date between January 1, 
2011, and February 28, 2011, may elect, within a specified period on or 
after March 1, 2011, a new annuity starting date and receive the 
remainder of his or her pension benefits in an accelerated form of 
payment. Plan T's enrolled actuary determines that the AFTAP, taking 
into account the amendment, would still be 80%. The amendment is 
permitted to take effect because Plan T would have an AFTAP of 80% 
taking into account the amendment and is therefore neither subject to 
the restriction on plan amendments in paragraph (c) of this section nor 
the restrictions on prohibited payments under paragraphs (d)(1) and 
(d)(3) of this section. Accordingly, Participant U may elect, within the 
specified period and subject to otherwise applicable qualification 
rules, including spousal consent, to receive the remainder of U's 
benefits in the form of a single sum on or after March 1, 2011.

    (5) Deemed election to reduce funding balances--(i) Limitations on 
accelerated benefit payments. If a benefit limitation under paragraph 
(d)(1) or (d)(3) of this section would (but for this paragraph (a)(5)) 
apply to a plan, the employer is treated as having made an election 
under section 430(f) to reduce the prefunding balance or funding 
standard carryover balance by such amount as is necessary for the 
adjusted funding target attainment percentage to be at the applicable 
threshold (60 or 80 percent, as the case may be) in order for the 
benefit limitation not to apply to the plan. The determination of 
whether a benefit limitation under paragraph (d) of this section would 
apply to a plan is based on whether the plan provides for an optional 
form of benefit that would be limited under section 436(d) and is not 
based on whether any participant elects payment of benefits in such a 
form.
    (ii) Other limitations for collectively bargained plans--(A) General 
rule. In the case of a collectively bargained plan to which a benefit 
limitation under paragraph (b), (c), or (e) of this section would (but 
for this paragraph (a)(5)) apply, the employer is treated as having made 
an election under section 430(f) to reduce the prefunding balance or 
funding standard carryover balance by such amount as is necessary for 
the adjusted funding target attainment percentage to be at the 
applicable threshold (60 or 80 percent, as the case may be) in order for 
the benefit limitation not to apply to the plan, taking into account the 
adjustments described in paragraph (g)(2)(iii)(A), (g)(3)(ii)(A), or 
(g)(5)(i)(B) of this section, whichever applies.
    (B) Collectively bargained plans. A plan is considered a 
collectively bargained plan for purposes of this paragraph (a)(5)(ii) 
if--
    (1) At least 50 percent of the employees benefiting under the plan 
(within the meaning of Sec.  1.410(b)-3(a)) are members of collective 
bargaining units for which the benefit levels under the plan are 
specified under a collective bargaining agreement; or
    (2) At least 25 percent of the participants in the plan are members 
of collective bargaining units for which the benefit levels under the 
plan are specified under a collective bargaining agreement.
    (iii) Exception for insufficient funding balances--(A) In general. 
Paragraphs (a)(5)(i) and (a)(5)(ii) of this section apply with respect 
to a benefit limitation for any plan year only if the application of 
those paragraphs would result in the corresponding benefit limitation 
not applying for such plan year. Thus, if the plan's prefunding and 
funding standard carryover balances were reduced to zero and the 
resulting increase in plan assets taken into account would still not 
increase the plan's adjusted funding target attainment percentage enough 
to reach the threshold percentage applicable to the benefit limitation, 
the deemed election to reduce those balances pursuant to paragraph 
(a)(5)(i) or (a)(5)(ii) of this section does not apply.
    (B) Presumed adjusted funding target attainment percentage less than 
60 percent. During any period when a plan is presumed to have an 
adjusted funding

[[Page 622]]

target attainment percentage of less than 60 percent as a result of 
paragraph (h)(3) of this section, the plan is treated as if the 
prefunding balance and the funding standard carryover balance are 
insufficient to increase the adjusted funding target attainment 
percentage to the threshold percentage of 60 percent. Accordingly, the 
deemed election to reduce those balances pursuant to paragraphs 
(a)(5)(i) and (a)(5)(ii) of this section does not apply to the plan.
    (iv) Other rules--(A) Date of deemed election. If an election is 
deemed to be made pursuant to this paragraph (a)(5), then the plan 
sponsor is treated as having made that election on the date as of which 
the applicable benefit limitation would otherwise apply.
    (B) Coordination with section 436 contributions. The determination 
of whether one of the benefit limitations described in paragraph 
(a)(5)(ii)(A) of this section would otherwise apply is made without 
regard to any contribution described in paragraph (f)(2) of this 
section. Thus, the requirement to reduce the prefunding balance or 
funding standard carryover balance under paragraph (a)(5)(ii) of this 
section cannot be avoided through the use of a section 436 contribution.
    (C) Coordination with elections to offset minimum required 
contribution. See Sec.  1.430(f)-1(d)(1)(ii) for rules on the 
coordination of elections to offset the minimum required contribution 
and the deemed election to reduce the prefunding and funding standard 
carryover balances under this paragraph (a)(5).
    (v) Example. The following example illustrates the rules of this 
paragraph (a)(5):

    Example. (i) Plan W is a collectively bargained, single employer 
defined benefit plan sponsored by Sponsor X, with a plan year that is 
the calendar year and a valuation date of January 1.
    (ii) The enrolled actuary for Plan W issues a certification on March 
1, 2010, that the 2010 AFTAP is 81%. Sponsor X adopts an amendment on 
March 25, 2010, to increase benefits under a formula based on 
participant compensation, with an effective date of May 1, 2010. 
(Because the formula is based on compensation, the exception in 
paragraph (c)(4)(i) of this section does not apply.) The plan's enrolled 
actuary determines that the plan's AFTAP for 2010 would be 75% if the 
benefits attributable to the plan amendment were taken into account in 
determining the funding target.
    (iii) Because the AFTAP would be below the 80% threshold if the 
benefits attributable to the plan amendment were taken into account in 
determining the funding target, Sponsor X is deemed pursuant to 
paragraph (a)(5)(ii) of this section to have made an election to reduce 
Plan W's prefunding and funding standard carryover balances by the 
amount necessary for the AFTAP to reach the 80% threshold (reflecting 
the increase in funding target attributable to the plan amendment), 
provided that the amount of those balances is sufficient for this 
purpose.
    (iv) If the deemed election described in paragraph (iii) of this 
example occurs, the plan amendment takes effect on its effective date 
(May 1, 2010). See paragraph (f) of this section for other methods to 
avoid or terminate benefit limitations (where, for example, the amount 
necessary for a benefit limitation not to apply for a plan year exceeds 
the sum of the prefunding balance and the funding standard carryover 
balance).

    (6) Notice requirements. See section 101(j) of ERISA for rules 
requiring the plan administrator of a single employer plan to provide a 
written notice to participants and beneficiaries within 30 days after 
certain specified dates, which depend on whether the plan has become 
subject to a restriction described in the ERISA provisions that are 
parallel to Internal Revenue Code sections 436(b), 436(d), and 436(e) 
(ERISA sections 206(g)(1), 206(g)(3), and 206(g)(4), respectively).
    (b) Limitation on shutdown benefits and other unpredictable 
contingent event benefits--(1) In general. Except as otherwise provided 
in this paragraph (b), a plan satisfies section 436(b) and this 
paragraph (b) only if it provides that unpredictable contingent event 
benefits with respect to any unpredictable contingent events occurring 
during a plan year will not be paid if the adjusted funding target 
attainment percentage for the plan year is--
    (i) Less than 60 percent; or
    (ii) 60 percent or more, but would be less than 60 percent if the 
adjusted funding target attainment percentage were redetermined applying 
an actuarial assumption that the likelihood of occurrence of the 
unpredictable contingent event during the plan year is 100 percent.
    (2) Exemption if section 436 contribution is made. The prohibition 
on payment of

[[Page 623]]

unpredictable contingent event benefits under paragraph (b)(1) of this 
section ceases to apply with respect to benefits attributable to an 
unpredictable contingent event occurring during the plan year upon 
payment by the plan sponsor of the contribution described in paragraph 
(f)(2)(iii) of this section with respect to that event. If the prior 
sentence applies with respect to an unpredictable contingent event, then 
all benefits with respect to the unpredictable contingent event must be 
paid, including benefits for periods prior to the contribution. See 
paragraph (f) of this section for additional rules.
    (3) Rules of application--(i) Participant-by-participant 
application. The limitations of section 436(b) and this paragraph (b) 
apply on a participant-by-participant basis. Thus, whether payment or 
commencement of an unpredictable contingent event benefit under a plan 
is restricted with respect to a participant is determined based on 
whether the participant satisfies the plan's eligibility requirements 
(other than the attainment of any age, performance of any service, 
receipt or derivation of any compensation, or the occurrence of death or 
disability) for such a benefit in a plan year in which the limitations 
of section 436(b) and this paragraph (b) apply.
    (ii) Multiple contingencies. In the case of a plan that provides for 
a benefit that depends upon the occurrence of more than one 
unpredictable contingent event with respect to a participant, the 
unpredictable contingent event for purposes of section 436(b) and this 
paragraph (b) occurs upon the last to occur of those unpredictable 
contingent events.
    (iii) Cessation of benefits. Cessation of a benefit under a plan 
upon the occurrence of a specified event is not an unpredictable 
contingent event for purposes of section 436(b) and this paragraph (b). 
Thus, section 436(b) and this paragraph (b) do not prohibit provisions 
of a plan that provide for cessation, suspension, or reduction of any 
benefits upon occurrence of any event. However, upon any subsequent 
recommencement of benefits (including any restoration of benefits), the 
rules of section 436 and this section will apply.
    (4) Prior unpredictable contingent event. Unpredictable contingent 
event benefits attributable to an unpredictable contingent event that 
occurred within a period during which no limitation under this paragraph 
(b) applied to the plan are not affected by the limitation described in 
this paragraph (b) as it applies in a subsequent period. For example, if 
a plant shutdown occurs in 2010 and the plan's funded status is such 
that benefits contingent upon that plant shutdown are not subject to the 
limitation described in this paragraph (b) for that calendar plan year, 
this paragraph (b) does not apply to restrict payment of those benefits 
even if another plant shutdown occurs in 2012 that results in the 
restriction of benefits that are contingent upon that later plant 
shutdown under this paragraph (b) (where the plan's adjusted funding 
target attainment percentage for 2012 would be less than 60 percent 
taking into account the liability attributable to those shutdown 
benefits).
    (c) Limitations on plan amendments increasing liability for 
benefits--(1) In general. Except as otherwise provided in this paragraph 
(c), a plan satisfies section 436(c) and this paragraph (c) only if the 
plan provides that no amendment to the plan that has the effect of 
increasing liabilities of the plan by reason of increases in benefits, 
establishment of new benefits, changing the rate of benefit accrual, or 
changing the rate at which benefits become nonforfeitable will take 
effect in a plan year if the adjusted funding target attainment 
percentage for the plan year is--
    (i) Less than 80 percent; or
    (ii) 80 percent or more, but would be less than 80 percent if the 
benefits attributable to the amendment were taken into account in 
determining the adjusted funding target attainment percentage.
    (2) Exemption if section 436 contribution is made--(i) General rule. 
The limitations on plan amendments in paragraph (c)(1) of this section 
cease to apply with respect to an amendment upon payment by the plan 
sponsor of the contribution described in paragraph (f)(2)(iv) of this 
section, so that

[[Page 624]]

the amendment is permitted to take effect as of the later of the first 
day of the plan year or the effective date of the amendment. See 
paragraph (f) of this section for additional rules.
    (ii) Amendments that do not increase funding target. If the amount 
of the contribution described in paragraph (f)(2)(iv) of this section is 
$0 (because the amendment increases benefits solely for future periods), 
the amendment is permitted to take effect without regard to this 
paragraph (c). However, see Sec.  1.430(d)-1(d)(2) for a rule that 
requires such an amendment to be taken into account in determining the 
funding target and the target normal cost in certain situations.
    (3) Rules of application regarding pre-existing plan provisions. If 
a plan contains a provision that provides for the automatic restoration 
of benefit accruals that were not permitted to accrue because of the 
application of section 436(e) and paragraph (e) of this section, the 
restoration of those accruals is generally treated as a plan amendment 
that is subject to section 436(c). However, such a provision is 
permitted to take effect without regard to the limits of section 436(c) 
and this paragraph (c) if--
    (i) The continuous period of the limitation is 12 months or less; 
and
    (ii) The plan's enrolled actuary certifies that the adjusted funding 
target attainment percentage for the plan would not be less than 60 
percent taking into account the restored benefit accruals for the prior 
plan year.
    (4) Exceptions--(i) Benefit increases based on compensation--(A) In 
general. In accordance with section 436(c)(3), section 436(c) and this 
paragraph (c) do not apply to any amendment that provides for an 
increase in benefits under a formula that is not based on a 
participant's compensation, but only if the rate of increase in benefits 
does not exceed the contemporaneous rate of increase in average wages of 
participants covered by the amendment. The determination of the rate of 
increase in average wages is made by taking into consideration the net 
increase in average wages from the period of time beginning with the 
effective date of the most recent benefit increase applicable to all of 
those participants who are covered by the current amendment and ending 
on the effective date of the current amendment.
    (B) Application to participants who are not currently employed. If 
an amendment applies to both currently employed participants and other 
participants, all participants to whom the amendment applies are 
included in determining the increase in average wages of the 
participants covered by the amendment for purposes of this paragraph 
(c)(4)(i). For this purpose, participants who are not employees at any 
time during the period from the effective date of the most recent 
earlier benefit increase applicable to all of the participants who are 
covered by the current amendment and ending on the effective date of the 
current amendment are treated as having no increase or decrease in wages 
for the period after severance from employment.
    (C) Separate amendments for different plan populations. In lieu of a 
single amendment that applies to both currently employed participants 
and other participants as described in paragraph (c)(4)(i)(B) of this 
section, the employer can adopt multiple amendments--such as one that 
increases benefits for participants currently employed on the effective 
date of the current amendment and another one that increases benefits 
for other participants. In that case, the two amendments are considered 
separately in determining the increase in average wages, and the 
exception in this paragraph (c)(4)(i) applies separately to each 
amendment. Thus, the increase in benefits for currently employed 
participants takes effect if it satisfies the exception under this 
paragraph (c)(4), but the amendment increasing benefits for other 
participants who received no increase in wages from the employer during 
the period over which the increase in average wages is separately 
subject to the rules of this paragraph (c) without regard to the rules 
of this paragraph (c)(4).
    (ii) Plan provisions providing for accelerated vesting. To the 
extent that any amendment provides for (or any pre-existing plan 
provision results in) a mandatory increase in the vesting of benefits 
under the Code or ERISA (such as vesting rate increases pursuant to 
statute, plan termination amendments or

[[Page 625]]

partial terminations under section 411(d)(3), and vesting increases 
required by the rules for top-heavy plans under section 416), that 
amendment (or pre-existing plan provision) does not constitute an 
amendment that changes the rate at which benefits become nonforfeitable 
for purposes of section 436(c) and this paragraph (c). However, this 
paragraph (c)(4)(ii) applies only to the extent the increase in vesting 
is necessary to enable the plan to continue to satisfy the requirements 
for qualified plans.
    (iii) Authority for additional exceptions. The Commissioner may, in 
guidance of general applicability, issue additional rules under which 
other amendments to a plan are not treated as amendments to which 
section 436(c) and this paragraph (c) apply. See Sec.  601.601(d)(2) 
relating to objectives and standards for publishing regulations, revenue 
rulings and revenue procedures in the Internal Revenue Bulletin.
    (5) Rule for determining when an amendment takes effect. For 
purposes of section 436(c) and this paragraph (c), in the case of an 
amendment that increases benefits, the amendment takes effect under a 
plan on the first date on which any individual who is or could be a 
participant or beneficiary under the plan would obtain a legal right to 
the increased benefit if the individual were on that date to satisfy the 
applicable requirements for entitlement to the benefit (such as the 
attainment of any age, performance of any service, receipt or derivation 
of any compensation, or the occurrence of death, disability, or 
severance from employment).
    (6) Treatment of mergers, consolidations, and transfers of plan 
assets into a plan. [Reserved]
    (d) Limitations on prohibited payments--(1) AFTAP less than 60 
percent. A plan satisfies the requirements of section 436(d)(1) and this 
paragraph (d)(1) only if the plan provides that, if the plan's adjusted 
funding target attainment percentage for a plan year is less than 60 
percent, a participant or beneficiary is not permitted to elect an 
optional form of benefit that includes a prohibited payment, and the 
plan will not pay any prohibited payment, with an annuity starting date 
on or after the applicable section 436 measurement date.
    (2) Bankruptcy. A plan satisfies the requirements of section 
436(d)(2) and this paragraph (d)(2) only if the plan provides that a 
participant or beneficiary is not permitted to elect an optional form of 
benefit that includes a prohibited payment, and the plan will not pay 
any prohibited payment, with an annuity starting date that occurs during 
any period in which the plan sponsor is a debtor in a case under title 
11, United States Code, or similar Federal or State law, except for 
payments made within a plan year with an annuity starting date that 
occurs on or after the date on which the enrolled actuary of the plan 
certifies that the plan's adjusted funding target attainment percentage 
for that plan year is not less than 100 percent.
    (3) Limited payment if AFTAP at least 60 percent but less than 80 
percent--(i) In general. A plan satisfies the requirements of section 
436(d)(3) and this paragraph (d)(3) only if the plan provides that, in 
any case in which the plan's adjusted funding target attainment 
percentage for a plan year is 60 percent or more but is less than 80 
percent, a participant or beneficiary is not permitted to elect the 
payment of an optional form of benefit that includes a prohibited 
payment, and the plan will not pay any prohibited payment, with an 
annuity starting date on or after the applicable section 436 measurement 
date, unless the present value, determined in accordance with section 
417(e)(3), of the portion of the benefit that is being paid in a 
prohibited payment (which portion is determined under paragraph 
(d)(3)(iii)(B) of this section) does not exceed the lesser of--
    (A) 50 percent of the present value (determined in accordance with 
section 417(e)(3)) of the benefit payable in the optional form of 
benefit that includes the prohibited payment; or
    (B) 100 percent of the PBGC maximum benefit guarantee amount 
described in paragraph (d)(3)(iii)(C) of this section.
    (ii) Bifurcation if optional form unavailable--(A) Requirement to 
offer bifurcation. If an optional form of benefit that is otherwise 
available under the terms of the plan is not available as of

[[Page 626]]

the annuity starting date because of the application of paragraph 
(d)(3)(i) of this section, then the plan must permit the participant or 
beneficiary to elect to--
    (1) Receive the unrestricted portion of that optional form of 
benefit (determined under the rules of paragraph (d)(3)(iii)(D) of this 
section) at that annuity starting date, determined by treating the 
unrestricted portion of the benefit as if it were the participant's or 
beneficiary's entire benefit under the plan;
    (2) Commence benefits with respect to the participant's or 
beneficiary's entire benefit under the plan in any other optional form 
of benefit available under the plan at the same annuity starting date 
that satisfies paragraph (d)(3)(i) of this section; or
    (3) Defer commencement of the payments to the extent described in 
paragraph (d)(5) of this section.
    (B) Rules relating to bifurcation. If the participant or beneficiary 
elects payment of the unrestricted portion of the benefit as described 
in paragraph (d)(3)(ii)(A)(1) of this section, then the plan must permit 
the participant or beneficiary to elect payment of the remainder of the 
participant's or beneficiary's benefits under the plan in any optional 
form of benefit at that annuity starting date otherwise available under 
the plan that would not have included a prohibited payment if that 
optional form applied to the entire benefit of the participant or 
beneficiary. The rules of Sec.  1.417(e)-1 are applied separately to the 
separate optional forms for the unrestricted portion of the benefit and 
the remainder of the benefit (the restricted portion).
    (C) Plan alternative that anticipates election of payment that 
includes a prohibited payment. With respect to an optional form of 
benefit that includes a prohibited payment and that is not permitted to 
be paid under paragraph (d)(3)(i) of this section, for which no 
additional information from the participant or beneficiary (such as 
information regarding a social security leveling optional form of 
benefit) is needed to make that determination, rather than wait for the 
participant or beneficiary to elect such optional form of benefit, a 
plan is permitted to provide for separate elections with respect to the 
restricted and unrestricted portions of that optional form of benefit. 
However, the rule in the preceding sentence applies only if--
    (1) The plan applies the rule to all such optional forms; and
    (2) The plan identifies the option that the bifurcation election 
replaces.
    (iii) Definitions applicable to limited payment option--(A) In 
general. The definitions in this paragraph (d)(3)(iii) apply for 
purposes of this paragraph (d)(3).
    (B) Portion of benefit being paid in a prohibited payment. If a 
benefit is being paid in an optional form for which any of the payments 
is greater than the amount payable under a straight life annuity to the 
participant or beneficiary (plus any social security supplements 
described in the last sentence of section 411(a)(9) payable to the 
participant or beneficiary) with the same annuity starting date, then 
the portion of the benefit that is being paid in a prohibited payment is 
the excess of each payment over the smallest payment during the 
participant's lifetime under the optional form of benefit (treating a 
period after the annuity starting date and during the participant's 
lifetime in which no payments are made as a payment of zero).
    (C) PBGC maximum benefit guarantee amount. The PBGC maximum benefit 
guarantee amount described in this paragraph (d)(3)(iii)(C) is the 
present value (determined under guidance prescribed by the Pension 
Benefit Guaranty Corporation, using the interest and mortality 
assumptions under section 417(e)) of the maximum benefit guarantee with 
respect to a participant (based on the participant's age or the 
beneficiary's age at the annuity starting date) under section 4022 of 
ERISA for the year in which the annuity starting date occurs.
    (D) Unrestricted portion of the benefit--(1) General rule. Except as 
otherwise provided in this paragraph (d)(3)(iii)(D), the unrestricted 
portion of the benefit with respect to any optional form of benefit is 
50 percent of the amount payable under the optional form of benefit.
    (2) Special rule for forms which include social security leveling or 
a refund of employee contributions. For an optional

[[Page 627]]

form of benefit that is a prohibited payment on account of a social 
security leveling feature (as defined in Sec.  1.411(d)-3(g)(16)) or a 
refund of employee contributions feature (as defined in Sec.  1.411(d)-
3(g)(11)), the unrestricted portion of the benefit is the optional form 
of benefit that would apply if the participant's or beneficiary's 
accrued benefit were 50 percent smaller.
    (3) Limited to PBGC maximum benefit guarantee amount. After the 
application of the preceding rules of this paragraph (d)(3)(iii)(D), the 
unrestricted portion of the benefit with respect to the optional form of 
benefit is reduced, to the extent necessary, so that the present value 
(determined in accordance with section 417(e)) of the unrestricted 
portion of that optional form of benefit does not exceed the PBGC 
maximum benefit guarantee amount (described in paragraph (d)(3)(iii)(C) 
of this section).
    (iv) Other rules--(A) One time application. A plan satisfies the 
requirements of this paragraph (d)(3) only if the plan provides that, in 
the case of a participant with respect to whom a prohibited payment (or 
series of prohibited payments under a single optional form of benefit) 
is made pursuant to paragraph (d)(3)(i) or (ii) of this section, no 
additional prohibited payment may be made with respect to that 
participant during any period of consecutive plan years for which 
prohibited payments are limited under this paragraph (d).
    (B) Treatment of beneficiaries. For purposes of this paragraph 
(d)(3), benefits provided with respect to a participant and any 
beneficiary of the participant (including an alternate payee, as defined 
in section 414(p)(8)) are aggregated. If the only benefits paid under 
the plan with respect to the participant are death benefits payable to 
the beneficiary, then paragraph (d)(3)(iii)(B) of this section is 
applied by substituting the lifetime of the beneficiary for the lifetime 
of the participant. If the accrued benefit of a participant is allocated 
to such an alternate payee and one or more other persons, then the 
unrestricted amount under paragraph (d)(3)(iii)(D) of this section is 
allocated among such persons in the same manner as the accrued benefit 
is allocated, unless a qualified domestic relations order (as defined in 
section 414(p)(1)(A)) with respect to the participant or the alternate 
payee provides otherwise. See paragraphs (j)(2)(ii) and (j)(6)(ii) of 
this section for other special rules relating to beneficiaries.
    (C) Treatment of annuity purchases and plan transfers. This 
paragraph (d)(3)(iv)(C) applies for purposes of applying paragraphs 
(d)(3)(i) and (iii)(D) of this section. In the case of a prohibited 
payment described in paragraph (j)(6)(i)(B) of this section (relating to 
purchase from an insurer), the present value of the portion of the 
benefit that is being paid in a prohibited payment is the cost to the 
plan of the irrevocable commitment and, in the case of a prohibited 
payment described in paragraph (j)(6)(i)(C) of this section (relating to 
certain plan transfers), the present value of the portion of the benefit 
that is being paid in a prohibited payment is the present value of the 
liabilities transferred (determined in accordance with section 414(l)). 
In addition, the present value of the accrued benefit is substituted for 
the present value of the benefit payable in the optional form of benefit 
that includes the prohibited payment in paragraph (d)(3)(i)(A) of this 
section. (Further, see Sec.  1.411(d)-4, A-2(a)(3)(ii), for a rule under 
section 411(d)(6) that applies to an optional form of benefit that 
includes a prohibited payment described in paragraph (j)(6)(i)(B) of 
this section.)
    (v) Examples. The following examples illustrate the rules of this 
paragraph (d)(3):

    Example 1. (i) Plan A has a plan year that is the calendar year, and 
is subject to the restriction on prohibited payments under paragraph 
(d)(3) of this section for the 2010 plan year. Participant P is not 
married, and retires at age 65 during 2010, while the restriction under 
paragraph (d)(3) of this section applies to Plan A. P's accrued benefit 
is $10,000 per month, payable commencing at age 65 as a straight life 
annuity. Plan A provides for an optional single-sum payment (subject to 
the restrictions under section 436) equal to the present value of the 
participant's accrued benefit using actuarial assumptions under section 
417(e). P's single-sum payment, determined without regard to this 
paragraph (d), is calculated to be $1,416,000, payable at age 65.
    (ii) The PBGC guaranteed monthly benefit for a straight life annuity 
payable at age 65

[[Page 628]]

in 2010 (for purposes of this example) is assumed to be $4,500. The PBGC 
maximum benefit guarantee amount at age 65 is assumed to be $637,200 for 
2010.
    (iii) Because Participant P retires during a period when the 
restriction in paragraph (d)(3) of this section applies to Plan A, only 
a portion of the benefit can be paid in the form of a single sum. P 
elects a single-sum payment. Because a single-sum payment is a 
prohibited payment, a determination must be made whether the payment can 
be paid under paragraph (d)(3)(i) of this section. In this case, because 
the present value of the portion of Participant P's benefit that is 
being paid in a prohibited payment exceeds the lesser of 50% of the 
benefit or the PBGC maximum benefit guarantee amount, it cannot be paid 
under paragraph (d)(3)(i) of this section. Accordingly, the maximum 
single sum that P can receive is $637,200 (that is, the lesser of 50% of 
$1,416,000 or $637,200).
    (iv) Pursuant to paragraph (d)(3)(ii) of this section, Plan A must 
offer P the option to bifurcate the benefit into unrestricted and 
restricted portions. The unrestricted portion is a monthly straight life 
annuity of $4,500, which can be paid in a single sum of $637,200. If P 
elects to receive the unrestricted portion of the benefit in the form of 
a single sum, then, with respect to the $5,500 restricted portion, Plan 
A must permit P to elect any form of benefit that would otherwise be 
permitted with respect to the full $10,000 and that is not a prohibited 
payment. Alternatively, Plan A may provide that P is permitted to elect 
to defer commencement of the restricted portion, subject to applicable 
qualification rules.
    Example 2. (i) The facts are the same as in Example 1. In addition, 
Plan A provides an optional form of payment (subject to any benefit 
restrictions under section 436) that consists of a partial payment equal 
to the total return of employee contributions to the plan accumulated 
with interest, with an annuity payment for the remainder of the 
participant's benefit.
    (ii) Participant Q is not married, and retires at age 65 during 
2010, while Plan A is subject to the restriction under paragraph (d)(3) 
of this section. Participant Q has an accrued benefit equal to a 
straight life annuity of $3,000 per month. Under the optional form 
described in paragraph (i) of this Example 2, Q may elect a partial 
payment of $99,120 (representing the return of employee contributions 
accumulated with interest), plus a straight life annuity of $2,300 per 
month. The present value of Participant Q's accrued benefit, using 
actuarial assumptions under section 417(e), is $424,800.
    (iii) Because the present value of the portion of Q's benefit that 
is being paid in a prohibited payment ($99,120) does not exceed the 
lesser of 50% of the present value of benefits (50% of $424,800) or 100% 
of the PBGC maximum benefit guarantee amount ($637,200 at age 65 for 
2010), the optional form described in paragraph (i) of this Example 2 is 
permitted to be paid under paragraph (d)(3)(i) of this section.
    Example 3. (i) The facts are the same as in Example 1. In addition, 
Plan A provides an optional form of payment under a social security 
leveling option (subject to any benefit restrictions under section 436) 
that consists of an increased temporary benefit payable until age 62, 
with reduced payments beginning at age 62. The benefit is structured so 
that the combination of the participant's pension benefit and Social 
Security benefit provides an approximately level income for the 
participant's lifetime. The PBGC maximum benefit guarantee amount at age 
55 is assumed to be $362,776 for 2010.
    (ii) Participant R retires at age 55 in 2010 and is eligible to 
receive a level lifetime annuity of $1,200 per month beginning 
immediately. Instead, Participant R elects to receive a benefit under 
the social security leveling optional form of payment. Participant R's 
Social Security benefit payable at age 62 is projected, under the terms 
specified in Plan A, to be $1,500 per month. The Plan A adjustment 
factor for the social security leveling option using the minimum present 
value requirements of section 417(e)(3) is .590 at age 55. Therefore, 
Participant R's benefit payable from age 55 to age 62 is $2,085 per 
month ($1,200 + .590 x $1,500), and the benefit payable for 
Participant's lifetime, beginning after age 62, is $585 per month 
($2,085-$1,500).
    (iii) Because the optional form provides some payments which are 
greater than payments described in paragraph (j)(6)(i)(A) of this 
section ($1,200), the portion of the benefit that is being paid in a 
prohibited payment is $1,500 per month which is payable from age 55 to 
age 62. Using the applicable interest and mortality rates under section 
417(e) as in effect for Plan A at the time the benefit commences, the 
present value of a temporary benefit of $1,500 per month ($2,085-$585) 
payable from age 55 to age 62 is $106,417, and the present value of the 
entire benefit (a temporary benefit of $2,085 per month payable from age 
55 to age 62 plus a deferred lifetime benefit of $585 commencing at age 
62) is $207,468.
    (iv) Because $106,417 is more than 50% of $207,468 (and because 50% 
of Participant R's benefit is less than $362,776, which is the PBGC 
maximum guaranteed benefit amount at age 55 for 2010), Participant R can 
only receive 50% of the benefit in the form of the social security 
leveling option. Pursuant to paragraph (d)(3)(ii) of this section, Plan 
A must offer Participant R the option to bifurcate the benefit into 
unrestricted and restricted portions. Participant R elects to receive 
the restricted portion of the early retirement benefit as a level 
lifetime annuity of $600 commencing at age 55.

[[Page 629]]

    (v) Participant R elects to receive the unrestricted portion of the 
early retirement benefit in the social security leveling form of 
payment. This portion of the benefit is determined under the social 
security leveling form of payment as if Participant R's benefit was one-
half of the early retirement benefit, or $600. However, using a monthly 
level lifetime benefit of $600 and a monthly social security benefit of 
$1,500, Participant R would have a negative benefit after age 62 ($600 + 
.590 x $1,500 is only $1,485; offsetting $1,500 at age 62 would produce 
a negative amount). Plan A provides that in this situation, the benefit 
under the social security leveling option is an actuarially equivalent 
monthly annuity payable until age 62, with zero payable thereafter. 
Using the actuarial equivalence factor of .590 at age 55, the plan 
administrator determines that the unrestricted portion of Participant 
R's benefit is $1,463 per month, payable from age 55 to age 62 ($600 + 
.590 x $1,463 = $1,463 payable until age 62; $1,463-$1,463 = zero 
payable after age 62).
    (vi) Combining the unrestricted and restricted portions of the 
benefit, Participant R will receive a total of $2,063 per month from age 
55 to age 62 ($1,463 from the unrestricted portion of the benefit plus 
$600 from the restricted portion of the benefit), and $600 per month 
beginning at age 62 (zero from the unrestricted portion of the benefit 
plus $600 from the restricted portion of the benefit).

