[Federal Register Volume 69, Number 51 (Tuesday, March 16, 2004)]
[Proposed Rules]
[Pages 12291-12293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5903]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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  Federal Register / Vol. 69, No. 51 / Tuesday, March 16, 2004 / 
Proposed Rules  

[[Page 12291]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-149752-03]
RIN 1545-BC87


Exclusion of Employees of 501(c)(3) Organizations in 401(k) and 
401(m) Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments to the regulations 
under section 410(b) of the Internal Revenue Code. The proposed 
amendments permit, in certain circumstances, employees of a tax-exempt 
organization described in section 501(c)(3) to be excluded for the 
purpose of testing whether a section 401(k) plan (or a section 401(m) 
plan that is provided under the same general arrangement as the section 
401(k) plan of the employer) meets the requirements for minimum 
coverage specified in section 410(b). These regulations will affect 
tax-exempt employers described in section 501(c)(3), retirement plans 
sponsored by these employers, and participants in these plans.

DATES: Written or electronic comments and requests for a public hearing 
must be received by June 14, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-149752-03), room 
5203, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
149752-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet directly to the IRS Internet 
site at www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, R. Lisa 
Mojiri-Azad, 202-622-6060, or Stacey Grundman, 202-622-6090; concerning 
submissions and delivery of comments, Treena Garrett, 202-622-7180 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR Part 1) under section 410(b) of the Internal 
Revenue Code of 1986 (Code). The amendments implement a directive by 
Congress, contained in section 664 of the Economic Growth and Tax 
Relief Reconciliation Act of 2001 (Public Law 107-16, 115 Stat. 38) 
(EGTRRA), to amend Sec.  1.410(b)-6(g) of the regulations.
    Prior to the enactment of the Small Business Job Protection Act of 
1996 (Pub. L. 104-188, 110 Stat. 1755) (SBJPA), both governmental and 
tax-exempt entities generally were subject to the section 410(b) 
coverage requirements and precluded from maintaining section 401(k) 
plans pursuant to section 401(k)(4)(B). To prevent the section 
401(k)(4)(B) prohibition from causing a plan to fail section 410(b), 
the existing regulations provide that employees of either governmental 
or tax-exempt entities who are precluded from being eligible employees 
under a section 401(k) plan by reason of section 401(k)(4)(B) may be 
treated as excludable in applying the minimum coverage rules to a 
section 401(k) plan or a section 401(m) plan that is provided under the 
same general arrangement as the section 401(k) plan, if more than 95 
percent of the employees of the employer who are not precluded from 
being eligible employees by section 401(k)(4)(B) benefit under the plan 
for the plan year. Although tax-exempt organizations described in 
section 501(c)(3) were precluded by section 401(k)(4)(B) from 
maintaining a section 401(k) plan, they were permitted to allow their 
employees to make salary reduction contributions to a plan or contract 
that satisfies section 403(b) (a section 403(b) plan).
    Section 1426(a) of SBJPA amended section 401(k)(4)(B) to allow 
nongovernmental tax-exempt organizations (including organizations 
exempt under section 501(c)(3)) to maintain section 401(k) plans. Thus, 
a section 501(c)(3) tax-exempt organization can now maintain a section 
401(k) plan, a section 403(b) plan, or both. In light of this provision 
of SBJPA, section 664 of EGTRRA directed the Secretary of the Treasury 
to modify the regulations under section 410(b) to provide that 
employees of a tax-exempt organization described in section 501(c)(3) 
who are eligible to make salary reduction contributions under a section 
403(b) plan may be treated as excludable employees for the purpose of 
testing whether a section 401(k) plan or a section 401(m) plan that is 
provided under the same general arrangement as the section 401(k) plan 
meets the minimum coverage requirements contained in section 410(b) if 
(1) no employee of the organization is eligible to participate in the 
section 401(k) or section 401(m) plan and (2) at least 95 percent of 
the employees of the employer who are not employees of the organization 
are eligible to participate in the section 401(k) or section 401(m) 
plan.
    The change recognizes that many tax-exempt organizations maintained 
section 403(b) plans prior to the enactment of SBJPA and is needed to 
allow the continued maintenance of section 403(b) plans by these 
organizations without requiring the same employees to be covered under 
a section 401(k) plan and the section 403(b) plan. The change will help 
an employer that maintains both a section 401(k) plan and a section 
403(b) plan to satisfy the section 410(b) coverage requirements without 
the employer having to provide dual coverage for employees.

