[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2024 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, 2024
Containing a codification of documents of general
applicability and future effect
As of April 1, 2024
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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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........................ 667
Alphabetical List of Agencies Appearing in the CFR...... 687
Table of OMB Control Numbers............................ 697
List of CFR Sections Affected........................... 715
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 26 CFR 1.410(a)-1
refers to title 26, part
1, section 1.410(a)-1.
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[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
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Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
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collection request.
[[Page vi]]
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[[Page vii]]
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Oliver A. Potts,
Director,
Office of the Federal Register
April 1, 2024
[[Page ix]]
THIS TITLE
Title 26--Internal Revenue is composed of twenty-two volumes. The
contents of these volumes represent all current regulations codified
under this title by the Internal Revenue Service, Department of the
Treasury, as of April 1, 2024. The first fifteen volumes comprise part 1
(Subchapter A--Income Tax) and are arranged by sections as follows:
Sec. Sec. 1.0-1.60; Sec. Sec. 1.61-1.139; Sec. Sec. 1.140-1.169;
Sec. Sec. 1.170-1.300; Sec. Sec. 1.301-1.400; Sec. Sec. 1.401-1.409;
Sec. Sec. 1.410-1.440; Sec. Sec. 1.441-1.500; Sec. Sec. 1.501-1.640;
Sec. Sec. 1.641-1.850; Sec. Sec. 1.851-1.907; Sec. Sec. 1.908-1.1000;
Sec. Sec. 1.1001-1.1400; Sec. Sec. 1.1401-1.1550; and Sec. 1.1551 to
end of part 1. The sixteenth volume containing parts 2-29, includes the
remainder of subchapter A and all of Subchapter B--Estate and Gift
Taxes. The last six volumes contain parts 30-39 (Subchapter C--
Employment Taxes and Collection of Income Tax at Source); parts 40-49;
parts 50-299 (Subchapter D--Miscellaneous Excise Taxes); parts 300-499
(Subchapter F--Procedure and Administration); parts 500-599 (Subchapter
G--Regulations under Tax Conventions); and part 600 to end (Subchapter
H--Internal Revenue Practice).
The OMB control numbers for title 26 appear in Sec. 602.101 of this
chapter. For the convenience of the user, Sec. 602.101 appears in the
Finding Aids section of the volumes containing parts 1 to 599.
For this volume, Michele Bugenhagen was Chief Editor. The Code of
Federal Regulations publication program is under the direction of John
Hyrum Martinez, assisted by Stephen J. Frattini.
[[Page 1]]
TITLE 26--INTERNAL REVENUE
(This book contains part 1, Sec. Sec. 1.401 to 1.440)
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Part
chapter i--Internal Revenue Service, Department of the
Treasury (Continued)...................................... 1
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CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
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SUBCHAPTER A--INCOME TAX (CONTINUED)
Part Page
1 Income taxes (Continued).................... 5
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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 priod 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
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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
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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
[[Page 122]]
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
[[Page 123]]
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
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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
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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
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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
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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
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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
[[Page 136]]
fail to satisfy the requirements of section 411(d)(6) merely because the
plan amendment changes the plan's vesting computation period.
(4) Changes in lookback months and stability periods for mortality
table and interest rate. Subject to the rules of this paragraph (a)(4),
a defined benefit plan may be amended by an amendment that is adopted on
or after January 19, 2024 to change the stability period described in
Sec. 1.417(e)-1(d)(4)(ii) from one stability period to a different
stability period or to change the lookback month described in Sec.
1.417(e)-1(d)(4)(iii) from one lookback month to a different lookback
month (including an indirect change to the stability period or lookback
month as a result of a change in plan year). The amendments described in
this paragraph (a)(4) may be made with respect to any plan provision
under which an interest rate or mortality table is specified by
reference to a stability period or a lookback month, provided that any
distribution for which the annuity starting date occurs on or after the
effective date of the amendment and before the end of the one-year
period commencing on the applicable amendment date for the amendment is
equal to the greater of--
(i) The amount determined using the pre-amendment stability period
and lookback month; and
(ii) The amount determined using the post-amendment stability period
and lookback month.
(5) 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
[[Page 137]]
(a), and thus violates section 411(d)(6), because the amendment places
greater restrictions or conditions on the rights to section 411(d)(6)
protected benefits, as of January 1, 2008, for participants who have
fewer than 5 years of service, by restricting the ability of those
participants to receive further vesting protections on benefits accrued
as of that date.
Example 4. (i) Facts. (A) Employer O sponsors Plan D, a qualified
profit sharing plan under which each employee has a nonforfeitable right
to a percentage of his or her employer-derived accrued benefit based on
the following table:
------------------------------------------------------------------------
Completed years of service Nonforfeitable percentage
------------------------------------------------------------------------
Fewer than 3.............................. 0
3......................................... 20
4......................................... 40
5......................................... 60
6......................................... 80
7......................................... 100
------------------------------------------------------------------------
(B) In January 2006, Employer O acquires Company X, which maintains
Plan E, a qualified profit sharing plan under which each employee who
has completed 5 years of service has a nonforfeitable right to 100% of
the employer-derived accrued benefit. In 2007, Plan E is merged into
Plan D. On the effective date for the merger, Plan D is amended to
provide that the vesting schedule for participants of Plan E is the 7-
year graded vesting schedule of Plan D. In accordance with section
411(a)(10)(A), the plan amendment provides that any participant of Plan
E who had completed 5 years of service prior to the amendment is fully
vested. In addition, as required under section 411(a)(10)(B), the
amendment provides that any participant in Plan E who has at least 3
years of service prior to the amendment is permitted to make an
irrevocable election to have the vesting of his or her nonforfeitable
right to the employer-derived accrued benefit determined under either
the 5-year cliff vesting schedule or the 7-year graded vesting schedule.
Participant G, who has an account balance of $10,000 on the applicable
amendment date, is a participant in Plan E with 2 years of service as of
the applicable amendment date. As of the date of the merger, Participant
G's nonforfeitable right to G's employer-derived accrued benefit is 0%
under both the 7-year graded vesting schedule of Plan D and the 5-year
cliff vesting schedule of Plan E.
(ii) Conclusion. Under paragraph (a)(3) of this section, the plan
amendment does not satisfy the requirements of this paragraph (a) and
violates section 411(d)(6), because the amendment places greater
restrictions or conditions on the rights to section 411(d)(6) protected
benefits with respect to G and any participant who has fewer than 5
years of service and who elected (or was made subject to) the new
vesting schedule. A method of avoiding a section 411 (d)(6) violation
with respect to account balances attributable to 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
[[Page 138]]
retirement factors that are used to determine the early retirement
annuity, the amendments are treated as one amendment and only violate
section 411(d)(6) if, after the two amendments, the net dollar amount of
any early retirement annuity with respect to the accrued benefit of any
participant as of the applicable amendment date is lower than it would
have been without the two amendments. As an example of the application
of paragraph (a)(2)(iii) of this section to section 411(d)(6)(B)
protected benefits, a series of amendments made within a 3-year period
that, when taken together, have the effect of reducing or eliminating
early retirement benefits or retirement-type subsidies in a manner that
adversely affects the rights of any participant in a more than de
minimis manner violates section 411(d)(6)(B) even if each amendment
would be permissible pursuant to paragraphs (c), (d), or (f) of this
section.
(2) Permissible elimination of section 411(d)(6)(B) protected
benefits--(i) In general. A plan is permitted to be amended to eliminate
a section 411(d)(6)(B) protected benefit if the elimination is in
accordance with this section or Sec. 1.411(d)-4.
(ii) Increases in payment amounts do not eliminate an optional form
of benefit. An amendment is not treated as eliminating an optional form
of benefit or eliminating or reducing an early retirement benefit or
retirement-type subsidy under the plan, if, effective after the plan
amendment, there is another optional form of benefit available to the
participant under the plan that is of inherently equal or greater value
(within the meaning of Sec. 1.401(a)(4)-4(d)(4)(i)(A)). Thus, for
example, a change in the method of calculating a joint and survivor
annuity from using a 90% adjustment factor on account of the
survivorship payment at particular ages for a participant and a spouse
to using a 91% adjustment factor at the same ages is not treated as an
elimination of an optional form of benefit. Similarly, a plan that
offers a subsidized qualified joint and survivor annuity option for
married participants under which the amount payable during the
participant's lifetime is not less than the amount payable under the
plan's straight life annuity is permitted to be amended to eliminate the
straight life annuity option for married participants.
(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
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has 16 years of service, M's career average pay is $37,500, and the
average of M's highest 3 consecutive years of compensation is $67,308.
Thus, M's accrued benefit as of the effective date of the amendment is
increased from $12,000 per year at normal retirement age (2% times
$37,500 times 16 years of service) to $14,000 per year at normal
retirement age (1.3% times $67,308 times 16 years of service). (These
facts are similar to the facts in Example 1 in paragraph (a)(4) of this
section.) Before the amendment, Plan A permitted a former employee to
commence distribution of benefits as early as age 55 and, for a
participant with at least 15 years of service, actuarially reduced the
amount payable in the form of a straight life annuity commencing before
normal retirement age by 3% per year from age 60 to age 65 and by 7% per
year from age 55 through age 59. Thus, before the amendment, the amount
of M's early retirement benefit that would be payable for commencement
at age 55 was $6,000 per year ($12,000 per year minus 3% for 5 years and
minus 7% for 5 more years). The amendment also alters the actuarial
reduction factor so that, for a participant with at least 15 years of
service, the amount payable in a straight life annuity commencing before
normal retirement age is reduced by 6% per year. As a result, the amount
of M's early retirement benefit at age 55 becomes $5,600 per year after
the amendment ($14,000 minus 6% for 10 years).
(ii) Conclusion. The straight life annuity payable under Plan A at
age 55 is an optional form of benefit that includes an early retirement
subsidy. The plan amendment fails to satisfy the requirements of section
411(d)(6)(B) because the amendment decreases the optional form of
benefit payable to Participant M below the level that Participant M was
entitled to receive immediately before the effective date of the
amendment. If instead Plan A had included a provision under which M's
straight life annuity payable at any age could be not be less than what
it was immediately before the amendment (so that M's straight life
annuity payable at age 55 could not be less than $6,000 per year), then
the amendment would not fail to satisfy the requirements of section
411(d)(6)(B) with respect to M's straight life annuity payable at age 55
(although the straight life annuity payable to M at age 55 would not
increase until the point in time at which the new formula amount with
the new actuarial reduction factors exceeds the amount payable under the
minimum provision, approximately 14 months after the amendment becomes
effective).
Example 2. (i) Facts involving plant shutdown benefits. Plan B
permits participants who have a severance from employment before normal
retirement age (age 65) to commence distributions at any time after age
55 with the amount payable to be actuarially reduced using reasonable
actuarial assumptions regarding interest and mortality specified in the
plan, but provides that the annual reduction for any participant who has
at 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
[[Page 140]]
is not taken into account in determining whether a prohibited reduction
has occurred.
Example 3. (i) Facts. Plan C, a multiemployer defined benefit plan
in which participation is limited to electricians in the construction
industry, provides that a participant may elect to commence
distributions only if the participant is not currently employed by a
participating employer and provides that, if the participant has a
specified number of years of service and attains a specified age, the
distribution is without any actuarial reduction for commencement before
normal retirement age. Since the plan's inception, Plan C has provided
for suspension of pension benefits during periods of disqualifying
employment (ERISA section 203(a)(3)(B) service). Before 2007, the plan
defined disqualifying employment to include any job as an electrician in
the particular industry and geographic location to which Plan C applies.
This definition of disqualifying employment did not cover a job as an
electrician supervisor. In 2005, Participant E, having rendered the
specified number of years of service and attained the specified age to
retire with a fully subsidized early retirement benefit, retires from
E's job as an electrician with Employer Y and starts a position with
Employer Z as an electrician supervisor. Employer Z is not a
participating employer in Plan C but is an employer in the same industry
and geographic location as Employer Y. When E left service with Employer
Y, E's position as an electrician supervisor was not disqualifying
employment for purposes of Plan C's suspension of pension benefit
provision, and E elected to commence benefit payments in 2005. In 2006,
effective January 1, 2007, Plan C is amended to expand the definition of
disqualifying employment to include any job (including supervisory
positions) as an electrician in the same industry and geographic
location to which Plan C applies. The plan's definition of disqualifying
employment satisfies the requirements of section 411(a)(3)(B). On
January 1, 2007, E's pension benefits are suspended because of E's
disqualifying employment as an electrician supervisor.
(ii) Conclusion. Under paragraphs (a)(3) and (b)(1) of this section,
the 2007 plan amendment violates section 411(d)(6), because the
amendment places greater restrictions or conditions on a participant's
rights to section 411(d)(6) protected benefits to the extent it applies
with respect to benefits that accrued before January 1, 2007. The result
would be the same even if the amendment did not apply to former
employees and instead applied only to participants who were actively
employed at the time of the applicable amendment.
(c) Permissible elimination of optional forms of benefit that are
redundant--(1) General rule. Except as otherwise provided in paragraph
(c)(5) of this section, a plan is permitted to be amended 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.
[[Page 141]]
(ii) Special rule for core options. An optional form of benefit that
is a core option as defined in paragraph (g)(5) of this section may not
be eliminated as a redundant benefit under the rules of this paragraph
(c) unless the retained optional form of benefit and the eliminated core
option are identical except for differences described in paragraph
(c)(3)(ii) of this section. Thus, for example, a particular 10-year term
certain and life annuity may not be eliminated by plan amendment unless
the retained optional form of benefit is another 10-year term certain
and life annuity.
(3) Family of optional forms of benefit--(i) In general. Paragraph
(c)(4) of this section describes certain families of optional forms of
benefits. Not every optional form of benefit that is offered under a
plan necessarily fits within a family of optional forms of benefit as
described in paragraph (c)(4) of this section. Each optional form of
benefit that is not included in any particular family of optional forms
of benefit listed in paragraph (c)(4) of this section is in a separate
family of optional forms of benefit with other optional forms of benefit
that would be identical to that optional form of benefit but for
differences that are disregarded under paragraph (c)(3)(ii) of this
section.
(ii) Certain differences among optional forms of benefit--(A)
Differences in actuarial factors and annuity starting dates. The
determination of whether two optional forms of benefit are within a
family of optional forms of benefit is made without regard to actuarial
factors or annuity starting dates. Thus, any optional forms of benefit
that are part of the same generalized optional form (within the meaning
of paragraph (g)(8) of this section) are in the same family of optional
forms of benefit. For example, if a plan has a single-sum distribution
option for some participants that is calculated using a 5% interest rate
and a specific mortality table (but no less than the minimum present
value as determined under section 417(e)) and another single-sum
distribution option for other participants that is calculated using the
applicable interest rate as defined in section 417(e)(3)(A)(ii)(II) and
the applicable mortality table as defined in section
417(e)(3)(A)(ii)(I), both single-sum distribution options are part of
the same 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
[[Page 142]]
family if it provides a life annuity to the participant and a survivor
annuity to an individual that is at least 50% and no more than 100% of
the annuity payable during the joint lives of the participant and the
participant's survivor.
(ii) Joint and contingent options with continuation percentages less
than 50%. An optional form of benefit is within the less than 50% joint
and contingent family if it provides a life annuity to the participant
and a survivor annuity to an individual that is less than 50% of the
annuity payable during the joint lives of the participant and the
participant's survivor.
(iii) Term certain and life annuity options with a term of 10 years
or less. An optional form of benefit is within the 10 years or less term
certain and life family if it is a life annuity with a guarantee that
payments will continue to the participant's beneficiary for the
remainder of a fixed period that is 10 years or less if the participant
dies before the end of the fixed period.
(iv) Term certain and life annuity options with a term longer than
10 years. An optional form of benefit is within the longer than 10 years
term certain and life family if it is a life annuity with a guarantee
that payments will continue to the participant's beneficiary for the
remainder of a fixed period that is in excess of 10 years if the
participant dies before the end of the fixed period.
(v) Level installment payment options over a period of 10 years or
less. An optional form of benefit is within the 10 years or less
installment family if it provides for substantially level payments to
the participant for a fixed period of at least 2 years and not in excess
of 10 years with a guarantee that payments will continue to the
participant's beneficiary for the remainder of the fixed period if the
participant dies before the end of the fixed period.
(vi) Level installment payment options over a period of more than 10
years. An optional form of benefit is within the more than 10 years
installment family if it provides for substantially level payments to
the participant for a fixed period that is in excess of 10 years with a
guarantee that payments will continue to the participant's beneficiary
for the remainder of the fixed period if the participant dies before the
end of the fixed period.
(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
[[Page 143]]
example, for the portion of a participant's benefit that is not paid in
a single sum, the determination of whether any optional form of benefit
is within a family of optional forms of benefit is permitted to be made
disregarding the fact that the other portion of the participant's
benefit is paid in a single sum).
(d) Permissible elimination of noncore optional forms of benefit
where core options are offered--(1) General rule. Except as otherwise
provided in paragraph (d)(2) of this section, a plan is permitted to be
amended to eliminate an optional form of benefit for a participant with
respect to benefits accrued before the applicable amendment date if--
(i) After the amendment becomes applicable, each of the core options
described in paragraph (g)(5) of this section is available to the
participant with respect to benefits accrued before and after the
amendment;
(ii) The plan amendment is not applicable with respect to an
optional form of benefit with an annuity commencement date that is
earlier than 4 years after the date the amendment is adopted; and
(iii) The requirements of paragraph (e) of this section are
satisfied in any case in which either:
(A) One or more of the core options are not available commencing on
the same annuity commencement date as the optional form of benefit that
is being eliminated; or
(B) As of the date the amendment is adopted, the actuarial present
value of the benefit payable under any core option with the same annuity
commencement date is less than the actuarial present value of benefits
payable under the optional form of benefit that is being eliminated.
(2) Special rules--(i) Treatment of certain features included in
optional forms of benefit. For purposes of applying this paragraph (d),
to the extent an optional form of benefit that is being eliminated
includes either a social security leveling feature or a refund of
employee contributions feature, at least one of the core options must
also be available with that feature, and, to the extent that the
optional form of benefit that is being eliminated does not include a
social security leveling feature or a refund of employee contributions
feature, each of the core options must be available without that
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
[[Page 144]]
the core options rule under this paragraph (d), with an adoption date of
January 1, 2006 and an effective date of January 1, 2010, the plan would
not be permitted to be amended to make changes to the core options
offered under the plan (and the core options would continue to apply
with respect to the participant's accrued benefit) until January 1,
2013.
(v) Special rule for joint and contingent annuity core option. If a
plan offers joint and contingent annuities under which a participant is
entitled to a life annuity with a survivor annuity for the individual
designated by the participant (including a non-spousal contingent
annuitant) with continuation percentage options of both 50% and 100%
(after adjustments permitted under paragraph (g)(5)(ii) of this section
to comply with applicable law), the plan is permitted to treat both of
these options as core options for purposes of this paragraph (d), in
lieu of a 75% joint and contingent annuity. Thus, such a plan is
permitted to use the rules of this paragraph (d) if the plan satisfies
all of the requirements of this paragraph (d) (taking into account the
modification rule in paragraph (g)(5)(ii) of this section) other than
the requirement of offering a 75% joint and contingent annuity as
described in paragraph (g)(5)(i)(B) of this section.
(e) Permissible plan amendments under paragraphs (c) and (d)
eliminating or reducing section 411(d)(6)(B) protected benefits that are
burdensome and of de minimis value--(1) In general. A plan amendment
that, pursuant to paragraph (c)(1)(iii) or (d)(1)(iii) of this section,
is required to satisfy this paragraph (e) satisfies this paragraph (e)
if--
(i) The amendment eliminates section 411(d)(6)(B) protected benefits
that create significant burdens or complexities for the plan and its
participants as described in paragraph (e)(2) of this section; and
(ii) The amendment does not adversely affect the rights of any
participant in a more than de minimis manner as described in paragraph
(e)(3) of this section.
(2) Plan amendments eliminating section 411(d)(6)(B) protected
benefits that create significant burdens and complexities--(i) Facts and
circumstances analysis--(A) In general. The determination of whether a
plan amendment eliminates section 411(d)(6)(B) protected benefits that
create significant burdens 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.
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(D) Example. The following example illustrates the application of
this paragraph (e)(2)(i):
Example. (i) Facts. Plan A is a defined benefit plan under which
employees may select a distribution in the form of a straight life
annuity, a straight life annuity with cost-of-living increases, a 50%
qualified joint and survivor annuity with a pop-up provision, or a 10-
year term certain and life annuity. On January 15, 2007, Plan A is
amended, effective June 1, 2007, to eliminate the 50% qualified joint
and survivor annuity with a pop-up provision as described in paragraph
(c)(3)(ii)(B)(1) of this section and replace it with a 50% qualified
joint and survivor annuity without the pop-up provision (and using the
same actuarial factor).
(ii) Conclusion. Plan A satisfies the requirements of paragraph
(e)(2)(i)(B) of this section because, based on the relevant facts and
circumstances (e.g., the amendment replaces a complex optional form of
benefit with a simpler form), the amendment eliminates section
411(d)(6)(B) protected benefits that create significant burdens and
complexities. Accordingly, the plan amendment is permitted to eliminate
the pop-up provision, provided that the plan amendment satisfies all the
other applicable requirements in paragraph (c) or (d) of this section.
For example, the plan amendment must not eliminate the most valuable
option for a participant with a short life expectancy (as defined in
paragraph (g)(5)(iii) of this section) and the plan amendment must not
adversely affect the rights of any participant in a more than de minimis
manner, taking into account the actuarial factors for the joint and
survivor annuity with the pop-up provision and the joint and survivor
annuity without the pop-up provision, as described in paragraph (e)(3)
of this section.
(ii) Presumptions for certain amendments--(A) Presumption for
amendments eliminating certain annuity starting dates. If the annuity
starting dates under the plan considered in the aggregate are burdensome
or complex, then elimination of any one of the annuity starting dates is
presumed to eliminate section 411(d)(6)(B) protected benefits that
create significant burdens or complexities for the plan and its
participants. However, if the effect of a plan amendment with respect to
a set of optional forms of benefit is merely to substitute one set of
annuity starting dates for another set of annuity starting dates,
without any reduction in the number of different annuity starting dates,
then the plan amendment does not satisfy the requirements of this
paragraph (e)(2).
(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
[[Page 146]]
any participant in a more than de minimis manner if--
(A) The retained optional form of benefit described in paragraph (c)
of this section has substantially the same annuity commencement date as
the optional form of benefit that is being eliminated, as described in
paragraph (e)(4) of this section; and
(B) Either the actuarial present value of the benefit payable in the
optional form of benefit that is being eliminated does not exceed the
actuarial present value of the benefit payable in the retained optional
form of benefit by more than a de minimis amount, as described in
paragraph (e)(5) of this section, or the amendment satisfies the
requirements of paragraph (e)(6) of this section relating to a delayed
effective date.
(ii) Rules for core options under paragraph (d) of this section. For
purposes of paragraph (d) of this section, the elimination of an
optional form of benefit does not adversely affect the rights of any
participant in a more than de minimis manner if, with respect to each of
the core options--
(A) The core option is available after the amendment with
substantially the same annuity commencement date as the optional form of
benefit that is being eliminated, as described in paragraph (e)(4) of
this section; and
(B) Either the actuarial present value of the benefit payable in the
optional form of benefit that is being eliminated does not exceed the
actuarial present value of the benefit payable under the core option by
more than a de minimis amount, as described in paragraph (e)(5) of this
section, or the amendment satisfies the requirements of paragraph (e)(6)
of this section.
(4) Definition of substantially the same annuity starting dates. For
purposes of applying paragraphs (e)(3)(i)(A) and (ii)(A) of this
section, annuity starting dates are considered substantially the same if
they are within 6 months of each other.
(5) Definition of de minimis difference in actuarial present value.
For purposes of applying paragraph (e)(3)(i)(B) and (ii)(B) of this
section, a difference in actuarial present value between the optional
form of benefit being eliminated and the retained optional form of
benefit or core option is not more than a de minimis amount if, as of
the date the 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
[[Page 147]]
as conservative unless they include assumptions that a participant's
compensation will not increase and that future benefit accruals will not
exceed accruals in recent periods.
(C) Effect of subsequent amendments reducing future benefit accruals
on the expected transition period. If, during the expected transition
period for a plan amendment eliminating an optional form of benefit, the
plan is subsequently amended to reduce the rate of future benefit
accrual (or otherwise to lengthen the expected transition period), thus
that subsequent plan amendment must provide that the elimination of the
optional form of benefit is void or must provide for the effective date
for elimination of the optional form of benefit to be further extended
to a new expected transition period that satisfies this paragraph (e)(6)
taking into account the subsequent amendment.
(iii) Applicability of the delayed effective date rule limited to
employees who continue to accrue benefits through the end of expected
transition period. An amendment eliminating an optional form of benefit
under this paragraph (e)(6) must be limited to participants who continue
to accrue benefits under the plan through the end of the expected
transition period. Thus, for example, the plan amendment may not apply
to any participant who has a severance from employment during the
expected transition period.
(iv) Special rule for section 204(h) notice. See Sec. 54.4980F-
1(b), Q&A-8(c) of this chapter for a special rule relating to this
paragraph (e)(6).
(f) Utilization test--(1) General rule. A plan is permitted to be
amended to eliminate all of the optional forms of benefit that comprise
a generalized optional form (as defined in paragraph (g)(8) of this
section) for a participant with respect to benefits accrued before the
applicable amendment date if--
(i) None of the optional forms of benefit being eliminated is a core
option, within the meaning of paragraph (g)(5) of this section;
(ii) The plan amendment is not applicable with respect to an
optional form of benefit with an annuity commencement date that is
earlier than the number of days in the maximum Qualified Joint and
Survivor Annuity explanation period (as defined in paragraph (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
[[Page 148]]
plan years, the plan is not permitted to be amended in accordance with
the utilization test in this paragraph (f).
(3) Participants taken into account. A participant is taken into
account for purposes of this paragraph (f) only if the participant was
eligible to elect to commence payment of an optional form of benefit
that is part of the generalized optional form being eliminated with an
annuity commencement date that is within the look-back period. However,
a participant is not taken into account if the participant--
(i) Did not elect any optional form of benefit with an annuity
commencement date that was within the look-back period;
(ii) Elected an optional form of benefit that included a single-sum
distribution that applied with respect to at least 25% of the
participant's accrued benefit;
(iii) Elected an optional form of benefit that was only available
during a limited period of time and that contained a retirement-type
subsidy where the subsidy that is part of the generalized optional form
being eliminated was not extended to any optional form of benefit with
the same annuity commencement date; or
(iv) Elected an optional form of benefit with an annuity
commencement date that was more than 10 years before normal retirement
age.
(4) Determining the applicable number of participants. For purposes
of applying the rules in this paragraph (f), the applicable number of
participants is 50 participants. However, notwithstanding paragraph
(f)(3)(ii) of this section, a plan is permitted to take into account any
participant who elected an optional form of benefit that included a
single-sum distribution that applied with respect to at least 25% of the
participant's accrued benefit, but only if the applicable number of
participants is increased to 1,000 participants.
(5) Default elections. For purposes of this paragraph (f), an
election includes the payment of an optional form of benefit that
applies in the absence of an affirmative election.
(g) Definitions and use of terms. The definitions in this paragraph
(g) apply for purposes of this section.
(1) Actuarial present value. The term actuarial present value means
actuarial 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;
[[Page 149]]
(B) A 75% joint and contingent annuity generalized optional form
under which the participant is entitled to a life annuity with a
survivor annuity for any individual designated by the participant
(including a non-spousal contingent annuitant) that is 75% of the amount
payable during the participant's life (but see paragraph (d)(2)(v) of
this section for a special rule relating to the joint and contingent
annuity core option);
(C) A 10-year term certain and life annuity generalized optional
form under which the participant is entitled to a life annuity with a
guarantee that payments will continue to any person designated by the
participant for the remainder of a fixed period of 10 years if the
participant dies before the end of the 10-year period; and
(D) The most valuable option for a participant with a short life
expectancy (as defined in paragraph (g)(5)(iii) of this section).
(ii) Modification of core options to satisfy other requirements. An
annuity does not fail to be a core option (e.g., a joint and contingent
annuity described in paragraph (g)(5)(i)(B) of this section or a 10-year
term certain and life annuity described in paragraph (g)(5)(i)(C) of
this section) as a result of differences to comply with applicable law,
such as limitations on death benefits to comply with the incidental
benefit requirement of Sec. 1.401-1(b)(1)(i) or on account of the
spousal consent rules of section 417.
(iii) Most valuable option for a participant with a short life
expectancy--(A) General definition. Except as provided in paragraph
(g)(5)(iii)(B) of this section, most valuable option for a participant
with a short life expectancy means, for an annuity starting date, the
optional form of benefit that is reasonably expected to result in
payments that have the largest actuarial present value in the case of a
participant who dies shortly after the annuity starting date, taking
into account both payments due to the participant prior to the
participant's death and any payments due after the participant's death.
For this purpose, a plan is permitted to assume that the spouse of the
participant is the same age as the participant. In addition, a plan is
permitted to assume that the optional form of benefit that 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
[[Page 150]]
the option was available before the plan amendment.
(6) Definitions of types of section 411(d)(6)(B) protected
benefits--(i) Early retirement benefit. The term early retirement
benefit means the right, under the terms of a plan, to commence
distribution of a retirement-type benefit at a particular date after
severance from employment with the employer and before normal retirement
age. Different early retirement benefits result from differences in
terms relating to timing.
(ii) Optional form of benefit--(A) In general. The term optional
form of benefit means a distribution alternative (including the normal
form of benefit) that is available under the plan with respect to an
accrued benefit or a distribution alternative with respect to a
retirement-type benefit. Different optional forms of benefit exist if a
distribution alternative is not payable on substantially the same terms
as another distribution alternative. The relevant terms include all
terms affecting the value of the optional form, such as the method of
benefit calculation and the actuarial factors or assumptions used to
determine the amount distributed. Thus, for example, different optional
forms of benefit may result from differences in terms relating to the
payment schedule, timing, commencement, medium of distribution (e.g., in
cash or in kind), election rights, differences in eligibility
requirements, or the portion of the benefit to which the distribution
alternative applies. Likewise, differences in the normal retirement ages
of employees or in the form in which the accrued benefit of employees is
payable at normal retirement age under a plan are taken into account in
determining whether a distribution alternative constitutes one or more
optional forms of benefit.
(B) Death benefits. If a death benefit is payable after the annuity
starting date for a specific optional form of benefit and the same death
benefit would not be provided if another optional form of benefit were
elected by a participant, then that death benefit is part of the
specific optional form of benefit and is thus protected under section
411(d)(6). A death benefit is not treated as part of a specific optional
form of benefit merely because the 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
[[Page 151]]
section 411(d)(6)(B) protected benefit mean to eliminate or the
elimination of an optional form of benefit or an early retirement
benefit and to reduce or a reduction in a retirement-type subsidy. The
terms reduce or reduction when used in connection with a retirement-type
subsidy mean to reduce or a reduction in the amount of the subsidy. For
purposes of this section, an elimination includes a reduction and a
reduction includes an elimination.
(8) Generalized optional form. The term generalized optional form
means a group of optional forms of benefit that are identical except for
differences due to the actuarial factors that are used to determine the
amount of the distributions under those optional forms of benefit and
the annuity starting dates.
(9) Maximum QJSA explanation period. The term maximum QJSA
explanation period means the maximum number of days before an annuity
starting date for a qualified joint and survivor annuity for which a
written explanation relating to the qualified joint and survivor annuity
would satisfy the timing requirements of section 417(a)(3) and Sec.
1.417(e)-1(b)(3)(ii).
(10) Other right and feature. The term other right or feature has
the meaning set forth at Sec. 1.401(a)(4)-4(e)(3)(ii).
(11) Refund of employee contributions feature. The term refund of
employee contributions features means a feature with respect to an
optional form of benefit that provides for employee contributions and
interest thereon to be paid in a single sum at the annuity starting date
with the remainder to be paid in another form beginning on that date.
(12) Retirement; retirement age. For purposes of this section, the
date of retirement means the annuity starting date. Thus, retirement age
means a participant's age at the annuity starting date.
(13) Retroactive annuity starting date feature. The term retroactive
annuity starting date feature means a feature with respect to an
optional form of benefit under which the annuity starting date for the
distribution occurs on or before the date the written explanation
required by section 417(a)(3) is provided to the participant.
(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
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families: a straight life annuity; a straight life annuity with cost-of-
living increases; joint and contingent options with continuation
percentages of less than 50%; and joint and contingent options with
continuation percentages of 50% or more. The amendment does not affect
either of the first 2 families, but affects the 2 families relating to
joint and contingent options.
(B) Conclusion for elimination of optional forms of benefit as
redundant. The amendment satisfies the requirements of paragraph (c) of
this section. First, the eliminated optional forms of benefit are
redundant with respect to the retained optional forms of benefit because
each eliminated joint and contingent annuity option with a continuation
percentage of less than 50% is redundant with respect to the 25%
continuation option and each eliminated joint and contingent annuity
option with a continuation percentage of 50% or higher is redundant with
respect to any one of the retained 50%, 75%, or 100% continuation
options. In addition, to the extent that the optional form of benefit
that is being eliminated does not include a social security leveling
feature, return of employee contribution feature, or retroactive annuity
starting date feature, the retained optional form of benefit does not
include that feature. Second, the amendment is not effective with
respect to annuity commencement dates before September 1, 2006, as
required under paragraph (c)(1)(ii) of this section. Third, the plan
amendment does not eliminate any available core option, including the
most valuable option for a participant with a short life expectancy,
treating a joint and contingent annuity with a 100% continuation
percentage as this optional form of benefit pursuant to paragraph
(g)(5)(iii)(B)(2) of this section. Finally, the amendment need not
satisfy the requirements of paragraph (e) of this section because the
retained optional forms of benefit are available on the same annuity
commencement dates and have the same actuarial present value as the
optional forms of benefit that are being eliminated.
Example 2. (i) Facts involving elimination of optional forms of
benefit as redundant if additional restrictions are imposed. The facts
are the same as Example 1, except that the plan amendment also restricts
the class of beneficiaries that may be elected under the 4 retained
joint and contingent annuities to the employee's spouse.
(ii) Conclusion. The amendment fails to satisfy the requirements of
paragraph (c)(2)(i)(B) of this section because the retained joint and
contingent annuities have materially greater restrictions on the
beneficiary designation than did the eliminated joint and contingent
annuities. Thus, the joint and contingent annuities being eliminated are
not redundant with respect to the retained joint and contingent
annuities. In addition, the amendment fails to satisfy the 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.
[[Page 153]]
Third, to the extent that the optional form of benefit that is being
eliminated does not include a social security leveling feature, a return
of employee contribution feature, or retroactive annuity starting date
feature, the retained optional form of benefit must not include that
feature. Fourth, the plan amendment does not eliminate any available
core option, including the most valuable option for a participant with a
short life expectancy, treating a joint and contingent annuity with a
100% continuation percentage as this optional form of benefit pursuant
to paragraph (g)(5)(iii)(B)(2) of this section. Fifth, the amendment is
not effective with respect to annuity commencement dates before
September 1, 2006, as required under paragraph (c)(1)(ii) of this
section. The amendment need not satisfy the requirements of paragraph
(e) of this section because the retained optional forms of benefit are
available on the same annuity commencement dates and have the same
actuarial present value as the optional forms of benefit that are being
eliminated.
Example 4. (i) Facts involving elimination of noncore options.
Employer N sponsors Plan E, a defined benefit plan that permits every
participant to elect payment in the following actuarially equivalent
optional forms of benefit (Plan E's uniformly available options), with
spousal consent if applicable: a straight life annuity; a 50%, 75%, or
100% joint and contingent annuity with no restrictions on designation of
beneficiaries; and a 5-, 10-, or 15-year term certain and life annuity.
In addition, each can be elected in conjunction with a social security
leveling feature, with the participant permitted to select a social
security commencement age from age 62 to age 67. None of Plan E's
uniformly available options include a single-sum distribution. The plan
has been in existence for over 30 years, during which time Employer N
has acquired a large number of other businesses, including merging over
20 defined benefit plans of acquired entities into Plan E. Many of the
merged plans offered optional forms of benefit that were not among Plan
E's uniformly available options, including some plans funded through
insurance products, often offering all of the insurance annuities that
the insurance carrier offers, and with some of the merged plans offering
single-sum distributions. In particular, under the XYZ acquisition that
occurred in 1990, the XYZ acquired plan offered a single-sum
distribution option that was frozen at the time of the acquisition. On
April 1, 2006, each single-sum distribution option applies to less than
25% of the XYZ participants' accrued benefits. Employer N has generally,
but not uniformly, followed the practice of limiting the optional forms
of benefit for an acquired unit to an employee's service before the date
of the merger, and 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
[[Page 154]]
amendment need not satisfy the requirements of paragraph (e) of this
section because the retained optional forms of benefit are available on
the same annuity commencement date and have the same actuarial present
value as the optional forms of benefit that are being eliminated. The
conclusion that the amendment satisfies the requirements of paragraph
(d) of this section assumes that no amendments are made to change the
core options before May 1, 2014.
Example 5. (i) Facts involving reductions in actuarial present
value. (A) Plan F is a defined benefit plan providing an accrued benefit
of 1% of the average of a participant's highest 3 consecutive years' pay
times years of service, payable as a straight life annuity beginning at
the normal retirement age at age 65. Plan F permits employees to elect
to commence actuarially reduced distributions at any time after the
later of termination of employment or attainment of age 55. At each
potential annuity commencement date, Plan F permits employees to select,
with spousal consent, either a straight life annuity, a joint and
contingent annuity with the participant having the right to select any
beneficiary and a continuation percentage of 50%, 66 2/3%, 75%, or 100%,
or a 10-year certain and life annuity with the participant having the
right to select any beneficiary, subject to modification to the extent
necessary to satisfy the requirements of the incidental benefit
requirement of Sec. 1.401-1(b)(1)(i). The amount of any joint and
contingent annuity and the 10-year certain and life annuity is
determined as the actuarial equivalent of the straight life annuity
payable at the same age using reasonable actuarial assumptions. The plan
covers employees at 4 divisions, one of which, Division X, was acquired
on January 1, 1999. The plan provides for distributions before normal
retirement age to be actuarially reduced, but, if a participant retires
after attainment of age 55 and completion of 10 years of service, the
applicable early retirement reduction factor is 3% per year for the
years between age 65 and 62 and 6% per year for the ages from 62 to 55
for all employees at any division, except for employees who were in
Division X on January 1, 1999, for whom the early retirement reduction
factor for retirement after age 55 and 10 years of service is 5% for
each year before age 65. On June 2, 2006, effective January 1, 2007,
Plan F is amended to change the early retirement reduction factors for
all employees of Division X to be the same as for other employees,
effective with respect to annuity commencement dates that are on or
after January 1, 2008, but only with respect to participants who are
employees on or after January 1, 2008 and only if Plan F continues
accruals at the current rate through January 1, 2008 (or the effective
date of the change in reduction factors is delayed to reflect the 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
[[Page 155]]
eliminating the existing optional forms of benefit (where the amount of
the benefit is based on preamendment early retirement factors in any
case where the new factors result in a smaller amount payable) and
adding new optional forms of benefit (where the amount of benefit is
based on the different early retirement factors). Accordingly, the
elimination must satisfy the requirements of paragraph (c) or (d) of
this section if the amount payable at any date is less than would have
been payable under the plan before the amendment.
(iii) Conclusion concerning application of redundancy rules. The
amendment satisfies the requirements of paragraph (c)(1)(i) and (ii) of
this section (see paragraphs (iv) through (vi) of this Example 5 below
for the requirements of paragraph (c)(1)(iii) of this section). First,
with respect to each eliminated optional form of benefit (i.e., with
respect to each optional form of benefit with the Old Division X
Factor), after the amendment there is a retained optional form of
benefit that is in the same family of optional forms of benefit (i.e.,
the optional form of benefit with the New Factor). Second, the amendment
is not effective with respect to annuity commencement dates that are
less than the time period required under paragraph (c)(1)(ii) of this
section. Third, to the extent that the plan amendment eliminates the
most valuable option for a participant with a short life expectancy, the
retained optional form of benefit is identical except for differences in
actuarial factors.
(iv) Conclusion concerning application of the requirements under
paragraph (e) of this section. The plan amendment must satisfy the
requirements of paragraph (e) of this section because, as of the
December 2, 2006 adoption date, the actuarial present value of the early
retirement subsidy is less than the actuarial present value of the early
retirement subsidy being eliminated. The plan amendment satisfies the
requirements under paragraph (e)(1)(i) and (2) of this section because
the amendment eliminates optional forms of benefit that create
significant burdens or complexities for the plan and its participants.
See below for the de minimis requirement under paragraph (e)(1)(ii) and
(3) of this section.
(v) Conclusion concerning application of de minimis rules under
paragraph (e)(5) of this section. In order to satisfy the requirements
under paragraph (e)(1)(ii) and (3) of this section, the amendment must
satisfy the requirements of either paragraph (e)(5) or paragraph (e)(6)
of this section. The amendment does not satisfy the requirements of
paragraph (e)(5) of this section because the reduction in the actuarial
present value is more than a de minimis amount under paragraph (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
[[Page 156]]
participant between the ages of 62 and 67. Under Plan G, the normal
retirement age is defined as age 65.
(B) Utilization test. In 2007, the plan sponsor of Plan G, after
reviewing participants' benefit elections, determines that, during the
period from January 1, 2005, through June 30, 2007, no participant has
elected a 5-year term certain and life annuity with a social security
leveling option. During that period, Plan G has made the 5-year term
certain and life annuity with a social security leveling option
available to 142 participants who were at least age 55 and who elected
optional forms of benefit with an annuity commencement dates during that
period. In addition, during that period, 20 of the 142 participants
elected a single-sum distribution and there was no retirement-type
subsidy available for a limited period of time. Plan G, in accordance
with paragraph (f)(1) of this section, is amended on September 15, 2007,
effective as of January 1, 2008, to eliminate all 5-year term certain
and life annuities with a social security leveling option for all
annuity commencement dates on or after January 1, 2008.
(ii) Conclusion. The amendment satisfies the requirements of
paragraph (f) of this section. First, the 5-year term certain and life
annuity with a social security leveling option is not a core option as
defined in paragraph (g)(5) of this section. Second, the plan amendment
is not applicable with respect to an optional form of benefit with an
annuity commencement date that is earlier than the number of days in the
maximum QJSA explanation period after the date the amendment is adopted.
Third, the 5-year term certain and life annuity with a social security
leveling option has been available to at least 50 participants who are
taken into account for purposes of paragraph (f) of this section during
the look-back period. Fourth, during the look-back period, no
participant elected any optional form that is part of the generalized
optional form being eliminated (for example, the 5-year term and life
annuity with a social security leveling option).
(i) [Reserved]
(j) Effective dates--(1) General effective date. Except as otherwise
provided in this paragraph (j), the rules of this section apply to
amendments adopted on or after August 12, 2005.
(2) Effective date for rules relating to contingent event benefits.
Paragraph (b)(1)(ii) of this section applies to amendments adopted after
December 31, 2005.
(3) Effective dates for rules relating to section 411(a)
nonforfeitability provisions--(i) Application of suspension of 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; T.D. 9987, 89 FR 3357, Jan. 19, 2024]
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
[[Page 157]]
of section 411(d)(6) and, where applicable, the definitely determinable
requirement of section 401(a) (including section 401(a)(25)) and cannot,
therefore, be reduced, eliminated, or made subject to employer
discretion except to the extent permitted by regulations.
(b) Optional forms of benefit--(1) In general. The term optional
form of benefit has the same meaning as in Sec. 1.411(d)-3(g)(6)(ii).
Under this definition, different optional forms of benefit exist if a
distribution alternative is not payable on substantially the same terms
as another distribution alternative. Thus, for example, different
optional forms of benefit may result from differences in terms relating
to the payment schedule, timing, commencement, medium of distribution
(e.g., in cash or in kind), election rights, differences in eligibility
requirements, or the portion of the benefit to which the distribution
alternative applies.
(2) Examples. The following examples illustrate the meaning of the
term ``optional form of benefit.'' Other issues, such as the requirement
that the optional forms satisfy section 401(a)(4), are not addressed in
these examples and no inferences are intended with respect to such
requirements. Assume that the distribution forms, including those not
described in these examples, provided under the plan in each of the
following examples are identical in all respects not described.
Example 1. A plan permits each participant to receive his benefit
under the plan as a single sum distribution; a level monthly
distribution schedule over 15 years; a single life annuity; a joint and
50 percent survivor annuity; a joint and 75 percent survivor annuity; a
joint and 50 percent survivor annuity with a benefit increase for the
participant if the beneficiary dies before a specified date; and joint
and 50 percent survivor annuity with a 10 year certain feature. Each of
these benefit distribution options is an optional form of benefit
(without regard to whether the values of these options are actuarially
equivalent).
Example 2. A plan permits each participant who is employed by
division A to receive his benefit in a single sum distribution payable
upon termination from employment and each participant who is employed by
division B in a single sum distribution payable upon termination from
employment on or after the attainment of age 50. This plan provides two
single sum optional forms of benefit.
Example 3. A plan permits each participant to receive his benefit in
a single life annuity 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
[[Page 158]]
the same terms with the exception of payment on plan termination to
employees of Division B. The plan provides for two optional forms of
benefit.
Example 10. A profit-sharing plan provides for loans secured by an
employee's account balance. In the event of default on such a loan,
there is an execution on such account balances. Such execution is a
distribution of the employee's accrued benefits under the plan. A
distribution of an accrued benefit contingent on default under a plan
loan secured by such accrued benefits is an optional form of benefit
under the plan.
(c) Plan terms--(1) General rule. Generally, benefits described in
section 411(d)(6)(A), early retirement benefits, retirement-type
subsidies, and optional forms of benefit are section 411(d)(6) protected
benefits only if they are provided under the terms of a plan. However,
if an employer establishes a pattern of repeated plan amendments
providing for similar benefits in similar situations for substantially
consecutive, limited periods of time, such benefits will be treated as
provided under the terms of the plan, without regard to the limited
periods of time, to the extent necessary to carry out the purposes of
section 411(d)(6) and, where applicable, the definitely determinable
requirement of section 401(a), including section 401(a)(25). A pattern
of repeated plan amendments providing that a particular optional form of
benefit is available to certain named employees for a limited period of
time is within the scope of this rule and may result in such optional
form of benefit being treated as provided under the terms of the plan to
all employees covered under the plan without regard to the limited
period of time and the limited group of named employees.