    (4) Exception for cessation of benefit accruals. This paragraph (d) 
does not apply to a plan for a plan year if the terms of the plan, as in 
effect for the period beginning on September 1, 2005, provided for no 
benefit accruals with respect to any participants. If a plan that is 
described in this paragraph (d)(4) provides for benefit accruals during 
any time on or after September 1, 2005 (treating benefit increases 
pursuant to a plan amendment as benefit accruals), this paragraph (d)(4) 
ceases to apply for the plan as of the date any benefits accrue under 
the plan (or the date the amendment takes effect). For example, the 
exception in this paragraph (d)(4) does not apply to a plan after the 
plan increases benefits to take into account increases in the 
limitations under section 415(b) on or after September 1, 2005.
    (5) Right to delay commencement. If a participant or beneficiary 
requests a distribution in an optional form of benefit that includes a 
prohibited payment that is not permitted to be paid under paragraph 
(d)(1), (d)(2), or (d)(3) of this section, the participant retains the 
right to delay commencement of benefits in accordance with the terms of 
the plan and applicable qualification requirements (such as sections 
411(a)(11) and 401(a)(9)).
    (6) Plan alternative for special optional forms. A plan is permitted 
to offer optional forms of benefit that are solely available during the 
period in which paragraph (d)(1), (d)(2), or (d)(3) of this section 
applies to limit prohibited payments under the plan. For example, a plan 
may permit participants or beneficiaries who commence benefits during 
the period in which paragraph (d)(1) of this section (or paragraph 
(d)(2) of this section) applies to limit prohibited payments under the 
plan to elect, within a specified period after the date on which that 
paragraph ceases to apply to limit prohibited payments under the plan, 
to receive the remaining benefit in the form of a single-sum payment 
equal to the present value of the remaining benefit, but only to the 
extent then permitted under this paragraph (d). As another example, 
during a period when paragraph (d)(3) of this section applies to a plan, 
the plan may permit participants and beneficiaries to elect payment in 
an optional form of benefit that provides for the current payment of the 
unrestricted portion of the benefit, with a delayed commencement for the 
restricted portion of the benefit (subject to other applicable 
qualification requirements, such as sections 411(a)(11) and 401(a)(9)), 
or may satisfy paragraph (d)(3)(i) of this section by permitting 
participants and beneficiaries to elect an optional form of benefit that 
combines an unsubsidized single-sum payment for over 50 percent of the 
accrued benefit with a subsidized early retirement life annuity for the 
remainder of the accrued benefit. Any such optional forms must satisfy 
this paragraph (d) and applicable qualification requirements, including 
satisfaction of section 417(e) and section 415 (at each annuity starting 
date).
    (7) Exception for distributions permitted without consent of the 
participant under section 411(a)(11). [Reserved]
    (e) Limitation on benefit accruals for plans with severe funding 
shortfalls--(1)

[[Page 630]]

In general. Except as otherwise provided in this paragraph (e), a plan 
satisfies the requirements of section 436(e) and this paragraph (e) only 
if it provides that, in any case in which the plan's adjusted funding 
target attainment percentage for a plan year is less than 60 percent, 
benefit accruals under the plan will cease as of the applicable section 
436 measurement date. If a plan is required to cease benefit accruals 
under this paragraph (e), then the plan is not permitted to be amended 
in a manner that would increase the liabilities of the plan by reason of 
an increase in benefits or establishment of new benefits. The preceding 
sentence applies regardless of whether an amendment would otherwise be 
permissible under paragraph (c)(2) or (c)(3) of this section.
    (2) Exemption if section 436 contribution is made. The prohibition 
on additional benefit accruals under a plan described in paragraph 
(e)(1) of this section ceases to apply with respect to a plan year, 
effective as of the first day of the plan year, upon payment by the plan 
sponsor of the contribution described in paragraph (f)(2)(v) of this 
section. See paragraph (f) of this section for additional rules.
    (3) Special rule under section 203 of the Worker, Retiree, and 
Employer Recovery Act of 2008. [Reserved]
    (f) Methods to avoid or terminate benefit limitations--(1) In 
general. This paragraph (f) sets forth rules relating to employer 
contributions and other methods to avoid or terminate the application of 
section 436 limitations under a plan for a plan year. In general, there 
are four methods a plan sponsor may utilize to avoid or terminate one or 
more of the benefit limitations under this section for a plan year. Two 
of these methods (where the plan sponsor elects to reduce the prefunding 
balance or funding standard carryover balance and where the plan sponsor 
makes additional contributions under section 430 for the prior plan year 
within the time period provided by section 430(j)(1) that are not added 
to the prefunding balance) involve increasing the amount of plan assets 
which are taken into account in determining the adjusted funding target 
attainment percentage. The other two methods (making a contribution that 
is specifically designated as a current year contribution to avoid or 
terminate application of a benefit limitation under paragraph (b), (c), 
or (e) of this section, and providing security under section 436(f)(1)) 
are described in paragraphs (f)(2) and (f)(3) of this section, 
respectively.
    (2) Current year contributions to avoid or terminate benefit 
limitations--(i) General rules--(A) Amount of contribution--(1) In 
general. This paragraph (f)(2) sets forth rules regarding contributions 
to avoid or terminate the application of section 436 limitations under a 
plan for a plan year that apply to unpredictable contingent event 
benefits, plan amendments that increase liabilities for benefits, and 
benefit accruals.
    (2) Interest adjustment. Any contribution made by a plan sponsor 
pursuant to this paragraph (f)(2) on a date other than the valuation 
date for the plan year must be adjusted with interest at the plan's 
effective interest rate under section 430(h)(2)(A) for the plan year. If 
the plan's effective interest rate for the plan year has not been 
determined at the time of the contribution, then this interest 
adjustment must be made using the highest of the three segment rates as 
applicable for the plan year under section 430(h)(2)(C). In such a case, 
if the effective interest rate for the plan year under section 
430(h)(2)(A) is subsequently determined to be less than that highest 
rate, the excess is recharacterized as an employer contribution taken 
into account under section 430 for the current plan year.
    (B) Timing requirement for section 436 contributions. Any 
contribution described in this paragraph (f)(2) must be paid before the 
unpredictable contingent event benefits are permitted to be paid, the 
plan amendment is permitted to take effect, or the benefit accruals are 
permitted to resume. In addition, any contribution described in this 
paragraph (f)(2) must be paid during the plan year.
    (C) Prefunding balance or funding standard carryover balance may not 
be used. No prefunding balance or funding standard carryover balance 
under section 430(f) may be used as a contribution described in this 
paragraph (f)(2). However, a plan sponsor is permitted

[[Page 631]]

to elect to reduce the funding standard carryover balance or the 
prefunding balance in order to increase the adjusted funding target 
attainment percentage for a plan year. See paragraph (a)(5) of this 
section for a rule mandating such a reduction in certain situations.
    (ii) Section 436 contributions separate from minimum required 
contributions--(A) In general. The contributions described in this 
paragraph (f)(2) are contributions described in sections 436(b)(2), 
436(c)(2), and 436(e)(2), and are separate from any minimum required 
contributions under section 430. Thus, if a plan sponsor makes a 
contribution described in this paragraph (f)(2) for a plan year but does 
not make the minimum required contribution for the plan year, the plan 
fails to satisfy the minimum funding requirements under section 430 for 
the plan year. In addition, a contribution described in this paragraph 
(f)(2) is disregarded in determining the maximum addition to the 
prefunding balance under section 430(f)(6) and Sec.  1.430(f)-
1(b)(1)(ii).
    (B) Designation requirement. Any contribution made by a plan sponsor 
pursuant to this paragraph (f)(2) must be designated as such at the time 
the contribution is used to avoid or terminate the limitations under 
this paragraph (f)(2), including designation of the benefits or 
amendments to which the limits do not apply because of the contribution. 
Except as specifically provided in paragraph (f)(2)(i)(A)(2), (g) or (h) 
of this section, such a contribution cannot be subsequently 
recharacterized with respect to any plan year as a contribution to 
satisfy a minimum required contribution obligation, or otherwise. The 
designation must be made in accordance with the rules and procedures 
that otherwise apply to elections under Sec.  1.430(f)-1(f) with respect 
to the prefunding and funding standard carryover balances.
    (C) Requirement to recertify AFTAP. If the plan's enrolled actuary 
has already certified the adjusted funding target attainment percentage 
for the plan year, a plan sponsor is treated as making the contribution 
described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or (f)(2)(v) of 
this section for the plan year only after the plan's enrolled actuary 
certifies an updated adjusted funding target attainment percentage for 
the plan year that takes into account the increased liability for the 
unpredictable contingent event benefits, the plan amendments, or 
restored accruals, and the associated section 436 contribution, under 
the rules of paragraph (h)(4)(v) of this section. See also paragraph 
(g)(4)(i) of this section for a requirement to modify the presumed 
adjusted funding target attainment percentage to take the liability for 
the unpredictable contingent event benefits or plan amendments, and the 
associated section 436 contribution, into account (if the contribution 
described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or (f)(2)(v) of 
this section is made before the plan's enrolled actuary certifies the 
adjusted funding target attainment percentage for the plan year).
    (iii) Contribution for unpredictable contingent event benefits. In 
the case of a contribution to avoid or terminate the application of the 
limitation on benefits attributable to an unpredictable contingent event 
under section 436(b)--
    (A) In the event that the adjusted funding target attainment 
percentage for the plan year determined without taking into account the 
liability attributable to the unpredictable contingent event benefits is 
less than 60 percent, the amount of the contribution under section 
436(b)(2) is equal to the amount of the increase in the funding target 
of the plan for the plan year if the benefits attributable to the 
unpredictable contingent event were included in the determination of the 
funding target.
    (B) In the event that the adjusted funding target attainment 
percentage for the plan year determined without taking into account the 
liability attributable to the unpredictable contingent event benefits is 
60 percent or more, the amount of the contribution under section 
436(b)(2) is the amount that would be sufficient to result in an 
adjusted funding target attainment percentage for the plan year of 60 
percent if the contribution (and any prior section 436 contributions 
made for the plan year) were included as part of the plan assets and the 
funding target were to take into account the adjustments described in 
paragraph (g)(2)(iii)(A),

[[Page 632]]

(g)(3)(ii)(A), or (g)(5)(i)(B) of this section, whichever applies.
    (iv) Contribution for plan amendments increasing liability for 
benefits. In the case of a contribution to avoid or terminate the 
application of the limitation on benefits attributable to a plan 
amendment under section 436(c)--
    (A) In the event that the adjusted funding target attainment 
percentage for the plan year determined without taking into account the 
liability attributable to the plan amendment is less than 80 percent, 
the amount of the contribution under section 436(c)(2) is equal to the 
amount of the increase in the funding target of the plan for the plan 
year if the liabilities attributable to the amendment were included in 
the determination of the funding target.
    (B) In the event that the adjusted funding target attainment 
percentage for the plan year determined without taking into account the 
liability attributable to the plan amendment is 80 percent or more, the 
amount of the contribution under section 436(c)(2) is the amount that 
would be sufficient to result in an adjusted funding target attainment 
percentage for the plan year of 80 percent if the contribution (and any 
prior section 436 contributions made for the plan year) were included as 
part of the plan assets and the funding target were to take into account 
the adjustments described in paragraph (g)(2)(iii)(A), (g)(3)(ii)(A), or 
(g)(5)(i)(B) of this section, whichever applies.
    (v) Contribution required for continued benefit accruals. In the 
case of a contribution to avoid or terminate the application of the 
limitation on accruals under section 436(e), the amount of the 
contribution under section 436(e)(2) is equal to the amount sufficient 
to result in an adjusted funding target attainment percentage for the 
plan year of 60 percent if the contribution (and any prior section 436 
contributions made for the plan year) were included as part of the plan 
assets and the funding target were to take into account the adjustments 
described in paragraph (g)(2)(iii)(A) or (g)(5)(i)(B) of this section, 
whichever applies.
    (3) Security to increase adjusted funding target attainment 
percentage--(i) In general. For purposes of avoiding benefit limitations 
under section 436, a plan sponsor may provide security in the form 
described in paragraph (f)(3)(ii) of this section. In such a case, the 
adjusted funding target attainment percentage for the plan year is 
determined by treating as an asset of the plan any security provided by 
a plan sponsor by the valuation date for the plan year in a form meeting 
the requirements of paragraph (f)(3)(ii) of this section. However, this 
security is not taken into account as a plan asset for any other 
purpose, including section 430.
    (ii) Form of security. The forms of security permitted under 
paragraph (f)(3)(i) of this section are limited to--
    (A) A bond issued by a corporate surety company that is an 
acceptable surety for purposes of section 412 of ERISA; or
    (B) Cash, or United States obligations which mature in 3 years or 
less, held in escrow by a bank or an insurance company.
    (iii) Enforcement. Any form of security provided under paragraph 
(f)(3)(i) of this section must provide--
    (A) That it will be paid to the plan upon the earliest of--
    (1) The plan termination date as defined in section 4048 of ERISA;
    (2) If there is a failure to make a payment of the minimum required 
contribution for any plan year beginning after the security is provided, 
the due date for the payment under section 430(j)(1) or 430(j)(3); or
    (3) If the plan's adjusted funding target attainment percentage is 
less than 60 percent (without regard to any security provided under this 
paragraph (f)(3)) for a consecutive period of 7 plan years, the 
valuation date for the last plan year in the 7-year period; and
    (B) That the plan administrator must notify the surety, bank, or 
insurance company that issued or holds the security of any event 
described in paragraph (f)(3)(iii)(A) of this section within 10 days of 
its occurrence.
    (iv) Release of security. The form of security is permitted to 
provide that it will be released (and any amounts thereunder will be 
refunded to the plan sponsor together with any interest accrued thereon) 
as provided in the agreement governing the security, but such release is 
not permitted until the

[[Page 633]]

plan's enrolled actuary has certified that the plan's adjusted funding 
target attainment percentage for a plan year is at least 90 percent 
(without regard to any security provided under this paragraph (f)(3)) or 
until replacement security has been provided in accordance with 
paragraph (f)(3)(vi) of this section.
    (v) Contribution of security to plan. Any security provided under 
this paragraph (f)(3) that is subsequently turned over to the plan 
(whether pursuant to the enforcement mechanism of paragraph (f)(3)(iii) 
of this section or after its release under paragraph (f)(3)(iv) of this 
section) is treated as a contribution by the plan sponsor taken into 
account under section 430 when contributed and, if turned over pursuant 
to paragraph (f)(3)(iii) of this section, is not a contribution under 
paragraph (f)(2) of this section.
    (vi) Replacement security. If security has been provided to a plan 
pursuant to this paragraph (f)(3), the plan sponsor may provide new 
security to the plan and subsequently or simultaneously have the 
original security released, but only if--
    (A) The new security is in a form that satisfies the requirements of 
paragraph (f)(3)(ii) of this section;
    (B) The amount of the new security is no less than the amount of the 
original security, determined at the time the original security is 
released; and
    (C) The period described in paragraph (f)(3)(iii)(A)(3) of this 
section with respect to the new security is the same as the period that 
applied under that paragraph to the original security.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (f):

    Example 1. (i) Plan Z is a non-collectively bargained defined 
benefit plan with a plan year that is the calendar year and a valuation 
date of January 1. Plan Z's sponsor is not in bankruptcy, and Plan Z did 
not purchase any annuities in 2009 or 2010. As of January 1, 2011, Plan 
Z does not have a funding standard carryover balance or a prefunding 
balance, and is not in at-risk status. As of that date, Plan Z has plan 
assets (and adjusted plan assets) of $2,000,000 and a funding target 
(and an adjusted funding target) of $2,550,000. On March 1, 2011, the 
enrolled actuary for the plan certifies that the AFTAP as of January 1, 
2011, is 78.43%. The effective interest rate for Plan Z for the 2011 
plan year is 5.5%.
    (ii) On May 1, 2011, the plan sponsor amends Plan Z to increase 
benefits. The enrolled actuary for the plan determines that the present 
value, as of January 1, 2011, of the increase in the funding target due 
to the amendment is $400,000. Because the AFTAP prior to the plan 
amendment is less than 80%, Plan Z is subject to the restriction on plan 
amendments in paragraph (c) of this section, and the amendment cannot 
take effect unless the employer utilizes one of the methods described in 
paragraph (f) of this section to avoid benefit limitations.
    (iii) In order for the amendment to be permitted to take effect, the 
plan sponsor makes a contribution described in paragraph (f)(2) of this 
section. Because the AFTAP prior to the amendment was less than 80%, the 
provisions of paragraph (f)(2)(iv)(A) of this section apply. The amount 
of the contribution as of January 1, 2011, needed to avoid the 
restriction on plan amendments under paragraph (c) of this section is 
equal to the amount of the increase in funding target attributable to 
the amendment, or $400,000. Under the provisions of paragraph 
(f)(2)(iv)(A) of this section, this contribution is required even 
though, if the contribution were included as part of the plan assets and 
the liabilities attributable to the plan amendment were included in the 
funding target, the AFTAP would be 81.36% (that is, adjusted plan assets 
of $2,000,000 plus the contribution of $400,000 as of January 1, 2011; 
divided by the adjusted funding target of $2,550,000 increased to 
reflect the additional $400,000 in the funding target attributable to 
the plan amendment).
    (iv) However, because the contribution is not paid until May 1, 
2011, the necessary contribution amount must be adjusted to reflect 
interest from the valuation date to the date of the contribution, at 
Plan Z's effective interest rate for the 2011 plan year. The amount of 
the required contribution after adjustment is $407,203, determined as 
$400,000 increased for 4 months of compound interest at an effective 
annual interest rate of 5.5%.
    (v) A contribution of $407,203 is made on May 1, 2011, and is 
designated as a contribution under paragraph (f)(2) of this section with 
respect to the May 1, 2011, plan amendment. Accordingly, the 
contribution is not applied toward minimum funding requirements under 
section 430, and is not eligible for inclusion in the prefunding balance 
under Sec.  1.430(f)-1(b)(1). Since this contribution meets the 
requirements of paragraph (f)(2) of this section, the plan amendment 
takes effect in accordance with its terms.
    Example 2. (i) The facts are the same as in Example 1, except that 
the plan is in at-risk status under section 430(i). The funding target 
determined under section 430(i) is $2,600,000, and the funding target 
determined without regard to section 430(i) is $2,550,000.

[[Page 634]]

    (ii) On May 1, 2011, the plan sponsor amends Plan Z to increase 
benefits. The plan's enrolled actuary determines that the present value 
as of January 1, 2011 of the increase in the funding target due to the 
amendment (taking into account the at-risk status of the plan) is 
$440,000. Because the AFTAP prior to the plan amendment is 78.43% 
(determined taking into account the at-risk status of Plan Z), Plan Z is 
subject to the restriction on plan amendments in paragraph (c) of this 
section, and the amendment cannot take effect unless the employer 
utilizes one of the methods described in this paragraph (f) to avoid 
benefit limitations.
    (iii) In order for this amendment to be permitted to take effect, 
the plan sponsor makes a contribution described in paragraph (f)(2) of 
this section. Because the AFTAP prior to the amendment was less than 
80%, the provisions of paragraph (f)(2)(iv)(A) of this section apply. 
The amount of the contribution as of January 1, 2011, needed to avoid 
the restriction on plan amendments under paragraph (c) of this section 
is equal to the amount of the increase in funding target attributable to 
the amendment, or $440,000. Under the provisions of paragraph 
(f)(2)(iv)(A) of this section, this contribution is required even 
though, if the contribution were included as part of the plan assets and 
the liability attributable to the plan amendment were included in the 
funding target, the AFTAP would exceed 80%.
    (iv) However, because the contribution is not paid until May 1, 
2011, the necessary contribution amount must be adjusted to reflect 
interest from the valuation date to the date of the contribution, at 
Plan Z's effective interest rate for the 2011 plan year. The amount of 
the required contribution after adjustment is $447,923, determined as 
$440,000 increased for 4 months of compound interest at an effective 
annual interest rate of 5.5%.
    (v) A contribution of $447,923 is made on May 1, 2011, and is 
designated as a contribution under paragraph (f)(2) of this section with 
respect to the May 1, 2011, plan amendment. Accordingly, the 
contribution is not applied toward minimum funding requirements under 
section 430, and is not eligible for inclusion in the prefunding balance 
under Sec.  1.430(f)-1(b)(1). Since this contribution meets the 
requirements of paragraph (f)(2) of this section, the plan amendment 
takes effect in accordance with its terms.
    Example 3. (i) The facts are the same as in Example 1, except that 
the enrolled actuary for the plan does not issue the certification of 
the 2011 AFTAP until September 1, 2011. Prior to October 1, 2010, the 
enrolled actuary had certified the 2010 AFTAP to be 82%. Other than this 
amendment, no other amendment or unpredictable contingent event has 
occurred that requires a recertification. As of May 1, 2011, the plan's 
effective interest rate for the 2011 plan year has not yet been 
determined. The highest of the three segment rates applicable to the 
2011 plan year under section 430(h)(2)(C) is 6%.
    (ii) Because the enrolled actuary has not certified the actual AFTAP 
as of January 1, 2011, and the amendment is scheduled to take effect 
after April 1, 2011, the rules of paragraph (h)(2)(iii) of this section 
apply. Accordingly, the AFTAP for 2011 (prior to reflecting the effect 
of the amendment) is presumed to be 10 percentage points lower than the 
2010 AFTAP, or 72%. Because this presumed AFTAP is less than 80%, the 
restriction on plan amendments in paragraph (c) of this section applies, 
and the plan amendment cannot take effect.
    (iii) In order to allow the plan amendment to take effect, the plan 
sponsor decides to make a contribution under paragraph (f)(2) of this 
section on May 1, 2011. Because the presumed AFTAP was less than 80% 
prior to reflecting the plan amendment, the rules of paragraph 
(f)(2)(iv)(A) of this section apply, and the amount of the contribution 
under section 436(c)(2) is the amount of the increase in the funding 
target for the year if the plan amendment were included in the 
determination of the funding target. Accordingly, an additional 
contribution of $400,000 is required as of January 1, 2011, to avoid the 
restriction on plan amendments under paragraph (c) of this section.
    (iv) However, since the contribution is not made until May 1, 2011, 
the amount of the required contribution must be adjusted to reflect 
interest from the valuation date to the date of the contribution. Since 
the effective interest rate has not yet been determined, the interest 
adjustment is based on the highest of the three segment rates applicable 
for the 2011 plan year under section 430(h)(2)(C), or 6%. The amount of 
the required contribution after adjustment is $407,845, determined as 
$400,000 increased for 4 months of compound interest at the highest 
segment interest rate for 2011, or 6%.
    (v) A contribution of $407,845 is made on May 1, 2011, and is 
designated as a contribution under paragraph (f)(2) of this section with 
respect to the May 1, 2011, plan amendment. Accordingly, the 
contribution is not applied toward minimum funding requirements under 
section 430, and is not eligible for inclusion in the prefunding balance 
under Sec.  1.430(f)-1(b)(1). Since this contribution meets the 
requirements of paragraph (f)(2) of this section, the plan amendment 
takes effect in accordance with its terms.
    (vi) After the plan's effective interest rate for 2011 has been 
determined to be 5.5%, the amount of excess interest previously 
contributed is recharacterized as an employer contribution taken into 
account under section 430 for 2011 (because that rate for the year is 
less than 6%).


[[Page 635]]


    (g) Rules of operation for periods prior to and after 
certification--(1) In general. Section 436(h) and paragraph (h) of this 
section set forth a series of presumptions that apply before the 
enrolled actuary for a plan issues a certification of the plan's 
adjusted funding target attainment percentage for the plan year. This 
paragraph (g) sets forth rules for the application of limitations under 
sections 436(b), 436(c), 436(d), and 436(e) prior to and during the 
period those presumptions apply to the plan, and describes the 
interaction of those presumptions with plan operations after the plan's 
enrolled actuary has issued a certification of the plan's adjusted 
funding target attainment percentage for the plan year. Paragraph (g)(2) 
of this section sets forth rules that apply to periods during which a 
presumption under section 436(h) and paragraph (h) of this section 
applies. Paragraph (g)(3) of this section sets forth rules that apply to 
periods during which no presumptions under section 436(h) and paragraph 
(h) of this section apply but which are prior to the enrolled actuary's 
certification of the plan's adjusted funding target attainment 
percentage for the plan year. Paragraph (g)(4) of this section sets 
forth rules for modifying the plan's presumed adjusted funding target 
attainment percentage in certain situations. Paragraph (g)(5) of this 
section sets forth rules that apply after the enrolled actuary's 
certification of the plan's adjusted funding target attainment 
percentage for a plan year. Paragraph (g)(6) of this section sets forth 
examples illustrating the rules in this paragraph (g).
    (2) Periods prior to certification during which a presumption 
applies--(i) Plan must follow presumptions. A plan must provide that, 
for any period during which a presumption under section 436(h) and 
paragraph (h)(1), (2), or (3) of this section applies to the plan, the 
limitations applicable under section 436 and paragraphs (b), (c), (d), 
and (e) of this section are applied to the plan as if the adjusted 
funding target attainment percentage for the year were the presumed 
adjusted funding target attainment percentage determined under the rules 
of section 436(h) and paragraph (h)(1), (2), or (3) of this section, as 
applicable, updated to take into account certain unpredictable 
contingent event benefits and plan amendments in accordance with section 
436 and the rules of this paragraph (g).
    (ii) Determination of amount of reduction in balances--(A) In 
general. During the period described in this paragraph (g)(2), the rules 
of paragraph (a)(5) of this section (relating to the deemed election to 
reduce the funding standard carryover balance and the prefunding 
balance) must be applied based on the presumed adjusted funding target 
attainment percentage. This paragraph (g)(2)(ii) provides rules for the 
determination of the reduction that applies as of the first day of the 
plan year, and, in certain circumstances, that applies later in the plan 
year. Paragraph (g)(2)(iii) of this section provides additional rules 
that apply with respect to unpredictable contingent event benefits or 
plan amendments, which rules must be applied prior to the application of 
paragraph (g)(2)(iv) of this section relating to section 436 
contributions. The reapplication of the rules under this paragraph 
(g)(2) regarding the deemed election in paragraph (a)(5) of this section 
may require an additional reduction in the prefunding and funding 
standard carryover balances if the amount of the reduction in those 
balances that is necessary to reach the applicable threshold to avoid 
the application of a section 436 limitation exceeds the amount that was 
initially reduced. Prior reductions of the prefunding and funding 
standard carryover balances continue to apply.
    (B) Reduction in balances at the first day of plan year--(1) Plans 
with a certified AFTAP for the prior plan year. If section 436(h)(1) and 
paragraph (h)(1) of this section apply to determine the presumed 
adjusted funding target attainment percentage as of the first day of the 
current plan year based on the plan's enrolled actuary certification of 
the adjusted funding target attainment percentage for the prior plan 
year made during that prior plan year, then, in order to determine the 
amount of the reduction (if any) in the funding standard carryover 
balance and prefunding balance under this paragraph (g)(2)(ii), a 
presumed adjusted

[[Page 636]]

funding target must be established as of the first day of the plan year, 
and that amount is then compared to the interim value of adjusted plan 
assets as of that date. For this purpose, the interim value of adjusted 
plan assets is equal to the value of adjusted plan assets (within the 
meaning of paragraph (j)(1)(ii) of this section) as of the first day of 
the plan year, determined without regard to future contributions and 
future elections with respect to the plan's prefunding and funding 
standard carryover balances under section 430(f) (for example, elections 
to add to the prefunding balance for the prior plan year, elections to 
use the prefunding and funding standard carryover balances to offset the 
minimum required contribution for a year, and elections (including 
deemed elections under paragraph (a)(5) of this section) to reduce the 
prefunding and funding standard carryover balances for the current plan 
year), and the presumed adjusted funding target is equal to the interim 
value of adjusted plan assets for the plan year divided by the presumed 
adjusted funding target attainment percentage. As provided in Sec.  
1.430(f)-1(e)(1), the rules of Sec.  1.430(f)-1(d)(1)(ii) apply for 
purposes of determining the amount of the prefunding balance or the 
funding standard carryover balance that is available for reduction.
    (2) Plans with presumed AFTAP deemed under 60 percent. If paragraph 
(g)(2)(ii)(B)(1) of this section does not apply to the plan for a plan 
year and the last day of the plan year is on or after the first day of 
the 10th month of the plan year, such that the presumed adjusted funding 
target attainment percentage for the prior plan year is conclusively 
presumed to be less than 60 percent under section 436(h)(2) and 
paragraph (h)(3) of this section, then no reduction in the funding 
standard carryover balance and prefunding balance is required under this 
paragraph (g)(2)(ii)(B). However, see paragraph (g)(2)(iv)(A) of this 
section for rules for determining the amount of a section 436 
contribution that would permit unpredictable contingent event benefits 
to be paid in such a case.
    (3) Treatment of short plan years. If paragraph (g)(2)(ii)(B)(1) of 
this section does not apply to the plan for a plan year but the last day 
of the plan year is before the first day of the 10th month of the plan 
year, such that section 436(h)(2) and paragraph (h)(3) of this section 
did not apply for that plan year, then paragraph (g)(2)(ii)(B)(1) of 
this section must be applied as of the first day of the next plan year 
based on the presumed adjusted funding target attainment percentage as 
of that last day of the prior short plan year.
    (C) Change in presumed AFTAP later in the plan year. If the presumed 
adjusted funding target attainment percentage for the plan year changes 
during the year, the rules regarding the deemed election to reduce the 
prefunding and funding standard carryover balances described in 
paragraph (a)(5) of this section must be reapplied based on the new 
presumed adjusted funding target attainment percentage. This will 
typically occur on the first day of the 4th month of a plan year, but 
could happen at a different date if the enrolled actuary certifies the 
adjusted funding target attainment percentage for the prior plan year 
during the current plan year. In order to determine the amount of any 
reduction in the prefunding and funding standard carryover balances that 
would apply in such a situation, a new presumed adjusted funding target 
must be established, which is then compared to the updated interim value 
of adjusted plan assets. For this purpose, the updated interim value of 
adjusted plan assets for the plan year is determined as the interim 
value of adjusted plan assets as of the first day of the plan year 
updated to take into account contributions for the prior plan year and 
section 430(f) elections with respect to the plan's prefunding and 
funding standard carryover balances made before the date of the change 
in the presumed adjusted funding target attainment percentage, and the 
new presumed adjusted funding target is equal to the updated interim 
value of adjusted plan assets divided by the new presumed adjusted 
funding target attainment percentage.
    (D) Plans funded below the threshold. If, after application of 
paragraph (g)(2)(ii)(B) and (C) of this section, the

