[Federal Register Volume 59, Number 246 (Friday, December 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31427]
[[Page Unknown]]
[Federal Register: December 23, 1994]
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.401(k)-0 is amended as follows:
1. The entries for Sec. 1.401(k)-1, paragraph (b)(3) and (b)(3)(i)
and (ii) are revised.
2. The entries for Sec. 1.401(k)-1, paragraph (b)(3)(ii)(A) and
(B), and (b)(3)(iii) and (iv) are removed.
3. The entry for Sec. 1.401(k)-1 paragraph (b)(4)(ii) is revised.
4. An entry for Sec. 1.401(k)-1, paragraph (e)(6)(vi) is added.
5. The entries for Sec. 1.401(k)-1, paragraph (g)(11)(i) and (ii)
are revised.
6. Entries for Sec. 1.401(k)-1, paragraphs (g)(11)(ii)(A) through
(C) are added.
7. The entries for Sec. 1.401(k)-1, paragraphs (g)(11)(iii),
(g)(11)(iii)(A) through (D), (g)(11)(iii)(D)(1) and (2), and
(g)(11)(iv) are removed.
8. Entries for Sec. 1.401(k)-1, paragraph (g)(15) and (16) are
added.
9. The entry for Sec. 1.401(k)-1, paragraph (h)(4)(ii) is revised.
The added and revised entries read as follows:
Sec. 1.401(k)-0 Certain cash or deferred arrangements, table of
contents.
* * * * *
Sec. 1.401(k)-1 * * *
* * * * *
(b) * * *
(3) Aggregation.
(i) Aggregation of arrangements and plans.
(ii) Restructuring and Permissive Aggregation.
(4) * * *
(ii) Elective contributions and qualified nonelective
contributions used to satisfy actual contribution percentage test.
* * * * *
(e) * * *
(6) * * *
(vi) Examples.
* * * * *
(g) * * *
(11) * * *
(i) Application of section 410(b) rules.
(ii) Modifications to section 410(b) rules.
(A) In general.
(B) Plans benefiting collective bargaining unit employees.
(C) Multiemployer plans.
* * * * *
(15) Section 401(k) plan.
(16) Section 401(m) plan.
(h) * * *
(4) * * *
(ii) Plan years beginning before January 1, 1996.
* * * * *
Par. 3. Section 1.401(k)-1 is amended as follows:
1. Paragraph (a) is amended as follows:
i. Paragraph (a)(3)(iv) is amended by adding a sentence immediately
before the last sentence.
ii. Paragraph (a)(3)(v) is revised.
iii. Paragraph (a)(3)(vi), Example 3, is added.
iv. Paragraphs (a)(4)(ii) and (iv), (a)(5)(iv), (a)(6)(ii)(C), and
(a)(7)(i) are revised.
2. Paragraph (b) is amended as follows:
i. Paragraphs (b)(1)(i), (ii), and (b)(3) are revised.
ii. Paragraph (b)(4)(ii) heading is revised and a sentence is added
at the end of the paragraph.
iii. Paragraphs (b)(4)(iv), (b)(5)(i) and (ii) are amended by
adding a sentence at the end of each paragraph.
iv. Paragraph (b)(5)(vi) is revised.
v. Paragraph (b)(6) is amended by:
a. Revising Example 2, paragraph (i).
b. Revising Example 3, paragraph (i).
c. Revising Example 4, paragraph (i).
3. Paragraph (d) is amended as follows:
i. Paragraphs (d)(2)(iv)(A)(3), (d)(3), and (d)(4)(i) are revised.
ii. The last sentence of paragraph (d)(5) is revised.
iii. A sentence is added at the end of paragraph (d)(6)(iv).
4. Paragraph (e) is amended as follows:
i. A sentence is added at the end of paragraph (e)(6)(ii).
ii. Paragraph (e)(6)(vi) is added.
iii. Paragraph (e)(7) is revised.
5. Paragraph (f) is amended as follows:
i. Paragraphs (f)(1)(iii), (f)(2), (f)(3)(ii), and (f)(3)(iii)(C)
are revised.
ii. In paragraph (f)(3)(v), paragraph (i) of the Example is
revised.
iii. Paragraph (f)(4)(ii)(B) is revised.
iv. Paragraph (f)(7), paragraph (i) of Example 1, and Examples 2
and 3 are revised.
6. Paragraph (g) is amended as follows:
i. Paragraphs (g)(1)(ii)(B)(1) and (C)(1), and (g)(2)(i) are
revised.
ii. A sentence is added at the end of paragraph (g)(4)(ii).
iii. Paragraphs (g)(5), (6) and (11) are revised.
iv. Paragraphs (g)(15) and (16) are added.
7. Paragraphs (h)(3)(iii) (A) and (B)(2), and (h)(4)(ii) are
revised.
The added and revised provisions read as follows:
Sec. 1.401(k)-1 Certain cash or deferred arrangements.
(a) * * *
(3) * * *
(iv) * * * In no event is an election made after December 23, 1994
treated as one-time irrevocable election under this paragraph if the
election is made by an employee who previously became eligible under
another plan (whether or not terminated) of the employer. * * *
(v) Tax treatment of employees. An amount generally is includible
in an employee's gross income for the taxable year in which the
employee actually or constructively receives the amount. But for
section 402(e)(3) and section 401(k), an employee is treated as having
received an amount that is contributed to a plan pursuant to the
employee's cash or deferred election. This is the case even if the
election to defer is made before the year in which the amount is
earned, or before the amount is currently available. See Sec. 1.402(a)-
1(d).
(vi) * * *
* * * * *
Example 3. (i) Employer A establishes a qualified money purchase
pension plan in 1986. This is the first qualified plan established
by Employer A. All salaried employees are eligible to participate
under the plan. Hourly-paid employees are not eligible to
participate under the plan. In 1996, Employer A establishes a
profit-sharing plan under which all employees (both salaried and
hourly) are eligible. Employer A permits all employees on the
effective date of the profit-sharing plan to make a one-time
irrevocable election to have Employer A contribute five percent of
compensation on their behalf to the plan and to any other plan of
Employer A (including plans not yet established) for the duration of
the employee's employment with Employer A, and have their salaries
reduced by five percent.
(ii) The election provided under the profit-sharing plan is not
a one-time irrevocable election within the meaning of Sec. 1.401(k)-
1(a)(3)(iv) with respect to the salaried employees of Employer A
who, at any time before becoming eligible to participate under the
profit-sharing plan, became eligible to participate under the money
purchase pension plan. The election under the profit-sharing plan is
a one-time irrevocable election within the meaning of Sec. 1.401(k)-
1(a)(3)(iv) with respect to the hourly employees, because they were
not previously eligible to participate under another plan of the
employer.
(4) * * *
(ii) Treatment of elective contributions as employer contributions.
Except as provided in paragraph (f) of this section, elective
contributions under a qualified cash or deferred arrangement are
treated as employer contributions. Thus, for example, elective
contributions are treated as employer contributions for purposes of
sections 401(a) and 401(k), 402, 404, 409, 411, 412, 415, 416, and 417.
* * * * *
(iv) Application of nondiscrimination requirements to plan that
includes a qualified cash or deferred arrangement. A plan that includes
a qualified cash or deferred arrangement must satisfy the requirements
of sections 401(a)(4) and 410(b). Thus, for example, the plan must
satisfy section 401(a)(4) with respect to the amount of contributions
or benefits and the availability of benefits, rights and features under
the plan. See Sec. 1.401(a)(4)-1(b)(3). The right to make each level of
elective contributions under a cash or deferred arrangement is a
benefit, right or feature subject to this requirement, and each of
these rights must therefore generally be available to a group of
employees that satisfies section 410(b). See Sec. 1.401(a)(4)-
4(e)(3)(i) and (iii)(D). Thus, for example, if all employees are
eligible to make a stated level of elective contributions under a cash
or deferred arrangement, but that level of contributions can only be
made from compensation in excess of a stated amount, such as the Social
Security taxable wage base, the arrangement will generally favor highly
compensated employees with respect to the availability of elective
contributions and thus will generally not satisfy the requirements of
section 401(a)(4). For plan years beginning after December 31, 1984,
the amount of elective contributions under a qualified cash or deferred
arrangement satisfies the requirements of section 401(a)(4) only if the
amount of elective contributions satisfies the special
nondiscrimination test of section 401(k)(3) and paragraph (b)(2) of
this section. See Sec. 1.401(a)(4)-1(b)(2)(ii)(B). See also
Sec. 1.401(a)(4)- 11(g)(3)(vii)(A), relating to corrective amendments
that may be made to satisfy the minimum coverage requirements of
section 410(b).
(5) * * *
(iv) Qualification of plan that includes a nonqualified cash or
deferred arrangement. A profit-sharing, stock bonus, pre-ERISA money
purchase pension, or rural cooperative plan does not fail to satisfy
the requirements of section 401(a) merely because the plan includes a
nonqualified cash or deferred arrangement. In determining whether the
plan satisfies the requirements of section 401(a)(4), the special
nondiscrimination tests of sections 401(k)(3) and 401(m)(2) may not be
used. See Secs. 1.401(a)(4)-1(b)(2)(ii)(B) and 1.410(b)-9 (definition
of section 401(k) plan).
(6) * * *
(ii) * * *
(C) Transition rule for partnership cash or deferred elections. A
one-time irrevocable election to participate or not to participate in a
plan in which partners may participate is not a cash or deferred
election if the election was made on or before the later of the first
day of the first plan year beginning after December 31, 1988, or March
31, 1989. This election may be made after the commencement of
employment or after the employee's first becoming eligible under any
plan of the employer. In no event, however, may the election be made
after December 23, 1994. The election may be made even if the one-time
irrevocable election in Sec. 1.401(k)-1(a)(3)(iv) was previously made.