(2) Effective date. The provisions of paragraph (c)(1)of this Q&A-1
are effective as of July 11, 1988. Thus, patterns or repeated plan
amendments adopted and effective before July 11, 1988 will be
disregarded in determining whether such amendments have created an
ongoing optional form of benefit under the plan.
(d) Benefits that are not section 411(d)(6) protected benefits. The
following benefits are examples of items that are not section 411(d)(6)
protected benefits:
(1) Ancillary life insurance protection;
(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
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of the later of the amendment's adoption date or effective date without
violating section 411(d)(6).
(2) Selection of optional forms of benefit--(i) General rule. A plan
may treat a participant as receiving his entire nonforfeitable accrued
benefit under the plan if the participant receives his benefit in an
optional form of benefit in an amount determined under the plan that is
at least the actuarial equivalent of the employee's nonforfeitable
accrued benefit payable at normal retirement age under the plan. This is
true even though the participant could have elected to receive an
optional form of benefit with a greater actuarial value than the value
of the optional form received, such as an optional form including
retirement-type subsidies, and without regard to whether such other,
more valuable optional form could have commenced immediately or could
have become available only upon the employee's future satisfaction of
specified eligibility conditions.
(ii) Election of an optional form. Except as provided in paragraph
(a)(2)(iii) of this Q&A-2, a plan does not violate section 411(d)(6)
merely because an employee's election to receive a portion of his
nonforfeitable accrued benefit in one optional form of benefit precludes
the employee from receiving that portion of his benefit in another
optional form of benefit. Such employee retains all 411(d)(6) protected
rights with respect to the entire portion of such employee's
nonforfeitable accrued benefit for which no distribution election was
made. For purposes of this rule, an elective transfer of an otherwise
distributable benefit is treated as the selection of an optional form of
benefit. See Q&A-3 of this section.
(iii) Buy-back rule. Notwithstanding paragraph (a)(2)(ii) of this
Q&A-2, an employee who received a distribution of his nonforfeitable
benefit from a plan that is required to provide a repayment opportunity
to such employee if he returns to service within the applicable period
pursuant to the requirements of section 411(a)(7) and who, upon
subsequent reemployment, repays the full amount of such distribution in
accordance with section 411(a)(7)(C) must be reinstated in the full
array of section 411(d)(6) protected benefits that existed with respect
to such benefit prior to distribution.
(iv) Examples. The rules in this paragraph (a)(2) can be illustrated
by the following examples:
Example 1. Defined benefit plan X provides, among its optional forms
of benefit, for a subsidized early retirement benefit payable in the
form of an annuity and available to employees who terminate from
employment on or after their 55th birthdays. In addition plan X provides
for a single sum distribution available on termination from employment
or termination of the plan. The single sum distribution is determined on
the basis of the present value of the accrued normal retirement benefit
and does not take the early retirement subsidy into account. Plan X is
terminated December 31, 1991. Employees U, age 47, V, age 55, and W, age
47, all continue in the service of the employer. Employees X, age 47, Y,
age 55 and Z, age 47, terminate from employment with the employer during
1991. Employees U and V elect to take the single sum optional form of
distribution at the time of plan termination. Employees X and Y elect to
take the single sum distribution on termination from employment with the
employer. The elimination of the subsidized early retirement benefit
with respect to employees U, V, X and Y does not result in a violation
of section 411(d)(6). This is the result even though employees U and X
had not yet satisfied the conditions for the subsidized early retirement
benefit. Because employees W and Z have not selected an optional form of
benefit, they continue to have a 411(d)(6) protected right to the full
array of section 411(d)(6) protected benefits provided under the plan,
including the single sum distribution form and the subsidized early
retirement benefit.
Example 2. A partially vested employee receives a single sum
distribution of the present value of his entire nonforfeitable benefit
on account of separation from service under a defined benefit plan
providing for a repayment provision. Upon reemployment with the employer
such employee makes repayment in the required amount in accordance with
section 411(a)(7). Such employee may, upon subsequent termination of
employment, elect to take such repaid benefits in any optional form
provided under the plan as of the time of the employee's initial
separation from service. If the plan was amended prior to such
repayment, to eliminate the single sum optional form of benefit with
respect to benefits accrued after the date of the amendment, such
participant has a 411(d)(6) protected right to take distribution of the
repaid benefit in the form of a single sum distribution.
(3) Certain transactions--(i) Plan mergers and benefit transfers.
The prohibition
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against the reduction or elimination of section 411(d)(6) protected
benefits already accrued applies to plan mergers, spinoffs, transfers,
and transactions amending or having the effect of amending a plan or
plans to transfer plan benefits. Thus, for example, if plan A, a profit-
sharing plan that provides for distribution of plan benefits in annual
installments over ten or twenty years, is merged with plan B, a profit-
sharing plan that provides for distribution of plan benefits in annual
installments over life expectancy at time of retirement, the merged plan
must retain the ten or twenty year installment option for participants
with respect to benefits already accrued under plan A as of the merger
and the installments over life expectancy for participants with benefits
already accrued under plan B. Similarly, for example, if an employee's
benefit under a defined contribution plan is transferred to another
defined contribution plan (whether or not of the same employer), the
optional forms of benefit available with respect to the employee's
benefit accrued under the transferor plan may not be eliminated or
reduced except as otherwise permitted under this regulation. See Q&A-3
of this section with respect to the transfer of benefits between and
among defined benefit and defined contribution plans.
(ii) Annuity contracts--(A) General rule. The right of a participant
to receive a benefit in the form of cash payments from the plan and the
right of a participant to receive that benefit in the form of the
distribution of an annuity contract that provides for cash payments that
are identical in all respects to the cash payments from the plan except
with respect to the source of the payments are not separate optional
forms of benefit. Therefore, for example, if a plan includes an optional
form of benefit under which benefits are distributed in the medium of an
annuity contract that provides for cash payments, that optional form of
benefit may be modified by a plan amendment that substitutes cash
payments from the plan for the annuity contract, where those cash
payments from the plan are identical to the cash payments payable from
the annuity contract in all respects except with respect to the source
of the payments. The protection provided by section 411(d)(6) may not 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
[[Page 161]]
July 1, 1990. The plan will fail to satisfy section 411(d)(6) unless the
optional forms of benefit provided under the plan are preserved under
the annuity contract purchased on plan termination. Thus, such annuity
contract must provide a participant the same optional benefit
commencement rights that the plan provided. In addition, such contract
must provide the same election rights with respect to such benefit
options. This is the case even if, for example, in conjunction with the
termination, the employer amended the plan to permit participants to
elect a qualified joint and survivor annuity, single life annuity, or
single sum distribution commencing on July 1, 1990.
(4) Benefits payable to a spouse or beneficiary. Section 411(d)(6)
protected benefits may not be eliminated merely because they are payable
with respect to a spouse or other beneficiary.
(b) Section 411(d)(6) protected benefits that may be eliminated or
reduced only as permitted by the Commissioner--(1) In general. The
Commissioner may, consistent with the provisions of this section,
provide for the elimination or reduction of section 411(d)(6) protected
benefits that have already accrued only to the extent that such
elimination or reduction does not result in the loss to plan
participants of either a valuable right or an employer-subsidized
optional form of benefit where a similar optional form of benefit with a
comparable subsidy is not provided or to the extent such elimination or
reduction is necessary to permit compliance with other requirements of
section 401(a) (e.g., sections 401(a)(4), 401(a)(9) and 415). The
Commissioner may exercise this authority only through the publication of
revenue rulings, notices, and other documents of general applicability.
(2) Section 411(d)(6) protected benefits that may be eliminated or
reduced. The elimination or reduction of certain section 411(d)(6)
protected benefits that have already accrued in the following situations
does not violate section 411(d)(6). The rules with respect to
permissible eliminations and reductions provided in this paragraph
(b)(2) generally are effective January 30, 1986; however, the rules of
paragraphs (b)(2)(iii) (A) and (B) and (b)(2)(viii) of this Q&A-2 are
effective for plan amendments that are adopted and effective on or after
September 6, 2000. These exceptions create no inference with respect to
whether any other applicable requirements are satisfied (for 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
[[Page 162]]
optional form of benefit may be modified by a plan amendment that
substitutes cash for the marketable securities as the medium of
distribution. For purposes of this paragraph (b)(2)(iii)(A) and
paragraph (b)(2)(iii)(B) of this Q&A-2, the term marketable securities
means marketable securities as defined in section 731(c)(2), and the
term securities of the employer means securities of the employer as
defined in section 402(e)(4)(E)(ii).
(B) Amendments to defined contribution plans to specify medium of
distribution. If a defined contribution plan includes an optional form
of benefit under which benefits are distributable to a participant in a
medium other than cash, the plan may be amended to limit the types of
property in which distributions may be made to the participant to the
types of property specified in the amendment. For this purpose, the
types of property specified in the amendment must include all types of
property (other than marketable securities that are not securities of
the employer) that are allocated to the participant's account on the
effective date of the amendment and in which the participant would be
able to receive a distribution immediately before the effective date of
the amendment if a distributable event occurred. In addition, a plan
amendment may provide that the participant's right to receive a
distribution in the form of specified types of property is limited to
the property allocated to the participant's account at the time of
distribution that consists of property of those specified types.
(C) In-kind distributions after plan termination. If a plan includes
an optional form of benefit under which benefits are distributed in
specified property, that optional form of benefit may be modified for
distributions after plan termination by substituting cash for the
specified property as the medium of distribution to the extent that, on
plan termination, an employee has the opportunity to receive the
optional form of benefit in the form of the specified property. This
exception is not available, however, if the employer that maintains the
terminating plan also maintains another plan that provides an optional
form of benefit under which benefits are distributed in the specified
property.
(D) Examples. The following examples illustrate the application of
this paragraph (b)(2)(iii):
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):
[[Page 163]]
(A) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of employer
stock and shares of PQR limited partnership. See paragraph
(b)(2)(iii)(A) of this Q&A-2.
(B) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of employer
stock and shares of PQR limited partnership, and that also provides that
only participants with employer stock allocated to their accounts as of
the effective date of the amendment have the right to distributions in
the form of employer stock, and that only participants with shares of
PQR limited partnership allocated to their accounts as of the effective
date of the amendment have the right to distributions in the form of
shares of PQR limited partnership. To comply with the plan amendment,
the plan administrator retains a list of participants with employer
stock allocated to their accounts as of the effective date of the
amendment, and a list of participants with shares of PQR limited
partnership allocated to their accounts as of the effective date of the
amendment. See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
(C) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of employer
stock and shares of PQR limited partnership to the extent that those
assets are allocated to the participant's account at the time of the
distribution. See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
(D) A plan amendment that limits non-cash distributions to a
participant on termination of employment to a distribution of employer
stock and shares of PQR limited partnership, and that provides that only
participants with employer stock allocated to their accounts as of the
effective date of the amendment have the right to distributions in the
form of employer stock, and that only participants with shares of PQR
limited partnership allocated to their accounts as of the effective date
of the amendment have the right to distributions in the form of shares
of PQR limited partnership, and that further provides that the
distribution of that stock or those shares is available only to the
extent that those assets are allocated to those participants' accounts
at the time of the distribution. To comply with the plan amendment, the
plan administrator retains a list of participants with employer stock
allocated to their accounts as of the effective date of the amendment,
and a list of participants with shares of PQR limited partnership
allocated to their accounts as of the effective date of the amendment.
See paragraphs (b)(2)(iii) (A) and (B) of this Q&A-2.
Example 3. (i) An employer maintains a stock bonus plan under which
a participant, upon termination of employment, may elect to receive
benefits in a single-sum distribution in employer stock. This is the
only plan maintained by the employer under which distributions in
employer stock are available. 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
[[Page 164]]
defined contribution plan that is not subject to section 412 and does
not provide for an annuity option is terminated, the plan may be amended
to provide for the distribution of a participant's accrued benefit upon
termination in a single sum optional form without the participant's
consent. The preceding sentence does not apply if the employer maintains
any other defined contribution plan (other than an employee stock
ownership plan as defined in section 4975(e)(7)).
(B) Examples. The provisions of this paragraph (b)(2)(vi) can be
illustrated by the following examples:
Example 1. Employer X maintains a defined contribution plan that is
not subject to section 412. The plan provides for distribution in the
form of equal installments over five years or equal installments over
twenty years. X maintains no other defined contribution plans. X
terminates its defined contribution plan after amending the plan to
provide for the distribution of all participants' accrued benefits in
the form of single sum distributions, without obtaining participant
consent. Pursuant to the rule in this paragraph (b)(2)(iv), this
amendment does not violate the requirements of section 411(d)(6).
Example 2. Corporations X and Y are members of controlled group
employer XY. Both X and Y maintain defined contribution plans. X's plan,
which is not subject to section 412, covers only employees working for
X. Y's plan, which is subject to section 412, covers only employees
working for Y. X terminates its defined contribution plan. Because
employer XY maintains another defined contribution plan, plan X may not
provide for the distribution of participants' accrued benefits upon
termination without a participants' consent.
(vii) Distribution of benefits on default of loans. Notwithstanding
that the distribution of benefits arising from an execution on an
account balance used to secure a loan on which there has been a default
is an optional form of benefit, a plan may be amended to eliminate or
change a provision for loans, even if such loans would be secured by an
employee's account balance.
(viii) Provisions for transfer of benefits between and among defined
contribution plans and defined benefit plans. A plan may be amended to
eliminate provisions permitting the transfer of benefits between and
among defined contribution plans and defined benefit plans.
(ix) De minimis change in the timing of an optional form of benefit.
A plan may 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
[[Page 165]]
first day of the first limitation year beginning after December 31,
1986, that exceed the benefit limitations under section 415 (b) or (e),
effective on the first day of the plan's first limitation year beginning
after December 31, 1986, because of a change in the terms and conditions
of the plan made after May 5, 1986, or the establishment of a plan after
that date, may be reduced to the level permitted under section 415 (b)
or (e).
(xii) Prohibited payment option under single-employer defined
benefit plan of plan sponsor in bankruptcy. A single-employer plan that
is covered under section 4021 of the Employee Retirement Income Security
Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)), as amended
(ERISA), may be amended, effective for a plan amendment that is both
adopted and effective after November 8, 2012, to eliminate an optional
form of benefit that includes a prohibited payment described in section
436(d)(5), provided that the following conditions are satisfied on the
applicable amendment date (as defined in Sec. 1.411(d)-3(g)(4)):
(A) The enrolled actuary of the plan has certified that the plan's
adjusted funding target attainment percentage (as defined in section
436(j)(2)) for the plan year that contains the applicable amendment date
is less than 100 percent.
(B) The plan is not permitted to pay any prohibited payment, due to
application of the requirements of section 436(d)(2) of the Internal
Revenue Code and section 206(g)(3)(B) of ERISA, because the plan sponsor
is a debtor in a bankruptcy case (that is, a case under title 11, United
States Code, or under similar Federal or State law).
(C) The court overseeing the bankruptcy case has issued an order,
after notice to the affected parties (as defined in section 4001(a)(21)
of ERISA) and a hearing, within the meaning of 11 U.S.C. 102(1), finding
that the adoption of the amendment eliminating that optional form of
benefit is necessary to avoid a distress termination of the plan
pursuant to section 4041(c) of ERISA or an involuntary termination of
the plan pursuant to section 4042 of ERISA before the plan sponsor
emerges from bankruptcy (or before the bankruptcy case is otherwise
completed).
(D) The Pension Benefit Guaranty Corporation has issued a
determination that--
(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
[[Page 166]]
409(h)(1)(B), provided such elimination or retention of discretion is
consistent with the distribution and payment requirements otherwise
applicable to such plans (e.g., those required by section 409).
(ii) Employer becomes substantially employee-owned or is an S
corporation. The employer eliminates, or retains the discretion to
eliminate, with respect to all participants, optional forms of benefit
by substituting cash distributions for distributions in the form of
employer stock with respect to benefits subject to section 409(h) in the
circumstances described in paragraph (d)(1)(ii)(A) or (B) of this Q&A-2,
but only if the employer otherwise meets the requirements of section
409(h)(2)--
(A) The employer becomes substantially employee-owned; or
(B) For taxable years of the employer beginning after December 31,
1997, the employer is an S corporation as defined in section 1361.
(iii) Employer securities become readily tradable. The employer
eliminates, or retains the discretion to eliminate, with respect to all
participants, in cases in which the employer securities become readily
tradable, optional forms of benefit by substituting distributions in the
form of employer securities for distributions in cash with respect to
benefits that are subject to section 409(h).
(iv) Employer securities cease to be readily tradable or certain
sales. The employer eliminates, or retains the discretion to eliminate,
with respect to all participants, optional forms of benefit by
substituting cash distributions for distributions in the form of
employer stock with respect to benefits that are subject to section
409(h) in the following circumstances:
(A) The employer stock ceases to be readily tradable;
(B) The employer stock continues to be readily tradable but there is
a sale of substantially all of the stock of the employer or a sale of
substantially all of the assets of a trade or business of the employer
and, in either situation, the purchasing employer continues to maintain
the plan.
In the situation described in paragraph (d)(1)(iv)(B) of this Q&A-2, the
employer may also substitute distributions in the purchasing employer's
stock for distributions in the form of employer stock of the predecessor
employer.
(2) Limitations on ESOP and stock bonus plan exceptions--(i)
Nondiscrimination requirement. Plan amendments and the retention and
exercise of discretion permitted under the exceptions in paragraph
(d)(1) must meet the nondiscrimination requirements of section
401(a)(4).
(ii) ESOP investment requirement. Except as provided in paragraph
(d)(2)(iii) of this Q&A-2, benefits provided by employee stock ownership
plans will not 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
[[Page 167]]
as violating the requirements of section 411(d)(6) if such reduction or
elimination reflects a reasonable interpretation of the statutory
language of section 411(d)(6)(C).
(4) Additional exceptions and requirements. The Commissioner may, in
revenue rulings, notices or other documents of general applicability,
prescribe such additional rules and exceptions, consistent with the
purposes of this section, as may be necessary or appropriate.
(e) Permitted plan amendments affecting alternative forms of payment
under defined contribution plans--(1) General rule. A defined
contribution plan does not violate the requirements of section 411(d)(6)
merely because the plan is amended to eliminate or restrict the ability
of a participant to receive payment of accrued benefits under a
particular optional form of benefit for distributions with annuity
starting dates after the date the amendment is adopted if, after the
plan amendment is effective with respect to the participant, the
alternative forms of payment available to the participant include
payment in a single-sum distribution form that is otherwise identical to
the optional form of benefit that is being eliminated or restricted.
(2) Otherwise identical single-sum distribution. For purposes of
this paragraph (e), a single-sum distribution form is otherwise
identical to an optional form of benefit that is eliminated or
restricted pursuant to paragraph (e)(1) of this Q&A-2 only if the
single-sum distribution form is identical in all respects to the
eliminated or restricted optional form of benefit (or would be identical
except that it provides greater rights to the participant) except with
respect to the timing of payments after commencement. For example, a
single-sum distribution form is not otherwise identical to a specified
installment form of benefit if the single-sum distribution form is not
available for distribution on the date on which the installment form
would have been available for commencement, is not available in the same
medium of distribution as the installment form, or imposes any condition
of eligibility that did not apply to the installment form. However, an
otherwise identical distribution form need not retain rights or features
of the optional form of benefit that is eliminated or restricted to the
extent that those rights or features would not be protected from
elimination or restriction under section 411(d)(6) or this section.
(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
[[Page 168]]
transaction amending or having the effect of amending a plan or plans to
transfer benefits. Thus, for example, except as otherwise provided in
this section, an employer who maintains a money purchase pension plan
that provides for a single sum optional form of benefit may not
establish another plan that does not provide for this optional form of
benefit and transfer participants' account balances to such new plan.
(2) Defined benefit feature and separate account feature. The
defined benefit feature of an employee's benefit under a defined benefit
plan and the separate account feature of an employee's benefit under a
defined contribution plan are section 411(d)(6) protected benefits.
Thus, for example, the elimination of the defined benefit feature of an
employee's benefit under a defined benefit plan, through transfer of
benefits from a defined benefit plan to a defined contribution plan or
plans, will violate section 411(d)(6).
(3) Waiver prohibition. In general, except as provided in paragraph
(b) of this Q&A-3, a participant may not elect to waive section
411(d)(6) protected benefits. Thus, for example, the elimination of the
defined benefit feature of a participant's benefit under a defined
benefit plan by reason of a transfer of such benefits to a defined
contribution plan pursuant to a participant election, at a time when the
benefit is not distributable to the participant, violates section
411(d)(6).
(4) Direct rollovers. A direct rollover described in Q&A-3 of Sec.
1.401(a)(31)-1 that is paid to a qualified plan is not a transfer of
assets and liabilities that must satisfy the requirements of section
414(l), and is not a transfer of benefits for purposes of applying the
requirements under section 411(d)(6) and paragraph (a)(1) of this Q&A-3.
Therefore, for example, if such a direct rollover is made to another
qualified plan, the receiving plan is not required to provide, with
respect to amounts paid to it in a direct rollover, the same optional
forms of benefit that were provided under the plan that made the direct
rollover. See Sec. 1.401(a)(31)-1, Q&A-14.
(b) Elective transfers of benefits between defined contribution
plans--(1) General rule. A transfer of a participant's entire benefit
between qualified defined contribution plans (other than any direct
rollover described in Q&A-3 of Sec. 1.401(a)(31)-1) that results in the
elimination or reduction of section 411(d)(6) protected benefits does
not 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
[[Page 169]]
respect to which the participant is not entitled to additional
allocations under the transferor plan.
(2) Applicable qualification requirements. A transfer described in
this paragraph (b) is a transfer of assets or liabilities within the
meaning of section 414(l)(1) and, thus, must satisfy the requirements of
section 414(l). In addition, this paragraph (b) only provides relief
under section 411(d)(6); a transfer described in this paragraph must
satisfy all other applicable qualification requirements. Thus, for
example, if the survivor annuity requirements of sections 401(a)(11) and
417 apply to the plan from which the benefits are transferred, as
described in this paragraph (b), but do not otherwise apply to the
receiving plan, the requirements of sections 401(a)(11) and 417 must be
met with respect to the transferred benefits under the receiving plan.
In addition, the vesting provisions under the receiving plan must
satisfy the requirements of section 411(a)(10) with respect to the
amounts transferred.
(3) Status of elective transfer as other right or feature. A right
to a transfer of benefits from a plan pursuant to the elective transfer
rules of this paragraph (b) is an other right or feature within the
meaning of Sec. 1.401(a)(4)-4(e)(3), the availability of which is
subject to the nondiscrimination requirements of section 401(a)(4) and
Sec. 1.401(a)(4)-4. However, for purposes of applying the rules of
Sec. 1.401(a)(4)-4, the following conditions are to be disregarded in
determining the employees to whom the other right or feature is
available--
(i) A condition restricting the availability of the transfer to
benefits of participants who are transferred to a different employer in
connection with a specified asset or stock disposition, merger, or other
similar transaction involving a change in employer of the employees of a
trade or business (i.e., a disposition within the meaning of Sec.
1.410(b)-2(f)), or in connection with any such disposition, merger, or
other similar transaction.
(ii) A condition restricting the availability of the transfer to
benefits of participants who have a change in employment status to an
employment status with respect to which the participant is not entitled
to additional allocations under the transferor plan.
(c) Elective transfers of certain distributable benefits between
qualified plans--(1) In general. A transfer of a participant's benefits
between qualified plans 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).
[[Page 170]]
(2) Treatment of transfer--(i) In general. A transfer of benefits
pursuant to this paragraph (c) generally is treated as a distribution
for purposes of section 401(a). For example, the transfer is subject to
the cash-out rules of section 411(a)(7), the early termination
requirements of section 411(d)(2), and the survivor annuity requirements
of sections 401(a)(11) and 417. A transfer pursuant to the elective
transfer rules of this paragraph (c) is not treated as a distribution
for purposes of the minimum distribution requirements of section
401(a)(9).
(ii) Status of elective transfer as optional form of benefit. A
right to a transfer of benefits from a plan pursuant to the elective
transfer rules of this paragraph (c) is an optional form of benefit
under section 411(d)(6), the availability of which is subject to the
nondiscrimination requirements of section 401(a)(4) and Sec.
1.401(a)(4)-4.
(3) Distributable benefits. For purposes of paragraph (c)(1)(i) of
this Q&A-3, a participant's benefits are distributable on a particular
date if, on that date, the participant is eligible, under the terms of
the plan from which the benefits are transferred, to receive an
immediate distribution of these benefits (e.g., in the form of an
immediately commencing annuity) from that plan under provisions of the
plan not inconsistent with section 401(a).
(d) Effective date. This Q&A-3 is applicable for transfers made on
or after September 6, 2000.
Q-4: May a plan provide that the employer may, through the exercise
of discretion, deny a participant a section 411(d)(6) protected benefit
for which the participant is otherwise eligible?
A-4: (a) In general. Except as provided in paragraph (d) of Q&A-2 of
this section with respect to certain employee stock ownership plans, a
plan that permits the employer, either directly or indirectly, through
the exercise of discretion, to deny a participant a section 411(d)(6)
protected benefit provided under the plan for which the participant is
otherwise eligible (but for the employer's exercise of discretion)
violates the requirements of section 411(d)(6). A plan provision that
makes a section 411(d)(6) protected benefit available only to those
employees as the employer may designate is within the scope of this
prohibition. Thus, for example, a plan provision under which only
employees who are designated by the employer are eligible to receive a
subsidized early retirement benefit constitutes an impermissible
provision 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
[[Page 171]]
with a heavy and immediate financial need or objective criteria designed
to determine whether an employee has a permanent and total disability)
have been satisfied; and
(3) Employer authority to determine, pursuant to specific guidelines
set forth in the plan, whether the participant or spouse is dead or
cannot be located.
Q-5: When will the exercise of discretion by some person or persons,
other than the employer, be treated as employer discretion?
A-5: For purposes of applying the rules of this section and Sec.
1.401(a)-4, the term ``employer'' includes plan administrator,
fiduciary, trustee, actuary, independent third party, and other persons.
Thus, if a plan permits any person, other than the participant (and
other than the participant's spouse), the discretion to deny or limit
the availability of a section 411(d)(6) protected benefit for which the
employee is otherwise eligible under the plan (but for the exercise of
such discretion), such plan violates the requirements of sections
401(a), including section 411(d)(6) and, where applicable, the
definitely determinable requirement of section 401(a), including section
401(a)(25).
Q-6: May a plan condition the availability of a section 411(d)(6)
protected benefit on the satisfaction of objective conditions that are
specifically set forth in the plan?
A-6: (a) Certain objective conditions permissible--(1) In general.
The availability of a section 411(d)(6) protected benefit may be limited
to employees who satisfy certain objective conditions provided the
conditions are ascertainable, clearly set forth in the plan and not
subject to the employer's discretion except to the extent reasonably
necessary to determine whether the objective conditions have been met.
Also, the availability of the section 411(d)(6) protected benefit must
meet the nondiscrimination requirements of section 401(a)(4). See Sec.
1.401(a)-4.
(2) Examples of permissible conditions. The following examples
illustrate of permissible objective conditions: a plan may deny a single
sum distribution form to employees for whom life insurance is not
available at standard rates as defined under the terms of the plan at
the time the single sum distribution would otherwise be payable; a plan
may provide that a single sum distribution is available only if the
employee is in extreme financial need as defined under the terms of the
plan at the time 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
[[Page 172]]
benefit that has already accrued violates section 411(d)(6). Also, the
addition of conditions (whether or not objective) or any change to
existing conditions with respect to section 411(d)(6) protected benefits
that results in any further restriction violates section 411(d)(6).
However, the addition of objective conditions to a section 411(d)(6)
protected benefit may be made with respect to benefits accrued after the
later of the adoption or effective date of the amendment. In addition,
objective conditions may be imposed on section 411(d)(6) protected
benefits accrued as of the date of an amendment where permitted under
the transitional rules of Sec. 1.401(a)-4 Q&A-5 and Q&A-8 of this
section. Finally, objective conditions may be imposed on section
411(d)(6) protected benefits to the extent permitted by the permissible
benefit cutback provisions of Q&A-2 of this section.
Q-8: If a plan contains an impermissible employer discretion
provision with respect to a section 411(d)(6) protected benefit, what
acceptable alternative exist for amending the plan without violating the
requirements of section 411(d)(6)?
A-8: (a) In general. The following rules apply for purposes of
making necessary amendments to existing plans (as defined in Q&A-9 of
this section) that contain discretion provisions with respect to the
availability of section 411(d)(6) protected benefits that violate the
requirements of section 401(a), including sections 401(a)(25) and
411(d)(6), and this section. These transitional rules are provided under
the authority of section 411(d)(6) and section 7805(b).
(b) Transitional alternatives. If the availability of an optional
forms of benefit, early or late retirement benefit, or retirement-type
subsidy under an existing plan is conditioned on the exercise of
employer discretion, the plan must be amended either to eliminate the
optional form of benefit, early or late retirement benefit, or
retirement-type subsidy to make such benefit available to all
participants without limitation, or to apply objective and
nondiscriminatory conditions to the availability of the optional form of
benefit, early or later retirement benefit, or retirement-type subsidy.
See paragraph (d) of this Q&A-8 for rules limiting the period during
which section 411(d)(6) protected benefits may be eliminated or reduced
under this paragraph.
(c) Compliance and amendment date provisions--(1) Operational
compliance requirement. On or before the applicable 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
[[Page 173]]
conforming amendment under this paragraph (c)(2) must be made with
respect to each section 411(d)(6) protected benefit for which such
amendment is required and must be retroactive to the applicable
effective date.
(d) Limitation on transitional alternatives. The transitional
alternatives permitting the elimination or reduction of section
411(d)(6) protected benefits are only permissible until the applicable
effective date for the plan (see Q&A-9 of this section). After the
applicable effective date, any amendment (other than one permitted under
paragraph (c)(2) of this Q&A-8) that eliminates or reduces a section
411(d)(6) protected benefit or imposes new objective conditions on the
availability of such benefit will fail to qualify for the exception to
section 411(d)(6) provided in this Q&A-8. This is the case without
regard to whether the section 411(d)(6) protected benefit is subject to
employer discretion.
Q-9: What are the applicable effective date rules for purposes of
this section?
A-9: (a) General effective date. Except as otherwise provided in
this section, the provisions of this section are effective January 30,
1986.
(b) New plans--(1) In general. Unless otherwise provided in
paragraph (b)(2) of this Q&A-9, plans that are either adopted or made
effective on or after August 1, 1986, are ``new plans''. With respect to
such new plans, this section is effective August 1, 1986. This effective
date is applicable to such plans whether or not they are collectively
bargained.
(2) Exception with respect to certain new plans. Plans that are new
plans as defined in paragraph (b)(1) of this Q&A-9; under which the
availability of a section 411(d)(6) protected benefit is subject to
employer discretion; and that receive a favorable determination letter
that covered such plan provisions with respect to an application
submitted prior to July 11, 1988, will be treated as existing plans with
respect to such section 411(d)(6) protected benefit for purposes of the
transitional rules of this section. Thus, such plans are eligible for
the compliance and amendment alternatives set forth in the transitional
rule in Q&A-8 of this section.
(c) Existing plans--(1) In general. Plans, including plans that are
adoptions of master or prototype plans, that are both adopted and in
effect prior to August 1, 1986, are ``existing plans'' for purposes of
this section. In addition, a plan that is established after July 31,
1986, but before January 1, 1989, as an initial adoption of a master or
prototype plan for which a favorable opinion letter was issued by the
Service after July 18, 1985 and before January 1, 1989, will be deemed
to be an existing plan for purposes of this section. See sections 4.01
and 4.02 of Rev. Proc. 84-23, 1984-1 C.B. 457, 459, for the definitions
of master prototype plans. However, if such plan ceases to be covered
under an opinion letter of the type described above, as a result of
amendment of the plan or adoption of a new plan, prior to the first day
of the first plan year beginning on or after January 1, 1989, then the
effective date for such plan will be determined as though the plan were
a new plan initially adopted as of the date of such amendment or
adoption of a new plan. Finally, new plans described in paragraph (b)(2)
of this Q&A-9 are treated as existing plans with respect to certain
section 411(d)(6) protected benefits. Subject to the limitations in
paragraph (c) of this Q&A-9, the effective dates set forth in paragraphs
(c)(2), (c)(3), and (c)(4) of this Q&A-9 apply to these existing plans
for purposes of this section:
(2) Existing noncollectively bargained plans. With respect to
existing plans other than collectively bargained plans this section is
effective for the first day of the first plan year commencing on or
after January 1, 1989.
(3) Existing collectively bargained plans. With respect to existing
collectively bargained plans this section is effective for the later of
the first day of the first plan year commencing on or after January 1,
1989, or the first day of the first plan year that the requirements of
section 410(b) as amended by TRA '86 apply to such plan.
(4) Existing master and prototype plans. With respect to existing
plans that are adoptions of master or prototype plans the effective date
will be the first day of the first plan year commencing on or after
January 1, 1989.
[[Page 174]]
(d) Delayed effective date not applicable to new alternatives or
conditions--(1) In general. The delayed effective dates in paragraphs
(c)(2) and (c)(3) of this Q&A-9 for existing plans are only applicable
with respect to a section 411(d)(6) protected benefit if both the
section 411(d)(6) protected benefit and the condition providing employer
discretion as to the availability of such benefit are both adopted and
in effect prior to August 1, 1986. If the preceding sentence is not
satisfied with respect to a particular section 411(d)(6) protected
benefit, this section is effective with respect to such section
411(d)(6) protected benefit as if the plan were a new plan.
(2) Addition of discretion on or after January 30, 1986. The delayed
effective dates in paragraphs (c)(2) and (c)(3) of this Q&A-9 are not
available with respect to any section 411(d)(6) protected benefit if the
section 411(d)(6) protected benefit was provided for in the plan prior
to January 30, 1986, and the availability of such benefit was made
subject to the exercise of employer discretion on or after January 30,
1986. If the conditions set forth in this paragraph are not satisfied
with respect to a particular section 411(d)(6) protected benefit, this
section is effective with respect to such section 411(d)(6) protected
benefit as if the plan were a new plan. A limited exception is provided
with respect to existing plans that provided a particular section
411(d)(6) protected benefit prior to January 30, 1986, and then amended
the plan after January 30, 1986, and before August 1, 1986, to add a
provision for employer discretion with respect to the availability of
such benefit. Such plans are required to have been amended retroactively
by December 31, 1987, to remove such provision for employer discretion,
and, if the benefit made subject to such discretion was subsequently
eliminated, the plan is required to have been further amended, by the
same date, to retroactively reinstate the benefit.
(3) Exception for certain amendments covered by a favorable
determination letter. If an amendment adding a section 411(d)(6)
protected benefit subject to employer discretion was adopted or made
effective after August 1, 1986, and the plan receives a favorable
determination letter covering such provision with respect to an
application for such letter made prior to July 11, 1988, then the
effective date for purposes of amending such provision under the
transitional rules is the applicable effective date determined under the
rules with respect to existing plans.
(e) Transitional rule effective date. The transitional rule provided
in Q&A-8 of this section is effective January 30, 1986.
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
[[Page 175]]
(ii) The adoption date of the amendment;
(2) The plan does not, except to the extent required by section
401(a)(9), preclude an employee who retires after the calendar year in
which the employee attains age 70\1/2\ from receiving benefits in any of
the same optional forms of benefit (except for the difference in the
timing of the commencement of payments) that would have been available
had the employee retired in the calendar year in which the employee
attained age 70\1/2\; and
(3) The amendment is adopted no later than--
(i) The last day of the remedial amendment period that applies to
the plan for changes under the Small Business Job Protection Act of 1996
(110 Stat. 1755); or
(ii) Solely in the case of a plan maintained pursuant to one or more
collective bargaining agreements between employee representatives and
one or more employers ratified before September 3, 1998, the last day of
the twelfth month beginning after the date on which the last of such
collective bargaining agreements terminates (determined without regard
to any extension thereof on or after September 3, 1998), if later than
the date described in paragraph (b)(3)(i) of this Q&A-10. For purposes
of this paragraph (b)(3)(ii), the rules of Sec. 1.410(b)-10(a)(2) apply
for purposes of determining whether a plan is maintained pursuant to one
or more collective bargaining agreements, except that September 3, 1998
is substituted for March 1, 1986, as the date before which the
collective bargaining agreements must be ratified.
(c) Age 70\1/2\ distribution option. For purposes of this Q&A-10, an
age 70\1/2\ distribution option is an optional form of benefit under
which benefits payable in a particular distribution form (including any
modifications that may be elected after benefit commencement) commence
at a time during the period that begins on or after January 1 of the
calendar year in which an employee attains age 70\1/2\ and ends April 1
of the immediately following calendar year.
(d) Examples. The provisions of this Q&A-10 are illustrated by the
following examples:
Example 1. Plan A, a defined benefit plan, provides each participant
with a qualified joint and survivor annuity (QJSA) that is available at
any time after the later of age 65 or retirement. However, in accordance
with section 401(a)(9) as in effect prior to January 1, 1997, Plan A
provides that if an employee does not retire by the end of the calendar
year in which the employee attains age 70\1/2\, then the QJSA commences
on the following 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
[[Page 176]]
section 401(a)(9) (calculated in accordance with a method specified in
the plan), Plan C will distribute the difference by December 31 of that
year (or for the year the employee attains age 70\1/2\, by April 1 of
the following year). On December 31, 1996, Plan C is amended to provide
that, for an employee other than an employee who is a 5-percent owner in
the year the employee attains age 70\1/2\, in applying the section
401(a)(9) override provision, the later of the year of retirement or
year of attainment of age 70\1/2\, is substituted for the year of
attainment of age 70\1/2\. After the amendment, Plan C still permits
each employee to elect to receive the same amount as was available
before the amendment. Because this amendment does not eliminate an
optional form of benefit, the amendment does not violate section
411(d)(6). Accordingly, the amendment is not required to satisfy the
conditions of paragraph (b) of this Q&A-10.
(e) Effective date. This Q&A-10 applies to amendments adopted and
effective after June 5, 1998.
Q-11: To what extent may a plan amendment that is made pursuant to
the Taxpayer Relief Act of 1997 (TRA '97) (Public Law 105-34, 111 Stat.
788), reduce or eliminate section 411(d)(6) protected benefits?
A-11: A plan amendment does not violate the requirements of section
411(d)(6) merely because the plan amendment reduces or eliminates
section 411(d)(6) protected benefits as of the effective date of the
plan amendment, provided that--
(a) The plan amendment is made pursuant to an amendment made by
title XV, or subtitle H of title X, of TRA '97; and
(b) The plan amendment is adopted no later than the last day of any
remedial amendment period that applies to the plan pursuant to
Sec. Sec. 1.401(b)-1 and 1.401(b)-1T for changes under TRA '97.
Q-12. Is there a transition period during which a plan is permitted
to eliminate a right to in-service distributions in connection with an
amendment to ensure that the plan's normal retirement age satisfies the
requirements of Sec. 1.401(a)-1(b)(2)?
A-12. (a) In general. A plan amendment that changes the normal
retirement age under the plan to a later normal retirement age pursuant
to Sec. 1.401(a)-1(b)(2) does not violate section 411(d)(6) merely
because it eliminates a right to an in-service distribution prior to the
amended normal retirement age. However, this paragraph does not provide
relief from any other applicable requirements; for example, this relief
does not permit the amendment to violate section 411(a)(9) (requiring
that the normal retirement benefit not be less than the greater of any
early retirement benefit payable under the 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
[[Page 177]]
employment before the revised normal retirement age and who are entitled
to a vested benefit with the right to be able to commence benefits at
any date from age 45 to age 70\1/2\. The plan amendment also revises the
plan's benefit accrual formula so that the benefit for prior service
(payable commencing at the revised normal retirement age or any other
age after age 45) is not less than would have applied under the plan's
formula before the amendment (also payable commencing at the
corresponding dates), based on the benefit accrued on May 21, 2007, and
provides for service thereafter to have the same rate of future benefit
accrual. Thus, for any participant employed on May 21, 2007, with
respect to benefits accrued for service after May 21, 2007, the amount
payable under the plan (as amended) at any benefit commencement date
after age 45 is the same amount that would have been payable at that
benefit commencement date under the plan prior to amendment. The plan
amendment also eliminates the right to an in-service distribution
between age 45 and the revised normal retirement age. Plan A has been
operated since May 22, 2007, in conformity with the amendment adopted on
February 18, 2008.
(ii) Conclusion. The plan amendment does not violate section
411(d)(6). Although the amendment eliminates the right to commence
benefits in-service between age 45 and the revised normal retirement
age, the amendment is made before the last day of the remedial amendment
period applicable to the plan under Sec. 1.401(b)-1 with respect to the
requirements of Sec. 1.401(a)-1(b)(2) and (3), and therefore the
amendment is permitted under paragraph (a) of this A-12. Further, the
amendment does not result in a reduction in any benefit for service
after May 22, 2007.
Thus, the amendment does not result in a reduction in any benefit
for future service, and advance notice of a significant reduction in the
rate of future benefit accrual is not required under section 4980F.
[53 FR 26058, July 11, 1988]
Editorial Note: For Federal Register citations affecting Sec.
1.411(d)-4, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.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
[[Page 178]]
a part of such funding method. Similarly, the specific mortality rate
determined to be applicable to a particular plan year is not part of the
funding method. See section 412(c)(5) for the requirement of approval to
change the funding method used by a plan.
[T.D. 7733, 45 FR 75202, Nov. 14, 1980]
Sec. 1.412(c)(1)-2 Shortfall method.
(a) In general--(1) Shortfall method. The shortfall method is a
funding method that adapts a plan's underlying funding method for
purposes of section 412. As such, the use of the shortfall method is
subject to section 412(c)(3). A plan described in paragraph (a)(2) of
this section may elect to determine the charges to the funding standard
account required by section 412(b) under the shortfall method. These
charges are computed on the basis of an estimated number of units of
service or production (for which a certain amount per unit is to be
charged). The difference between the net amount charged under this
method and the net amount that otherwise would have been charged under
section 412 for the same period is a shortfall loss (gain) and is to be
amortized over certain subsequent plan years.
(2) Eligibility for use of shortfall. No plan may use the shortfall
method unless--
(i) The plan is a collectively bargained plan described in section
413(a), and
(ii) Contributions to the plan are made at a rate specified under
the terms of a legally binding agreement applicable to the plan.
For purposes of this section, a plan maintained by a labor organization
which is exempt from tax under section 501(c)(5) is treated as a
collectively bargained plan and the governing rules of the organization
(such as its constitution, bylaws, or other document that can be altered
only through action of a convention of the organization) are treated as
a collectively bargained agreement.
(b) Computation and effect of net shortfall charge--(1) In general.
The ``net shortfall charge'' to the funding standard account under the
shortfall method is the product of (i) the estimated unit charge
described in paragraph (c) of this section that applies for a particular
plan year, multiplied by (ii) the actual number of base units (for
example, units of service or production) which occurred during that plan
year. When the shortfall method is used, the net shortfall charge is a
substitute for the specific charges and credits to the funding standard
account described in section 412 (b)(2) and (3)(B).
(2) Example. Paragraph (b)(1) of this section may be illustrated by
the following example:
Example. A pension plan uses the calendar year as the plan year and
the shortfall method. Its estimated unit charge applicable to 1980 is 80
cents per hour of covered employment. During 1980, there were 125,000
hours of covered employment. The net shortfall charge for the plan year
is $100,000 (i.e., 125,000 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.
[[Page 179]]
(c) Estimated unit charge. The estimated unit charge is the annual
computation charge described in paragraph (d) of this section divided by
the estimated base units of service or production described in paragraph
(e) of this section.
(d) Annual computation charge. The annual computation charge for a
plan year is the sum of the following amounts:
(1) The net charges and credits which, but for using the shortfall
method, would be made under section 412 (b)(2) and (b)(3)(B).
(2) The amount described in paragraph (g)(3) of this section, if
applicable, for amortization of shortfall gain or loss.
(e) Estimated base units--(1) In general. The estimated base units
are the expected units of service or production for a plan year (hours,
days, tons, dollars of compensation, etc.), determined as of the base
unit estimation date for that plan year under paragraph (f) of this
section. This estimate must be based on the past experience of the plan
and the reasonable expectations of the plan for the plan year. The
specific type of unit used must be described in the statement of funding
method for the plan year. (See paragraph (i)(3) of this section for
reporting requirements.)
(2) Reasonable expectations. The reasonableness of expectations used
under paragraph (e)(1) of this section is determined under the facts and
circumstances of the plan for each plan year as of the relevant base
unit estimation date. Expectations will be considered unreasonable if,
for example, they do not reflect a consistent and substantial decline or
growth in actual base units that has occurred over the course of recent
years and that is likely to continue beyond the base unit estimation
date. This determination of reasonableness is independent of
determinations made under section 412(c)(3) of the reasonableness of
actuarial assumptions.
(f) Base unit estimation date--(1) In general. The base unit
estimation date for the current plan year is determined under this
paragraph (f). This date shall be an actuarial valuation date no earlier
than the last actuarial valuation date occurring at least one year
before the earliest date any current collectively bargained agreement in
existence during the plan year came into effect.
(2) Four-month rule. For purposes of this paragraph (f), a current
collectively bargained agreement is one in effect during at least four
months of the current plan year.
(3) Effective date of agreement. For purposes of this paragraph (f),
a collectively bargained agreement shall be deemed to have come into
effect on the effective date of the agreement containing the currently
effective provision for contributions to the plan or the benefits
provided under the plan.
(4) Long-term contract rule. The effective date of a collectively
bargained agreement shall be deemed not to occur prior to the first day
of the third plan year preceding the current year.
(5) Special rule for plans computing separate net shortfall charge.