[[Page 637]]

presumed adjusted funding target attainment percentage under this 
paragraph (g)(2)(ii) is less than the 60 percent threshold under section 
436(e), then no benefit accruals are permitted under the plan unless the 
plan sponsor makes a section 436 contribution as provided in paragraph 
(g)(2)(iv)(A) of this section. See paragraph (g)(5)(ii) of this section 
for rules that apply on and after the date the enrolled actuary for the 
plan issues a certification of the adjusted funding target attainment 
percentage of the plan for the current plan year.
    (iii) Calculation of inclusive presumed AFTAP for application to 
unpredictable contingent event benefits and plan amendments--(A) 
Requirement to calculate inclusive presumed AFTAP. For purposes of 
applying the limitations under paragraphs (b) and (c) of this section 
during the period described in this paragraph (g)(2), an inclusive 
presumed adjusted funding target attainment percentage must be 
calculated. The inclusive presumed adjusted funding target attainment 
percentage is the ratio (expressed as a percentage) of the interim value 
of adjusted plan assets (updated to take into account contributions for 
the prior plan year, any prior section 436 contributions made for the 
plan year to the extent not previously taken into account in the interim 
value of adjusted plan assets for the plan year, and section 430(f) 
elections with respect to the plan's prefunding and funding standard 
carryover balances made before the date of the unpredictable contingent 
event or the date the plan amendment would take effect) to the inclusive 
presumed adjusted funding target. The inclusive presumed adjusted 
funding target is calculated as the presumed adjusted funding target 
determined under paragraph (g)(2)(ii)(B) or (C) of this section, 
increased to take into account--
    (1) The unpredictable contingent event benefits or plan amendment;
    (2) Any unpredictable contingent event benefits that are permitted 
to be paid as a result of any unpredictable contingent event that 
occurred, or plan amendment that has taken effect, in the prior plan 
year to the extent not taken into account in the prior plan year 
adjusted funding target attainment percentage; and
    (3) Any other unpredictable contingent event benefits that are 
permitted to be paid as a result of any unpredictable contingent event 
that occurred, or plan amendment that has taken effect, in the current 
plan year to the extent not previously taken into account in the 
presumed adjusted funding target for the plan year.
    (B) Mandatory reduction for collectively bargained plans. During the 
period described in this paragraph (g)(2), the rules of paragraph 
(a)(5)(ii) of this section (relating to the deemed election to reduce 
the funding standard carryover balance and the prefunding balance) must 
be applied by treating the inclusive presumed adjusted funding target 
attainment percentage determined under this paragraph (g)(2)(iii) as if 
it were the adjusted funding target attainment percentage.
    (C) Optional reduction for plans that are not collectively bargained 
plans. A plan sponsor of a plan that is not a collectively bargained 
plan (and, thus, is not required to reduce the funding standard 
carryover balance and the prefunding balance under the rules of 
paragraph (a)(5)(ii) of this section) is permitted to elect to reduce 
those balances in order to increase the updated interim value of 
adjusted plan assets that is used to determine the inclusive presumed 
adjusted funding target attainment percentage under this paragraph 
(g)(2)(iii).
    (D) Plans funded below the threshold. If, after application of 
paragraph (g)(2)(iii)(B) and (C) of this section, the inclusive presumed 
adjusted funding target attainment percentage determined under this 
paragraph (g)(2)(iii) is less than the applicable threshold under 
section 436(b) or 436(c), then the plan is not permitted to provide any 
benefits attributable to the unpredictable contingent event, nor is the 
plan amendment permitted to take effect, unless the plan sponsor makes a 
section 436 contribution as provided in paragraph (g)(2)(iv) of this 
section. See paragraph (g)(5)(ii) of this section for rules that apply 
on and after the date the enrolled actuary for the plan issues a 
certification of the adjusted funding

[[Page 638]]

target attainment percentage of the plan for the current plan year.
    (E) Plans funded at or above the threshold. If, after application of 
paragraph (g)(2)(iii)(B) or (C) of this section, the inclusive presumed 
adjusted funding target attainment percentage is greater than or equal 
to the applicable threshold under section 436(b) or 436(c), then the 
plan is not permitted to limit the payment of unpredictable contingent 
event benefits described in paragraph (b) of this section, nor is the 
plan permitted to restrict a plan amendment increasing benefit 
liabilities described in paragraph (c) of this section from taking 
effect, based on an expectation that the limitations under paragraph (b) 
or (c) of this section will apply following the enrolled actuary's 
certification of the adjusted funding target attainment percentage for 
the plan year.
    (iv) Section 436 contributions--(A) Plans with presumed AFTAP below 
60 percent--(1) Unpredictable contingent event benefits. If the presumed 
adjusted funding target attainment percentage for a plan is less than 60 
percent, then unpredictable contingent event benefits are permitted to 
be paid as a result of an unpredictable contingent event occurring 
during the period described in this paragraph (g)(2) if the plan sponsor 
makes the section 436 contribution described in paragraph (f)(2)(iii)(A) 
of this section.
    (2) Plan amendments. If the presumed adjusted funding target 
attainment percentage for a plan is less than 60 percent, then no plan 
amendment increasing plan liabilities is permitted to take effect during 
the period described in this paragraph (g)(2). See paragraph (e)(1) of 
this section.
    (3) Benefit accruals. If the presumed adjusted funding target 
attainment percentage for a plan year of less than 60 percent is 
determined based on the plan's enrolled actuary certification of the 
adjusted funding target attainment percentage for the prior plan year 
made during that prior plan year (as opposed to being presumed to be 
less than 60 percent under the rules of section 436(h)(2) and paragraph 
(h)(3) of this section because the actuary has not certified the 
adjusted funding target attainment percentage for the prior plan year 
before the first day of the 10th month of the prior plan year), then 
benefits are permitted to accrue if the plan sponsor makes a section 436 
contribution in the amount necessary to bring the ratio of the updated 
interim value of adjusted plan assets to the presumed adjusted funding 
target up to 60 percent, as described in paragraph (f)(2)(v) of this 
section.
    (B) Plan amendments for plans with presumed AFTAP below 80 percent. 
If the presumed adjusted funding target attainment percentage for a plan 
is less than 80 percent, but is not less than 60 percent, then a plan 
amendment increasing plan liabilities is permitted to take effect during 
the period described in this paragraph (g)(2) if the plan sponsor makes 
a section 436 contribution described in paragraph (f)(2)(iv)(A) of this 
section.
    (C) Contributions required to reach threshold. If a plan is 
described in paragraph (g)(2)(iii)(D) of this section and neither 
paragraph (g)(2)(iv)(A) nor (B) of this section apply to the plan, then 
unpredictable contingent event benefits are permitted to be paid or the 
plan amendment is permitted to become effective during the period this 
paragraph (g)(2) applies to the plan only if the plan sponsor makes a 
section 436 contribution in the amount necessary to bring the ratio of 
the updated interim value of adjusted plan assets to the inclusive 
presumed adjusted funding target up to the applicable threshold under 
section 436(b) or (c), as described in paragraph (f)(2)(iii)(B) or 
(f)(2)(iv)(B) of this section. This paragraph (g)(2)(iv)(C) applies, for 
example, if an unpredictable contingent event occurs in the case of a 
plan with a presumed adjusted funding target attainment percentage of 
more than 60 percent where taking into account the unpredictable 
contingent event benefit in the inclusive presumed adjusted funding 
target would cause the ratio of the interim value of adjusted plan 
assets to the inclusive presumed adjusted funding target to be less than 
60 percent.
    (v) Bankruptcy of plan sponsor. Pursuant to section 436(d)(2), 
during any period in which the plan sponsor of a plan is a debtor in a 
case under title 11, United States Code, or any similar

[[Page 639]]

Federal or State law (as described in paragraph (d)(2) of this section), 
no prohibited payment within the meaning of paragraph (j)(6) of this 
section may be paid if the plan's enrolled actuary has not yet certified 
the plan's adjusted funding target attainment percentage for the plan 
year to be at least 100 percent. Thus, the presumption rules of 
paragraph (h) of this section do not apply for purposes of section 
436(d)(2) and this paragraph (g)(2)(v).
    (3) Periods prior to certification during which no presumption 
applies--(i) Prohibited payments and benefit accruals. If no 
presumptions under section 436(h) apply to a plan during a period and 
the plan's enrolled actuary has not yet issued the certification of the 
plan's actual adjusted funding target attainment percentage for the plan 
year, the plan is not permitted to limit prohibited payments under 
paragraph (d) of this section or the accrual of benefits under paragraph 
(e) of this section based on an expectation that those paragraphs will 
apply to the plan once an actuarial certification is issued. However, 
see paragraph (g)(2)(v) of this section for a restriction on prohibited 
payments during any period in which the plan sponsor of a plan is a 
debtor in a case under title 11, United States Code, or any similar 
Federal or State law.
    (ii) Unpredictable contingent event benefits and plan amendments 
increasing benefit liability--(A) In general. If no presumptions under 
section 436(h) apply to a plan during a period and the plan's enrolled 
actuary has not yet issued a certification of the plan's adjusted 
funding target attainment percentage for the plan year, the limitations 
on unpredictable contingent event benefits under paragraph (b) of this 
section and plan amendments increasing benefit liabilities under 
paragraph (c) of this section must be applied during that period by 
following the rules of paragraphs (g)(2)(iii) of this section, based on 
the inclusive presumed adjusted funding target determined using the 
prior plan year adjusted funding target attainment percentage. Thus, 
whether unpredictable contingent event benefits are permitted to be paid 
or a plan amendment is permitted to take effect during a plan year is 
determined by calculating the ratio of the interim value of adjusted 
plan assets to the inclusive presumed adjusted funding target, where the 
inclusive presumed adjusted funding target is determined by dividing the 
interim value of adjusted plan assets by the prior plan year adjusted 
funding target attainment percentage and then adding the adjustments 
described in paragraphs (g)(2)(iii)(A)(1), (2) and (3) of this section. 
If, after application of paragraphs (g)(2)(iii)(B) and (C) of this 
section, that ratio is less than the applicable threshold under section 
436(b) or 436(c), then the plan is not permitted to provide any benefits 
attributable to the unpredictable contingent event, nor is the plan 
amendment permitted to take effect, unless the plan sponsor makes the 
contribution described in paragraph (g)(2)(iv)(C) of this section.
    (B) Recharacterization of contributions made to avoid benefit 
limitations. In any case where, pursuant to paragraph (g)(3)(ii)(A) of 
this section, the plan sponsor makes section 436 contributions to avoid 
the application of the applicable benefit limitation, to the extent 
those contributions would not be needed to permit the payment of the 
unpredictable contingent event benefits or for the plan amendment to go 
into effect based on a subsequent certification of the adjusted funding 
target attainment percentage for the current plan year that takes into 
account the increase in the liability attributable to the unpredictable 
contingent event benefits or plan amendment, the excess section 436 
contributions are recharacterized as employer contributions taken into 
account under section 430 for the current plan year.
    (4) Modification of the presumed AFTAP--(i) Section 436 
contributions. If, in accordance with the rules of paragraph (g)(2)(iv) 
of this section, unpredictable contingent event benefits are permitted 
to be paid, or a plan amendment takes effect, during the plan year 
because the plan sponsor makes a contribution described in paragraph 
(f)(2)(iii)(B) or (f)(2)(iv)(B) of this section, then the presumed 
adjusted funding target must be adjusted to reflect

[[Page 640]]

any increase in the funding target attributable to the unpredictable 
contingent event benefits or the plan amendment and the interim value of 
plan assets must be increased by the present value of the contribution. 
Similarly, if benefit accruals are permitted to resume in a plan year 
because the plan sponsor makes the contribution described in paragraph 
(f)(2)(v) of this section, then the presumed adjusted funding target 
must be adjusted to reflect any increase in the funding target 
attributable to the benefit accruals for the prior plan year and the 
interim value of adjusted plan assets must be increased by the present 
value of the contribution. The adjustment to the presumed adjusted 
funding target is made as of the date of the contribution, and that date 
is a section 436 measurement date.
    (ii) Modification of the presumed AFTAP for reduction in balances. 
If a plan's funding standard carryover balance or prefunding balance is 
reduced under the rules of paragraph (g)(2) or (g)(3) of this section, 
then the presumed adjusted funding target attainment percentage for the 
plan year is increased to reflect the higher interim value of adjusted 
plan assets resulting from the reduction in the funding standard 
carryover balance or prefunding balance. The date of the event that 
causes the reduction is a section 436 measurement date.
    (5) Periods after certification of AFTAP--(i) Plan must follow 
certified AFTAP--(A) In general. The rules of paragraphs (g)(2) and 
(g)(3) of this section no longer apply for a plan year on and after the 
date the enrolled actuary for the plan issues a certification of the 
adjusted funding target attainment percentage of the plan for the 
current plan year, provided that the certification is issued before the 
first day of the 10th month of the plan year. For example, the plan must 
provide that the limitations on prohibited payments apply for 
distributions with annuity starting dates on and after the date of that 
certification using the certified adjusted funding target attainment 
percentage of the plan for the plan year. Similarly, the plan must 
provide that any prohibition on accruals under paragraph (e) of this 
section as a result of the enrolled actuary's certification that the 
adjusted funding target attainment percentage of the plan for the plan 
year is less than 60 percent is effective as of the date of the 
certification and that any prohibition on accruals ceases to be 
effective on the date the enrolled actuary issues a certification that 
the adjusted funding target attainment percentage of the plan for the 
plan year is at least 60 percent.
    (B) Unpredictable contingent events and plan amendments. In the case 
of a plan that has been issued a certification of the plan's adjusted 
funding target attainment percentage for a plan year by the plan's 
enrolled actuary, the plan sponsor must comply with the requirements of 
paragraphs (b) and (c) of this section for an unpredictable contingent 
event that occurs or a plan amendment that takes effect on or after the 
date of the enrolled actuary's certification. Thus, the plan 
administrator must determine if the adjusted funding target attainment 
percentage would be at or above the applicable threshold if it were 
modified to take into account--
    (1) The unpredictable contingent event or plan amendment;
    (2) Any other unpredictable contingent event benefits that were 
permitted to be paid as a result of any unpredictable contingent event 
that occurred, and any other plan amendment that took effect, earlier 
during the plan year to the extent not taken into account in the 
certified adjusted funding target attainment percentage for the plan 
year; and
    (3) Any earlier section 436 contributions made for the plan year to 
the extent those contributions were not taken into account in the 
certified adjusted funding target attainment percentage.
    (C) Application of rule for deemed election to reduce funding 
balances. After the adjusted funding target attainment percentage for a 
plan year is certified by the plan's enrolled actuary, the deemed 
election to reduce the prefunding and funding standard carryover 
balances under paragraph (a)(5) of this section must be reapplied based 
on the actual funding target for the year

[[Page 641]]

(provided the certification is issued before the first day of the 10th 
month of the plan year). The reapplication of the rules under this 
paragraph (g)(5) regarding the deemed election in paragraph (a)(5) of 
this section may require an additional reduction in the prefunding and 
funding standard carryover balances if the amount of the reduction in 
the prefunding and funding standard carryover balances that is necessary 
to reach the applicable threshold to avoid the application of a section 
436 limitation exceeds the amount that was initially reduced. Prior 
reductions of the prefunding and funding standard carryover balances 
continue to apply.
    (ii) Applicability to prior periods--(A) In general. Except as 
otherwise provided in this paragraph (g)(5)(ii), the enrolled actuary's 
certification of the adjusted funding target attainment percentage for 
the plan for the plan year does not affect prior periods. For example, 
the certification does not affect the application of the limitation 
under paragraph (d) of this section for distributions with annuity 
starting dates before the certification or the application of the 
limitation under paragraph (e) of this section prior to the date of that 
certification. See paragraph (a)(4) of this section for rules relating 
to the period of time after benefits cease to be limited. Except as 
otherwise provided in this paragraph (g)(5)(ii), the enrolled actuary's 
certification of the adjusted funding target attainment percentage for 
the plan for the plan year does not affect the application of the 
limitation under paragraph (b) or (c) of this section to unpredictable 
contingent event benefits, or a plan amendment that increases the 
liability for benefits, where the unpredictable contingent event occurs 
or the amendment takes effect during the periods to which paragraphs 
(g)(2) and (g)(3) of this section apply.
    (B) Special rule for unpredictable contingent event benefits. If a 
plan does not pay benefits attributable to an unpredictable contingent 
event because of the application of paragraph (g)(2)(iii)(D) or 
(g)(3)(ii)(A) of this section, then the plan must pay the benefits 
attributable to that event that were not previously paid if such 
benefits would be permitted under the rules of section 436 based on a 
certified adjusted funding target attainment percentage for the plan 
year that takes into account the increase in the funding target that 
would be attributable to those unpredictable contingent event benefits.
    (C) Special rule for plan amendments that increase liability. If a 
plan amendment does not take effect because of the application of 
paragraph (g)(2)(iii)(D) or (g)(3)(ii)(A) of this section, the plan 
amendment must go into effect if it would be permitted under the rules 
of section 436 based on a certified actual adjusted funding target 
attainment percentage for the plan year that takes into account the 
increase in the funding target attributable to the plan amendment, 
unless the plan amendment provides otherwise.
    (D) Ordering rule for multiple unpredictable contingent events or 
plan amendments. [Reserved]
    (6) Examples. The following examples illustrate the rules of this 
paragraph (g). Unless otherwise indicated, these examples are based on 
the following facts: each plan has a plan year that is the calendar year 
and a valuation date of January 1; section 436 applies to the plan 
beginning in 2008; the plan has no funding standard carryover balance; 
the plan sponsor is not in bankruptcy; no annuity purchases have been 
made from the plan; and the plan offers a lump sum form of payment. No 
plan is in at-risk status for the years discussed in the examples. The 
examples read as follows:

    Example 1. (i) The plan's certified AFTAP as of January 1, 2010, is 
75%. As of January 1, 2011, Plan A has assets of $3,300,000 and a 
prefunding balance of $300,000. Beginning on January 1, 2011, Plan A's 
AFTAP for 2011 is presumed to be 75%, under the rules of paragraph (h) 
of this section and based on the certified AFTAP for 2010.
    (ii) Based on Plan A's presumed AFTAP of 75%, Plan A would continue 
to be subject to the restriction on prohibited payments in paragraph 
(d)(3) of this section as of January 1, 2011. However, under the 
provisions of paragraph (a)(5) of this section, if the prefunding 
balance is large enough, Plan A's sponsor is deemed to elect to reduce 
the prefunding balance to the extent needed to avoid this restriction.

[[Page 642]]

    (iii) The amount needed to avoid the restriction in paragraph (d)(3) 
of this section is determined by comparing the presumed adjusted funding 
target for Plan A with the interim value of adjusted plan assets as of 
the valuation date. The interim value of adjusted plan assets for Plan A 
is $3,000,000 (that is, the asset value of $3,300,000 reduced by the 
prefunding balance of $300,000). The presumed adjusted funding target 
for Plan A is the interim value of the adjusted plan assets divided by 
the presumed AFTAP, or $4,000,000 (that is, $3,000,000 divided by 75%).
    (iv) In order to avoid the restriction on prohibited payments in 
paragraph (d)(3) of this section, Plan A's presumed AFTAP must be 
increased to 80%. This requires an increase in Plan A's adjusted plan 
assets of $200,000 (that is, 80% of the presumed adjusted funding target 
of $4,000,000, minus the interim value of the adjusted plan assets of 
$3,000,000). Plan A's prefunding balance as of January 1, 2011, is 
reduced by $200,000 under the deemed election provisions of paragraph 
(a)(5) of this section. Accordingly, Plan A's prefunding balance is 
$100,000 (that is, $300,000 minus $200,000) and the interim value of 
adjusted plan assets is increased to $3,200,000 (that is, $3,300,000 
minus the reduced prefunding balance of $100,000). Pursuant to paragraph 
(g)(4)(ii) of this section, the presumed adjusted funding target 
attainment percentage for Plan A is redetermined as 80% and Plan A must 
pay the full amount of the accelerated benefit distributions elected by 
participants with an annuity starting date of January 1, 2011, or later.
    Example 2. (i) The facts are the same as in Example 1. As of April 
1, 2011, the enrolled actuary for Plan A has not certified the 2011 
AFTAP. Therefore, beginning April 1, 2011, Plan A's AFTAP is presumed to 
be reduced by 10 percentage points to 70%, in accordance with paragraph 
(h)(2) of this section. Under the provisions of paragraph (g)(2)(ii)(B) 
of this section, the deemed election to reduce the prefunding and 
funding standard carryover balances described in paragraph (a)(5) of 
this section must be reapplied based on the new presumed AFTAP.
    (ii) In accordance with paragraph (g)(2)(ii)(C) of this section, a 
new presumed adjusted funding target must be determined based on the new 
presumed AFTAP and must be compared to an updated interim value of 
adjusted plan assets. The new presumed adjusted funding target is 
$3,200,000 divided by the new presumed AFTAP of 70%, or $4,571,429.
    (iii) In order to avoid the restriction on prohibited payments in 
paragraph (d)(3) of this section, Plan A's presumed AFTAP must be 
increased to 80%. This requires an additional increase in Plan A's 
adjusted plan assets of $457,143 (that is, 80% of the new presumed 
adjusted funding target of $4,571,429, minus the updated interim value 
of the adjusted plan assets of $3,200,000 reflecting the deemed 
reduction in Plan A's prefunding balance).
    (iv) Plan A's remaining prefunding balance as of January 1, 2011, is 
only $100,000, which is not enough to avoid the restriction on 
prohibited payments under paragraph (d)(3) of this section. Accordingly, 
unless Plan A's sponsor utilizes one of the methods described in 
paragraph (f) of this section to avoid the restriction, Plan A is 
subject to the restriction on prohibited payments in paragraph (d)(3) of 
this section and cannot pay accelerated benefit distributions elected by 
participants with an annuity starting date of April 1, 2011, or later.
    (v) Plan A's prefunding balance remains at $100,000 because, under 
paragraph (a)(5)(iii) of this section, the deemed reduction rules do not 
apply if the prefunding balance is not large enough to increase the 
adjusted value of plan assets enough to avoid the restriction. However, 
the earlier deemed reduction of $200,000 continues to apply because all 
elections (including deemed elections) to reduce a plan's funding 
standard carryover balance or prefunding balance are irrevocable and 
must be unconditional in accordance with paragraph (g)(2)(ii)(A) of this 
section.
    Example 3. (i) The facts are the same as in Example 1. On July 1, 
2011, the enrolled actuary for Plan A calculates the actual adjusted 
funding target as $3,700,000 as of January 1, 2011. Therefore, the 2011 
AFTAP would have been 81.08% without reducing the prefunding balance 
(that is, plan assets of $3,300,000 minus the prefunding balance of 
$300,000, divided by the adjusted funding target of $3,700,000), and 
Plan A would not have been subject to the restrictions under paragraph 
(d)(3) of this section.
    (ii) However, paragraph (g)(5)(i)(C) of this section requires that 
any prior reductions in the prefunding or funding standard carryover 
balances continue to apply, and so Plan A's prefunding balance remains 
at the reduced amount of $100,000 as of January 1, 2011. The enrolled 
actuary certifies that the 2011 AFTAP is 86.49% (that is, plan assets of 
$3,300,000 reduced by the prefunding balance of $100,000, divided by the 
adjusted funding target of $3,700,000).
    Example 4. (i) Plan B is a collectively bargained plan with assets 
of $2,500,000 and a prefunding balance of $150,000 as of January 1, 
2011. On August 14, 2010, the enrolled actuary for Plan B certified the 
AFTAP for 2010 to be 83%. No unpredictable contingent events giving rise 
to unpredictable contingent event benefits occurred during 2010 and no 
plan amendments took effect in 2010 that were not taken into account in 
the certified AFTAP.
    (ii) On January 10, 2011, Plan B's sponsor amends the plan to 
increase benefits effective on February 1, 2011. The amendment would 
increase Plan B's funding target by

[[Page 643]]

$350,000. Under the rules of paragraph (g)(3) of this section, the 
determination of whether the amendment is permitted to take effect is 
based on a comparison of the inclusive presumed adjusted funding target 
with the updated interim value of adjusted plan assets.
    (iii) Plan B's interim value of adjusted plan assets as of the 
valuation date is $2,350,000 (that is, $2,500,000 minus the prefunding 
balance of $150,000). Prior to reflecting the amendment, Plan B's 
presumed adjusted funding target as of January 1, 2011, is $2,831,325, 
which is equal to the interim value of adjusted plan assets as of the 
valuation date of $2,350,000, divided by the presumed AFTAP of 83%. 
Increasing Plan B's presumed adjusted funding target by $350,000 to 
reflect the amendment results in an inclusive presumed adjusted funding 
target of $3,181,325 and would result in a presumed AFTAP of 73.87% 
(that is, the interim value of adjusted plan assets as of the valuation 
date of $2,350,000 divided by the inclusive presumed adjusted funding 
target of $3,181,325).
    (iv) Because Plan B's presumed AFTAP was over 80% prior to taking 
the amendment into account but would be less than 80% if the amendment 
were taken into account, section 436(c) and paragraph (c) of this 
section prohibit the plan amendment from taking effect unless the 
adjusted plan assets are increased so that the inclusive presumed AFTAP 
would be increased to 80%. This would require an additional amount of 
$195,060 (that is, 80% of the inclusive presumed adjusted funding target 
of $3,181,325 less the interim value of adjusted plan assets of 
$2,350,000).
    (v) Plan B's prefunding balance of $150,000 is not large enough for 
Plan B to avoid the restriction on plan amendments, and therefore the 
deemed election to reduce the prefunding balance under paragraph (a)(5) 
of this section does not apply, and the amendment cannot take effect 
unless the plan sponsor makes a contribution described in paragraph 
(f)(2) of this section.
    Example 5. (i) The facts are the same as in Example 4, except that 
Plan B's sponsor decides to make a contribution on February 1, 2011, to 
avoid the benefit limitation as provided in paragraph (f)(2) of this 
section. As of February 1, 2011, Plan B's effective interest rate for 
the 2011 plan year has not yet been determined. Pursuant to paragraph 
(f)(2)(i)(A)(2) of this section, Plan B's effective interest rate for 
2011 is treated as 6.25%, which is the largest of the three segment 
interest rates applicable to the 2011 plan year, as provided in 
paragraph (f)(2)(i)(A)(2) of this section.
    (ii) The amount of the contribution as of January 1, 2011, needed to 
avoid the restriction on plan amendments under paragraph (c) of this 
section is $195,060. However, because the contribution is not paid until 
February 1, 2011, the necessary contribution amount must be adjusted to 
reflect interest that would otherwise have accrued between the valuation 
date and the date of the contribution, at Plan B's effective interest 
rate for the 2011 plan year. The amount of the required contribution 
after adjustment is $196,048, determined as $195,060 increased for one 
month of compound interest at an effective annual interest rate of 
6.25%.
    (iii) In accordance with paragraph (g)(4)(i) of this section, the 
inclusive presumed AFTAP as of February 1, 2011, is 80 percent.
    Example 6. (i) The facts are the same as in Example 5. As of April 
1, 2011, the enrolled actuary for the plan has not certified the 2011 
AFTAP. Beginning April 1, 2011, Plan A's presumed AFTAP is equal to be 
70%, 10 percentage points lower than the inclusive presumed AFTAP as of 
February 1, 2011, in accordance with paragraphs (g)(2)(iii)(A) and 
(h)(2) of this section. On July 1, 2011, the enrolled actuary for the 
plan calculates the actual adjusted funding target, prior to taking the 
plan amendment into account, as $2,700,000, and determines the actual 
effective interest rate for 2011 to be 5.25%. On this basis, the actual 
AFTAP for 2011 (prior to taking the amendment into account) as 87.04% 
(that is, adjusted assets of $2,350,000 divided by the adjusted funding 
target of $2,700,000). Reflecting the $350,000 increase in funding 
target due to the plan amendment would increase the adjusted funding 
target to $3,050,000 and would decrease Plan B's AFTAP to 77.05%.
    (ii) Based on the calculated adjusted funding target, the amount 
that was necessary to avoid the benefit restriction under paragraph (c) 
of this section was $90,000 (that is, 80% of the adjusted funding target 
reflecting the plan amendment (or $3,050,000), minus the adjusted value 
of plan assets of $2,350,000). This amount must be adjusted for interest 
between the valuation date and the date the contribution was made using 
the effective interest rate for Plan B. Therefore, the amount required 
on the payment date of February 1, 2011, was $90,385 (that is, $90,000 
adjusted for compound interest for one month at Plan B's effective 
interest rate of 5.25% per year).
    (iii) Under paragraph (g)(3)(ii)(B) of this section, the 
contribution made on February 1, 2011, is recharacterized as an employer 
contribution under section 430 to the extent that it exceeded the amount 
necessary to avoid application of the restriction on plan amendments 
under paragraph (c) of this section. Therefore, $105,663 (that is, the 
$196,048 actual contribution paid on February 1, 2011, minus the $90,385 
required contribution based on the actual AFTAP) is recharacterized as 
an employer contribution under section 430 for the 2011 plan year. As 
such, it may be applied toward the minimum required contribution for 
2011, or the plan sponsor can elect to credit the contribution to Plan 
B's

[[Page 644]]

prefunding balance to the extent that the contributions for the 2011 
plan year exceed the minimum required contribution.
    (iv) This recharacterization applied only because the 436 
contribution was made during a period prior to the certification of Plan 
B's actual AFTAP for 2011 and during which no presumption applied (that 
is, when section 436 is applied based on the 2010 AFTAP, which was high 
enough that no restrictions applied for 2010). If the contribution had 
been made during a time when the presumptions applied (for instance, 
after April 1, 2011, when the presumed AFTAP was under 80%) then the 
only portion of the 436 contribution that would be recharacterized as an 
employer contribution under section 430 would be the portion of the 
interest adjustment attributable to the difference between the highest 
segment rate (6.25%) and the plan's actual effective interest rate 
(5.25%), in accordance with paragraph (f)(2)(i)(A)(2) of this section.
    (v) After reflecting the plan amendment and the present value of the 
portion of the section 436 contribution that is not recharacterized as 
an employer contribution under section 430, the adjusted assets as of 
January 1, 2011, for purposes of section 436 are $2,440,000 ($2,350,000 
plus $90,000) and the inclusive adjusted funding target is $3,050,000. 
Accordingly, the enrolled actuary certifies the inclusive AFTAP for 2011 
as 80% ($2,440,00 / $3,050,000). Note that assets for section 430 
purposes are not increased to reflect the section 436 contribution as of 
January 1, 2011.
    Example 7. (i) The facts are the same as in Example 6, except that 
on July 1, 2011, the enrolled actuary for Plan B calculates the actual 
adjusted funding target (before reflecting the plan amendment) as 
$3,000,000 and certifies the actual AFTAP as 78.33% prior to reflecting 
the plan amendment (that is, adjusted plan assets of $2,350,000 divided 
by the actual adjusted funding target of $3,000,000). Based on the 
provisions of paragraph (c) of this section, because the AFTAP prior to 
reflecting the amendment is less than 80%, the contribution required to 
avoid the restriction on plan amendments would have been the amount 
equal to the increase in funding target due to the plan amendment, or 
$350,000.
    (ii) However, according to paragraph (g)(5)(ii)(A) of this section, 
the enrolled actuary's certification of the 2011 AFTAP does not affect 
the application of the limitation under paragraph (c) of this section to 
the amendment, because the amendment to Plan B took effect prior to the 
date of the certification. Therefore, it is not necessary for Plan B's 
sponsor to contribute an additional amount in order for the plan 
amendment to remain in effect regardless of the extent to which the 
certified AFTAP for the plan year is less than the presumed inclusive 
AFTAP.