* * * * *
(7) * * * (i) In general. The amount of employer contributions
under a nonqualified cash or deferred arrangement is treated as
satisfying section 401(a)(4) if the arrangement is part of a
collectively bargained plan (including a plan adopted by a state or
local government before May 6, 1986) that automatically satisfies the
requirements of section 410(b). See Secs. 1.401(a)(4)-1(c)(5) and
1.410(b)-2(b)(7). Except as specifically provided otherwise, elective
contributions under the arrangement are treated as employer
contributions. See Sec. 1.401(k)-1(a)(5)(ii). However, elective
contributions under the nonqualified cash or deferred arrangement are
treated as employee contributions for purposes of section 402(a) for
plan years beginning after December 31, 1992, and are therefore not
excludable from gross income under section 402(e)(3). See
Sec. 1.402(a)-1(d)(3)(iv).
* * * * *
(b) * * *
(1) * * *
(i) The group of eligible employees under the section 401(k) plan
and the group of employees benefiting under the plan to which the
nonelective employer contributions are made separately satisfy the
requirements of section 410(b) (including the average benefit
percentage test, if applicable). For special rules governing the
application of section 410(b) to a cash or deferred arrangement, see
Secs. 1.410(b)-7(c)(1) and 1.410(b)-8(a)(1). See also Sec. 1.401(a)(4)-
11(g)(3)(vii)(A), relating to corrective amendments that may be made to
satisfy the minimum coverage requirements of section 410(b).
(ii) The cash or deferred arrangement satisfies the actual deferral
percentage test described in paragraph (b)(2) of this section. This is
the exclusive nondiscrimination test applicable to the amount of
elective contributions under a qualified cash or deferred arrangement.
See Sec. 1.401(a)(4)-1(b)(2)(ii)(B).
* * * * *
(3) Aggregation--(i) Aggregation of arrangements and plans. Except
as otherwise specifically provided in this paragraph (b)(3), all cash
or deferred arrangements included in a plan are treated as a single
cash or deferred arrangement. Thus, for example, if two groups of
employees are eligible for separate cash or deferred arrangements under
the same plan, the two cash or deferred arrangements are treated as a
single cash or deferred arrangement, even if they have significantly
different features, such as significantly different limits on elective
contributions. See Sec. 1.401(k)-1(g)(11) for the definition of plan
used for purposes of this section. That definition contains the
exclusive rules for aggregation and disaggregation of plans for
purposes of this section. See also paragraph (g)(1)(ii) of this section
for rules requiring the aggregation of elective contributions under two
or more plans in computing the actual deferral ratios of certain
employees.
(ii) Restructuring and Permissive Aggregation. Effective for plan
years beginning after December 31, 1991, restructuring under
Sec. 1.401(a)(4)-9(c) may not be used to demonstrate compliance with
the requirements of section 401(k). See Sec. 1.401(a)(4)-9(c)(3)(ii).
For plan years beginning before January 1, 1992, see Sec. 1.401(k)-
1(h)(3)(iii). An employer may, however, treat a plan benefiting
otherwise excludable employees as two separate plans for purposes of
sections 401(k) and 410(b) in accordance with Secs. 1.410(b)-6(b)(3)
and 1.410(b)-7(c)(3).
(4) * * *
(ii) Elective contributions and qualified nonelective contributions
used to satisfy actual contribution percentage test. * * * A qualified
nonelective contribution that is treated as a matching contribution is
subject to the actual contribution percentage test of section 401(m)(2)
and is not taken into account as an elective contribution under
paragraph (b)(2) or (5) of this section.
* * * * *
(iv) * * * See Secs. 1.401(a)(4)-1(b)(2)(ii)(B); 1.410(b)-7(c)(1).
(5) * * *
(i) * * * See Sec. 1.401(a)(4)-1(b)(2).
(ii) * * * See Sec. 1.401(a)(4)-1(b)(2).
* * * * *
(vi) For plan years beginning after December 31, 1988, or such
later date provided in paragraph (h) of this section, the section
401(k) plan and the plan or plans to which the qualified nonelective
contributions and qualified matching contributions are made, could be
aggregated under Sec. 1.410(b)-7(d) after application of the mandatory
disaggregation rules of Sec. 1.410(b)-7(c), as modified in
Sec. 1.401(k)-1(g)(11). If the plan year of the section 401(k) plan is
changed to satisfy the requirement under Sec. 1.410(b)-7(d)(5) that
aggregated plans have the same plan year, the qualified nonelective
contributions and qualified matching contributions may be taken into
account in the resulting short plan year only if the contributions
satisfy the requirements of paragraph (b)(4)(i) of this section with
respect to the short year as if the contributions were elective
contributions and the aggregated plans could otherwise be aggregated
for purposes of section 410(b).
(6) * * *
* * * * *
Example 2. (i) The facts are the same as in Example 1, except
that elective contributions are made pursuant to a salary reduction
agreement and no bonuses are paid. Employer X includes elective
contributions in compensation as permitted under Sec. 1.414(s)-
1(c)(4)(i). See Sec. 1.401(k)-1(g)(2)(i). In addition, A defers
$2,025. Thus, the compensation and elective contributions for A, B,
and C are:
------------------------------------------------------------------------
Actual
Elective deferral
Employee Compensation contributions ratio
(percent)
------------------------------------------------------------------------
A............................. $30,000 $2,025 6.75
B............................. 15,000 750 5.00
C............................. 10,000 450 4.50
------------------------------------------------------------------------
* * * * *
Example 3. (i) Employees D through L are eligible employees in
Employer A's profit-sharing plan that contains a cash or deferred
arrangement. Employer A includes elective contributions in
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). Each
eligible employee may elect to defer up to six percent of
compensation under the cash or deferred arrangement. Employees D and
E are highly compensated. The compensation, elective contributions,
and actual deferral ratios of these employees for the 1989 plan year
are shown below:
------------------------------------------------------------------------
Actual
Elective deferral
Employee Compensation contributions ratio
(percent)
------------------------------------------------------------------------
D............................. $100,000 $6,000 6
E............................. 80,000 4,000 5
F............................. 60,000 3,600 6
G............................. 40,000 1,600 4
H............................. 30,000 1,200 4
I............................. 20,000 600 3
J............................. 20,000 600 3
K............................. 10,000 300 3
L............................. 5,000 150 3
------------------------------------------------------------------------
* * * * *
Example 4. (i) Employer D maintains a profit-sharing plan that
contains a cash or deferred arrangement. Employer D includes
elective contributions in compensation as permitted under
Sec. 1.414(s)-1(c)(4)(i). The following amounts are contributed
under the plan:
* * * * *
(d) * * *
(2) * * *
(iv) * * *
(A) * * *
(3) Payment of tuition, related educational fees, and room and
board expenses, for the next 12 months of post-secondary education for
the employee, or the employee's spouse, children, or dependents (as
defined in section 152); or
* * * * *
(3) Rules applicable to distributions upon plan termination. A
distribution may not be made under paragraph (d)(1)(iii) of this
section if the employer establishes or maintains a successor plan. For
purposes of this rule, the definition of the term ``employer''
contained in paragraph (g)(6) of this section is applied as of the date
of plan termination, and a successor plan is any other defined
contribution plan maintained by the same employer. However, if at all
times during the 24-month period beginning 12 months before the
termination, fewer than two percent of the employees who were eligible
under the defined contribution plan that includes the cash or deferred
arrangement as of the date of plan termination are eligible under the
other defined contribution plan, the other plan is not a successor
plan. The term ``defined contribution plan'' means a plan that is a
defined contribution plan as defined in section 414(i), but does not
include an employee stock ownership plan as defined in section 4975(e)
or 409(a) or a simplified employee pension as defined in section
408(k). A plan is a successor plan only if it exists at any time during
the period beginning on the date of plan termination and ending 12
months after distribution of all assets from the terminated plan.
(4) * * * (i) Seller must maintain the plan. A distribution may be
made under section 401(k)(10) and paragraph (d)(1) (iv) or (v) of this
section only from a plan that the seller continues to maintain after
the disposition. This requirement is satisfied if and only if the
purchaser does not maintain the plan after the disposition. A purchaser
maintains the plan of the seller if it adopts the plan or otherwise
becomes an employer whose employees accrue benefits under the plan. A
purchaser also maintains the plan if the plan is merged or consolidated
with, or any assets or liabilities are transferred from the plan to a
plan maintained by the purchaser in a transaction subject to section
414(l)(1). A purchaser is not treated as maintaining the plan merely
because a plan that it maintains accepts elective transfers described
in Sec. 1.411(d)-4, Q&A-3(b)(1), or rollover contributions of amounts
distributed by the plan (including distributions that the recipient
elects, under section 401(a)(31), to have paid in a direct rollover to
the plan of the purchaser).
* * * * *
(5) * * * The term lump sum distribution has the meaning provided
in section 402(d)(4), without regard to subparagraphs (A) (i) through
(iv), (B), and (F) of that section.
(6) * * *
(iv) * * * The limitations of paragraph (d) of this section also do
not apply to amounts distributed from another plan that the recipient
elects under section 401(a)(31) to have paid in a direct rollover to
the plan.
* * * * *
(e) * * *
(6) * * *
(ii) * * * Benefits under any other plan or arrangement (whether or
not qualified) are not contingent upon an employee's electing to make
or not to make elective contributions under a cash or deferred
arrangement merely because the elective contributions are or are not
taken into account as compensation under the other plan or arrangement
for purposes of determining benefits.
* * * * *
(vi) Examples. The provisions of this paragraph (e)(6) are
illustrated by the following examples.
Example 1. Employer T maintains a cash or deferred arrangement
for all of its employees. Employer T also maintains a nonqualified
deferred compensation plan for two highly paid executives, Employees
R and C. Under the terms of the nonqualified deferred compensation
plan, R and C are eligible to participate only if they do not make
elective contributions under the cash or deferred arrangement.
Participation in the nonqualified plan is a contingent benefit for
purposes of this paragraph (e)(6), because R's and C's participation
is conditioned on their electing not to make elective contributions
under the cash or deferred arrangement.