A plan that computes a separate net shortfall charge for each contract,
contribution rate, employer, or benefit level under paragraph (b)(3) of
this section shall determine the base unit estimation date for each
separate charge without regard to any collectively bargained agreement
that does not relate to that contract, contribution rate, employer, or
benefit level. If a collective bargaining agreement requiring
contributions by a certain employer, or prescribing a certain benefit
level, is in effect on December 31, 1980, the preceding sentence shall
not apply to the computation of a separate net shortfall charge for that
employer or benefit level until the earlier of--
(i) The first plan year beginning after the date on which expires
the collective bargaining agreement requiring contributions by that
employer (or the last collective bargaining agreement relating to that
benefit level), or
(ii) The first plan year beginning after December 31, 1983.
(6) Example. The rules contained in paragraph (f) of this section
are illustrated by the following table. In the table, ``V'' signifies
actuarial valuation date (January 1 in each case shown); ``B'' signifies
beginning of a contract; and ``E'' signifies end of a contract. The
table shows the resulting earliest
[[Page 180]]
base unit estimation date with respect to the following assumed items:
Computation of Earliest Base Unit Estimation Date
----------------------------------------------------------------------------------------------------------------
Plan year (calendar year basis)
Example -----------------------------------------------------------------------------------
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
----------------------------------------------------------------------------------------------------------------
Plan A...................... V ..... ..... V ..... ..... V ..... ..... V
Contract 1................ ..... ..... E/B ..... ..... E/B ..... E/B ..... ..... ..... E/B
Base unit estimation date ..... ..... ..... 1973 1973 1973 1976 1976 1979 1979 1979 1979
\1\......................
----------------------------------------------------------------------------------------------------------------
Plan B...................... V ..... ..... V ..... ..... V ..... ..... V
Contract 2................ \2\ \2\ \2\ B* ..... E/B ..... ..... ..... E/B*
Contract 3................ E/B ..... ..... E/B ..... ..... E/B ..... ..... E/B
Base unit estimation date ..... ..... ..... 1973 1973 1973 1976 1976 1976 1976 1979 1979
\1\......................
----------------------------------------------------------------------------------------------------------------
Plan C...................... V V V V V V V V V V V V
Contract 4................ ..... ..... E/B ..... ..... E/B* ..... ..... ..... E/B*
Contract 5................ ..... ..... E/B ..... ..... E/B* ..... ..... ..... ..... E/B*
Base unit estimation date ..... ..... ..... 1974 1974 1977 1977 1977 1977 1978 1979 1981
\1\......................
----------------------------------------------------------------------------------------------------------------
\1\ The base unit estimation date may be on or any time after the actuarial valuation date in the year indicated
on this line.
\2\ No contract.
* Denotes that a prior contract ends and a new contract begins prior to the fifth month of a plan year.
(g) Amortization of shortfall gain or loss--(1) Definition. The
shortfall gain for a plan is the excess for the plan year of--
(i) The net shortfall charge computed under paragraph (b) of this
section over
(ii) The annual computation charge described in paragraph (d) of
this section.
The shortfall loss for a plan is the excess for the plan year of the
annual computation charge over the net shortfall charge.
(2) Shortfall amortization period--(i) First year. The plan year in
which the amortization of a shortfall gain or loss must begin is the
earlier of two years: the fifth plan year following the plan year in
which the shortfall gain or loss arose, or the first plan year beginning
after the latest scheduled expiration date of a collectively bargained
agreement in effect with respect to the plan during the plan year in
which the shortfall gain or loss arose. For purposes of this
subparagraph, a contract expiring on the last day of a plan year shall
be deemed to be renewed on such last day for the same period of years as
the contract that succeeds the expiring contract.
(ii) Last year. The plan year in which the amortization of a
shortfall gain or loss must end is the 15th plan year following the plan
year in which the shortfall gain or loss arose. For a multiemployer plan
described in section 414(f), the amortization must end with the 20th
plan year instead of the 15th.
(3) Annual amortization amount. The shortfall gain or loss must be
amortized in equal annual installments. The total amount to be amortized
must be adjusted for interest at the rate used for determining the
plan's normal cost.
(4) Shortfall gain or loss under spread gain type of funding
method--(i) In general. A spread gain type of funding method spreads
experience gains and losses over future periods as part of a plan's
normal cost. (Examples of spread gain types of funding methods are the
aggregate cost method, the frozen initial liability method, and the
attained age normal method.) However, a shortfall gain or loss is not an
experience gain or loss. Therefore, a plan using a spread gain type of
funding method together with the shortfall method must amortize
shortfall gains and losses and otherwise meet the requirements of
paragraph (g) of this section.
(ii) Asset adjustment for aggregate method. A plan using the
shortfall method with the aggregate cost method of funding must adjust
its plan assets for a shortfall gain or loss in calculating normal cost.
The unamortized 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
[[Page 181]]
the beginning of each year, the actual unfunded liability under the
method used by the plan must equal the outstanding balance of all
amortization bases, including bases for shortfall gains and losses, less
the credit balance under the funding standard account at the end of the
prior year.
(6) Example. This paragraph is illustrated by the following
examples:
Example 1. A multiemployer plan described in section 414 (f) is
maintained with the calendar year as the plan year and uses the
shortfall method. The plan uses the frozen initial liability funding
method. A five percent interest assumption is used by the plan, with
payments computed as of the first day of each plan year for all items.
The expiration dates of contracts in effect during plan years 1976,
1977, and 1978 are such that the amortization of gains or losses for
each year must begin in the fifth following plan year. The assumed plan
costs and estimated base units for selected years, and the computations
under this section which follow from such assumptions are shown in the
following table. In the table, ``*'' denotes an assumed item. The
remaining figures have been calculated on the basis of these
assumptions.
(A) Computation of Net Shortfall Charge and Shortfall Gain or Loss
------------------------------------------------------------------------
Plan year 1976 1977 1978
------------------------------------------------------------------------
1. Normal cost*.................. $100,000 $100,000 $100,000
2. Amortization of unfunded 50,000 50,000 50,000
liability*......................
--------------------------------------
3. Total annual computation $150,000 $150,000 $150,000
charges.........................
4. Estimated base units*......... 100,000 100,000 100,000
5. Estimated unit charge (line 3 / $1.50 $1.50 $1.50
line 4)........................
6. Actual units during year*..... 80,000 90,000 110,000
7. Net shortfall charge for year 120,000 135,000 165,000
(line 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
[[Page 182]]
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 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
[[Page 183]]
2. Actual unfunded liability as of 12-31-76................ 900,000
------------
3. Gain (or loss) (item 1 - item 2)........................ 7,393
(i) Election procedure--(1) In general. To elect the shortfall
method, a collectively bargained plan must attach a statement to the
annual report required under section 6058 (a) for the first plan year to
which it is applied. The statement shall state that the shortfall method
is adopted, beginning with the plan year covered by such report. Advance
approval from the Internal Revenue Service is not required if the
shortfall method is first adopted on or before the later of--
(i) The first plan year to which section 412 applies or
(ii) The last plan year commencing before December 31, 1981.
However, approval must be received pursuant to section 412(c)(5) prior
to the adoption of the shortfall method at a later time, or the
discontinuance of such method, once adopted.
(2) Use of specific computation method. A specific method of
computation under the shortfall method is described in paragraph (b)(3)
of this section, regarding the treatment of more than one contract,
employer, or benefit level under the plan. This specific method may be
adopted with respect to any plan year to which the shortfall method
applies. Approval from the Commissioner must be received under section
412(c)(5) prior to the adoption of this specific computation method for
a plan year subsequent to the first plan year to which the shortfall
method applies, or prior to the discontinuance of a specific computation
method, once adopted.
(3) Reporting requirements. Each annual report required by section
6058(a) and periodic report of the actuary required by section 6059 must
include all additional information relevant to the use of the shortfall
method as may be required by the applicable forms and the instructions
for such forms.
(j) Transitional rule. In lieu of paragraphs (g)(2) and (h)(2) of
this section relating to the amortization period for shortfall and
experience gains and losses, for gains and losses arising in plan years
beginning before January 1, 1981, a plan may rely on the prior published
position of the Internal Revenue Service with respect to the
amortization period for shortfall and experience gains and losses.
(k) Supersession. This section and Sec. 1.412 (c) (1)-1 supersede
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
[[Page 184]]
(ii) The plan has been restored by the PBGC pursuant to its
authority under section 4047 of ERISA.
(b) Computation and effect of the initial restoration amortization
base--(1) In general. The initial restoration amortization base is
determined under the underlying funding method used by the plan. When
the plan uses a spread gain funding method that does not maintain an
unfunded liability, the plan must change either to an immediate gain
method that directly calculates an accrued liability or to a spread gain
method that maintains an unfunded liability. A plan may adopt any cost
method that satisfies this requirement and that is acceptable under
section 412 and the regulations thereunder, provided that the plan
administrator follows the procedures established by the Commissioner for
changes in funding methods. The initial restoration amortization base is
determined using the valuation for the plan year in which the initial
post-restoration valuation date falls. The initial restoration
amortization base equals the accrued liability with respect to plan
benefit liabilities returned by the PBGC less the value of the plan
assets returned by the PBGC. The initial restoration amortization base
replaces all prior amortization bases including those under section
412(b)(2) (B), (C), and (D) and under section 412(b)(3)(B). Any base
resulting from a change in funding method, including a change required
under this paragraph, is treated as a prior amortization base within the
meaning of this paragraph (b). Any accumulated funding deficiency or
credit balance in the funding standard account is set equal to zero when
the initial restoration amortization base is established.
(2) Example. The following example illustrates the provisions of
this paragraph (b):
Example. A pension plan uses the calendar year as its plan year,
makes its annual periodic valuation as of January 1, and uses the unit
credit actuarial cost method for funding purposes. The plan is in the
process of being terminated. By order of the PBGC the plan is restored
as of July 1, 1991. The initial post-restoration valuation date is
January 1, 1992, and a restoration payment schedule order is issued on
October 31, 1992. If, as of January 1, 1992, the accrued liability of
the plan is $1,000,000 and the value of the plan assets is $200,000, the
initial restoration amortization base is $800,000.
(c) Establishment of a restoration payment schedule--(1)
Certification requirement. When the PBGC establishes a restoration
payment schedule, the Executive Director of the PBGC must certify to the
PBGC's Board of Directors, and to the Internal Revenue Service, that the
PBGC has reviewed the funding of the plan, the financial condition of
the plan sponsor and its controlled group members, the payments required
under the restoration payment schedule (taking into account the
availability of deferrals authorized under paragraph (c)(4) of this
section), and any other factor that the PBGC deems relevant, and, based
on that review, determines that it is in the best interests of
participants and beneficiaries of the plan and the pension insurance
program that the restored plan not be reterminated.
(2) Requirements for restoration payment schedule--(i) Amortization
of base over period of no more than 30 years. The restoration payment
schedule must be prescribed in an order requiring the employer to make
stated contributions to the plan sufficient to amortize the initial
restoration amortization base over a period extending not more than 30
years after the initial post-restoration valuation date (the restoration
payment period). Payments included in the restoration payment schedule
order are charged to the funding standard account of the plan at the end
of each plan year in accordance with paragraph (d) of this section. The
restoration payment schedule must provide for total charges that are
sufficient to amortize the entire amount of the initial restoration
amortization base by the end of the restoration payment period. The
scheduled charges need not be in level amounts, but the present value of
the prescribed charges on the initial post-restoration valuation date,
computed with interest at the valuation rate, must equal the initial
restoration amortization base.
(ii) Minimum annual charge. The restoration payment schedule must
prescribe annual charges that are sufficient to prevent the outstanding
balance of the initial restoration amortization base from exceeding
whichever
[[Page 185]]
of the following amounts is applicable--
(A) During the first 10 plan years on the restoration payment
schedule, the amount of the initial restoration amortization base on the
date the base was established; or
(B) During plan years 11 through 20 on the restoration payment
schedule, the maximum permitted outstanding balance of the initial
restoration amortization base at the end of the tenth plan year, as
calculated under paragraph (c)(2)(iii) of this section; or
(C) During plan years 21 through the end of the restoration payment
schedule, the maximum permitted outstanding balance of the initial
restoration amortization base at the end of the twentieth plan year, as
calculated under paragraph (c)(2)(iii) of this section.
(iii) Interim amortization requirements. The restoration payment
schedule must provide for sufficient periodic charges so that the
outstanding balance of the initial restoration amortization base at the
end of the tenth plan year and at the end of the twentieth plan year of
the restoration payment period will not be larger than the outstanding
balance that would have remained at the end of the tenth plan year and
at the end of the twentieth plan year, respectively, if the initial
restoration amortization base had been amortized in level annual amounts
over the restoration payment period at the valuation rate.
(3) Amendments to the restoration payment schedule. The order
establishing the restoration payment schedule may be amended by the PBGC
from time to time with respect to any remaining payments, provided that
no amendment may extend the restoration payment period beyond 30 years
from the initial post-restoration valuation date, and provided further
that the restoration payment schedule, as amended, satisfies the
requirements of paragraph (c)(2) of this section.
(4) Deferral of minimum scheduled annual payment amounts--(i)
Authority to grant deferral. Not later than 2\1/2\ months following the
end of the plan year, the PBGC may grant a deferral of the charges
required in the restoration payment schedule for that plan year if the
requirements in paragraph (c)(4)(ii) of this section are satisfied. The
PBGC may require the plan sponsor and its controlled group members to
provide security to the plan as a condition to granting a deferral.
(ii) Determination of business hardship. Before granting a deferral
under this paragraph (c)(4), the PBGC must make a determination that the
granting of the deferral is in the best interests of plan participants
and the plan termination insurance system, and that the plan sponsor and
its controlled group members are unable to make the scheduled
restoration payments without experiencing temporary substantial business
hardship. In making these determinations, the factors the PBGC shall
consider, include, but are not limited to, the following--
(A) Whether the plan sponsor and its controlled group members are
operating at an economic loss;
(B) Whether there is substantial unemployment or underemployment in
the trades or businesses of the plan sponsor and its controlled group
members;
(C) Whether the sales and profits of the industry or industries are
depressed or declining; and
(D) Whether it is reasonable to expect that the plan termination
insurance system will suffer a greater loss if the plan is terminated
than if it is continued as a restored plan.
(iii) Amount of deferral. The amount of the deferral for any
particular plan year may not exceed the lesser of the amount that would
have been required to be contributed under the restoration payment
schedule for that year or interest at the valuation rate on the
outstanding balance of the initial restoration amortization base for
that year. An amortization payment for a deferral granted for a prior
plan year may not be deferred. No deferral may extend the overall
restoration payment period beyond 30 years.
(iv) Modification of payment schedule. The restoration payment
schedule must be adjusted to reflect any deferral granted for a plan
year in the manner prescribed in this paragraph (c). The charge
otherwise specified in the schedule is reduced by the amount of any
deferral. The charges under the
[[Page 186]]
restoration payment schedule for the subsequent plan years are increased
by the amounts in paragraph (c)(4)(v) of this section.
(v) Amortization of deferred amount. The amount of any deferral
granted by the PBGC for any plan year must be amortized in level amounts
over five years or such shorter period as may be prescribed by the PBGC,
at the valuation rate, beginning with the plan year following the year
of the deferral.
(vi) Number of deferrals permitted. The PBGC may not grant more than
five deferrals of the minimum scheduled payments as required by this
section during the restoration payment period and no more than three of
these deferrals may be granted during the first ten years of that
period.
(vii) Deferrals override minimum annual charges and interim
amortization requirements. In determining the minimum annual charge
under paragraph (c)(2)(ii) of this section and in applying the interim
amortization requirements of paragraph (c)(2)(iii) of this section, the
unamortized balances of any deferrals granted by the PBGC under this
paragraph shall be added to the outstanding balance of the initial
restoration amortization base otherwise allowable.
(d) Charging the scheduled restoration payments to the funding
standard account. In addition to any other charges and credits
prescribed in the normal operation of the funding standard account under
section 412, the amount of each payment specified in the restoration
payment schedule shall be charged against the funding standard account
of the plan for the plan year to which that payment is attributed in the
restoration payment schedule. To the extent that the restoration payment
schedule provides for payments before the end of the plan year, the
annual charge to the funding standard account attributable to the
restoration payment schedule is equal to the sum of the periodic
payments for the plan year accumulated with interest at the valuation
rate to the last day of the plan year.
(e) Changes in actuarial assumptions or methods. The plan
administrator must notify the PBGC of any changes in the actuarial
assumptions or methods used by the plan. Upon notification of any such
change, the PBGC may make any changes to the restoration payment
schedule that it deems appropriate.
(f) Change to restoration method. A plan that has been restored must
use the restoration method until the initial restoration amortization
base has been fully amortized. The use of this method does not require
prior approval from the Commissioner. A plan using the restoration
method must compute the charges to the funding standard account to
amortize the initial restoration amortization base in accordance with
the order of the PBGC and in accordance with this section.
(g) Deficit reduction contribution--(1) Calculation of deficit
reduction contribution. For any plan using the restoration method, the
deficit reduction contribution under section 412(l)(2) is equal to the
sum of--
(i) The unfunded section 412(l) restoration liability amount; plus
(ii) The unfunded new liability amount.
(2) Unfunded section 412(l) restoration liability amount. The
unfunded section 412(l) restoration liability amount is the amount
necessary to amortize fully the unfunded section 412(l) restoration
liability in installments, as prescribed by the PBGC, over not more than
30 years. The annual amount need not be level, but at all times the
present value of the future amortization charges prescribed under the
restoration payment schedule, at the current liability interest rate,
must equal the outstanding balance of the unfunded section 412(l)
restoration liability and the schedule must provide that at the end of
no more than 30 years the entire amount of the unfunded section 412(l)
restoration liability base will have been fully amortized. The schedule
prescribed for amortization of the unfunded section 412(l) restoration
liability must comply with the requirements imposed in paragraph (c) of
this section on the restoration payment schedule, except as provided in
paragraph (g)(7) of this section and except that the maximum permitted
outstanding balance of the unfunded section 412(l) restoration liability
at the end of the tenth plan year must not be greater than the
outstanding balance of the section 412(l)
[[Page 187]]
restoration liability that would have remained at the end of the tenth
plan year if the unfunded section 412(l) restoration liability had been
amortized in level amounts over the restoration payment period at the
actual current liability interest rate for each year, increased by the
current liability interest rate differential as defined under paragraph
(g)(7) of this section. The unfunded section 412(l) restoration
liability amount for the tenth plan year otherwise prescribed under the
restoration payment schedule is increased by any outstanding current
liability interest rate differential. By issuing an appropriate order,
the PBGC may permit the outstanding current liability interest rate
differential to be amortized over the tenth through the fourteenth plan
years. If the PBGC permits the amortization of the outstanding current
liability interest rate differential, then the unfunded section 412(l)
restoration liability amount for each year to which an amortization
payment is attributed under the order shall be increased by such
payment. The outstanding balance otherwise required by paragraph (g)(2)
of this section is increased by the outstanding balance, if any, of the
base resulting from the amortization of the current liability interest
rate differential. The PBGC may amend the amortization schedule for the
unfunded section 412(l) restoration liability subject to the limits on
amendments to the amortization schedule prescribed for the initial
restoration amortization base.
(3) Establishment of unfunded section 412(l) restoration liability.
In the plan year in which the initial post-restoration valuation date
falls, the unfunded section 412(l) restoration liability is equal to the
unfunded current liability of the plan.
(4) Unfunded new liability amount. In the case of a plan using the
restoration method, the unfunded new liability amount is the applicable
percentage, as defined in section 412(l)(4)(C), of the unfunded new
liability determined under paragraph (g)(5) of this section.
(5) Unfunded new liability. The unfunded new liability of a plan
using the restoration method is the excess, if any, of the unfunded
current liability of the plan, within the meaning of section
412(l)(8)(A) for the plan year (determined without taking into account
any unpredictable contingent event benefits, even if the event has
occurred) over the outstanding balance of the unfunded section 412(l)
restoration liability determined under paragraph (g)(3) of this section.
(6) Offset of amortization charges. The amounts charged to the
funding standard account pursuant to the restoration payment schedule in
order to amortize the initial restoration base, as described in
paragraph (d) of this section, must be offset against the deficit
reduction contribution in paragraph (g)(1) of this section along with
any other applicable amounts provided in section 412(l)(1)(A)(ii).
(7) Interest rate differential. During the first 10 plan years after
the initial post-restoration valuation date, the restoration payment
schedule must prescribe an unfunded section 412(l) restoration liability
amount for each plan year that is sufficient to prevent the outstanding
balance of the unfunded section 412(l) restoration liability from
exceeding the initial amount of the unfunded section 412(l) restoration
liability increased by the current liability interest rate differential.
The current liability interest rate differential at any point during the
first ten years of the restoration payment period is the excess, if any,
of the outstanding balance of the unfunded section 412(l) restoration
liability determined using the actual current liability interest rate
for each year, taking into account the charges described in paragraph
(d) of this section, over the outstanding balance of the unfunded
section 412(l) restoration liability determined using the lowest, for
each year, of the initial current liability interest rate, the current
liability interest rate for the computation year, and the valuation
interest rate, taking into account the charges described in paragraph
(d) of this section.
(h) Election of the alternative minimum funding standard. A plan
using the restoration method may not elect the alternative minimum
funding standard under section 412(g).
(i) Funding review by the PBGC. The PBGC must review the funding of
any plan using the restoration method at
[[Page 188]]
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 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
[[Page 189]]
actuarial report (required under section 6059). The method must be
described in sufficient detail so that another actuary employing the
method described would arrive at a reasonably similar result. Whether a
deviation from the stated actuarial valuation method is a change in
funding method is to be determined in accordance with section 412(c)(5)
and the regulations thereunder. A deviation to include a type of asset
not previously held by the plan would not be a change in funding method.
(3) Consistent valuation dates. The same day or days (such as the
first or the last day of a plan year) must be used for all purposes to
value the plan's assets for each plan year, or portion of plan year, for
which a valuation is made. For purposes of this section, each such day
is a valuation date. A change in the day or days used is a change in
funding method.
(4) Reflect fair market value. The valuation method must take into
account fair market value by making use of the--
(i) Fair market value (determined under paragraph (c) of this
section), or
(ii) Average value (determined under paragraph (b)(7) of this
section) of the plan's assets as of the applicable asset valuation date.
This is done either directly in the computation of their actuarial value
or indirectly in the computation of upper or lower limits placed on that
value.
(5) Results above and below fair market or average value. A method
will not satisfy the requirements of this paragraph (b) if it is
designed to produce a result which will be consistently above or below
the values described in paragraph (b)(4) (i) and (ii). However, a method
designed to produce a result which consistently falls between fair
market value and average value will satisfy this requirement. See
Example 5 in paragraph (b)(9) of this section for an illustration of a
method described in the preceding sentence.
(6) Corridor limits. (i) Regardless of how the method reflects fair
market value under paragraph (b)(4), the method must result in an
actuarial value of the plan's assets which is not less than a minimum
amount and not more than a maximum amount. The minimum amount is the
lesser of 80 percent of the current fair market value of plan assets as
of the applicable asset valuation date or 85 percent of the average
value (as described in subparagraph (7)) of plan assets as of that date.
The maximum amount is the greater of 120 percent of the current fair
market value of plan assets as of the applicable asset valuation date or
115 percent of the average value of plan assets as of that date.
(ii) Under a plan's method, a preliminary computation of the
expected actuarial value may fall outside the prescribed corridor. A
method meets the requirements of paragraph (b)(6)(i) of this section is
such a case only by adjusting the expected actuarial value to the
nearest corridor limit applicable under the method. A plan may use an
actuarial valuation method with a narrower corridor than the general
corridor required under paragraph (b)(6)(i). The adjustment to the
nearest corridor limit of such a method for purposes of this subdivision
(ii) would be determined by the narrower corridor stated in the
description of the plan's method.
(7) Average value. the average value of plan assets is computed by--
(i) Determining the fair market value of plan assets at least
annually,
(ii) Adding the current fair market value of the assets (as of the
applicable valuation date) and their adjusted values (as described in
paragraph (b)(8) of this section) for a stated period not to 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.
[[Page 190]]
(ii) In determining the adjusted value of plan assets for a prior
valuation date, there is added to the fair market value of the plan
assets of that date the sum of all additions to the plan assets since
that date, excluding appreciation in the fair market value of the
assets. The additions would include, for example, any contribution to
the plan; any interest or dividend paid to the plan; and any asset not
taken into account in a prior valuation of assets, but taken into
account for the current year, in computing the fair market value of plan
assets under paragraph (c) of this section.
(iii) In determining the adjusted value of plan assets for a prior
valuation date, there is subtracted from the fair market value of the
plan assets on that date the sum of all reductions in plan assets since
that date, excluding depreciation in the fair market value of the
assets. The reductions would include, for example, any benefit paid from
plan assets; any expense paid from plan assets; and any asset taken into
account in a prior valuation of assets but not taken into account for
the current year, in computing the fair market value of plan assets
under paragraph (c) of this section.
(9) Examples. This paragraph (b) may be illustrated by the following
examples. In each example, assume that the pension plan uses a
consistent actuarial method of valuing its assets within the meaning of
paragraph (b)(1), (2), and (3) of this section.
Example 1. Plan A considers the value of its assets to be initial
cost, increased by an assumed rate of growth of X percent annually.
Under the circumstances, the X-percent factor used by the plan is a
reasonable assumption. Thus, this method is not designed to produce
results consistently above or below fair market value as prohibited by
paragraph (b)(5) of this section. Also, the method requires that the
actuarial value be adjusted as required to fall within the corridor
under paragraph (b) (6) and (7) of this section. Therefore, the method
reflects fair market value as required by paragraph (b)(4) of this
section.
Example 2. Plan B computes the actuarial value of its assets as
follows: It determines the fair market value of the plan assets. Then
the fair market value is adjusted to the extent necessary to make the
actuarial value fall within a ``5 percent'' corridor. This corridor is
plus or minus 5 percent of the following amount: the fair market value
of the assets at the beginning of the valuation period plus an assumed
annual growth of 4 percent with adjustments for contributions and
benefit payments during the period. This method reflects fair market
value in a manner prescribed by paragraph (b)(4) of this section. If the
4 percent factor used by the plan is a reasonable assumption, this
method is not designed to produce results consistently above or below
fair market value, and thus it satisfies paragraph (b)(5). However, this
method is unacceptable because in some instances it may result in an
actuarial value outside the corridor described in paragraph (b)(6) of
this section. This method would be permitted if a second corridor were
imposed which would adjust the value of the total plan assets to the
corridor limits as required by paragraph (b)(6).
Example 3. Plan C values its assets by multiplying their fair market
value by an index number. The use of the index results in the
hypothetical average value that plan assets present on the valuation
date would have had if they had been held during the current and four
preceding years, and had appreciated or depreciated at the actual yield
rates including appreciation and depreciation experienced by the plan
during that period. However, the method requires an adjustment to the
extent necessary to bring the resulting actuarial value of the assets
inside the corridor described in the statement of the plan's actuarial
valuation method. In this case, the stated corridor is 90 to 110 percent
of fair market value, a corridor narrower than that described in
paragraph (b)(7) of this section. This method is permitted.
Example 4. Plan D values its assets by multiplying their fair market
value by 95 percent. Although the method reflects fair market value and
the results of this method will always be within the required corridor,
it is not acceptable because it will consistently result in a value less
than fair market value.
Example 5. Plan E values its assets by using a five-year average
method with appropriate adjustments for the period. Under the particular
method used by Plan E, assets are not valued below 80 percent of fair
market value or above 100 percent of fair market value. If the average
produces a value that exceeds 100 percent of fair market value, the
excess between 100 and 120 percent is recorded in a ``value reserve
account.'' In years after one in which the average exceeds 100 percent
of fair market value, amounts are subtracted from this account and
added, to the extent necessary, to raise the value produced by the
average for that year to 100 percent of fair market value. This method
is permitted because it reflects fair market value under paragraph
(b)(4) of this section by appropriately computing an average
[[Page 191]]
value, it satisfies paragraph (b)(5) by producing a result that falls
consistently between fair market value and average value, and it
properly reflects the corridor described in paragraph (b)(7).
Example 6. All assets of Plan F are invested in a trust fund and the
plan year is the calendar year. The actuarial value is determined by
averaging fair market value over 4 years. An actuarial valuation is
performed as of December 31, 1988.
(i) The average value as of December 31, 1988, is computed as
follows:
----------------------------------------------------------------------------------------------------------------
1986 1986 1987 1987 1988 1988
----------------------------------------------------------------------------------------------------------------
Fair market value: Jan. 1............... .......... $150,000 .......... $196,500 .......... $238,000
Contributions......................... $65,000 .......... $62,000 .......... $66,000
Benefit payments...................... (22,000) .......... (24,000) .......... (25,000)
Expenses.............................. (6,500) .......... (7,000) .......... (7,500)
Interest and dividends................ 8,000 44,500 7,500 38,500 7,000 240,500
Net realized gains (losses)............. .......... (2,000) .......... 6,000 .......... (8,000)
Balancing item \1\...................... .......... 4,000 .......... (3,000) .......... (42,000)
-----------------------------------------------------------------------
Fair market value: Dec. 31.............. .......... 196,500 .......... 238,000 .......... 228,000
----------------------------------------------------------------------------------------------------------------
\1\ This equals the increase (decrease) in unrealized appreciation.
----------------------------------------------------------------------------------------------------------------
Adjusted values 1985 1986 1987 1988
----------------------------------------------------------------------------------------------------------------
Fair market value: Dec. 31...................... $150,000 $196,500 $238,000 $228,000
Net adjustments:
1988.......................................... 40,500 40,500 40,500
1987.......................................... 38,500 38,500
1986.......................................... 44,500
---------------------------------------------------------------
Total........................................ 273,500 275,500 278,500 228,000
===============================================================
Average value: 1988 = $273,500 + $275,500 + $278,500 + $228,000 / 4 = $263,875
----------------------------------------------------------------------------------------------------------------
(ii) Plan F properly determines an average value under paragraph
(b)(7) of this section for use as an actuarial value. Therefore, the
valuation method meets the requirements of this section.
Example 7. Plan G computes the actuarial value of the plan assets as
follows: The current fair market value of the plan assets is averaged
with the most recent prior adjusted actuarial value. This average value
is adjusted up or down toward the current fair market value by 20
percent of the difference between it and the current fair market value
of the assets. This value is further adjusted to the extent necessary to
fall within the corridor described in the statement of the plan's
actuarial valuation method. The lower end of the corridor is the lesser
of 80 percent of the fair market value of the plan assets or 85 percent
of the average value of the plan assets. The higher end of the corridor
is the greater of 120 percent of the fair market value of plan assets or
115 percent of the average value of plan assets. Average value for
purposes of the corridor is determined under paragraph (b)(7) of this
section. Assuming the numerical data of Example 6, the application of
the corridor is as follows. The actuarial asset value as of December 31,
1988, must not be less than $182,400 (80 percent of current fair market
value, $228,000) nor greater than $303,456 (115 percent of average
value, 263,875). This method is permitted because it reflects fair
market value in a manner permitted by paragraph (b)(4) of this section,
it produces an actuarial value which is neither consistently above nor
consistently below fair market or average value to satisfy paragraph
(b)(5), and it is appropriately limited by the corridor described in
paragraph (b)(6).
(c) Fair market value of assets--(1) General rules. Except as
otherwise provided in this paragraph (c), the fair market value of a
plan's assets for purposes of this section is the price at which the
property would change hands between 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
[[Page 192]]
market value of the plan's assets, even if the method does not meet all
of the requirements of paragraphs (a) through (c) of this section.
(3) Plan years beginning on or after November 12, 1980. Paragraphs
(a) through (c) of this section apply beginning with the first valuation
of plan assets made for a plan year to which section 412 applies that
begins on or after November 12, 1980. The statement of the plan's
actuarial asset valuation method required by paragraph (b)(2) of this
section must be included with the plan's actuarial report for that year,
in addition to any subsequent reports.
(4) Effect of change of asset valuation method. A plan which is
required to change its asset valuation method to comply with paragraphs
(a) through (c) of this section must make the change no later than the
time when the plan is first required to comply with this section under
paragraph (e)(3). A method of adjustment must be used to take account of
any difference in the actuarial value of the plan's assets based on the
old and new valuation methods. The plan may use either--
(i) A method of adjustment described in paragraph (e)(5) or (e)(6)
of this section without prior approval by the Commissioner, or
(ii) Any other method of adjustment if the Commissioner gives prior
approval under section 412(c)(5).
(5) Retroactive recomputation method. (i) Under this method of
adjustment, the plan recomputes the balance of the funding standard
account as of the beginning of the first plan year for which it uses its
new asset valuation method to comply with paragraphs (a) through (c) of
this section. This new balance is recomputed by retroactively applying
the plan's new method as of the first day of the first plan year to
which section 412 applies.
(ii) Beginning with the first plan year for which it uses its new
method, the plan computes the normal cost and amortization charges and
credits to the funding standard account based on the retroactive
application of its new method as of the first day of the first plan year
to which section 412 applies.
(iii) If the recomputed aggregate charges exceed the recomputed
aggregate credits to the funding standard account as of the end of the
first plan year for which the plan uses its new method, an additional
contribution to the plan may be necessary to avoid an accumulated
funding deficiency in that year. The use of the retroactive
recomputation method may also result in an accumulated funding
deficiency for years prior to that first year. In such cases, the rules
of section 412(c)(10), relating to the time when certain contributions
are deemed to have been made, apply.
(6) Prospective gain or loss adjustment method. (i) Under this
method of adjustment the plan values its assets under its new method no
later than the valuation date for the first plan year beginning after
[the publication date of this section]
(ii) Regardless of the type of funding method used by a plan, the
difference in the value of the assets under the old and the new asset
valuation methods may be treated as arising from an experience loss or
gain; or alternatively it may be treated as arising from a change in
actuarial assumptions.
(iii) The treatment of this difference as an experience gain or loss
or as a change in actuarial assumptions must be consistent with the
treatment of such gains, losses, or changes under the funding method
used by the plan. Thus, if a plan uses a spread gain type funding method
other than the aggregate cost method, the difference in the value of
assets under the old and the new asset valuation methods may be either
amortized or spread over future periods as a part of normal cost.
Examples of this type of funding method are the frozen initial liability
cost method and the attained age normal cost method. With an aggregate
method, the difference in the value of assets under the old and the new
asset valuation methods must be spread over future periods as a part of
normal cost.
(Secs. 412(c)(2) and 7805 of the Internal Revenue Code of 1954 (88 Stat.
916 and 68A Stat. 917; 26 U.S.C. 412(c)(2) and 7805))
[T.D. 7734, 45 FR 74718, Nov. 12, 1980]
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
[[Page 193]]
an ongoing plan, a funding method is reasonable for purposes of section
412(c)(3). A method is unreasonable only if it is found to be
inconsistent with a rule prescribed in this section. The term
``reasonable funding method'' under this section has the same meaning as
the term ``acceptable actuarial cost method'' under section 3(31) of the
Employee Retirement Income Security Act of 1974 (ERISA).
(2) Computations included in method. See Sec. 1.412(c)(1)-1(b) for
a discussion of matters that are, and are not, included in the funding
method of a plan.
(3) Plans using shortfall. The shortfall method is a method of
determining charges to the funding standard account by adapting the
underlying funding method of certain collectively bargained plans in the
manner described in Sec. 1.412(c)(1)-2. As such, the shortfall method
is a funding method. The underlying method of a plan that uses the
shortfall method must be a reasonable funding method under this section.
The rules contained in this section, relating to cost under a reasonable
funding method, apply in the shortfall method to the annual computation
charge under Sec. 1.412(c)(1)-2(d).
(4) Scope of funding method. Except for the shortfall method, a
reasonable funding method is applied to the computation of--
(i) The normal cost of a plan for a plan year; and, if applicable,
(ii) The bases established under section 412(b)(2)(B), (C), and (D),
and (3) (B) (``amortizable bases'').
(b) General rules for reasonable funding methods--(1) Basic funding
formula. At any time, except as provided by the Commissioner, the
present value of future benefits under a reasonable funding method must
equal the sum of the following amounts:
(i) The present value of normal costs (taking into account future
mandatory employee contributions, within the meaning of section
411(c)(2)(C), in the case of a contributory plan) over the future
working lifetime of participants;
(ii) The sum of the unamortized portions of amortizable bases, if
any, treating credit bases under section 412(b)(3)(B) as negative
numbers; and
(iii) The plan assets, decreased by a credit balance (and increased
by a debit balance) in the funding standard account under section
412(b).
(2) Normal cost. Normal cost under a reasonable funding method must
be expressed as--
(i) A level dollar amount, or a level percentage of pay, that is
computed from year to year on either an individual basis or an aggregate
basis; or
(ii) An amount equal to the present value of benefits accruing under
the method for a particular plan year.
(3) Application to shortfall. Paragraph (b)(2) will not fail to be
satisfied merely because an amount described in (i) or (ii) is expressed
as permitted under the shortfall method.
(c) Additional requirements--(1) Inclusion of all liabilities. Under
a reasonable funding method, all liabilities of the plan for benefits,
whether vested or not, must be taken into account.
(2) Production of experience gains and losses. If each actuarial
assumption is exactly realized under a reasonable funding method, no
experience gains or losses are produced.
(3) Plan population--(i) In general. Under a reasonable funding
method, the plan population must include three classes of individuals:
participants currently employed in the service of the employer; former
participants who either terminated service with the employer, or
retired, under the plan; and all other individuals currently entitled to
benefits under the plan. See Sec. 1.412(c)(3)-1(d)(2) for rules
concerning anticipated future participants.
(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
[[Page 194]]
this section. The excludable individuals are those former participants
who have terminated service with the employer without vested benefits
and whose service might be taken into account in future years because
the ``rule of parity'' of section 411(a)(6)(D) does not permit that
service to be disregarded. However if the plan's experience as to
separated employees' returning to service has been such that the
exclusion described in this subparagraph would be unreasonable, the
exclusion would no longer apply.
(4) Use of salary scale--(i) General acceptability. The use of a
salary scale assumption is not inappropriate merely because of the
funding method with which it is used. Therefore, in determining whether
actuarial assumptions are reasonable, a salary scale will not be
considered to be prohibited merely because a particular funding method
is being used.
(ii) Projection to appropriate salary. Under a reasonable funding
method, salary scales reflected in projected benefits must be the
expected salary on which benefits would be based under the plan at the
age when the receipt of benefits is expected to begin.
(5) Treatment of allocable items. Under a reasonable funding method
that allocates assets to individual participants to determine costs, the
allocation of assets among participants must be reasonable. An initial
allocation of assets among participants will be considered reasonable
only if it is in proportion to related liabilities. However, the
Commissioner may determine, based on the facts and circumstances, that
it is unreasonable to continue to allocate assets on this basis beyond
the initial year. Under a reasonable funding method that allocates
liabilities among different elements of past and future service, the
allocation of liabilities must be reasonable.
(d) Prohibited considerations under a reasonable funding method--(1)
Anticipated benefit changes--(i) In general. Except as otherwise
provided by the Commissioner, a reasonable funding method does not
anticipate changes in plan benefits that become effective, whether or
not retroactively, in a future plan year or that become effective after
the first day of, but during, a current plan year.
(ii) Exception for collectively bargained plans. A collectively
bargained plan described in section 413(a) may on a consistent basis
anticipate benefit increases scheduled to take effect during the term of
the collective-bargaining agreement applicable to the plan. A plan's
treatment of benefit increases scheduled in a collective bargaining
agreement is part of its funding method. Accordingly, a change in a
plan's treatment of such benefit increases (for example, ignoring
anticipated increases after taking them into account) is a change of
funding method.
(2) Anticipated future participants. A reasonable funding method
must not anticipate the affiliation with the plan of future participants
not employed in the service of the employer on the plan valuation date.
However, a reasonable funding method may anticipate the affiliation with
the plan of current employees who have not satisfied the participation
requirements of the plan.
(e) Special rules for certain funding methods--(1) Applicability of
special rules. Paragraph (e) of this section applies to a funding method
that determines normal cost under paragraph (b)(2)(ii) of this section.
(2) Use of salary scale. For rules relating to use of a salary scale
assumption, see paragraph (c)(4) of this section.
(3) Allocation of liabilities. In determining a plan's normal cost
and accrued liability for a particular plan year, the projected benefits
of the plan must be allocated between past years and future years.
Except in the case of a career average pay plan, this allocation must be
in proportion to the applicable rates of benefit accrual under the plan.
Thus, the allocation to past years is effected by multiplying the
projected benefit by a fraction. The numerator of the fraction is the
participant's credited years of service. The denominator is the
participant's total credited years of service at the anticipated benefit
commencement date. Adjustments are made to account for changes in the
rate of benefit accrual. An allocation based on compensation is not
permitted. In the case of a career average pay plan, an allocation
between past
[[Page 195]]
and future service benefits must be reasonable.
(f) Treatment of ancillary benefit costs--(1) General rule. Under a
reasonable funding method, except as otherwise provided by this
paragraph (f), ancillary benefit costs must be computed by using the
same method used to compute retirement benefit costs under a plan.
(2) Ancillary benefit defined. For purposes of this paragraph an
ancillary benefit is a benefit that is paid as a result of a specified
event which--
(i) Occurs not later than a participant's separation from service,
and
(ii) Was detrimental to the participant's health.
Thus, for example, benefits payable if a participant dies or becomes
disabled prior to separation from service are ancillary benefits because
the events giving rise to the benefits are detrimental to the
participant's health. However, an early retirement benefit, a social
security supplement (as defined in Sec. 1.411(a)-7(c)(4)(ii)), and the
vesting of plan benefits (even if more rapid than is required by section
411) are not ancillary benefits because those benefits do not result
from an event which is detrimental to the participant's health.
(3) Exception for certain insurance contracts. Under a reasonable
funding method, regardless of the method used to compute retirement
benefit costs, the cost of an ancillary benefit may equal the premium
paid for that benefit under an insurance contract if--
(i) The ancillary benefit is provided under the contract, and
(ii) The benefit is guaranteed under the contract.
(4) Exception for 1-year term funding and other approved methods.
[Reserved]
(5) Section 401(h) benefits. Section 412 does not apply to benefits
that are described in section 401(h) and for which a separate account is
maintained.
(g) Examples. The principles of this section are illustrated by the
following examples:
Example 1. Assume that a plan, using funding method A, is in its
first year. No contributions have been made to the plan, other than a
nominal contribution to establish a corpus for the plan's trust. There
is no past service liability, and the normal cost is a constant
percentage of an annually determined amount. The constant percentage is
99 percent, and the annually determined amount is the excess of the
present value of future benefits over plan assets. The present value of
future benefits is $10,000. Under paragraph (b)(1) of this section, the
present value of future benefits must equal the present value of future
normal costs plus plan assets. (No amortizable bases exist, nor are
there credit or debit balances.) Under method A, the present value of
future normal costs would equal the sum of a series of annually
decreasing amounts. Because of the constant percentage factor, the
present value of future normal costs over the years can never equal
$10,000, the present value of future benefits. In effect, then, assets
under method A can never equal the present value of future benefits if
all assumptions are exactly realized. Therefore, method A is not a
reasonable funding method.
Example 2. Assume that a plan, using funding method B, determines
normal cost by computing the present value of benefits expected to be
accrued under the plan by the end of 10 years after the valuation date
and adding to this the present value of benefits expected to be paid
within these 10 years. Plan assets are subtracted from the sum of the
two present value amounts. The difference then is divided by the present
value of salaries projected over the 10 years. Under paragraph (c)(1) of
this section, all liabilities of a plan must be taken into account.
Because method B takes into account only benefits paid or accrued by the
end of 10 years, it is not a reasonable funding method.
Example 3. Assume that a plan, using funding method C, determines
normal cost as a constant percentage of compensation. (This percentage
is determined as follows: The excess of projected benefits over accrued
benefits is computed. Then the present value of this excess is divided
by the present value of future salaries.) However, the accrued liability
is computed each year as the present value of accrued benefits. (This
computation 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)
[[Page 196]]
coupled with the manner of computing the accrued liability (and the
actual unfunded liability) generally produces gains in the earlier years
and losses in the later years if each actuarial assumption is exactly
realized. Therefore, method C is not a reasonable funding method.
Example 4. Assume that a plan, using funding method D, bases
benefits on final average pay. Under method D, the past service
liability on any date equals the present value of the accrued benefit on
that date based on compensation as of that date. The normal cost for any
year equals the present value of a certain amount. That amount is the
excess of the projected accrued benefit as of the end of the year over
the actual accrued benefit at the beginning of the year. Accrued
benefits, projected as of the end of a year, reflect a 1-year salary
projection. Under paragraph (c)(4) of this section, salary scales
reflected in projected benefits must project salaries to the salary on
which benefits would be based under the plan at the age when the receipt
of benefits under the plan is expected to begin. Because the plan is not
a career average pay plan and compensation is projected only 1 year,
method D is not a reasonable funding method. (Under paragraph (c)(4) of
this section, the use of a salary scale assumption could be required
with a unit credit method if, without the use of a salary scale,
assumptions in the aggregate are unreasonable.)
Example 5. Assume that a plan, using method E, a unit credit funding
method, calculates a participant's accrued benefit according to the
following formula: 2 percent of final salary for the first 10 years of
service and 1 percent of final salary for the years of service in excess
of 10. Under the plan, no employee may be credited with more than 25
years of service. The actuarial assumptions for the valuation include a
salary scale of 5 percent per year. For a participant at age 40 with 15
years of service, a current salary of $20,000 and a normal retirement
age of 65, the accrued liability for the retirement benefit is the
present value of an annuity of $16,932 per year, commencing at age 65.
The $16,932 is calculated as follows:
[GRAPHIC] [TIFF OMITTED] TC14NO91.161
(3.3864 is 1.05 raised to the 25th power; the 25th power reflects the
difference between normal retirement age and attained age (65-40).)
Salary under this method is projected to the age when the receipt of
benefits is expected to begin. Therefore, method E meets the requirement
of paragraph (c)(4) of this section. Also, the allocation of benefits
under method E between past and future years of service meets the
requirements of paragraph (e)(3) of this section.
Example 6. Assume that a plan that has two participants and that
previously used the unit credit cost method wishes to change the funding
method at the beginning of the plan year to funding method F, a
modification of the aggregate cost method. The modification involves
determining normal cost for each of the two participants under the plan.