    (h) Presumed underfunding for purposes of benefit limitations--(1) 
Presumption of continued underfunding--(i) In general. This paragraph 
(h)(1) applies to a plan for a plan year if a limitation under paragraph 
(b), (c), (d), or (e) of this section applied to the plan on the last 
day of the preceding plan year. If this paragraph (h)(1) applies to a 
plan, the first day of the plan year is a section 436 measurement date 
and the presumed adjusted funding target attainment percentage for the 
plan is the percentage under paragraph (h)(1)(ii) or (iii) of this 
section, whichever applies to the plan, beginning on that first day of 
the plan year and ending on the date specified in paragraph (h)(1)(iv) 
of this section.
    (ii) Rule where preceding year certification issued during preceding 
year--(A) General rule. In any case in which the plan's enrolled actuary 
has issued a certification under paragraph (h)(4) of this section of the 
adjusted funding target attainment percentage for the plan year 
preceding the current plan year before the first day of the current plan 
year, the presumed adjusted funding target attainment percentage of the 
plan for the current plan year is equal to the prior plan year adjusted 
funding target attainment percentage until it is changed under paragraph 
(h)(1)(iv) of this section.
    (B) Special rule for late certifications. If the certification of 
the adjusted funding target attainment percentage for the prior plan 
year occurred after the first day of the 10th month of that prior plan 
year, the plan is treated as if no such certification was made, unless 
the certification took into account the effect of any unpredictable 
contingent event benefits that are permitted to be paid based on 
unpredictable contingent events that occurred, and any plan amendments 
that became effective, during the prior plan year but before the 
certification (and any associated section 436 contributions).
    (iii) No certification for preceding year issued during preceding 
year--(A) Deemed percentage continues. In any case in which the plan's 
enrolled actuary has not issued a certification under paragraph (h)(4) 
of this section of the adjusted funding target attainment percentage of 
the plan for the plan year

[[Page 645]]

preceding the current plan year during that prior plan year, the 
presumed adjusted funding target attainment percentage of the plan for 
the current plan year is equal to the presumed adjusted funding target 
attainment percentage that applied on the last day of the preceding plan 
year until the presumed adjusted funding target attainment percentage is 
changed under paragraph (h)(1)(iii)(B) or (h)(1)(iv) of this section. 
Thus, if the prior plan year was a 12-month plan year (so that the last 
day of the plan year was after the first day of the 10th month of the 
plan year and the rules of section 436(h)(2) and paragraph (h)(3) of 
this section applied to the plan for that plan year), then the presumed 
adjusted funding target attainment percentage for the current plan year 
is presumed to be less than 60 percent. By contrast, if the prior plan 
year was less than 9 months, the presumed adjusted funding target 
attainment percentage for the current plan year is the presumed adjusted 
funding target attainment percentage at the last day of the preceding 
plan year.
    (B) Enrolled actuary's certification in following year. In any case 
in which the plan's enrolled actuary has issued the certification under 
paragraph (h)(4) of this section of the adjusted funding target 
attainment percentage of the plan for the plan year preceding the 
current plan year on or after the first day of the current plan year, 
the date of that prior plan year certification is a new section 436 
measurement date for the current plan year. In such a case, the presumed 
adjusted funding target attainment percentage for the current plan year 
is equal to the prior plan year adjusted funding target attainment 
percentage (reduced by 10 percentage points if paragraph (h)(2)(iv) of 
this section applies to the plan) until it is changed under paragraph 
(h)(1)(iv) of this section. The rules of paragraph (h)(1)(ii)(B) of this 
section apply for purposes of determining whether the enrolled actuary 
has issued a certification of the adjusted funding target attainment 
percentage for the prior plan year during the current plan year.
    (iv) Duration of use of presumed adjusted funding target attainment 
percentage. If this paragraph (h)(1) applies to a plan for a plan year, 
the presumed adjusted funding target attainment percentage determined 
under this paragraph (h)(1) applies until the earliest of--
    (A) The first day of the 4th month of the plan year if paragraph 
(h)(2) of this section applies;
    (B) The first day of the 10th month of the plan year if paragraph 
(h)(3) of this section applies;
    (C) The date of a change in the presumed adjusted funding target 
attainment percentage under paragraph (g)(4) of this section; or
    (D) The date the enrolled actuary issues a certification under 
paragraph (h)(4) of this section of the adjusted funding target 
attainment percentage for the plan year.
    (2) Presumption of underfunding beginning on first day of 4th month 
for certain underfunded plans--(i) In general. This paragraph (h)(2) 
applies to a plan for a plan year if--
    (A) The enrolled actuary for the plan has not issued a certification 
of the adjusted funding target attainment percentage for the plan year 
before the first day of the 4th month of the plan year; and
    (B) The plan's adjusted funding target attainment percentage for the 
preceding plan year was either--
    (1) At least 60 percent but less than 70 percent; or
    (2) At least 80 percent but less than 90 percent.
    (ii) Special rule for first plan year a plan is subject to section 
436. This paragraph (h)(2) also applies to a plan for the first 
effective plan year if--
    (A) The enrolled actuary for the plan has not issued a certification 
of the adjusted funding target attainment percentage for the plan year 
before the first day of the 4th month of the plan year; and
    (B) The prior plan year adjusted funding target attainment 
percentage is at least 70 percent but less than 80 percent.
    (iii) Presumed adjusted funding target attainment percentage. If 
this paragraph (h)(2) applies to a plan for a plan year and the date of 
the enrolled actuary's certification of the adjusted funding target 
attainment percentage under paragraph (h)(4) of this section for the 
prior plan year (taking into account

[[Page 646]]

the special rules for late certifications under paragraph (h)(1)(ii)(B) 
of this section) occurred before the first day of the 4th month of the 
current plan year, then, commencing on the first day of the 4th month of 
the current plan year--
    (A) The presumed adjusted funding target attainment percentage of 
the plan for the plan year is reduced by 10 percentage points; and
    (B) The first day of the 4th month of the plan year is a section 436 
measurement date.
    (iv) Certification for prior plan year. If this paragraph (h)(2) 
applies to a plan and the date of the enrolled actuary's certification 
of the adjusted funding target attainment percentage under paragraph 
(h)(4) of this section for the prior plan year (taking into account the 
rules for late certifications under paragraph (h)(1)(ii)(B) of this 
section) occurs on or after the first day of the 4th month of the 
current plan year, then, commencing on the date of that prior plan year 
certification--
    (A) The presumed adjusted funding target attainment percentage of 
the plan for the current plan year is equal to 10 percentage points less 
than the prior plan year adjusted funding target attainment percentage; 
and
    (B) The date of the prior plan year certification is a section 436 
measurement date.
    (v) Duration of use of presumed adjusted funding target attainment 
percentage. If this paragraph (h)(2) applies to a plan for a plan year, 
the presumed adjusted funding target attainment percentage determined 
under this paragraph (h)(2) applies until the earliest of--
    (A) The first day of the 10th month of the plan year if paragraph 
(h)(3) of this section applies;
    (B) The date of a change in the presumed adjusted funding target 
attainment percentage under paragraph (g)(4) of this section; or
    (C) The date the enrolled actuary issues a certification under 
paragraph (h)(4) of this section of the adjusted funding target 
attainment percentage for the plan year.
    (3) Presumption of underfunding beginning on first day of 10th 
month. In any case in which no certification of the specific adjusted 
funding target attainment percentage for the current plan year under 
paragraph (h)(4) of this section is made with respect to the plan before 
the first day of the 10th month of the plan year, then, commencing on 
the first day of the 10th month of the current plan year--
    (i) The presumed adjusted funding target attainment percentage of 
the plan for the plan year is presumed to be less than 60 percent; and
    (ii) The first day of the 10th month of the plan year is a section 
436 measurement date.
    (4) Certification of AFTAP--(i) Rules generally applicable to 
certifications--(A) In general. The enrolled actuary's certification 
referred to in this section must be made in writing, must be signed and 
dated to show the date of the signature, must be provided to the plan 
administrator, and, except as otherwise provided in paragraph (h)(4)(ii) 
of this section, must certify the plan's adjusted funding target 
attainment percentage for the plan year. Except in the case of a range 
certification described in paragraph (h)(4)(ii) of this section, the 
certification must set forth the value of plan assets, the prefunding 
balance, the funding standard carryover balance, the value of the 
funding target used in the determination, the aggregate amount of 
annuity purchases included in the adjusted value of plan assets and the 
adjusted funding target, the unpredictable contingent event benefits 
permitted to be paid for unpredictable contingent events that occurred 
during the current plan year that were taken into account for the 
current plan year (including any associated section 436 contributions), 
the plan amendments that took effect in the current plan year that were 
taken into account for the current plan year (including any associated 
section 436 contributions), any benefit accruals that were restored for 
the plan year (including any section 436 contributions), and any other 
relevant factors. The actuarial assumptions and funding methods used in 
the calculation for the certification must be the actuarial assumptions 
and funding methods used for the plan for purposes of determining the 
minimum required

[[Page 647]]

contributions under section 430 for the plan year.
    (B) Determination of plan assets. For purposes of making any 
determination of the adjusted funding target attainment percentage under 
this section, the determination is not permitted to include in plan 
assets contributions that have not been made to the plan by the 
certification date. Thus, the enrolled actuary's certification of the 
adjusted funding target attainment percentage for a plan year cannot 
take into account contributions that are expected to be made after the 
certification date. Notwithstanding the foregoing, for plan years 
beginning before January 1, 2009, the enrolled actuary's certification 
of the adjusted funding target attainment percentage is permitted to 
take into account employer contributions for the prior plan year that 
are reasonably expected to be made for that prior plan year but have not 
been contributed by the date of the enrolled actuary's certification. 
See paragraphs (h)(4)(iii) and (v) of this section for rules relating to 
changes in the certified percentage.
    (ii) Special rules for certification within range--(A) In general. 
Under this paragraph (h)(4)(ii), the plan's enrolled actuary is 
permitted to certify during a plan year that the plan's adjusted funding 
target attainment percentage for that plan year either is less than 60 
percent, is 60 percent or higher (but is less than 80 percent), is 80 
percent or higher, or is 100 percent or higher. If the enrolled actuary 
has issued such a range certification for a plan year and the enrolled 
actuary subsequently issues a certification of the specific adjusted 
funding target attainment percentage for the plan before the end of that 
plan year, then the certification of the specific adjusted funding 
target attainment percentage is treated as a change in the applicable 
percentage to which paragraph (h)(4)(iii) of this section applies.
    (B) Effect of range certification before certification of specific 
percentage. If a plan's enrolled actuary issues a range certification 
pursuant to this paragraph (h)(4)(ii), then, for purposes of this 
section (including application of the limitations of sections 436(b) and 
(c), contributions described in sections 436(b)(2), 436(c)(2), and 
436(e)(2), and the mandatory reduction of the prefunding and funding 
standard carryover balances under paragraph (a)(5) of this section), the 
plan is treated as having a certified percentage at the smallest value 
within the applicable range until a certification of the plan's specific 
adjusted funding target attainment percentage for the plan year has been 
issued under paragraph (h)(4)(i) of this section. However, if the plan's 
enrolled actuary has issued a range certification for the plan year but 
does not issue a certification of the specific adjusted funding target 
attainment percentage for the plan by the last day of that plan year, 
the adjusted funding target attainment percentage for the plan is 
retroactively deemed to be less than 60 percent as of the first day of 
the 10th month of the plan year.
    (C) Effect of range certification on and after certification of 
specific percentage. Once the certification of the specific adjusted 
funding target attainment percentage is issued by the plan's enrolled 
actuary, the certified percentage applies for all purposes of this 
section on and after the date of that certification. If the plan sponsor 
made section 436 contributions to avoid application of a benefit 
limitation during the period a range certification was in effect, those 
section 436 contributions are recharacterized as employer contributions 
under section 430 to the extent the contributions exceed the amount 
necessary to avoid application of a limitation based on the specific 
adjusted funding target attainment percentage as certified by the plan's 
enrolled actuary on or before the last day of the plan year.
    (iii) Change of certified percentage--(A) Application of new 
percentage. If the enrolled actuary for the plan provides a 
certification of the adjusted funding target attainment percentage of 
the plan for the plan year under this paragraph (h)(4) (including a 
range certification) and that certified percentage is superseded by a 
subsequent determination of the adjusted funding target attainment 
percentage for that plan year, then, except to the extent provided in 
paragraph (h)(4)(iv)(B) of this section, that later percentage must be 
applied for the portion of the plan year

[[Page 648]]

beginning on the date of the earlier certification. The subsequent 
determination could be the correction of a prior incorrect certification 
or it could be an update of a prior correct certification to take into 
account subsequent facts under the rules of paragraph (h)(4)(v) of this 
section. The implications of such a change depend on whether the change 
is a material change or an immaterial change. See paragraph (h)(4)(iv) 
of this section.
    (B) Material change. A change in a plan's certified adjusted funding 
target attainment percentage constitutes a material change for a plan 
year if plan operations with respect to benefits that are addressed by 
section 436, taking into account any actual contributions and elections 
under section 430(f) made by the plan sponsor based on the prior 
certified percentage, would have been different based on the subsequent 
determination of the plan's adjusted funding target attainment 
percentage for the plan year. A change in a plan's adjusted funding 
target attainment percentage for a plan year can be a material change 
even if the only impact of the change occurs in the following plan year 
under the rules for determining the presumed adjusted funding target 
attainment percentage in that following year.
    (C) Immaterial change. In general, an immaterial change is any 
change in an adjusted funding target attainment percentage for a plan 
year that is not a material change. In addition, subject to the 
requirement to recertify the adjusted funding target attainment 
percentage in paragraph (h)(4)(v)(B) of this section, a change in 
adjusted funding target attainment percentage is deemed to be an 
immaterial change if it merely reflects a change in the funding target 
for the plan year or the value of the adjusted plan assets after the 
date of the enrolled actuary's certification resulting from--
    (1) Additional contributions for the preceding year that are made by 
the plan sponsor;
    (2) The plan sponsor's election to reduce the prefunding balance or 
funding standard carryover balance;
    (3) The plan sponsor's election to apply the prefunding balance or 
funding standard carryover balance to offset the prior plan year's 
minimum required contribution;
    (4) A change in funding method or actuarial assumptions, where such 
change required actual approval of the Commissioner (rather than deemed 
approval);
    (5) Unpredictable contingent event benefits which are permitted to 
be paid because the employer makes the section 436 contribution 
described in paragraph (f)(2)(iii)(A) of this section;
    (6) Unpredictable contingent event benefits which are permitted to 
be paid because the plan's enrolled actuary determines that the increase 
in the funding target attributable to the occurrence of the 
unpredictable contingent event would not cause the plan's adjusted 
funding target attainment percentage to fall below 60 percent;
    (7) A plan amendment which takes effect because the employer makes 
the section 436 contribution described in paragraph (f)(2)(iv)(A) of 
this section, the liability for which was not taken into account in the 
certification of the adjusted funding target attainment percentage;
    (8) A plan amendment which takes effect because the plan's enrolled 
actuary determines that the increase in the funding target attributable 
to the plan amendment would not cause the plan's adjusted funding target 
attainment percentage to fall below 80 percent, the liability for which 
was not taken into account in the certification of the adjusted funding 
target attainment percentage; or
    (9) Any other event prescribed in guidance published in the Internal 
Revenue Bulletin.
    (iv) Effect of change in percentage--(A) Material change. In the 
case of a material change, if the plan's prior operations were in 
accordance with the prior certification of the adjusted funding target 
attainment percentage for the plan year (rather than the actual adjusted 
funding target attainment percentage for the plan year), then the plan 
will not have satisfied the requirements of section 401(a)(29) and 
section 436. Even if the plan's prior operations were in accordance with 
the subsequent certification of the adjusted funding target attainment 
percentage, the plan will not have satisfied the

[[Page 649]]

qualification requirements of section 401(a) because the plan will not 
have been operated in accordance with its terms during the period of 
time the prior certification applied. In addition, in the case of a 
material change, the rules requiring application of a presumed adjusted 
funding target attainment percentage under paragraphs (h)(1) through 
(h)(3) of this section continue to apply from and after the date of the 
prior certification until the date of the subsequent certification.
    (B) Immaterial change. An immaterial change in the adjusted funding 
target attainment percentage applies prospectively only and does not 
change the inapplicability of the presumptions under paragraphs (h)(1), 
(2), and (3) of this section prior to the date of the later 
certification.
    (v) Rules relating to updated certification--(A) In general. This 
paragraph (h)(4)(v) sets forth rules relating to updates of an actuary's 
certification of the plan's adjusted funding target attainment 
percentage for a plan year. Paragraphs (h)(4)(v)(B) and (D) of this 
section require that an updated adjusted funding target attainment 
percentage be certified in certain situations. Even if the updated 
adjusted funding target attainment percentage is not required to be 
certified, plan administrators may request that the actuary prepare an 
updated certification of the adjusted funding target attainment 
percentage, as described in paragraphs (h)(4)(v)(C) and (E) of this 
section. Any updated adjusted funding target attainment percentage 
determined under this paragraph (h)(4)(v) will apply beginning as of the 
date of the event that gave rise to the need for the update which is a 
section 436 measurement date. Thus, pursuant to this paragraph 
(h)(4)(v), the updated funding target attainment percentage applies 
thereafter for all purposes of section 436, including application with 
respect to unpredictable contingent events occurring on or after the 
measurement date (but not for unpredictable contingent events that 
occurred before such measurement date or for benefits with annuity 
starting dates before that measurement date). The updated adjusted 
funding target attainment percentage will continue to apply for the 
remainder of the plan year and will be used for the presumed adjusted 
funding target attainment percentage for the next plan year, unless 
there is a later updated certification of adjusted funding target 
attainment percentage for the plan year.
    (B) Requirement to recertify AFTAP if plan sponsor contributes to 
threshold. If, during the plan year, unpredictable contingent event 
benefits are permitted to be paid, a plan amendment takes effect, or 
benefits are permitted to accrue because the plan sponsor makes a 
contribution described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or 
(f)(2)(v) of this section, then, in accordance with paragraph 
(f)(2)(ii)(C) of this section, the plan's enrolled actuary must issue an 
updated certification of the adjusted funding target attainment 
percentage that takes into account such contribution as well as the 
liability for unpredictable contingent event benefits that are permitted 
to be paid, plan amendments that take effect during the plan year, and 
restored benefits.
    (C) Optional recertification of AFTAP after other unpredictable 
contingent event or plan amendment. Except as provided in paragraph 
(h)(4)(v)(D) of this section, if, during a plan year, unpredictable 
contingent event benefits are permitted to be paid, or a plan amendment 
takes effect, because either the plan sponsor makes a contribution 
described in paragraph (f)(2)(iii)(A) or (f)(2)(iv)(A) of this section, 
or the plan's enrolled actuary determines that the increase in the 
funding target attributable to the occurrence of the unpredictable 
contingent event or the plan amendment would not cause the plan's 
adjusted funding target attainment percentage to fall below the 
applicable 60 percent or 80 percent threshold (taking into account the 
occurrence of all previous unpredictable contingent event benefits and 
plan amendments to the extent not already reflected in the certified 
adjusted funding target attainment percentage for the plan year (or 
update)), then the plan administrator may request that the plan actuary 
issue an updated certification of the adjusted funding target attainment 
percentage that takes into account the

[[Page 650]]

unpredictable contingent event benefits or plan amendments and any 
associated section 436 contribution.
    (D) Requirement to recertify AFTAP after deemed immaterial change. 
If a change in the adjusted funding target attainment percentage as a 
result of one of the items listed in paragraph (h)(4)(iii)(C) of this 
section would be a material change, then the change is treated as an 
immaterial change only if the plan's enrolled actuary recertifies the 
adjusted funding target attainment percentage for the plan year as soon 
as practicable after the event that gives rise to the change.
    (E) Optional recertification after other immaterial change. If a 
change in the adjusted funding target attainment percentage is 
immaterial, then the plan administrator may request that the plan 
actuary issue an updated certification of the adjusted funding target 
attainment percentage that takes into account the unpredictable 
contingent event benefits or plan amendments and any associated section 
436 contribution.
    (5) Examples of rules of paragraphs (h)(1), (h)(2), and (h)(3) of 
this section. The following examples illustrate the rules of paragraphs 
(h)(1), (h)(2), and (h)(3) of this section. Unless otherwise indicated, 
the examples in this section are based on the information in this 
paragraph (h)(5). Each plan is a non-collectively bargained defined 
benefit plan with a plan year that is the calendar year and a valuation 
date of January 1. The plan year is subject to section 436 in 2008. The 
plan does not have a funding standard carryover balance or a prefunding 
balance as of any of the dates mentioned, and the plan sponsor does not 
elect to utilize any of the methods in paragraph (f) of this section to 
avoid applicable benefit restrictions. No range certification under 
paragraph (h)(4) of this section has been issued. The plan sponsor is 
not in bankruptcy. The examples read as follows:

    Example 1. (i) On July 15, 2010, the adjusted funding target 
attainment percentage (``AFTAP'') for Plan T for 2010 is certified to be 
65%. Based on this AFTAP, Plan T is subject to the restriction on 
prohibited payments in paragraph (d)(3) of this section for the 
remainder of 2010.
    (ii) Beginning January 1, 2011, Plan T's AFTAP for 2011 is presumed 
to be equal to the AFTAP for 2010, or 65%, under the provisions of 
paragraph (h)(1)(ii) of this section. Accordingly, the restriction on 
prohibited payments in paragraph (d)(3) of this section continues to 
apply.
    (iii) On March 1, 2011, the enrolled actuary for the plan certifies 
that the actual AFTAP for 2011 is 80%. Therefore, beginning March 1, 
2011, Plan T is no longer subject to the restriction under paragraph 
(d)(3) of this section, and so Plan T resumes paying the full amount of 
any prohibited payments elected by participants with an annuity starting 
date of March 1, 2011, or later.
    Example 2. (i) The facts are the same as in Example 1, except that 
the enrolled actuary for the plan does not certify the AFTAP for 2011 
until June 1, 2011, when it is certified to be 66%.
    (ii) Beginning January 1, 2011, Plan T's AFTAP for 2011 is presumed 
to be equal to the AFTAP for 2010, or 65%, under the provisions of 
paragraph (h)(1)(ii) of this section. Accordingly, the restriction on 
prohibited payments in paragraph (d)(3) of this section continues to 
apply.
    (iii) Pursuant to paragraph (h)(2)(iv) of this section, beginning 
April 1, 2011, the AFTAP for 2011 is presumed to be 55% (10 percentage 
points less than the AFTAP for 2010). Plan T is subject to the 
restriction on prohibited payments under paragraph (d)(1) of this 
section for annuity starting dates on or after April 1, 2011. In 
addition, Plan T is subject to the restriction on unpredictable 
contingent event benefits under paragraph (b) of this section for 
unpredictable contingent events occurring on or after April 1, 2011 and 
benefits are required to be frozen on and after April 1, 2011 under 
paragraph (e) of this section.
    (iv) Once the enrolled actuary for the plan certifies that the AFTAP 
for 2011 for Plan T is 66%, Plan T is no longer subject to the 
restriction under paragraph (d)(1) of this section, but it is subject to 
the restriction under paragraph (d)(3) of this section. Plan T must 
resume paying prohibited payments, as restricted under paragraph (d)(3) 
of this section, for participants who elect benefits in accelerated 
forms of payment and who have an annuity starting date of June 1, 2011, 
or later. In addition, Plan T must provide benefits for any 
unpredictable contingent event occurring on or after January 1, 2011, to 
the extent permitted under paragraph (b) of this section. Similarly, 
Plan T is no longer subject to the restriction on benefit accruals under 
paragraph (e) of this section, and benefit accruals resume under Plan T 
beginning June 1, 2011, unless Plan T provides otherwise.
    Example 3. (i) The facts are the same as in Example 1, except that 
the enrolled actuary for the plan does not certify the 2011 AFTAP until 
November 15, 2011. Beginning October 1, 2011, Plan T is conclusively 
presumed to have

[[Page 651]]

an AFTAP of less than 60%, in accordance with the provisions of 
paragraph (h)(3) of this section. Accordingly, Plan T is subject to the 
restrictions in paragraphs (b), (d)(1), and (e) of this section 
commencing on October 1, 2011.
    (ii) On November 15, 2011, the enrolled actuary for the plan 
certifies that the AFTAP for 2011 is 72%. However, because the 
certification occurred after September 30, 2011, the certification does 
not constitute a new section 436 measurement date, and Plan T continues 
to be subject to the restrictions on unpredictable contingent event 
benefits, prohibited payments, and benefit accruals under paragraphs 
(b), (d)(1), and (e) of this section.
    (iii) Beginning January 1, 2012, the 2012 AFTAP for Plan T is 
presumed to be equal to the 2011 AFTAP of 72%. Because the presumed 2012 
AFTAP is between 70% and 80% and, therefore, paragraph (h)(2) of this 
section (which provides for a 10 percentage point reduction in a plan's 
AFTAP in certain cases) will not apply, the presumed AFTAP will remain 
at 72% until the plan's enrolled actuary certifies the AFTAP for 2012 or 
until paragraph (h)(3) of this section applies on the first day of the 
10th month of the plan year. Because the presumed AFTAP is 72%, Plan T 
is no longer subject to the restrictions on prohibited payments under 
paragraph (d)(1) of this section, and Plan T must provide benefits for 
any unpredictable contingent event occurring on or after January 1, 
2012, to the extent permitted under paragraph (b) of this section and 
must resume paying prohibited payments, as restricted under paragraph 
(d)(3) of this section, that are elected by participants with annuity 
starting dates on or after January 1, 2012. Similarly, Plan T is no 
longer subject to the restriction on benefit accruals under paragraph 
(e) of this section, and benefit accruals resume under Plan T beginning 
January 1, 2012, unless Plan T provides otherwise.
    Example 4. (i) The facts are the same as in Example 3, except that 
the enrolled actuary for the plan does not issue a certification of the 
AFTAP for 2011 for Plan T until February 1, 2012.
    (ii) Beginning on January 1, 2012, the presumptions in paragraph 
(h)(1)(iii) of this section apply for the 2012 plan year. Because the 
enrolled actuary for the plan has not certified the AFTAP for 2011, the 
presumed AFTAP as of October 1, 2011, continues to apply for the period 
beginning January 1, 2012. Therefore, the AFTAP as of January 1, 2012, 
is presumed to be less than 60%, and Plan T continues to be subject to 
the restrictions on unpredictable contingent event benefits under 
paragraph (b) of this section, prohibited payments under paragraph 
(d)(1) of this section, and benefit accruals under paragraph (e) of this 
section.
    (iii) On February 1, 2012, the enrolled actuary for the plan 
certifies that the AFTAP for 2011 for Plan T is 65%. Because the 
enrolled actuary for the plan has not issued a certification of the 
AFTAP for 2012, the provisions of paragraph (h)(1)(iii)(B) of this 
section apply. Accordingly, the certification date for the 2011 AFTAP 
(February 1, 2012) is a section 436 measurement date and 65% is the 
presumed AFTAP for 2012 beginning on that date.
    (iv) Because the presumed AFTAP is over 60% but less than 80%, the 
full restriction on prohibited payments under paragraph (d)(1) of this 
section no longer applies; however, the partial restriction on 
prohibited payments under paragraph (d)(3) of this section applies 
beginning on February 1, 2012. Therefore, Plan T must pay a portion of 
the prohibited payments elected by participants with annuity starting 
dates on or after February 1, 2012. Furthermore, based on the presumed 
AFTAP of 65%, the restriction on unpredictable contingent event benefits 
under paragraph (b) of this section ceases to apply for events occurring 
on or after February 1, 2012, to the extent permitted under paragraph 
(b) of this section and the restriction on benefit accruals under 
paragraph (e) of this section no longer applies so that, unless Plan T 
provides otherwise, benefit accruals will resume as of February 1, 2012.
    Example 5. (i) The facts are the same as in Example 3, except that 
the enrolled actuary for the plan does not issue a certification of the 
actual AFTAP for Plan T as of January 1, 2011, until May 1, 2012.
    (ii) Beginning on January 1, 2012, the presumptions in paragraph 
(h)(1)(iii) of this section apply for the 2012 plan year. Because the 
enrolled actuary for the plan has not certified the actual AFTAP as of 
January 1, 2011, the presumed AFTAP as of October 1, 2011, continues to 
apply for the period beginning January 1, 2012. Therefore, the AFTAP as 
of January 1, 2012, is presumed to be less than 60%, and Plan T 
continues to be subject to the restrictions on unpredictable contingent 
event benefits under paragraph (b) of this section, on prohibited 
payments under paragraph (d)(1) of this section, and on benefit accruals 
under paragraph (e) of this section.
    (iii) Since the enrolled actuary for the plan has not issued a 
certification of the actual AFTAP as of January 1, 2011, the rules of 
paragraph (h)(1)(iii) of this section apply beginning April 1, 2012, and 
the AFTAP is presumed to remain less than 60%. Plan T continues to be 
subject to the restrictions on unpredictable contingent event benefits 
under paragraph (b) of this section, on prohibited payments under 
paragraph (d)(1) of this section, and on benefit accruals under 
paragraph (e) of this section.
    (iv) On May 1, 2012, the enrolled actuary for the plan certifies 
that the actual AFTAP for 2011 for Plan T is 65%. Because the enrolled 
actuary for the plan has not issued a

[[Page 652]]

certification of the actual AFTAP as of January 1, 2012, the provisions 
of paragraph (h)(2)(iv) of this section apply. Accordingly, on May 1, 
2012, the 2012 AFTAP is presumed to be 10 percentage points less than 
the 2011 AFTAP, or 55%, so that the restrictions under paragraphs (b), 
(d), and (e) of this section continue to apply.
    Example 6. (i) The enrolled actuary for Plan V certifies the plan's 
AFTAP for 2010 to be 69%. Based on this AFTAP, Plan V is subject to the 
restriction in paragraph (d)(3) of this section, and can only pay a 
portion (generally 50%) of the prohibited payments otherwise due to plan 
participants who commence benefits while the restriction is in effect. 
The enrolled actuary for the plan does not issue a certification of the 
AFTAP for 2011 until June 1, 2011.
    (ii) Beginning January 1, 2011, Plan V's 2011 AFTAP is presumed to 
be equal to the 2010 AFTAP, or 69%, under the provisions of paragraph 
(h)(1)(ii) of this section. Accordingly, the restriction on prohibited 
payments in paragraph (d)(3) of this section continues to apply from 
January 1, 2011, through March 31, 2011, and Plan T may only pay a 
portion of the prohibited payments otherwise due to participants who 
commence benefit payments during this period.
    (iii) Beginning April 1, 2011, the provisions of paragraph 
(h)(2)(ii) of this section apply. Under those provisions, the AFTAP 
beginning April 1, 2011, is presumed to be 10 percentage points lower 
than the presumed 2011 AFTAP, or 59%. Because Plan V's presumed AFTAP 
for 2011 is less than 60%, the restrictions on unpredictable contingent 
event benefits under paragraph (b) of this section, on the payment of 
accelerated benefit distributions under paragraph (d)(1) of this 
section, and on benefit accruals under paragraph (e) of this section 
apply. Accordingly, Plan V cannot pay any unpredictable contingent event 
benefits for events occurring on or after April 1, 2011, or prohibited 
payments to participants with an annuity starting date on or after April 
1, 2011, and benefit accruals cease as of April 1, 2011.
    (iv) On June 1, 2011, Plan V's enrolled actuary certifies that the 
plan's AFTAP for 2011 is 71%. Therefore, the restrictions on 
unpredictable contingent event benefits, prohibited payments, and 
benefit accruals in paragraphs (b), (d)(1), and (e) of this section no 
longer apply, but the partial restriction on benefit payments in 
paragraph (d)(3) of this section does apply. Accordingly, Plan V begins 
paying unpredictable contingent event benefits for events occurring on 
or after January 1, 2011, to the extent permitted under paragraph (b) of 
this section and a portion of the prohibited payments elected by 
participants with an annuity starting date on or after June 1, 2011. 
Benefit accruals previously restricted under paragraph (e) of this 
section resume effective June 1, 2011, unless Plan V provides otherwise.
    (v) Participants who were not able to elect an accelerated form of 
payment during the period from April 1, 2011, through May 31, 2011, 
would be able to elect a new annuity starting date with a partial 
distribution of accelerated benefits effective June 1, 2011, if Plan V 
contained a preexisting provision permitting such an election after the 
restriction in paragraph (d)(1) of this section no longer applies. This 
is permitted because, under paragraph (a)(4)(ii)(B) of this section, a 
preexisting provision of this type is not considered a plan amendment 
and is therefore not subject to the plan amendment restriction in 
paragraph (c) of this section even though Plan V's AFTAP for 2011 is 
less than 80%.
    (vi) Benefit accruals for the period beginning April 1, 2011, 
through May 31, 2011, would be automatically restored if Plan V 
contained a preexisting provision to retroactively restore benefit 
accruals restricted under paragraph (e) of this section after the 
restriction no longer applies. This is permitted because under paragraph 
(a)(4)(ii)(B) of this section, a preexisting provision of this type is 
not considered to be a plan amendment and is therefore not subject to 
the plan amendment restriction in paragraph (c) of this section even 
though Plan V's AFTAP for 2011 is less than 80%, because the period of 
the restriction did not exceed 12 months.

    (6) Examples of rules of paragraph (h)(4) of this section. The 
following examples illustrate the rules of paragraph (h)(4) of this 
section:

    Example 1. (i) Plan Y is a non-collectively bargained defined 
benefit plan with a plan year that is the calendar year and a valuation 
date of January 1. Plan Y does not have a funding standard carryover 
balance or a prefunding balance. Plan Y's sponsor is not in bankruptcy. 
In June of 2010, the actual AFTAP for 2010 for Plan Y is certified as 
65%. On the last day of the 2010 plan year, Plan Y is subject to the 
restrictions in paragraph (d)(3) of this section.
    (ii) The enrolled actuary for the plan issues a range certification 
on March 21, 2011, certifying that the AFTAP for 2011 is at least 60% 
and less than 80%. Because the certification was issued before the first 
day of the 4th month of the plan year, the 10 percentage point reduction 
in the presumed AFTAP under paragraph (h)(2) of this section does not 
apply. In addition, because the enrolled actuary for the plan has 
certified that the AFTAP is within this range, Plan Y is not subject to 
the full restriction on accelerated benefit payments in paragraph (d)(1) 
of this section or the restriction on benefit accruals under paragraph 
(e) of this section.