Example 2. Employer T maintains a cash or deferred arrangement
for all its employees. Employer T also maintains a nonqualified
deferred compensation plan for two highly paid executives, Employees
R and C. Under the terms of the arrangements, Employees R and C may
defer a maximum of 10 percent of their compensation, and may
allocate their deferral between the cash or deferred arrangement and
the nonqualified deferred compensation plan in any way they choose
(subject to the overall 10 percent maximum). Because the maximum
deferral available under the nonqualified deferred compensation plan
depends on the elective deferrals made under the cash or deferred
arrangement, the right to participate in the nonqualified plan is a
contingent benefit for purposes of paragraph (e)(6).
(7) Coordination with other plans. For plan years beginning after
December 31, 1988, or such later date provided in paragraph (h) of this
section, a cash or deferred arrangement satisfies this paragraph (e)
only if no elective contributions (or qualified matching contributions
treated as elective contributions under paragraph (b)(5) of this
section) under the arrangement are taken into account for purposes of
determining whether any other contributions under any plan (including
the plan to which the elective contributions are made) satisfy the
requirements of section 401(a). Indeed, the portion of a plan that
consists of elective contributions is treated as a separate plan for
purposes of sections 401(a)(4) and 410(b). See Sec. 1.410(b)-7(c)(1).
Similarly, elective contributions under a cash or deferred arrangement
generally may not be taken into account in determining whether a plan
satisfies the minimum contribution or benefit requirements of section
416. See Sec. 1.416-1, M-20. However, qualified nonelective
contributions that are treated as elective contributions for purposes
of section 401(k)(3) under paragraph (b)(5) of this section may be used
to enable a plan to satisfy the minimum contribution or benefit
requirements under section 416. See Sec. 1.416-1, M-18. This paragraph
(e) does not apply for purposes of determining whether a plan satisfies
the average benefit percentage requirement of section 410(b)(2)(A)(ii).
See also Sec. 1.401(m)-1(b)(5) for circumstances under which elective
contributions may be used to determine whether a plan satisfies the
requirements of section 401(m).
* * * * *
(f) * * *
(1) * * *
* * * * *
(iii) Impermissible correction methods. Excess contributions for a
plan year may not remain unallocated or be allocated to a suspense
account for allocation to one or more employees in any future year. In
addition, excess contributions may not be corrected using the
retroactive correction rules of Sec. 1.401(a)(4)-11(g). See
Sec. 1.401(a)(4)-11(g) (3)(vii) and (5). See paragraph (f)(6) of this
section for the effects of a failure to correct excess contributions.
(2) Amount of excess contributions. The amount of excess
contributions for a highly compensated employee for a plan year is the
amount (if any) by which the employee's elective contributions must be
reduced for the employee's actual deferral ratio to equal the highest
permitted actual deferral ratio under the plan. To calculate the
highest permitted actual deferral ratio under a plan, the actual
deferral ratio of the highly compensated employee with the highest
actual deferral ratio is reduced by the amount required to cause the
employee's actual deferral ratio to equal the ratio of the highly
compensated employee with the next highest actual deferral ratio. If a
lesser reduction would enable the arrangement to satisfy the actual
deferral percentage test, only this lesser reduction may be made. This
process must be repeated until the cash or deferred arrangement
satisfies the actual deferral percentage test. The highest actual
deferral ratio remaining under the plan after leveling is the highest
permitted actual deferral ratio. Thus, for each highly compensated
employee, the amount of excess contributions for a plan year is equal
to the employee's elective contributions, plus qualified nonelective
contributions and qualified matching contributions taken into account
in determining the employee's actual deferral ratio under paragraph
(g)(1) of this section, minus the amount determined by multiplying the
employee's actual deferral ratio (determined after application of this
paragraph (f)(2)) by the compensation used in determining the ratio. In
no case may the amount of excess contributions to be recharacterized or
distributed for a plan year with respect to any highly compensated
employee exceed the amount of elective contributions made on behalf of
the highly compensated employee for the plan year.
(3) * * *
(ii) Treatment of recharacterized excess contributions.
(A) Excess contributions recharacterized under this paragraph
(f)(3) are includable in the employee's gross income on the earliest
dates any elective contribution made on behalf of the employee during
the plan year would have been received by the employee had the employee
originally elected to receive the amounts in cash, or on such later
date permitted in paragraph (f)(3)(iv) of this section. The
recharacterized excess contributions must be treated as employee
contributions for purposes of section 72, section 401(a)(4) and 401(m),
and paragraphs (b) and (d) of this section. This requirement is not
treated as satisfied unless:
(1) The payor or plan administrator reports the recharacterized
excess contributions as employee contributions to the Internal Revenue
Service and the employee by--
(i) Timely providing such forms as the Commissioner may designate
to the employer and to employees whose excess contributions are
recharacterized under this paragraph (f)(3); and
(ii) Timely taking such other action as the Commissioner may
require; and
(2) The plan administrator accounts for the amounts as
contributions by the employee for purposes of sections 72 and 6047.
(B) Recharacterized excess contributions continue to be treated as
employer contributions that are elective contributions for all other
purposes under the Internal Revenue Code, including sections 401(a)
(other than 401(a)(4) and 401(m)), 404, 409, 411, 412, 415, 416, and
417. Thus, for example, recharacterized excess contributions remain
subject to the requirements of paragraph (c) of this section; must be
deducted under section 404; and are treated as employer contributions
described in section 415(c)(2)(A) and Sec. 1.415-6(b). In addition,
these amounts are not treated as compensation for purposes of sections
404 and 415, and may be treated as compensation for purposes of
sections 401(a)(4), 401(a)(5), 401(k), 401(l) and 414(s) only to the
extent that elective contributions may be treated, and are treated
under the plan, as compensation. See Sec. 1.414(s)-1(c)(4)(i).
Recharacterized excess contributions that relate to plan years ending
on or before October 24, 1988, may be treated as either employer
contributions or employee contributions for purposes of paragraph (d)
of this section. The amount of excess contributions included in an
employee's gross income is reduced as provided under paragraph
(f)(5)(i)(B) of this section.
(iii) * * *
(C) Plans under which excess contributions may be recharacterized.
For plan years beginning after December 31, 1991, elective
contributions may be recharacterized under this paragraph (f)(3) only
under the plan under which they are made or under a plan with which
that plan could be aggregated under Sec. 1.410(b)-7(d) after
application of the mandatory disaggregation rules of Sec. 410(b)-7(c),
as modified in Sec. 1.401(k)-1(g)(11). For plan years beginning before
that date and after December 31, 1988, or such later date provided
under paragraph (h) of this section, elective contributions may be
recharacterized under this paragraph (f)(3) only under the plan under
which they are made or under a plan with the same plan year as that
plan.
* * * * *
(v) * * *
Example. (i) Employer X maintains Plan Y, a calendar year
profit-sharing plan that includes a qualified cash or deferred
arrangement. Under Plan Y, each eligible employee may elect to defer
up to 10 percent of compensation under a salary reduction agreement.
An eligible employee may also make employee contributions of up to
10 percent of compensation. X pays the amounts deferred to the trust
on the last day of each month. Employer X includes elective
contributions in compensation as permitted under Sec. 1.414(s)-
1(c)(4)(i). See Sec. 1.401(k)-1(g)(2)(i). Salaries are paid on the
same date.
* * * * *
(4) * * *
(ii) * * *
(B) Method of allocating income. A plan may use any reasonable
method for computing the income allocable to excess contributions,
provided that the method does not violate section 401(a)(4), is used
consistently for all participants and for all corrective distributions
under the plan for the plan year, and is used by the plan for
allocating income to participants' accounts. See Sec. 1.401(a)(4)-
1(c)(8).
* * * * *
(7) * * *
Example 1. (i) The Y corporation maintains a cash or deferred
arrangement. The plan year is the calendar year. For plan year 1989,
all 10 of Y's employees are eligible to participate in the cash or
deferred arrangement. The Y corporation includes elective
contributions in compensation as permitted under Sec. 1.414(s)-
1(c)(4)(i). See Sec. 1.401(k)-1(g)(2)(i). The employees'
compensation, elective contributions, and actual deferral ratios are
shown in the following table:
------------------------------------------------------------------------
Actual
Elective deferral
Employee Compensation contributions ratio (ADR)
(percent
------------------------------------------------------------------------
A............................ $160,000 $6,400 4.0
B............................ 140,000 7,000 5.0
C............................ 70,000 7,000 10.0
D............................ 65,000 6,500 10.0
E............................ 42,000 2,100 5.0
F............................ 35,000 3,500 10.0
G............................ 28,000 2,800 10.0
H............................ 21,000 700 3.33
I............................ 21,000 0 0
J............................ 21,000 0 0
------------------------------------------------------------------------
* * * * *
Example 2. A, B, and C are highly compensated employees of
Employer R. Employer R maintains a cash or deferred arrangement.
Employer R includes elective contributions in compensation as
permitted under Sec. 1.414(s)-1(c)(4)(i). For the plan year 1990, A,
B, and C each earns compensation of $100,000 and contributes $7,000
to the plan during the period January through June. B retires in
November of 1990 and makes a withdrawal of B's entire account
balance of $200,000. In January of 1991, R computes the ADP test for
its employees and learns that the highly compensated employees
should have contributed only five percent of compensation. Since B
made a contribution of $7,000 for 1990, B's contribution and
compensation are used in determining the ADP despite the subsequent
$200,000 withdrawal. A, B, and C must each receive a corrective
distribution of $2,000 in order to meet the ADP test. Since B has
already withdrawn B's total account balance under the plan, only A
and C must receive a distribution of $2,000 each in order for the
plan to meet the ADP test of section 401(k)(3)(A)(ii). Pursuant to
the 1990 Form 1099-R Instructions, the plan must issue two Forms
1099-R to B, one reporting the portion of the distribution that was
necessary to correct the excess contribution (including income), and
one reporting the balance of the distribution. If B had withdrawn
less than the total account balance, B would have to withdraw the
lesser of $2,000 or the remaining account balance.