Therefore, it requires an allocation of assets to each participant for
valuation purposes. The actuary proposes to allocate the assets on hand
at the beginning of the plan year of the change in funding method in
proportion to the accrued liabilities calculated under the unit credit
cost method. The relevant results of the calculations are shown below:
------------------------------------------------------------------------
Employees
---------------- Totals
M N
------------------------------------------------------------------------
Accrued Liabilities (unit credit method):
Dollar amount................................ 15,670 906 16,576
Per cent of total............................ 94.53 5.47 100.00
Assets:
Dollar amount................................ 7,835 453 8,288
per cent of total............................ 94.53 5.47 100.00
------------------------------------------------------------------------
The proposed allocation in proportion to the accrued liabilities
under the unit credit cost method satisfies the requirements of
paragraph (c)(5) of this section at the beginning of the first plan year
for which the new method is used.
Example 7. The facts are the same as in Example 6. However, the
actuary proposes to 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]
[[Page 197]]
Sec. 1.412(c)(3)-2 Effective dates and transitional rules relating to
reasonable funding methods.
(a) Introduction. This section prescribes effective dates for rules
relating to reasonable funding methods, under section 412(c)(3) and
Sec. 1.412(c)(3)-1. Also, this section sets forth rules concerning
adjustments to a plan's funding standard account that are necessitated
by a change in funding method, and a provision setting forth procedural
requirements for use of an optional phase-in of required changes.
(b) Effective date--(1) General rule. Except as otherwise provided
by subparagraph (2) of this paragraph, Sec. 1.412(c)(3)-1 applies to
any valuation of a plan's liabilities (within the meaning of section
412(c)(9)) as of a date after April 30, 1981.
(2) Exception. If a collective bargaining agreement which determines
contributions to a plan is in effect on April 30, 1981, then Sec.
1.412(c)(3)-1 applies to any valuation of that plan's liabilities as of
a date after the earlier of the date on which the last such collective
bargaining agreement expires or April 30, 1984.
(3) Transitional rule. The reasonableness of a funding method used
in making a valuation of a plan's liability as of a date before the
effective date determined under subparagraph (1) or (2) of this
paragraph is determined on the basis of such published guidance as was
available on the date as of which the valuation was made.
(c) Change of funding method without approval--(1) In general. A
plan that is required to change its funding method to comply with Sec.
1.412(c)(3)-1 is not required to submit the change of funding method for
approval as otherwise required by section 412(c)(5). However, this
change must be described on Form 5500, Schedule B for the plan year with
respect to which the change is first effective.
(2) Amortization base. An amortization base must be established in
the plan year of the change in method equal to the change in the
unfunded liability due to the change (where both unfunded liabilities
are based on the same actuarial assumptions). Such a base must be
amortized over 30 years in determining the charges or credits to the
funding standard account, unless the Commissioner upon application
permits amortization over a shorter period.
(d) Phase-in of additional funding required by new method--(1) In
general. A plan that is required to change its funding method to comply
with Sec. 1.412(c)(3)-1 may elect to charge and credit the funding
standard account as provided in this paragraph. An election under this
paragraph shall be irrevocable.
(2) Credit in year of change. In the plan year of the change in
method the funding standard account may be credited with an amount not
in excess of 0.8 multiplied by the excess (if any) of--
(i) The normal cost under the new method plus the amortization
charge (or minus the amortization credit) computed as described in Sec.
1.412(c)(3)-2(c)(2), over
(ii) The normal cost under the prior method, for the plan year of
the change in method.
(3) Credits in the next three years. In the three years following
the year of the change the funding standard account may be credited with
an amount not in excess of 0.6, 0.4, and 0.2 respectively in the first,
second, and third years, multiplied by either of the following amounts,
computed as of the last day of the year of credit--
(i) The excess described in Sec. 1.412(c)(3)-2(d)(2) multiplied by
a fraction (not greater than 1), the numerator of which is the number of
participants in the year of the credit and the denominator of which is
the number of participants in the year of the change, or, at the option
of the plan,
(ii) The excess (if any) in the year of credit of--
(A) The net charge to the funding standard account based on the new
method, over
(B) The net charge to the funding standing account based on the
prior method.
(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
[[Page 198]]
Sec. 1.412(c)(3)-2(c)) which would be required using the actuarial
assumptions and plan benefit structure in effect on the last day of the
plan year of change.
(5) Fifteen-year amortization of credits. The funding standard
account shall be charged with 15-year amortization of each credit
described in Sec. 1.412(c)(3)-2(d) (2) and (3) beginning in the year
following each such credit.
(6) Manner of election. An election under this paragraph shall be
made by the claiming of the credits described in Sec. 1.412(c)(3)-2(d)
(2) and (3) on Schedule B to Form 5500 and by filing such other
information as may be required by the Commissioner.
(e) Effect on shortfall method. The charges and credits described in
this section apply in the shortfall method to the annual computation
charge described in Sec. 1.412(c)(1)-2(d). The amounts described in
Sec. 1.412(c)(3)-2(d) shall be determined before the application of the
shortfall method.
(Sec. 3(31) of the Employee Retirement Income Security Act of 1974 (88
Stat. 837; 29 U.S.C. 1002) and sec. 7805 of the Internal Revenue Code of
1954 (68A Stat. 917; 26 U.S.C. 7805))
[T.D. 7746, 45 FR 86432, Dec. 31, 1980]
Sec. 1.412(i)-1 Certain insurance contract plans.
(a) In general. Under section 412(h)(2) of the Internal Revenue Code
of 1954, as added by section 1013(a) of the Employee Retirement Income
Security Act of 1974 (88 Stat. 914) (hereinafter referred to as ``the
Act''), an insurance contract plan described in section 412(i) for a
plan year is not subject to the minimum funding requirements of section
412 for that plan year. Consequently, if an individual or group
insurance contract plan satisfies all of the requirements of paragraph
(b)(2) or (c)(2) of this section, whichever are applicable, for the plan
year, the plan is not subject to the requirements of section 412 for
that plan year. The effective date for section 412 of the Code is
determined under section 1017 of the Act. In general, in the case of a
plan which was not in existence on January 1, 1974, this section applies
for plan years beginning after September 2, 1974, and in the case of a
plan in existence on January 1, 1974, to plan years beginning after
December 31, 1975.
(b) Individual insurance contract plans. (1) An individual insurance
contract plan is described in section 412(i) during a plan year if the
plan satisfies the requirements of paragraph (b)(2) of this section for
the plan year.
(2) The requirements of this paragraph are:
(i) The plan must be funded exclusively by the purchase from an
insurance company or companies (licensed under the law of a State or the
District of Columbia to do business with the plan) of individual annuity
or individual insurance contracts, or a combination thereof. The
purchase may be made either directly by the employer or through the use
of a custodial account or trust. A plan shall not be considered to be
funded otherwise than exclusively by the purchase of individual annuity
or individual insurance contracts merely because the employer makes a
payment necessary to comply with the provisions of section 411(c)(2)
(relating to accrued benefit from employee contributions).
(ii) The individual annuity or individual insurance contracts issued
under the plan must provide for level annual, or more frequent, premium
payments to be paid under the plan for the period commencing with the
date each individual participating in the plan became a participant and
ending not later than the normal retirement age for that individual or,
if earlier, the date the individual ceases his participation in the
plan. Premium payments may be considered to be level even though items
such as experience gains and dividends are applied against premiums. In
the case of an increase in benefits, the contracts must provide for
level annual payments with respect to such increase to be paid for the
period commencing at the time the increase becomes effective. If payment
commences on the first payment date under the contract occurring after
the 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
[[Page 199]]
on the effective date of the benefit increase, whichever is applicable.
If an individual accrues benefits after his normal retirement age, the
requirements of this subdivision are satisfied if payment is made at the
time such benefits accrue. If the provisions required by this
subdivision are set forth in a separate agreement with the issuer of the
individual contracts, they need not be included in the individual
contracts.
(iii) The benefits provided by the plan for each individual
participant must be equal to the benefits provided under his individual
contracts at his normal retirement age under the plan provisions.
(iv) The benefits provided by the plan for each individual
participant must be guaranteed by the life insurance company, described
in paragraph (b)(2)(i) of this section, issuing the individual contracts
to the extent premiums have been paid.
(v) Except as provided in the following sentence, all premiums
payable for the plan year, and for all prior plan years, under the
insurance or annuity contracts must have been paid before lapse. If the
lapse has occurred during the plan year, the requirements of this
subdivision will be considered to have been met if reinstatement of the
insurance policy, under which the individual insurance contracts are
issued, occurs during the year of the lapse and before distribution is
made or benefits commence to any participant whose benefits are reduced
because of the lapse.
(vi) No rights under the individual contracts may have been subject
to a security interest at any time during the plan year. This
subdivision shall not apply to contracts which have been distributed to
participants if the security interest is created after the date of
distribution.
(vii) No policy loans, including loans to individual participants,
on any of the individual contracts may be outstanding at any time during
the plan year. This subdivision shall not apply to contracts which have
been distributed to participants if the loan is made after the date of
distribution. An application of funds by the issuer to pay premiums due
under the contracts shall be deemed not to be a policy loan if the
amount of the funds so applied, and interest thereon, is repaid during
the plan year in which the funds are applied and before distribution is
made or benefits commence to any participant whose benefits are reduced
because of such application.
(c) Group insurance contract plans. (1) A group insurance contract
plan is described in section 412(i) during a plan year if the plan
satisfies the requirements of subparagraph (2) for the plan year.
(2) The requirements of this subparagraph are:
(i) The plan must be funded exclusively by the purchase from an
insurance company or companies, described in paragraph (b)(2)(i) of this
section, of group annuity or group insurance contracts, or a combination
thereof. The purchase may be made either directly by the employer or
through the use of a custodial account or trust. A plan shall not be
considered to be funded otherwise than exclusively by the purchase of
group annuity or group insurance contracts merely because the employer
makes a payment necessary to comply with the provisions of section 411
(c)(2) (relating to accrued benefit derived from employee
contributions).
(ii) In the case of a plan funded by a group insurance contract or a
group annuity contract the requirements of paragraph (b)(2)(ii) of this
section must be satisfied by the group contract issued under the plan.
Thus, for example, each individual participant's benefits under the
group contract must be provided for by level annual, or more frequent,
payments equivalent to the payments required to satisfy such paragraph.
The requirements of this subdivision will not be satisfied if benefits
for any individual are not provided for by level payments made on his
behalf under the group contract.
(iii) The group annuity or group insurance contract must satisfy the
requirements of clauses (iii), (iv), (v), (vi), and (vii) of paragraph
(b)(2). Thus, for example, each participant's benefits provided by the
plan must be equal to his benefits provided under the group contract at
his normal retirement age.
(iv)(A) If the plan is funded by a group annuity contract, the value
of
[[Page 200]]
the benefits guaranteed by the insurance company issuing the contract
under the plan with respect to each participant under the contract must
not be less than the value of such benefits which the cash surrender
value would provide for that participant under any individual annuity
contract plan satisfying the requirements of paragraph (b) and approved
for sale in the State where the principal office of the plan is located.
(B) If the plan is funded by a group insurance contract, the value
of the benefits guaranteed by the insurance company issuing the contract
under the plan with respect to each participate under the contract must
not be less than the value of such benefits which the cash surrender
value would provide for that participant under any individual insurance
contract plan satisfying the requirements of paragraph (b) and approved
for sale in the State where the principal office of the plan is located.
(v) Under the group annuity or group insurance contract, premiums or
other consideration received by the insurance company (and, if a
custodial account or trust is used, the custodian or trustee thereof)
must be allocated to purchase individual benefits for participants under
the plan. A plan which maintains unallocated funds in an auxiliary trust
fund or which provides that an insurance company will maintain
unallocated funds in a separate account, such as a group deposit
administration contract, does not satisfy the requirements of this
subdivision.
(d) Combination of plans. A plan which is funded by a combination of
individual contracts and a group contract shall be treated as a plan
described in section 412 (i) for the plan year if the combination, in
the aggregate, satisfies the requirements of this section for the plan
year.
[T.D. 7746, 45 FR 47676, July 16, 1980; 45 FR 50563, July 30, 1980]
Sec. 1.413-1 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
[[Page 201]]
apply to a plan for plan years beginning after December 31, 1953.
(b) Participation. Section 410 and the regulations thereunder shall
be applied as if all employees of each of the employers who are parties
to the collective-bargaining agreement and all such employees who are
subject to the same benefit computation formula under the plan were
employed by a single employer.
(c) Discrimination, etc.--(1) General rule. Section 401(a)(4)
(relating to prohibited discrimination) and section 411(d)(3) (relating
to vesting required on termination, partial termination, or
discontinuance of contributions) shall be applied as if all the
participants in the plan, who are subject to the same benefit
computation formula and who are employed by employers who are parties to
the collective bargaining agreement, are employed by a single employer.
(2) Application of discrimination rules. Under section 401(a)(4) and
the regulations thereunder a plan is not qualified unless the
contributions or benefits provided under the plan do not discriminate in
favor of officers, shareholders or highly compensated employees
(hereinafter referred to collectively as ``the prohibited group''). The
presence or absence of such discrimination under a plan to which this
section applies at any time shall not be determined on an employer-by-
employer basis, but rather by testing separately each group of employees
who are subject to the same benefit computation formula to determine if
there is discrimination within such group. Consequently, discrimination
in contributions or benefits among two or more different groups or among
employees in different groups covered by the plan may be present without
causing the plan to be disqualified. However, the presence of prohibited
discrimination within one such group will result in the disqualification
of the plan for all groups. Section 401(a)(4) and the regulations
thereunder provide rules relating to the determination of which
employees are members of the prohibited group and to the determination
of discrimination in contributions or benefits which are applicable to a
plan to which this section applies. The determination of whether or not
an individual employee is a highly compensated employee shall be based
on the relationship of the compensation of the employee to the
compensation of all the other employees of all employers who are
maintaining the plan and have employees covered under the same benefit
computation formula, whether or not such other employees are covered by
the plan or are covered under the same benefit computation formula,
rather than to the compensation of all the other employees of the
employer of such individual employee.
(3) Application of termination, etc. rules. Section 411(d)(3) and
the regulations thereunder (relating to vesting required in the case of
a termination, partial termination, or complete discontinuance of
contributions) apply to a plan subject to the provisions of this
section. The requirements of section 411(d)(3) shall be applied as if
all participants in the plan who are subject to the same benefit
computation formula and who are employed by employers who are parties to
the collective bargaining agreement are employed by a single employer.
The determination of whether or not there is a termination, partial
termination, or complete discontinuance of contributions shall be made
separately for each such group of participants who are treated as
employed by a single employer. Consequently, if there are two or more
groups of participants, a termination, partial termination, or complete
discontinuance can take place under a plan with respect to one group of
participants but not with respect to another such group of participants
or for the entire plan. See 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.
[[Page 202]]
(5) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example 1. Plan A is a defined benefit plan subject to the
provisions of this section and covers two groups of participants, local
unions 1 and 2. Each local union has negotiated its own bargaining
agreement with employers X, Y, and Z to provide its own benefit
computation formula. The following table indicates the composition of
the plan A participants:
------------------------------------------------------------------------
Employer Employer Employer
X Y Z Total
------------------------------------------------------------------------
Local union 1................. 20 10 70 100
Local union 2................. 30 70 100 200
------------------------------------------------------------------------
Under the rules of subparagraph (2) of this paragraph, the determination
of whether contributions or benefits provided under the plan
discriminate in favor of the prohibited group is made by applying the
rules of section 401(a)(4) separately to participants who are members of
local union 1 and local union 2. Thus, plan A will satisfy the
qualification requirements of section 401(a)(4) if, within local union 1
and local union 2, respectively, plan benefits do not discriminate in
favor of participants who are prohibited group employees within local
union 1 and local union 2. Under the rules of subparagraph (2) of this
paragraph, the determination under section 401(a)(4) of whether or not
any individual employee, included within the 300 participants in plan A,
is a highly compensated employee is based on the relationship of the
compensation of such individual employee to the compensation of all the
employees of Employers X, Y, and Z, whether or not such employees are
participants in plan A. Thus, if there are 20 participants who are
prohibited group employees within the 100 participants of local union 1,
discrimination is determined by comparing the benefits of the 20
prohibited group participants to the benefits of the other 80
participants within local union 1. The same comparison would have to be
made for the local union 2 participants between the prohibited group
participants and the other participants in local union 2. Discrimination
in benefits, if any, between the participants in local union 1 and local
union 2, or among the employees of X, Y, or Z, would not affect the
qualification of plan A under section 401(a)(4).
Example 2. Assume the same facts as in example (1). Employer X
withdraws from the plan. Under subparagraph (3) of this paragraph,
whether or not as a result of the withdrawal there is a partial
termination under section 411(d)(3) is to be determined by applying the
requirements of such section separately to the local union 1 and local
union 2 participants. See Sec. 1.411(d)-2 for the requirements relating
to partial terminations. The application of such requirements raises the
following possibilities with respect to the plan: (1) A partial
termination as to local union 1, (2) a partial termination as to local
union 2, (3) a partial termination as to both local unions 1 and 2, or
(4) no partial termination for either local union.
Example 3. Assume the same facts as in example (1). Plan A is
amended to cease future benefit accruals under the plan for local union
1 participants. Under subparagraph (3) of the paragraph, whether or not
as a result of the cessation there is a partial termination under
section 411(d)(3) is to be determined by applying the requirements of
such section separately to the local union 1 and local union 2
participants.
Example 4. Plan A is a defined benefit plan that provides for two
normal retirement benefits, X and 2X. A participant receives benefit X
if the collective bargaining agreement covering his employment provides
for a contribution rate, M. If such agreement provides for a
contribution rate of N, the participant receives benefit 2X. Benefit X
and benefit 2X constitute separate benefit computation formulas.
Example 5. Plan B is a defined benefit plan that provides for a
normal retirement benefit, X. Benefit X is provided for all plan
participants even though there are two collective bargaining agreements
providing for different contribution rates, M and N. Plan B has a single
benefit computation formula, 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),
[[Page 203]]
because all the employees participating in the plan are deemed to be
employees of A.
(e) Vesting. Section 411 (other than section 411(d)(3) relating to
termination or partial termination; discontinuance of contributions) and
the regulations thereunder shall be applied as if all employers who have
been parties to the collective-bargaining agreement constituted a single
employer. The application of any rules with respect to breaks in service
under section 411 shall be made under regulations prescribed by the
Secretary of Labor. Thus, for example, all the hours which an employee
worked for each employer in a collectively-bargained plan would be
aggregated in computing the employee's hours of service under the plan.
See also 29 CFR Part 2530 (Department of Labor regulations relating to
minimum standards for employee pension benefit plans.)
(f)-(h) [Reserved]
(i) Employees of labor unions--(1) General rule. For purposes of
section 413(b) and this section, employees of employee representatives
shall be treated as employees of an employer establishing and
maintaining a plan to which section 413(b) and this section apply if,
with respect to the employees of such representatives, the plan
satisfies the nondiscrimination requirements of section 401(a)(4)
(determined without regard to section 413(b)(2)) and the minimum
participation and coverage requirements of section 410 (determined
without regard to section 413(b)(1)). For purposes of the preceding
sentence, the plan and any affiliated employee health or welfare plan
shall be deemed to be an employee representative. If employees of
employee representatives, the plan, or an affiliated employee health or
welfare plan are covered by the plan and are not treated as employees of
an employer establishing and maintaining the plan under the provisions
of this paragraph, the plan fails to satisfy the qualification
requirements of section 401(a). In addition, in order for such a plan to
be qualified, the plan must satisfy the requirements of section 413(b)
(1) and (2), relating to participation and discrimination, respectively;
see paragraphs (b) and (c) of this section. For purposes of this
paragraph, an affiliated health or welfare plan is a health or welfare
plan that is maintained under the same collective bargaining agreement
or agreements, and that covers the same membership.
(2) Effective dates and transitional rules. (i) Section 413(b)(8)
and this paragraph apply to a plan for plan years beginning after
December 31, 1953.
(ii) In applying the rules of this paragraph to a plan for plan
years to which section 410 does not apply, section 401(a)(3) (as in
effect on September 1, 1974) shall be substituted for section 410. See
Sec. 1.401-3 for rules prescribed under section 401(a)(3) as in effect
on September 1, 1974. See Sec. 1.410(a)-2 for the effective dates of
section 410.
(3) Examples. The provisions of this paragraph are illustrated by
the following examples:
Example 1. Plan A is a defined benefit plan, maintained pursuant to
a collective bargaining agreement between employers, X, Y, and Z and
labor union, L, which covers members of L employed by X, Y, and Z. In
1978, plan A is amended to cover, under the same benefit formula, all
five employees of L who have satisfied the minimum age and service
requirements of the plans (age 25 and 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
[[Page 204]]
treated as employees of an employer establishing and maintaining the A
plan because such coverage requirements are not satisfied by L.
Consequently, the A plan fails to satisfy the qualification requirements
of section 401(a).
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42340, Aug. 23, 1977, as amended by 42 FR 47198, Sept.
20, 1977; T.D. 7654, 44 FR 65063, Nov. 9, 1979]
Sec. 1.413-2 Special rules for plans maintained by more than one employer.
(a) Application of section 413(c)--(1) In general. Section 413(c)
describes certain plans (and each trust which is a part of any such
plan) hereinafter referred to as ``section 413(c) plans.'' A plan (and
each trust which is a part of such plan) is deemed to be a section
413(c) plan if it is described in subparagraph (2) of this paragraph.
Notwithstanding any other provision of the code (not specifically in
conflict with the special rules hereinafter mentioned), a section 413(c)
plan is subject to the special rules of section 413(c) (1) through (6)
and paragraphs (b) through (g) of this section.
(2) Section 413(c) plan. A plan (and each trust which is a part of
such plan) is a section 413(c) plan if--
(i) The plan is a single plan, within the meaning of section 413(a)
and Sec. 1.413-1(a)(2), and
(ii) The plan is maintained by more than one employer.
For purposes of subdivision (ii) of this subparagraph, the number of
employers maintaining the plan is determined by treating any employers
described in section 414(b) (relating to a controlled group of
corporations) or any employers described in section 414(c) (relating to
trades or businesses under common control), whichever is applicable, as
if such employers are a single employer. See Sec. 1.411(a)-5(b)(3) for
rules relating to the time when an employer maintains a plan. A master
or prototype plan is not a section 413(c) plan unless such a plan is
described in this subparagraph. Similarly, the mere fact that a plan, or
plans, utilizes a common trust fund or otherwise pools plan assets for
investment purposes does not, by itself, result in a particular plan
being treated as a section 413(c) plan.
(3) Additional rules. (i) If a plan is a collectively bargained plan
described in Sec. 1.413-1(a), the rules of section 413(c) and this
section do not apply, and the rules of section 413(b) and Sec. 1.413-1
do apply to the plan.
(ii) The special rules of section 413(b)(1) and Sec. 1.413-1(b)
relating to the application of section 410, other than the rules of
section 410(a), do not apply to a section 413(c) plan. Thus, for
example, the minimum coverage requirements of section 410(b) are
generally applied to a section 413(c) plan on an employer-by-employer
basis, taking into account the generally applicable rules such as
section 401(a)(5) and section 414 (b) and (c).
(iii) The special rules of section 413(b)(2) and Sec. 1.413-1(c)
(relating to (A) section 401(a)(4) and prohibited discrimination, and
(B) 411(d)(3) and vesting required on termination, partial termination,
or discontinuance of contributions) do not apply to a section 413(c)
plan. Thus, for example, the determination of whether or not there is a
termination, within the meaning of section 411(d)(3), of a section
413(c) plan is made solely by reference to the rules of sections
411(d)(3) and 413(c)(3).
(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).
[[Page 205]]
(d) Vesting. Section 411 and the regulations thereunder shall be
applied as if all employers who maintain the plan constituted a single
employer. The application of any rules with respect to breaks in service
under section 411 shall be made under regulations prescribed by the
Secretary of Labor. Thus, for example, all the hours which an employee
worked for each employer maintaining the plan would be aggregated in
computing the employee's hours of service under the plan. See also 29
CFR Part 2530 (Department of Labor regulations relating to minimum
standards for employee pension benefit plans).
(Sec. 411 (88 Stat. 901; 26 U.S.C. 411))
[T.D. 7501, 42 FR 42340, Aug. 23, 1977, as amended by 42 FR 47198, Sept.
20, 1977; T.D. 7654, 44 FR 65065, Nov. 9, 1979]
Sec. 1.414(b)-1 Controlled group of corporations.
(a) Defintion of controlled group of corporations. For purposes of
this section, the term ``controlled group of corporations'' has the same
meaning as is assigned to the term in section 1563(a) and the
regulations thereunder, except that (1) the term ``controlled group of
corporations'' shall not include an ``insurance group'' described in
section 1563(a)(4), and (2) section 1563(e)(3)(C) (relating to stock
owned by certain employees' trusts) shall not apply. For purposes of
this section, the term ``members of a controlled group'' means two or
more corporations connected through stock ownership described in section
1563(a) (1), (2), or (3), whether or not such corporations are
``component members of a controlled group'' within the meaning of
section 1563(b). Two or more corporations are members of a controlled
group at any time such corporations meet the requirements of section
1563(a) (as modified by this paragraph). For purposes of this section,
if a corporation is a member of more than one controlled group of
corporations, such corporation shall be treated as a member of each
controlled group.
(b) Single plan adopted by two or more members. If two or more
members of a controlled group of corporations adopt a single plan for a
plan year, then the minimum funding standard provided in section 412,
the tax imposed by section 4971, and the applicable limitations provided
by section 404(a) shall be determined as if such members were a single
employer. In such a case, the amount of such items and the allocable
portion attributable to each member shall be determined in the manner
provided in regulations under sections 412, 4971, and 404(a).
(c) Cross reference. For rules relating to the application of
sections 401, 408(k), 410, 411, 415, and 416 with respect to two or more
trades or businesses which are under common control, see section 414(c)
and the regulations thereunder.
[T.D. 8179, 53 FR 6605, Mar. 2, 1988]
Sec. 1.414(c)-1 Commonly controlled trades or businesses.
For purposes of applying the provisions of sections 401 (relating to
qualified pension, profit-sharing, and stock bonus plans), 408(k)
(relating to simplified employee pensions), 410 (relating to minimum
participation standards), 411 (relating to minimum vesting standards),
415 (relating to limitations on benefits and contributions under
qualified plans), and 416 (relating to 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
[[Page 206]]
``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 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
[[Page 207]]
(iv) In the case of an organization which is a sole proprietorship,
one of such persons owns such sole proprietorship.
(d) Combined group of trades or businesses under common control. The
term ``combined group of trades or businesses under common control''
means any group of three or more organizations, if (1) each such
organization is a member of either a parent-subsidiary group of trades
or businesses under common control or a brother-sister group of trades
or businesses under common control, and (2) at least one such
organization is the common parent organization of a parent-subsidiary
group of trades or businesses under common control and is also a member
of a brother-sister group of trades or businesses under common control.
(e) Examples. The definitions of parent-subsidiary group of trades
or businesses under common control, brother-sister group of trades or
businesses under common control, and combined group of trades or
businesses under common control may be illustrated by the following
examples.
Example 1. (a) The ABC partnership owns stock possessing 80 percent
of the total combined voting power of all classes of stock entitled to
voting of S corporation. ABC partnership is the common parent of a
parent-subsidiary group of trades or businesses under common control
consisting of the ABC partnership and S Corporation.
(b) Assume the same facts as in (a) and assume further that S owns
80 percent of the profits interest in the DEF Partnership. The ABC
Partnership is the common parent of a parent-subsidiary group of trades
or businesses under common control consisting of the ABC Partnership, S
Corporation, and the DEF Partnership. The result would be the same if
the ABC Partnership, rather than S, owned 80 percent of the profits
interest in the DEF Partnership.
Example 2. L Corporation owns 80 percent of the only class of stock
of T Corporation, and T, in turn, owns 40 percent of the capital
interest in the GHI Partnership. L also owns 80 percent of the only
class of stock of N Corporation and N, in turn, owns 40 percent of the
capital interest in the GHI Partnership. L is the common parent of a
parent-subsidiary group of trades or businesses under common control
consisting of L Corporation, T Corporation, N Corporation, and the GHI
Partnership.
Example 3. ABC Partnership owns 75 percent of the only class of
stock of X and Y Corporations; X owns all the remaining stock of Y, and
Y owns all the remaining stock of X. Since interorganization ownership
is excluded (that is, treated as not outstanding) for purposes of
determining whether ABC owns a controlling interest of at least one of
the other organizations, ABC is treated as the owner of stock possessing
100 percent of the voting power and value of all classes of stock of X
and of Y for purposes of paragraph (b)(1)(ii) of this section.
Therefore, ABC is the common parent of a parent-subsidiary group of
trades or businesses under common control consisting of the ABC
Partnership, X Corporation, and Y Corporation.
Example 4. Unrelated individuals A, B, C, D, E, and F own an
interest in sole proprietorship A, a capital interest in the GHI
Partnership, and stock of corporations M, W, X, Y, and Z (each of which
has only one class of stock outstanding) in the following proportions:
Organizations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Individuals A GHI M W X Y Z
--------------------------------------------------------------------------------------------------------------------------------------------------------
A..................................................... 100% 50% 100% 60% 40% 20% 60%
B..................................................... -- 40% -- 15% 40% 50% 30%
C..................................................... -- -- -- -- 10% 10% 10%
D..................................................... -- -- -- 25% -- 20% --
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
[[Page 208]]
GHI and at least 80% of the total combined voting power of corporations
X and Z. Therefore, GHI, X and Z comprise a brother-sister group of
trades or businesses under common control. Y is not a member of this
group because neither the effective control requirement nor the 80%
controlling interest requirement are met. (The effective control
requirement is not met because A's and B's combined identical ownership
in GHI, X, Y and Z (20% for A and 30% for B) does not exceed 50%. The
80% controlling interest test is not met because A and B together only
own 70% of the total combined voting power of the stock of Y.) A and M
are not members of this group because B owns no interest in either
organization and A's ownership of GHI, X and Z, considered alone, is
less than 80%.
Example 5. The outstanding stock of corporations U and V, which have
only one class of stock outstanding, is owned by the following unrelated
individuals:
Corporations
------------------------------------------------------------------------
U V
Individuals -----------------------------
(percent) (percent)
------------------------------------------------------------------------
A......................................... 12 12
B......................................... 12 12
C......................................... 12 12
D......................................... 12 12
E......................................... 13 13
F......................................... 13 13
G......................................... 13 13
H......................................... 13 13
-----------------------------
100 100
------------------------------------------------------------------------
Any group of five of the shareholders will own more than 50 percent of
the stock in each corporation, in identical holdings. However, U and V
are not members of a brother-sister group of trades or businesses under
common control because at least 80 percent of the stock of each
corporation is not owned by the same five or fewer persons.
Example 6. A, an individual, owns a controlling interest in ABC
Partnership and DEF Partnership. ABC, in turn, owns a controlling
interest in X Corporation. Since ABC, DEF, and X are each members of
either a parent-subsidiary group or a brother-sister group of trades or
businesses under common control, and ABC is the common parent of a
parent-subsidiary group of trades or businesses under common control
consisting of ABC and X, and also a member of a brother-sister group of
trades or businesses under common control consisting of ABC and DEF, ABC
Partnership, DEF Partnership, and X Corporation are members of the same
combined group of trades or businesses under common control.
[T.D. 8179, 53 FR 6606, Mar. 2, 1988, as amended by T.D. 8540, 59 FR
30102, June 10, 1994]
Sec. 1.414(c)-3 Exclusion of certain interests or stock in determining
control.
(a) In general. For purposes of Sec. 1.414(c)-2 (b)(2)(i) and
(c)(2), the term ``interest'' and the term ``stock'' do not include an
interest which is treated as not outstanding under paragraph (b) of this
section in the case of a parent-subsidiary group of trades or businesses
under common control or under paragraph (c) of this section in the case
of a brother-sister group of trades or businesses under common control.
In addition, the term ``stock'' does not include treasury stock or
nonvoting stock which is limited and preferred as to dividends. For
definitions of certain terms used in this section, see paragraph (d) of
this section.
(b) Parent-subsidiary group of trades or businesses under common
control--(1) In general. If an organization (hereinafter in this section
referred to as ``parent organization'') owns (within the meaning of
paragraph (b)(2) of this section)--
(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
[[Page 209]]
an estate, with the application of paragraphs (b) (2), (3), and (4) of
Sec. 1.414(c)-4, and
(ii) In the case of a parent organization which is a corporation,
with the application of Sec. 1.414(c)-4(b)(4).
(3) Plan of deferred compensation. An interest which is an interest
in or stock of the subsidiary organization held by a trust which is part
of a plan of deferred compensation (within the meaning of section
406(a)(3) and the regulations thereunder) for the benefit of the
employees of the parent organization or the subsidiary organization
shall be excluded.
(4) Principal owners, officers, etc. An interest which is an
interest in or stock of the subsidiary organization owned (directly and
with the application of Sec. 1.414(c)-4) by an individual who is a
principal owner, officer, partner, or fiduciary of the parent
organization shall be excluded.
(5) Employees. An interest which is an interest in or stock of the
subsidiary organization owned (directly and with the application of
Sec. 1.414(c)-4) by an employee of the subsidiary organization shall be
excluded if such interest or such stock is subject to conditions which
substantially restrict or limit the employee's right (or if the employee
constructively owns such interest or such stock, the direct or record
owner's right) to dispose of such interest or such stock and which run
in favor of the parent or subsidiary organization.
(6) Controlled exempt organization. An interest which is an interest
in or stock of the subsidiary organization shall be excluded if owned
(directly and with the application of Sec. 1.414(c)-4) by an
organization (other than the parent organization):
(i) To which section 501 (relating to certain educational and
charitable organizations which are exempt from tax) applies, and
(ii) Which is controlled directly or indirectly (within the meaning
of paragraph (d)(7) of this section) by the parent organization or
subsidiary organization, by an individual, estate, or trust that is a
principal owner of the parent organization, by an officer, partner, or
fiduciary of the parent organization, or by any combination thereof.
(c) Brother-sister group of trades or businesses under common
control--(1) In general. If five or fewer persons (hereinafter in this
section referred to as ``common owners'') who are individuals, estates,
or trusts own (directly and with the application of Sec. 1.414(c)-4)--
(i) In the case of a corporation, 50 percent or more of the total
combined voting power of all classes of stock entitled to vote or 50
percent or more of the total value of shares of all classes of stock or
such corporation,
(ii) In the case of a trust or an estate, an actuarial interest
(within the meaning of Sec. 1.414(c)-2(b)(2)(ii)) of 50 percent or more
of such trust or estate, and
(iii) In the case of a partnership, 50 percent or more of the
profits or capital interest of such partnership, then for purposes of
determining whether such organization is a member of a 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
[[Page 210]]
application of Sec. 1.414(c)-4) by an organization:
(i) To which section 501(c)(3) (relating to certain educational and
charitable organizations which are exempt from tax) applies, and
(ii) Which is controlled directly or indirectly (within the meaning
of paragraph (d)(7) of this section) by such organization, by an
individual, estate, or trust that is a principal owner of such
organization, by an officer, partner, or fiduciary of such organization,
or by any combination thereof.
(d) Definitions--(1) Employee. For purposes of this section, the
term ``employee'' has the same meaning such term is given in section
3306(i) of the Code (relating to definitions for purposes of the Federal
Unemployment Tax Act).
(2) Principal owner. For purposes of this section, the term
``principal owner'' means a person who owns (directly and with the
application of Sec. 1.414(c)-4)--
(i) In the case of a corporation, 5 percent or more of the total
combined voting power of all classes of stock entitled to vote in such
corporation or 5 percent of more of the total value of shares of all
classes of stock of such corporation;
(ii) In the case of a trust or estate, an actuarial interest of 5
percent or more of such trust or estate; or
(iii) In the case of a partnership, 5 percent or more of the profits
or capital interest of such partnership.
(3) Officer. For purposes of this section, the term ``officer''
includes the president, vice-presidents, general manager, treasurer,
secretary, and comptroller of a corporation, and any other person who
performs duties corresponding to those normally performed by persons
occupying such positions.
(4) Partner. For purposes of this section, the term ``partner''
means any person defined in section 7701(a)(2) (relating to definitions
of partner).
(5) Fiduciary. For purposes of this section and Sec. 1.414(c)-4,
the term ``fiduciary'' has the same meaning as such term is given in
section 7701(a)(6) and the regulations thereunder.
(6) Substantial conditions. (i) In general. For purposes of this
section, an interest in or stock of an organization is subject to
conditions which substantially restrict or limit the right to dispose of
such interest or stock and which run in favor of another person if the
condition extends directly or indirectly to such person preferential
rights with respect to the acquisition of the direct owner's (or the
record owner's) interest or stock. For a condition to be in favor of
another person it is not necessary that such person be extended a
discriminatory concession with respect to price. A right of first
refusal with respect to an interest or stock in favor of another person
is a condition which substantially restricts or limits the direct or
record owner's right of disposition which runs in favor of such person.
Further, any legally enforceable condition which prohibits the direct or
record owner from disposing of his or her interest or stock without the
consent of another person will be considered to be a substantial
limitation running in favor of such person.
(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
[[Page 211]]
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 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]
[[Page 212]]
Sec. 1.414(c)-4 Rules for determining ownership.
(a) In general. In determining the ownership of an interest in an
organization for purposes of Sec. 1.414(c)-2 and Sec. 1.414(c)-3, the
constructive ownership rules of paragraph (b) of this section shall
apply, subject to the operating rules contained in paragraph (c). For
purposes of this section the term ``interest'' means: in the case of a
corporation, stock; in the case of a trust or estate, an actuarial
interest; in the case of a partnership, an interest in the profits or
capital; and in the case of a sole proprietorship, the proprietorship.
(b) Constructive ownership--(1) Options. If a person has an option
to acquire any outstanding interest in an organization, such interest
shall be considered as owned by such person. For this purpose, an option
to acquire an option, and each one of a series of such options shall be
considered as an option to acquire such interest.
(2) Attribution from partnerships--(i) General. An interest owned,
directly or indirectly, by or for a partnership shall be considered as
owned by any partner having an interest of 5 percent or more in either
the profits or capital of the partnership in proportion to such
partner's interest in the profits or capital, whichever such proportion
is greater.
(ii) Example. The provisions of paragraph (b)(2)(i) of this section
may be illustrated by the following example:
Example. A, B, and C, unrelated individuals, are partners in the ABC
Partnership. The partners' interest in the capital and profits of ABC
are as follows:
(In percent)
------------------------------------------------------------------------
Partner Capital Profits
------------------------------------------------------------------------
A......................................... 36 25
B......................................... 60 71
C......................................... 4 4
------------------------------------------------------------------------
The ABC Partnership owns the entire outstanding stock (100 shares)
of X Corporation. Under paragraph (b)(2)(i) of this section, A is
considered to own the stock of X owned by the partnership in proportion
to his interest in capital (36 percent) or profits (25 percent),
whichever such proportion is greater. Therefore, A is considered to own
36 shares of X stock. Since B has a greater interest in the profits of
the partnership than in the capital, B is considered to own X stock in
proportion to his interest in such profits. Therefore, B is considered
to own 71 shares of X stock. Since C does not have an interest of 5
percent or more in either the capital or profits of ABC, he is not
considered to own any shares of X stock.
(3) Attribution from estates and trusts--(i) In general. An interest
in an organization (hereinafter called an ``organization interest'')
owned, directly or indirectly, by or for an estate or trust shall be
considered as owned by any beneficiary of such estate or trust who has
an actuarial interest of 5 percent or more in such organization
interest, to the extent of such actuarial interest. For purposes of this
subparagraph, the actuarial interest of each beneficiary shall be
determined by assuming the maximum exercise of discretion 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
[[Page 213]]
subdivision in determining a beneficiary's actuarial interest in an
organization interest owned directly or indirectly by or for an estate
or trust.
(ii) Special rules for estates. (A) For purposes of this paragraph
(b)(3) with respect to an estate, property of a decedent shall be
considered as owned by his or her estate if such property is subject to
administration by the executor or administrator for the purposes of
paying claims against the estate and expenses of administration
notwithstanding that, under local law, legal title to such property
vests in the decedent's heirs, legatees or devisees immediately upon
death.
(B) For purposes of this paragraph (b)(3) with respect to an estate,
the term ``beneficiary'' includes any person entitled to receive
property of a decedent pursuant to a will or pursuant to laws of descent
and distribution.
(C) For purposes of this paragraph (b)(3) with respect to an estate,
a person shall no longer be considered a beneficiary of an estate when
all the property to which he or she is entitled has been received by him
or her, when he or she no longer has a claim against the estate arising
out of having been a beneficiary, and when there is only a remote
possibility that it will be necessary for the estate to seek the return
of property from him or her or to seek payment from him or her by
contribution or otherwise to satisfy claims against the estate or
expenses of administration.
(iii) Grantor trusts, etc. An interest owned, directly or
indirectly, by or for any portion of a trust of which a person is
considered the owner under subpart E, part I, subchapter J of the Code
(relating to grantors and others treated as substantial owners) is
considered as owned by such person.
(4) Attribution from corporations--(i) General. An interest owned,
directly or indirectly, by or for a corporation shall be considered as
owned by any person who owns (directly and, in the case of a parent-
subsidiary group of trades or businesses under common control, with the
application of paragraph (b)(1) of this section, or in the case of a
brother-sister group of trades or business under common control, with
the application of this section), 5 percent or more in value of the
stock in that proportion which the value of the stock which such person
so owns bears to the total value of all the stock in such corporation.
(ii) Example. The provisions of paragraph (b)(4)(i) of this section
may be illustrated by the following example:
Example. B, an individual, owns 60 of the 100 shares of the only
class of outstanding stock of corporation P. C, an individual, owns 4
shares of the P stock, and corporation X owns 36 shares of the P stock.
Corporation P owns, directly and indirectly, 50 shares of the stock of
corporation S. Under this subparagraph, B is considered to own 30 shares
of the S stock (60/100 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
[[Page 214]]
(D) Such interest in such organization is not, at any time during
such taxable year, subject to conditions which substantially restrict or
limit the spouse's right to dispose of such interest and which run in
favor of the individual or the individual's children who have not
attained the age of 21 years. The principles of Sec. 1.414(c)-
3(d)(6)(i) shall apply in determining whether a condition is a condition
described in the preceding sentence.
(iii) Definitions. For purposes of paragraph (b)(5)(ii)(C) of this
section, the gross income of an organization shall be determined under
section 61 and the regulations thereunder. The terms ``interest'',
``royalties'', ``rents'', ``dividends'', and ``annuities'' shall have
the same meaning such terms are given for purposes of section 1244(c)
and Sec. 1.1244(c)-1(e)(1).
(6) Children, grandchildren, parents, and grandparents--(i) Children
and parents. An individual shall be considered to own an interest owned,
directly or indirectly, by or for the individual's children who have not
attained the age of 21 years, and if the individual has not attained the
age of 21 years, an interest owned, directly or indirectly, by or for
the individual's parents.
(ii) Children, grandchildren, parents, and grandparents. If an
individual is in effective control (within the meaning of Sec.
1.414(c)-2(c)(2)), directly and with the application of the rules of
this paragraph without regard to this subdivision, of an organization,
then such individual shall be considered to own an interest in such
organization owned, directly or indirectly, by or for the individual's
parents, grandparents, grandchildren, and children who have attained the
age of 21 years.
(iii) Adopted children. For purposes of this section, a legally
adopted child of an individual shall be treated as a child of such
individual.
(iv) Example. The provisions of this subparagraph (6) may be
illustrated by the following example:
Example: (A) Facts. Individual F owns directly 40 percent of the
profits interest of the DEF Partnership. His son, M, 20 years of age,
owns directly 30 percent of the profits interest of DEF, and his son, A,
30 years of age, owns directly 20 percent of the profits interest of
DEF. The 10 percent remaining of the profits interest and 100 percent of
the capital interest of DEF is owned by an unrelated person.
(B) F's ownership. F owns 40 percent of the profits interest in DEF
directly and is considered to own the 30 percent profits interest owned
directly by M. Since, for purposes of the effective control test
contained in paragraph (b)(6)(ii) of this section, F is treated as
owning 70 percent of the profits interest of DEF, F is also considered
as owning the 20 percent profits interest of DEF owned by his adult son,
A. Accordingly, F is considered as owning a total of 90 percent of the
profits interest in DEF.
(C) M's ownership. Minor son, M. owns 30 percent of the profits
interest in DEF directly, and is considered to own the 40 percent
profits interest owned directly by his father, F. However, M is not
considered to own the 20 percent profits interest of DEF 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
[[Page 215]]
under paragraph (b)(1) of this section (relating to option attribution)
and under any other subparagraph of paragraph (b) of this section, such
interest shall be considered as owned by such person under paragraph
(b)(1) of this section.
(4) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example 1. A, 30 years of age, has a 90 percent interest in the
capital and profits of DEF Partnership. DEF owns all the outstanding
stock of corporation X and X owns 60 shares of the 100 outstanding
shares of corporation Y. Under paragraph (c)(1) of this section, the 60
shares of Y constructively owned by DEF by reason of paragraph (b)(4) of
this section are treated as actually owned by DEF for purposes of
applying paragraph (b)(2) of this section. Therefore, A is considered as
owning 54 shares of the Y stock (90 percent of 60 shares).
Example 2. Assume the same facts as in example (1). Assume further
that B, who is 20 years of age and the brother of A, directly owns 40
shares of Y stock. Although the stock of Y owned by B is considered as
owned by C (the father of A and B) under paragraph (b)(6)(i) of this
section, under paragraph (c)(2) of this section such stock may not be
treated as owned by C for purposes of applying paragraph (b)(6)(ii) of
this section in order to make A the constructive owner of such stock.
Example 3. Assume the same facts as in example (2), and further
assume that C has an option to acquire the 40 shares of Y stock owned by
his son, B. The rule contained in paragraph (c)(2) of this section does
not prevent the reattribution of such 40 shares to A because, under
paragraph (c)(3) of this section, C is considered as owning the 40
shares by reason of option attribution and not by reason of family
attribution. Therefore, since A is in effective control of Y under
paragraph (b)(6)(ii) of this section, the 40 shares of Y stock
constructively owned by C are reattributed to A. A is considered as
owning a total of 94 shares of Y stock.
[T.D. 8179, 53 FR 6609, Mar. 2, 1988; 53 FR 8302, Mar. 14, 1988, as
amended by T.D. 8540, 59 FR 30102, June 10, 1994]
Sec. 1.414(c)-5 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)
[[Page 216]]
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
(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.