[[Page 653]]

    (iii) On August 1, 2011, the enrolled actuary for the plan certifies 
that the actual AFTAP as of January 1, 2011, is 75.86%. This AFTAP falls 
within the previously certified range. Thus, the change is immaterial 
under paragraph (h)(4)(iii) of this section and the new certification 
does not change the applicability or inapplicability of the restrictions 
in this section.
    Example 2. (i) The facts are the same as in Example 1, except that 
the plan sponsor makes an additional contribution for the 2010 plan year 
on September 1, 2011, that is not added to the prefunding balance. 
Reflecting this contribution, the enrolled actuary for the plan issues a 
revised certification stating that the AFTAP for 2011 is 81%, and Plan Y 
is no longer subject to the restriction on accelerated benefit payments 
under paragraph (d)(3) of this section on that date.
    (ii) Although the revised certification changes the applicability of 
the restriction under paragraph (d)(3) of this section, the change is 
not a material change under paragraph (h)(4)(iii)(C)(1) of this section 
because the AFTAP changed only because of additional contributions for 
the preceding year made by the plan sponsor after the date of the 
enrolled actuary's initial certification.

    (i) [Reserved]
    (j) Definitions. For purposes of this section--
    (1) Adjusted funding target attainment percentage--(i) In general. 
Except as otherwise provided in this paragraph (j)(1), the adjusted 
funding target attainment percentage for a plan year is the fraction 
(expressed as a percentage)--
    (A) The numerator of which is the adjusted plan assets for the plan 
year described in paragraph (j)(1)(ii) of this section; and
    (B) The denominator of which is the adjusted funding target for the 
plan year described in paragraph (j)(1)(iii) of this section.
    (ii) Adjusted plan assets--(A) General rule. The adjusted plan 
assets for a plan year is generally determined by--
    (1) Subtracting the plan's funding standard carryover balance and 
prefunding balance as of the valuation date from the value of plan 
assets for the plan year under section 430(g) (but treating the 
resulting value as zero if it is below zero); and
    (2) Increasing the resulting value by the aggregate amount of 
purchases of annuities for participants and beneficiaries (other than 
participants who, at the time of the purchase, were highly compensated 
employees as defined in section 414(q), which definition includes highly 
compensated former employees under Sec.  1.414(q)-1T, Q&A-4) which were 
made by the plan during the preceding 2 plan years, to the extent not 
included in plan assets for purposes of section 430.
    (B) Special rule for plans that are fully funded without regard to 
subtraction of funding balances from plan assets. If for a plan year the 
value of plan assets determined without subtracting the funding standard 
carryover balance and the prefunding balance is not less than 100 
percent of the plan's funding target determined under section 430 
without regard to section 430(i), then the adjusted value of plan assets 
used in the calculation of the adjusted funding target attainment 
percentage for the plan year is determined without subtracting the 
plan's funding standard carryover balance and prefunding balance from 
the value of plan assets for the plan year.
    (C) Special rule for plans with section 436 contributions. If an 
employer makes a contribution described in paragraph (f)(2) of this 
section after the valuation date in order to avoid or terminate 
limitations under section 436, then the present value of that 
contribution (determined using the effective interest rate under section 
430(h)(2)(A) for the plan year) is permitted to be added to the plan 
assets as of the valuation date for purposes of determining or 
redetermining the adjusted funding target attainment percentage for a 
plan year, but only if the liability for the benefits, amendment, or 
accruals that would have been limited (but for the contribution) is 
included in determining the adjusted funding target for the plan year.
    (D) Transition rule. Paragraph (j)(1)(ii)(B) of this section is 
applied to plan years beginning after 2007 and before 2011 by 
substituting for ``100 percent'' the applicable percentage determined in 
accordance with the following table:

------------------------------------------------------------------------
   In the case of a plan year beginning in calendar      The applicable
                        year:                            percentage is:
------------------------------------------------------------------------
2008.................................................                 92
2009.................................................                 94
2010.................................................                 96
------------------------------------------------------------------------

    (E) Limitation on transition rule. Paragraph (j)(1)(ii)(D) of this 
section does

[[Page 654]]

not apply with respect to the current plan year unless, for each plan 
year beginning after December 31, 2007, and before the current plan 
year, the value of plan assets determined without subtracting the 
funding standard carryover balance and the prefunding balance is not 
less than the product of--
    (1) The applicable percentage determined under paragraph 
(j)(1)(ii)(D) of this section for that plan year; and
    (2) The funding target (determined without regard to the at-risk 
rules of section 430(i)) for that plan year.
    (iii) Adjusted funding target--(A) In general. Except as otherwise 
provided in this paragraph (j)(1)(iii), the adjusted funding target 
equals the funding target for the plan year, determined in accordance 
with the rules set forth in Sec.  1.430(d)-1, but without regard to the 
at-risk rules under section 430(i), increased by the aggregate amount of 
purchases of annuities that were added to assets for purposes of 
determining the plan's adjusted plan assets under paragraph 
(j)(1)(ii)(A)(2) of this section. The definition of adjusted funding 
target for a plan maintained by a commercial airline for which the plan 
sponsor has made the election described in section 402(a)(1) of Pension 
Protection Act of 2006 (PPA '06), Public Law 109-280 (120 Stat. 780), is 
the same as if it did not make such an election.
    (B) Adjusted funding target after updated certification. After the 
plan's enrolled actuary prepares an updated certification of the 
adjusted funding target attainment percentage under paragraph (h)(4)(v) 
of this section, the adjusted funding target will also be updated to 
reflect unpredictable contingent event benefits and plan amendments not 
already taken into account.
    (iv) Plans with zero adjusted funding target. If the adjusted 
funding target for the plan year is zero, then the adjusted funding 
target attainment percentage for the plan year is 100 percent.
    (v) Plans with end of year valuation dates. [Reserved]
    (vi) Special rule for plans that are the result of a merger. 
[Reserved]
    (vii) Special rule for plans that are involved in a spinoff. 
[Reserved]
    (2) Annuity starting date--(i) General rule. The term annuity 
starting date means, as applicable--
    (A) The first day of the first period for which an amount is payable 
as an annuity as described in section 417(f)(2)(A)(i);
    (B) In the case of a benefit not payable in the form of an annuity, 
the annuity starting date is the annuity starting date for the qualified 
joint and survivor annuity that is payable under the plan at the same 
time as the benefit that is not payable as an annuity;
    (C) In the case of an amount payable under a retroactive annuity 
starting date, the benefit commencement date (instead of the date 
determined under paragraphs (j)(2)(i)(A) and (B) of this section);
    (D) The date of the purchase of an irrevocable commitment from an 
insurer to pay benefits under the plan; and
    (E) The date of any transfer to another plan described in paragraph 
(j)(6)(i)(C) of this section.
    (ii) Special rule for beneficiaries. If a participant commences 
benefits at an annuity starting date (as defined in paragraph (j)(2)(i) 
of this section) and, after the death of the participant, payments 
continue to a beneficiary, the annuity starting date for the payments to 
the participant constitutes the annuity starting date for payments to 
the beneficiary, except that a new annuity starting date occurs 
(determined by applying paragraph (j)(2)(i)(A), (B), and (C) of this 
section to the payments to the beneficiary) if the amounts payable to 
all beneficiaries of the participant in the aggregate at any future date 
can exceed the monthly amount that would have been paid to the 
participant had he or she not died.
    (3) First effective plan year. The first effective plan year for a 
plan is the first plan year to which section 436 applies to the plan 
under paragraph (k)(1) or (k)(2) of this section.
    (4) Funding target. In general, the funding target means the funding 
target under Sec.  1.430(d)-1, without regard to the at-risk rules under 
section 430(i) and Sec.  1.430(i)-1. However, solely for purposes of 
sections 436(b)(2)(A) and (c)(2)(A), the funding target means the 
funding target under Sec.  1.430(i)-1 if the plan is in at-risk status 
for the plan year.
    (5) Prior plan year adjusted funding target attainment percentage--
(i) In general. Except as otherwise provided in

[[Page 655]]

this paragraph (j)(5), the prior plan year adjusted funding target 
attainment percentage is the adjusted funding target attainment 
percentage determined under paragraph (j)(1) of this section for the 
immediately preceding plan year.
    (ii) Special rules--(A) Special rule for new plans. In the case of a 
plan established during the plan year that was not the result of a 
merger or spinoff, the adjusted funding target attainment percentage is 
equal to 100 percent for plan years before the plan was established. 
Except as otherwise provided in paragraph (j)(5)(ii)(B) of this section, 
a plan that has a predecessor plan in accordance with Sec.  1.415(f)-
1(c) is not a plan established during the plan year under this paragraph 
(j)(5)(ii)(A). Instead, if the plan has a predecessor plan, the adjusted 
funding target attainment percentage for the prior plan year is the 
adjusted funding target attainment percentage for the prior plan year 
for the predecessor plan (and that predecessor plan's adjusted funding 
target attainment percentage is treated as equal to 100 percent on any 
date on which it is terminated, other than in a distress termination).
    (B) Special rules for plans that are the result of a merger. 
[Reserved]
    (C) Special rules for plans that are involved in a spinoff. 
[Reserved]
    (iii) Special rules for 2007 plan year--(A) General determination of 
2007 adjusted funding target attainment percentage. In the case of the 
first plan year beginning in 2008, except as otherwise provided in this 
paragraph (j)(5), the adjusted funding target attainment percentage for 
the immediately preceding plan year (the 2007 plan year) is determined 
as the fraction (expressed as a percentage)--
    (1) The numerator of which is the value of plan assets determined 
under paragraph (j)(5)(iii)(B) of this section increased by the 
aggregate amount of purchases of annuities for participants and 
beneficiaries (other than participants who, at the time of the purchase, 
were highly compensated employees as defined in section 414(q), which 
definition includes highly compensated former employees under Sec.  
1.414(q)-1T, Q&A-4 which were made by the plan during the preceding 2 
plan years, to the extent not included in plan assets under section 
412(c)(2) (as in effect prior to amendment by PPA '06); and
    (2) The denominator of which is the plan's current liability 
determined pursuant to section 412(l)(7) (as in effect prior to 
amendment by PPA '06) on the valuation date for the 2007 plan year 
increased by the aggregate amount of purchases of annuities that were 
added to the plan assets under the rules of paragraph (j)(5)(iii)(A)(1) 
of this section.
    (B) General determination of value of plan assets--(1) In general. 
The value of plan assets for purposes of this paragraph (j)(5)(iii) is 
determined under section 412(c)(2) as in effect for the 2007 plan year, 
except that the value of plan assets prior to subtracting the plan's 
funding standard account credit balance described in paragraph 
(j)(5)(iii)(B)(2) of this section must be adjusted so that the value of 
plan assets is neither less than 90 percent of the fair market value of 
plan assets nor greater than 110 percent of the fair market value of 
plan assets on the valuation date for that plan year.
    (2) Subtraction of credit balance. If a plan has a funding standard 
account credit balance as of the valuation date for the 2007 plan year, 
that balance is subtracted from the value of plan assets described in 
paragraph (j)(5)(iii)(B)(1) of this section as of that valuation date. 
However, the subtraction does not apply if the value of plan assets 
prior to adjustment under paragraph (j)(5)(iii)(B)(1) of this section is 
greater than or equal to 90 percent of the plan's current liability as 
of the valuation date for the 2007 plan year.
    (3) Effect of funding standard carryover balance reduction for 2007 
plan year. Notwithstanding paragraph (j)(5)(iii)(B)(2) of this section, 
if, for the first plan year beginning in 2008, the employer has made an 
election to reduce some or all of the funding standard carryover balance 
as of the first day of that year in accordance with Sec.  1.430(f)-1(e), 
then the present value (determined as of the valuation date for the 2007 
plan year using the valuation interest rate for that plan year) of the 
amount so reduced is not treated as part of the funding standard account 
credit balance when that balance is subtracted

[[Page 656]]

from the asset value under paragraph (j)(5)(iii)(B)(2) of this section.
    (C) Plan with end-of-year valuation date. With respect to the first 
plan year beginning in 2008, if the plan had a valuation date under 
section 412 that was the last day of the plan year for each of the plan 
years beginning in 2006 and 2007, the adjusted funding target attainment 
percentage for the 2007 plan year may be determined as the fraction 
(expressed as a percentage)--
    (1) The numerator of which is the value of plan assets determined 
under paragraph (j)(5)(iii)(D) of this section increased by the 
aggregate amount of purchases of annuities for participants and 
beneficiaries (other than participants who, at the time of the purchase, 
were highly compensated employees as defined in section 414(q), which 
definition includes highly compensated former employees under Sec.  
1.414(q)-1T, Q&A-4 which were made by the plan during the preceding 2 
plan years, to the extent not included in plan assets under section 
412(c)(2) (as in effect prior to amendment by PPA '06); and
    (2) The denominator of which is the plan's current liability 
determined pursuant to section 412(l)(7) (as in effect prior to 
amendment by PPA '06) on the valuation date for the second plan year 
that begins before 2008 (the 2006 plan year), including the increase in 
current liability for the 2006 plan year, increased by the aggregate 
amount of purchases of annuities that were added to the plan assets 
under the rules of paragraph (j)(5)(iii)(C)(1) of this section.
    (D) Special asset determinations for 2006 adjusted funding target 
attainment percentage--(1) General rule. If the adjusted funding target 
attainment percentage for the 2007 plan year is determined under the 
rules of paragraph (j)(5)(iii)(C) of this section, then the value of 
plan assets is determined as the value of plan assets under section 
412(c)(2) as in effect for the 2006 plan year, adjusted as provided in 
this paragraph (j)(5)(iii)(D).
    (2) Inclusion of contributions for 2006. Contributions made for the 
2006 plan year are taken into account in determining the value of plan 
assets, regardless of whether those contributions are made during the 
plan year or after the end of the plan year and within the period 
specified under section 412(c)(10) (as in effect prior to amendment by 
PPA '06).
    (3) Restriction to 90-110 percent corridor. The value of plan assets 
taking into account the amount of contributions made for the 2006 plan 
year is increased or decreased, as necessary, so that it is neither less 
than 90 percent of the fair market value of plan assets nor greater than 
110 percent of the fair market value of plan assets on the valuation 
date for the 2006 plan year (taking into account assets attributable to 
contributions for the 2006 plan year).
    (4) Subtraction of credit balance. The plan's funding standard 
account credit balance as of the end of the 2006 plan year is generally 
subtracted from the value of plan assets determined after application of 
paragraph (j)(5)(iii)(D)(3) of this section. However, this subtraction 
does not apply if the value of plan assets is greater than or equal to 
90 percent of the plan's current liability determined under section 
412(l)(7) (as in effect prior to amendment by PPA '06) on the valuation 
date for the 2006 plan year.
    (E) Special rules for mergers and spinoffs. Rules similar to the 
rules of paragraph (j)(5)(ii) of this section apply for purposes of 
determining the adjusted funding target attainment percentage for the 
2007 plan year in the case of a newly established plan, a plan that is 
the result of a merger of two plans, or a plan that is in involved in a 
spinoff.
    (6) Prohibited payment--(i) General rule. The term prohibited 
payment means--
    (A) Any payment for a month that is in excess of the monthly amount 
paid under a straight life annuity (plus any social security supplements 
described in the last sentence of section 411(a)(9)) to a participant or 
beneficiary whose annuity starting date occurs during any period that a 
limitation under paragraph (d) of this section is in effect;
    (B) Any payment for the purchase of an irrevocable commitment from 
an insurer to pay benefits;
    (C) Any transfer of assets and liabilities to another plan 
maintained by the same employer (or by any member of

[[Page 657]]

the employer's controlled group) that is made in order to avoid or 
terminate the application of section 436 benefit limitations; and
    (D) Any other amount that is identified as a prohibited payment by 
the Commissioner in revenue rulings and procedures, notices, and other 
guidance published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2) relating to objectives and standards for publishing 
regulations, revenue rulings and revenue procedures in the Internal 
Revenue Bulletin).
    (ii) Special rule for beneficiaries. In the case of a beneficiary 
that is not an individual, the amount that is a prohibited payment is 
determined by substituting for the amount in paragraph (j)(1)(i)(A) of 
this section the monthly amount payable in installments over 240 months 
that is actuarially equivalent to the benefit payable to the 
beneficiary.
    (7) Section 436 contributions. Section 436 contributions are the 
contributions described in paragraph (f)(2) of this section that are 
made in order to avoid the application of section 436 limitations under 
a plan for a plan year.
    (8) Section 436 measurement date. A section 436 measurement date is 
the date that is used to determine when the limitations of sections 
436(d) and 436(e) apply or cease to apply, and is also used for 
calculations with respect to applying the limitations of paragraphs (b) 
and (c) of this section. See paragraphs (h)(1)(i), (h)(2)(iii)(B), 
(h)(2)(iv)(B), and (h)(3)(i) of this section regarding section 436 
measurement dates that result from application of the presumptions under 
paragraph (h) of this section.
    (9) Unpredictable contingent event. An unpredictable contingent 
event benefit means any benefit or increase in benefits to the extent 
the benefit or increase would not be payable but for the occurrence of 
an unpredictable contingent event. For this purpose, an unpredictable 
contingent event means a plant shutdown (whether full or partial) or 
similar event, or an event (including the absence of an event) other 
than the attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability. For example, if a plan provides for an unreduced early 
retirement benefit upon the occurrence of an event other than the 
attainment of any age, performance of any service, receipt or derivation 
of any compensation, or the occurrence of death or disability, then that 
unreduced early retirement benefit is an unpredictable contingent event 
benefit to the extent of any portion of the benefit that would not be 
payable but for the occurrence of the event, even if the remainder of 
the benefit is payable without regard to the occurrence of the event. 
Similarly, if a plan includes a benefit payable upon the presence 
(including the absence) of circumstances specified in the plan (other 
than the attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability), but not upon a severance from employment that does not 
include those circumstances, that benefit is an unpredictable contingent 
event benefit.
    (10) Examples. The following examples illustrate the rules of this 
paragraph (j):

    Example 1. (i) Plan S is a non-collectively bargained defined 
benefit plan with a plan year that is the calendar year and a valuation 
date of January 1. The first effective plan year is 2008. Plan S is not 
in at-risk status for 2008.
    (ii) As of January 1, 2008, Plan S has a value of plan assets (equal 
to the market value of assets) of $2,100,000 and a funding standard 
carryover balance of $200,000. During 2006, assets from Plan S were used 
to purchase a total of $100,000 in annuities for employees other than 
highly compensated employees. No annuities were purchased during 2007. 
On May 1, 2008, the enrolled actuary for the plan determines that the 
funding target as of January 1, 2008, is $2,500,000.
    (iii) The adjusted value of assets for Plan S as of January 1, 2008, 
is $2,000,000 (that is, plan assets of $2,100,000, plus annuity 
purchases of $100,000, and minus the funding standard carryover balance 
of $200,000). The adjusted funding target is $2,600,000 (that is, the 
funding target of $2,500,000, increased by the annuity purchases of 
$100,000).
    (iv) Based on the above adjusted plan assets and adjusted funding 
target, the adjusted funding target attainment percentage (AFTAP) as of 
January 1, 2008, would be 76.92%. Since the AFTAP is less than 80% but 
is at least 60%, Plan S is subject to the restrictions in paragraph 
(d)(3) of this section.

[[Page 658]]

    Example 2. (i) The facts are the same as in Example 1, except that 
it is reasonable to expect that the plan sponsor will make a 
contribution of $80,000 to Plan S for the 2007 plan year by September 
15, 2008. This amount is in excess of the minimum required contribution 
for 2007. The plan sponsor elects to reduce the funding standard 
carryover balance by $80,000.
    (ii) Because it is reasonable to expect that the $80,000 will be 
contributed by the plan sponsor, that amount is taken into account when 
the enrolled actuary certifies the 2008 AFTAP under the special rule in 
paragraph (h)(4)(i)(B) of this section for plan years beginning before 
2009. Accordingly, the enrolled actuary for the plan certifies the 2008 
AFTAP as 80% (that is, adjusted plan assets of $2,080,000, reflecting 
the $80,000 in contributions receivable, divided by the adjusted funding 
target of $2,600,000).
    (iii) The ability to take contributions into account before they are 
actually paid to the plan is available only for plan years beginning 
before 2009. Furthermore, if the employer does not actually make the 
contribution and the difference between the incorrect certification and 
the corrected AFTAP constitutes a material change, the plan will have 
violated section 401(a)(29) or will not have been operated in accordance 
with its terms.
    Example 3. (i) Plan R is a defined benefit plan with a plan year 
that is the calendar year and a valuation date of January 1. Section 436 
applies to Plan R for 2008. The valuation interest rate for the 2007 
plan year for Plan R is 7%. The fair market value of assets of Plan R as 
of January 1, 2007, is $1,000,000. The actuarial value of assets of Plan 
R as of January 1, 2007, is $1,200,000. The current liability of Plan R 
as of January 1, 2007, is $1,500,000. The funding standard account 
credit balance as of January 1, 2007, is $80,000. The funding standard 
carryover balance of Plan R is $50,000 as of the beginning of the 2008 
plan year. The sponsor of Plan R, Sponsor T, elects in 2008 to reduce 
the funding standard carryover balance in accordance with Sec.  
1.430(f)-1 by $45,000. No annuities were purchased using plan assets 
during 2005 or 2006.
    (ii) Pursuant to paragraph (j)(5)(iii)(B)(1) of this section, the 
asset value used to determine the AFTAP for the 2007 plan year is 
limited to 110% of the fair market value of assets on January 1, 2007, 
or $1,100,000 (110% of $1,000,000).
    (iii) Pursuant to paragraph (j)(5)(iii)(B)(2) of this section, the 
funding standard account credit balance as of January 1, 2007, is 
subtracted from the asset value used to determine the AFTAP for the 2007 
plan year. However, pursuant to paragraph (j)(5)(iii)(B)(3) of this 
section, the present value of the amount by which Sponsor T elected to 
reduce the funding standard carryover balance in 2008 is not subtracted.
    (iv) The present value, determined at an interest rate of 7%, of the 
$45,000 reduction in the funding standard carryover balance elected by 
Sponsor T in 2008 is $42,056. Thus, $42,056 is not subtracted from the 
2007 plan year asset value. Accordingly, the funding standard account 
credit balance that is subtracted from the 2007 plan year asset value is 
$37,944 (that is, $80,000 less $42,056).
    (v) Thus, the asset value that is used to determine the FTAP for the 
2007 plan year is $1,100,000 less $37,944, or $1,062,056. Accordingly, 
for purposes of this section, the FTAP for the 2007 plan year for Plan R 
is 70.8% (that is, $1,062,056 divided by $1,500,000).
    Example 4. (i) Plan T is a non-collectively bargained defined 
benefit plan that was established prior to 2007. Plan T has a plan year 
that is the calendar year and a valuation date of January 1. The first 
effective plan year is 2008; the plan met the conditions of paragraph 
(j)(1)(ii)(E) of this section for 2008. As of January 1, 2009, Plan T 
has a value of plan assets (equal to the market value of assets) of 
$3,000,000, a funding standard carryover balance of $150,000, and a 
prefunding balance of $50,000. During 2007 and 2008, assets from Plan T 
were used to purchase a total of $400,000 in annuities for employees 
other than highly compensated employees. The funding target for Plan T 
(without regard to the at-risk rules of section 430(i)) is $3,200,000 as 
of January 1, 2009.
    (ii) The plan's funding status is calculated in accordance with 
paragraph (j)(1)(ii)(B) of this section to determine whether the special 
rule for fully-funded plans applies to Plan T. Accordingly, the value of 
plan assets determined without subtracting the funding standard 
carryover balance and the prefunding balance is 93.75% of the plan's 
funding target ($3,000,000 / $3,200,000). The applicable transitional 
percentage in paragraph (j)(1)(ii)(D) of this section is 94% for 2009. 
Because the percentage calculated above is less than 94%, the transition 
rule does not apply to Plan T.
    (iii) Accordingly, the January 1, 2009, AFTAP for Plan T is 
calculated without reflecting the special rule in paragraph 
(j)(1)(ii)(B) of this section. The AFTAP as of January 1, 2009, is 
calculated by dividing the adjusted assets by the adjusted funding 
target. For this purpose, the value of assets is increased by the 
annuities purchased for nonhighly compensated employees during 2007 and 
2008, and decreased by the funding standard carryover balance and the 
prefunding balance as of January 1, 2009, resulting in an adjusted asset 
value of $3,200,000 (that is, $3,000,000 + $400,000-$150,000-$50,000). 
The funding target is increased by the annuities purchased for nonhighly 
compensated employees during

[[Page 659]]

2007 and 2008, resulting in an adjusted funding target of $3,600,000 
(that is, $3,200,000 + $400,000). The AFTAP for Plan T for 2009 is 
therefore $3,200,000 / $3,600,000, or 88.89%.

    (k) Effective/applicability dates--(1) Statutory effective date. 
Section 436 generally applies to plan years beginning on or after 
January 1, 2008. The applicability of section 436 for purposes of 
determining the minimum required contribution is delayed for certain 
plans in accordance with sections 104 through 106 of PPA '06.
    (2) Collectively bargained plan exception--(i) In general. In the 
case of a collectively bargained plan that is maintained pursuant to one 
or more collective bargaining agreements between employee 
representatives and one or more employers ratified before January 1, 
2008, section 436 does not apply to plan years beginning before the 
earlier of--
    (A) January 1, 2010; or
    (B) The later of--
    (1) The date on which the last such collective bargaining agreement 
relating to the plan terminates (determined without regard to any 
extension thereof agreed to after August 17, 2006); or
    (2) The first day of the first plan year to which section 436 would 
(but for this paragraph (k)(2)) apply.
    (ii) Treatment of certain plan amendments. For purposes of this 
paragraph (k)(2), 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 by section 436 is not treated as a 
termination of the collective bargaining agreement.
    (iii) Treatment of plans with both collectively bargained and non-
collectively bargained employees. In the case of a plan with respect to 
which a collective bargaining agreement applies to some, but not all, of 
the plan participants, the plan is considered a collectively bargained 
plan for purposes of this paragraph (k)(2) if it is considered a 
collectively bargained plan under the rules of paragraph (a)(5)(ii)(B) 
of this section.
    (3) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010. For plan 
years beginning before January 1, 2010, plans are permitted to rely on 
the provisions set forth in this section for purposes of satisfying the 
requirements of section 436.

[T.D. 9467, 74 FR 53061, Oct. 15, 2009, as amended by T.D. 9732, 80 FR 
54400, Sept. 9, 2015]



Sec. Sec.  1.437-1.440  [Reserved]

[[Page 661]]



                              FINDING AIDS




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

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume to the Code of Federal Regulations 
which is published separately and revised annually.

  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  Table of OMB Control Numbers
  List of CFR Sections Affected

[[Page 663]]



                    Table of CFR Titles and Chapters




                      (Revised as of April 1, 2019)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
       III  Administrative Conference of the United States (Parts 
                300--399)
        IV  Miscellaneous Agencies (Parts 400--599)
        VI  National Capital Planning Commission (Parts 600--699)

                    Title 2--Grants and Agreements

            Subtitle A--Office of Management and Budget Guidance 
                for Grants and Agreements
         I  Office of Management and Budget Governmentwide 
                Guidance for Grants and Agreements (Parts 2--199)
        II  Office of Management and Budget Guidance (Parts 200--
                299)
            Subtitle B--Federal Agency Regulations for Grants and 
                Agreements
       III  Department of Health and Human Services (Parts 300--
                399)
        IV  Department of Agriculture (Parts 400--499)
        VI  Department of State (Parts 600--699)
       VII  Agency for International Development (Parts 700--799)
      VIII  Department of Veterans Affairs (Parts 800--899)
        IX  Department of Energy (Parts 900--999)
         X  Department of the Treasury (Parts 1000--1099)
        XI  Department of Defense (Parts 1100--1199)
       XII  Department of Transportation (Parts 1200--1299)
      XIII  Department of Commerce (Parts 1300--1399)
       XIV  Department of the Interior (Parts 1400--1499)
        XV  Environmental Protection Agency (Parts 1500--1599)
     XVIII  National Aeronautics and Space Administration (Parts 
                1800--1899)
        XX  United States Nuclear Regulatory Commission (Parts 
                2000--2099)
      XXII  Corporation for National and Community Service (Parts 
                2200--2299)
     XXIII  Social Security Administration (Parts 2300--2399)
      XXIV  Department of Housing and Urban Development (Parts 
                2400--2499)
       XXV  National Science Foundation (Parts 2500--2599)
      XXVI  National Archives and Records Administration (Parts 
                2600--2699)

[[Page 664]]

     XXVII  Small Business Administration (Parts 2700--2799)
    XXVIII  Department of Justice (Parts 2800--2899)
      XXIX  Department of Labor (Parts 2900--2999)
       XXX  Department of Homeland Security (Parts 3000--3099)
      XXXI  Institute of Museum and Library Services (Parts 3100--
                3199)
     XXXII  National Endowment for the Arts (Parts 3200--3299)
    XXXIII  National Endowment for the Humanities (Parts 3300--
                3399)
     XXXIV  Department of Education (Parts 3400--3499)
      XXXV  Export-Import Bank of the United States (Parts 3500--
                3599)
     XXXVI  Office of National Drug Control Policy, Executive 
                Office of the President (Parts 3600--3699)
    XXXVII  Peace Corps (Parts 3700--3799)
     LVIII  Election Assistance Commission (Parts 5800--5899)
       LIX  Gulf Coast Ecosystem Restoration Council (Parts 5900--
                5999)

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  Government Accountability Office (Parts 1--199)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
        IV  Office of Personnel Management and Office of the 
                Director of National Intelligence (Parts 1400--
                1499)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Parts 2100--2199)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Parts 3200--
                3299)
     XXIII  Department of Energy (Parts 3300--3399)
      XXIV  Federal Energy Regulatory Commission (Parts 3400--
                3499)
       XXV  Department of the Interior (Parts 3500--3599)
      XXVI  Department of Defense (Parts 3600--3699)

[[Page 665]]

    XXVIII  Department of Justice (Parts 3800--3899)
      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  Overseas Private Investment Corporation (Parts 4300--
                4399)
     XXXIV  Securities and Exchange Commission (Parts 4400--4499)
      XXXV  Office of Personnel Management (Parts 4500--4599)
     XXXVI  Department of Homeland Security (Parts 4600--4699)
    XXXVII  Federal Election Commission (Parts 4700--4799)
        XL  Interstate Commerce Commission (Parts 5000--5099)
       XLI  Commodity Futures Trading Commission (Parts 5100--
                5199)
      XLII  Department of Labor (Parts 5200--5299)
     XLIII  National Science Foundation (Parts 5300--5399)
       XLV  Department of Health and Human Services (Parts 5500--
                5599)
      XLVI  Postal Rate Commission (Parts 5600--5699)
     XLVII  Federal Trade Commission (Parts 5700--5799)
    XLVIII  Nuclear Regulatory Commission (Parts 5800--5899)
      XLIX  Federal Labor Relations Authority (Parts 5900--5999)
         L  Department of Transportation (Parts 6000--6099)
       LII  Export-Import Bank of the United States (Parts 6200--
                6299)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Parts 6400--6499)
        LV  National Endowment for the Arts (Parts 6500--6599)
       LVI  National Endowment for the Humanities (Parts 6600--
                6699)
      LVII  General Services Administration (Parts 6700--6799)
     LVIII  Board of Governors of the Federal Reserve System 
                (Parts 6800--6899)
       LIX  National Aeronautics and Space Administration (Parts 
                6900--6999)
        LX  United States Postal Service (Parts 7000--7099)
       LXI  National Labor Relations Board (Parts 7100--7199)
      LXII  Equal Employment Opportunity Commission (Parts 7200--
                7299)
     LXIII  Inter-American Foundation (Parts 7300--7399)
      LXIV  Merit Systems Protection Board (Parts 7400--7499)
       LXV  Department of Housing and Urban Development (Parts 
                7500--7599)
      LXVI  National Archives and Records Administration (Parts 
                7600--7699)
     LXVII  Institute of Museum and Library Services (Parts 7700--
                7799)
    LXVIII  Commission on Civil Rights (Parts 7800--7899)
      LXIX  Tennessee Valley Authority (Parts 7900--7999)
       LXX  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 8000--8099)
      LXXI  Consumer Product Safety Commission (Parts 8100--8199)
    LXXIII  Department of Agriculture (Parts 8300--8399)