Example 3. Individual A has a child, B. Both participate in a
cash or deferred arrangement maintained by Employer X. A is one of
the 10 most highly compensated employees and B is a nonhighly
compensated employee. Employer X includes elective contributions in
compensation as permitted under Sec. 1.414(s)-1(c)(4)(i). A has
compensation of $100,000 and defers $7,000 under the cash or
deferred arrangement; B has compensation of $40,000 and defers
$4,000 under the arrangement. The actual deferral ratio of the
family unit is 7.86 percent, calculated by aggregating the
contributions and compensation of A and B ($7,000 + $4,000)/
($100,000 + $40,000). For the plan, it is determined that under
Sec. 1.401(k)-1(f)(2), the actual deferral ratio of the aggregate
family unit must be reduced to 7.20 percent. This reduction is
applied in proportion to A's and B's contributions. The excess
contributions are $920 ($11,000 total contributions minus $10,080
(7.20% x $140,000)). A's share of the excess contributions is
$585.45 ($7,000/$11,000 x $920); B's share is $334.55 ($4,000/
$11,000 x $920).
* * * * *
(g) * * *
(1) * * *
(ii) * * *
(B) * * * (1) Highly compensated employees. For plan years
beginning after December 31, 1984, the actual deferral ratio of a
highly compensated employee who is eligible to participate in more than
one cash or deferred arrangement of the same employer is generally
calculated by treating all the cash or deferred arrangements in which
the employee is eligible to participate as one arrangement. However,
plans that are not permitted to be aggregated under Sec. 1.410(b)-7(c),
as modified in paragraph (g)(11) of this section, are not aggregated
for this purpose. For example, if a highly compensated employee with
compensation of $80,000 could make elective contributions under two
separate cash or deferred arrangements, the actual deferral ratio for
the employee under each arrangement would generally be calculated by
dividing the total elective contributions by the employee under both
arrangements by $80,000. If one of the cash or deferred arrangements
were part of an ESOP, however, while the other was not, the actual
deferral percentage of the employee under each arrangement would be
calculated by dividing the employee's elective contributions under each
arrangement by $80,000 because the ESOP portion is mandatorily
disaggregated from the non-ESOP portion.
* * * * *
(C) * * * (1) Aggregation of elective contributions and other
amounts. For plan years beginning after December 31, 1986, or any later
date provided in paragraph (h) of this section, if a highly compensated
employee is subject to the family aggregation rules of section
414(q)(6) because that employee is either a five-percent owner or one
of the 10 most highly compensated employees, the combined actual
deferral ratio for the family group (which is treated as one highly
compensated employee) must be determined by combining the elective
contributions, compensation, and amounts treated as elective
contributions of all family members.
* * * * *
(2) * * * (i) Years beginning after December 31, 1986. For plan
years beginning after December 31, 1986, or such later date provided in
paragraph (h) of this section, the term compensation means compensation
as defined in section 414(s) andP Sec. 1.414(s)-1. The period used to
determine an employee's compensation for a plan year must be either the
plan year or the calendar year ending within the plan year. Whichever
period is selected must be applied uniformly to determine the
compensation of every eligible employee under the plan for that plan
year for purposes of this section. An employer may, however, limit the
period taken into account under either method to that portion of the
plan year or calendar year in which the employee was an eligible
employee, provided that this limit is applied uniformly to all eligible
employees under the plan for the plan year for purposes of this
section. See also section 401(a)(17) and Sec. 1.401(a)(17)-1(c)(1).
* * * * *
(4) * * *
(ii) * * * In no event is an election made after December 23, 1994
treated as a one-time irrevocable election under this paragraph if the
election is made by an employee who previously became eligible under
another plan (whether or not terminated) of the employer.
(5) Employee. The term employee means an employee within the
meaning of Sec. 1.410(b)-9.
(6) Employer. The term employer means the employer within the
meaning of Sec. 1.410(b)-9.
* * * * *
(11) Plan--(i) Application of section 410(b) rules. The term plan
means a plan within the meaning ofP Sec. 1.410(b)-7 (a) and (b), after
application of the mandatory disaggregation rules of Sec. 1.410(b)-7(c)
and the permissive aggregation rules of Sec. 1.410(b)-7(d), with the
modifications provided in paragraph (g)(11)(ii) of this section. Thus,
for example, two plans (within the meaning of Sec. 1.410(b)-7(b)) that
are treated as a single plan pursuant to the permissive aggregation
rules of Sec. 1.410(b)-7(d) are treated as a single plan for purposes
of section 401(k). See also Sec. 1.401(k)-1(b)(3)(ii).
(ii) Modifications to section 410(b) rules--(A) In general. For
purposes of this paragraph (g)(11), Sec. 1.410(b)-7 (c) and (d) are
applied without regard to Sec. 1.410(b)-7(c)(1), relating to section
401(k) and 401(m) plans.
(B) Plans benefiting collective bargaining unit employees. A plan
that benefits employees who are included in a unit of employees covered
by a collective bargaining agreement and employees who are not included
in such a collective bargaining unit is treated as comprising separate
plans. This paragraph (g)(11)(ii)(B) is generally applied separately
with respect to each collective bargaining unit. At the option of the
employer, however, two or more separate collective bargaining units can
be treated as a single collective bargaining unit, provided that the
combinations of units are determined on a basis that is reasonable and
reasonably consistent from year to year. Thus, for example, if a plan
benefits employees in three categories--employees included in
collective bargaining unit A, employees included in collective
bargaining unit B, and employees who are not included in any collective
bargaining unit--the plan can be treated as comprising three separate
plans, each of which benefits only one category of employees. However,
if collective bargaining units A and B are treated as a single
collective bargaining unit, the plan will be treated as comprising only
two separate plans, one benefiting all employees who are included in a
collective bargaining unit and another benefiting all other employees.
Similarly, if a plan benefits only employees who are included in
collective bargaining unit A and employees who are included in
collective bargaining unit B, the plan can be treated as comprising two
separate plans. However, if collective bargaining units A and B are
treated as a single collective bargaining unit, the plan will be
treated as a single plan. An employee is treated as included in a unit
of employees covered by a collective bargaining agreement if and only
if the employee is a collectively bargained employee within the meaning
of Sec. 1.410(b)-6(d)(2).
(C) Multiemployer plans. Consistent with section 413(b), the
portion of the plan that is maintained pursuant to a collective
bargaining agreement (within the meaning of Sec. 1.413-1(a)(2)) is
treated as a single plan maintained by a single employer that employs
all the employees benefiting under the same benefit computation formula
and covered pursuant to that collective bargaining agreement. The rules
of paragraph (g)(11)(ii)(B) of this section (including the optional
aggregation of collective bargaining units) apply to the resulting
deemed single plan in the same manner as they would to a single
employer plan, except that the plan administrator is substituted for
the employer where appropriate and appropriate fiduciary obligations
are taken into account. The noncollectively bargained portion of the
plan is treated as maintained by one or more employers, depending on
whether the noncollective bargaining unit employees who benefit under
the plan are employed by one or more employers.
* * * * *
(15) Section 401(k) plan. The term section 401(k) plan means a
section 401(k) plan within the meaning of Sec. 1.410(b)-9.
(16) Section 401(m) plan. The term section 401(m) plan means a
section 401(m) plan within the meaning of Sec. 1.410(b)-9.
(h) * * *
(3) * * *
(iii) * * * (A) General rule. In determining whether the
requirements of section 401(k) are satisfied for plan years beginning
before January 1, 1992, a plan may be treated as consisting of two or
more component plans, each consisting of all of the allocations and
other benefits, rights, and features provided to a group of employees
under the plan. See Sec. 1.401(a)(4)-9(c). An employee may not be
included in more than one component plan of the same plan for a plan
year under this method. If this method is used for a plan year, the
requirements of section 401(k) are applied separately with respect to
each component plan for the plan year. Thus, for example, the actual
deferral ratio and the amount of excess contributions, if any, of each
eligible employee under each component plan must be determined as if
the component plan were a separate plan. This method applies solely for
purposes of section 401(k). Thus, for example, the requirements of
section 410(b) must still be satisfied by the entire plan.
(B) * * *
(2) Commonality requirement. The group of employees used to
identify a component plan must share some common attribute or
attributes, other than similar actual deferral ratios. Permissible
common attributes include, for example, employment at the same work
site, in the same job category, for the same division or subsidiary, or
for a unit acquired in a specific merger or acquisition, employment for
the same number of years, compensation under the same method, e.g.,
salaried or hourly, coverage under the same contribution formula, and
attributes that could be used as the basis of a classification that
would be treated as reasonable under Sec. 1.410(b)-4(b). Employees
whose only common attribute is the same or similar actual deferral
ratios, or another attribute having substantially the same effect as
the same or similar actual deferral ratios, are not considered as
sharing a common attribute for this purpose. This rule applies
regardless of whether the component plan or the plan of which it is a
part satisfies the ratio or percentage test of section 410(b).
(4) * * *
(ii) Plan years beginning before January 1, 1996. The following
rules apply to a governmental plan described in section 414(d) that is
not a collectively bargained plan and includes a nonqualified cash or
deferred arrangement. These rules apply for plan years beginning before
the later of January 1, 1996, or 90 days after the opening of the first
legislative session beginning on or after January 1, 1996, of the
governing body with authority to amend the plan, if that body does not
meet continuously. For purposes of this paragraph (b)(1), the term
governing body with authority to amend the plan means the legislature,
board, commission, council, or other governing body with authority to
amend the plan.
* * * * *
Par. 4. Section 1.401(m)-0 is amended as follows:
1. The entry for Sec. 1.401(m)-1, paragraph (b)(3)(ii) is removed.
2. The entry for Sec. 1.401(m)-1, paragraph (b)(3)(iii) is revised
and redesignated (b)(3)(ii).