[[Page 217]]
(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.
(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
[[Page 218]]
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 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
[[Page 219]]
(B) Whether the failure to meet such provisions was due to a
reasonable mistake as to what constituted an unrelated trade or business
or whether a particular person or group of persons were employed in
connection with one or more unrelated trades or businesses.
(iv) For purposes of this section, an employee will be considered
eligible to participate in a plan if such employee is a participant in
the plan or could be a participant in the plan upon making mandatory
employee contributions to the plan.
(3) Employment in connection with one or more unrelated trades or
businesses. An employee is employed in connection with one or more
unrelated trades or businesses of a church if a majority of such
employee's duties and responsibilities in the employ of the church are
directly or indirectly related to the carrying on of such trades or
businesses. Although an employee's duties and responsibilities may be
insignificant with respect to any one unrelated trade or business, such
employee will nonetheless be considered as employed in connection with
one or more unrelated trades or businesses if such employee's duties and
responsibilities with respect to all of the unrelated trades or
businesses of the church represent a majority of the total of such
person's duties and responsibilities in the employ of the church.
(c) Plans of two or more employers. The term ``church plan'' does
not include a plan which, during the plan year, is maintained by two or
more employers unless--
(1) Each of the employers is a church that is exempt from tax under
section 501(a), and
(2) With respect to the employees of each employer, the plan meets
the provisions of paragraph (b)(2)(ii) of this section or would be
determined to be a church plan based on all the facts and circumstances
described in paragraph (b)(2)(iii) of this section.
Thus, if with respect to a single employer the plan fails to meet any
provision of this paragraph, the entire plan ceases to be a church plan
unless that employer ceases maintaining the plan for all plan years
beginning after the plan year in which it receives a final notification
from the Internal Revenue Service that it does not meet the provisions
of this paragraph. If the employer does cease maintaining the plan in
accordance with this paragraph, the fact that the employer formerly did
maintain the plan will not prevent the plan from being a church plan for
prior years.
(d) Special rule. (1) Notwithstanding paragraph (c)(1) of this
section, a plan maintained by a church and one or more agencies of such
church for the employees of such church and of such agency or agencies,
that is in existence on January 1, 1974, shall be treated as a church
plan for plan years ending after September 2, 1974, and beginning before
January 1, 1983, provided that the plan is described in paragraph (c) of
this section without regard to paragraph (c)(1) of this section, and the
plan is not maintained by an agency which did not maintain the plan on
January 1, 1974.
(2) For the purposes of section 414(e) and this section, an agency
of a church means an organization which is exempt from tax under section
501 and which is either controlled by, or associated with, a church. For
example, an organization, a majority of whose officers or directors are
appointed by a church's governing board or by officials of a church, is
controlled by a church within the meaning of this paragraph. An
organization is associated with a church if it shares common religious
bonds and convictions with that church.
(e) Religious orders and religious organizations. For the purpose of
this section the term ``church'' includes a religious order or a
religious organization if such order or organization (1) is an integral
part of a church, and (2) is engaged in carrying out the functions of a
church, whether as a civil law corporation or otherwise.
(f) Separately incorporated fiduciaries. A plan which otherwise
meets the provisions of this section shall not lose its status as a
church plan because of the fact that it is administered by a separately
incorporated fiduciary such as a pension board or a bank.
(g) Cross reference. (1) For rules relating to treatment of church
plans, see section 410(c), 411(e), 412(h), 4975(g), and the regulations
thereunder.
[[Page 220]]
(2) For rules relating to church plan elections, see section 410(d)
and the regulations thereunder.
[T.D. 7688, 45 FR 20797, Mar. 31, 1980]
Sec. 1.414(f)-1 Definition of multiemployer plan.
(a) General rule. For purposes of part I of subchapter D of chapter
1 of the Code and the regulations thereunder, a plan is a multiemployer
plan for a plan year if all of the following requirements are satisfied:
(1) Number of contributing employers. More than one employer is
required by the plan instrument or other agreement to contribute (or to
have contributions made on its behalf) to the plan for the plan year.
(2) Collective bargaining agreement. The plan is maintained for the
plan year pursuant to one or more collective bargaining agreements
between employee representatives and more than one employer.
(3) Amount of contributions. Except as provided by paragraph (c) of
this section (relating to the special rule for contributions exceeding
50 percent), the amount of contributions made under the plan for the
plan year by or on behalf of each employer is less than 50 percent of
the total amount of contributions made under the plan for such plan year
by or on behalf of all employers.
(4) Benefits. The plan provides that the amount of benefits payable
with respect to each employee participating in the plan is determined
without regard to whether or not his employer continues as a member of
the plan. If benefits accrued as a result of the participant's service
with his employer during a period before such employer was a member of
the plan, this requirement does not apply to the amount of those
benefits, except that this requirement does apply to the amount of those
benefits (i) which are accrued benefits derived from employee
contributions, or (ii) which are accrued under a plan maintained by an
employer prior to the time such employer became a member of the plan to
which the requirements of this paragraph (a) are applied.
(5) Other requirements. The plan satisfies such other requirements
as the Secretary of Labor by regulations prescribes under the authority
of section 414(f)(1)(E) of the Code and section 3(37) of the Employee
Retirement Income Security Act of 1974 (Pub. L. 93-406, 88 Stat. 839).
See 29 CFR 2510.3-37.
(b) Special rules--(1) Amount of contributions. For purposes of
paragraphs (a)(3) and (c) of this section, the amount of contributions
made under the plan for the plan year by or on behalf of each employer
shall be the sum of such contributions made on or before the last day of
the plan year. For purposes of determining whether contributions are
made on or before the last day of the plan year, the rule of section
412(c)(10) and the regulations thereunder (relating to the treatment of
certain contributions made after the last day of the plan year as made
on such last day) shall apply.
(2) Benefits. (i) For purposes of paragraph (a)(4) of this section,
certain benefit amounts are treated as accrued as a result of the
participant's service with an employer during a period before such
employer was a member of 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.
[[Page 221]]
(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).
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
[[Page 222]]
defined in this section for any plan year (including plan years ending
prior to September 3, 1974), ``75 percent'' shall be substituted for
``50 percent'' in applying paragraph (a)(3) of this section for
subsequent plan years until the first plan year following a plan year in
which the amount contributed by or on behalf of one employer is 75
percent or more of the total amount of contributions made under the plan
for that plan year by or on behalf of all of the employers making
contributions. In such case ``75 percent'' shall not again be
substituted for ``50 percent'' until the plan has met the requirements
of paragraph (a) of this section (determined without regard to this
paragraph) for one plan year.
(d) Examples. The application of this section is illustrated by the
following examples. For purposes of these examples, assume that the plan
meets the requirements of paragraphs (a) (1), (2), (4), and (5) of this
section for each plan year.
Example 1. On January 1, 1970, U, V, and W, three employers none of
which is a member of a controlled group of corporations with any of the
other two employers, establish a plan with a plan year corresponding to
the calendar year. U, V, and W each contribute less than one-half of the
total contributions made under the plan for each of the years 1970,
1971, and 1972. For the years 1973, 1974, and 1975, U contributes 70
percent and V and W each contribute 15 percent of the total
contributions made under the plan for each year. The plan is a
multiemployer plan under section 414(f) and this section for 1975
because no employer has contributed 75 percent or more of the total
amount contributed for each of the plan years subsequent to 1972.
Example 2. (i) First plan year. On January 1, 1975, X, Y, and Z,
three employers none of which is a member of a controlled group of
corporations with any of the other two employers, establish a plan with
a plan year corresponding to the calendar year. X, Y, and Z each
contribute less than one-half of the total contributions made under the
plan for 1975. The plan is a multiemployer plan for 1975 because it
meets the 50 percent contribution requirement of paragraph (a)(3) of
this section.
(ii) Second plan year. For the second plan year, 1976, X contributes
70 percent and Y and Z each contribute 15 percent of the total
contributions made under the plan. The plan is a multiemployer plan for
1976 because it was a multiemployer plan for the preceding plan year and
satisfies the 75 percent contribution requirement of paragraph (c) of
this section.
(iii) Third plan year. For the third plan year, 1977, X contributes
80 percent and Y and Z each contribute 10 percent of the total
contributions made under the plan. The plan is not a multiemployer plan
for 1977 because it fails to satisfy the 75 percent contribution
requirement of paragraph (c) of this section.
(iv) Fourth plan year. For the fourth plan year, 1978, Y contributes
60 percent and X and Z each contribute 20 percent of the total
contributions made under the plan. The 75 percent contribution
requirement of paragraph (c) of this section does not apply. The plan is
not a multiemployer plan for 1978 because it fails to satisfy the 50
percent contribution requirement of paragraph (a)(3) of this section.
(v) Fifth plan year. For the fifth plan year, 1979, X, Y, and Z each
contribute less than one-half of the total contributions made under the
plan. The 75 percent contribution requirement of paragraph (c) of this
section does not apply. The plan is a multiemployer plan for 1979
because it again meets the 50 percent contribution requirement of
paragraph (a)(3) of this section.
(vi) Sixth plan year. For the sixth plan year, 1980, the plan will
continue to be a multiemployer plan, provided that no employer
contributes 75 percent or more of the total amount of contributions made
under the plan for the plan year.
(e) Retention of records. (1) For plan years ending prior to
September 3, 1974, a plan may be required to furnish proof that it met
the requirements of section 414(f) and this section for each plan year
ending prior to that date to the extent necessary to show the
applicability of the 75 percent test provided in paragraph (c) of this
section.
(2) For plan years ending after September 2, 1974, a plan may be
required to furnish proof that it met the requirements of section 414(f)
and this section for 6 immediately preceding plan years.
(Secs. 414(f) and 7805 of the Internal Revenue Code of 1954 (88 Stat.
927, 26 U.S.C. 414(f); 68A Stat. 917; 26 U.S.C. 7805))
[T.D. 7552, 43 FR 29940, July 12, 1978]
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
[[Page 223]]
designates a person or a group of persons as plan administrator, the
person or group of persons collectively is the plan administrator for
the plan year. The instrument may specifically designate a plan
administrator--
(1) By name,
(2) By reference to the person or group of persons holding a named
position or positions,
(3) By reference to a procedure established under the terms of the
instrument pursuant to which a plan administrator is designated, or
(4) By reference to the person or group of persons charged with
specific responsibilities of plan administrator. Consistent with the
provisions of section 405 (c) (1) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1105 (c) (1)), a plan may provide for
the allocation of specific responsibilities of plan administrator among
named persons and for named persons to designate others to carry out
such responsibilities. A person or group of persons may be designated as
plan administrator in accordance with the rules of this paragraph even
though the person or group of persons does not carry the specific title
``plan administrator''. In the absence of a person or group of persons
designated as the plan administrator (individually, collectively, or by
designation of different specific administrative responsibilities), the
plan administrator for the plan year is the person or group of persons
specified in paragraph (b) of this section.
(b) Plan administrator not specifically designated. If no person or
group of persons is specifically designated as the plan administrator
for a plan year by the instrument under which the plan is operated, the
plan administrator for such year is the person or group of persons
determined under the following rules:
(1) Single employer. In the case of a plan maintained by a single
employer, the employer is the plan administrator. If the employer is a
corporation, the corporation is the plan administrator. However, the
corporation's board of directors may authorize a person or group of
persons to fulfill responsibilities of the corporation as plan
administrator. In the absence of such authorization, any corporate
officer authorized under law, corporate by-laws, or resolution of the
board of directors to act on behalf of the corporation with respect to
contracts of a value equivalent to the fair market value of the assets
of the plan shall be presumed to have authority to fulfill
responsibilities of the corporation as plan administrator. For purposes
of this paragraph (b) (1), ``employer'' means the ``employer'' as
defined in section 3 (5) of the Employee Retirement Income Security Act
of 1974 (29 U.S.C. 1003 (5)).
(2) Employee organization. In the case of a plan maintained by an
employee organization, the employee organization is the plan
administrator.
(3) Group representing the parties. In the case of a plan maintained
by two or more employers, or jointly by one or more employers and one or
more employee organizations, the association, committee, joint board of
trustees, or other similar group of representatives of the parties who
maintain the plan, as the case may be, is the plan administrator. For
purposes of this subparagraph (3), a plan shall be considered maintained
by two or more employers or jointly by one or more employers and one or
more employee organizations only if none of the parties has the express
power, under the terms of the instrument under which the plan is
operated, to terminate the plan unilaterally.
(4) Person in control of assets. In any case where a plan
administrator may not be determined by application of paragraphs (a) and
(b), (1), (2), and (3) of this section, the plan administrator is the
person or persons actually responsible, whether or not under the terms
of the plan, for the control, disposition, or management of the cash or
property received by or contributed to the plan, irrespective of whether
such control, disposition, or management is exercised directly by such
person or persons or indirectly through an agent or trustee designated
by such person or persons.
(Secs. 414(g) and 7805 of the Internal Revenue Code of 1954 (88 Stat.
927, 68A Stat 917; 26 U.S.C. 414(g), 7805))
[T.D. 7618, 44 FR 27657, May 11, 1979]
[[Page 224]]
Sec. 1.414(l)-1 Mergers and consolidations of plans or transfers of
plan assets.
(a) In general--(1) Scope of the regulations. Sections 401(a)(12)
and 414(l) apply only to plans to which section 411 applies without
regard to section 411(e)(2). Thus, for example, these sections do not
apply to a governmental plan within the meaning of section 414(d); a
church plan, within the meaning of section 414(e), for which there has
not been made the election under section 410(d) to have the
participation, vesting, funding, etc. requirements apply; or a plan
which at no time after September 2, 1974, provided for employer
contributions.
(2) General rule. Under section 414(l),
(i) A trust which forms a part of a plan will not constitute a
qualified trust under section 401, and
(ii) A plan will not be treated as being qualified under section 403
(a) and 405 (a), unless, in the case of a merger or consolidation (as
defined in paragraph (b)(2) of this section), or a transfer of assets or
liabilities (as defined in paragraph (b)(3) of this section), the
following condition is satisfied. This condition requires that each
participant receive benefits on a termination basis (as defined in
paragraph (b)(5) of this section) from the plan immediately after the
merger, consolidation or transfer which are equal to or greater than the
benefits the participant would receive on a termination basis
immediately before the merger, consolidation, or transfer.
(b) Definitions. For purposes of this section:
(1) Single plan. A plan is a ``single plan'' if and only if, on an
ongoing basis, all of the plan assets are available to pay benefits to
employees who are covered by the plan and their beneficiaries. For
purposes of the preceding sentence, all the assets of a plan will not
fail to be available to provide all the benefits of a plan merely
because the plan is funded in part or in whole with allocated insurance
instruments. A plan will not fail to be a single plan merely because of
the following:
(i) The plan has several distinct benefit structures which apply
either to the same or different participants,
(ii) The plan has several plan documents,
(iii) Several employers, whether or not affiliated, contribute to
the plan,
(iv) The assets of the plan are invested in several trusts or
annuity contracts, or
(v) Separate accounting is maintained for purposes of cost
allocation but not for purposes of providing benefits under the plan.
However, more than one plan will exist if a portion of the plan assets
is not available to pay some of the benefits. This will be so even if
each plan has the same benefit structure or plan document, or if all or
part of the assets are invested in one trust with separate accounting
with respect to each plan.
(2) Merger or consolidation. The terms ``merger'' or
``consolidation'' means the combining of two or more plans into a single
plan. A merger or consolidation will not occur merely because one or
more corporations undergo a reorganization (whether or not taxable).
Furthermore, a merger or consolidation will not occur if two plans are
not combined into a single plan, such as by using one trust which limits
the availability of assets of one plan to provide benefits to
participants and beneficiaries of only that plan.
(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
[[Page 225]]
Act of 1974 (``ERISA'') and the regulations thereunder if the plan
terminated. Thus, the term does not include benefits that are guaranteed
by the Pension Benefit Guaranty Corporation, but not provided by the
plan assets.
(ii) For purposes of determining the benefits on a termination
basis, the allocation of assets to various priority categories under
section 4044 of ERISA must be made on the basis of reasonable actuarial
assumptions. The assumptions used by the Pension Benefit Guaranty
Corporation as of the date of the merger or spinoff are deemed
reasonable for this purpose.
(iii) If a change in the benefit structure of a plan in conjunction
with a merger, consolidation, or transfer of assets or liabilities
alters the benefits on a termination basis, the change should be
designated, at the time the merger, consolidation, or transfer occurs,
to be effective either immediately before or immediately after that
occurrence. In the event that no designation is made, the change in the
benefit structure will be deemed to occur immediately after the merger,
consolidation, or transfer of assets or liabilities.
(6) Lower funded plan. (i) The term ``lower funded plan'' generally
means the plan which, immediately prior to the merger, would have its
assets exhausted in a higher priority category than the other plan.
(ii) Where two plans, immediately prior to the merger, would have
their assets exhausted in the same priority category of section 4044 of
ERISA in the event of termination, the lower funded plan is the one in
which the assets would satisfy a lesser proportion of the liability
allocated to that priority category.
(7) Priority category. The term ``priority category'' means the
category of benefits described in each paragraph of section 4044(a) of
ERISA. References to higher or highest priority categories refer to
those priority categories which receive the first allocation of asserts,
i.e. the lowest paragraph numbers in section 4044(a).
(8) Separate accounting of assets. The term ``separate accounting of
assets'' means the maintenance of an asset account with respect to a
given group of participants which is:
(i) Credited with contributions made to the plan on behalf of the
participants and with its allocable share of investment income, if any,
and
(ii) Charged with benefits paid to the participants, and with its
allocable share of investment losses or expenses.
(9) Present value of accrued benefit. For purposes of this section,
the present value of an accrued benefit must be determined on the basis
of reasonable actuarial assumptions. For this purpose, the assumptions
used by the Pension Benefit Guaranty Corporation as of the date of the
merger or spinoff are deemed reasonable.
(10) Valuation of plan assets. In determining the value of a plan's
assets, the standards set forth in regulations prescribed by the Pension
Benefit Guaranty Corporation (29 CFR Part 2611) shall be applied.
(11) Date of merger or spinoff. The actual date of a merger or
spinoff shall be determined on the basis of the facts and circumstances
of the particular situation. For purposes of this determination, the
following factors, none of which is necessarily controlling, are
relevant:
(i) The date on which the affected employees stop accruing benefits
under one plan and begin coverage and benefit accruals under another
plan.
(ii) The date as of which the amount of assets to be eventually
transferred is calculated.
(iii) If the merger or spinoff agreement provides that interest is
to accrue from a certain date to the date of actual transfer, the date
from which such interest will accrue.
(c) Application of section 414(l)--(1) Two or more plans. (i)
Section 414(l) does not apply unless more than a single plan is
involved. It also does not apply unless at least a single plan assumes
liabilities from another plan or obtains assets from another plan (as in
a merger or spinoff). For purposes of section 414(l), a transfer of
assets or liabilities will not be deemed to occur merely because a
defined contribution plan is amended to become a defined benefit plan.
This rule will apply even if, under
[[Page 226]]
the facts and circumstances of a particular case, a termination of the
defined contribution plan will be considered to have occurred for
purposes of other provisions of the Code.
(ii) The requirements of this subparagraph may be illustrated as
follows:
Example. After acquiring Corporation B, Corporation A amends
Corporation B's defined benefit plan (Plan B) to provide the same
benefits as Corporation A's defined benefit plan (Plan A). The assets of
Plan B are transferred to the trust containing the assets of Plan A in
such a manner that the assets of each plan: (1) are separately accounted
for, and (2) are not available to pay benefits of the other plan.
Because of condition (2) there are still two plans and, therefore, a
merger did not occur. As a result, section 414(l) does not apply. If at
some later date Corporation A were to sell Corporation B and transfer
the assets of Plan B that were separately accounted for to another trust
or to an annuity contract solely for the purpose of providing Plan B's
benefits, this transfer would also not involve section 414(l). This is
so because Plan B was a separate plan before the entire transaction and
because no plan assumed liabilities or obtained assets from another
plan. If, on the other hand, Corporation A merged Plan A and Plan B at
the time of the acquisition of Corporation B by deleting condition (2)
above, then section 414(l) would apply both to the merger of Plan A and
Plan B and to the spinoff of Plan B from the merged plan. The spinoff
would have to satisfy the requirements of paragraph (n) of this section,
even if the assets attributable to Plan A and Plan B were separately
accounted for in order to allocate funding costs.
(2) Multiemployer plans. Except to the extent provided by
regulations of the Pension Benefit Guaranty Corporation, section 114(l)
does not apply to any transaction to the extent that participants either
before or after that transaction are covered under a multiemployer plan
within the meaning of section 414(f). Until these regulations are
issued, section 414(l) does not apply to any of the following
situations:
(i) A multiemployer plan is split into two or more plans, one or
more of which are not multiemployer plans, or (ii) A single employer
plan is merged into a multiemployer plan.
Therefore, if some (but not all) of the participants in a single
employer plan become participants in a multiemployer plan under an
agreement in which the multiemployer plan assumes all the liabilities of
the single employer plan with respect to these participants and in which
some or all of the assets of the single employer plan are transferred to
the multiemployer plan, section 414(l) applies, but only with respect to
the participants in the single employer plan who did not transfer to the
multiemployer plan.
(d) Merger of defined contribution plans. In the case of a merger of
two or more defined contribution plans, the requirements of section
414(l) will be satisfied if all of the following conditions are met:
(1) The sum of the account balances in each plan equals the fair
market value (determined as of the date of the merger) of the entire
plan assets.
(2) The assets of each plan are combined to form the assets of the
plan as merged.
(3) Immediately after the merger, each participant in the plan as
merged has an account balance equal to the sum of the account balances
the participant had in the plans immediately prior to merger.
(e) Merger of defined benefit plans--(1) General rule. Section
414(l) compares the benefits on a termination basis before and after the
merger. If the sum of the assets of all plans is not less than the sum
of the present values of the accrued benefit (whether or not vested) of
all plans, the requirements of section 414(l) will be satisfied merely
by combining the assets and preserving each participant's accrued
benefits. This is so because all the accrued benefits of the plan as
merged are provided on a termination basis by the plan as merged.
However, if the sum of the assets of all plans is less than the sum of
the present values of the accrued benefits (whether or not vested) in
all plans, the accrued benefits in the plan as merged are not provided
on a termination basis.
(2) Special schedule of benefits. Generally, for some participants,
the benefits provided on a termination basis for the plan as merged
would be different from the benefits provided on a termination basis in
the plans prior to merger if the assets were merely combined and if each
participant retained his accrued benefit. Some participants
[[Page 227]]
would, therefore, receive greater benefits on a termination basis as a
result of the merger and some other participants would receive smaller
benefits. Accordingly, the requirements of section 414(l) would not be
satisfied unless the distribution on termination were modified in some
manner to prevent any participant from receiving smaller benefits on a
termination basis as a result of the merger. This is accomplished
through modifying the application of section 4044 of ERISA by inserting
a special schedule of benefits.
(f) Operational rules for the special schedule. The application of
section 4044 of ERISA as modified by the schedule of benefits is
accomplished by the following steps:
(1) Section 4044 is applied in the plan as merged through the
priority categories fully satisfied by the assets of the lower funded
plan immediately prior to the merger.
(2) The assets in the plan as merged are then allocated to the next
priority category as a percentage of the value of the benefits that
would otherwise be allocated to that priority category. That percentage
is the ratio of (i) the assets allocated to the first priority category
not fully satisfied by the lower funded plan immediately prior to the
merger to (ii) the assets that would have been allocated had that
priority category been fully satisfied.
(3) A schedule of benefits is formed listing participants and
scheduled accrued benefits. The scheduled accrued benefit is the excess
of the benefits provided on a termination basis with respect to any
participant from the plans immediately prior to the merger, over the
benefits provided on a termination basis in subparagraphs (1) and (2) of
this paragraph immediately after the merger. After allocating the assets
in accordance with subparagraph (2) of this paragraph, the assets are
allocated to the schedule of benefits as follows:
(i) First the assets are allocated to the scheduled benefits to the
extent that the participant would have benefits provided in subparagraph
(4) of this paragraph if there were no scheduled benefits.
(ii) Then the assets are allocated to the scheduled benefits to the
extent that the participant would have benefits provided pursuant to
subparagraph (5) of this paragraph if there were no scheduled benefits.
These assets should be allocated first to those scheduled benefits that
are in the highest priority category under section 4044.
(4) The assets are then allocated to those benefits in the priority
category described in subparagraph (2) of this paragraph with respect to
which assets were not allocated. This allocation is made to the extent
that these benefits are not associated with benefits in the schedule.
(5) Finally, the assets are allocated in accordance with section
4044 with respect to priority categories lower than the priority
category described in subparagraph (4) of this paragraph. This
allocation is made to the extent that these benefits are not associated
with benefits in the schedule.
(g) Successive mergers--(1) In general. In the case of a current
merger of a defined benefit plan with another defined benefit plan which
as a result of a previous merger has a special schedule, the rules of
paragraphs (e) and (f) of this section apply as if the schedule were
considered a category described in section 4044 of ERISA. Thus, a second
schedule may be formed as a result of the current merger. The second
schedule will be inserted in the priority category of section 4044
described in paragraph (f)(2) of this section as of the date of the
current merger. This priority category may be higher, lower, or within
the schedule of benefits existing on account of a previous merger. If
this priority schedule is inserted within a schedule of benefits, a new
single schedule of benefits replacing the old schedule of benefits would
in effect be created.
(2) Allocation of assets. Assets in the new schedule of benefits are
allocated as follows:
(i) First to the benefits remaining in the old schedule to the
extent that there are assets immediately prior to the second merger to
satisfy the original benefits,
(ii) Then to the benefits provided on a termination basis from the
plans immediately prior to the second merger
[[Page 228]]
to the extent that they are not provided before the schedule after the
second merger or in subdivision (i) of this subparagraph,
(iii) Then to benefits remaining in the original schedule not
included in subdivision (i) of this subparagraph.
(h) De minimis rule for merger of defined benefit plan--(1) In
general. In the case of a merger of a defined benefit plan (``smaller
plan'') whose liabilities (i.e., the present value of accrued benefits,
whether or not vested) are less than 3 percent of the assets of another
defined benefit plan (``larger plan'') as of at least one day in the
larger plan's plan year in which the merger of the two plans occurs,
section 414(l) will be deemed to be satisfied if the following condition
is met. The condition requires that a special schedule of benefits
(consisting of all the benefits that would be provided by the smaller
plan on a termination basis just prior to the merger) be payable in a
priority category higher than the highest priority category in section
4044 of ERISA. Assets will be allocated to that schedule in accordance
with the allocation of assets to scheduled benefits in paragraph (f)(3)
of this section.
(2) Application to a series of mergers. In the case of a series of
such mergers in a given plan year of the larger plan, the rule described
in subparagraph (1) of this paragraph will apply only if the sum of the
liabilities (whether or not vested) assumed by the larger plan are less
than 3 percent of the assets of the larger plan as of at least one day
in the plan year of the larger plan in which the mergers occurred.
(3) Application to a merger occurring over more than one plan year.
In the case of a merger of a smaller plan or a portion thereof with a
larger plan designed to occur in steps over more than one plan year of
the larger plan, the entire transaction will be deemed to occur in the
plan year of the larger plan which contains the first of these steps.
(4) Liabilities of the smaller plan. For purposes of subparagraphs
(2) and (3) of this paragraph, mergers satisfying paragraphs (e), (f) or
(g) of this section will be ignored in determining the sum of the
liabilities assumed by the larger plan.
(i) Data maintenance--(1) Alternative to the special schedule. In
the case of a merger which would require the creation of a special
schedule in order to satisfy section 414(l), the schedule need not be
created at the time of the merger if data sufficient to create the
schedule is maintained. The schedule would only have to be created in
the event of a subsequent plan termination or a subsequent spinoff. In
that case the schedule must be determined as of the date of the merger.
(2) Required data. The data that must be maintained depends on the
plan, and care should be taken to ensure that all necessary data is
maintained. Furthermore, in order to take advantage of the data
maintenance alternative provided in this paragraph, an enrolled actuary
must certify to the plan administrator that each element of data
necessary to determine the schedule as of the date of the merger is
maintained. This certification must be based either upon the enrolled
actuary's independent examination of the data, or upon his reliance,
which under the circumstances of the particular situation must be
reasonable, upon a written statement of the plan administrator
concerning what data is actually being maintained.
(j) Five year rule--(1) Limitation on the required use of the
special schedule. A plan will not fail to satisfy the requirements of
section 414(l) merely because the effects of the special schedule
created pursuant to paragraphs (e)(2) or (h) of this section are ignored
5 years after the date of a merger. Furthermore, the date maintained
pursuant to paragraph (i) of this section need not be maintained for
more than 5 years after the merger, if the plan does not have a spinoff
or a termination within 5 years.
(2) Illustration. If Plans A and B merge to form Plan AB and if Plan
AB merges with Plan C 3 years later to form Plan ABC and if Plan ABC
terminates 4 years later, the data relating to the merger of Plans A and
B need not be maintained for more than 5 years after the merger of Plans
A and B. In addition, after 5 years have elapsed after the merger of
Plans A and B, the effect of any special schedule created by the merger
of Plans A and B on the
[[Page 229]]
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 230]]
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 231]]
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 232]]
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 233]]
(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 234]]
(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 235]]
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 236]]
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 237]]
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 238]]
(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 239]]
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 240]]
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 241]]
(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 242]]
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 243]]
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 244]]
(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 245]]
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 246]]
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 247]]
(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 248]]
(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 249]]
(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 250]]
[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 251]]
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 252]]
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 253]]
separate lines of business for purposes of section 410(b) in accordance
with paragraph (b) of this section may apply the requirements of section
410(b) on an employer-wide rather than a qualified-separate-line-of-
business basis with respect to any plan (within the meaning of Sec.
1.414(r)-8(d)(2), but without regard to the mandatory disaggregation
rule of Sec. 1.410(b)-7(c)(4) for portions of a plan that benefit
employees of different qualified separate lines of business) that
benefits a group of employees that satisfies the percentage test of
section 410(b)(1)(A) (i.e., benefits at least 70 percent of the
employer's nonexcludable nonhighly compensated employees). If section
401(a)(4) requires that a group of employees under the plan described in
the preceding sentence satisfy section 410(b) for purposes of satisfying
section 401(a)(4), the percentage test of section 410(b)(1)(A) must be
satisfied by each such group of employees. See Sec. 1.414(r)-8(c). The
rules of this paragraph (c)(2)(ii) are illustrated by the following
example.
Example. Employer A maintains a single profit-sharing plan, Plan W,
and three pension plans, Plans X, Y and Z, each benefiting employees of
a different one of Employer A's three qualified separate lines of
business. Contributions to the profit-sharing plan are made pursuant to
a cash or deferred arrangement in which all employees of Employer A are
eligible to participate. Assume that, as a result, Plan W satisfies the
requirements to be tested under this paragraph (c)(2)(ii). None of the
pension plans benefits more than 70 percent of the nonexcludable
nonhighly compensated employees of Employer A. Employer A is treated as
operating qualified separate lines of business for purposes of applying
section 410(b) to its qualified plans. The requirements of sections
410(b) and 401(a)(4) must therefore be applied to Plans X, Y and Z
separately with respect to the employees of each of the three qualified
separate line of business operated by Employer A. Since Plan W benefits
at least 70 percent of the nonexcludable nonhighly compensated employees
of Employer A, however, the requirements of sections 410(b) and
401(a)(4) (including section 401(k)) may be applied to Plan W on an
employer-wide basis.
(3) Separate application of section 401(a)(26)--(i) General rule.
Except as provided in paragraph (c)(3)(ii) of this section, an employer
is permitted to apply the requirements of section 401(a)(26) separately
with respect to the employees of each qualified separate line of
business operated by the employer only if the employer does so with
respect to all its plans, all its employees, and all its qualified
separate lines of business. Rules for applying the requirements of
section 401(a)(26) separately with respect to the employees of a
qualified separate line of business are provided in Sec. 1.414(r)-9. An
employer may apply the rules of section 414(r) for purposes of section
401(a)(26) even if it does not apply the rules of section 414(r) for
purposes of section 410(b).
(ii) Special rule for employer-wide plans. Notwithstanding the first
sentence of paragraph (c)(3)(i) of this section, an employer that is
treated as operating qualified separate lines of business in accordance
with paragraph (b) of this section for purposes of both sections 410(b)
and 401(a)(26) may apply the requirements of section 401(a)(26) on an
employer-wide rather than a qualified-separate-line-of-business basis
with respect to any plan (within the meaning of Sec. 1.414(r)-9(c)(2),
but without regard to the mandatory disaggregation rule of Sec.
1.401(a)(26)-2(d)(1)(iv) for portions of a plan that benefit employees
of different qualified separate lines of business), but only if the
special rule for employer-wide plans in paragraph (c)(2)(ii) of this
section is applied to the same plan for the same plan year.
(4) Separate application of section 129(d)(8). [Reserved]
(5) Separate application of other Code requirements. Under no
circumstance may the requirements of any section of the Code (other than
a section described in paragraphs (c)(2) through (c)(4) of this section)
be applied separately with respect to the employees of a qualified
separate line of business unless the section specifically cross-
references, or is specifically cross-referenced by, section 414(r). The
Code sections whose requirements may not be applied separately with
respect to the employees of a qualified separate line of business
include, but are not limited to, sections 79(d)(3), 105(h), 117(d)(3),
120(c)(2), 125(g)(3), 127(b)(2), 129(d)(3), 132, 195, 401(a)(3) (as in
effect on September 1, 1974), 414(q)(4),
[[Page 254]]
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
[[Page 255]]
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]
[[Page 256]]
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 257]]
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 258]]
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 259]]
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 260]]
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 261]]
(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 262]]
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 263]]
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 264]]
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 265]]
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 266]]
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 267]]
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 268]]
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 269]]
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 270]]
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 271]]
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 272]]
(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),
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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
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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 275]]
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)
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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 277]]
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 278]]
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 279]]
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 280]]
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 281]]
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 282]]
(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 283]]
(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 284]]
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 285]]
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 286]]
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 287]]
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 288]]
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 289]]
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 290]]
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 291]]
(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 292]]
(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 293]]
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 294]]
(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 295]]
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 296]]
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 297]]
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 298]]
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 299]]
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 300]]
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 301]]
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 302]]
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 303]]
(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 304]]
(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 305]]
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 306]]
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 307]]
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 308]]
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 309]]
(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 310]]
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 311]]
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 312]]
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 313]]
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 314]]
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 315]]
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 316]]
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 317]]
(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 318]]
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 319]]
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 320]]
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 321]]
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 322]]
(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 323]]
(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 324]]
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 325]]
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 326]]
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 327]]
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 328]]
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
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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
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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 332]]
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 333]]
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 334]]
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 335]]
(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 336]]
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
[[Page 337]]
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 338]]
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 339]]
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 340]]
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
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(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
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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
[[Page 343]]
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 345]]
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 346]]
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 347]]
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 348]]
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 349]]
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 350]]
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 351]]
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 352]]
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 353]]
(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 354]]
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 355]]
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 356]]
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 357]]
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 358]]
(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 359]]
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 360]]
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 361]]
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 362]]
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 363]]
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 364]]
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 365]]
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 366]]
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 367]]
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 368]]
(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 369]]
(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 370]]
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 371]]
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 372]]
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 373]]
(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 374]]
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 375]]
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 376]]
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 377]]
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 378]]
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 379]]
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 380]]
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 381]]
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 382]]
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 383]]
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 384]]
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 385]]
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 386]]
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 387]]
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 388]]
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 389]]
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 390]]
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 391]]
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 392]]
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 393]]
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 394]]
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 395]]
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 396]]
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 397]]
(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 398]]
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 399]]
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 400]]
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 401]]
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 402]]
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 403]]
(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 404]]
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 405]]
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 406]]
(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 407]]
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 408]]
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 409]]
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 410]]
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 411]]
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--(A) In general. 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
distribution, must not be less than the amount calculated using the
applicable mortality table described in paragraph (d)(2) of this section
and the applicable interest rate described in paragraph (d)(3) of this
section, as determined for the month described in paragraph (d)(4) of
this section. In the case of an optional form of benefit payable before
normal retirement age, the present value of the optional form determined
in accordance with the preceding sentence may not be less than the
present value of the accrued benefit payable at normal retirement age.
In the case of an optional form of benefit payable on or after normal
retirement age, the present value of the optional form determined in
accordance with the first sentence of this paragraph (d)(1)(i)(A) may
not be less than the present value of the immediate annuity (payable in
the same form as the accrued benefit is expressed). The present value
determined under this paragraph (d) also applies for purposes of
determining whether consent for a distribution is
[[Page 412]]
required under paragraph (b) of this section.
(B) Payment of a portion of a participant's benefit. The rules of
this paragraph (d)(1) apply with respect to a payment of only a portion
of the accrued benefit in the same manner as these rules would apply to
a distribution of the entire accrued benefit. See paragraph (d)(7) of
this section for rules relating to such a bifurcation of a participant's
accrued benefit.
(C) Special rules for applicable defined benefit plans. See section
411(a)(13) and Sec. 1.411(a)(13)-1 for an exception from the rules of
section 417(e)(3) and this paragraph (d) that applies to certain
distributions from plans with lump sum-based benefit formulas.
(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 whether the requirements of section 401(a)(11) apply
to the plan.
(2) Applicable mortality table--(i) In general. The applicable
mortality table for a calendar year is the mortality table that is
prescribed by the Commissioner in guidance published in the Internal
Revenue Bulletin. See Sec. 601.601(d) of this chapter. This mortality
table is to be based on the table specified under section 430(h)(3)(A),
but without regard to section 430(h)(3)(C) or (D).
(ii) Mortality discounts--(A) In general. Except as provided in
paragraph (d)(2)(ii)(B) of this section, the probability of death under
the applicable mortality table is taken into account for purposes of
determining the present value under this paragraph (d) without regard to
the death benefits provided under the plan (other than a death benefit
that is part of the normal form of benefit or part of another optional
form of benefit, as described in Sec. 1.411(d)-3(g)(6)(ii)(B), for
which present value is determined).
(B) Special rule for employee-provided benefit. For purposes of
determining the present value under this paragraph (d) with respect to
the portion of the accrued benefit derived from employee contributions
(that is determined in accordance with the rules of section 411(c)), the
probability of death during the assumed deferral period, if any, is not
taken into account. For purposes of the preceding sentence, the assumed
deferral period is the period between the date of the present value
determination and the assumed commencement date for the annuity
attributable to the accrued benefit derived from employee contributions.
(C) Exception from requirement that QJSA be most valuable form of
benefit. An optional form of benefit that is subject to the minimum
present value requirement of this section is not treated as failing the
requirement under Sec. 1.401(a)-20, Q&A-16, that an optional form of
benefit for a married participant may not be more valuable than the
qualified joint and survivor annuity payable at the same time merely
because, in applying the rules of this section in determining the amount
of the optional form of benefit, the amount payable is calculated--
(1) Taking into account both the probability of death before
retirement and any death benefit under the plan, or
(2) Using the present value factor for the employee-provided portion
of the benefit determined under paragraph (d)(2)(ii)(B) of this section
as the present value factor for the employer-provided portion of the
benefit.
(3) Applicable interest rate--(i) In general. The applicable
interest rate for a month is determined using the first, second, and
third segment rates for that month under section 430(h)(2)(C), as
modified pursuant to section 417(e)(3)(D) (and without regard to the
segment rate stabilization rules of section 430(h)(2)(C)(iv)). These
section 417(e) segment rates are specified by the Commissioner in
revenue rulings, notices, or other guidance published in the Internal
Revenue Bulletin and are applied under rules similar to the rules under
Sec. 1.430(h)(2)-1(b). Thus, for example, in determining the present
value of a straight life annuity, the first segment rate is applied with
respect to payments expected to be made during the 5-year period
beginning on the annuity starting date, the second segment rate is
applied with respect to payments expected to be made during the 15-year
period following the end of
[[Page 413]]
that 5-year period, and the third segment rate is applied with respect
to payments expected to be made after the end of that 15-year period.
The section 417(e) segment rates that are published by the Commissioner
are to be used for this purpose without further adjustment.
(ii) Examples. The following examples illustrate the rules of
paragraphs (d)(2) and (d)(3)(i) of this section:
(A) Example 1--(1) Facts. Plan A is a non-contributory defined
benefit plan with a calendar-year plan year. The normal retirement age
is 65, and all participant elections are made with proper spousal
consent. Plan A includes an optional form of benefit that provides a
single-sum distribution equal to the present value of the participant's
accrued benefit. Plan A provides that the applicable interest rate for
any distribution is determined using the segment rates as specified by
the Commissioner for the month preceding the month containing the
annuity starting date of the distribution. The applicable mortality
table is the table specified by the Commissioner for the calendar year
that contains the annuity starting date.
(2) Analysis of minimum amount of single-sum distribution.
Participant P retires in November 2024 at age 60 and elects (with
spousal consent) to receive a single-sum distribution. P has an accrued
benefit of $2,000 per month payable as a life annuity beginning at the
plan's normal retirement age of 65. The applicable mortality rates for
2024 apply. For purposes of this paragraph (d)(3)(ii)(A) (Example 1),
the section 417(e) segment rates published by the Commissioner for
October 2024 are assumed to be 3.00 percent, 4.00 percent, and 5.00
percent for the first, second, and third segment rates, respectively.
The present value factor for a participant, age 60, for a deferred
annuity payable at age 65, calculated based on these interest rates and
the applicable mortality table for 2024, is 10.432. To satisfy the
requirements of section 417(e)(3) and this paragraph (d), the single-sum
distribution received by P cannot be less than $250,368 (that is, $2,000
x 12 x 10.432).
(B) Example 2--(1) Facts. The facts are the same as in paragraph
(d)(3)(ii)(A)(1) of this section (Example 1), except that Plan A
provides for mandatory employee contributions. Participant Q retires in
November 2024 at age 60 and elects (with spousal consent) to receive a
single-sum distribution of Q's entire accrued benefit. Q has an accrued
benefit of $2,000 per month payable as a life annuity beginning at Plan
A's normal retirement age of 65, consisting of an accrued benefit
derived from employee contributions determined in accordance with
section 411(c)(2) (Q's employee-provided accrued benefit) of $500 per
month and an accrued benefit derived from employer contributions (Q's
employer-provided accrued benefit) of $1,500 per month.
(2) Analysis of minimum amount of the employee-provided portion of
the single-sum distribution. Pursuant to paragraph (d)(2)(ii)(B) of this
section, the single-sum distribution used to settle Q's employee-
provided accrued benefit may not be less than the present value of the
employee-provided portion of Q's accrued benefit determined using the
applicable interest and mortality rates described in paragraphs
(d)(2)(i) and (d)(3)(i) of this section, but without taking into account
the probability of death during the assumed deferral period in
accordance with paragraph (d)(2)(ii)(B) of this section. The present
value factor for a participant, age 60, for a deferred annuity payable
at age 65, calculated based on the interest and mortality rates
specified in paragraph (d)(3)(ii)(A) of this section (Example 1), taking
the probability of death only after age 65 into account, is 10.704. To
satisfy the requirement of section 417(e)(3) and this paragraph (d), the
single-sum distribution received by Q with respect to the employee-
provided portion of the accrued benefit may not be less than $64,224
(that is, $500 x 12 x 10.704).
(3) Analysis of minimum amount of the employer-provided portion of
the single-sum distribution. The single-sum distribution made to settle
Q's employer-provided accrued benefit may not be less than the present
value of that portion of Q's accrued benefit determined using the
applicable interest and mortality rates. However, for this purpose, Plan
A is permitted to take into account the probability of death during
[[Page 414]]
the assumed deferral period in accordance with paragraph (d)(2)(ii)(A)
of this section. The single-sum distribution received by Q with respect
to the employer-provided portion of the accrued benefit may not be less
than $187,776 (that is, $1,500 x 12 x 10.432).
(4) Analysis of minimum amount of the total single-sum distribution.
To satisfy the requirements of section 417(e)(3) and this paragraph (d),
the total single-sum distribution received by Q may not be less than the
sum of the minimum single-sum distribution with respect to the employee-
provided and employer-provided portions of the accrued benefit, or
$252,000 ($64,224 + $187,776).
(5) Analysis of minimum amount of partial single-sum distribution.
If Q were to receive a partial single-sum distribution (that is, a
single-sum distribution that is less than $252,000) with the balance
payable as an annuity, then, in accordance with paragraph (d)(7)(iii)(D)
of this section, the plan must specify the portion of the participant's
accrued benefit that is settled by that distribution of the partial
single-sum distribution (unless the plan uses the same single-sum factor
with respect to all portions of the accrued benefit). Because the
present value factor for the employee-provided benefit cannot take into
account the probability of death before age 65, the plan may use the
same present value factor to determine the portion of the accrued
benefit that is settled by the single-sum distribution that applies to
both the employee-provided and the employer-provided portions of the
accrued benefit only if the factor that is used does not take into
account the probability of death before age 65.
(4) Time for determining interest rate and mortality table--(i)
Interest rate general rule. Except as provided in paragraphs (d)(4)(v)
or (vi) of this section, the applicable interest rate to be used for a
distribution is the applicable interest 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)(iv) of this section) for the stability period (as
described in paragraph (d)(4)(iii) 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) Mortality table general rule. The applicable mortality table to
be used for a distribution is the mortality table that is described in
paragraph (d)(2)(i) of this section for the calendar year during which
the stability period containing the annuity starting date begins.
(iii) Stability period. A plan must specify the period for which the
applicable interest rate remains constant (the stability period). This
stability period may be one calendar month, one plan quarter, one
calendar quarter, one plan year, or one calendar year. This same
stability period also applies to the applicable mortality table.
(iv) Lookback month. A plan must specify the lookback month that is
used to determine the applicable interest rate with respect to a
stability period. The lookback month may be the first, second, third,
fourth, or fifth full calendar month preceding the first day of the
stability period.
(v) Permitted average interest rate. A plan may apply the rules of
paragraph (d)(4)(i) of this section by substituting a permitted average
applicable interest rate with respect to the plan's stability period for
the applicable interest rate determined under paragraph (d)(3) of this
section for the applicable lookback month with respect to the plan's
stability period. For this purpose, a permitted average applicable
interest rate with respect to a stability period is the applicable
interest rate that is computed using the average of the section 417(e)
segment rates described in 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)(v) to apply, a plan must specify the manner in
which the permitted average interest rate is computed.