[[Page 666]]

     LXXIV  Federal Mine Safety and Health Review Commission 
                (Parts 8400--8499)
     LXXVI  Federal Retirement Thrift Investment Board (Parts 
                8600--8699)
    LXXVII  Office of Management and Budget (Parts 8700--8799)
      LXXX  Federal Housing Finance Agency (Parts 9000--9099)
   LXXXIII  Special Inspector General for Afghanistan 
                Reconstruction (Parts 9300--9399)
    LXXXIV  Bureau of Consumer Financial Protection (Parts 9400--
                9499)
    LXXXVI  National Credit Union Administration (Parts 9600--
                9699)
     XCVII  Department of Homeland Security Human Resources 
                Management System (Department of Homeland 
                Security--Office of Personnel Management) (Parts 
                9700--9799)
    XCVIII  Council of the Inspectors General on Integrity and 
                Efficiency (Parts 9800--9899)
      XCIX  Military Compensation and Retirement Modernization 
                Commission (Parts 9900--9999)
         C  National Council on Disability (Parts 10000--10049)
        CI  National Mediation Board (Part 10101)

                      Title 6--Domestic Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 1--199)
         X  Privacy and Civil Liberties Oversight Board (Parts 
                1000--1099)

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
        II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Grain Inspection, Packers and Stockyards 
                Administration (Federal Grain Inspection Service), 
                Department of Agriculture (Parts 800--899)

[[Page 667]]

        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)
        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  Rural Telephone Bank, Department of Agriculture (Parts 
                1600--1699)
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
        XX  Local Television Loan Guarantee Board (Parts 2200--
                2299)
       XXV  Office of Advocacy and Outreach, Department of 
                Agriculture (Parts 2500--2599)
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy Policy and New Uses, Department of 
                Agriculture (Parts 2900--2999)
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  National Institute of Food and Agriculture (Parts 
                3400--3499)
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

[[Page 668]]

                    Title 8--Aliens and Nationality

         I  Department of Homeland Security (Immigration and 
                Naturalization) (Parts 1--499)
         V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Grain Inspection, Packers and Stockyards 
                Administration (Packers and Stockyards Programs), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
      XIII  Nuclear Waste Technical Review Board (Parts 1300--
                1399)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Parts 1800--1899)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)
        II  Election Assistance Commission (Parts 9400--9499)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)
         V  (Parts 500--599) [Reserved]
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
         X  Bureau of Consumer Financial Protection (Parts 1000--
                1099)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XII  Federal Housing Finance Agency (Parts 1200--1299)
      XIII  Financial Stability Oversight Council (Parts 1300--
                1399)

[[Page 669]]

       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
        XV  Department of the Treasury (Parts 1500--1599)
       XVI  Office of Financial Research (Parts 1600--1699)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
        IV  Emergency Steel Guarantee Loan Board (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board (Parts 
                500--599)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--1199)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
        XI  National Technical Information Service, Department of 
                Commerce (Parts 1100--1199)

[[Page 670]]

      XIII  East-West Foreign Trade Board (Parts 1300--1399)
       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399) [Reserved]

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)
      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  U.S. Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  U.S. Immigration and Customs Enforcement, Department 
                of Homeland Security (Parts 400--599) [Reserved]

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)
       III  Social Security Administration (Parts 400--499)

[[Page 671]]

        IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)
         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board (Parts 900--999)
         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
      XIII  Millennium Challenge Corporation (Parts 1300--1399)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)

[[Page 672]]

        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)
       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XV  Emergency Mortgage Insurance and Loan Programs, 
                Department of Housing and Urban Development (Parts 
                2700--2799) [Reserved]
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
      XXIV  Board of Directors of the HOPE for Homeowners Program 
                (Parts 4000--4099) [Reserved]
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

[[Page 673]]

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--899)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900--999)
        VI  Office of the Assistant Secretary, Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Parts 1200--1299)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--End)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
        II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--299)
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)

[[Page 674]]

        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)
        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Employee Benefits Security Administration, Department 
                of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Bureau of Safety and Environmental Enforcement, 
                Department of the Interior (Parts 200--299)
        IV  Geological Survey, Department of the Interior (Parts 
                400--499)
         V  Bureau of Ocean Energy Management, Department of the 
                Interior (Parts 500--599)
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)
       XII  Office of Natural Resources Revenue, Department of the 
                Interior (Parts 1200--1299)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
        IV  Secret Service, Department of the Treasury (Parts 
                400--499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)

[[Page 675]]

      VIII  Office of Investment Security, Department of the 
                Treasury (Parts 800--899)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)
         X  Financial Crimes Enforcement Network, Department of 
                the Treasury (Parts 1000--1099)

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Defense Logistics Agency (Parts 1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
      XVII  Office of the Director of National Intelligence (Parts 
                1700--1799)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Corps of Engineers, Department of the Army, Department 
                of Defense (Parts 200--399)
        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)
       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)

[[Page 676]]

        IV  Office of Career, Technical and Adult Education, 
                Department of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599) 
                [Reserved]
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
       VII  Office of Educational Research and Improvement, 
                Department of Education (Parts 700--799) 
                [Reserved]
            Subtitle C--Regulations Relating to Education
        XI  (Parts 1100--1199) [Reserved]
       XII  National Council on Disability (Parts 1200--1299)

                          Title 35 [Reserved]

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
        VI  [Reserved]
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Parts 1500--
                1599)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

             Title 37--Patents, Trademarks, and Copyrights

         I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)
        II  U.S. Copyright Office, Library of Congress (Parts 
                200--299)
       III  Copyright Royalty Board, Library of Congress (Parts 
                300--399)
        IV  National Institute of Standards and Technology, 
                Department of Commerce (Parts 400--599)

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--199)
        II  Armed Forces Retirement Home (Parts 200--299)

[[Page 677]]

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Regulatory Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--1099)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)
      VIII  Gulf Coast Ecosystem Restoration Council (Parts 1800--
                1899)

          Title 41--Public Contracts and Property Management

            Subtitle A--Federal Procurement Regulations System 
                [Note]
            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
   62--100  [Reserved]
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       102  Federal Management Regulation (Parts 102-1--102-299)
  103--104  [Reserved]
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)
       128  Department of Justice (Parts 128-1--128-99)
  129--200  [Reserved]
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System [Reserved]
            Subtitle F--Federal Travel Regulation System
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)

[[Page 678]]

       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-1--303-99)
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
   II--III  [Reserved]
        IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--699)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1099)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 400--999)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10099)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency, Department of 
                Homeland Security (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare
        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)
       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 400--499)

[[Page 679]]

         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)
        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)
        IX  Denali Commission (Parts 900--999)
         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
      XIII  Administration for Children and Families, Department 
                of Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission of Fine Arts (Parts 2100--2199)
     XXIII  Arctic Research Commission (Parts 2300--2399)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)
       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)
        IV  National Telecommunications and Information 
                Administration, Department of Commerce, and 
                National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 400--499)
         V  The First Responder Network Authority (Parts 500--599)

[[Page 680]]

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)
         2  Defense Acquisition Regulations System, Department of 
                Defense (Parts 200--299)
         3  Department of Health and Human Services (Parts 300--
                399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  Agency for International Development (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)
        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management, Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  Broadcasting Board of Governors (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)
        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199)
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399) 
                [Reserved]
        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
        57  African Development Foundation (Parts 5700--5799)
        61  Civilian Board of Contract Appeals, General Services 
                Administration (Parts 6100--6199)
        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

[[Page 681]]

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Pipeline and Hazardous Materials Safety 
                Administration, Department of Transportation 
                (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Homeland Security (Parts 
                400--499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board (Parts 1000--1399)
        XI  Research and Innovative Technology Administration, 
                Department of Transportation (Parts 1400--1499) 
                [Reserved]
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1699)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)
         V  Marine Mammal Commission (Parts 500--599)
        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

[[Page 683]]





           Alphabetical List of Agencies Appearing in the CFR




                      (Revised as of April 1, 2019)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Conference of the United States    1, III
Advisory Council on Historic Preservation         36, VIII
Advocacy and Outreach, Office of                  7, XXV
Afghanistan Reconstruction, Special Inspector     5, LXXXIII
     General for
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development              2, VII; 22, II
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, IX, X, XI
Agricultural Research Service                     7, V
Agriculture, Department of                        2, IV; 5, LXXIII
  Advocacy and Outreach, Office of                7, XXV
  Agricultural Marketing Service                  7, I, IX, X, XI
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Economic Research Service                       7, XXXVII
  Energy Policy and New Uses, Office of           2, IX; 7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Grain Inspection, Packers and Stockyards        7, VIII; 9, II
       Administration
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  National Institute of Food and Agriculture      7, XXXIV
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force, Department of                          32, VII
  Federal Acquisition Regulation Supplement       48, 53
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII
Animal and Plant Health Inspection Service        7, III; 9, I

[[Page 684]]

Appalachian Regional Commission                   5, IX
Architectural and Transportation Barriers         36, XI
     Compliance Board
Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI
Army, Department of                               32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase from People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Career, Technical, and Adult Education, Office    34, IV
     of
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chemical Safety and Hazardous Investigation       40, VI
     Board
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X, XIII
Civil Rights, Commission on                       5, LXVIII; 45, VII
Civil Rights, Office for                          34, I
Council of the Inspectors General on Integrity    5, XCVIII
     and Efficiency
Court Services and Offender Supervision Agency    5, LXX
     for the District of Columbia
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce, Department of                           2, XIII; 44, IV; 50, VI
  Census Bureau                                   15, I
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II; 37, IV
  National Marine Fisheries Service               50, II, IV
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Technical Information Service          15, XI
  National Telecommunications and Information     15, XXIII; 47, III, IV
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Secretary of Commerce, Office of                15, Subtitle A
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Financial Protection Bureau              5, LXXXIV; 12, X
Consumer Product Safety Commission                5, LXXI; 16, II
Copyright Royalty Board                           37, III
Corporation for National and Community Service    2, XXII; 45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    5, LXX; 28, VIII
     for the District of Columbia
Customs and Border Protection                     19, I
Defense Contract Audit Agency                     32, I
Defense, Department of                            2, XI; 5, XXVI; 32, 
                                                  Subtitle A; 40, VII
  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII

[[Page 685]]

  Army Department                                 32, V; 33, II; 36, III; 
                                                  48, 51
  Defense Acquisition Regulations System          48, 2
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 2, XI; 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
Denali Commission                                 45, IX
Disability, National Council on                   5, C; 34, XII
District of Columbia, Court Services and          5, LXX; 28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          2, XXXIV; 5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Career, Technical, and Adult Education, Office  34, IV
       of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
Educational Research and Improvement, Office of   34, VII
Election Assistance Commission                    2, LVIII; 11, II
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Policy, National Commission for        1, IV
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             2, IX; 5, XXIII; 10, II, 
                                                  III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   2, XV; 5, LIV; 40, I, IV, 
                                                  VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                2, Subtitle A; 5, III, 
                                                  LXXVII; 14, VI; 48, 99
  National Drug Control Policy, Office of         2, XXXVI; 21, III
  National Security Council                       32, XXI; 47, 2

[[Page 686]]

  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II
  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           2, XXXV; 5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       5, XXXVII; 11, I
Federal Emergency Management Agency               44, I
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Agency                    5, LXXX; 12, XII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority                 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Financial Crimes Enforcement Network              31, X
Financial Research Office                         12, XVI
Financial Stability Oversight Council             12, XIII
Fine Arts, Commission of                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV
Forest Service                                    36, II
General Services Administration                   5, LVII; 41, 105

[[Page 687]]

  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5
  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Accountability Office                  4, I
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Gulf Coast Ecosystem Restoration Council          2, LIX; 40, VIII
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          2, III; 5, XLV; 45, 
                                                  Subtitle A
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X, XIII
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Indian Health Service                           25, V
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  2, XXX; 5, XXXVI; 6, I; 8, 
                                                  I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection                   19, I
  Federal Emergency Management Agency             44, I
  Human Resources Management and Labor Relations  5, XCVII
       Systems
  Immigration and Customs Enforcement Bureau      19, IV
  Transportation Security Administration          49, XII
HOPE for Homeowners Program, Board of Directors   24, XXIV
     of
Housing and Urban Development, Department of      2, XXIV; 5, LXV; 24, 
                                                  Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Immigration and Customs Enforcement Bureau        19, IV
Immigration Review, Executive Office for          8, V
Independent Counsel, Office of                    28, VII
Independent Counsel, Offices of                   28, VI
Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
   Secretary
[[Page 688]]

Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V
Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General
  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII, XV
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior, Department of                           2, XIV
  American Indians, Office of the Special         25, VII
       Trustee
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Natural Resource Revenue, Office of             30, XII
  Ocean Energy Management, Bureau of              30, V
  Reclamation, Bureau of                          43, I
  Safety and Enforcement Bureau, Bureau of        30, II
  Secretary of the Interior, Office of            2, XIV; 43, Subtitle A
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
Investment Security, Office of                    31, VIII
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice, Department of                            2, XXVIII; 5, XXVIII; 28, 
                                                  I, XI; 40, IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  Independent Counsel, Offices of                 28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor, Department of                              2, XXIX; 5, XLII
  Employee Benefits Security Administration       29, XXV
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI
  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
     of
[[Page 689]]

  Federal Procurement Regulations System          41, 50
  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A
  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I, VII
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Libraries and Information Science, National       45, XVII
     Commission on
Library of Congress                               36, VII
  Copyright Royalty Board                         37, III
  U.S. Copyright Office                           37, II
Local Television Loan Guarantee Board             7, XX
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II, LXIV
Micronesian Status Negotiations, Office for       32, XXVII
Military Compensation and Retirement              5, XCIX
     Modernization Commission
Millennium Challenge Corporation                  22, XIII
Mine Safety and Health Administration             30, I
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
Museum and Library Services, Institute of         2, XXXI
National Aeronautics and Space Administration     2, XVIII; 5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   2, XXII; 45, XII, XXV
National Archives and Records Administration      2, XXVI; 5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Capital Planning Commission              1, IV, VI
National Counterintelligence Center               32, XVIII
National Credit Union Administration              5, LXXXVI; 12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           2, XXXVI; 21, III
National Endowment for the Arts                   2, XXXII
National Endowment for the Humanities             2, XXXIII
National Foundation on the Arts and the           45, XI
     Humanities
National Geospatial-Intelligence Agency           32, I
National Highway Traffic Safety Administration    23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute of Food and Agriculture        7, XXXIV
National Institute of Standards and Technology    15, II; 37, IV
National Intelligence, Office of Director of      5, IV; 32, XVII
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV
National Mediation Board                          5, CI; 29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III
National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       2, XXV; 5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI

[[Page 690]]

National Security Council and Office of Science   47, II
     and Technology Policy
National Technical Information Service            15, XI
National Telecommunications and Information       15, XXIII; 47, III, IV, V
     Administration
National Transportation Safety Board              49, VIII
Natural Resources Conservation Service            7, VI
Natural Resource Revenue, Office of               30, XII
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy, Department of                               32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
     Commission
Nuclear Regulatory Commission                     2, XX; 5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Ocean Energy Management, Bureau of                30, V
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Overseas Private Investment Corporation           5, XXXIII; 22, VII
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, XXXV; 5, IV; 45, 
                                                  VIII
  Human Resources Management and Labor Relations  5, XCVII
       Systems, Department of Homeland Security
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Pipeline and Hazardous Materials Safety           49, I
     Administration
Postal Regulatory Commission                      5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Privacy and Civil Liberties Oversight Board       6, X
Procurement and Property Management, Office of    7, XXXII
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Relocation Allowances                             41, 302
Research and Innovative Technology                49, XI
     Administration
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII
Safety and Environmental Enforcement, Bureau of   30, II
Saint Lawrence Seaway Development Corporation     33, IV
Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                5, XXXIV; 17, II

[[Page 691]]

Selective Service System                          32, XVI
Small Business Administration                     2, XXVII; 13, I
Smithsonian Institution                           36, V
Social Security Administration                    2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State, Department of                              2, VI; 22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Tennessee Valley Authority                        5, LXIX; 18, XIII
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     2, XII; 5, L
  Commercial Space Transportation                 14, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II
  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 47, IV; 49, V
  Pipeline and Hazardous Materials Safety         49, I
       Administration
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury, Department of the                       2, X;5, XXI; 12, XV; 17, 
                                                  IV; 31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection                   19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Claims Collection Standards             31, IX
  Federal Law Enforcement Training Center         31, VII
  Financial Crimes Enforcement Network            31, X
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  Investment Security, Office of                  31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
U.S. Copyright Office                             37, II
Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs, Department of                   2, VIII; 38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I, VII
World Agricultural Outlook Board                  7, XXXVIII

[[Page 693]]







                      Table of OMB Control Numbers



The OMB control numbers for chapter I of title 26 were consolidated into 
Sec. Sec.  601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR 
58008, Nov. 12, 1996, Sec.  601.9000 was removed. Section 602.101 is 
reprinted below for the convenience of the user.



PART 602_OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT--Table of Contents





Sec.  602.101  OMB Control numbers.

    (a) Purpose. This part collects and displays the control numbers 
assigned to collections of information in Internal Revenue Service 
regulations by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1980. The Internal Revenue Service intends 
that this part comply with the requirements of Sec. Sec.  1320.7(f), 
1320.12, 1320.13, and 1320.14 of 5 CFR part 1320 (OMB regulations 
implementing the Paperwork Reduction Act), for the display of control 
numbers assigned by OMB to collections of information in Internal 
Revenue Service regulations. This part does not display control numbers 
assigned by the Office of Management and Budget to collections of 
information of the Bureau of Alcohol, Tobacco, and Firearms.
    (b) Display.

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................    1545-1654
1.25-1T....................................................    1545-0922
                                                               1545-0930
1.25-2T....................................................    1545-0922
                                                               1545-0930
1.25-3T....................................................    1545-0922
                                                               1545-0930
1.25-4T....................................................    1545-0922
1.25-5T....................................................    1545-0922
1.25-6T....................................................    1545-0922
1.25-7T....................................................    1545-0922
1.25-8T....................................................    1545-0922
1.25A-1....................................................    1545-1630
1.28-1.....................................................    1545-0619
1.31-2.....................................................    1545-0074
1.32-2.....................................................    1545-0074
1.32-3.....................................................    1545-1575
1.36B-5....................................................    1545-2232
1.37-1.....................................................    1545-0074
1.37-3.....................................................    1545-0074
1.41-2.....................................................    1545-0619
1.41-3.....................................................    1545-0619
1.41-4A....................................................    1545-0074
1.41-4 (b) and (c).........................................    1545-0074
1.41-8(b)..................................................    1545-1625
1.41-8(d)..................................................    1545-0732
1.41-9.....................................................    1545-0619
1.42-1T....................................................    1545-0984
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1.42-5.....................................................    1545-1357
1.42-6.....................................................    1545-1102
1.42-8.....................................................    1545-1102
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1.42-13....................................................    1545-1357
1.42-14....................................................    1545-1423
1.42-17....................................................    1545-1357
1.42-18....................................................    1545-2088
1.43-3(a)(3)...............................................    1545-1292
1.43-3(b)(3)...............................................    1545-1292
1.44B-1....................................................    1545-0219
1.45D-1....................................................    1545-1765
1.45G-1....................................................    1545-2031
1.46-1.....................................................    1545-0123
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1.46-3.....................................................    1545-0155
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1.47-1.....................................................    1545-0155
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1.48-3.....................................................    1545-0155
1.48-4.....................................................    1545-0155
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1.48-5.....................................................    1545-0155
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1.48-12....................................................    1545-0155
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1.50A-1....................................................    1545-0895
1.50A-2....................................................    1545-0895
1.50A-3....................................................    1545-0895
1.50A-4....................................................    1545-0895
1.50A-5....................................................    1545-0895
1.50A-6....................................................    1545-0895
1.50A-7....................................................    1545-0895
1.50B-1....................................................    1545-0895
1.50B-2....................................................    1545-0895
1.50B-3....................................................    1545-0895
1.50B-4....................................................    1545-0895
1.50B-5....................................................    1545-0895
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1.56(g)-1..................................................    1545-1233
1.57-5.....................................................    1545-0227
1.58-1.....................................................    1545-0175
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1.67-3.....................................................    1545-1018
1.67-3T....................................................    1545-0118
1.71-1T....................................................    1545-0074
1.72-4.....................................................    1545-0074
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1.72-9.....................................................    1545-0074
1.72-17....................................................    1545-0074
1.72-17A...................................................    1545-0074
1.72-18....................................................    1545-0074
1.74-1.....................................................    1545-1100
1.79-2.....................................................    1545-0074
1.79-3.....................................................    1545-0074
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1.83-6.....................................................    1545-1448
1.103-10...................................................    1545-0123
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1.103A-2...................................................    1545-0720
1.105-4....................................................    1545-0074
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1.105-6....................................................    1545-0074
1.108-4....................................................    1545-1539
1.108-5....................................................    1545-1421
1.108-7....................................................    1545-2155
1.108(i)-1.................................................    1545-2147
1.108(i)-2.................................................    1545-2147
1.110-1....................................................    1545-1661
1.117-5....................................................    1545-0869
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1.120-3....................................................    1545-0057
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1.121-5....................................................    1545-0072
1.127-2....................................................    1545-0768
1.132-2....................................................    1545-0771
1.132-5....................................................    1545-0771
1.132-9(b).................................................    1545-1676
1.141-1....................................................    1545-1451
1.141-12...................................................    1545-1451
1.142-2....................................................    1545-1451
1.142(f)(4)-1..............................................    1545-1730
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1.148-2....................................................    1545-1098
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1.149(e)-1.................................................    1545-0720
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1.151-1....................................................    1545-0074
1.152-3....................................................    1545-0071
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1.152-4....................................................    1545-0074
1.152-4T...................................................    1545-0074
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1.162-27...................................................    1545-1466
1.163-5....................................................    1545-0786
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1.163-8T...................................................    1545-0995
1.163-10T..................................................    1545-0074
1.163-13...................................................    1545-1491
1.163(d)-1.................................................    1545-1421
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1.166-4....................................................    1545-0123
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1.167(a)-5T................................................    1545-1021
1.167(a)-7.................................................    1545-0172
1.167(a)-11................................................    1545-0152
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1.167(a)-12................................................    1545-0172
1.167(d)-1.................................................    1545-0172
1.167(e)-1.................................................    1545-0172
1.167(f)-11................................................    1545-0172
1.167(l)-1.................................................    1545-0172
1.168(d)-1.................................................    1545-1146
1.168(i)-1.................................................    1545-1331
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1.170-3....................................................    1545-0123
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1.170A-2...................................................    1545-0074
1.170A-4(A)(b).............................................    1545-0123
1.170A-8...................................................    1545-0074
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1.170A-13(f)...............................................    1545-1464
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1.174-4....................................................    1545-0152
1.175-3....................................................    1545-0187
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1.179-2....................................................    1545-1201
1.179-3....................................................    1545-1201
1.179-5....................................................    1545-0172
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1.179B-1T..................................................    1545-2076
1.179C-1...................................................    1545-2103
1.179C-1T..................................................    1545-2103
1.180-2....................................................    1545-0074
1.181-1....................................................    1545-2059
1.181-2....................................................    1545-2059
1.181-3....................................................    1545-2059
1.182-6....................................................    1545-0074
1.183-1....................................................    1545-0195
1.183-2....................................................    1545-0195
1.183-3....................................................    1545-0195
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1.190-3....................................................    1545-0074
1.194-2....................................................    1545-0735
1.194-4....................................................    1545-0735
1.195-1....................................................    1545-1582
1.197-1T...................................................    1545-1425
1.197-2....................................................    1545-1671
1.199-6....................................................    1545-1966
1.213-1....................................................    1545-0074
1.215-1T...................................................    1545-0074
1.217-2....................................................    1545-0182
1.243-3....................................................    1545-0123
1.243-4....................................................    1545-0123
1.243-5....................................................    1545-0123
1.248-1....................................................    1545-0172
1.261-1....................................................    1545-1041
1.263(a)-1.................................................    1545-2248
1.263(a)-3.................................................    1545-2248
1.263(a)-5.................................................    1545-1870
1.263(e)-1.................................................    1545-0123
1.263A-1...................................................    1545-0987
1.263A-1T..................................................    1545-0187
1.263A-2...................................................    1545-0987
1.263A-3...................................................    1545-0987
1.263A-8(b)(2)(iii)........................................    1545-1265
1.263A-9(d)(1).............................................    1545-1265
1.263A-9(f)(1)(ii).........................................    1545-1265
1.263A-9(f)(2)(iv).........................................    1545-1265
1.263A-9(g)(2)(iv)(C)......................................    1545-1265
1.263A-9(g)(3)(iv).........................................    1545-1265
1.265-1....................................................    1545-0074
1.265-2....................................................    1545-0123
1.266-1....................................................    1545-0123
1.267(f)-1.................................................    1545-0885
1.268-1....................................................    1545-0184
1.274-1....................................................    1545-0139
1.274-2....................................................    1545-0139
1.274-3....................................................    1545-0139
1.274-4....................................................    1545-0139
1.274-5....................................................    1545-0771
1.274-5A...................................................    1545-0139
                                                               1545-0771
1.274-5T...................................................    1545-0074
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1.274-6....................................................    1545-0139
                                                               1545-0771
1.274-6T...................................................    1545-0074
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1.274-7....................................................    1545-0139
1.274-8....................................................    1545-0139
1.279-6....................................................    1545-0123
1.280C-4...................................................    1545-1155
1.280F-3T..................................................    1545-0074
1.280G-1...................................................    1545-1851
1.281-4....................................................    1545-0123
1.302-4....................................................    1545-0074
1.305-3....................................................    1545-0123
1.305-5....................................................    1545-1438
1.307-2....................................................    1545-0074
1.312-15...................................................    1545-0172
1.316-1....................................................    1545-0123
1.331-1....................................................    1545-0074
1.332-4....................................................    1545-0123
1.332-6....................................................    1545-2019
1.336-2....................................................    1545-2125
1.336-4....................................................    1545-2125
1.337(d)-1.................................................    1545-1160
1.337(d)-2.................................................    1545-1160
                                                               1545-1774
1.337(d)-4.................................................    1545-1633
1.337(d)-5.................................................    1545-1672
1.337(d)-6.................................................    1545-1672
1.337(d)-7.................................................    1545-1672
1.338-2....................................................    1545-1658
1.338-5....................................................    1545-1658
1.338-10...................................................    1545-1658
1.338-11...................................................    1545-1990
1.338(h)(10)-1.............................................    1545-1658
1.338(i)-1.................................................    1545-1990
1.351-3....................................................    1545-2019
1.355-5....................................................    1545-2019
1.362-2....................................................    1545-0123
1.362-4....................................................    1545-2247
1.367(a)-1T................................................    1545-0026
1.367(a)-2T................................................    1545-0026
1.367(a)-3.................................................    1545-0026
                                                               1545-1478
1.367(a)-3T................................................    1545-2183
1.367(a)-6T................................................    1545-0026
1.367(a)-7.................................................    1545-2183
1.367(a)-7T................................................    1545-2183
1.367(a)-8.................................................    1545-1271
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1.367(b)-3T................................................    1545-1666
1.367(d)-1T................................................    1545-0026
1.367(e)-1.................................................    1545-1487
1.367(e)-2.................................................    1545-1487
1.368-1....................................................    1545-1691
1.368-3....................................................    1545-2019
1.371-1....................................................    1545-0123
1.371-2....................................................    1545-0123
1.374-3....................................................    1545-0123
1.381(b)-1.................................................    1545-0123
1.381(c)(4)-1..............................................    1545-0123
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1.381(c)(5)-1..............................................    1545-0123
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1.381(c)(6)-1..............................................    1545-0123
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1.381(c)(8)-1..............................................    1545-0123
1.381(c)(10)-1.............................................    1545-0123
1.381(c)(11)-1(k)..........................................    1545-0123
1.381(c)(13)-1.............................................    1545-0123
1.381(c)(17)-1.............................................    1545-0045
1.381(c)(22)-1.............................................    1545-1990
1.381(c)(25)-1.............................................    1545-0045
1.382-1T...................................................    1545-0123
1.382-2....................................................    1545-0123
1.382-2T...................................................    1545-0123
1.382-3....................................................    1545-1281
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1.382-4....................................................    1545-1120
1.382-6....................................................    1545-1381
1.382-8....................................................    1545-1434
1.382-9....................................................    1545-1120
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1.382-11...................................................    1545-2019
1.382-91...................................................    1545-1260
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1.383-1....................................................    1545-0074
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1.401-1....................................................    1545-0020
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                                                               1545-0534
                                                               1545-0710
1.401(a)-11................................................    1545-0710
1.401(a)-20................................................    1545-0928
1.401(a)-31................................................    1545-1341
1.401(a)-50................................................    1545-0710
1.401(a)(9)-1..............................................    1545-1573
1.401(a)(9)-3..............................................    1545-1466
1.401(a)(9)-4..............................................    1545-1573
1.401(a)(9)-6..............................................    1545-2234
1.401(a)(31)-1.............................................    1545-1341
1.401(b)-1.................................................    1545-0197
1.401(f)-1.................................................    1545-0710
1.401(k)-1.................................................    1545-1039
                                                               1545-1069
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                                                               1545-1930
1.401(k)-2.................................................    1545-1669
1.401(k)-3.................................................    1545-1669
1.401(k)-4.................................................    1545-1669
1.401(m)-3.................................................    1545-1699
1.401-14...................................................    1545-0710
1.402(c)-2.................................................    1545-1341
1.402(f)-1.................................................    1545-1341
                                                               1545-1632
1.402A-1...................................................    1545-1992
1.403(b)-1.................................................    1545-0710
1.403(b)-3.................................................    1545-0996
1.403(b)-7.................................................    1545-1341
1.403(b)-10................................................    1545-2068
1.404(a)-12................................................    1545-0710
1.404A-2...................................................    1545-0123
1.404A-6...................................................    1545-0123
1.408-2....................................................    1545-0390
1.408-5....................................................    1545-0747
1.408-6....................................................    1545-0203
                                                               1545-0390
1.408-7....................................................    1545-0119
1.408(q)-1.................................................    1545-1841
1.408A-2...................................................    1545-1616
1.408A-4...................................................    1545-1616
1.408A-5...................................................    1545-1616
1.408A-7...................................................    1545-1616
1.410(a)-2.................................................    1545-0710
1.410(d)-1.................................................    1545-0710
1.411(a)-11................................................    1545-1471
                                                               1545-1632
1.411(d)-4.................................................    1545-1545
1.411(d)-6.................................................    1545-1477
1.412(c)(1)-2..............................................    1545-0710
1.412(c)(2)-1..............................................    1545-0710
1.412(c)(3)-2..............................................    1545-0710
1.414(c)-5.................................................    1545-0797
1.414(r)-1.................................................    1545-1221
1.415-2....................................................    1545-0710
1.415-6....................................................    1545-0710
1.417(a)(3)-1..............................................    1545-0928
1.417(e)-1.................................................    1545-1471
                                                               1545-1724
1.417(e)-1T................................................    1545-1471
1.419A(f)(6)-1.............................................    1545-1795
1.422-1....................................................    1545-0820
1.430(f)-1.................................................    1545-2095
1.430(g)-1.................................................    1545-2095
1.430(h)(2)-1..............................................    1545-2095
1.432(e)(9)-1T.............................................    1545-2260
1.436-1....................................................    1545-2095
1.441-2....................................................    1545-1748
1.442-1....................................................    1545-0074
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1.443-1....................................................    1545-0123
1.444-3T...................................................    1545-1036
1.444-4....................................................    1545-1591
1.446-1....................................................    1545-0074
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1.446-4(d).................................................    1545-1412
1.448-1(g).................................................    1545-0152
1.448-1(h).................................................    1545-0152
1.448-1(i).................................................    1545-0152
1.448-2....................................................    1545-1855
1.448-2T...................................................    1545-0152
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1.451-1....................................................    1545-0091
1.451-4....................................................    1545-0123
1.451-5....................................................    1545-0074
1.451-6....................................................    1545-0074
1.451-7....................................................    1545-0074
1.453-1....................................................    1545-0152
1.453-2....................................................    1545-0152
1.453-8....................................................    1545-0152
                                                               1545-0228
1.453A-1...................................................    1545-0152
                                                               1545-1134
1.453A-3...................................................    1545-0963
1.454-1....................................................    1545-0074
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1.456-2....................................................    1545-0123
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1.457-8....................................................    1545-1580
1.458-1....................................................    1545-0879
1.458-2....................................................    1545-0152
1.460-1....................................................    1545-1650
1.460-6....................................................    1545-1031
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1.461-1....................................................    1545-0074
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1.463-1T...................................................    1545-0916
1.465-1T...................................................    1545-0712
1.466-1T...................................................    1545-0152
1.466-4....................................................    1545-0152
1.468A-3...................................................    1545-1269
                                                               1545-1378
                                                               1545-1511
1.468A-3(h), 1.468A-7, and 1.468A-8(d).....................    1545-2091
1.468A-4...................................................    1545-0954
1.468A-7...................................................    1545-0954
                                                               1545-1511
1.468A-8...................................................    1545-1269
1.468B-1...................................................    1545-1631
1.468B-1(j)................................................    1545-1299
1.468B-2(k)................................................    1545-1299
1.468B-2(l)................................................    1545-1299
1.468B-3(b)................................................    1545-1299
1.468B-3(e)................................................    1545-1299
1.468B-5(b)................................................    1545-1299
1.468B-9...................................................    1545-1631
1.469-1....................................................    1545-1008
1.469-2T...................................................    1545-0712
                                                               1545-1091
1.469-4T...................................................    1545-0985
                                                               1545-1037
1.469-7....................................................    1545-1244
1.471-2....................................................    1545-0123
1.471-5....................................................    1545-0123
1.471-6....................................................    1545-0123
1.471-8....................................................    1545-0123
1.471-11...................................................    1545-0123
                                                               1545-0152
1.472-1....................................................    1545-0042
                                                               1545-0152
1.472-2....................................................    1545-0152
1.472-3....................................................    1545-0042
1.472-5....................................................    1545-0152
1.472-8....................................................    1545-0028
                                                               1545-0042
                                                               1545-1767
1.475(a)-4.................................................    1545-1945
1.481-4....................................................    1545-0152
1.481-5....................................................    1545-0152
1.482-1....................................................    1545-1364
1.482-4....................................................    1545-1364
1.482-7....................................................    1545-1364
                                                               1545-1794
1.482-9(b).................................................    1545-2149
1.501(a)-1.................................................    1545-0056
                                                               1545-0057
1.501(c)(3)-1..............................................    1545-0056
1.501(c)(9)-5..............................................    1545-0047
1.501(c)(17)-3.............................................    1545-0047
1.501(e)-1.................................................    1545-0814
1.501(r)-3.................................................    1545-0047
1.501(r)-4.................................................    1545-0047
1.501(r)-6.................................................    1545-0047
1.503(c)-1.................................................    1545-0047
                                                               1545-0052
1.505(c)-1T................................................    1545-0916
1.506-1T...................................................    1545-2268
1.507-1....................................................    1545-0052
1.507-2....................................................    1545-0052
1.508-1....................................................    1545-0052
                                                               1545-0056
1.509(a)-3.................................................    1545-0047
1.509(a)-4.................................................    1545-2157
1.509(a)-5.................................................    1545-0047
1.509(c)-1.................................................    1545-0052
1.512(a)-1.................................................    1545-0687
1.512(a)-4.................................................    1545-0047
                                                               1545-0687
1.521-1....................................................    1545-0051
                                                               1545-0058
1.527-2....................................................    1545-0129
1.527-5....................................................    1545-0129
1.527-6....................................................    1545-0129
1.527-9....................................................    1545-0129
1.528-8....................................................    1545-0127
1.533-2....................................................    1545-0123
1.534-2....................................................    1545-0123
1.542-3....................................................    1545-0123
1.545-2....................................................    1545-0123
1.545-3....................................................    1545-0123
1.547-2....................................................    1545-0045
                                                               1545-0123
1.547-3....................................................    1545-0123
1.561-1....................................................    1545-0044
1.561-2....................................................    1545-0123
1.562-3....................................................    1545-0123
1.563-2....................................................    1545-0123
1.564-1....................................................    1545-0123
1.565-1....................................................    1545-0043
                                                               1545-0123
1.565-2....................................................    1545-0043
1.565-3....................................................    1545-0043
1.565-5....................................................    1545-0043
1.565-6....................................................    1545-0043
1.585-1....................................................    1545-0123
1.585-3....................................................    1545-0123
1.585-8....................................................    1545-1290
1.597-2....................................................    1545-1300
1.597-4....................................................    1545-1300
1.597-6....................................................    1545-1300
1.597-7....................................................    1545-1300
1.611-2....................................................    1545-0099
1.611-3....................................................    1545-0007
                                                               1545-0099
                                                               1545-1784
1.612-4....................................................    1545-0074
1.612-5....................................................    1545-0099
1.613-3....................................................    1545-0099
1.613-4....................................................    1545-0099
1.613-6....................................................    1545-0099
1.613-7....................................................    1545-0099
1.613A-3...................................................    1545-0919
1.613A-3(e)................................................    1545-1251
1.613A-3(l)................................................    1545-0919
1.613A-5...................................................    1545-0099
1.613A-6...................................................    1545-0099
1.614-2....................................................    1545-0099
1.614-3....................................................    1545-0099
1.614-5....................................................    1545-0099
1.614-6....................................................    1545-0099
1.614-8....................................................    1545-0099
1.617-1....................................................    1545-0099
1.617-3....................................................    1545-0099
1.617-4....................................................    1545-0099
1.631-1....................................................    1545-0007