Explanation of Provisions

    These regulations provide that employees of a tax-exempt 
organization described in section 501(c)(3) who are eligible to make 
salary reduction contributions under a section 403(b) plan may be 
treated as excludable employees for the purpose of testing whether a 
section 401(k) plan or a section 401(m) plan that is provided under the 
same general arrangement as the section 401(k) plan meets the minimum 
coverage requirements contained in section 410(b) if (1) no employee of 
the tax-exempt organization is eligible to participate in the section 
401(k) or section 401(m) plan and (2) at least 95 percent of the 
employees of the employer who are not employees of the tax-exempt

[[Page 12292]]

organization are eligible to participate in the section 401(k) or 
section 401(m) plan.
    The proposed regulations do not include any changes to the 
treatment of governmental plans under the current regulations. Unless 
grandfathered, State and local governmental entities continue to be 
precluded from maintaining section 401(k) plans pursuant to section 
401(k)(4)(B). However, as a result of section 1505(a)(1) of the 
Taxpayer Relief Act of 1997 (Public Law 105-34, 111 Stat. 788), which 
added section 401(a)(5)(G) to the Code, governmental plans (within the 
meaning of section 414(d)) maintained by a State or local government or 
political subdivision thereof (or agency or instrumentality thereof) 
are not subject to the minimum coverage requirements contained in 
section 410(b). Consequently, the IRS and Treasury request comments on 
whether it would be appropriate to modify the special rule for 
governmental plans contained in Sec.  1.410(b)-6(g) to reflect the 
addition of section 401(a)(5)(G) (including whether there continues to 
be a need for this special rule with respect to governmental plans).

Effective Date

    As directed by Congress in section 664 of EGTRRA, the amendments to 
Sec.  1.410(b)-6(g) are proposed to be effective for plan years 
beginning after December 31, 1996. Taxpayers may rely on these proposed 
regulations for guidance pending the issuance of final regulations. If, 
and to the extent, future guidance is more restrictive than the 
guidance in these proposed regulations, the future guidance will be 
applied without retroactive effect.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and, because 
the regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury request comments on the clarity of the proposed 
rules and how they can be made easier to understand. All comments will 
be available for public inspection and copying. A public hearing will 
be scheduled if requested in writing by any person that timely submits 
written comments. If a public hearing is scheduled, notice of the date, 
time, and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal authors of these proposed regulations are R. Lisa 
Mojiri-Azad and Stacey Grundman of the Office of the Division Counsel/
Associate Chief Counsel (Tax Exempt and Government Entities). However, 
other personnel from the IRS and Treasury participated in the 
development of these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entry for Sec. Sec.  1.410(b)-2 through 1.410(b)-10 and 
adding entries in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805. * * *

    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).
    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).* * *

    Par. 2. Section 1.410(b)-0, table of contents, the entry for 
1.410(b)-6 is amended by:
    1. Revising the paragraph heading for 1.410(b)-6(g).
    2. Adding paragraph headings for 1.410(b)-6(g)(1) and (g)(2).
    The revision and additions read as follows:


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

* * * * *


Sec.  1.410(b)-6  Excludable employees.

* * * * *

    (g) Employees of certain governmental or tax-exempt entities.
    (1) Employees of governmental entities.
    (2) Employees of tax-exempt entities.

* * * * *
    Par. 3. In Sec.  1.410(b)-6, paragraph (g) is revised to read as 
follows:


Sec.  1.410(b)-6  Excludable employees.

* * * * *
    (g) Employees of certain governmental or tax-exempt entities. 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)(1) and (2) of this section.
    (1) 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 section 401(k)(4)(B)(ii) benefit under the plan for the 
plan year.
    (2) Employees of tax-exempt entities. Employees of a tax-exempt 
organization described in section 501(c)(3) who are eligible to make 
salary reduction contributions under a section 403(b) plan may be 
treated as excludable employees if --
    (i) No employee of the organization is eligible to participate in 
the section 401(k) or section 401(m) plan; and
    (ii) At least 95 percent of the employees of the employer who are 
not employees of the organization are eligible to participate in the 
section 401(k) or section 401(m) plan.
* * * * *

Mark E. Mathews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 04-5903 Filed 3-15-04; 8:45 am]
BILLING CODE 4830-01-P