3. The entry for Sec. 1.401(m)-1, paragraph (b)(4)(ii)(B) is
revised.
4. An entry for Sec. 1.401(m)-1, paragraph (e)(3)(vii) is added.
5. Entries for Sec. 1.401(m)-1, paragraph (f)(16) and (17) are
added.
The added and revised entries read as follows:
Sec. 1.401(m)-0 Employee and matching contributions, table of
contents.
* * * * *
Sec. 1.401(m)-1 * * *
* * * * *
(b) * * *
(3) * * *
(ii) Restructuring and Permissive Disaggregation.
(4) * * *
(ii) * * *
(B) Matching contributions and qualified nonelective
contributions used to satisfy actual deferral percentage test.
* * * * *
(e) * * *
(3) * * *
(vii) No corrective distribution of matching contributions other
than excess aggregate contributions.
* * * * *
(f) * * *
(16) Section 401(k) plan.
(17) Section 401(m) plan.
* * * * *
Par. 5. Section 1.401(m)-1 is amended as follows:
1. Paragraph (a) is revised.
2. Paragraph (b) is amended as follows:
i. Paragraph (b)(1) is revised.
ii. Paragraphs (b)(3)(i) and (b)(3)(ii) are revised.
iii. Paragraph (b)(3)(iii) is removed.
iv. A sentence is added at the end of paragraph (b)(4)(ii)(A).
v. Paragraph (b)(4)(ii)(B) is revised.
vi. Paragraph (b)(5) (i) and (ii) are amended by adding a sentence
at the end.
vii. Paragraph (b)(5)(v) is revised.
3. Paragraph (c)(1) is revised.
4. Paragraph (d) is amended as follows:
i. Paragraph (i) of Example 3 is revised.
ii. Paragraph (i) of Example 4 is revised.
5. Paragraph (e) is amended as follows:
i. Paragraph (e)(1)(iii) is revised.
ii. A sentence is added at the end of paragraph (e)(3)(ii)(B).
iii. Paragraph (e)(3)(vii) is added.
iv. Paragraph (e)(4) is revised.
v. Paragraph (e)(6) is amended as follows:
a. Examples 2 through 6 are revised.
b. Example 8 is added.
6. Paragraph (f) is amended as follows:
i. Paragraphs (f)(1)(ii) (B) and (C)(1), and (f)(2) are revised.
ii. A sentence is added at the end of paragraph (f)(4)(ii).
iii. Paragraph (f)(12)(i)(B) is revised.
iv. Paragraphs (f) (16) and (17) are added.
7. Paragraph (g)(4), (g)(5)(ii) (A) and (B)(2) are revised.
The added and revised provisions read as follows:
Sec. 1.401(m)-1 Employee and matching contributions.
(a) General Rules--(1) Nondiscriminatory amount of contributions. A
defined contribution plan does not satisfy section 401(a)(4) for a plan
year unless the amount of employee and matching contributions to the
plan for the plan year satisfies section 401(a)(4). See
Sec. 1.401(a)(4)-1(b)(2)(ii). Except as specifically provided
otherwise, for plan years beginning after December 31, 1986 (or such
later date provided in paragraph (g) of this section) the amount of
employee and matching contributions under a plan satisfies the
requirements of section 401(a)(4) only if the employee and matching
contributions under the plan satisfy the actual contribution percentage
test of section 401(m)(2) and paragraph (b) of this section. See
Sec. 1.401(a)(4)-1(b)(2)(ii)(B). Also, except as specifically provided
otherwise, for plan years beginning after December 31, 1988 (or such
later date provided in Sec. 1.401(m)-2(d)), the amount of employee and
matching contributions under a plan satisfies the requirements of
sections 401(m) and 401(a)(4) only if any multiple use of the
alternative methods of compliance with sections 401 (k) and (m)
(contained in sections 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii),
respectively) is corrected under Sec. 1.401(m)- 2(c). See section
401(m)(9) and Sec. 1.401(m)-2. For these purposes, the employee and
matching contributions are combined with the elective and qualified
nonelective contributions, if any, that are treated as matching
contributions, and the recharacterized elective contributions, if any,
that are treated as employee contributions for purposes of section
401(m).
(2) Other nondiscrimination rules. Nondiscrimination requirements
in addition to those described in paragraph (a)(1) of this section
apply to employee and matching contributions under sections 401(a)(4)
and 410(b). For example, under section 401(a)(4) a plan may not
discriminate with respect to the availability of benefits, rights, and
features under the plan. See Sec. 1.401(a)(4)-1(b)(3). The right to
make each level of employee contributions, and the right to each level
of matching contributions, are benefits, rights, or features subject to
this requirement, and each level must therefore generally be available
to a group of employees that satisfies section 410(b). See
Sec. 1.401(a)(4)-4(e)(3) (i) and (iii) (F) through (G). Thus, for
example, a plan does not satisfy section 401(a)(4) if it provides a
higher rate of matching contributions for highly compensated employees
than for nonhighly compensated employees. See paragraph (e)(4) of this
section for rules relating to the application of section 401(a)(4) to
the correction of excess aggregate contributions. See Sec. 1.401(a)(4)-
11(g)(3)(vii) for special rules relating to correction of violations of
the minimum coverage requirements or discriminatory rates of match in a
section 401(m) plan. For special rules governing the application of
section 410(b) to employee and matching contributions, see
Secs. 1.410(b)-7(c)(1) and 1.410(b)-8(a)(1).
(3) Rules applicable to collectively bargained plans. The
requirements of this section are treated as satisfied by employee and
matching contributions under a collectively bargained plan (or the
portion of a plan) that automatically satisfies section 410(b). See
Secs. 1.401(a)(4)-1(c)(5) and 1.410(b)-2(b)(7). There are no excess
aggregate contributions under a plan (or a portion of a plan) that is
treated under this paragraph (a)(3) as satisfying the requirements of
this section. Thus, the provisions of section 4979 and Sec. 54.4979-1
of this chapter do not apply to contributions described in the first
sentence of this paragraph (a)(3).
(b) Actual contribution percentage test--(1) General rule. (i) For
plan years beginning after December 31, 1986, or such later date
provided in paragraph (g) of this section, the actual contribution
percentage test is satisfied if--
(A) The actual contribution percentage for the group of eligible
highly compensated employees is not more than the actual contribution
percentage for the group of all other eligible employees multiplied by
1.25; or
(B) The excess of the actual contribution percentage for the group
of eligible highly compensated employees over the actual contribution
percentage for the group of all other eligible employees is not more
than two percentage points, and the actual contribution percentage for
the group of eligible highly compensated employees is not more than the
actual contribution percentage for the group of all other eligible
employees multiplied by two.
(ii) A plan does not fail to satisfy the requirements of this
paragraph (b)(1) merely because all of the eligible employees under the
plan for a year are highly compensated employees.
* * * * *
(3) * * * (i) General rule. See Sec. 1.401(m)-1(f)(14) for the
definition of a plan used for purposes of this section and
Sec. 1.401(m)-2. That definition contains the exclusive rules for
aggregation and disaggregation of plans for purposes of this section
and Sec. 1.401(m)-2.
(ii) Restructuring and Permissive Disaggregation. Effective for
plan years beginning after December 31, 1991, restructuring under
Sec. 1.401(a)(4)-9(c) may not be used to demonstrate compliance with
the requirements of section 401(m). See Sec. 1.401(a)(4)- 9(c)(3)(ii).
For plan years beginning before January 1, 1992, see Sec. 1.401(m)-
1(g)(5)(ii). An employer may, however, treat a plan benefiting
otherwise excludable employees as two separate plans for purposes of
sections 401(m) and 410(b) in accordance with Secs. 1.410(b)-6(b)(3)
and 1.410(b)-7(c)(3).
(4) * * *
(ii) * * * (A) * * * See Secs. 1.401(a)(4)-1(b)(2)(ii)(B);
1.410(b)-7(c)(1).
(B) Matching contributions and qualified nonelective contributions
used to satisfy actual deferral percentage test. A matching
contribution that is treated as an elective contribution is subject to
the actual deferral percentage test of section 401(k)(3) and is not
taken into account under paragraph (b)(1) of this section. See
Sec. 1.401(k)-1(b)(5)(iii) for the rule relating to years before
January 1, 1987. A qualified nonelective contribution that is treated
as an elective contribution is subject to the actual deferral
percentage test of section 401(k)(3) and is not taken into account as a
matching contribution under paragraph (b)(1) or (5) of this section.
* * * * *
(5) * * *
(i) * * * See Sec. 1.401(a)(4)-1(b)(2).
(ii) * * * See Sec. 1.401(a)(4)-1(b)(2).
* * * * *
(v) For plan years beginning after December 31, 1988, or such later
date provided in paragraph (g) of this section, the plan that takes
qualified nonelective contributions and elective contributions into
account in determining whether employee and matching contributions
satisfy the requirements of section 401(m)(2)(A), and the plans to
which the qualified nonelective contributions and elective
contributions are made, could be aggregated under Sec. 1.410(b)-7(d)
after application of the mandatory disaggregation rules of
Sec. 1.410(b)-7(c), as modified in Sec. 1.401(k)-1(g)(11). If the plan
year of the section 401(m) plan is changed to satisfy the requirement
under Sec. 1.410(b)-7(d)(5) that the aggregated plans have the same
plan year, the elective contributions may be taken into account in the
resulting short plan year only if these contributions satisfy the
requirements of Sec. 1.401(k)-1(b)(4) with respect to the short year,
and the qualified nonelective contributions may be taken into account
in the resulting short plan year only if these contributions satisfy
the requirements of Sec. 1.401(k)-1(b)(4)(i)(A) with respect to the
short year as if they were elective contributions.