[[Page 698]]

 
1.631-2....................................................    1545-0007
1.641(b)-2.................................................    1545-0092
1.642(c)-1.................................................    1545-0092
1.642(c)-2.................................................    1545-0092
1.642(c)-5.................................................    1545-0074
1.642(c)-6.................................................    1545-0020
                                                               1545-0074
                                                               1545-0092
1.642(g)-1.................................................    1545-0092
1.642(i)-1.................................................    1545-0092
1.645-1....................................................    1545-1578
1.663(b)-2.................................................    1545-0092
1.664-1....................................................    1545-0196
1.664-1(a)(7)..............................................    1545-1536
1.664-1(c).................................................    1545-2101
1.664-2....................................................    1545-0196
1.664-3....................................................    1545-0196
1.664-4....................................................    1545-0020
                                                               1545-0196
1.665(a)-0A through
1.665(g)-2A................................................    1545-0192
1.666(d)-1A................................................    1545-0092
1.671-4....................................................    1545-1442
1.671-5....................................................    1545-1540
1.701-1....................................................    1545-0099
1.702-1....................................................    1545-0074
1.703-1....................................................    1545-0099
1.704-2....................................................    1545-1090
1.706-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0134
1.706-1T...................................................    1545-0099
1.706-4(f).................................................    1545-0123
1.707-3(c)(2)..............................................    1545-1243
1.707-5(a)(7)(ii)..........................................    1545-1243
1.707-6(c).................................................    1545-1243
1.707-8....................................................    1545-1243
1.708-1....................................................    1545-0099
1.732-1....................................................    1545-0099
                                                               1545-1588
1.736-1....................................................    1545-0074
1.743-1....................................................    1545-0074
                                                               1545-1588
1.751-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0941
1.752-2....................................................    1545-1905
1.752-5....................................................    1545-1090
1.752-7....................................................    1545-1843
1.754-1....................................................    1545-0099
1.755-1....................................................    1545-0099
1.761-2....................................................    1545-1338
1.801-1....................................................    1545-0123
                                                               1545-0128
1.801-3....................................................    1545-0123
1.801-5....................................................    1545-0128
1.801-8....................................................    1545-0128
1.804-4....................................................    1545-0128
1.811-2....................................................    1545-0128
1.812-2....................................................    1545-0128
1.815-6....................................................    1545-0128
1.818-4....................................................    1545-0128
1.818-5....................................................    1545-0128
1.818-8....................................................    1545-0128
1.819-2....................................................    1545-0128
1.822-5....................................................    1545-1027
1.822-6....................................................    1545-1027
1.822-8....................................................    1545-1027
1.822-9....................................................    1545-1027
1.826-1....................................................    1545-1027
1.826-2....................................................    1545-1027
1.826-3....................................................    1545-1027
1.826-4....................................................    1545-1027
1.826-6....................................................    1545-1027
1.831-3....................................................    1545-0123
1.832-4....................................................    1545-1227
1.832-5....................................................    1545-0123
1.848-2(g)(8)..............................................    1545-1287
1.848-2(h)(3)..............................................    1545-1287
1.848-2(i)(4)..............................................    1545-1287
1.851-2....................................................    1545-1010
1.851-4....................................................    1545-0123
1.852-1....................................................    1545-0123
1.852-4....................................................    1545-0123
                                                               1545-0145
1.852-6....................................................    1545-0123
                                                               1545-0144
1.852-7....................................................    1545-0074
1.852-9....................................................    1545-0074
                                                               1545-0123
                                                               1545-0144
                                                               1545-0145
                                                               1545-1783
1.852-11...................................................    1545-1094
1.853-3....................................................    1545-2035
1.853-4....................................................    1545-2035
1.854-2....................................................    1545-0123
1.855-1....................................................    1545-0123
1.856-2....................................................    1545-0123
                                                               1545-1004
1.856-6....................................................    1545-0123
1.856-7....................................................    1545-0123
1.856-8....................................................    1545-0123
1.857-8....................................................    1545-0123
1.857-9....................................................    1545-0074
1.858-1....................................................    1545-0123
1.860-2....................................................    1545-0045
1.860-4....................................................    1545-0045
                                                               1545-1054
                                                               1545-1057
1.860E-1...................................................    1545-1675
1.860E-2(a)(5).............................................    1545-1276
1.860E-2(a)(7).............................................    1545-1276
1.860E-2(b)(2).............................................    1545-1276
1.860G-2...................................................    1545-2110
1.861-2....................................................    1545-0089
1.861-3....................................................    1545-0089
1.861-4....................................................    1545-1900
1.861-8....................................................    1545-0126
1.861-8(e)(6) and (g)......................................    1545-1224
1.861-9T...................................................    1545-0121
                                                               1545-1072
1.861-18...................................................    1545-1594
1.863-1....................................................    1545-1476
1.863-3....................................................    1545-1476
                                                               1545-1556
1.863-3A...................................................    1545-0126
1.863-4....................................................    1545-0126
1.863-7....................................................    1545-0132
1.863-8....................................................    1545-1718
1.863-9....................................................    1545-1718
1.864-4....................................................    1545-0126
1.871-1....................................................    1545-0096
1.871-6....................................................    1545-0795
1.871-7....................................................    1545-0089
1.871-10...................................................    1545-0089
                                                               1545-0165
1.874-1....................................................    1545-0089
1.881-4....................................................    1545-1440
1.882-4....................................................    1545-0126
1.883-0....................................................    1545-1677
1.883-1....................................................    1545-1677
1.883-2....................................................    1545-1677
1.883-3....................................................    1545-1677

[[Page 699]]

 
1.883-4....................................................    1545-1677
1.883-5....................................................    1545-1677
1.884-0....................................................    1545-1070
1.884-1....................................................    1545-1070
1.884-2....................................................    1545-1070
1.884-2T...................................................    1545-0126
                                                               1545-1070
1.884-4....................................................    1545-1070
1.884-5....................................................    1545-1070
1.892-1T...................................................    1545-1053
1.892-2T...................................................    1545-1053
1.892-3T...................................................    1545-1053
1.892-4T...................................................    1545-1053
1.892-5T...................................................    1545-1053
1.892-6T...................................................    1545-1053
1.892-7T...................................................    1545-1053
1.897-2....................................................    1545-0123
                                                               1545-0902
1.897-3....................................................    1545-0123
1.897-5T...................................................    1545-0902
1.897-6T...................................................    1545-0902
1.901-2....................................................    1545-0746
1.901-2A...................................................    1545-0746
1.901-3....................................................    1545-0122
1.902-1....................................................    1545-0122
                                                               1545-1458
1.904-1....................................................    1545-0121
                                                               1545-0122
1.904-2....................................................    1545-0121
                                                               1545-0122
1.904-3....................................................    1545-0121
1.904-4....................................................    1545-0121
1.904-5....................................................    1545-0121
1.904-7....................................................    1545-2104
1.904-7T...................................................    1545-2104
1.904(f)-1.................................................    1545-0121
                                                               1545-0122
1.904(f)-2.................................................    1545-0121
1.904(f)-3.................................................    1545-0121
1.904(f)-4.................................................    1545-0121
1.904(f)-5.................................................    1545-0121
1.904(f)-6.................................................    1545-0121
1.904(f)-7.................................................    1545-1127
1.905-2....................................................    1545-0122
1.905-3T...................................................    1545-1056
1.905-4T...................................................    1545-1056
1.905-5T...................................................    1545-1056
1.911-1....................................................    1545-0067
                                                               1545-0070
1.911-2....................................................    1545-0067
                                                               1545-0070
1.911-3....................................................    1545-0067
                                                               1545-0070
1.911-4....................................................    1545-0067
                                                               1545-0070
1.911-5....................................................    1545-0067
                                                               1545-0070
1.911-6....................................................    1545-0067
                                                               1545-0070
1.911-7....................................................    1545-0067
                                                               1545-0070
1.913-13...................................................    1545-0067
1.921-1T...................................................    1545-0190
                                                               1545-0884
                                                               1545-0935
                                                               1545-0939
1.921-2....................................................    1545-0884
1.927(a)-1T................................................    1545-0935
1.927(d)-2T................................................    1545-0935
1.931-1....................................................    1545-0074
                                                               1545-0123
1.934-1....................................................    1545-0782
1.935-1....................................................    1545-0074
                                                               1545-0087
                                                               1545-0803
1.936-1....................................................    1545-0215
                                                               1545-0217
1.936-4....................................................    1545-0215
1.936-5....................................................    1545-0704
1.936-6....................................................    1545-0215
1.936-7....................................................    1545-0215
1.936-10(c)................................................    1545-1138
1.937-1....................................................    1545-1930
1.952-2....................................................    1545-0126
1.953-2....................................................    1545-0126
1.954-1....................................................    1545-1068
1.954-2....................................................    1545-1068
1.955-2....................................................    1545-0123
1.955-3....................................................    1545-0123
1.955A-2...................................................    1545-0755
1.955A-3...................................................    1545-0755
1.956-1....................................................    1545-0704
1.956-2....................................................    1545-0704
1.959-1....................................................    1545-0704
1.959-2....................................................    1545-0704
1.960-1....................................................    1545-0122
1.962-2....................................................    1545-0704
1.962-3....................................................    1545-0704
1.964-1....................................................    1545-0126
                                                               1545-0704
                                                               1545-1072
                                                               1545-2104
1.964-3....................................................    1545-0126
1.970-2....................................................    1545-0126
1.985-2....................................................    1545-1051
                                                               1545-1131
1.985-3....................................................    1545-1051
1.987-1....................................................    1545-2265
1.987-3....................................................    1545-2265
1.987-9....................................................    1545-2265
1.987-10...................................................    1545-2265
1.988-0....................................................    1545-1131
1.988-1....................................................    1545-1131
1.988-2....................................................    1545-1131
1.988-3....................................................    1545-1131
1.988-4....................................................    1545-1131
1.988-5....................................................    1545-1131
1.988-6....................................................    1545-1831
1.992-1....................................................    1545-0190
                                                               1545-0938
1.992-2....................................................    1545-0190
                                                               1545-0884
                                                               1545-0938
1.992-3....................................................    1545-0190
                                                               1545-0938
1.992-4....................................................    1545-0190
                                                               1545-0938
1.993-3....................................................    1545-0938
1.993-4....................................................    1545-0938
1.994-1....................................................    1545-0938
1.995-5....................................................    1545-0938
1.1001-1...................................................    1545-1902
1.1012-1...................................................    1545-0074
                                                               1545-1139
1.1014-4...................................................    1545-0184
1.1015-1...................................................    1545-0020
1.1017-1...................................................    1545-1539
1.1031(d)-1T...............................................    1545-1021
1.1033(a)-2................................................    1545-0184
1.1033(g)-1................................................    1545-0184
1.1039-1...................................................    1545-0184
1.1041-1T..................................................    1545-0074
1.1041-2...................................................    1545-1751
1.1042-1T..................................................    1545-0916

[[Page 700]]

 
1.1044(a)-1................................................    1545-1421
1.1045-1...................................................    1545-1893
1.1060-1...................................................    1545-1658
                                                               1545-1990
1.1071-1...................................................    1545-0184
1.1071-4...................................................    1545-0184
1.1081-4...................................................    1545-0028
                                                               1545-0046
                                                               1545-0123
1.1081-11..................................................    1545-2019
1.1082-1...................................................    1545-0046
1.1082-2...................................................    1545-0046
1.1082-3...................................................    1545-0046
                                                               1545-0184
1.1082-4...................................................    1545-0046
1.1082-5...................................................    1545-0046
1.1082-6...................................................    1545-0046
1.1083-1...................................................    1545-0123
1.1092(b)-1T...............................................    1545-0644
1.1092(b)-2T...............................................    1545-0644
1.1092(b)-3T...............................................    1545-0644
1.1092(b)-4T...............................................    1545-0644
1.1092(b)-5T...............................................    1545-0644
1.1211-1...................................................    1545-0074
1.1212-1...................................................    1545-0074
1.1221-2...................................................    1545-1480
1.1231-1...................................................    1545-0177
                                                               1545-0184
1.1231-2...................................................    1545-0177
                                                               1545-0184
1.1231-2...................................................    1545-0074
1.1232-3...................................................    1545-0074
1.1237-1...................................................    1545-0184
1.1239-1...................................................    1545-0091
1.1242-1...................................................    1545-0184
1.1243-1...................................................    1545-0123
1.1244(e)-1................................................    1545-0123
                                                               1545-1447
1.1245-1...................................................    1545-0184
1.1245-2...................................................    1545-0184
1.1245-3...................................................    1545-0184
1.1245-4...................................................    1545-0184
1.1245-5...................................................    1545-0184
1.1245-6...................................................    1545-0184
1.1248-7...................................................    1545-0074
1.1248(f)-2................................................    1545-2183
1.1248(f)-3T...............................................    1545-2183
1.1250-1...................................................    1545-0184
1.1250-2...................................................    1545-0184
1.1250-3...................................................    1545-0184
1.1250-4...................................................    1545-0184
1.1250-5...................................................    1545-0184
1.1251-1...................................................    1545-0184
1.1251-2...................................................    1545-0074
                                                               1545-0184
1.1251-3...................................................    1545-0184
1.1251-4...................................................    1545-0184
1.1252-1...................................................    1545-0184
1.1252-2...................................................    1545-0184
1.1254-1(c)(3).............................................    1545-1352
1.1254-4...................................................    1545-1493
1.1254-5(d)(2).............................................    1545-1352
1.1258-1...................................................    1545-1452
1.1272-3...................................................    1545-1353
1.1273-2(f)(9).............................................    1545-1353
1.1273-2(h)(2).............................................    1545-1353
1.1274-3(d)................................................    1545-1353
1.1274-5(b)................................................    1545-1353
1.1274A-1(c)...............................................    1545-1353
1.1275-2...................................................    1545-1450
1.1275-3...................................................    1545-0887
                                                               1545-1353
                                                               1545-1450
1.1275-4...................................................    1545-1450
1.1275-6...................................................    1545-1450
1.1287-1...................................................    1545-0786
1.1291-9...................................................    1545-1507
1.1291-10..................................................    1545-1304
                                                               1545-1507
1.1294-1T..................................................    1545-1002
                                                               1545-1028
1.1295-1...................................................    1545-1555
1.1295-3...................................................    1545-1555
1.1298-3...................................................    1545-1507
1.1301-1...................................................    1545-1662
1.1311(a)-1................................................    1545-0074
1.1361-1...................................................    1545-0731
                                                               1545-1591
                                                               1545-2114
1.1361-3...................................................    1545-1590
1.1361-5...................................................    1545-1590
1.1362-1...................................................    1545-1308
1.1362-2...................................................    1545-1308
1.1362-3...................................................    1545-1308
1.1362-4...................................................    1545-1308
1.1362-5...................................................    1545-1308
1.1362-6...................................................    1545-1308
1.1362-7...................................................    1545-1308
1.1362-8...................................................    1545-1590
1.1363-2...................................................    1545-1906
1.1366-1...................................................    1545-1613
1.1367-1(f)................................................    1545-1139
1.1368-1(f)(2).............................................    1545-1139
1.1368-1(f)(3).............................................    1545-1139
1.1368-1(f)(4).............................................    1545-1139
1.1368-1(g)(2).............................................    1545-1139
1.1374-1A..................................................    1545-0130
1.1377-1...................................................    1545-1462
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1.1383-1...................................................    1545-0074
1.1385-1...................................................    1545-0074
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1.1397E-1..................................................    1545-1908
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1.1402(a)-2................................................    1545-0074
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1.1402(a)-15...............................................    1545-0074
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1.1402(b)-1................................................    1545-0171
1.1402(c)-2................................................    1545-0074
1.1402(e)(1)-1.............................................    1545-0074
1.1402(e)(2)-1.............................................    1545-0074
1.1402(e)-1A...............................................    1545-0168
1.1402(e)-2A...............................................    1545-0168
1.1402(e)-3A...............................................    1545-0168
1.1402(e)-4A...............................................    1545-0168
1.1402(e)-5A...............................................    1545-0168
1.1402(f)-1................................................    1545-0074
1.1402(h)-1................................................    1545-0064
1.1411-10(g)...............................................    1545-2227
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1.1502-20..................................................    1545-1774
1.1502-21..................................................    1545-1237
1.1502-21T.................................................    1545-2171
1.1502-31..................................................    1545-1344
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1.1502-76..................................................    1545-1344
1.1502-76T.................................................    1545-2019
1.1502-77..................................................    1545-1699
1.1502-77A.................................................    1545-0123
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1.1502-77B.................................................    1545-1699
1.1502-78..................................................    1545-0582
1.1502-95..................................................    1545-1218
1.1502-95A.................................................    1545-1218
1.1502-96..................................................    1545-1218
1.1503-2...................................................    1545-1583
1.1503-2A..................................................    1545-1083
1.1503(d)-1................................................    1545-1946
1.1503(d)-3................................................    1545-1946
1.1503(d)-4................................................    1545-1946
1.1503(d)-5................................................    1545-1946
1.1503(d)-6................................................    1545-1946
1.1552-1...................................................    1545-0123
1.1561-3...................................................    1545-0123
1.1563-1...................................................    1545-0123
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1.1563-3...................................................    1545-0123
1.5000A-3..................................................    1545-0074
1.5000A-4..................................................    1545-0074
1.5000C-2..................................................    1545-0096
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1.5000C-3..................................................    1545-0096
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1.6015(a)-1................................................    1545-0087
1.6015(b)-1................................................    1545-0087
1.6015(d)-1................................................    1545-0087
1.6015(e)-1................................................    1545-0087
1.6015(f)-1................................................    1545-0087
1.6015(g)-1................................................    1545-0087
1.6015(h)-1................................................    1545-0087
1.6015(i)-1................................................    1545-0087
1.6017-1...................................................    1545-0074
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1.6031(a)-1................................................    1545-1583
1.6031(b)-1T...............................................    1545-0099
1.6031(c)-1T...............................................    1545-0099
1.6032-1...................................................    1545-0099
1.6033-2...................................................    1545-0047
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1.6038B-1..................................................    1545-1617
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1.6038B-1T.................................................    1545-0026
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1.6038B-2..................................................    1545-1617
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1.6041-1...................................................    1545-0008
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1.6044-5...................................................    1545-0118
1.6045-1...................................................    1545-0715
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1.6045-1(c)(3)(xi)(C)......................................    1545-2186
1.6045-1(n)(5).............................................    1545-2186
1.6045A-1..................................................    1545-2186
1.6045-2...................................................    1545-0115
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1.6046-2...................................................    1545-0704
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1.6046A....................................................    1545-1646
1.6047-1...................................................    1545-0119
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1.6047-2...................................................    1545-2234
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1.6050E-1..................................................    1545-0120
1.6050H-1..................................................    1545-0901
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1.6050H-2..................................................    1545-0901
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1.6050I-2..................................................    1545-1449
1.6050J-1T.................................................    1545-0877
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1.6050S-1..................................................    1545-1678
1.6050S-2..................................................    1545-1729
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1.6425-3...................................................    1545-0170
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1.6654-2...................................................    1545-0087
1.6654-3...................................................    1545-0087
1.6655(e)-1................................................    1545-1421
1.6662-3(c)................................................    1545-0889
1.6662-4(e) and (f)........................................    1545-0889
1.6662-6...................................................    1545-1426
1.6694-1...................................................    1545-0074
1.6694-2...................................................    1545-0074
1.6694-2(c)................................................    1545-1231
1.6694-2(c)(3).............................................    1545-1231
1.6694-3(e)................................................    1545-1231
1.6695-1...................................................    1545-0074
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1.6696-1...................................................    1545-0074
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1.6851-1...................................................    1545-0086
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1.6851-2...................................................    1545-0086
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1.7476-1...................................................    1545-0197
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1.7519-2T..................................................    1545-1036
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1.7520-3...................................................    1545-1343
1.7520-4...................................................    1545-1343
1.7701(l)-3................................................    1545-1642
1.7872-15..................................................    1545-1792
1.9100-1...................................................    1545-0074
1.9101-1...................................................    1545-0008
2.1-4......................................................    1545-0123
2.1-5......................................................    1545-0123
2.1-6......................................................    1545-0123
2.1-10.....................................................    1545-0123
2.1-11.....................................................    1545-0123
2.1-12.....................................................    1545-0123
2.1-13.....................................................    1545-0123
2.1-20.....................................................    1545-0123
2.1-22.....................................................    1545-0123
2.1-26.....................................................    1545-0123
3.2........................................................    1545-0123
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4.954-2....................................................    1545-1068
5.6411-1...................................................    1545-0042
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5c.44F-1...................................................    1545-0619
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6a.103A-2..................................................    1545-0123
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6a.103A-3..................................................    1545-0720
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7.465-2....................................................    1545-0712
7.465-3....................................................    1545-0712
7.465-4....................................................    1545-0712
7.465-5....................................................    1545-0712
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7.999-1....................................................    1545-0216
7.6039A-1..................................................    1545-0015
7.6041-1...................................................    1545-0115
11.410-1...................................................    1545-0710
11.412(c)-7................................................    1545-0710
11.412(c)-11...............................................    1545-0710
12.7.......................................................    1545-0190
12.8.......................................................    1545-0191
12.9.......................................................    1545-0195
14a.422A-1.................................................    1545-0123
15A.453-1..................................................    1545-0228
16A.126-2..................................................    1545-0074
16A.1255-1.................................................    1545-0184
16A.1255-2.................................................    1545-0184
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18.1378-1..................................................    1545-0130
18.1379-1..................................................    1545-0130
18.1379-2..................................................    1545-0130
20.2010-2..................................................    1545-0015
20.2011-1..................................................    1545-0015
20.2014-5..................................................    1545-0015
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20.2014-6..................................................    1545-0015
20.2016-1..................................................    1545-0015
20.2031-2..................................................    1545-0015
20.2031-3..................................................    1545-0015
20.2031-4..................................................    1545-0015
20.2031-6..................................................    1545-0015
20.2031-7..................................................    1545-0020
20.2031-10.................................................    1545-0015
20.2032-1..................................................    1545-0015
20.2032A-3.................................................    1545-0015
20.2032A-4.................................................    1545-0015
20.2032A-8.................................................    1545-0015
20.2039-4..................................................    1545-0015
20.2051-1..................................................    1545-0015
20.2053-3..................................................    1545-0015
20.2053-9..................................................    1545-0015
20.2053-10.................................................    1545-0015
20.2055-1..................................................    1545-0015
20.2055-2..................................................    1545-0015
                                                               1545-0092
20.2055-3..................................................    1545-0015
20.2056(b)-4...............................................    1545-0015
20.2056(b)-7...............................................    1545-0015
                                                               1545-1612
20.2056A-2.................................................    1545-1443
20.2056A-3.................................................    1545-1360
20.2056A-4.................................................    1545-1360
20.2056A-10................................................    1545-1360
20.2106-1..................................................    1545-0015
20.2106-2..................................................    1545-0015
20.2204-1..................................................    1545-0015
20.2204-2..................................................    1545-0015
20.6001-1..................................................    1545-0015
20.6011-1..................................................    1545-0015
20.6018-1..................................................    1545-0015
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20.6018-2..................................................    1545-0015
20.6018-3..................................................    1545-0015
20.6018-4..................................................    1545-0015
                                                               1545-0022
20.6036-2..................................................    1545-0015
20.6060-1(a)(1)............................................    1545-1231
20.6061-1..................................................    1545-0015
20.6065-1..................................................    1545-0015
20.6075-1..................................................    1545-0015
20.6081-1..................................................    1545-0015
                                                               1545-0181
                                                               1545-1707
20.6091-1..................................................    1545-0015
20.6107-1..................................................    1545-1231
20.6161-1..................................................    1545-0015
                                                               1545-0181
20.6161-2..................................................    1545-0015
                                                               1545-0181
20.6163-1..................................................    1545-0015
20.6166-1..................................................    1545-0181
20.6166A-1.................................................    1545-0015
20.6166A-3.................................................    1545-0015
20.6324A-1.................................................    1545-0754
20.7520-1..................................................    1545-1343
20.7520-2..................................................    1545-1343
20.7520-3..................................................    1545-1343
20.7520-4..................................................    1545-1343
22.0.......................................................    1545-0015
25.2511-2..................................................    1545-0020
25.2512-2..................................................    1545-0020
25.2512-3..................................................    1545-0020
25.2512-5..................................................    1545-0020
25.2512-9..................................................    1545-0020
25.2513-1..................................................    1545-0020
25.2513-2..................................................    1545-0020
                                                               1545-0021
25.2513-3..................................................    1545-0020
25.2518-2..................................................    1545-0959
25.2522(a)-1...............................................    1545-0196
25.2522(c)-3...............................................    1545-0020
                                                               1545-0196
25.2523(a)-1...............................................    1545-0020
                                                               1545-0196
25.2523(f)-1...............................................    1545-0015
25.2701-2..................................................    1545-1241
25.2701-4..................................................    1545-1241
25.2701-5..................................................    1545-1273
25.2702-5..................................................    1545-1485
25.2702-6..................................................    1545-1273
25.6001-1..................................................    1545-0020
                                                               1545-0022
25.6011-1..................................................    1545-0020
25.6019-1..................................................    1545-0020
25.6019-2..................................................    1545-0020
25.6019-3..................................................    1545-0020
25.6019-4..................................................    1545-0020
25.6060-1(a)(1)............................................    1545-1231
25.6061-1..................................................    1545-0020
25.6065-1..................................................    1545-0020
25.6075-1..................................................    1545-0020
25.6081-1..................................................    1545-0020
25.6091-1..................................................    1545-0020
25.6091-2..................................................    1545-0020
25.6107-1..................................................    1545-1231
25.6151-1..................................................    1545-0020
25.6161-1..................................................    1545-0020
25.7520-1..................................................    1545-1343
25.7520-2..................................................    1545-1343
25.7520-3..................................................    1545-1343
25.7520-4..................................................    1545-1343
26.2601-1..................................................    1545-0985
26.2632-1..................................................    1545-0985
                                                               1545-1892
26.2642-1..................................................    1545-0985
26.2642-2..................................................    1545-0985
26.2642-3..................................................    1545-0985