(vi) Additional determination dates. The Commissioner may prescribe,
in
[[Page 415]]
guidance published in the Internal Revenue Bulletin, other times that a
plan may provide for determining the applicable interest rate. See Sec.
601.601(d) of this chapter.
(vii) Example of determination of applicable interest rate--(A)
Facts. The facts are the same as in paragraph (d)(3)(ii)(A)(1) of this
section (Example 1), except that Plan A provides that the applicable
interest rate for any annuity starting date is determined using the
segment rates specified by the Commissioner for the third calendar month
preceding the beginning of the plan quarter that contains the annuity
starting date. Plan A also provides that the applicable mortality table
is the table specified by the Commissioner for the calendar year that
contains the beginning of the quarterly stability period.
(B) Analysis. The segment rates that apply for annuity starting
dates during the period beginning October 1, 2024, and ending December
31, 2024, are the segment rates for July 2024. This plan design permits
the applicable interest rate to be fixed for each plan quarter and for
the applicable interest rate for all distributions made during each plan
quarter to be determined before the beginning of the plan quarter.
(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--(i) In general. This paragraph (d) (other than the
provisions relating to section 411(d)(6) requirements in paragraph
(d)(9) of this section) does not apply to the amount of a distribution
paid in the form of an annual benefit that--
(A) Does not decrease during the life of the participant, or, in the
case of a QPSA, the life of the participant's spouse; or
(B) Decreases during the life of the participant merely because of--
(1) The death of the survivor annuitant (but only if the reduction
is to a level not below 50 percent of the annual benefit payable before
the death of the survivor annuitant); or
(2) The cessation or reduction of a Social Security supplement or
qualified disability benefit (as defined in section 411(a)(9)).
(ii) Example of Social Security level income option--(A) Facts. The
facts are the same as in paragraph (d)(3)(ii)(A)(1) of this section
(Example 1). Plan A also provides for an optional distribution in the
form of a Social Security level income option that is actuarially
equivalent to the straight life annuity payable at the same commencement
date. Under this optional form, the participant receives a larger
monthly payment until age 65, and a smaller monthly payment afterward,
so that it is estimated that the participant will receive level monthly
payments for life (taking into account the participant's estimated
Social Security benefit beginning at age 65). Based on the plan's early
retirement reduction factor of 0.65 at age 60, Participant R's reduced
early retirement benefit payable as a straight life annuity benefit
commencing at age 60 is $1,300 per month (which is less than the early
retirement benefit that is actuarially equivalent to the accrued benefit
determined using the applicable interest and mortality rates under
section 417(e)(3)). Participant R's estimated Social Security benefit is
$1,000 per month beginning at age 65. Plan A provides that actuarial
equivalence is determined using a 6 percent interest rate and the
mortality table set forth in Revenue Ruling 2001-62, 2001-53 IRB 632.
(B) Analysis of benefit calculation using plan factors. Using the
plan's terms for determining actuarial equivalence (an interest rate of
6 percent and the mortality table set forth in Revenue Ruling 2001-62),
the present value factor
[[Page 416]]
for a participant, age 60, with lifetime benefits commencing at age 65
is 7.800, and the present value factor for a temporary annuity payable
to that participant until age 65 is 4.278. The benefit payable to
Participant R in the form of a Social Security level income option (with
a decrease of $1,000 occurring at age 65) that is actuarially equivalent
to the early retirement benefit of $1,300 is $1,945.80 per month until
age 65 and $945.80 per month thereafter.
(C) Analysis of minimum present value. Because the benefit payable
under the Social Security level income option decreases at age 65 and
the decrease is not on account of the death of the participant or a
beneficiary or the cessation or reduction of a Social Security
supplement or a qualified disability benefit, the exception under this
paragraph (d)(6) from the minimum present value requirements of section
417(e)(3) does not apply to the benefits payable under the plan's Social
Security level income option. As illustrated in paragraph (d)(3)(ii)(A)
of this section (Example 1), to satisfy the requirements of section
417(e)(3) and this paragraph (d), the minimum present value of a benefit
payable to Participant R at age 60 cannot be less than $250,368 (that
is, $2,000 x 12 x 10.432).
(D) Conclusion. Based on the applicable interest rate and applicable
mortality table under section 417(e)(3) that are assumed in paragraph
(d)(3)(ii)(A) of this section (Example 1), the present value factor for
a participant, age 60, with lifetime benefits commencing at age 65 is
10.432, and the present value factor for a temporary annuity payable
until age 65 is 4.604. The present value of the benefit payable to
Participant R under the Social Security level income option is $225,901
($1,945.80 x 4.604 x 12 + $945.80 x 10.432 x 12). Because this present
value is less than the minimum present value of a benefit payable to
Participant R at age 60 ($250,368), the plan would fail to satisfy the
minimum present value requirement of section 417(e)(3). However, see
paragraph (d)(7)(ii)(C) of this section for a rule permitting a plan to
provide for implicit bifurcation of a Social Security level income
option.
(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 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--
[[Page 417]]
(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.
(C) Bifurcation of Social Security level income option. A plan that
provides for a Social Security level income option satisfies the
requirements of this paragraph (d) with respect to the temporary annuity
portion of the Social Security level income option if, under the terms
of the plan--
(1) 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 paid in
the form of the temporary annuity is no less than the excess, if any,
of--
(i) The participant's total accrued benefit under the plan expressed
in that form and commencing at that age; over
(ii) The annuity payable in that form commencing at that age that is
actuarially equivalent to that temporary annuity, determined using the
applicable interest rate and the applicable mortality table; and
(2) The portion of the participant's immediate annuity (payable in
the same form as the accrued benefit is expressed) that is not paid in
the form of the temporary annuity is no less than the excess, if any,
of--
(i) The participant's immediate annuity (payable in the same form as
the accrued benefit is expressed); over
(ii) The immediate annuity payable in that form that is actuarially
equivalent to that temporary annuity, determined using the applicable
interest rate and the applicable mortality table.
(D) Social Security level income option. For purposes of paragraph
(d)(7)(ii)(C) of this section, a Social Security level income option is
an optional form of benefit under which a participant's accrued benefit
is paid in the form of an annuity for the life of the participant with
additional temporary annuity payments that cease at the participant's
assumed Social Security commencement age and that do not exceed the
participant's estimated Social Security benefit at that age. For this
purpose, a participant's estimated Social Security benefit is the
estimated amount of old-age insurance benefits for the participant under
title II of the Social Security Act (as amended) and the assumed Social
Security commencement age is an age that is not later than the age as of
which the participant is entitled to those benefits without reduction on
account of age.
(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.
[[Page 418]]
(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 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%.
(A)(1) 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.
(2) 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
[[Page 419]]
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.
(3) 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.
(4) 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.
(B)(1) 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.
(2) 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 remainder
as a 10-year certain and life annuity.
(3) 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
[[Page 420]]
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.
(4) 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.
(5) 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.
(C)(1) The facts are the same as in paragraph (d)(7)(v)(B)(1) of
this section (Example 2), 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.
(2) 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.
(3) 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.
(4) 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
[[Page 421]]
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.
(D)(1) 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.
(2) 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).
(E)(1) The facts are the same as in paragraph (d)(7)(v)(D)(1) of
this section (Example 4), 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.
(2) Under the analysis set forth in paragraph (d)(7)(v)(D)(1) of
this section (Example 4), 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.
(3) 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
[[Page 422]]
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).
(4) 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 present value requirements of section 417(e)(3).
(F)(1) 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.
(2) 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).
(3) 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).
(4) 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.
[[Page 423]]
(G)(1) 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.
(2) 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.
(3) 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.
(H) Example of bifurcation of Social Security level income option--
(1) Facts. The facts are the same as in paragraph (d)(6)(ii)(A) of this
section (Example of Social Security level income option), except that
Plan A is amended to provide for implicit bifurcation of a distribution
paid in the form of a Social Security level income option, as described
in paragraph (d)(7)(ii)(C) of this section. Thus, under the plan
amendment, a distribution in the form of a Social Security level income
option is bifurcated into a temporary annuity portion that ceases at the
participant's assumed Social Security commencement age and a life
annuity portion.
(2) Analysis of bifurcation requirements. If the requirements of
paragraph (d)(7)(ii)(C) of this section are satisfied, then the
temporary annuity portion of the Social Security level income option
satisfies the minimum present value rules of section 417(e)(3) and this
paragraph (d). In order to satisfy paragraph (d)(7)(ii)(C) of this
section, there are two requirements that must be satisfied. First, the
portion of the participant's accrued benefit that is not paid in the
form of the temporary annuity must be no less than the excess of the
participant's total accrued benefit over the annuity that is actuarially
equivalent to the temporary annuity (determined using the applicable
interest and mortality rates under section 417(e)(3)), both expressed in
the normal form of benefit commencing at normal retirement age (or at
the current date, if later). Second, the portion of the participant's
immediate annuity that is not paid in the form of the temporary annuity
must be no less than the excess of the participant's total immediate
annuity over the immediate annuity that is actuarially equivalent to the
temporary annuity (determined using the applicable interest and
mortality rates under section 417(e)(3)), both expressed in the form of
benefit in which the accrued benefit is expressed but commencing at the
current age.
(3) Analysis of minimum portion of accrued benefit payable as
lifetime annuity. A temporary annuity that is payable from age 60 to 65
in the amount of $1,000 per month is actuarially equivalent, determined
using the applicable interest rate and applicable mortality table under
section 417(e)(3), to a straight life annuity of $441.33 per month
payable at normal retirement age. Therefore, under the amendment, the
portion of Participant R's accrued benefit that is not paid in the form
of that temporary annuity must be no less than $1,558.67 per month
payable as
[[Page 424]]
a straight life annuity at normal retirement age ($2,000-$441.33).
Because the portion of the accrued benefit that is not being paid in the
form of the temporary annuity determined without regard to the amendment
is $1,455.08 (the lifetime annuity of $945.80, divided by the early
retirement factor of .65), the amendment increases that portion of the
accrued benefit to $1,558.67, and the associated early retirement
benefit commencing at age 60 is $1,013.14 ($1,558.67 x 0.65).
(4) Analysis of minimum portion of immediate benefit payable as
lifetime annuity. A temporary annuity that is payable from age 60 to 65
in the amount of $1,000 per month is actuarially equivalent, determined
using the applicable interest rate and applicable mortality table under
section 417(e)(3), to a straight life annuity of $306.20 per month
commencing at age 60. Therefore, under the amendment, the portion of the
participant's immediate benefit that is not paid in the form of that
temporary annuity must be no less than $993.80 ($1,300-$306.20). Because
this minimum amount of immediate annuity is less than the otherwise
calculated early retirement benefit at age 60 of $1,013.14, the
amendment does not increase the immediate annuity above that amount.
(5) Conclusion. Because the portion of the benefit under the Social
Security level income option that is not paid in the form of a temporary
annuity satisfies the requirements of paragraph (d)(7)(ii)(C) of this
section, the plan is permitted under paragraph (d)(7)(iii)(A) of this
section to treat the temporary annuity and the remaining portion of the
benefit as separate distribution options for purposes of this paragraph
(d). Under paragraph (d)(7)(ii)(C) of this section, the temporary
annuity portion of the Social Security level income option is treated as
satisfying the minimum present value requirements of section 417(e) and
this paragraph (d). Because the lifetime annuity portion of the Social
Security level income option is non-decreasing during the lifetime of
the participant, that portion is described in paragraph (d)(6) of this
section and is therefore excepted from the requirements of section
417(e)(3). Thus, under the amendment, the combined payments payable to
Participant R under the Social Security level income option of $2,013.14
per month until age 65 and $1,013.14 per month thereafter satisfy the
requirements of section 417(e)(3) and this paragraph (d).
(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 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
[[Page 425]]
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.
(vi) Applicability date for provisions reflecting PPA '06 updates
and other rules. Paragraphs (d)(1) through (4) of this section apply to
distributions with annuity starting dates occurring on or after October
1, 2024. For earlier distributions, the rules of Sec. 1.417(e)-1(d) as
set forth in 26 CFR part 1, revised as of April 1, 2023, apply, except
that taxpayers may instead apply the rules of paragraphs (d)(1) through
(4) of this section.
(9) Relationship with section 411(d)(6). A plan amendment that
changes the interest rate or the mortality assumptions used for the
purposes described in paragraph (d)(1) of this section (including a plan
amendment that changes the time for determining those assumptions) is
generally subject to section 411(d)(6). However, for certain exceptions
to the rule in the preceding sentence, see paragraph (d)(7)(iv) of this
section (with respect to a plan amendment providing for bifurcation that
was adopted before December 31, 2017), Sec. 1.411(d)-3(a)(4) (regarding
changes in lookback months and stability periods for mortality table and
interest rate), Sec. 1.411(d)-4, Q&A-2(b)(2)(v) (with respect to plan
amendments relating to involuntary distributions), and section
1107(a)(2) of the Pension Protection Act of 2006, Public Law 109-280,
120 Stat. 780 (PPA '06) (with respect to certain plan amendments that
were made pursuant to a change to the Internal Revenue Code made by PPA
'06 or pursuant to regulations issued thereunder).
(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
[[Page 426]]
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.
(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; T.D. 9987, 89 FR 3558, Jan. 19, 2024]
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
[[Page 427]]
to contributions paid or accrued in taxable years beginning before the
termination of the last of the collective bargaining agreements pursuant
to which the plan is maintained (determined without regard to any
extension thereof agreed to after July 1, 1985). For purposes of the
preceding sentence, any plan amendment made pursuant to a collective
bargaining agreement relating to the plan which amends the plan solely
to conform to any requirement added under section 511 of the Tax Reform
Act of 1984 (i.e., requirements under sections 419, 419A, 512(a)(3)(E),
and 4976) shall not be treated as a termination of such collective
bargaining agreement. See Sec. 1.419A-2T for special rules relating to
the application of section 419 to collectively bargained welfare benefit
funds.
(c) Notwithstanding paragraphs (a) and (b), section 419 applies to
any contribution of a facility to a welfare benefit fund (or other
contribution, such as cash, which is used to acquire, construct, or
improve such a facility) after June 22, 1984, unless such facility is
placed in service by the fund before January 1, 1987, and either (1) is
acquired or improved by the fund (or contributed to the fund) pursuant
to a binding contract in effect on June 22, 1984, and at all times
thereafter, or (2) the construction of which was begun by or for the
welfare benefit fund before June 22, 1984. See Q&A-11 of this regulation
for special rules relating to the application of section 419 to the
contribution of a facility to a welfare benefit fund (and to the
contribution of other amounts, such as cash, used to acquire, construct,
or improve such a facility) before section 419 generally becomes
effective with respect to contributions to the fund.
Q-3. What is a ``welfare benefit fund'' under section 419?
A-3. (a) A ``welfare benefit fund'' is any fund which is part of a
plan, or method or arrangement, of an employer and through which the
employer provides welfare benefits to employees or their beneficiaries.
For purposes of this section, the term ``welfare benefit'' includes any
benefit other than a benefit with respect to which the employer's
deduction is governed by section 83(h), section 404 (determined without
regard to section 404(b)(2)), section 404A, or section 463.
(b) Under section 419(e)(3) (A) and (B), the term ``fund'' includes
any organization described in section 501(c) (7), (9), (17) or (20), and
any trust, corporation, or other organization not exempt from tax
imposed by chapter 1, subtitle A, of the Internal Revenue Code. Thus, a
taxable trust or taxable corporation that is maintained for the purpose
of providing welfare benefits to an employer's employees is a ``welfare
benefit fund.''
(c) Section 419(e)(3)(C) also provides that the term ``fund''
includes, to the extent provided in regulations, any account held for an
employer by any person. Pending the issuance of further guidance, only
the following accounts, and arrangements that effectively constitute
accounts, as described below, are ``funds'' within section 419(e)(3)(C).
A retired lives reserve or a premium stabilization reserve
maintained by an insurance company is a ``fund,'' or part of a ``fund,''
if it is maintained for a particular employer and the employer has the
right to have any amount in the reserve applied against its future
years' benefit costs or insurance premiums. Also, if an employer makes a
payment to an insurance company under an ``administrative services
only'' arrangement with respect to which the life insurance company
maintains a separate account to provide benefits, then the arrangement
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
[[Page 428]]
cancellation by either of the parties, neither of the parties can
receive a refund or additional amounts or benefits and neither of the
parties can incur a residual liability beyond the end of the policy year
(other than, in the case of the insurer, to provide benefits with
respect to claims incurred before cancellation). The determination
whether either of the parties can receive a refund or additional amounts
or benefits or can incur a residual liability upon cancellation of an
arrangement will be made by examining both the contractual rights and
obligations of the parties under the arrangement and the actual practice
of the insurance company (and other insurance companies) with respect to
other employers upon cancellation of similar arrangements. Similarly, a
disability income policy does not constitute a ``fund'' under the
preceding provisions merely because, under the policy, an employer pays
an annual premium so that employees who became disabled in such year may
receive benefit payments for the duration of the disability.
Q-4: For purposes of determining the section 419 limit on the
employer's deduction for contributions to the fund for a taxable year of
the employer, which taxable year of the welfare benefit fund is related
to the taxable year of the employer?
A-4: The amount of an employer's deduction for contributions to a
welfare benefit fund for a taxable year of the employer is limited to
the ``qualified cost'' of the welfare benefit fund for the taxable year
of the fund that is related to such taxable year of the employer. The
taxable year of the welfare benefit fund that ends with or within the
taxable year of the employer is the taxable year of the fund that is
related to the taxable year of the employer. Thus, for example, if an
employer has a calendar taxable year and it makes contributions to a
fund having a taxable year ending June 30, the ``qualified cost'' of the
fund for the taxable year of the fund ending on June 30, 1986, applies
to limit the employer's deduction for contributions to the fund in the
employer's 1986 taxable year. In the case of employer contributions paid
directly to an account or arrangement with an insurance company that is
treated as a welfare benefit fund for the purposes of section 419, the
policy year will be treated as the taxable year of the fund. See Q&A-7
of this regulation for special section 419 rules relating to the
coordination of taxable years for the taxable year of the employer in
which a welfare benefit fund is established and for the next following
taxable year of the employer.
Q-5: What is the ``qualified cost'' of a welfare benefit fund for a
taxable year under section 419?
A-5: (a) Under section 419(c), the ``qualified cost'' of a welfare
benefit fund for a taxable year of the fund is the sum of: (1) The
``qualified direct cost'' of such fund for such taxable year of the
fund, and (2) the amount that may be added to the qualified asset
account for such taxable year of the fund to the extent that such
addition does not result in a total amount of such account as of the end
of such taxable year of the fund that exceeds the applicable account
limit under section 419A(c). However, in calculating the qualified cost
of a welfare benefit fund for a taxable year of the fund, this sum is
reduced by the fund's ``after-tax income'' (as defined in section
419(c)(4)) for such taxable year of the fund. Also, the qualified cost
of a welfare benefit fund is reduced further under the provisions of
paragraph (b) of this Q&A.
(b)(1) Pursuant to section 419A(i), notwithstanding section 419 and
Sec. 1.419-1T, contributions to a welfare benefit 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
[[Page 429]]
of the employer (but not actually paid to such fund on or before the end
of a taxable year of the employer) and deducted by the employer for such
or any prior taxable year of the employer, shall be treated as an amount
in the fund as of the end of the last taxable year of the fund that
relates to the taxable year of the employer. Contributions that are not
deductible under this subparagraph are in excess of the qualified cost
of the welfare benefit fund for the taxable year of the fund that
relates to the taxable year of the employer and thus are treated as
contributed to the fund on the first day of the employer's next taxable
year.
(2) Paragraph (b)(1) of this section shall not apply to
contributions with respect to a collectively bargained welfare benefit
fund within the meaning of Sec. 1.419A-2T. In addition, paragraph
(b)(1) of this section shall not apply to any taxable year of an
employer beginning after the end of the earlier of the following taxable
years: (i) the first taxable year of the employer beginning after
December 31, 1985, for which the employer's deduction limit under
section 419 (after the application of paragraph (b)(1) of this section)
is at least equal to the qualified direct cost of the fund for the
taxable year (or years) of the fund that relates to such first taxable
year of the employer, or (ii) the first taxable year of the employer
beginning after December 31, 1985, with or within which ends the first
taxable year of the fund with respect to which the total amount in the
fund as of the end of such taxable year of the fund does not exceed the
account limit for such taxable year of the fund (as adjusted under
section 419A(f)(7)).
(3) For example, assume an employer with a taxable year ending June
30 and a welfare benefit fund with a taxable year ending January 31.
During its taxable year ending June 30, 1987, and on or before January
31, 1987, the employer contributes $250,000 to the fund, and during the
remaining portion of its taxable year ending June 30, 1987, the employer
contributes $200,000. The qualified direct cost of the fund for its
taxable year ending January 31, 1987, is $500,000, the account limit
applicable to such taxable year (after the adjustment under section
419A(f)(7)) is $750,000, and the total amount in the fund as of January
31, 1987, is $800,000. Before the application of this paragraph, the
employer may deduct the entire $450,000 contribution for its taxable
year ending June 30, 1987. However, under this paragraph, the excess of
(i) the sum of the total amount in the fund as of January 31, 1987
($800,000), and employer contributions to the fund after January 31,
1987, and on or before June 30, 1987 ($200,000), over (ii) the account
limit applicable to the fund for its taxable year ending January 31,
1987 ($750,000), is $250,000. Thus, under this paragraph, only $200,000
of the $450,000 contribution the employer made during its taxable year
ending June 30, 1987, is deductible for such taxable year. If the excess
were $450,000 or greater, no portion of the $450,000 contribution would
be deductible by the employer for its taxable year ending June 30, 1987.
Such nondeductible contributions are in excess of the fund's qualified
cost for the taxable year related to the employer's taxable year and
thus are deemed to be contributed on the first day of the employer's
next taxable year.
(c) See Q&A-7 of this regulation for special rules relating to the
calculation of the qualified cost of a welfare benefit fund for an
Initial Fund Year and an Overlap Fund Year (as defined 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
[[Page 430]]
directly by the employer and (2) the employer used the cash receipts and
disbursements method of accounting and had the same taxable year as the
fund. In this regard, a benefit is treated as provided when such benefit
would be includible in the gross income of the employee if provided
directly by the employer (or would be so includible but for a provision
of chapter 1, subtitle A, of the Internal Revenue Code excluding it from
gross income). Thus, for example, if a calendar year welfare benefit
fund pays an insurance company in July 1986 the full premium for
coverage of its current employees under a term health insurance policy
for the twelve month period ending June 30, 1987, the insurance coverage
will be treated as provided by the fund over such twelve month period.
Accordingly, only the portion of the premium for coverage during 1986
will be treated as a ``qualified direct cost'' of the fund for 1986; the
remaining portion of the premium will be treated as a ``qualified direct
cost'' of the fund for 1987. The ``qualified direct cost'' for a taxable
year of the fund includes the administrative expenses incurred by the
welfare benefit fund in delivering the benefits for such year.
(b) If, in a taxable year of a welfare benefit fund, the fund holds
an asset with a useful life extending substantially beyond the end of
the taxable year (e.g., buildings, vehicles, tangible assets, and
licenses) and, for such taxable year of the fund, the asset is used in
the provision of welfare benefits to employees, the ``qualified direct
cost'' of the fund for such taxable year of the fund includes the amount
that would have been allowable to the employer as a deduction under the
applicable Code provisions (e.g., sections 168 and 179) with respect to
the portion of the asset used in the provision of welfare benefits for
such year if the employer had acquired and placed in service the asset
at the same time the fund received and placed in service the asset, and
the employer had the same taxable year as the fund. This rule applies
regardless of whether the fund received the asset through a contribution
of the asset by the employer or through an acquisition or the
construction by the fund of the asset. For example, assume that in 1986
a calendar year employer contributes recovery property under section
168(c) to a welfare benefit fund with a calendar taxable year to be used
in the provision of welfare benefits. The employer will be treated as
having sold the property in such year and thus will recognize gain to
the extent that the fair market value of the property exceeds the
employer's adjusted basis in the property. In this regard, see section
1239(d). Also, the employer will be treated as having made a
contribution to the fund in such year equal to the fair market value of
the property. Finally, the qualified direct cost of the welfare benefit
fund for 1986 will include the amount that the employer could have
deducted in 1986 with respect to the portion of the property used in the
provision of welfare benefits if the employer had acquired the property
in 1986 and had placed the property in service when the fund actually
placed the property in service. Similarly, for example, assume that in
1986 a welfare bendfit fund purchases and places in service a facility
to be used in the provision of welfare benefits. The qualified direct
cost of the fund for 1986 will include the amount that the employer
could have deducted with respect to such facility if the employer had
purchased and placed in service the facility at the same time 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
[[Page 431]]
schedule for a period of 60 months beginning with the month in which the
facility is placed in service under rules similar to those provided for
section 188 property under Sec. 1.188-1(a). For purposes of this
section, a ``child care facility'' is tangible property of a character
subject to depreciation that is located in the United States and
specifically used as an integral part of a ``qualified child care center
facility'' within the meaning of Sec. 1.188-1(d)(4).
(e) See Q&A-7 of this regulation for special section 419 rules
relating to the calculation of the qualified direct cost of a welfare
benefit fund for an Initial Fund Year and an Overlap Fund Year (as
defined in Q&A-7). See Q&A-11 of this regulation for special rules
relating to the contribution to a welfare benefit fund of a facility
(and to the contribution of other amounts, such as cash, used to
acquire, construct, or improve a facility) before section 419 generally
becomes effective with respect to contributions to the fund.
Q-7: What special rules apply for purposes of determining the
section 419 limit on the employer's deduction for contributions to a
welfare benefit fund for the taxable year of the employer in which the
fund is established and for the next following taxable year of the
employer?
A-7: (a) If the taxable year of a welfare benefit fund is the same
as the taxable year of the employer, there are no special rules that
apply for purposes of determining the section 419 limit on an employer's
deduction for contributions to the fund for either the taxable year of
the employer in which the fund is established or the next following
taxable year of the employer. However, if the taxable year of a welfare
benefit fund is different from the taxable year of the employer, the
general section 419 rules are modified by the special rules set forth
below for purposes of determining the section 419 deduction limit for
the taxable year of the employer in which a fund is established and for
the next following taxable year of the employer.
(b) If a welfare benefit fund is established after December 31,
1985, during a taxable year of an employer and either (i) the first
taxable year of the fund ends after the close of such taxable year of
the employer, or (ii) the first taxable year of the fund is six months
or less and ends before the close of such taxable year of the employer
and the second taxable year of the fund begins before and ends after the
close of such taxable year of the employer, the taxable year of the fund
that contains the closing day of such taxable year of the employer will
be treated as an ``Overlap Fund Year.'' For purposes of determining the
limit on the employer's deduction for contributions to a welfare benefit
fund for the taxable year of the employer in which the fund was
established, the period between the beginning of the fund's Overlap Fund
Year and the end of the employer's taxable year in which the Overlap
Fund Year began will be treated as a taxable year of the fund (``Initial
Fund Year'').
(c) The qualified cost of a welfare benefit fund for its Initial
Fund Year will be equal to the qualified direct cost of the fund for
such Initial Fund Year. The qualified cost of a fund for its Overlap
Fund Year will be determined under the general rules of Q&A-5 of this
regulation and section 419(c), with the exception that such qualfied
cost will be reduced by the employer contributions made during the
Initial Fund Year and deductible by the employer for the taxable year of
the employer in which the Overlap Fund Year of the fund begins.
(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
[[Page 432]]
$900 for its taxable year ending on December 31, 1986, and $1,600 for
its taxable year ending on December 31, 1987. If the qualified direct
cost of the fund for the Initial Fund Year had been $1,050 and the
qualified cost for the Overlap Fund Year had been $2,500 (prior to the
reduction required by paragraph (c) of this Q&A), the employer's
deduction for its taxable year ending December 31, 1986, would have been
$1,000 and its deduction for its taxable year ending December 31, 1987,
would have been $1,500.
(e) Assume that an employer with a calendar taxable year establishes
on March 1, 1986, a welfare benefit fund with a taxable year ending June
30. Thus, the fund has a short first taxable year ending June 30, 1986,
an Overlap Fund Year from July 1, 1986, until June 30, 1987, and an
ongoing June 30 taxable year. The employer contributes $1,750 to the
fund during the employer's taxable year ending December 31, 1986--$750
during the short first taxable year of the fund and $1,000 during the
Initial Fund Year (i.e., the period between July 1, 1986, and December
31, 1986)--and $1,500 to the fund during its taxable year ending
December 31, 1987. Assume that the qualified cost of the fund for the
short first taxable year of the fund is $800, the qualified direct cost
for the Initial Fund Year is $900, and the qualified cost for the
Overlap Fund Year is $2,500 (prior to the reduction required by
paragraph (c) of this Q&A). Under the special rules of paragraphs (b)
and (c), the employer may deduct $1,700 for its taxable year ending
December 31, 1986, and $1,550 for its taxable year ending December 31,
1987.
Q-8: How does section 419 treat an employer's contribution with
respect to a welfare benefit fund in excess of the applicable deduction
limit for a taxable year of the employer?
A-8: (a) If an employer makes contributions to a welfare benefit
fund in a taxable year of the employer and such contributions (when
combined with prior contributions that are deemed under the rule of this
Q&A and section 419(d) to have been made in such taxable year) exceed
the section 419 deduction limit for such taxable year of the employer,
the excess amounts are deemed to be contributed to the fund on the first
day of the next taxable year of the employer. Such deemed contributions
are combined with amounts actually contributed by the employer to the
fund during the next taxable year and may be deductible for such year,
subject to the otherwise applicable section 419 deduction limit for such
year.
(b) Contributions to a welfare benefit fund on or before December
31, 1985, that were not deductible by the employer for any taxable year
of the employer ending on or before December 31, 1985, or for the first
taxable year of the employer ending after December 31, 1985, as pre-1986
contributions (see Q&A-9 of this regulation) are deemed to be
contributed to the fund on January 1, 1986, However, see Q&A-11 of this
regulation for special rules relating to the contribution to a welfare
benefit fund of amounts (such as cash) used to acquire, construct, or
improve a facility before section 419 generally becomes effective with
respect to contributions to the fund. Generally, such contributions (to
the extent that they were made after June 22, 1984 and on or before
December 31, 1985) are treated as nondeductible pre-1986 contributions
and are deemed to be contributed in the form of a facility at the same
time as when the facility is placed in service by the fund.
Q-9: How does an employer with a fiscal taxable year calculate its
deduction limit for contributions with respect to 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
[[Page 433]]
that relates to such taxable year of the employer, and (2) the
contributions paid to the fund during the 1985 portion of such first
taxable year of the employer (``the pre-1986 contributions'') to the
extent that such pre-1986 contributions are deductible under the rules
governing the deduction of such contributions before section 419
generally becomes effective (including the rules set forth in Q&A-10 of
this regulation, modified for purposes of this Q&A-9 by substituting
``December 31, 1986'' for ``December 31, 1985'' in paragraph (c)). See
Q&A-11 of this regulation for special rules relating to the contribution
to a welfare benefit fund of a facility (and to the contribution of
other amounts, such as cash, used to acquire, construct, or improve such
a facility) before section 419 generally becomes effective with respect
to contributions to such fund.
(b) For example, assume that an employer with a taxable year ending
June 30, contributes to a welfare benefit fund with a taxable year
ending January 31. This employer contributes $1,000 to the fund between
July 1, 1985, and December 31, 1985, and an additional $500 to the fund
between January 1, 1986, and June 30, 1986. Assume further that the
qualified direct cost of the fund for the taxable year of the fund
ending January 31, 1986, is $500 and that the qualified cost for such
taxable year is $800. Under the deduction rule set forth above, the
employer's deduction for its taxable year ending June 30, 1986, is the
greater of two amounts: (1) The contributions made during such full
taxable year ($1,500) up to the qualifed cost of the fund with respect
to such taxable year ($800), and (2) the pre-1986 contributions ($1,000)
to the extent that such pre-1986 contributions are deductible under the
pre-section 419 rules. In determining the extent to which the pre-1986
contributions are deductible under the pre-section 419 rules, the rules
contained in Q&A-10 apply as though December 31, 1985, in paragraph (c)
were December 31, 1986. Assuming that only $875 is deductible under the
pre-section 419 rules, because $875 is greater than $800, this employer
may deduct $875 for its first taxable year ending after December 31,
1985. This full $875 deduction for 1985 is deemed to consist entirely of
pre-1986 contributions.
Q-10: How do the rules of sections 263, 446(b), 461(a), and 461(h)
apply in determining whether contributions with respect to a welfare
benefit fund are deductible for a taxable year?
A-10: (a) Both before and after the effective date of section 419
(see Q&A-2 of this regulation), an employer is allowed a deduction for
taxable year for contributions paid or accrued with respect to a
``welfare benefit fund'' (as defined in Q&A-3 of this regulation and
section 419(e)) only to the extent that such contributions satisfy the
requirements of section 162 or 212. These requirements must be satisfied
after the effective date of section 419 because 419 requires that (among
other requirements) contributions to a welfare benefit fund satisfy the
requirements of section 162 or 212.
(b) Except as provided in paragraphs (c) and (d), in determinig the
extent to which contributions paid or accrued with respect to welfare
benefit fund satisfy the requirements of section 162 or 212 for a
taxable year (both before and after section 419 generally becomes
effective with respect to such contributions), the rules of sections
263, 446(b), 461(a) (including the rules that relate to the creation of
an asset with a useful life extending substantially beyond the close of
the taxable year), and 461(h) (to the extent that such section 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
[[Page 434]]
was not in excess of the amount deductible under the principles of
Revenue Rulings 69-382, 1969-2 C.B. 28; 69-478, 1969-2 C.B. 29; and 73-
599, 1973-2 C.B. 40, modified as appropriate for benefits for active
employees.
(d) Notwithstanding paragraph (b), in determining the extent to
which contributions paid or accrued with respect to a welfare benefit
fund are deductible under section 419, the rules of sections 263,
446(b), and 461(a) will be treated as having been satisfied to the
extent that such contributions satisfy the otherwise applicable rules of
section 419. Thus, for example, contributions to a welfare benefit fund
will not fail to be deductible under section 419 merely because they
create an asset with a useful life extending substantially beyoud the
close of the taxable year if such contributions satisfy the otherwise
applicable requirements of section 419.
(e) In determining the extent to which contributions with respect to
a welfare benefit fund satisfy the requirements of section 461(h) for
any taxable year for which section 461(h) is effective, pursuant to the
authority under section 461(h)(2), economic performance occurs as
contributions to the welfare benefit fund are made. Solely for purposes
of section 461(h), in the case of an employer's taxable year ending on
or after July 18, 1984, and on or before March 21, 1986, contributions
made to the welfare benefit fund after the end of such taxable year and
on or before March 21, 1986 shall be deemed to have been made on the
last day of such taxable year.
Q-11: What special section 419 rules apply to the payment or accrual
with respect to a welfare benefit fund of a facility (and the payment or
accrual of other amounts, such as cash, used to acquire, construct, or
improve such a facility)?
A-11: (a)(1) In the case of an employer's payment or accrual with
respect to a welfare benefit fund after June 22, 1984, and on or before
December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2 of
this regulation, before section 419 generally becomes effective with
respect to contributions to such fund), of a facility, the rules of
section 419, Sec. 1.419-1T, and Sec. 1.419A-2T generally apply to
determine the extent to which such contribution is deductible by the
employer for its taxable year of contribution. For this purpose,
however, the facility is to be treated as the only contribution made to
the fund and the qualified cost of the fund for the taxable year of the
fund in which the facility was contributed is to be equal to the
qualified direct cost directly attributable to the facility (as
determined under Q&A-6 of this regulation). Also, for this purpose, the
welfare benefit fund to which the facility was contributed may not be
aggregated with any other fund. For purposes of this Q&A, ``facility''
means any tangible asset with a useful life extending substantially
beyond the end of the taxable year (e.g., vehicles, buildings) and any
intangible asset (e.g., licenses) related to a tangible asset, whether
or not such asset is used in the provision of welfare benefits. See,
however, paragraph (c) of Q&A-2 of this regulation for a binding
contract exception.
(2) For example, assume that an employer and a welfare benefit fund
each has a calendar taxable year and that, during 1985, the employer
contributes to the fund $200,000 in cash and a facility with a fair
market value of $100,000. Such facility is used in the provision of
welfare benefits under the fund. The employer is treated as having sold
the facility in such year and thus will recognize gain to the extent
that the fair market value of the facility exceeds the employer's
adjusted basis in the facility. In this regard, see section 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
[[Page 435]]
these assumptions, the employer would have been allowed a $10,000
deduction with respect to the facility for the 1985 taxable year, the
fund's qualified cost for its 1985 taxable year would be only $10,000.
Thus, only $10,000 of the $100,000 facility contribution would be
deductible by the employer for its 1985 taxable year (i.e., the taxable
year of the employer with or within which the applicable taxable year of
the fund ends). However, in determining the extent to which the $200,000
in cash is deductible by the employer for its 1985 taxable year, the
$100,000 facility is not to be disregarded. Thus, if under the
applicable pre-section 419 rules the employer is allowed for 1985 a
total deduction of only $175,000, the employer would be permitted a
deduction for 1985 of $175,000 ($10,000 with respect to the facility and
$165,000 of the cash contribution). The nondeductible portion of the
cash contribution is to be treated as contributed to the fund on the
first day of the next taxable year of the employer. If under the
applicable pre-section 419 rules the employer were allowed a total
deduction of $300,000 for 1985, the employer would be permitted a
deduction for 1985 of only $210,000 ($10,000 with respect to the
facility and the full $200,000 cash contribution).
(3) For example, assume that an employer has a June 30 taxable year
and maintains a welfare benefit fund with a taxable year ending January
31. During the 1985 portion of its taxable year ending June 30, 1986,
the employer contributes $50,000 in cash and a facility with a fair
market value of $100,000; and during the 1986 portion of such taxable
year, the employer contributes another $75,000 in cash to the fund. The
facility is used in the provision of welfare benefits under the fund.
Under the rules of Q&A-9 of this regulation, the employer's deduction
for its June 30, 1986, taxable year is limited to the greater of the
following two amounts: (i) The contributions paid to the fund during
such taxable year ($225,000) up to the qualified cost of the fund for
the taxable year of the fund ending January 31, 1986, and (ii) the
contributions paid to the fund during the 1985 portion of the employer's
taxable year ending June 30, 1986 (``the pre-1986 contributions'')
($150,000) to the extent that such pre-1986 contributions are deductible
under the rules governing the deduction of such contributions before
section 419 is generally effective with respect to the fund. For
purposes of this rule, the contribution of the facility on or before
December 31, 1985, is to be treated as a pre-1986 contribution and the
rules of section 419 and this Q&A are to be treated as rules governing
the deduction of such contribution before section 419 generally becomes
effective with respect to the fund. Thus, in determining the extent to
which the facility is deductible as a pre-1986 contribution under the
rules before section 419 generally becomes effective, the facility is
treated as the only contribution to the welfare benefit fund and the
qualified cost of such fund for the taxable year of the fund in which
the facility was contributed is the amount that would have been
allowable to the employer as a deduction with respect to the portion of
the facility used in the provision of welfare benefits if the employer
had placed in service the facility at the same time that the fund placed
in service the facility and the employer's taxable year ended on January
31, 1986.
(b)(1) The preceding rules shall also apply for purposes of
determining when and the extent to which an employer may deduct
contributions or other items and amounts after June 22, 1984 and on or
before December 31, 1985 (or, if applicable under paragraph (b) of Q&A-2
of this regulation, before section 419 generally becomes effective 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
[[Page 436]]
used for acquisition, construction, or improvement of the facility. Such
non-facility contributions, to the extent that they were made after June
22, 1984, and on or before December 31, 1985 (or, if applicable under
paragraph (b) of Q&A-2 of this regulation, before section 419 generally
becomes effective with respect to contributions to the fund), are not
deductible by the employer as non-facility contributions for any year.
Instead, the employer is permitted a deduction with respect to such
contributions only under the rules of this Q&A as though the employer
had contributed a facility to the fund at the same time that the fund
placed in service the facility in question and, at such time, the
facility had a fair market value equal to the total of such non-facility
contributions.
(2) For example, assume that an employer and a welfare benefit fund
each has a calendar taxable year and during 1985 the fund acquired and
placed in service a facility with a fair market value of $100,000 to be
used in the provision of welfare benefits. Further, during July 1984 the
employer contributed $150,000 in cash to the fund and, during the
portion of 1985, before the facility was placed in service by the fund,
the employer contributed another $75,000 in cash to the fund; during the
remaining portion of 1985, the employer contributed $125,000 in cash.
The facility is used in the provision of welfare benefits under the
fund. Because $25,000 of the employer's 1984 contribution is treated
under this rule as used for the acquisition of a facility, such $25,000
is not deductible by the employer for 1984. For purposes of determining
the employer's deduction for 1985, the employer will be treated as
having contributed $125,000 in cash and a facility with a fair market
value of $100,000. The employer's deduction for its 1985 taxable year
will be determined under the rules relating to the contribution of a
facility after June 22, 1984, and on or before December 31, 1985.
(3) For example, assume that an employer and a welfare benefit fund
each has a calendar taxable year and during 1986 the fund placed in
service a facility with a fair market value of $100,000 to be used in
the provision of welfare benefits. During 1985, the employer contributed
$125,000 in cash to the fund. During the portion of 1986 before the
facility was placed in service, the employer contributed $60,000 in
cash, and during the remaining portion of 1986, the employer contributed
another $75,000 in cash. The facility is used in the provision of
welfare benefits under the fund. Because $40,000 of its 1985 cash
contribution is treated under this rule as used for the acquisition of
the facility, such $40,000 is not deductible by the employer for 1985.
For purposes of determining the employer's deduction for 1986, the
employer will be treated as though it had contributed a $40,000 facility
to the fund at the time the fund placed the facility in service.
(c) For purposes of calculating the ``existing excess reserve
amount'' under Q&A-1 of Sec. 1.419A-1T and the ``existing reserves for
post-retirement medical or life insurance benefits'' under Q&A-4 of
Sec. 1.512(a)-5T (but not the exempt function income under Q&A-3 of
Sec. 1.512(a)-5T), the amount set aside as of any applicable date is to
be reduced to the extent that contributions originally included in such
amount are subsequently treated under this Q&A as used for the
acquisition, construction, or improvement of an asset excluded from the
calculation of the total amount set aside under paragraph (b) of Sec.
1.512(a)-5T (or would be so treated under this Q&A if it applied to such
asset). The reduction required 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
[[Page 437]]
applicable under paragraph (b) of Q&A-2 of Sec. 1.419-1T, taxable years
of the employer beginning after the termination of the last of the
collective bargaining agreements pursuant to which the plan is
maintained) shall be increased by the following percentages of the
``existing excess reserve amount'':
Percent
First taxable year............................................ 80
Second taxable year........................................... 60
Third taxable year............................................ 40
Fourth taxable year........................................... 20
For purposes of this section, the ``existing excess reserve amount''
for any taxable year of a fund is the excess of (a) the assets actually
set aside for purposes described in section 419A(a) at the close of the
first taxable year of the fund ending after July 18, 1984 (calculated in
the manner set forth in Q&A-3 of Sec. 1.512(a)-3T, and adjusted under
paragraph (c) of Q&A-11 of Sec. 1.419-1T), reduced by employer
contributions to the fund before the close of such first taxable year to
the extent that such contributions are not deductible for the taxable
year of the employer with or within which such taxable year of the fund
ends and for any prior taxable year of the employer, over (b) the
account limit which would have applied to the taxable year of the fund
for which the excess is being computed (without regard to this
transition rule). A welfare benefit fund is treated as in existence on
July 18, 1984, for purposes of this transition rule only if amounts were
actually set aside in such fund on such date to provide welfare benefits
enumerated under section 419A.
[T.D. 8073, 51 FR 4329, Feb. 4, 1986, as amended at 51 FR 11303, Apr. 2,
1986]
Sec. 1.419A-2T Qualified asset account limitation for collectively bargained funds. (Temporary)
Q-1: What account limits apply to welfare benefit funds that are
maintained pursuant to a collective bargaining agreement?
A-1: Contributions to a welfare benefit fund maintained pursuant to
one or more collective bargaining agreements and the reserves of such a
fund generally are subject to the rules of sections 419, 419A, and 512.
However, neither contributions to nor reserves of such a collectively
bargained welfare benefit fund shall be treated as exceeding the
otherwise applicable limits of section 419(b), 419A(b), or 512(a)(3)(E)
until the earlier of: (i) The date on which the last of the collective
bargaining agreements relating to the fund in effect on, or ratified on
or before, the date of issuance of final regulations concerning such
limits for collectively bargained welfare benefit funds terminates
(determined without regard to any extension thereof agreed to after the
date of issuance of such final regulations), or (ii) the date 3 years
after the issuance of such final regulations.
Q-2: What is a welfare benefit fund maintained pursuant to a
collective bargaining agreement for purposes of Q&A-1?
A-2: (1) For purposes of Q&A-1, a collectively bargained welfare
benefit fund is a welfare benefit fund that is maintained pursuant to an
agreement which the Secretary of Labor determines to be a collective
bargaining agreement and which meets the requirements of the Secretary
of the Treasury as set forth in paragraph 2 below.
(2) Notwithstanding a determination by the Secretary of Labor that
an agreement is a collective bargaining agreement, a welfare benefit
fund is 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.
[[Page 438]]
(3) In the case of a collectively bargained welfare benefit fund,
only the portion of the fund (as determined under allocation rules to be
provided by the Commissioner) attributable to employees covered by a
collective bargaining agreement, and from which benefits for such
employees are provided, is considered to be maintained pursuant to a
collective bargaining agreement.
(4) Notwithstanding the preceding paragraphs and pending the
issuance of regulations setting account limits for collectively
bargained welfare benefit funds, a welfare benefit fund will not be
treated as a collectively bargained welfare benefit fund for purposes of
Q&A-1 if and when, after July 1, 1985, the number of employees who are
not covered by a collective bargaining agreement and are eligible to
receive benefits under the fund increases by reason of an amendment,
merger, or other action of the employer or the fund. In addition,
pending the issuance of such regulations, for purposes of applying the
50 percent test of paragraph (2) to a welfare benefit fund that is not
in existence on July 1, 1985, ``90 percent'' shall be substituted for
``50 percent''.