(c) * * * (1) Coordination with other plans. Except as expressly
permitted under section 401(k) or 401(m), for plan years beginning
after December 31, 1988, or such later date provided in paragraph (g)
of this section, employee or matching contributions (or elective
contributions treated as matching contributions under paragraph (b)(5)
of this section) may not be taken into account for purposes of
determining whether any other contributions under any plan (including
the plan to which the employee or matching contributions are made)
satisfy the requirements of section 401(a). Indeed, the portion of a
plan that consists of employee and matching contributions is treated as
a separate plan for purposes of sections 401(a)(4) and 410(b). See
Sec. 1.410(b)-7(c)(1). Similarly, although matching contributions and
qualified nonelective contributions may be used to enable a plan to
satisfy the minimum contribution or benefit requirements under section
416, matching contributions that are used in this way are not treated
as matching contributions, and must therefore satisfy the
nondiscrimination requirements of section 401(a)(4) without regard to
section 401(k) or 401(m). See Sec. 1.416-1, M-18 & M-19 and paragraph
(f)(12)(iii) of this section. See also Sec. 1.401(k)-1(b)(5) for
circumstances under which matching contributions may be used to
determine whether a plan satisfies the requirements of section 401(k).
This paragraph does not apply for purposes of determining whether a
plan satisfies the average benefit percentage test of section
410(b)(2)(A)(ii).
* * * * *
(d) * * *
Example 3. (i) Employer N maintains a plan that contains a cash
or deferred arrangement and permits employee contributions. Employer
N includes elective contributions in compensation as permitted under
Sec. 1.414(s)-1(c)(4)(i). See Sec. 1.401(k)-1(g)(2)(i). For the 1988
plan year, the average percentages of compensation contributed to
the plan by the highly compensated and nonhighly compensated
employees as elective contributions and employee contributions are
shown in the chart below. Elective contributions meet the
requirements of paragraph (b)(5) of this section.
------------------------------------------------------------------------
Elective Employee
Contributions Contributions
(percent) (percent)
------------------------------------------------------------------------
Highly compensated........................ 10 10
Nonhighly compensated..................... 10 6
------------------------------------------------------------------------
* * * * *
Example 4. (i) Employer P maintains a plan that includes a cash
or deferred arrangement. Elective contributions, qualified
nonelective contributions (QNCs), employee contributions, and
matching contributions are made to the plan. Employer P includes
elective contributions in compensation as permitted under
Sec. 1.414(s)-1(c)(4)(i). The elective contributions and QNCs meet
the requirements of paragraph (b)(5) of this section. For the 1989
plan year, the QNCs, elective contributions, and employee and
matching contributions, expressed as a percentage of compensation,
are shown in the following table:
------------------------------------------------------------------------
Employee/
QNCs Elective Matching
(percent) Contributions Contributions
(percent) (percent)
------------------------------------------------------------------------
Highly compensated........... 3 5 6
Nonhighly compensated........ 3 4 2
------------------------------------------------------------------------
* * * * *
(e) * * *
(1) * * *
(iii) Impermissible correction methods. Excess aggregate
contributions may not be corrected by forfeiting vested matching
contributions, recharacterizing matching contributions, or not making
matching contributions required under the terms of the plan. Excess
aggregate contributions for a plan year may not remain unallocated or
be allocated to a suspense account for allocation to one or more
employees in any future year. In addition, excess aggregate
contributions may not be corrected using the retroactive correction
rules of Sec. 1.401(a)(4)-11(g). See Sec. 1.401(a)(4)-11(g)(3)(vii) and
(5). See paragraph (e)(5) of this section for the effects of a failure
to correct excess aggregate contributions. See Sec. 1.411(a)-4(b)(7)
regarding permissible forfeitures of matching contributions.
* * * * *
(3) * * *
(ii) * * *
(B) * * * See Sec. 1.401(a)(4)-1(c)(8).
* * * * *
(vii) No corrective distribution of matching contributions other
than excess aggregate contributions. A matching contribution that is an
excess aggregate contribution may be distributed as provided in section
401(m)(6) and Sec. 1.401(m)-1(e)(3). A matching contribution may not be
distributed merely because the contribution to which it relates is
treated as an excess contribution, excess deferral, or excess aggregate
contribution. See Secs. 1.401(k)-1(f)(5)(iii) and 1.411(a)-4(b)(7)
regarding permissible forfeitures of matching contributions that relate
to excess contributions, excess deferrals, or excess aggregate
contributions.
(4) Coordination with section 401(a)(4). A matching contribution is
taken into account under section 401(a)(4) even if it is distributed,
unless the distributed contribution is an excess aggregate
contribution. However, the method of distributing excess aggregate
contributions provided in the plan must satisfy the requirements of
section 401(a)(4). This requires that after correction each level of
matching contributions be currently and effectively available to a
group of employees that satisfies section 410(b). See Sec. 1.401(a)(4)-
4(e)(3)(iii)(G). Thus, a plan that provides the same rate of matching
contributions to all employees will not meet the requirements of
section 401(a)(4) if employee contributions are distributed under this
paragraph (e) to highly compensated employees to the extent needed to
meet the requirements of section 401(m)(2), while matching
contributions attributable to employee contributions remain allocated
to the highly compensated employees' accounts. See Sec. 1.411(a)-
4(b)(7) for a rule that allows forfeiture of these matching
contributions to avoid a violation of section 401(a)(4). See also
Sec. 1.401(a)(4)-11(g)(3)(vii)(B) regarding the use of additional
allocations to the accounts of nonhighly compensated employees for the
purpose of correcting a discriminatory rate of matching contributions.
A method of distributing excess aggregate contributions will not be
considered discriminatory solely because, in accordance with the terms
of the plan, unmatched employee contributions that exceed the highest
rate at which employee contributions are matched are distributed before
matched employee contributions, or matching contributions are
distributed (or forfeited) prior to employee contributions. See Example
6 in paragraph (e)(6) of this section.
* * * * *
(6) * * *
* * * * *
Example 2. (i) Employee A is the sole highly compensated
participant in a cash or deferred arrangement maintained by Employer
X. The plan that includes the arrangement, Plan X, provides a fully
vested matching contribution equal to 50 percent of elective
contributions. Plan X is a calendar year plan. Employer X includes
elective contributions in compensation as permitted under
Sec. 1.414(s)-1(c)(4)(i). See Sec. 1.401(k)-1(g)(2)(i). Plan X
corrects excess contributions by recharacterization. For the 1988
plan year, A's compensation is $58,333, and A's elective
contributions are $7,000. The actual deferral percentages and actual
contribution percentages of A and other employees under Plan X are
shown below:
------------------------------------------------------------------------
Actual Actual
deferral contribution
percentage percentage
------------------------------------------------------------------------
Employee A.................................... 12 6
Nonhighly compensated......................... 8 4
------------------------------------------------------------------------
(ii) In February 1989, Employer X determines that A's actual
deferral ratio must be reduced to 10 percent, or $5,833, which
requires a recharacterization of $1,167 as an employee contribution.
This increases A's actual contribution ratio to eight percent
($3,500 in matching contributions plus $1,167 recharacterized as
employee contributions, divided by $58,333 in compensation). Since
A's actual contribution ratio must be limited to six percent for
Plan X to satisfy the actual contribution percentage test, Plan X
must distribute $1,167 of A's employee and matching contributions.
If $1,167 in matching contributions is distributed, this will
correct the excess aggregate contributions and will not result in a
discriminatory rate of matching contributions. See Example 8.
Example 3. Same as Example 2, except that in 1988 A also had
elective contributions of $1,313 under Plan Y, maintained by an
employer unrelated to X. In January 1989, A requests and receives a
distribution of $1,000 in excess deferrals from Plan X. Pursuant to
the terms of Plan X, A forfeits the $500 match on the excess
deferrals to correct a discriminatory rate of match (see Example 8).
The $1,167 that would otherwise have been recharacterized for Plan X
to satisfy the actual deferral percentage test is reduced by the
$1,000 already distributed as an excess deferral, leaving $167 to be
recharacterized. See Sec. 1.401(k)-1(f)(5)(i). Pursuant to the terms
of Plan X, A forfeits the $83.50 match on the recharacterized $167
to correct a discriminatory rate of match. A's actual contribution
ratio is now 5.29 percent ($2,916.50 ($3,500-$500-$83.50)) in
matching contributions plus $167 in employee contributions, divided
by $58,333 in compensation). Since Plan X satisfies the actual
contribution percentage test, no further distribution is required or
permitted.
Example 4. Same as Example 3, except that A does not request a
distribution of excess deferrals until March 1989. Employer X has
already recharacterized $1,167 as employee contributions. Under
Sec. 1.402(g)-1(e)(6), the amount of excess deferrals is reduced by
the amount of excess contributions that are recharacterized. Because
the amount recharacterized is greater than the excess deferrals,
Plan X is neither required nor permitted to make a distribution of
excess deferrals, and the recharacterization has corrected the
excess deferrals.
Example 5. For the 1987 plan year, Employee B defers $7,000
under Plan C and $1,000 under plan D. Plans C and D are maintained
by unrelated Employers C and D; both Plans C and D have calendar
plan years. Plan C provides a fully vested, 100 percent matching
contribution and does not take elective contributions into account
under section 401(m) or take matching contributions into account
under section 401(k). Employer C determines that B has excess
contributions of $600 and excess aggregate contributions of $1,600.
B timely requests and receives a distribution of the $1,000 excess
deferral from Plan C, and pursuant to the terms of Plan C, forfeits
the corresponding $1,000 matching contribution to correct a
discriminatory rate of match (see Example 8). Plan C provides that
excess contributions and excess aggregate contributions are
corrected by distribution. No distribution is required or permitted
to correct the excess contributions because $1,000 has been
distributed from this plan as excess deferrals. The distribution
required to correct the excess aggregate contributions (after
forfeiting the matching contribution) is $600 ($1,600 in excess
aggregate contributions minus $1,000 in forfeited matching
contributions). If B had corrected the excess deferrals of $1,000 by
withdrawing $1,000 from Plan D, Plan C would have had to correct the
$600 excess contributions in Plan C by distributing $600. Since B
then would have forfeited $600 (instead of $1,000) in matching
contributions, B would have had $1,000 ($1,600 in excess aggregate
contributions minus $600 in forfeited matching contributions)
remaining of excess aggregate contributions in Plan C. These would
have been corrected by distributing an additional $1,000 from Plan
C.