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26.2642-4..................................................    1545-0985
26.2642-6..................................................    1545-1902
26.2652-2..................................................    1545-0985
26.2654-1..................................................    1545-1902
26.2662-1..................................................    1545-0015
                                                               1545-0985
26.2662-2..................................................    1545-0985
26.6060-1(a)(1)............................................    1545-1231
26.6107-1..................................................    1545-1231
31.3102-3..................................................    1545-0029
                                                               1545-0059
                                                               1545-0065
31.3121(b)(19)-1...........................................    1545-0029
31.3121(d)-1...............................................    1545-0004
31.3121(i)-1...............................................    1545-0034
31.3121(r)-1...............................................    1545-0029
31.3121(s)-1...............................................    1545-0029
31.3121(v)(2)-1............................................    1545-1643
31.3302(a)-2...............................................    1545-0028
31.3302(a)-3...............................................    1545-0028
31.3302(b)-2...............................................    1545-0028
31.3302(e)-1...............................................    1545-0028
31.3306(c)(18)-1...........................................    1545-0029
31.3401(a)-1...............................................    1545-0029
31.3401(a)(6)..............................................    1545-1484
31.3401(a)(6)-1............................................    1545-0029
                                                               1545-0096
                                                               1545-0795
31.3401(a)(7)-1............................................    1545-0029
31.3401(a)(8)(A)-1 ........................................    1545-0029
                                                               1545-0666
31.3401(a)(8)(C)-1 ........................................    1545-0029
31.3401(a)(15)-1...........................................    1545-0182
31.3401(c)-1...............................................    1545-0004
31.3402(b)-1...............................................    1545-0010
31.3402(c)-1...............................................    1545-0010
31.3402(f)(1)-1............................................    1545-0010
31.3402(f)(2)-1............................................    1545-0010
                                                               1545-0410
31.3402(f)(3)-1............................................    1545-0010
31.3402(f)(4)-1............................................    1545-0010
31.3402(f)(4)-2............................................    1545-0010
31.3402(f)(5)-1............................................    1545-0010
                                                               1545-1435
31.3402(h)(1)-1............................................    1545-0029
31.3402(h)(3)-1............................................    1545-0010
                                                               1545-0029
31.3402(h)(4)-1............................................    1545-0010
31.3402(i)-(1).............................................    1545-0010
31.3402(i)-(2).............................................    1545-0010
31.3402(k)-1...............................................    1545-0065
31.3402(l)-(1).............................................    1545-0010
31.3402(m)-(1).............................................    1545-0010
31.3402(n)-(1).............................................    1545-0010
31.3402(o)-2...............................................    1545-0415
31.3402(o)-3...............................................    1545-0008
                                                               1545-0010
                                                               1545-0415
                                                               1545-0717
31.3402(p)-1...............................................    1545-0415
                                                               1545-0717
31.3402(q)-1...............................................    1545-0238
                                                               1545-0239
31.3404-1..................................................    1545-0029
31.3405(c)-1...............................................    1545-1341
31.3406(a)-1...............................................    1545-0112
31.3406(a)-2...............................................    1545-0112
31.3406(a)-3...............................................    1545-0112
31.3406(a)-4...............................................    1545-0112
31.3406(b)(2)-1............................................    1545-0112
31.3406(b)(2)-2............................................    1545-0112
31.3406(b)(2)-3............................................    1545-0112
31.3406(b)(2)-4............................................    1545-0112
31.3406(b)(2)-5............................................    1545-0112
31.3406(b)(3)-1............................................    1545-0112
31.3406(b)(3)-2............................................    1545-0112
31.3406(b)(3)-3............................................    1545-0112
31.3406(b)(3)-4............................................    1545-0112
31.3406(b)(4)-1............................................    1545-0112
31.3406(c)-1...............................................    1545-0112
31.3406(d)-1...............................................    1545-0112
31.3406(d)-2...............................................    1545-0112
31.3406(d)-3...............................................    1545-0112
31.3406(d)-4...............................................    1545-0112
31.3406(d)-5...............................................    1545-0112
31.3406(e)-1...............................................    1545-0112
31.3406(f)-1...............................................    1545-0112
31.3406(g)-1...............................................    1545-0096
                                                               1545-0112
                                                               1545-1819
31.3406(g)-2...............................................    1545-0112
31.3406(g)-3...............................................    1545-0112
31.3406(h)-1...............................................    1545-0112
31.3406(h)-2...............................................    1545-0112
31.3406(h)-3...............................................    1545-0112
31.3406(i)-1...............................................    1545-0112
31.3501(a)-1T..............................................    1545-0771
31.3503-1..................................................    1545-0024
31.3504-1..................................................    1545-0029
31.6001-1..................................................    1545-0798
31.6001-2..................................................    1545-0034
                                                               1545-0798
31.6001-3..................................................    1545-0798
31.6001-4..................................................    1545-0028
31.6001-5..................................................    1545-0798
31.6001-6..................................................    1545-0029
                                                               1459-0798
31.6011(a)-1...............................................    1545-0029
                                                               1545-0034
                                                               1545-0035
                                                               1545-0059
                                                               1545-0074
                                                               1545-0256
                                                               1545-0718
                                                               1545-2097
31.6011(a)-2...............................................    1545-0001
                                                               1545-0002
31.6011(a)-3...............................................    1545-0028
31.6011(a)-3A..............................................    1545-0955
31.6011(a)-4...............................................    1545-0034
                                                               1545-0035
                                                               1545-0718
                                                               1545-1413
                                                               1545-2097
31.6011(a)-5...............................................    1545-0028
                                                               1545-0718
                                                               1545-2097
31.6011(a)-6...............................................    1545-0028
31.6011(a)-7...............................................    1545-0074
31.6011(a)-8...............................................    1545-0028
31.6011(a)-9...............................................    1545-0028
31.6011(a)-10..............................................    1545-0112
31.6011(b)-1...............................................    1545-0003
31.6011(b)-2...............................................    1545-0029
31.6051-1..................................................    1545-0008
                                                               1545-0182
                                                               1545-0458
                                                               1545-1729
31.6051-2..................................................    1545-0008
31.6051-3..................................................    1545-0008
31.6053-1..................................................    1545-0029
                                                               1545-0062
                                                               1545-0064
                                                               1545-0065

[[Page 706]]

 
                                                               1545-1603
31.6053-2..................................................    1545-0008
31.6053-3..................................................    1545-0065
                                                               1545-0714
31.6053-4..................................................    1545-0065
                                                               1545-1603
31.6060-1(a)(1)............................................    1545-1231
31.6065(a)-1...............................................    1545-0029
31.6071(a)-1...............................................    1545-0001
                                                               1545-0028
                                                               1545-0029
31.6071(a)-1A..............................................    1545-0955
31.6081(a)-1...............................................    1545-0008
                                                               1545-0028
31.6091-1..................................................    1545-0028
                                                               1545-0029
31.6107-1..................................................    1545-1231
31.6157-1..................................................    1545-0955
31.6205-1..................................................    1545-0029
                                                               1545-2097
31.6301(c)-1AT.............................................    1545-0035
                                                               1545-0112
                                                               1545-0257
31.6302-1..................................................    1545-1413
31.6302-2..................................................    1545-1413
31.6302-3..................................................    1545-1413
31.6302-4..................................................    1545-1413
31.6302(c)-2...............................................    1545-0001
                                                               1545-0257
31.6302(c)-2A..............................................    1545-0955
31.6302(c)-3...............................................    1545-0257
31.6402(a)-2...............................................    1545-0256
                                                               1545-2097
31.6413(a)-1...............................................    1545-0029
                                                               1545-2097
31.6413(a)-2...............................................    1545-0029
                                                               1545-0256
                                                               1545-2097
31.6413(c)-1...............................................    1545-0029
                                                               1545-0171
31.6414-1..................................................    1545-0029
                                                               1545-2097
32.1.......................................................    1545-0029
                                                               1545-0415
32.2.......................................................    1545-0029
35a.3406-2.................................................    1545-0112
35a.9999-5.................................................    1545-0029
36.3121(l)(1)-1............................................    1545-0137
36.3121(l)(1)-2............................................    1545-0137
36.3121(l)(3)-1............................................    1545-0123
36.3121(1)(7)-1............................................    1545-0123
36.3121(1)(10)-1...........................................    1545-0029
36.3121(1)(10)-3...........................................    1545-0029
36.3121(1)(10)-4...........................................    1545-0257
40.6060-1(a)(1)............................................    1545-1231
40.6107-1..................................................    1545-1231
40.6302(c)-3(b)(2)(ii).....................................    1545-1296
40.6302(c)-3(b)(2)(iii)....................................    1545-1296
40.6302(c)-3(e)............................................    1545-1296
40.6302(c)-3(f)(2)(ii).....................................    1545-1296
41.4481-1..................................................    1545-0143
41.4481-2..................................................    1545-0143
41.4483-3..................................................    1545-0143
41.6001-1..................................................    1545-0143
41.6001-2..................................................    1545-0143
41.6001-3..................................................    1545-0143
41.6060-1(a)(1)............................................    1545-1231
41.6071(a)-1...............................................    1545-0143
41.6081(a)-1...............................................    1545-0143
41.6091-1..................................................    1545-0143
41.6107-1..................................................    1545-1231
41.6109-1..................................................    1545-0143
41.6151(a)-1...............................................    1545-0143
41.6156-1..................................................    1545-0143
41.6161(a)(1)-1............................................    1545-0143
44.4401-1..................................................    1545-0235
44.4403-1..................................................    1545-0235
44.4412-1..................................................    1545-0236
44.4901-1..................................................    1545-0236
44.4905-1..................................................    1545-0236
44.4905-2..................................................    1545-0236
44.6001-1..................................................    1545-0235
44.6011(a)-1...............................................    1545-0235
                                                               1545-0236
44.6060-1(a)(1)............................................    1545-1231
44.6071-1..................................................    1545-0235
44.6091-1..................................................    1545-0235
44.6107-1..................................................    1545-1231
44.6151-1..................................................    1545-0235
44.6419-1..................................................    1545-0235
44.6419-2..................................................    1545-0235
46.4371-4..................................................    1545-0023
46.4374-1..................................................    1545-0023
46.4375-1..................................................    1545-2238
46.4376-1..................................................    1545-2238
46.4701-1..................................................    1545-0023
                                                               1545-0257
48.4041-4..................................................    1545-0023
48.4041-5..................................................    1545-0023
48.4041-6..................................................    1545-0023
48.4041-7..................................................    1545-0023
48.4041-9..................................................    1545-0023
48.4041-10.................................................    1545-0023
48.4041-11.................................................    1545-0023
48.4041-12.................................................    1545-0023
48.4041-13.................................................    1545-0023
48.4041-19.................................................    1545-0023
48.4041-20.................................................    1545-0023
48.4041-21.................................................    1545-1270
48.4042-2..................................................    1545-0023
48.4052-1..................................................    1545-1418
48.4061(a)-1...............................................    1545-0023
48.4061(a)-2...............................................    1545-0023
48.4061(b)-3...............................................    1545-0023
48.4064-1..................................................    1545-0014
                                                               1545-0242
48.4071-1..................................................    1545-0023
48.4073-1..................................................    1545-0023
48.4073-3..................................................    1545-0023
                                                               1545-1074
                                                               1545-1087
48.4081-2..................................................    1545-1270
                                                               1545-1418
48.4081-3..................................................    1545-1270
                                                               1545-1418
                                                               1545-1897
48.4081-4(b)(2)(ii)........................................    1545-1270
48.4081-4(b)(3)(i).........................................    1545-1270
48.4081-4(c)...............................................    1545-1270
48.4081-6(c)(1)(ii)........................................    1545-1270
48.4081-7..................................................    1545-1270
                                                               1545-1418
48.4082-1T.................................................    1545-1418
48.4082-2..................................................    1545-1418
48.4082-6..................................................    1545-1418
48.4082-7..................................................    1545-1418
48.4101-1..................................................    1545-1418
48.4101-1T.................................................    1545-1418
48.4101-2..................................................    1545-1418
48.4161(a)-1...............................................    1545-0723
48.4161(a)-2...............................................    1545-0723
48.4161(a)-3...............................................    1545-0723
48.4161(b)-1...............................................    1545-0723
48.4216(a)-2...............................................    1545-0023

[[Page 707]]

 
48.4216(a)-3...............................................    1545-0023
48.4216(c)-1...............................................    1545-0023
48.4221-1..................................................    1545-0023
48.4221-2..................................................    1545-0023
48.4221-3..................................................    1545-0023
48.4221-4..................................................    1545-0023
48.4221-5..................................................    1545-0023
48.4221-6..................................................    1545-0023
48.4221-7..................................................    1545-0023
48.4222(a)-1...............................................    1545-0014
                                                               1545-0023
48.4223-1..................................................    1545-0023
                                                               1545-0257
                                                               1545-0723
48.6302(c)-1...............................................    1545-0023
                                                               1545-0257
48.6412-1..................................................    1545-0723
48.6416(a)-1...............................................    1545-0023
                                                               1545-0723
48.6416(a)-2...............................................    1545-0723
48.6416(a)-3...............................................    1545-0723
48.6416(b)(1)-1............................................    1545-0723
48.6416(b)(1)-2............................................    1545-0723
48.6416(b)(1)-3............................................    1545-0723
48.6416(b)(1)-4............................................    1545-0723
48.6416(b)(2)-1............................................    1545-0723
48.6416(b)(2)-2............................................    1545-0723
48.6416(b)(2)-3............................................    1545-0723
                                                               1545-1087
48.6416(b)(2)-4............................................    1545-0723
48.6416(b)(3)-1............................................    1545-0723
48.6416(b)(3)-2............................................    1545-0723
48.6416(b)(3)-3............................................    1545-0723
48.6416(b)(4)-1............................................    1545-0723
48.6416(b)(5)-1............................................    1545-0723
48.6416(c)-1...............................................    1545-0723
48.6416(e)-1...............................................    1545-0023
                                                               1545-0723
48.6416(f)-1...............................................    1545-0023
                                                               1545-0723
48.6416(g)-1...............................................    1545-0723
48.6416(h)-1...............................................    1545-0723
48.6420(c)-2...............................................    1545-0023
48.6420(f)-1...............................................    1545-0023
48.6420-1..................................................    1545-0162
                                                               1545-0723
48.6420-2..................................................    1545-0162
                                                               1545-0723
48.6420-3..................................................    1545-0162
                                                               1545-0723
48.6420-4..................................................    1545-0162
                                                               1545-0723
48.6420-5..................................................    1545-0162
                                                               1545-0723
48.6420-6..................................................    1545-0162
                                                               1545-0723
48.6421-0..................................................    1545-0162
                                                               1545-0723
48.6421-1..................................................    1545-0162
                                                               1545-0723
48.6421-2..................................................    1545-0162
                                                               1545-0723
48.6421-3..................................................    1545-0162
                                                               1545-0723
48.6421-4..................................................    1545-0162
                                                               1545-0723
48.6421-5..................................................    1545-0162
                                                               1545-0723
48.6421-6..................................................    1545-0162
                                                               1545-0723
48.6421-7..................................................    1545-0162
                                                               1545-0723
48.6424-0..................................................    1545-0723
48.6424-1..................................................    1545-0723
48.6424-2..................................................    1545-0723
48.6424-3..................................................    1545-0723
48.6424-4..................................................    1545-0723
48.6424-5..................................................    1545-0723
48.6424-6..................................................    1545-0723
48.6427-0..................................................    1545-0723
48.6427-1..................................................    1545-0023
                                                               1545-0162
                                                               1545-0723
48.6427-2..................................................    1545-0162
                                                               1545-0723
48.6427-3..................................................    1545-0723
48.6427-4..................................................    1545-0723
48.6427-5..................................................    1545-0723
48.6427-8..................................................    1545-1418
48.6427-9..................................................    1545-1418
48.6427-10.................................................    1545-1418
48.6427-11.................................................    1545-1418
49.4251-1..................................................    1545-1075
49.4251-2..................................................    1545-1075
49.4251-4(d)(2)............................................    1545-1628
49.4253-3..................................................    1545-0023
49.4253-4..................................................    1545-0023
49.4264(b)-1...............................................    1545-0023
                                                               1545-0224
                                                               1545-0225
                                                               1545-0226
                                                               1545-0230
                                                               1545-0257
                                                               1545-0912
49.4271-1(d)...............................................    1545-0685
49.5000B-1.................................................    1545-2177
51.2(f)(2)(ii).............................................    1545-2209
51.7.......................................................    1545-2209
52.4682-1(b)(2)(iii).......................................    1545-1153
52.4682-2(b)...............................................    1545-1153
                                                               1545-1361
52.4682-2(d)...............................................    1545-1153
                                                               1545-1361
52.4682-3(c)(2)............................................    1545-1153
52.4682-3(g)...............................................    1545-1153
52.4682-4(f)...............................................    1545-0257
                                                               1545-1153
52.4682-5(d)...............................................    1545-1361
52.4682-5(f)...............................................    1545-1361
53.4940-1..................................................    1545-0052
                                                               1545-0196
53.4942(a)-1...............................................    1545-0052
53.4942(a)-2...............................................    1545-0052
53.4942(a)-3...............................................    1545-0052
53.4942(b)-3...............................................    1545-0052
53.4945-1..................................................    1545-0052
53.4945-4..................................................    1545-0052
53.4945-5..................................................    1545-0052
53.4945-6..................................................    1545-0052
53.4947-1..................................................    1545-0196
53.4947-2..................................................    1545-0196
53.4948-1..................................................    1545-0052
53.4958-6..................................................    1545-1623
53.4961-2..................................................    1545-0024
53.4963-1..................................................    1545-0024
53.6001-1..................................................    1545-0052
53.6011-1..................................................    1545-0049
                                                               1545-0052
                                                               1545-0092
                                                               1545-0196
53.6060-1(a)(1)............................................    1545-1231
53.6065-1..................................................    1545-0052
53.6071-1..................................................    1545-0049
53.6081-1..................................................    1545-0066

[[Page 708]]

 
                                                               1545-0148
53.6107-1..................................................    1545-1231
53.6161-1..................................................    1545-0575
54.4975-7..................................................    1545-0575
54.4977-1T.................................................    1545-0771
54.4980B-6.................................................    1545-1581
54.4980B-7.................................................    1545-1581
54.4980B-8.................................................    1545-1581
54.4980F-1.................................................    1545-1780
54.6011-1..................................................    1545-0575
54.6011-1T.................................................    1545-0575
54.6060-1(a)(1)............................................    1545-1231
54.6107-1..................................................    1545-1231
54.9801-3..................................................    1545-1537
54.9801-4..................................................    1545-1537
54.9801-5..................................................    1545-1537
54.9801-6..................................................    1545-1537
54.9812-1T.................................................    1545-2165
54.9815-1251T..............................................    1545-2178
54.9815-2711T..............................................    1545-2179
54.9815-2712T..............................................    1545-2180
54.9815-2714T..............................................    1545-2172
54.9815-2715...............................................    1545-2229
54.9815-2719AT.............................................    1545-2181
54.9815-2719T..............................................    1545-2182
55.6001-1..................................................    1545-0123
55.6011-1..................................................    1545-0123
                                                               1545-0999
                                                               1545-1016
55.6060-1(a)(1)............................................    1545-1231
55.6061-1..................................................    1545-0999
55.6071-1..................................................    1545-0999
55.6107-1..................................................    1545-1231
56.4911-6..................................................    1545-0052
56.4911-7..................................................    1545-0052
56.4911-9..................................................    1545-0052
56.4911-10.................................................    1545-0052
56.6001-1..................................................    1545-1049
56.6011-1..................................................    1545-1049
56.6060-1(a)(1)............................................    1545-1231
56.6081-1..................................................    1545-1049
56.6107-1..................................................    1545-1231
56.6161-1..................................................    1545-0257
                                                               1545-1049
57.2(e)(2)(i)..............................................    1545-2249
145.4051-1.................................................    1545-0745
145.4052-1.................................................    1545-0120
                                                               1545-0745
                                                               1545-1076
145.4061-1.................................................    1545-0224
                                                               1545-0230
                                                               1545-0257
                                                               1545-0745
156.6001-1.................................................    1545-1049
156.6011-1.................................................    1545-1049
156.6060-1(a)(1)...........................................    1545-1231
156.6081-1.................................................    1545-1049
156.6107-1.................................................    1545-1231
156.6161-1.................................................    1545-1049
157.6001-1.................................................    1545-1824
157.6011-1.................................................    1545-1824
157.6060-1(a)(1)...........................................    1545-1231
157.6081-1.................................................    1545-1824
157.6107-1.................................................    1545-1231
157.6161-1.................................................    1545-1824
301.6011-2.................................................    1545-0225
                                                               1545-0350
                                                               1545-0387
                                                               1545-0441
                                                               1545-0957
301.6011(g)-1..............................................    1545-2079
301.6017-1.................................................    1545-0090
301.6034-1.................................................    1545-0092
301.6036-1.................................................    1545-0013
                                                               1545-0773
301.6047-1.................................................    1545-0367
                                                               1545-0957
301.6056-1.................................................    1545-2251
301.6056-2.................................................    1545-2251
301.6057-1.................................................    1545-0710
301.6057-2.................................................    1545-0710
301.6058-1.................................................    1545-0710
301.6059-1.................................................    1545-0710
301.6103(c)-1..............................................    1545-1816
301.6103(n)-1..............................................    1545-1841
301.6103(p)(2)(B)-1........................................    1545-1757
301.6104(a)-1..............................................    1545-0495
301.6104(a)-5..............................................    1545-0056
301.6104(a)-6..............................................    1545-0056
301.6104(b)-1..............................................    1545-0094
                                                               1545-0742
301.6104(d)-1..............................................    1545-1655
301.6104(d)-2..............................................    1545-1655
301.6104(d)-3..............................................    1545-1655
301.6109-1.................................................    1545-0003
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
                                                               1545-1461
                                                               1545-2242
301.6109-3.................................................    1545-1564
301.6110-3.................................................    1545-0074
301.6110-5.................................................    1545-0074
301.6111-1T................................................    1545-0865
                                                               1545-0881
301.6111-2.................................................    1545-0865
                                                               1545-1687
301.6112-1.................................................    1545-0865
                                                               1545-1686
301.6112-1T................................................    1545-0865
                                                               1545-1686
301.6114-1.................................................    1545-1126
                                                               1545-1484
301.6222(a)-2..............................................    1545-0790
301.6222(b)-1..............................................    1545-0790
301.6222(b)-2..............................................    1545-0790
301.6222(b)-3..............................................    1545-0790
301.6223(b)-1..............................................    1545-0790
301.6223(c)-1..............................................    1545-0790
301.6223(e)-2..............................................    1545-0790
301.6223(g)-1..............................................    1545-0790
301.6223(h)-1..............................................    1545-0790
301.6224(b)-1..............................................    1545-0790
301.6224(c)-1..............................................    1545-0790
301.6224(c)-3..............................................    1545-0790
301.6227(c)-1..............................................    1545-0790
301.6227(d)-1..............................................    1545-0790
301.6229(b)-2..............................................    1545-0790
301.6230(b)-1..............................................    1545-0790
301.6230(e)-1..............................................    1545-0790
301.6231(a)(1)-1...........................................    1545-0790
301.6231(a)(7)-1...........................................    1545-0790
301.6231(c)-1..............................................    1545-0790
301.6231(c)-2..............................................    1545-0790
301.6316-4.................................................    1545-0074
301.6316-5.................................................    1545-0074
301.6316-6.................................................    1545-0074
301.6316-7.................................................    1545-0029
301.6324A-1................................................    1545-0015
301.6361-1.................................................    1545-0024
                                                               1545-0074
301.6361-2.................................................    1545-0024
301.6361-3.................................................    1545-0074

[[Page 709]]

 
301.6402-2.................................................    1545-0024
                                                               1545-0073
                                                               1545-0091
301.6402-3.................................................    1545-0055
                                                               1545-0073
                                                               1545-0091
                                                               1545-0132
                                                               1545-1484
301.6402-5.................................................    1545-0928
301.6404-1.................................................    1545-0024
301.6404-2T................................................    1545-0024
301.6404-3.................................................    1545-0024
301.6405-1.................................................    1545-0024
301.6501(c)-1..............................................    1545-1241
                                                               1545-1637
301.6501(d)-1..............................................    1545-0074
                                                               1545-0430
301.6511(d)-1..............................................    1545-0024
                                                               1545-0582
301.6511(d)-2..............................................    1545-0024
                                                               1545-0582
301.6511(d)-3..............................................    1545-0024
                                                               1545-0582
301.6652-2.................................................    1545-0092
301.6685-1.................................................    1545-0092
301.6689-1T................................................    1545-1056
301.6707-1T................................................    1545-0865
                                                               1545-0881
301.6708-1T................................................    1545-0865
301.6712-1.................................................    1545-1126
301.6903-1.................................................    1545-0013
                                                               1545-1783
301.6905-1.................................................    1545-0074
301.7001-1.................................................    1545-0123
301.7101-1.................................................    1545-1029
301.7207-1.................................................    1545-0092
301.7216-2.................................................    1545-0074
301.7216-2(o)..............................................    1545-1209
301.7425-3.................................................    1545-0854
301.7430-2(c)..............................................    1545-1356
301.7502-1.................................................    1545-1899
301.7507-8.................................................    1545-0123
301.7507-9.................................................    1545-0123
301.7513-1.................................................    1545-0429
301.7517-1.................................................    1545-0015
301.7605-1.................................................    1545-0795
301.7623-1.................................................    1545-0409
                                                               1545-1534
301.7654-1.................................................    1545-0803
301.7701-3.................................................    1545-1486
301.7701-4.................................................    1545-1465
301.7701-7.................................................    1545-1600
301.7701-16................................................    1545-0795
301.7701(b)-1..............................................    1545-0089
301.7701(b)-2..............................................    1545-0089
301.7701(b)-3..............................................    1545-0089
301.7701(b)-4..............................................    1545-0089
301.7701(b)-5..............................................    1545-0089
301.7701(b)-6..............................................    1545-0089
301.7701(b)-7..............................................    1545-0089
                                                               1545-1126
301.7701(b)-9..............................................    1545-0089
301.7705-1T................................................    1545-2266
301.7705-2T................................................    1545-2266
301.7805-1.................................................    1545-0805
301.9000-5.................................................    1545-1850
301.9001-1.................................................    1545-0220
301.9100-2.................................................    1545-1488
301.9100-3.................................................    1545-1488
301.9100-4T................................................    1545-0016
                                                               1545-0042
                                                               1545-0074
                                                               1545-0129
                                                               1545-0172
                                                               1545-0619
301.9100-6T................................................    1545-0872
301.9100-7T................................................    1545-0982
301.9100-8.................................................    1545-1112
301.9100-11T...............................................    1545-0123
301.9100-12T...............................................    1545-0026
                                                               1545-0074
                                                               1545-0172
                                                               1545-1027
301.9100-14T...............................................    1545-0046
301.9100-15T...............................................    1545-0046
301.9100-16T...............................................    1545-0152
302.1-7....................................................    1545-0024
305.7701-1.................................................    1545-0823
305.7871-1.................................................    1545-0823
420.0-1....................................................    1545-0710
Part 509...................................................    1545-0846
Part 513...................................................    1545-0834
Part 514...................................................    1545-0845
Part 521...................................................    1545-0848
601.104....................................................    1545-0233
601.105....................................................    1545-0091
601.201....................................................    1545-0019
                                                               1545-0819
601.204....................................................    1545-0152
601.401....................................................    1545-0257
601.504....................................................    1545-0150
601.601....................................................    1545-0800
601.602....................................................    1545-0295
                                                               1545-0387
                                                               1545-0957
601.702....................................................    1545-0429
------------------------------------------------------------------------


(26 U.S.C. 7805)

[T.D. 8011, 50 FR 10222, Mar. 14, 1985]

    Editorial Note: For Federal Register citations affecting Sec.  
602.101, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.

[[Page 711]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations (CFR) that 
were made by documents published in the Federal Register since January 
1, 2014 are enumerated in the following list. Entries indicate the 
nature of the changes effected. Page numbers refer to Federal Register 
pages. The user should consult the entries for chapters, parts and 
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the 
annual edition of the monthly List of CFR Sections Affected (LSA). The 
LSA is available at www.govinfo.gov. For changes to this volume of the 
CFR prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 
1964-1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. 
The ``List of CFR Sections Affected 1986-2000'' is available at 
www.govinfo.gov.

                                  2014

26 CFR
                                                                   79 FR
                                                                    Page
Chapter I
1.411(a)(13)-1 (b)(2), (3), (4), (d)(3)(i), (4)(ii)(A), (C), (6) 
        and (e)(2)(ii) revised; (d)(4)(ii)(E) added................56457
1.411(b)-1 (b)(2)(ii)(G) added.....................................56459
1.411(b)(5)-1 (b)(1)(i)(B), (C), (ii), (iii), (2)(i), (c)(3)(i), 
        (d)(1)(iv)(D), (2)(i), (ii), (3), (4)(ii), (iv), (5)(ii), 
        (iv), (6)(ii), (iii), (e)(2), (3)(ii)(B), (C), (iii), (4) 
        and (f)(2)(i)(B) revised; (c)(3)(iii) removed; (c)(5) 
        Example 8, (d)(1)(viii), (4)(v), (e)(3)(ii)(D), (iv), (v) 
        and (5) added; (d)(1)(v) and (e)(3)(i) amended.............56460

                                  2015

26 CFR
                                                                   80 FR
                                                                    Page
Chapter I
1.411(a)(13)-1 (d)(3)(i), (4)(ii)(A) and (C) amended...............70683
    (e)(2)(ii) revised.............................................70684
1.411(b)(5)-1 (b)(1)(ii)(F), (iii), (2)(i), (d)(1)(iv)(A), 
        (e)(2)(ii)(B)(1) and (3)(ii)(D) amended; (d)(1)(iv)(E), 
        (e)(3)(vi) and (vii) added; (f)(2)(i)(B) revised...........70684
1.430(a)-1 Added...................................................54383
1.430(f)-1 (b)(5) heading, (ii), (d)(1)(i)(B) heading and (2) 
        removed; (b)(5)(i) and (d)(1)(i)(B)(1) redesignated as 
        (b)(5) and (d)(1)(i)(B); new (b)(5) heading and new 
        (d)(1)(i)(B) heading revised; new (b)(5), new 
        (d)(1)(i)(B), (f)(1)(i), (2)(i) and (3)(i) amended; 
        (f)(1)(iii) added..........................................54389
1.430(h)(2)-1 (b)(2) revised.......................................54390
1.430(j)-1 Added...................................................54390
1.432(e)(9)-1T Added...............................................35215
    (g)(1)(v) correctly amended....................................46795
    (h)(2) revised; (h)(3)(iv), (v), (7) and (8) added.............52975
1.436-1 (h)(4)(iii)(C)(7) and (8) amended; (h)(4)(iii)(C)(9) added
                                                                   54400

                                  2016

26 CFR
                                                                   81 FR
                                                                    Page
Chapter I
1.417(e)-1 (d)(1) redesignated as (d)(1)(i); (d)(1) heading, (ii) 
        and (8)(v) added; new (d)(1)(i) heading, (7), (8) heading 
        and (i) revised; new (d)(1)(i) amended.....................62361
1.432(e)(9)-1 Added................................................25557

[[Page 712]]

    (d)(8) revised.................................................27015
1.432(e)(9)-1T Removed.............................................25573

                                  2017

26 CFR
                                                                   82 FR
                                                                    Page
Chapter I
1.421-2 (c)(4)(i)(a), (ii) and (f) heading revised; (f)(3) added 
                                                                    6238
1.423-2 (k)(2) and (l) amended......................................6238
1.424-1 (c)(2) amended; (g)(3) added................................6238
1.430(h)(3)-1 Revised..............................................46398
1.430(h)(3)-2 Revised..............................................46404
1.431(c)(6)-1 Revised..............................................46410
1.433(h)(3)-1 Added................................................46410

                                  2018

                       (No regulations published)

                                  2019

   (Regulations published from January 1, 2019, through April 1, 2019)

26 CFR
                                                                   84 FR
                                                                    Page
Chapter I
1.410(a)-1 (a)(3), (b)(8), and (c)(2) amended.......................9234
1.410(b)-0 Amended..................................................9234
1.410(b)-1 Removed..................................................9234
1.411(a)-1 (b)(9) removed...........................................9234
1.411(a)-5 (b)(6) introductory text amended.........................9234
1.411(a)-9 Removed..................................................9234
1.411(d)-2 (e) amended..............................................9234
1.411(d)-5 Removed..................................................9234
1.412(b)-5 Removed..................................................9234
1.412(c)(1)-3T Removed..............................................9234
1.412(l)(7)-1 Removed...............................................9234
1.414(r)-8 (b)(2)(i) and (3) amended................................9234
1.416-1 Amended.....................................................9234


                                  [all]