[T.D. 8034, 50 FR 27428, July 3, 1985]
Sec. 1.419A(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)
[[Page 439]]
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 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
[[Page 440]]
(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 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
[[Page 441]]
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.
(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
[[Page 442]]
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 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.
[[Page 443]]
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 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
[[Page 444]]
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 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
[[Page 445]]
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 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.
[[Page 446]]
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
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
[[Page 447]]
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.
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
[[Page 448]]
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 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
[[Page 449]]
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 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
[[Page 450]]
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.
(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
[[Page 451]]
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 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:
[[Page 452]]
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, 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.
[[Page 453]]
(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 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.
[[Page 454]]
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 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
[[Page 455]]
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 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
[[Page 456]]
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.
(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
[[Page 457]]
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 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
[[Page 458]]
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) 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
[[Page 459]]
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.
(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
[[Page 460]]
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
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
[[Page 461]]
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:
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.
[[Page 462]]
(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 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
[[Page 463]]
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. 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
[[Page 464]]
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 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
[[Page 465]]
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 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
[[Page 466]]
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 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
[[Page 467]]
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 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
[[Page 468]]
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
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
[[Page 469]]
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 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)
[[Page 470]]
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.
(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
[[Page 471]]
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 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
[[Page 472]]
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).
(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
[[Page 473]]
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 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
[[Page 474]]
$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]
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
[[Page 475]]
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 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
[[Page 476]]
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 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.
[[Page 477]]
(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,
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.
[[Page 478]]
(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);
(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
[[Page 479]]
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 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,
[[Page 480]]
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 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
[[Page 481]]
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 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.
[[Page 482]]
(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 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
[[Page 483]]
(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 (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
[[Page 484]]
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 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
[[Page 485]]
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 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
[[Page 486]]
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 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
[[Page 487]]
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 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
[[Page 488]]
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 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
[[Page 489]]
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 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
[[Page 490]]
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 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
[[Page 491]]
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
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--
[[Page 492]]
(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 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
[[Page 493]]
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
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
[[Page 494]]
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 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.
[[Page 495]]
(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 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
[[Page 496]]
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 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
[[Page 497]]
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 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
[[Page 498]]
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 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
[[Page 499]]
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 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).
[[Page 500]]
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).
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
[[Page 501]]
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 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
[[Page 502]]
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.
(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.
[[Page 503]]
(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. 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,
[[Page 504]]
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 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
[[Page 505]]
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.
(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
[[Page 506]]
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
(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
[[Page 507]]
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)-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.
[[Page 508]]
(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.
(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
[[Page 509]]
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 $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
[[Page 510]]
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 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
[[Page 511]]
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
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.
[[Page 512]]
(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
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-
[[Page 513]]
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). 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.
[[Page 514]]
(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 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
[[Page 515]]
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 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
[[Page 516]]
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 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
[[Page 517]]
(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 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
[[Page 518]]
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 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
[[Page 519]]
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 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
[[Page 520]]
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 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.
[[Page 521]]
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 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
[[Page 522]]
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 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
[[Page 523]]
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 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
[[Page 524]]
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 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
[[Page 525]]
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 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
[[Page 526]]
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 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
[[Page 527]]
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 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.
[[Page 528]]
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 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
[[Page 529]]
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:
----------------------------------------------------------------------------------------------------------------
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
[[Page 530]]
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 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.
[[Page 531]]
(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 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
[[Page 532]]
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 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
[[Page 533]]
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 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
[[Page 534]]
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 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
[[Page 535]]
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 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
[[Page 536]]
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 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.
[[Page 537]]
(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 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
[[Page 538]]
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 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--
[[Page 539]]
(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 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
[[Page 540]]
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 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
[[Page 541]]
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 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%.
[[Page 542]]
(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 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
[[Page 543]]
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 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.
[[Page 544]]
(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 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
[[Page 545]]
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 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
[[Page 546]]
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 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.
[[Page 547]]
(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
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
[[Page 548]]
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 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
[[Page 549]]
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.
(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,
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. 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
[[Page 550]]
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.
(2) Definition of segment rates--(i) First segment rate. For
purposes of this section, except as otherwise provided under the
interest rate stabilization rules in section 430(h)(2)(C)(iv), 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 interest rate stabilization rules in
section 430(h)(2)(C)(iv), 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 interest rate stabilization rules in
section 430(h)(2)(C)(iv), 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--(i)
Construction of monthly corporate bond yield curve. For purposes of this
section, the monthly corporate bond yield curve for a month is defined
as the set of spot rates at specified durations. The specified durations
are at 6-month intervals ranging from 6 months through 100 years and the
spot rate at a duration is the yield (when compounded semiannually) for
a bond that matures at that duration with a single payment at maturity.
The monthly corporate bond yield curve is constructed as the average of
the spot rates from the set of daily corporate bond yield curves as
specified in paragraph (d)(1)(ii) of this section. Each daily corporate
bond yield curve is constructed using the methodology
[[Page 551]]
set forth in paragraph (d)(2) of this section based on the data
described in paragraph (d)(3) of this section. The yield curve for each
month will be published in the Internal Revenue Bulletin. See Sec.
601.601(d) of this chapter.
(ii) Monthly corporate bond yield curve constructed through
averaging. Each spot rate at a specified duration on the monthly
corporate bond yield curve for a month is equal to the arithmetic
average, for each business day of that month, of the spot rates at that
duration on the daily corporate bond yield curves.
(2) Construction of the daily corporate bond yield curve--(i) In
general--(A) Calculation of spot rates. The spot rate at duration of \1/
2\ year on the daily corporate bond yield curve is set equal to the
yield at maturity of \1/2\ year from the daily par yield curve described
in paragraph (d)(2)(i)(B) of this section. The spot rate for any later
duration on the daily corporate bond yield curve is determined by
applying an iterative process based on the spot rates at earlier
durations and the daily par yield curve.
(B) Calculation of par yield curve. The daily par yield curve (that
is, the curve in which the rate at maturity t on the curve is equal to
the yield for a bond with maturity of t for which the price is the same
as the principal amount) is calculated from the discount function
described in paragraph (d)(2)(i)(C) of this section and the hump
adjustment variable described in paragraph (d)(2)(iii)(D) of this
section.
(C) Derivation of discount function. The discount function for a day
at duration t (denoted d(t)) is derived from the forward interest rate
function as described in paragraph (d)(2)(ii) of this section (denoted
f(z)) using the following equation:
[GRAPHIC] [TIFF OMITTED] TR12JA24.072
(ii) Determination of forward interest rates--(A) In general. The
forward interest rate function used to derive the discount function is
determined as a series of cubic polynomials (referred to as a cubic
spline) that have a smooth junction at specified knot points (maturities
of 0, 1.5, 3, 7, 15, and 30 years). The requirement that the polynomials
have a smooth junction at a knot point is satisfied if the two
polynomials that are meeting at the knot have the same value, the same
derivative, and the same second derivative at that knot point.
(B) Constraints on the forward interest function. The following
three constraints are placed on the forward interest rate function--
(1) The second derivative of the function is set to 0 at maturity 0.
(2) The value of the forward interest rate function at and after 30
years is constrained to equal its average value from 15 to 30 years.
(3) The derivative of the forward interest rate function is set to 0
at maturity 30 years.
(iii) Parameters for daily bond price model--(A) B-spline
coefficients. The assumed cubic spline for the forward interest rate
function can be described as a linear combination of B-splines, with
five parameters, which are determined taking into account the two
coefficients for the bond-quality adjustment variables described in
paragraphs (d)(2)(iii)(B) and (C) of this section and the coefficient
for the hump adjustment variable described in paragraph (d)(2)(iii)(D)
of this section. The five parameters and three coefficients are
determined using the bond data weighted as described in paragraph
(d)(2)(iv) of this section. After this weighting of the bond data, the
five parameters and three coefficients are chosen to minimize the sum of
the squared differences between the bid price for each of the bonds (or
ask price
[[Page 552]]
for commercial paper) and the price estimated for each of those bonds
determined using the specified parameters and coefficients, and taking
into account the bond's coupon rate, number of years until maturity, and
rating.
(B) Adjustment factor for share of bonds that are AA-rated. The
first adjustment variable is based on the proportion of bonds that are
rated AA within the universe of bonds in the data set that are rated AA
or AAA, weighted by par value. In the case of an AAA-rated bond the
adjustment variable described in this paragraph (d)(2)(iii)(B) is equal
to the product of the proportion described in the preceding sentence and
the number of years until maturity for the bond. In the case of an AA-
rated bond the adjustment variable described in this paragraph
(d)(2)(iii)(B) is equal to the product of (1- that proportion) and the
number of years until maturity for the bond. In the case of an A-rated
bond, the adjustment variable described in this paragraph (d)(2)(iii)(B)
is 0.
(C) Adjustment factor for share of bonds that are A-rated. The
second adjustment variable is based on the proportion of bonds rated A
within the universe of bonds in the data set, weighted by par value. In
the case of an AAA-rated bond or an AA-rated bond, the adjustment
variable described in this paragraph (d)(2)(iii)(C) is equal to the
product of the proportion described in the preceding sentence and the
number of years until maturity for the bond. In the case of an A-rated
bond, the adjustment variable described in this paragraph (d)(2)(iii)(C)
is equal to the product of (1- that proportion) and the number of years
until maturity for the bond.
(D) Hump adjustment variable. The hump adjustment variable is a
mathematical function that is a cubic spline in the interval from 10
years maturity through 30 years maturity made up of two polynomials with
a smooth junction (as described in paragraph (d)(2)(ii)(A) of this
section) at 20 years maturity. The spline rises from 0 at 10 years
maturity to 1.0 at 20 years maturity, then falls back down to 0 at 30
years maturity. The hump adjustment variable is 0 for maturities less
than 10 years and maturities greater than 30 years.
(iv) Weighting of bond data. The bond data are weighted in three
steps. In the first step, equal weights are assigned to the commercial
paper rates at the short end of the curve, and the par amounts
outstanding of all the bonds are rescaled so that their sum equals the
sum of the weights for commercial paper. In the second step, the squared
price difference for each commercial paper rate is multiplied by the
commercial paper weight, and the squared price difference for each bond
is multiplied by the bond's rescaled par amount outstanding. In the
third step, applicable for bonds with duration greater than 1, the
weighted squared price difference for each bond from the second step is
divided by the bond's duration.
(3) Data used--(i) In general. Except as otherwise provided in this
paragraph (d)(3), the bonds that are used to construct the daily
corporate bond yield curve for a business day are bonds with maturities
longer than \1/2\ year, with at least two payment dates, and that:
(A) Are designated as corporate;
(B) Have high quality ratings (AAA, AA, or A) as of that business
day from the nationally recognized statistical rating organizations;
(C) Have at least $250 million in par amount outstanding on at least
one day during the month;
(D) Pay fixed nominal semiannual coupons and the principal amount at
maturity; and
(E) Mature not later than 30 years after that business day.
(ii) Excluded bonds. The following types of bonds are not used to
construct the daily corporate bond yield curve for a date:
(A) Bonds not denominated in U.S. dollars;
(B) Bonds not issued by U.S. corporations;
(C) Bonds that are capital securities (sometimes referred to as
hybrid preferred stock);
(D) Bonds with variable coupon rates;
(E) Convertible bonds;
(F) Bonds issued by a government-sponsored enterprise (such as the
Federal National Mortgage Association);
(G) Asset-backed bonds;
[[Page 553]]
(H) Callable bonds, unless the call feature is make-whole or the
call feature is exercisable only during the last year before maturity;
(I) Putable bonds;
(J) Bonds with sinking funds; and
(K) Bonds with an outstanding par amount below $250 million for the
day for which the daily yield curve is constructed.
(iii) Durations equal to or below \1/2\ year. The data for durations
equal to or below \1/2\ year that is used to construct the daily
corporate bond yield curve consists of AA financial and AA nonfinancial
commercial paper rates, as reported by the Federal Reserve Board.
(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 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 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)(3), 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.
(4) 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
[[Page 554]]
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 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
[[Page 555]]
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) Applicability date. This section applies for months that begin
on or after February 1, 2024. For rules that apply for earlier periods,
see 26 CFR 1.430(h)(2)-1 revised as of April 1, 2023.
[T.D. 9467, 74 FR 53055, Oct. 15, 2009; T.D. 9732, 80 FR 54390, Sept. 9,
2015; T.D. 9986, 89 FR 2130, Jan. 12, 2024]
Sec. 1.430(h)(3)-1 Mortality tables used to determine present value.
(a) Overview--(1) Standard mortality tables. This section sets forth
rules for the mortality tables to be used in determining present value
or making any computation under section 430. These mortality tables
include--
(i) Generational mortality tables described in paragraph (b) of this
section; and
(ii) Static mortality tables for small plans described in paragraph
(c) of this section.
(2) Alternative tables--(i) Plan-specific mortality tables. In lieu
of using the mortality tables provided under this section, plan-specific
substitute mortality tables are permitted to be used for purposes of
section 430 pursuant to section 430(h)(3)(C), provided that the
requirements of Sec. 1.430(h)(3)-2 are satisfied.
(ii) Disabled individuals. In lieu of using the mortality tables
provided under this section, mortality tables for disabled individuals
are permitted to be used pursuant to section 430(h)(3)(D). These tables
are provided in guidance published in the Internal Revenue Bulletin. See
Sec. 601.601(d) of this chapter.
(3) Individuals not identified as either male or female. The
mortality tables in this section are applied for an individual based on
the individual's gender. With respect to the portion of a plan's
population for which male or female gender is not identified (for
example, because an individual identifies as nonbinary or because the
gender information for an individual is not available), the plan's
actuary must use a reasonable approach for determining liability. Some
reasonable approaches for these individuals include--
(i) Determining the liability for an individual for whom male or
female gender is not identified as the weighted average of the liability
calculated as if the individual were male and the liability calculated
as if the individual were female, with an appropriate weighting that
takes into account the distribution of gender for individuals in the
plan's population for whom gender is identified; and
(ii) Assigning either male or female status randomly to an
individual for whom male or female gender is not identified in a manner
that is expected to result in an appropriate proportion of males and
females for the plan's population that takes into account the
distribution of gender for individuals in the plan's population for whom
gender is identified.
(b) Generational mortality tables--(1) In general--(i) Construction
of generational mortality tables. The generational mortality tables that
are permitted to be used under section 430(h)(3)(A) and paragraph
(a)(1)(i) of this section are constructed from the base mortality tables
described in paragraph (b)(1)(ii) of this section and the mortality
improvement rates described in paragraph (b)(1)(iii) of this section, as
adjusted in accordance with paragraph (b)(1)(v) of this section.
(ii) Base mortality tables. The base mortality tables are set forth
in paragraph (d) of this section.
(iii) Mortality improvement rates--(A) Mortality improvement rates
for valuation dates occurring on or after January 1, 2024. Except as
otherwise provided in this paragraph (b)(1)(iii), the mortality
improvement rates for valuation dates occurring on or after January 1,
2024, are the 2024 Adjusted Scale MP-2021
[[Page 556]]
Rates as incorporated by reference pursuant to paragraph (b)(1)(iv)(A)
of this section.
(B) [Reserved.]
(iv) Incorporation by reference. The material listed in this
paragraph (b)(1)(iv) is incorporated by reference into this section with
the approval of the Director of the Federal Register under 5 U.S.C.
552(a) and 1 CFR part 51. This material is available for inspection at
the IRS and at the National Archives and Records Administration (NARA).
Contact IRS at: IRS Office of Chief Counsel, Qualified Plans Branch 1,
CC:EEE:EB:QP1, 1111 Constitution Avenue NW, Washington, DC 20224; (202)
317-6700; www.irs.gov/retirement-plans/pension-plan-mortality-tables.
For information on the availability of this material at NARA, visit
www.archives.gov/federal-register/cfr/ibr-locations or email
[email protected]. The material may be obtained from IRS:
www.irs.gov/retirement-plans/pension-plan-mortality-tables.
(A) 2024 Adjusted Scale MP-2021 Rates, dated August 11, 2023.
(B) [Reserved]
(2) Application of mortality improvement rates--(i) In general.
Under the generational mortality tables described in this paragraph (b),
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
tables set forth in paragraph (d) of this section for that age, gender,
and status as an annuitant or a non-annuitant) multiplied by the
cumulative mortality improvement factor for the individual's gender and
for that age for the period from the base year for those mortality
tables through the calendar year in which the individual is projected to
reach the particular age. Paragraph (b)(3) of this section provides an
example that shows how the base mortality tables in paragraph (d) of
this section and the mortality improvement rates for valuation dates
occurring during 2024 are combined to determine projected mortality
rates.
(ii) 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.
(iii) 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. If that annual mortality improvement rate is greater than 1
(corresponding to a negative mortality improvement rate), then the
projected mortality rate for that age and gender for that year is
greater than the projected mortality rate for the same age and gender
for the preceding year.
(3) Example of calculation--(i) Calculation of mortality rate. The
mortality rate for 2024 that is applied to a male annuitant who is age
68 in 2024 is equal to the product of the mortality rate under paragraph
(d) of this section for a male annuitant who was age 68 in 2012
(0.01418) and the cumulative mortality improvement factor calculated
from the 2024 Adjusted Scale MP-2021 Rates for an age 68 male from 2012
to 2024. The cumulative mortality improvement factor for age 68 males
for the period from 2012 to 2024 is 0.9827, and the mortality rate for
2024 for male annuitants who are age 68 in that year is 0.01393, as
shown in the following table.
Table 1 to Paragraph (b)(3)(i)
----------------------------------------------------------------------------------------------------------------
Annual mortality
Rate of mortality improvement Cumulative
Calendar year improvement from factor (1 - mortality Mortality
prior year to mortality improvement rate
current year improvement rate) factor
----------------------------------------------------------------------------------------------------------------
2012................................ n/a n/a n/a 0.01418
2013................................ 0.0071 0.9929 0.9929
2014................................ 0.0047 0.9953 0.9882
2015................................ 0.0029 0.9971 0.9854
2016................................ 0.0017 0.9983 0.9837
2017................................ 0.0009 0.9991 0.9828
2018................................ 0.0001 0.9999 0.9827
[[Page 557]]
2019................................ (0.0001) 1.0001 0.9828
2020................................ 0.0001 0.9999 0.9827
2021................................ 0.0000 1.0000 0.9827
2022................................ 0.0000 1.0000 0.9827
2023................................ 0.0000 1.0000 0.9827
2024................................ 0.0000 1.0000 0.9827 0.01393
----------------------------------------------------------------------------------------------------------------
(ii) 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 2024 valuation date) of future
payments in a benefit stream payable for a male annuitant who is age 68
in 2024, the probability of survival for the annuitant is based on the
mortality rate for a male annuitant who is age 68 in 2024 (0.01393), and
the projected mortality rate for a male annuitant who will be age 69 in
2025 (0.01507), age 70 in 2026 (0.01635), and so on.
(4) Use of the tables--(i) Separate tables for annuitants and non-
annuitants. Separate mortality tables are provided for use with respect
to annuitants and non-annuitants. The non-annuitant mortality tables are
applied to determine the probability of survival for a non-annuitant for
the period before the non-annuitant is projected to commence receiving
benefits. The annuitant mortality tables are applied to determine the
present value of benefits for each annuitant. In addition, the annuitant
mortality tables are applied for each non-annuitant 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 non-
annuitant 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 non-annuitant with respect to the balance
of the benefit. In addition, with respect to a beneficiary of a
participant, the annuitant mortality tables apply 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 tables apply with respect to the beneficiary for the period
beginning with each assumed commencement of benefits for the
beneficiary.
(ii) Examples of calculation using separate non-annuitant and
annuitant 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 non-annuitant mortality tables for the
period before the participant attains age 55 and using the annuitant
mortality tables 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 non-
annuitant mortality tables for the period before the participant attains
age 65 and using the annuitant mortality tables for ages 65 and above.
(c) Static mortality tables--(1) Availability of alternative tables
for small plans--(i) In general. As an alternative to the generational
mortality tables defined in paragraph (b) of this section, static
mortality tables may be used for a small plan. The static mortality
tables described in this paragraph (c) are constructed from the separate
non-annuitant and annuitant static mortality tables described in
paragraph (c)(2)(i)
[[Page 558]]
of this section, combined using the procedure described in paragraph
(c)(2)(ii) of this section.
(ii) Definition of small plan. For purposes of this paragraph (c), 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.
(iii) Use of static mortality tables. The static mortality tables
that are used for a valuation date are the static mortality tables for
the calendar year that includes the valuation date.
(iv) Publication of mortality tables. The static mortality tables
for the 2024 calendar year are set forth in paragraph (e) of this
section.
Note 1 to paragraph (c)(1)(iv): The static mortality tables for
valuation dates occurring in later calendar years will be published in
the Internal Revenue Bulletin. See Sec. 601.601(d) of this chapter.
(2) Development of static mortality tables--(i) Non-annuitant and
annuitant mortality tables. The non-annuitant and annuitant static
mortality tables are determined using the base mortality tables
described in paragraph (b)(1)(ii) of this section. The rates in those
base mortality tables are adjusted using the mortality improvement rates
described in paragraph (b)(1)(iii) of this section, in accordance with
the rules set forth in paragraph (c)(3) of this section.
(ii) Combined static mortality tables. The static mortality tables
described in this paragraph (c) are constructed from the separate non-
annuitant and annuitant static mortality tables pursuant to paragraph
(c)(2)(i) of this section, blended using the weighting factors in
paragraph (d) of this section. The weighting factors are applied to
develop these combined static tables using the following equation:
Combined mortality rate = [non-annuitant rate * (1 - weighting factor)]
+ [annuitant rate * weighting factor].
(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
paragraph (b)(2)(ii) of this section) for the period from 2012 through
that calendar year; and
(B) The cumulative mortality improvement factor (determined under
paragraph (b)(2)(ii) 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 paragraph (c)(3)(ii) of
this section 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. For 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 2024, 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 2024. Under paragraph
(c)(3)(iii) of this section, the mortality rate for an 85-year-old male
annuitant in the static mortality table for 2024 is \2/3\ times the
projected mortality rate for a male annuitant that age in 2030 plus \1/
3\ times the projected mortality rate for a male annuitant that age in
2031. Accordingly, the mortality rate for an
[[Page 559]]
85-year-old male annuitant in the static mortality table for 2024 is
0.08126 (\2/3\ times the projected mortality rate for an 85-year-old
male annuitant in 2030 (0.08146) plus \1/3\ times the projected
mortality rate for an 85-year-old male annuitant in 2031 (0.08086)).
(d) Base mortality tables. The following are the base mortality
tables. The base year for these tables is 2012.
Table 2 to Paragraph (d)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Males Females
------------------------------------------------------------------------------------------------
Age Weighting Weighting
Non-annuitant Annuitant factor for Non-annuitant Annuitant factor for
small plan small plans
--------------------------------------------------------------------------------------------------------------------------------------------------------
0...................................................... 0.00650 0.00650 0.0000 0.00544 0.00544 0.0000
1...................................................... 0.00045 0.00045 0.0000 0.00038 0.00038 0.0000
2...................................................... 0.00030 0.00030 0.0000 0.00023 0.00023 0.0000
3...................................................... 0.00022 0.00022 0.0000 0.00018 0.00018 0.0000
4...................................................... 0.00019 0.00019 0.0000 0.00013 0.00013 0.0000
5...................................................... 0.00016 0.00016 0.0000 0.00012 0.00012 0.0000
6...................................................... 0.00014 0.00014 0.0000 0.00011 0.00011 0.0000
7...................................................... 0.00013 0.00013 0.0000 0.00010 0.00010 0.0000
8...................................................... 0.00011 0.00011 0.0000 0.00009 0.00009 0.0000
9...................................................... 0.00009 0.00009 0.0000 0.00009 0.00009 0.0000
10..................................................... 0.00008 0.00008 0.0000 0.00009 0.00009 0.0000
11..................................................... 0.00009 0.00009 0.0000 0.00009 0.00009 0.0000
12..................................................... 0.00013 0.00013 0.0000 0.00010 0.00010 0.0000
13..................................................... 0.00017 0.00017 0.0000 0.00012 0.00012 0.0000
14..................................................... 0.00022 0.00022 0.0000 0.00013 0.00013 0.0000
15..................................................... 0.00028 0.00028 0.0000 0.00013 0.00013 0.0000
16..................................................... 0.00034 0.00034 0.0000 0.00014 0.00014 0.0000
17..................................................... 0.00040 0.00040 0.0000 0.00015 0.00015 0.0000
18..................................................... 0.00046 0.00046 0.0000 0.00015 0.00015 0.0000
19..................................................... 0.00053 0.00053 0.0000 0.00015 0.00015 0.0000
20..................................................... 0.00056 0.00056 0.0000 0.00015 0.00015 0.0000
21..................................................... 0.00056 0.00056 0.0000 0.00015 0.00015 0.0000
22..................................................... 0.00056 0.00056 0.0000 0.00016 0.00016 0.0000
23..................................................... 0.00055 0.00055 0.0000 0.00018 0.00018 0.0000
24..................................................... 0.00055 0.00055 0.0000 0.00019 0.00019 0.0000
25..................................................... 0.00054 0.00054 0.0000 0.00019 0.00019 0.0000
26..................................................... 0.00054 0.00054 0.0000 0.00019 0.00019 0.0000
27..................................................... 0.00054 0.00054 0.0000 0.00020 0.00020 0.0000
28..................................................... 0.00054 0.00054 0.0000 0.00020 0.00020 0.0000
29..................................................... 0.00054 0.00054 0.0000 0.00020 0.00020 0.0000
30..................................................... 0.00055 0.00055 0.0000 0.00021 0.00021 0.0000
31..................................................... 0.00055 0.00055 0.0000 0.00022 0.00022 0.0000
32..................................................... 0.00056 0.00056 0.0000 0.00023 0.00023 0.0000
33..................................................... 0.00058 0.00058 0.0000 0.00025 0.00025 0.0000
34..................................................... 0.00059 0.00059 0.0000 0.00026 0.00026 0.0000
35..................................................... 0.00061 0.00061 0.0000 0.00028 0.00028 0.0000
36..................................................... 0.00063 0.00063 0.0000 0.00031 0.00031 0.0000
37..................................................... 0.00065 0.00065 0.0000 0.00034 0.00034 0.0000
38..................................................... 0.00068 0.00068 0.0000 0.00036 0.00036 0.0000
39..................................................... 0.00071 0.00071 0.0000 0.00040 0.00040 0.0000
40..................................................... 0.00074 0.00074 0.0000 0.00043 0.00043 0.0000
41..................................................... 0.00077 0.00082 0.0008 0.00047 0.00049 0.0010
42..................................................... 0.00081 0.00099 0.0016 0.00051 0.00061 0.0020
43..................................................... 0.00086 0.00124 0.0024 0.00055 0.00078 0.0030
44..................................................... 0.00091 0.00158 0.0032 0.00060 0.00101 0.0040
45..................................................... 0.00097 0.00200 0.0040 0.00065 0.00130 0.0051
46..................................................... 0.00105 0.00251 0.0047 0.00071 0.00165 0.0061
47..................................................... 0.00113 0.00310 0.0055 0.00077 0.00206 0.0071
48..................................................... 0.00123 0.00378 0.0063 0.00083 0.00252 0.0081
49..................................................... 0.00134 0.00454 0.0071 0.00090 0.00304 0.0091
50..................................................... 0.00147 0.00539 0.0079 0.00098 0.00362 0.0101
51..................................................... 0.00161 0.00544 0.0140 0.00107 0.00426 0.0185
52..................................................... 0.00177 0.00565 0.0209 0.00116 0.00495 0.0262
53..................................................... 0.00194 0.00588 0.0302 0.00126 0.00500 0.0349
54..................................................... 0.00213 0.00616 0.0430 0.00137 0.00512 0.0449
55..................................................... 0.00234 0.00647 0.0898 0.00148 0.00517 0.0853
56..................................................... 0.00257 0.00686 0.1676 0.00161 0.00522 0.1535
57..................................................... 0.00281 0.00728 0.2153 0.00175 0.00528 0.1923
58..................................................... 0.00308 0.00770 0.2635 0.00190 0.00561 0.2291
59..................................................... 0.00338 0.00811 0.3144 0.00206 0.00601 0.2680
60..................................................... 0.00369 0.00848 0.3821 0.00224 0.00643 0.3192
[[Page 560]]
61..................................................... 0.00403 0.00882 0.4579 0.00243 0.00690 0.3731
62..................................................... 0.00441 0.00918 0.5935 0.00264 0.00743 0.4705
63..................................................... 0.00481 0.00960 0.7153 0.00287 0.00796 0.5668
64..................................................... 0.00525 0.01014 0.7764 0.00312 0.00859 0.6230
65..................................................... 0.00573 0.01087 0.8454 0.00339 0.00928 0.7172
66..................................................... 0.00636 0.01178 0.9002 0.00380 0.01003 0.8006
67..................................................... 0.00706 0.01288 0.9275 0.00427 0.01089 0.8414
68..................................................... 0.00784 0.01418 0.9431 0.00480 0.01192 0.8658
69..................................................... 0.00870 0.01564 0.9547 0.00540 0.01309 0.8857
70..................................................... 0.00967 0.01729 0.9642 0.00606 0.01444 0.9046
71..................................................... 0.01073 0.01914 0.9732 0.00681 0.01597 0.9240
72..................................................... 0.01192 0.02121 0.9791 0.00765 0.01770 0.9365
73..................................................... 0.01323 0.02354 0.9823 0.00860 0.01967 0.9437
74..................................................... 0.01469 0.02613 0.9847 0.00966 0.02192 0.9512
75..................................................... 0.01632 0.02905 0.9868 0.01085 0.02445 0.9568
76..................................................... 0.01812 0.03233 0.9889 0.01219 0.02727 0.9637
77..................................................... 0.02012 0.03604 0.9906 0.01370 0.03042 0.9682
78..................................................... 0.02234 0.04026 0.9920 0.01539 0.03391 0.9727
79..................................................... 0.02480 0.04504 0.9935 0.01729 0.03775 0.9765
80..................................................... 0.02754 0.05046 1.0000 0.01943 0.04198 1.0000
81..................................................... 0.02989 0.05657 1.0000 0.02134 0.04663 1.0000
82..................................................... 0.03460 0.06343 1.0000 0.02516 0.05178 1.0000
83..................................................... 0.04166 0.07114 1.0000 0.03089 0.05754 1.0000
84..................................................... 0.05108 0.07977 1.0000 0.03853 0.06401 1.0000
85..................................................... 0.06285 0.08946 1.0000 0.04808 0.07132 1.0000
86..................................................... 0.07698 0.10032 1.0000 0.05955 0.07954 1.0000
87..................................................... 0.09346 0.11248 1.0000 0.07293 0.08879 1.0000
88..................................................... 0.11229 0.12600 1.0000 0.08822 0.09936 1.0000
89..................................................... 0.13348 0.14088 1.0000 0.10542 0.11124 1.0000
90..................................................... 0.15703 0.15703 1.0000 0.12453 0.12453 1.0000
91..................................................... 0.17401 0.17401 1.0000 0.13818 0.13818 1.0000
92..................................................... 0.19151 0.19151 1.0000 0.15250 0.15250 1.0000
93..................................................... 0.20936 0.20936 1.0000 0.16737 0.16737 1.0000
94..................................................... 0.22742 0.22742 1.0000 0.18274 0.18274 1.0000
95..................................................... 0.24569 0.24569 1.0000 0.19863 0.19863 1.0000
96..................................................... 0.26415 0.26415 1.0000 0.21509 0.21509 1.0000
97..................................................... 0.28281 0.28281 1.0000 0.23214 0.23214 1.0000
98..................................................... 0.30169 0.30169 1.0000 0.24983 0.24983 1.0000
99..................................................... 0.32077 0.32077 1.0000 0.26814 0.26814 1.0000
100.................................................... 0.33996 0.33996 1.0000 0.28698 0.28698 1.0000
101.................................................... 0.35910 0.35910 1.0000 0.30619 0.30619 1.0000
102.................................................... 0.37794 0.37794 1.0000 0.32549 0.32549 1.0000
103.................................................... 0.39633 0.39633 1.0000 0.34472 0.34472 1.0000
104.................................................... 0.41415 0.41415 1.0000 0.36375 0.36375 1.0000
105.................................................... 0.43131 0.43131 1.0000 0.38243 0.38243 1.0000
106.................................................... 0.44771 0.44771 1.0000 0.40065 0.40065 1.0000
107.................................................... 0.46329 0.46329 1.0000 0.41828 0.41828 1.0000
108.................................................... 0.47800 0.47800 1.0000 0.43522 0.43522 1.0000
109.................................................... 0.49181 0.49181 1.0000 0.45139 0.45139 1.0000
110.................................................... 0.50000 0.50000 1.0000 0.46673 0.46673 1.0000
111.................................................... 0.50000 0.50000 1.0000 0.48120 0.48120 1.0000
112.................................................... 0.50000 0.50000 1.0000 0.49477 0.49477 1.0000
113.................................................... 0.50000 0.50000 1.0000 0.50000 0.50000 1.0000
114.................................................... 0.50000 0.50000 1.0000 0.50000 0.50000 1.0000
115.................................................... 0.50000 0.50000 1.0000 0.50000 0.50000 1.0000
116.................................................... 0.50000 0.50000 1.0000 0.50000 0.50000 1.0000
117.................................................... 0.50000 0.50000 1.0000 0.50000 0.50000 1.0000
118.................................................... 0.50000 0.50000 1.0000 0.50000 0.50000 1.0000
119.................................................... 0.50000 0.50000 1.0000 0.50000 0.50000 1.0000
120.................................................... 1.00000 1.00000 1.0000 1.00000 1.00000 1.0000
--------------------------------------------------------------------------------------------------------------------------------------------------------
(e) Static tables for 2024. The following static mortality tables
are used pursuant to paragraph (a)(1)(ii) of this section for
determining present value or making any computation under section
[[Page 561]]
430 with respect to valuation dates occurring during 2024.
Table 3 to Paragraph (e)
------------------------------------------------------------------------
Age Male Female
------------------------------------------------------------------------
0................................................. 0.00356 0.00306
1................................................. 0.00025 0.00022
2................................................. 0.00017 0.00013
3................................................. 0.00012 0.00010
4................................................. 0.00011 0.00008
5................................................. 0.00009 0.00007
6................................................. 0.00008 0.00007
7................................................. 0.00008 0.00006
8................................................. 0.00006 0.00005
9................................................. 0.00005 0.00005
10................................................ 0.00005 0.00006
11................................................ 0.00005 0.00006
12................................................ 0.00008 0.00006
13................................................ 0.00010 0.00008
14................................................ 0.00013 0.00008
15................................................ 0.00017 0.00008
16................................................ 0.00021 0.00009
17................................................ 0.00025 0.00010
18................................................ 0.00029 0.00010
19................................................ 0.00034 0.00010
20................................................ 0.00036 0.00010
21................................................ 0.00037 0.00010
22................................................ 0.00037 0.00011
23................................................ 0.00038 0.00013
24................................................ 0.00039 0.00014
25................................................ 0.00040 0.00014
26................................................ 0.00041 0.00015
27................................................ 0.00043 0.00016
28................................................ 0.00044 0.00016
29................................................ 0.00046 0.00017
30................................................ 0.00049 0.00018
31................................................ 0.00050 0.00019
32................................................ 0.00053 0.00021
33................................................ 0.00056 0.00023
34................................................ 0.00059 0.00024
35................................................ 0.00062 0.00026
36................................................ 0.00065 0.00029
37................................................ 0.00067 0.00031
38................................................ 0.00070 0.00032
39................................................ 0.00072 0.00035
40................................................ 0.00074 0.00037
41................................................ 0.00075 0.00039
42................................................ 0.00077 0.00041
43................................................ 0.00079 0.00043
44................................................ 0.00081 0.00045
45................................................ 0.00084 0.00048
46................................................ 0.00088 0.00051
47................................................ 0.00092 0.00055
48................................................ 0.00098 0.00059
49................................................ 0.00104 0.00064
50................................................ 0.00113 0.00070
51................................................ 0.00124 0.00080
52................................................ 0.00137 0.00090
53................................................ 0.00153 0.00101
54................................................ 0.00173 0.00115
55................................................ 0.00206 0.00138
56................................................ 0.00253 0.00170
57................................................ 0.00296 0.00195
58................................................ 0.00344 0.00225
59................................................ 0.00397 0.00258
60................................................ 0.00458 0.00299
61................................................ 0.00523 0.00343
62................................................ 0.00615 0.00409
63................................................ 0.00703 0.00478
64................................................ 0.00774 0.00537
65................................................ 0.00861 0.00619
66................................................ 0.00957 0.00707
67................................................ 0.01054 0.00786
68................................................ 0.01163 0.00871
69................................................ 0.01283 0.00968
70................................................ 0.01419 0.01082
71................................................ 0.01575 0.01217
72................................................ 0.01750 0.01368
73................................................ 0.01949 0.01540
74................................................ 0.02175 0.01742
75................................................ 0.02433 0.01975
76................................................ 0.02729 0.02240
77................................................ 0.03069 0.02540
78................................................ 0.03460 0.02878
79................................................ 0.03912 0.03254
80................................................ 0.04442 0.03715
81................................................ 0.05008 0.04158
82................................................ 0.05649 0.04650
83................................................ 0.06372 0.05202
84................................................ 0.07192 0.05823
85................................................ 0.08126 0.06527
86................................................ 0.09180 0.07337
87................................................ 0.10364 0.08255
88................................................ 0.11688 0.09305
89................................................ 0.13148 0.10480
90................................................ 0.14733 0.11790
91................................................ 0.16404 0.13141
92................................................ 0.18111 0.14547
93................................................ 0.19847 0.16007
94................................................ 0.21588 0.17495
95................................................ 0.23319 0.19020
96................................................ 0.25152 0.20655
97................................................ 0.27010 0.22354
98................................................ 0.28899 0.24127
99................................................ 0.30836 0.25965
100............................................... 0.32788 0.27862
101............................................... 0.34742 0.29799
102............................................... 0.36672 0.31750
103............................................... 0.38574 0.33705
104............................................... 0.40436 0.35650
105............................................... 0.42191 0.37576
106............................................... 0.43897 0.39452
107............................................... 0.45520 0.41279
108............................................... 0.47064 0.43024
109............................................... 0.48536 0.44694
110............................................... 0.49448 0.46282
111............................................... 0.49552 0.47794
112............................................... 0.49656 0.49215
113............................................... 0.49756 0.49820
114............................................... 0.49870 0.49900
115............................................... 0.49975 0.49980
116............................................... 0.49990 0.49990
117............................................... 0.49995 0.50000
118............................................... 0.50000 0.50000
119............................................... 0.50000 0.50000
120............................................... 1.00000 1.00000
------------------------------------------------------------------------
(f) Applicability date. This section applies for valuation dates
occurring on or after January 1, 2024.
[T.D. 9983, 88 FR 72361, Oct. 20, 2023]
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)-
[[Page 562]]
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 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
[[Page 563]]
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.
(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(b)(2)(ii) for
that age and gender for the applicable period. The applicable period is
the period beginning with the
[[Page 564]]
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 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
[[Page 565]]
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) 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 changes to the mortality improvement
rates under Sec. 1.430(h)(3)-1(b)(1)(iii) or annual updates to the
static mortality tables issued as noted in Sec. 1.430(h)(3)-
1(c)(1)(iv)).
(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 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
[[Page 566]]
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.
(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
[[Page 567]]
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:
[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:
[[Page 568]]
[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 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(b)(2)(ii) to the base mortality table under Sec.
1.430(h)(3)-1(d) for the period beginning with 2012 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(b)(1)(iii) 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
[[Page 569]]
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 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
[[Page 570]]
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).
(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
[[Page 571]]
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 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
[[Page 572]]
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 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, as amended by T.D. 9983, 88 FR
72366, Oct. 20, 2023]
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
[[Page 573]]
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
(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.
[[Page 574]]
(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 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).
[[Page 575]]
(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 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
[[Page 576]]
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]
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
[[Page 577]]
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 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
[[Page 578]]
(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 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
[[Page 579]]
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).
(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
[[Page 580]]
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--
(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
[[Page 581]]
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 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
[[Page 582]]
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 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
[[Page 583]]
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]
(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.
[[Page 584]]
(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 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
[[Page 585]]
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, 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
[[Page 586]]
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.
(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).
[[Page 587]]
(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 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),
[[Page 588]]
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
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
[[Page 589]]
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).
(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)
[[Page 590]]
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, 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
[[Page 591]]
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 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.
[[Page 592]]
(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).
(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. In
accordance with section 431(c)(6)(D), the mortality assumptions that
apply to a single-employer defined benefit plan for the plan year
pursuant to section 430(h)(3)(A) and (D) and Sec. Sec. 1.430(h)(3)-
1(a)(1) and (a)(2)(ii) are
[[Page 593]]
used to determine a multiemployer plan's current liability for purposes
of applying the rules of section 431(c)(6). For purposes of this
paragraph (a), either the generational mortality tables used pursuant to
Sec. 1.430(h)(3)-1(b) or the static mortality tables used pursuant to
Sec. 1.430(h)(3)-1(c) are permitted to be used without regard to
whether the plan is a small plan. However, substitute mortality tables
under Sec. Sec. 1.430(h)(3)-1(a)(2)(i) and 1.430(h)(3)-2 are not
permitted to be used for purposes of this paragraph (a).
(b) Applicability date. This section applies for valuation dates
occurring on or after January 1, 2024.
[T.D. 9983, 88 FR 72366, Oct. 20, 2023]
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
[[Page 594]]
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 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.
[[Page 595]]
(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 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--
[[Page 596]]
(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);
(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
[[Page 597]]
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
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
[[Page 598]]
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 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
[[Page 599]]
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.
(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
[[Page 600]]
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).
(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
[[Page 601]]
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, 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.
[[Page 602]]
(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 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
[[Page 603]]
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
(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,
[[Page 604]]
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).
(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
[[Page 605]]
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--
(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
[[Page 606]]
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;
(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
[[Page 607]]
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.
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
[[Page 608]]
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 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
[[Page 609]]
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 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
[[Page 610]]
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 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.
[[Page 611]]
(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
(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--
[[Page 612]]
(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 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--
[[Page 613]]
(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 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
[[Page 614]]
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 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),
[[Page 615]]
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 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
[[Page 616]]
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 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
[[Page 617]]
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 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--
[[Page 618]]
(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);
(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
[[Page 619]]
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 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)
[[Page 620]]
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 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.
[[Page 621]]
(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 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 single-employer defined benefit plan for the plan year
pursuant to section 430(h)(3)(A) and (D) and Sec. Sec. 1.430(h)(3)-
1(a)(1) and (a)(2)(ii) are used to determine a cooperative and small
employer charity (CSEC) plan's current liability under section 433(h).
For purposes of this paragraph (a), either the generational mortality
tables used pursuant to Sec. 1.430(h)(3)-1(b) or the static mortality
tables used pursuant to Sec. 1.430(h)(3)-1(c) are permitted to be used
without regard to whether the plan is a small plan as defined in Sec.
1.430(h)(3)-1(c)(1)(ii). However, substitute mortality tables under
Sec. Sec. 1.430(h)(3)-1(a)(2)(i) and 1.430(h)(3)-2 are not permitted to
be used for purposes of this paragraph (a).
(b) Applicability date. This section applies for valuation dates
occurring on or after January 1, 2024.
[T.D. 9983, 88 FR 72366, Oct. 20, 2023]
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.
[[Page 622]]
(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]
(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)
[[Page 623]]
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, 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
[[Page 624]]
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 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
[[Page 625]]
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% 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.
[[Page 626]]
(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 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)
[[Page 627]]
(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 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
[[Page 628]]
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 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
[[Page 629]]
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 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
[[Page 630]]
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 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).
[[Page 631]]
(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 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
[[Page 632]]
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 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
[[Page 633]]
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.
(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
[[Page 634]]
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) 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
[[Page 635]]
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 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
[[Page 636]]
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), (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
[[Page 637]]
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 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).
[[Page 638]]
(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.
(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,
[[Page 639]]
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%).
(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
[[Page 640]]
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 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
[[Page 641]]
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 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).
[[Page 642]]
(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 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
[[Page 643]]
(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 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
[[Page 644]]
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 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
[[Page 645]]
(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 (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:
[[Page 646]]
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.
(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
[[Page 647]]
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 $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
[[Page 648]]
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 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
[[Page 649]]
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 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--
[[Page 650]]
(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 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
[[Page 651]]
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
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
[[Page 652]]
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 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
[[Page 653]]
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 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
[[Page 654]]
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 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
[[Page 655]]
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 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
[[Page 656]]
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 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
[[Page 657]]
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.
(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,
[[Page 658]]
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 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
[[Page 659]]
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 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
[[Page 660]]
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 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
[[Page 661]]
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 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
[[Page 662]]
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.