Example 6. Employee B is the sole highly compensated employee in
a thrift plan under which the employer matches 100 percent of
employee contributions up to two percent of compensation, and 50
percent of employee contributions up to the next four percent of
compensation. For the 1988 plan year, B has compensation of
$100,000. B makes an employee contribution of $7,000, or seven
percent, and receives a four percent matching contribution of
$4,000. Thus, B's actual contribution ratio (ACR) is 11 percent. The
actual contribution percentage for the nonhighly compensated
employees is five percent, and the employer determines that B's ACR
must be reduced to seven percent to comply with the rules of section
401(m). In this case, the plan satisfies the requirements of this
paragraph if it distributes the unmatched employee contributions of
$1,000, and $2,000 of matched employee contributions with their
related matches of $1,000. This would leave B with four percent
employee contributions, and three percent matching contributions,
for an ACR of seven percent. The plan could instead distribute all
matching contributions. The plan would fail to meet the requirements
of this paragraph if it distributed $4,000 (four percent) of B's
employee contributions and none of B's matching contributions
because this would result in a discriminatory rate of matching
contributions. See Sec. 1.401(m)-1(e)(2) and (4). See also Example
8.
* * * * *
Example 8. (i) Employer B maintains a calendar year profit
sharing plan that includes a cash or deferred arrangement. Elective
contributions are matched at the rate of 100 percent. After-tax
employee contributions are permitted under the plan only for
nonhighly compensated employees and are matched at the same rate. No
employees make excess deferrals. Employee A, a highly compensated
employee, makes an $8,000 elective contribution and receives an
$8,000 matching contribution.
(ii) Employer B performs the actual deferral percentage (ADP),
the actual contribution percentage (ACP), and the multiple use
tests. To correct failures of the ADP and ACP tests, the plan
distributes to A $1,000 of excess contributions and $500 of excess
aggregate contributions. After the distributions, A's contributions
for the year are $7,000 of elective contributions and $7,500 of
matching contributions. As a result, A has received a higher
effective rate of matching contributions than nonhighly compensated
employees ($7,000 of elective contributions matched by $7,500 is an
effective matching rate of 107 percent). If this amount remains in
A's account without correction, it will cause the plan to fail to
satisfy section 401(a)(4), because only a highly compensated
employee receives the higher matching contribution rate. The
remaining $500 matching contribution may be forfeited (but not
distributed) under section 411(a)(3)(G), if the plan so provides.
The plan could instead correct the discriminatory rate of matching
contributions by making additional allocations to the accounts of
nonhighly compensated employees. See Sec. 1.401(a)(4)-
11(g)(3)(vii)(B) and (6), Example 7.
(f) * * *
(1) * * *
(ii) * * *
(B) Highly compensated employee eligible under more than one plan.
The actual contribution ratio of a highly compensated employee who is
eligible to participate in more than one plan of an employer to which
employee or matching contributions are made is calculated by treating
all the plans in which the employee is eligible to participate as one
plan. However, plans that are not permitted to be aggregated under
Sec. 1.410(b)-7(c), as modified in Sec. 1.401(k)-1(g)(11), are not
aggregated for this purpose. For example, if a highly compensated
employee with compensation of $80,000 may receive matching
contributions under two plans of an employer, the employee's actual
contribution ratio under each plan is calculated by dividing the
employee's total matching contributions under both plans by $80,000,
unless the plans are required to be disaggregated. In that case, the
actual contribution ratio of the employee under each plan is to be
calculated by dividing the employee's matching contributions under that
plan by $80,000. See paragraph (b)(3) of this section for the treatment
of certain multiple plans. For plan years beginning after December 31,
1988, or such later date provided in paragraph (g) of this section, if
a highly compensated employee participates in two or more plans that
have different plan years, this paragraph (f)(1)(ii) is applied by
treating all plans whose plan years end with or within the same
calendar year as a single plan.
(C) Employees subject to family aggregation rules--(1) Aggregation
of employee contributions and other amounts. For plan years beginning
after December 31, 1986, or such later date provided in paragraph (g)
of this section, if a highly compensated employee is subject to the
family aggregation rules of section 414(q)(6) because that employee is
either a five-percent owner or one of the 10 most highly compensated
employees, the combined actual contribution ratio for the family group
(treated as one highly compensated employee) must be determined by
combining the employee contributions, matching contributions, amounts
treated as matching contributions, and compensation of all family
members.
* * * * *
(2) Compensation. The term compensation means compensation as
defined in Sec. 1.401(k)-1(g)(2)(i).
* * * * *
(4) * * *
(ii) * * * In no event is an election made after December 23, 1994
treated as a one-time irrevocable election under this paragraph if the
election is made by an employee who previously became eligible under
another plan (whether or not terminated) of the employer.
* * * * *
(12) * * *
(i) * * *
(B) Any employer contribution (including a contribution made at the
employer's discretion) to a defined contribution plan on account of an
elective deferral (as defined in Sec. 1.402(g)-1(b)); and
* * * * *
(16) Section 401(k) plan. The term section 401(k) plan means a
section 401(k) plan within the meaning of Sec. 1.410(b)-9.
(17) Section 401(m) plan. The term section 401(m) plan means a
section 401(m) plan within the meaning of Sec. 1.410(b)-9.
(g) * * *
(4) State and local government plans. A governmental plan described
in section 414(d), including a plan subject to section 403(b)(12)(A)(i)
(nonelective plan) is treated as satisfying section 401(m) for plan
years beginning before the later of January 1, 1996, or 90 days after
the opening of the first legislative session beginning on or after
January 1, 1996, of the governing body with authority to amend the
plan, if that body does not meet continuously. For purposes of this
paragraph (g)(4), the term governing body with authority to amend the
plan means the legislature, board, commission, council, or other
governing body with authority to amend the plan.
(5) * * *
(ii) * * * (A) General rule. In determining whether the
requirements of section 401(m) are satisfied for plan years beginning
before January 1, 1992, a plan may be treated as consisting of two or
more component plans, each consisting of all of the allocations and
other benefits, rights, and features provided to a group of employees
under the plan. See Sec. 1.401(a)(4)-9(c). An employee may not be
included in more than one component plan of the same plan for a plan
year under this method. If this method is used for a plan year, the
requirements of section 401(m) are applied separately with respect to
each component plan for the plan year. Thus, for example, the actual
contribution ratio and the amount of excess aggregate contributions, if
any, of each eligible employee under each component plan must be
determined as if the component plan were a separate plan. This method
applies solely for purposes of section 401(m). Thus, for example, the
requirements of section 410(b) must still be satisfied by the entire
plan.
(B) * * *
(2) Commonality requirement. The group of employees used to
identify a component plan must share some common attribute or
attributes, other than similar actual contribution ratios. Permissible
common attributes include, for example, employment at the same work
site, in the same job category, for the same division or subsidiary, or
for a unit acquired in a specific merger or acquisition, employment for
the same number of years, compensation under the same method (e.g.,
salaried or hourly), coverage under the same contribution formula, and
attributes that could be used as the basis of a classification that
would be treated as reasonable under Sec. 1.410(b)-4(b). Employees
whose only common attribute is the same or similar actual contribution
ratios, or another attribute having substantially the same effect as
the same or similar actual contribution ratios, are not considered as
sharing a common attribute for this purpose. This rule applies
regardless of whether the component plan or the plan of which it is a
part satisfies the ratio or percentage test of section 410(b).
Par. 6. Section 1.401(m)-2 is amended as follows:
1. A sentence is added at the end of paragraph (a).
2. Paragraph (b)(1) is revised.
3. Paragraph (c)(1) and (c)(4), Example 1 (i), is revised.
4. The added and revised provisions read as follows:
Sec. 1.401(m)-2 Multiple use of alternative limitation.
(a) * * * The consequences of multiple use of the alternative
methods of compliance are described in Sec. 1.401(m)-1(a)(1).
(b) General rule for determination of multiple use--(1) In general.
(i) Multiple use of the alternative limitation occurs if all of the
conditions of this paragraph (b)(1) are satisfied:
(A) One or more highly compensated employees of the employer are
eligible employees in both a cash or deferred arrangement subject to
section 401(k) and a plan maintained by the employer subject to section
401(m).
(B) The sum of the actual deferral percentage of the entire group
of eligible highly compensated employees under the arrangement subject
to section 401(k) and the actual contribution percentage of the entire
group of eligible highly compensated employees under the plan subject
to section 401(m) exceeds the aggregate limit of paragraph (b)(3) of
this section.
(C) The actual deferral percentage of the entire group of eligible
highly compensated employees under the arrangement subject to section
401(k) exceeds the amount described in section 401(k)(3)(A)(ii)(I).
(D) The actual contribution percentage of the entire group of
eligible highly compensated employees under the arrangement subject to
section 401(m) exceeds the amount described in section 401(m)(2)(A)(i).
(ii) The actual deferral percentage and actual contribution
percentage of the group of eligible highly compensated employees are
determined after use of qualified nonelective contributions and
qualified matching contributions to meet the requirements of section
401(k)(3)(A)(ii) and after use of qualified nonelective contributions
and elective contributions to meet the requirements of section
401(m)(2)(A). The actual deferral percentage and actual contribution
percentage of the group of eligible highly compensated employees are
determined after any corrective distribution or forfeiture of excess
deferrals, excess contributions, or excess aggregate contributions and
after any recharacterization of excess contributions required without
regard to this section. Only plans and arrangements maintained by the
same employer are taken into account under this paragraph (b)(1). If
the employer maintains two or more plans after application of the rules
under Sec. 1.401(k)- 1(g)(11), multiple use is tested separately with
respect to each plan. Thus, for example, if an employer maintains a
cash or deferred arrangement with matching contributions, under which
elective contributions may be made under either an ESOP or a non-ESOP,
multiple use is tested separately with respect to elective
contributions and matching contributions under the ESOP, and with
respect to elective contributions and matching contributions under the
non-ESOP.