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
[[Page 663]]
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 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 665]]
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 667]]
Table of CFR Titles and Chapters
(Revised as of April 1, 2024)
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 668]]
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)
LX Federal Communications Commission (Parts 6000--6099)
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)
[[Page 669]]
XXVI Department of Defense (Parts 3600--3699)
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 U.S. International Development Finance 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)
[[Page 670]]
LXXIII Department of Agriculture (Parts 8300--8399)
LXXIV Federal Mine Safety and Health Review Commission
(Parts 8400--8499)
LXXVI Federal Retirement Thrift Investment Board (Parts
8600--8699)
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 (Parts 10100--10199)
CII U.S. Office of Special Counsel (Parts 10200--10299)
CIII Federal Mediation and Conciliation Service (Parts
10300--10399)
CIV Office of the Intellectual Property Enforcement
Coordinator (Part 10400--10499)
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)
[[Page 671]]
VIII Agricultural Marketing Service (Federal Grain
Inspection Service, Fair Trade Practices Program),
Department of Agriculture (Parts 800--899)
IX Agricultural Marketing Service (Marketing Agreements
and Orders; Fruits, Vegetables, Nuts), Department
of Agriculture (Parts 900--999)
X Agricultural Marketing Service (Marketing Agreements
and Orders; Milk), Department of Agriculture
(Parts 1000--1199)
XI Agricultural Marketing Service (Marketing Agreements
and Orders; Miscellaneous Commodities), Department
of Agriculture (Parts 1200--1299)
XIV Commodity Credit Corporation, Department of
Agriculture (Parts 1400--1499)
XV Foreign Agricultural Service, Department of
Agriculture (Parts 1500--1599)
XVI [Reserved]
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 [Reserved]
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]
[[Page 672]]
XLII Rural Business-Cooperative Service, Department of
Agriculture (Parts 4200--4299)
L Rural Business-Cooperative Service, Rural Housing
Service, and Rural Utilities Service, Department
of Agriculture (Parts 5000--5099)
Title 8--Aliens and Nationality
I Department of Homeland Security (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 Agricultural Marketing Service (Fair Trade Practices
Program), 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)
[[Page 673]]
IX (Parts 900--999)[Reserved]
X Consumer Financial Protection Bureau (Parts 1000--
1099)
XI Federal Financial Institutions Examination Council
(Parts 1100--1199)
XII Federal Housing Finance Agency (Parts 1200--1299)
XIII Financial Stability Oversight Council (Parts 1300--
1399)
XIV Farm Credit System Insurance Corporation (Parts 1400--
1499)
XV Department of the Treasury (Parts 1500--1599)
XVI Office of Financial Research, Department of the
Treasury (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)
[[Page 674]]
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)
XIII East-West Foreign Trade Board (Parts 1300--1399)
XIV Minority Business Development Agency (Parts 1400--
1499)
XV Office of the Under-Secretary for Economic Affairs,
Department of Commerce (Parts 1500--1599)
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)
[[Page 675]]
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)
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 United States Agency for Global Media (Parts 500--599)
VII U.S. International Development Finance 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)
[[Page 676]]
XV African Development Foundation (Parts 1500--1599)
XVI Japan-United States Friendship Commission (Parts
1600--1699)
XVII United States Institute of Peace (Parts 1700--1799)
Title 23--Highways
I Federal Highway Administration, Department of
Transportation (Parts 1--999)
II National Highway Traffic Safety Administration and
Federal Highway Administration, Department of
Transportation (Parts 1200--1299)
III National Highway Traffic Safety Administration,
Department of Transportation (Parts 1300--1399)
Title 24--Housing and Urban Development
Subtitle A--Office of the Secretary, Department of
Housing and Urban Development (Parts 0--99)
Subtitle B--Regulations Relating to Housing and Urban
Development
I Office of Assistant Secretary for Equal Opportunity,
Department of Housing and Urban Development (Parts
100--199)
II Office of Assistant Secretary for Housing-Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 200--299)
III Government National Mortgage Association, Department
of Housing and Urban Development (Parts 300--399)
IV Office of Housing and Office of Multifamily Housing
Assistance Restructuring, Department of Housing
and Urban Development (Parts 400--499)
V Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 500--599)
VI Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 600--699) [Reserved]
VII Office of the Secretary, Department of Housing and
Urban Development (Housing Assistance Programs and
Public and Indian Housing Programs) (Parts 700--
799)
VIII Office of the Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Section 8 Housing Assistance
Programs, Section 202 Direct Loan Program, Section
202 Supportive Housing for the Elderly Program and
Section 811 Supportive Housing for Persons With
Disabilities Program) (Parts 800--899)
IX Office of Assistant Secretary for Public and Indian
Housing, Department of Housing and Urban
Development (Parts 900--1699)
X Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Interstate Land Sales
Registration Program) (Parts 1700--1799)
[Reserved]
[[Page 677]]
XII Office of Inspector General, Department of Housing and
Urban Development (Parts 2000--2099)
XV Emergency Mortgage Insurance and Loan Programs,
Department of Housing and Urban Development (Parts
2700--2799) [Reserved]
XX Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 3200--3899)
XXIV Board of Directors of the HOPE for Homeowners Program
(Parts 4000--4099) [Reserved]
XXV Neighborhood Reinvestment Corporation (Parts 4100--
4199)
Title 25--Indians
I Bureau of Indian Affairs, Department of the Interior
(Parts 1--299)
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--799)
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)
[[Page 678]]
VIII Court Services and Offender Supervision Agency for the
District of Columbia (Parts 800--899)
IX National Crime Prevention and Privacy Compact Council
(Parts 900--999)
XI Department of Justice and Department of State (Parts
1100--1199)
Title 29--Labor
Subtitle A--Office of the Secretary of Labor (Parts
0--99)
Subtitle B--Regulations Relating to Labor
I National Labor Relations Board (Parts 100--199)
II Office of Labor-Management Standards, Department of
Labor (Parts 200--299)
III National Railroad Adjustment Board (Parts 300--399)
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)
[[Page 679]]
Title 31--Money and Finance: Treasury
Subtitle A--Office of the Secretary of the Treasury
(Parts 0--50)
Subtitle B--Regulations Relating to Money and Finance
I Monetary Offices, Department of the Treasury (Parts
51--199)
II Fiscal Service, Department of the Treasury (Parts
200--399)
IV Secret Service, Department of the Treasury (Parts
400--499)
V Office of Foreign Assets Control, Department of the
Treasury (Parts 500--599)
VI Bureau of Engraving and Printing, Department of the
Treasury (Parts 600--699)
VII Federal Law Enforcement Training Center, Department of
the Treasury (Parts 700--799)
VIII Office of 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 Department of Defense, 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)
[[Page 680]]
IV Great Lakes St. Lawrence Seaway Development
Corporation, Department of Transportation (Parts
400--499)
Title 34--Education
Subtitle A--Office of the Secretary, Department of
Education (Parts 1--99)
Subtitle B--Regulations of the Offices of the
Department of Education
I Office for Civil Rights, Department of Education
(Parts 100--199)
II Office of Elementary and Secondary Education,
Department of Education (Parts 200--299)
III Office of Special Education and Rehabilitative
Services, Department of Education (Parts 300--399)
IV Office of Career, Technical, and Adult Education,
Department of Education (Parts 400--499)
V Office of Bilingual Education and Minority Languages
Affairs, Department of Education (Parts 500--599)
[Reserved]
VI Office of Postsecondary Education, Department of
Education (Parts 600--699)
VII Office of Educational Research and Improvement,
Department of Education (Parts 700--799)
[Reserved]
Subtitle C--Regulations Relating to Education
XI [Reserved]
XII National Council on Disability (Parts 1200--1299)
Title 35 [Reserved]
Title 36--Parks, Forests, and Public Property
I National Park Service, Department of the Interior
(Parts 1--199)
II Forest Service, Department of Agriculture (Parts 200--
299)
III Corps of Engineers, Department of the Army (Parts
300--399)
IV American Battle Monuments Commission (Parts 400--499)
V Smithsonian Institution (Parts 500--599)
VI [Reserved]
VII Library of Congress (Parts 700--799)
VIII Advisory Council on Historic Preservation (Parts 800--
899)
IX Pennsylvania Avenue Development Corporation (Parts
900--999)
X Presidio Trust (Parts 1000--1099)
XI Architectural and Transportation Barriers Compliance
Board (Parts 1100--1199)
XII National Archives and Records Administration (Parts
1200--1299)
XV Oklahoma City National Memorial Trust (Parts 1500--
1599)
XVI Morris K. Udall Scholarship and Excellence in National
Environmental Policy Foundation (Parts 1600--1699)
[[Page 681]]
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)
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)
IX Federal Permitting Improvement Steering Council (Part
1900)
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)
[[Page 682]]
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--Federal Acquisition Supply Chain Security
201 Federal Acquisition Security Council (Parts 201-1--
201-99)
Subtitle E [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)
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)
[[Page 683]]
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 Services, Administration of
Families and Services, Department of Health and
Human Services (Parts 300--399)
IV Office of Refugee Resettlement, Administration for
Children and Families, Department of Health and
Human Services (Parts 400--499)
V Foreign Claims Settlement Commission of the United
States, Department of Justice (Parts 500--599)
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)
[[Page 684]]
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)
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 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)
[[Page 685]]
51 Department of the Army Acquisition Regulations (Parts
5100--5199) [Reserved]
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)
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)
[[Page 686]]
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 687]]
Alphabetical List of Agencies Appearing in the CFR
(Revised as of April 1, 2024)
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, VIII, IX, X, XI; 9,
II
Agricultural Research Service 7, V
Agriculture, Department of 2, IV; 5, LXXIII
Advocacy and Outreach, Office of 7, XXV
Agricultural Marketing Service 7, I, VIII, IX, X, XI; 9,
II
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
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 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
Appalachian Regional Commission 5, IX
Architectural and Transportation Barriers 36, XI
Compliance Board
[[Page 688]]
Arctic Research Commission 45, XXIII
Armed Forces Retirement Home 5, XI; 38, II
Army, Department of 32, V
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 51
Benefits Review Board 20, VII
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Blind or Severely Disabled, Committee for 41, 51
Purchase from People Who Are
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 Hazard Investigation Board 40, VI
Chief Financial Officer, Office of 7, XXX
Child Support Services, Office of 45, III
Children and Families, Administration for 45, II, IV, X, XIII
Civil Rights, Commission on 5, LXVIII; 45, VII
Civil Rights, Office for 34, I
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 Affairs, Office of the Under- 15, XV
Secretary for
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
Council of the Inspectors General on Integrity 5, XCVIII
and Efficiency
Court Services and Offender Supervision Agency 5, LXX; 28, VIII
for the District of Columbia
Customs and Border Protection 19, I
Defense, Department of 2, XI; 5, XXVI; 32,
Subtitle A; 40, VII
Advanced Research Projects Agency 32, I
Air Force Department 32, VII
Army Department 32, V; 33, II; 36, III;
48, 51
Defense Acquisition Regulations System 48, 2
Defense Intelligence Agency 32, I
[[Page 689]]
Defense Logistics Agency 32, I, XII; 48, 54
Engineers, Corps of 33, II; 36, III
National Imagery and Mapping Agency 32, I
Navy, Department of 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 Affairs, Office of the Under-Secretary 15, XV
for
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, II
Presidential Documents 3
Science and Technology Policy, Office of 32, XXIV; 47, II
Trade Representative, Office of the United 15, XX
States
[[Page 690]]
Export-Import Bank of the United States 2, XXXV; 5, LII; 12, IV
Families and Services, Administration of 45, III
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 Acquisition Security Council 41, 201
Federal Aviation Administration 14, I
Commercial Space Transportation 14, III
Federal Claims Collection Standards 31, IX
Federal Communications Commission 2, LX; 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 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 5, CIII; 29, XII
Federal Mine Safety and Health Review Commission 5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration 49, III
Federal Permitting Improvement Steering Council 40, IX
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
Contract Appeals, Board of 48, 61
[[Page 691]]
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
Great Lakes St. Lawrence Seaway Development 33, IV
Corporation
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 Services, Office of 45, III
Children and Families, Administration for 45, II, IV, X, XIII
Community Services, Office of 45, X
Families and Services, Administration of 45, III
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
[[Page 692]]
Indian Affairs, Office of the Assistant 25, VI
Secretary
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
Intellectual Property Enforcement Coordinator, 5, CIV
Office of
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 Environmental Enforcement, Bureau 30, II
of
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 Development Finance Corporation, 5, XXXIII; 22, VII
U.S.
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
Benefits Review Board 20, VII
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
[[Page 693]]
Employment and Training Administration 20, V
Federal Acquisition Regulation 48, 29
Federal Contract Compliance Programs, Office 41, 60
of
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, VI
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
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
[[Page 694]]
Federal Acquisition Regulation 48, 25
National Security Council 32, XXI; 47, II
National Technical Information Service 15, XI
National Telecommunications and Information 15, XXIII; 47, III, IV, V
Administration
National Transportation Safety Board 49, VIII
Natural Resource Revenue, Office of 30, XII
Natural Resources Conservation Service 7, VI
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
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, IV, XXXV; 45, VIII
Federal Acquisition Regulation 48, 17
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Human Resources Management and Labor Relations 5, XCVII
Systems, Department of Homeland Security
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 and Indian Housing, Office of Assistant 24, IX
Secretary for
Public Contracts, Department of Labor 41, 50
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, L
Rural Housing Service 7, XVIII, XXXV, L
Rural Utilities Service 7, XVII, XVIII, XLII, L
Safety and Environmental Enforcement, Bureau of 30, II
Science and Technology Policy, Office of 32, XXIV; 47, II
Secret Service 31, IV
Securities and Exchange Commission 5, XXXIV; 17, II
Selective Service System 32, XVI
Small Business Administration 2, XXVII; 13, I
Smithsonian Institution 36, V
Social Security Administration 2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States 5, XI
Special Counsel, Office of 5, VIII
Special Education and Rehabilitative Services, 34, III
Office of
[[Page 695]]
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
Great Lakes St. Lawrence Seaway Development 33, IV
Corporation
Maritime Administration 46, II
National Highway Traffic Safety Administration 23, II, III; 47, IV; 49, V
Pipeline and Hazardous Materials Safety 49, I
Administration
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 Agency for Global Media 22, V
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
U.S. Office of Special Counsel 5, CII
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, VI
World Agricultural Outlook Board 7, XXXVIII
[[Page 697]]
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
Authority: 26 U.S.C. 7805.
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
1545-0988
1.42-5..................................................... 1545-1357
1.42-6..................................................... 1545-1102
1.42-8..................................................... 1545-1102
1.42-10.................................................... 1545-1102
1.42-13.................................................... 1545-1357
1.42-14.................................................... 1545-1423
1.42-17.................................................... 1545-1357
1.42-18.................................................... 1545-2088
1.43-3(a)(3)............................................... 1545-1292
1.43-3(b)(3)............................................... 1545-1292
1.44B-1.................................................... 1545-0219
1.45D-1.................................................... 1545-1765
1.45G-1.................................................... 1545-2031
1.46-1..................................................... 1545-0123
1545-0155
1.46-3..................................................... 1545-0155
1.46-4..................................................... 1545-0155
1.46-5..................................................... 1545-0155
1.46-6..................................................... 1545-0155
1.46-8..................................................... 1545-0155
1.46-9..................................................... 1545-0155
1.46-10.................................................... 1545-0118
1.47-1..................................................... 1545-0155
1545-0166
1.47-3..................................................... 1545-0155
1545-0166
1.47-4..................................................... 1545-0123
1.47-5..................................................... 1545-0092
1.47-6..................................................... 1545-0099
1.48-3..................................................... 1545-0155
1.48-4..................................................... 1545-0155
1545-0808
1.48-5..................................................... 1545-0155
1.48-6..................................................... 1545-0155
1.48-12.................................................... 1545-0155
1545-1783
1.50A-1.................................................... 1545-0895
1.50A-2.................................................... 1545-0895
1.50A-3.................................................... 1545-0895
1.50A-4.................................................... 1545-0895
1.50A-5.................................................... 1545-0895
1.50A-6.................................................... 1545-0895
1.50A-7.................................................... 1545-0895
1.50B-1.................................................... 1545-0895
1.50B-2.................................................... 1545-0895
1.50B-3.................................................... 1545-0895
1.50B-4.................................................... 1545-0895
[[Page 698]]
1.50B-5.................................................... 1545-0895
1.51-1..................................................... 1545-0219
1545-0241
1545-0244
1545-0797
1.52-2..................................................... 1545-0219
1.52-3..................................................... 1545-0219
1.56(g)-1.................................................. 1545-1233
1.57-5..................................................... 1545-0227
1.58-1..................................................... 1545-0175
1.59-1..................................................... 1545-1903
1.61-2..................................................... 1545-0771
1.61-4..................................................... 1545-0187
1.61-15.................................................... 1545-0074
1.62-2..................................................... 1545-1148
1.63-1..................................................... 1545-0074
1.66-4..................................................... 1545-1770
1.67-2T.................................................... 1545-0110
1.67-3..................................................... 1545-1018
1.67-3T.................................................... 1545-0118
1.71-1T.................................................... 1545-0074
1.72-4..................................................... 1545-0074
1.72-6..................................................... 1545-0074
1.72-9..................................................... 1545-0074
1.72-17.................................................... 1545-0074
1.72-17A................................................... 1545-0074
1.72-18.................................................... 1545-0074
1.74-1..................................................... 1545-1100
1.79-2..................................................... 1545-0074
1.79-3..................................................... 1545-0074
1.83-2..................................................... 1545-0074
1.83-5..................................................... 1545-0074
1.83-6..................................................... 1545-1448
1.103-10................................................... 1545-0123
1545-0940
1.103A-2................................................... 1545-0720
1.105-4.................................................... 1545-0074
1.105-5.................................................... 1545-0074
1.105-6.................................................... 1545-0074
1.108-4.................................................... 1545-1539
1.108-5.................................................... 1545-1421
1.108-7.................................................... 1545-2155
1.108(i)-1................................................. 1545-2147
1.108(i)-2................................................. 1545-2147
1.110-1.................................................... 1545-1661
1.117-5.................................................... 1545-0869
1.118-2.................................................... 1545-1639
1.119-1.................................................... 1545-0067
1.120-3.................................................... 1545-0057
1.121-1.................................................... 1545-0072
1.121-2.................................................... 1545-0072
1.121-3.................................................... 1545-0072
1.121-4.................................................... 1545-0072
1545-0091
1.121-5.................................................... 1545-0072
1.127-2.................................................... 1545-0768
1.132-2.................................................... 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
1.148-0.................................................... 1545-1098
1.148-1.................................................... 1545-1098
1.148-2.................................................... 1545-1098
1545-1347
1.148-3.................................................... 1545-1098
1545-1347
1.148-4.................................................... 1545-1098
1545-1347
1.148-5.................................................... 1545-1098
1545-1490
1.148-6.................................................... 1545-1098
1545-1451
1.148-7.................................................... 1545-1098
1545-1347
1.148-8.................................................... 1545-1098
1.148-11................................................... 1545-1098
1545-1347
1.149(e)-1................................................. 1545-0720
1.150-1.................................................... 1545-1347
1.151-1.................................................... 1545-0074
1.152-3.................................................... 1545-0071
1545-1783
1.152-4.................................................... 1545-0074
1.152-4T................................................... 1545-0074
1.162-1.................................................... 1545-0139
1.162-2.................................................... 1545-0139
1.162-3.................................................... 1545-0139
1.162-4.................................................... 1545-0139
1.162-5.................................................... 1545-0139
1.162-6.................................................... 1545-0139
1.162-7.................................................... 1545-0139
1.162-8.................................................... 1545-0139
1.162-9.................................................... 1545-0139
1.162-10................................................... 1545-0139
1.162-11................................................... 1545-0139
1.162-12................................................... 1545-0139
1.162-13................................................... 1545-0139
1.162-14................................................... 1545-0139
1.162-15................................................... 1545-0139
1.162-16................................................... 1545-0139
1.162-17................................................... 1545-0139
1.162-18................................................... 1545-0139
1.162-19................................................... 1545-0139
1.162-20................................................... 1545-0139
1.162-24................................................... 1545-2115
1.162-27................................................... 1545-1466
1.163-5.................................................... 1545-0786
1545-1132
1.163-8T................................................... 1545-0995
1.163-10T.................................................. 1545-0074
1.163-13................................................... 1545-1491
1.163(d)-1................................................. 1545-1421
1.165-1.................................................... 1545-0177
1.165-2.................................................... 1545-0177
1.165-3.................................................... 1545-0177
1.165-4.................................................... 1545-0177
1.165-5.................................................... 1545-0177
1.165-6.................................................... 1545-0177
1.165-7.................................................... 1545-0177
1.165-8.................................................... 1545-0177
1.165-9.................................................... 1545-0177
1.165-10................................................... 1545-0177
1.165-11................................................... 1545-0074
1545-0177
1545-0786
1.165-12................................................... 1545-0786
1.166-1.................................................... 1545-0123
1.166-2.................................................... 1545-1254
1.166-4.................................................... 1545-0123
1.166-10................................................... 1545-0123
1.167(a)-5T................................................ 1545-1021
1.167(a)-7................................................. 1545-0172
1.167(a)-11................................................ 1545-0152
1545-0172
1.167(a)-12................................................ 1545-0172
1.167(d)-1................................................. 1545-0172
1.167(e)-1................................................. 1545-0172
1.167(f)-11................................................ 1545-0172
1.167(l)-1................................................. 1545-0172
1.168(d)-1................................................. 1545-1146
1.168(i)-1................................................. 1545-1331
[[Page 699]]
1.168-5.................................................... 1545-0172
1.169-4.................................................... 1545-0172
1.170-1.................................................... 1545-0074
1.170-2.................................................... 1545-0074
1.170-3.................................................... 1545-0123
1.170A-1................................................... 1545-0074
1.170A-2................................................... 1545-0074
1.170A-4(A)(b)............................................. 1545-0123
1.170A-8................................................... 1545-0074
1.170A-9................................................... 1545-0052
1545-0074
1.170A-11.................................................. 1545-0074
1545-0123
1545-1868
1.170A-12.................................................. 1545-0020
1545-0074
1.170A-13.................................................. 1545-0074
1545-0754
1545-0908
1545-1431
1.170A-13(f)............................................... 1545-1464
1.170A-14.................................................. 1545-0763
1.170A-15.................................................. 1545-1953
1.170A-16.................................................. 1545-1953
1.170A-17.................................................. 1545-1953
1.170A-18.................................................. 1545-1953
1.171-4.................................................... 1545-1491
1.171-5.................................................... 1545-1491
1.172-1.................................................... 1545-0172
1.172-13................................................... 1545-0863
1.173-1.................................................... 1545-0172
1.174-3.................................................... 1545-0152
1.174-4.................................................... 1545-0152
1.175-3.................................................... 1545-0187
1.175-6.................................................... 1545-0152
1.179-2.................................................... 1545-1201
1.179-3.................................................... 1545-1201
1.179-5.................................................... 1545-0172
1545-1201
1.179B-1T.................................................. 1545-2076
1.179C-1................................................... 1545-2103
1.179C-1T.................................................. 1545-2103
1.180-2.................................................... 1545-0074
1.181-1.................................................... 1545-2059
1.181-2.................................................... 1545-2059
1.181-3.................................................... 1545-2059
1.182-6.................................................... 1545-0074
1.183-1.................................................... 1545-0195
1.183-2.................................................... 1545-0195
1.183-3.................................................... 1545-0195
1.183-4.................................................... 1545-0195
1.190-3.................................................... 1545-0074
1.194-2.................................................... 1545-0735
1.194-4.................................................... 1545-0735
1.195-1.................................................... 1545-1582
1.197-1T................................................... 1545-1425
1.197-2.................................................... 1545-1671
1.199-6.................................................... 1545-1966
1.213-1.................................................... 1545-0074
1.215-1T................................................... 1545-0074
1.217-2.................................................... 1545-0182
1.243-3.................................................... 1545-0123
1.243-4.................................................... 1545-0123
1.243-5.................................................... 1545-0123
1.248-1.................................................... 1545-0172
1.261-1.................................................... 1545-1041
1.263(a)-1................................................. 1545-2248
1.263(a)-3................................................. 1545-2248
1.263(a)-5................................................. 1545-1870
1.263(e)-1................................................. 1545-0123
1.263A-1................................................... 1545-0987
1.263A-1T.................................................. 1545-0187
1.263A-2................................................... 1545-0987
1.263A-3................................................... 1545-0987
1.263A-8(b)(2)(iii)........................................ 1545-1265
1.263A-9(d)(1)............................................. 1545-1265
1.263A-9(f)(1)(ii)......................................... 1545-1265
1.263A-9(f)(2)(iv)......................................... 1545-1265
1.263A-9(g)(2)(iv)(C)...................................... 1545-1265
1.263A-9(g)(3)(iv)......................................... 1545-1265
1.265-1.................................................... 1545-0074
1.265-2.................................................... 1545-0123
1.266-1.................................................... 1545-0123
1.267(f)-1................................................. 1545-0885
1.268-1.................................................... 1545-0184
1.274-1.................................................... 1545-0139
1.274-2.................................................... 1545-0139
1.274-3.................................................... 1545-0139
1.274-4.................................................... 1545-0139
1.274-5.................................................... 1545-0771
1.274-5A................................................... 1545-0139
1545-0771
1.274-5T................................................... 1545-0074
1545-0172
1545-0771
1.274-6.................................................... 1545-0139
1545-0771
1.274-6T................................................... 1545-0074
1545-0771
1.274-7.................................................... 1545-0139
1.274-8.................................................... 1545-0139
1.279-6.................................................... 1545-0123
1.280C-4................................................... 1545-1155
1.280F-3T.................................................. 1545-0074
1.280G-1................................................... 1545-1851
1.281-4.................................................... 1545-0123
1.302-4.................................................... 1545-0074
1.305-3.................................................... 1545-0123
1.305-5.................................................... 1545-1438
1.307-2.................................................... 1545-0074
1.312-15................................................... 1545-0172
1.316-1.................................................... 1545-0123
1.331-1.................................................... 1545-0074
1.332-4.................................................... 1545-0123
1.332-6.................................................... 1545-2019
1.336-2.................................................... 1545-2125
1.336-4.................................................... 1545-2125
1.337(d)-1................................................. 1545-1160
1.337(d)-2................................................. 1545-1160
1545-1774
1.337(d)-4................................................. 1545-1633
1.337(d)-5................................................. 1545-1672
1.337(d)-6................................................. 1545-1672
1.337(d)-7................................................. 1545-1672
1.338-2.................................................... 1545-1658
1.338-5.................................................... 1545-1658
1.338-10................................................... 1545-1658
1.338-11................................................... 1545-1990
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
1545-2056
[[Page 700]]
1545-2183
1.367(b)-1................................................. 1545-1271
1.367(b)-3T................................................ 1545-1666
1.367(d)-1T................................................ 1545-0026
1.367(e)-1................................................. 1545-1487
1.367(e)-2................................................. 1545-1487
1.368-1.................................................... 1545-1691
1.368-3.................................................... 1545-2019
1.371-1.................................................... 1545-0123
1.371-2.................................................... 1545-0123
1.374-3.................................................... 1545-0123
1.381(b)-1................................................. 1545-0123
1.381(c)(4)-1.............................................. 1545-0123
1545-0152
1545-0879
1.381(c)(5)-1.............................................. 1545-0123
1545-0152
1.381(c)(6)-1.............................................. 1545-0123
1545-0152
1.381(c)(8)-1.............................................. 1545-0123
1.381(c)(10)-1............................................. 1545-0123
1.381(c)(11)-1(k).......................................... 1545-0123
1.381(c)(13)-1............................................. 1545-0123
1.381(c)(17)-1............................................. 1545-0045
1.381(c)(22)-1............................................. 1545-1990
1.381(c)(25)-1............................................. 1545-0045
1.382-1T................................................... 1545-0123
1.382-2.................................................... 1545-0123
1.382-2T................................................... 1545-0123
1.382-3.................................................... 1545-1281
1545-1345
1.382-4.................................................... 1545-1120
1.382-6.................................................... 1545-1381
1.382-8.................................................... 1545-1434
1.382-9.................................................... 1545-1120
1545-1260
1545-1275
1545-1324
1.382-11................................................... 1545-2019
1.382-91................................................... 1545-1260
1545-1324
1.383-1.................................................... 1545-0074
1545-1120
1.401-1.................................................... 1545-0020
1545-0197
1545-0200
1545-0534
1545-0710
1.401(a)-11................................................ 1545-0710
1.401(a)-20................................................ 1545-0928
1.401(a)-31................................................ 1545-1341
1.401(a)-50................................................ 1545-0710
1.401(a)(9)-1.............................................. 1545-1573
1.401(a)(9)-3.............................................. 1545-1466
1.401(a)(9)-4.............................................. 1545-1573
1.401(a)(9)-6.............................................. 1545-2234
1.401(a)(31)-1............................................. 1545-1341
1.401(b)-1................................................. 1545-0197
1.401(f)-1................................................. 1545-0710
1.401(k)-1................................................. 1545-1039
1545-1069
1545-1669
1545-1930
1.401(k)-2................................................. 1545-1669
1.401(k)-3................................................. 1545-1669
1.401(k)-4................................................. 1545-1669
1.401(m)-3................................................. 1545-1699
1.401-14................................................... 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
1545-0123
1545-0134
1545-0152
1545-0820
1545-1748
1.443-1.................................................... 1545-0123
1.444-3T................................................... 1545-1036
1.444-4.................................................... 1545-1591
1.446-1.................................................... 1545-0074
1545-0152
1.446-4(d)................................................. 1545-1412
1.448-1(g)................................................. 1545-0152
1.448-1(h)................................................. 1545-0152
1.448-1(i)................................................. 1545-0152
1.448-2.................................................... 1545-1855
1.448-2T................................................... 1545-0152
1545-1855
1.451-1.................................................... 1545-0091
1.451-4.................................................... 1545-0123
1.451-6.................................................... 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
[[Page 701]]
1.455-2.................................................... 1545-0152
1.455-6.................................................... 1545-0123
1.456-2.................................................... 1545-0123
1.456-6.................................................... 1545-0123
1.456-7.................................................... 1545-0123
1.457-8.................................................... 1545-1580
1.458-1.................................................... 1545-0879
1.458-2.................................................... 1545-0152
1.460-1.................................................... 1545-1650
1.460-6.................................................... 1545-1031
1545-1572
1545-1732
1.461-1.................................................... 1545-0074
1.461-2.................................................... 1545-0096
1.461-4.................................................... 1545-0917
1.461-5.................................................... 1545-0917
1.463-1T................................................... 1545-0916
1.465-1T................................................... 1545-0712
1.466-1T................................................... 1545-0152
1.466-4.................................................... 1545-0152
1.468A-3................................................... 1545-1269
1545-1378
1545-1511
1.468A-3(h), 1.468A-7, and 1.468A-8(d)..................... 1545-2091
1.468A-4................................................... 1545-0954
1.468A-7................................................... 1545-0954
1545-1511
1.468A-8................................................... 1545-1269
1.468B-1................................................... 1545-1631
1.468B-1(j)................................................ 1545-1299
1.468B-2(k)................................................ 1545-1299
1.468B-2(l)................................................ 1545-1299
1.468B-3(b)................................................ 1545-1299
1.468B-3(e)................................................ 1545-1299
1.468B-5(b)................................................ 1545-1299
1.468B-9................................................... 1545-1631
1.469-1.................................................... 1545-1008
1.469-2T................................................... 1545-0712
1545-1091
1.469-4T................................................... 1545-0985
1545-1037
1.469-7.................................................... 1545-1244
1.471-2.................................................... 1545-0123
1.471-5.................................................... 1545-0123
1.471-6.................................................... 1545-0123
1.471-8.................................................... 1545-0123
1.471-11................................................... 1545-0123
1545-0152
1.472-1.................................................... 1545-0042
1545-0152
1.472-2.................................................... 1545-0152
1.472-3.................................................... 1545-0042
1.472-5.................................................... 1545-0152
1.472-8.................................................... 1545-0028
1545-0042
1545-1767
1.475(a)-4................................................. 1545-1945
1.481-4.................................................... 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
1.506-1.................................................... 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
1.529A-2................................................... 1545-2293
1.529A-5................................................... 1545-2262
1.529A-6................................................... 1545-2262
1.529A-7................................................... 1545-2262
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
[[Page 702]]
1.614-8.................................................... 1545-0099
1.617-1.................................................... 1545-0099
1.617-3.................................................... 1545-0099
1.617-4.................................................... 1545-0099
1.631-1.................................................... 1545-0007
1.631-2.................................................... 1545-0007
1.641(b)-2................................................. 1545-0092
1.642(c)-1................................................. 1545-0092
1.642(c)-2................................................. 1545-0092
1.642(c)-5................................................. 1545-0074
1.642(c)-6................................................. 1545-0020
1545-0074
1545-0092
1.642(g)-1................................................. 1545-0092
1.642(i)-1................................................. 1545-0092
1.645-1.................................................... 1545-1578
1.663(b)-2................................................. 1545-0092
1.664-1.................................................... 1545-0196
1.664-1(a)(7).............................................. 1545-1536
1.664-1(c)................................................. 1545-2101
1.664-2.................................................... 1545-0196
1.664-3.................................................... 1545-0196
1.664-4.................................................... 1545-0020
1545-0196
1.665(a)-0A through
1.665(g)-2A................................................ 1545-0192
1.666(d)-1A................................................ 1545-0092
1.671-4.................................................... 1545-1442
1.671-5.................................................... 1545-1540
1.701-1.................................................... 1545-0099
1.702-1.................................................... 1545-0074
1.703-1.................................................... 1545-0099
1.704-2.................................................... 1545-1090
1.706-1.................................................... 1545-0074
1545-0099
1545-0134
1.706-1T................................................... 1545-0099
1.706-4(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
[[Page 703]]
1.882-4.................................................... 1545-0126
1.883-0.................................................... 1545-1677
1.883-1.................................................... 1545-1677
1.883-2.................................................... 1545-1677
1.883-3.................................................... 1545-1677
1.883-4.................................................... 1545-1677
1.883-5.................................................... 1545-1677
1.884-0.................................................... 1545-1070
1.884-1.................................................... 1545-1070
1.884-2.................................................... 1545-1070
1.884-2T................................................... 1545-0126
1545-1070
1.884-4.................................................... 1545-1070
1.884-5.................................................... 1545-1070
1.892-1T................................................... 1545-1053
1.892-2T................................................... 1545-1053
1.892-3T................................................... 1545-1053
1.892-4T................................................... 1545-1053
1.892-5T................................................... 1545-1053
1.892-6T................................................... 1545-1053
1.892-7T................................................... 1545-1053
1.897-2.................................................... 1545-0123
1545-0902
1.897-3.................................................... 1545-0123
1.897-5T................................................... 1545-0902
1.897-6T................................................... 1545-0902
1.901-2.................................................... 1545-0746
1.901-2A................................................... 1545-0746
1.901-3.................................................... 1545-0122
1.902-1.................................................... 1545-0122
1545-1458
1.904-1.................................................... 1545-0121
1545-0122
1.904-2.................................................... 1545-0121
1545-0122
1.904-3.................................................... 1545-0121
1.904-4.................................................... 1545-0121
1.904-5.................................................... 1545-0121
1.904-7.................................................... 1545-2104
1.904-7T................................................... 1545-2104
1.904(f)-1................................................. 1545-0121
1545-0122
1.904(f)-2................................................. 1545-0121
1.904(f)-3................................................. 1545-0121
1.904(f)-4................................................. 1545-0121
1.904(f)-5................................................. 1545-0121
1.904(f)-6................................................. 1545-0121
1.904(f)-7................................................. 1545-1127
1.905-2.................................................... 1545-0122
1.905-3T................................................... 1545-1056
1.905-4T................................................... 1545-1056
1.905-5T................................................... 1545-1056
1.911-1.................................................... 1545-0067
1545-0070
1.911-2.................................................... 1545-0067
1545-0070
1.911-3.................................................... 1545-0067
1545-0070
1.911-4.................................................... 1545-0067
1545-0070
1.911-5.................................................... 1545-0067
1545-0070
1.911-6.................................................... 1545-0067
1545-0070
1.911-7.................................................... 1545-0067
1545-0070
1.913-13................................................... 1545-0067
1.921-1T................................................... 1545-0190
1545-0884
1545-0935
1545-0939
1.921-2.................................................... 1545-0884
1.927(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
[[Page 704]]
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
1.1044(a)-1................................................ 1545-1421
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1.1092(b)-1T............................................... 1545-0644
1.1092(b)-2T............................................... 1545-0644
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1.1092(b)-4T............................................... 1545-0644
1.1092(b)-5T............................................... 1545-0644
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1.1244(e)-1................................................ 1545-0123
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1.1254-1(c)(3)............................................. 1545-1352
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1.1254-5(d)(2)............................................. 1545-1352
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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
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1545-1028
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1.1301-1................................................... 1545-1662
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1.1367-1(f)................................................ 1545-1139
1.1368-1(f)(2)............................................. 1545-1139
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1.1368-1(f)(4)............................................. 1545-1139
1.1368-1(g)(2)............................................. 1545-1139
1.1374-1A.................................................. 1545-0130
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1.1402(h)-1................................................ 1545-0064
1.1411-10(g)............................................... 1545-2227
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1.1502-77B................................................. 1545-1699
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1.1503(d)-1................................................ 1545-1946
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1.6662-4(e) and (f)........................................ 1545-0889
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1.6694-2(c)(3)............................................. 1545-1231
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20.2010-2.................................................. 1545-0015
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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
1545-0531
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
[[Page 709]]
1545-1892
26.2642-1.................................................. 1545-0985
26.2642-2.................................................. 1545-0985
26.2642-3.................................................. 1545-0985
26.2642-4.................................................. 1545-0985
26.2642-6.................................................. 1545-1902
26.2652-2.................................................. 1545-0985
26.2654-1.................................................. 1545-1902
26.2662-1.................................................. 1545-0015
1545-0985
26.2662-2.................................................. 1545-0985
26.6060-1(a)(1)............................................ 1545-1231
26.6107-1.................................................. 1545-1231
31.3102-3.................................................. 1545-0029
1545-0059
1545-0065
31.3121(b)(19)-1........................................... 1545-0029
31.3121(d)-1............................................... 1545-0004
31.3121(i)-1............................................... 1545-0034
31.3121(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
31.3511-1.................................................. 1545-2266
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
[[Page 710]]
31.6051-3.................................................. 1545-0008
31.6053-1.................................................. 1545-0029
1545-0062
1545-0064
1545-0065
1545-1603
31.6053-2.................................................. 1545-0008
31.6053-3.................................................. 1545-0065
1545-0714
31.6053-4.................................................. 1545-0065
1545-1603
31.6060-1(a)(1)............................................ 1545-1231
31.6065(a)-1............................................... 1545-0029
31.6071(a)-1............................................... 1545-0001
1545-0028
1545-0029
31.6071(a)-1A.............................................. 1545-0955
31.6081(a)-1............................................... 1545-0008
1545-0028
31.6091-1.................................................. 1545-0028
1545-0029
31.6107-1.................................................. 1545-1231
31.6157-1.................................................. 1545-0955
31.6205-1.................................................. 1545-0029
1545-2097
31.6301(c)-1AT............................................. 1545-0035
1545-0112
1545-0257
31.6302-1.................................................. 1545-1413
31.6302-2.................................................. 1545-1413
31.6302-3.................................................. 1545-1413
31.6302-4.................................................. 1545-1413
31.6302(c)-2............................................... 1545-0001
1545-0257
31.6302(c)-2A.............................................. 1545-0955
31.6302(c)-3............................................... 1545-0257
31.6402(a)-2............................................... 1545-0256
1545-2097
31.6413(a)-1............................................... 1545-0029
1545-2097
31.6413(a)-2............................................... 1545-0029
1545-0256
1545-2097
31.6413(c)-1............................................... 1545-0029
1545-0171
31.6414-1.................................................. 1545-0029
1545-2097
32.1....................................................... 1545-0029
1545-0415
32.2....................................................... 1545-0029
35a.3406-2................................................. 1545-0112
35a.9999-5................................................. 1545-0029
36.3121(l)(1)-1............................................ 1545-0137
36.3121(l)(1)-2............................................ 1545-0137
36.3121(l)(3)-1............................................ 1545-0123
36.3121(1)(7)-1............................................ 1545-0123
36.3121(1)(10)-1........................................... 1545-0029
36.3121(1)(10)-3........................................... 1545-0029
36.3121(1)(10)-4........................................... 1545-0257
40.6060-1(a)(1)............................................ 1545-1231
40.6107-1.................................................. 1545-1231
40.6302(c)-3(b)(2)(ii)..................................... 1545-1296
40.6302(c)-3(b)(2)(iii).................................... 1545-1296
40.6302(c)-3(e)............................................ 1545-1296
40.6302(c)-3(f)(2)(ii)..................................... 1545-1296
41.4481-1.................................................. 1545-0143
41.4481-2.................................................. 1545-0143
41.4483-3.................................................. 1545-0143
41.6001-1.................................................. 1545-0143
41.6001-2.................................................. 1545-0143
41.6001-3.................................................. 1545-0143
41.6060-1(a)(1)............................................ 1545-1231
41.6071(a)-1............................................... 1545-0143
41.6081(a)-1............................................... 1545-0143
41.6091-1.................................................. 1545-0143
41.6107-1.................................................. 1545-1231
41.6109-1.................................................. 1545-0143
41.6151(a)-1............................................... 1545-0143
41.6156-1.................................................. 1545-0143
41.6161(a)(1)-1............................................ 1545-0143
44.4401-1.................................................. 1545-0235
44.4403-1.................................................. 1545-0235
44.4412-1.................................................. 1545-0236
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
[[Page 711]]
48.4161(a)-1............................................... 1545-0723
48.4161(a)-2............................................... 1545-0723
48.4161(a)-3............................................... 1545-0723
48.4161(b)-1............................................... 1545-0723
48.4216(a)-2............................................... 1545-0023
48.4216(a)-3............................................... 1545-0023
48.4216(c)-1............................................... 1545-0023
48.4221-1.................................................. 1545-0023
48.4221-2.................................................. 1545-0023
48.4221-3.................................................. 1545-0023
48.4221-4.................................................. 1545-0023
48.4221-5.................................................. 1545-0023
48.4221-6.................................................. 1545-0023
48.4221-7.................................................. 1545-0023
48.4222(a)-1............................................... 1545-0014
1545-0023
48.4223-1.................................................. 1545-0023
1545-0257
1545-0723
48.6302(c)-1............................................... 1545-0023
1545-0257
48.6412-1.................................................. 1545-0723
48.6416(a)-1............................................... 1545-0023
1545-0723
48.6416(a)-2............................................... 1545-0723
48.6416(a)-3............................................... 1545-0723
48.6416(b)(1)-1............................................ 1545-0723
48.6416(b)(1)-2............................................ 1545-0723
48.6416(b)(1)-3............................................ 1545-0723
48.6416(b)(1)-4............................................ 1545-0723
48.6416(b)(2)-1............................................ 1545-0723
48.6416(b)(2)-2............................................ 1545-0723
48.6416(b)(2)-3............................................ 1545-0723
1545-1087
48.6416(b)(2)-4............................................ 1545-0723
48.6416(b)(3)-1............................................ 1545-0723
48.6416(b)(3)-2............................................ 1545-0723
48.6416(b)(3)-3............................................ 1545-0723
48.6416(b)(4)-1............................................ 1545-0723
48.6416(b)(5)-1............................................ 1545-0723
48.6416(c)-1............................................... 1545-0723
48.6416(e)-1............................................... 1545-0023
1545-0723
48.6416(f)-1............................................... 1545-0023
1545-0723
48.6416(g)-1............................................... 1545-0723
48.6416(h)-1............................................... 1545-0723
48.6420(c)-2............................................... 1545-0023
48.6420(f)-1............................................... 1545-0023
48.6420-1.................................................. 1545-0162
1545-0723
48.6420-2.................................................. 1545-0162
1545-0723
48.6420-3.................................................. 1545-0162
1545-0723
48.6420-4.................................................. 1545-0162
1545-0723
48.6420-5.................................................. 1545-0162
1545-0723
48.6420-6.................................................. 1545-0162
1545-0723
48.6421-0.................................................. 1545-0162
1545-0723
48.6421-1.................................................. 1545-0162
1545-0723
48.6421-2.................................................. 1545-0162
1545-0723
48.6421-3.................................................. 1545-0162
1545-0723
48.6421-4.................................................. 1545-0162
1545-0723
48.6421-5.................................................. 1545-0162
1545-0723
48.6421-6.................................................. 1545-0162
1545-0723
48.6421-7.................................................. 1545-0162
1545-0723
48.6424-0.................................................. 1545-0723
48.6424-1.................................................. 1545-0723
48.6424-2.................................................. 1545-0723
48.6424-3.................................................. 1545-0723
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
[[Page 712]]
1545-0196
53.6060-1(a)(1)............................................ 1545-1231
53.6065-1.................................................. 1545-0052
53.6071-1.................................................. 1545-0049
53.6081-1.................................................. 1545-0066
1545-0148
53.6107-1.................................................. 1545-1231
53.6161-1.................................................. 1545-0575
54.4975-7.................................................. 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
[[Page 713]]
301.6324A-1................................................ 1545-0015
301.6361-1................................................. 1545-0024
1545-0074
301.6361-2................................................. 1545-0024
301.6361-3................................................. 1545-0074
301.6402-2................................................. 1545-0024
1545-0073
1545-0091
301.6402-3................................................. 1545-0055
1545-0073
1545-0091
1545-0132
1545-1484
301.6402-5................................................. 1545-0928
301.6404-1................................................. 1545-0024
301.6404-2T................................................ 1545-0024
301.6404-3................................................. 1545-0024
301.6405-1................................................. 1545-0024
301.6501(c)-1.............................................. 1545-1241
1545-1637
301.6501(d)-1.............................................. 1545-0074
1545-0430
301.6511(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
301.7705-1................................................. 1545-2266
301.7705-2................................................. 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
------------------------------------------------------------------------
[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 715]]
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, 2019 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.
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
2020 2022
(No regulations published)
2023
26 CFR
88 FR
Page
Chapter I
1.430(h)(3)-1 Revised..............................................72361
1.430(h)(3)-2 (c)(3)(ii) and (d)(4)(iii)(A) amended; (c)(6)(ii)(E)
revised....................................................72366
1.431(c)(6)-1 Revised..............................................72366
1.433(h)(3)-1 Revised..............................................72366
2024
(Regulations published from January 1, 2024 through April 1, 2024)
26 CFR
89 FR
Page
Chapter I
1.411(d)-3 (a)(4) redesignated as (a)(5); new (a)(4) added..........3557
1.417(e)-1 (d)(1)(i), (2) through (4), (6), and (9) revised;
(d)(7)(ii)(C), (D), (v)(H), (8)(vi) added; (d)(7)(v)
Examples 1 through 7 redesignated as (d)(7)(v)(A) through
(G); new (d)(7)(v)(A)(i) through (iv), new (B)(i) through
(v), new (C)(i) through (iv), new (D)(i), new (ii), new
(E)(i) through (iv), new (F)(i) through (iv), and new
(G)(i) through (iii) redesignated as (d)(7)(v)(A)(1)
through (4), (B)(1) through (5), (C)(1) through (4),
(D)(1), (2), (E)(1) through (4), (F)(1) through (4), and
(G)(1) through (3); new (d)(7)(v)(C)(1), new (E)(1), and
new (2) amended; (d)(10) removed............................3558
[[Page 716]]
[all]