* * * * *
(c) * * * (1) In general. If multiple use of the alternative
limitation occurs with respect to two or more plans or arrangements
maintained by an employer, it must be corrected by reducing the actual
deferral percentage, the actual contribution percentage of highly
compensated employees, or a combination of the two, in the manner
described in paragraph (c)(3) of this section. Instead of making this
reduction, the employer may eliminate the multiple use of the
alternative limitation by making qualified nonelective contributions in
accordance with Sec. 1.401(k)-1(b)(5) and (f)(1) or Sec. 1.401(m)-
1(b)(5) and (e)(1).
* * * * *
(4) * * *
Example 1. (i) All employees of Employer Q are eligible in both
an arrangement subject to section 401(k) and a plan subject to
section 401(m). Both plans have a calendar plan year. The plans
provide that multiple use of the alternative limitation will be
corrected in the plan subject to section 401(m) and that any
required reduction in actual contribution ratios will apply only to
employees eligible to participate in both arrangements. Employer Q
includes elective contributions in compensation as permitted under
Sec. 1.414(s)-1(c)(4)(i). See Sec. 1.401(k)-1(g)(2)(i). Employees X
and Y are highly compensated. Each received compensation of
$100,000, deferred $6,000, received a $3,000 matching contribution,
and made employee contributions of $3,000. Actual deferral and
contribution percentages under the arrangement and plan for the 1989
plan year are shown below. No excess deferrals, excess
contributions, or excess aggregate contributions have yet been
required to be distributed, forfeited, or recharacterized under the
plan.
------------------------------------------------------------------------
Actual Actual
deferral contribution
percentage percentage
------------------------------------------------------------------------
Highly compensated............................ 6 6
Nonhighly compensated......................... 4 4
------------------------------------------------------------------------
* * * * *
Par. 7. Section 1.402(a)-1 is amended as follows:
1. Paragraph (d)(3)(iv) is revised.
2. Paragraph (d)(3)(v) is added.
3. The added and revised provisions read as follows:
Sec. 1.402(a)-1 Taxability of beneficiary under a trust which meets
the requirements of section 401(a).
* * * * *
(d) * * *
(3) * * *
(iv) Special rule for collectively bargained plans. For plan years
beginning before January 1, 1993, a nonqualified cash or deferred
arrangement will be treated as satisfying section 401(k)(3) solely for
purposes of paragraph (d)(2)(i) of this section if it is part of a plan
(or portion of a plan) that automatically satisfies section 401(a)(4)
under Sec. 1.401(k)-1(a)(7), relating to certain collectively bargained
plans.
(v) Special rule for governmental plans. For plan years beginning
before the later of January 1, 1996, or 90 days after the opening of
the first legislative session beginning on or after January 1, 1996, of
the governing body with authority to amend the plan, if that body does
not meet continuously, in the case of governmental plans described in
section 414(d), a nonqualified cash or deferred arrangement will be
treated as satisfying section 401(k)(3) solely for purposes of
paragraph (d)(2)(i) of this section if it is part of a plan adopted by
a state or local government before May 6, 1986. For purposes of this
paragraph (d)(3)(v), the term governing body with authority to amend
the plan means the legislature, board, commission, council, or other
governing body with authority to amend the plan.
Par. 8. Section 1.402(g)-1 is amended as follows:
1. Paragraph (e)(5)(ii) is revised.
2. In paragraph (e)(11), paragraph (iv) of Example 2, is revised
and paragraph (v) is removed.
3. The added and revised provisions read as follows:
Sec. 1.402(g)-1 Limitation on exclusion for elective deferrals.
(e) * * *
(5) * * *
(ii) Method of allocating income. A plan may use any reasonable
method for computing the income allocable to excess deferrals, provided
that the method does not violate section 401(a)(4), is used
consistently for all participants and for all corrective distributions
under a plan for the plan year, and is used by the plan for allocating
income to participants' accounts. See Sec. 1.401(a)(4)-1(c)(8).
* * * * *
(11) * * *
Example 2. * * *
(iv) In February 1990, B notifies X that B made elective
deferrals of $2,000 under a qualified cash or deferred arrangement
maintained by an unrelated employer in 1989, and requests
distribution of $2,000 from X's plan. However, since B has already
received a distribution of $2,002 to meet the ADP test, no
additional amounts are required or are permitted to be distributed
as excess deferrals by this plan, and the prior distribution of
excess contributions has corrected the excess deferrals. But X must
report $2,000 as a distribution of an excess deferral and $2 as a
distribution of an excess contribution.
* * * * *
Par. 9. In Sec. 1.411(d)-4, A-2 is amended by revising paragraph
(b)(2) (x) and (xi) to read as follows:
1.411(d)-4 Section 411(d)(6) protected benefits.
* * * * *
A-2: * * *
(b) * * *
(2) * * *
(x) Amendment of hardship distribution standards. A qualified cash
or deferred arrangement that permits hardship distributions under
Sec. 1.401(k)-1(d)(2) may be amended to specify or modify
nondiscriminatory and objective standards for determining the existence
of an immediate and heavy financial need, the amount necessary to meet
the need, or other conditions relating to eligibility to receive a
hardship distribution. For example, a plan will not be treated as
violating section 411(d)(6) merely because it is amended to specify or
modify the resources an employee must exhaust to qualify for a hardship
distribution or to require employees to provide additional statements
or representations to establish the existence of a hardship. A
qualified cash or deferred arrangement may also be amended to eliminate
hardship distributions. 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)(2).
(xi) Section 415 benefit limitations. Accrued benefits under a plan
as of the first day of the first limitation year beginning after
December 31, 1986, that exceed the benefit limitations under section
415 (b) or (e), effective on the first day of the plan's first
limitation year beginning after December 31, 1986, because of a change
in the terms and conditions of the plan made after May 5, 1986, or the
establishment of a plan after that date, may be reduced to the level
permitted under section 415 (b) or (e).
* * * * *
Par. 10. Section 1.415-6 is amended by revising paragraph
(b)(6)(iv) to read as follows:
Sec. 1.415-6 Limitation for defined contribution plans.
* * * * *
(b) * * *
(6) * * *
(iv) Notwithstanding paragraph (b)(6) (i), (ii), or (iii) of this
section, the plan may provide for the distribution of elective
deferrals (within the meaning of section 402(g)(3)) or the return of
employee contributions (whether voluntary or mandatory), and for the
distribution of gains attributable to those elective deferrals and
employee contributions, to the extent that the distribution or return
would reduce the excess amounts in the participant's account. These
distributed or returned amounts are disregarded for purposes of section
402(g), the actual deferral percentage test of section 401(k)(3), and
the actual contribution percentage test of section 401(m)(2). However,
the return of mandatory employee contributions may result in
discrimination in favor of highly compensated employees. If the plan
does not provide for the return of gains attributable to the returned
employee contributions, such earnings will be considered as an employee
contribution for the limitation year in which the returned contribution
was made. For limitation years beginning after December 31, 1995, if a
plan does not provide for the distribution of gains attributable to the
distributed elective deferrals, such earnings will be considered as an
employer contribution for the limitation year in which the distributed
elective deferral was made. If a suspense account is in existence at
any time during the limitation year in accordance with this
subparagraph, investment gains and losses and other income may, but
need not, be allocated to the suspense account. To the extent that
investment gains or other income or investment losses are allocated to
the suspense account, the entire amount allocated to participants from
the suspense account, including any such gains or other income or less
any such losses, is considered as the annual addition. See
Sec. 1.401(a)-2(b) for provisions relating to the disposition of a
suspense account in existence upon termination of a plan.
* * * * *
PART 54--PENSION EXCISE TAXES
Par. 11. The authority citation for part 54 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 12. Section 54.4979-0 is amended as follows:
1. The entry for Sec. 54.4979-1, paragraph (d)(4) is revised.
2. The entry for Sec. 54.4979-1, paragraph (d)(5) is removed.
The revised entry reads as follows:
Sec. 54.4979-0. Excise tax on certain excess contributions and excess
aggregate contributions, table of contents.
* * * * *
Sec. 54.4979-1* * *
(d) * * *
(4) Plan years beginning before January 1, 1992.
Par. 13. Section 54.4979-1 is amended as follows:
1. Paragraph (d)(1) is revised.
2. Paragraph (d)(3) is revised.
3. Paragraph (d)(4) is removed.
4. Paragraph (d)(5) is redesignated as paragraph (d)(4).
The revised provisions read as follows:
Sec. 54.4979-1 Excise tax on certain excess contributions and excess
aggregate contributions.
(d) Effective date--(1) General rule. Except as provided in
paragraphs (d)(2) through (4), this section is effective for plan years
beginning after December 31, 1986.
* * * * *
(3) Collectively bargained plans and plans of state or local
governments. For plan years beginning before January 1, 1993, the
provisions of this section do not apply to a collectively bargained
plan that automatically satisfies the requirements of section 410(b).
See Secs. 1.401(a)(4)-1(c)(5) and 1.410(b)-2(b)(7) of this chapter. In
the case of a plan (including a collectively bargained plan) maintained
by a state or local government, the provisions of this section do not
apply for plan years beginning before the later of January 1, 1996, or
90 days after the opening of the first legislative session beginning on
or after January 1, 1996, of the governing body with authority to amend
the plan, if that body does not meet continuously. For purposes of this
paragraph (d)(3), the term governing body with authority to amend the
plan means the legislature, board, commission, council, or other
governing body with authority to amend the plan.
(4) Plan years beginning before January 1, 1992. * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 13, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-31427 Filed 12-22-94; 8:45 am]
BILLING CODE 4830-01-U