[Federal Register Volume 72, Number 65 (Thursday, April 5, 2007)]
[Rules and Regulations]
[Pages 16878-16931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-5750]



[[Page 16877]]

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Part II





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1 and 11



Limitations on Benefits and Contributions Under Qualified Plans; Final 
Rule

  Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Rules 
and Regulations  

[[Page 16878]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 11

[TD 9319]
RIN 1545-BD52


Limitations on Benefits and Contributions Under Qualified Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under section 415 of 
the Internal Revenue Code (Code) regarding the limitations of section 
415, including updates to the regulations for numerous statutory 
changes since comprehensive final regulations were last published under 
section 415. The final regulations also make conforming changes to 
regulations under sections 401(a), 401(a)(9), 401(k), 402, 416, and 
457, and make other minor corrective changes to regulations under 
sections 401(a)(4), 414(s), 457, and 924. These regulations affect 
administrators of, participants in, and beneficiaries of qualified 
employer plans and certain other retirement plans.

DATES: Effective Date: These regulations are effective April 5, 2007.
    Applicability Dates: These regulations generally apply for 
limitation years beginning on or after July 1, 2007. See Sec. Sec.  
1.401(k)-1(e)(8), 1.415(a)-1(g), 1.457-6(c)(2)(i), and 1.457-12 
regarding the applicability dates of these regulations.

FOR FURTHER INFORMATION CONTACT: Vernon S. Carter at (202) 622-6060 or 
Linda S.F. Marshall at (202) 622-6090 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR Parts 1 and 11) under section 415 of the Code relating to 
limitations on benefits and contributions under qualified plans. In 
addition, this document contains conforming amendments to the Income 
Tax Regulations under sections 401(a) (including section 401(a)(9)), 
401(k), 402, 416, and 457, as well as minor corrective changes to the 
regulations under section 457 and changes to other regulations under 
sections 401(a) (including section 401(a)(4)), 414(s), and 924 to 
update cross-references to the final regulations under section 415.
    Section 415 was added to the Code by the Employee Retirement Income 
Security Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA), and has 
been amended many times since. Section 415 provides a series of limits 
on benefits under qualified defined benefit plans and on contributions 
and other additions under qualified defined contribution plans. See 
also section 401(a)(16). Pursuant to section 415(a)(2), the limitations 
of section 415 also apply to section 403(b) annuity contracts and to 
simplified employee pensions described in section 408(k) (SEPs). In 
addition, the limitations of section 415 for defined contribution plans 
apply to contributions allocated to any individual medical account that 
is part of a pension or annuity plan established pursuant to section 
401(h) and to amounts attributable to medical benefits allocated to an 
account under a welfare benefit fund established for a key employee 
pursuant to section 419A(d)(1).
    Section 404(j) provides generally that, in computing the amount of 
any deduction for contributions under a qualified plan, benefits and 
annual additions in excess of the applicable limitations under section 
415 are not taken into account. In addition, in computing the 
applicable limits on deductions for contributions to a defined benefit 
plan, and in computing the full funding limitation, an adjustment under 
section 415(d)(1) is not taken into account for any year before the 
year for which that adjustment first takes effect.
    The definition of compensation that is used for purposes of section 
415 is also used for a number of other purposes under the Code. Under 
section 219(b)(3), contributions on behalf of an employee to a plan 
described in section 501(c)(18) are limited to 25 percent of 
compensation as defined in section 415(c)(3). Section 404(a)(12) 
provides that, for various specified purposes in determining deductible 
limits under section 404, the term compensation includes amounts 
treated as participant's compensation under section 415(c)(3)(C) or 
(D). Pursuant to section 409(b)(3), for purposes of determining whether 
employer securities are allocated proportionately to compensation in 
accordance with the rules of section 409(b)(1), the amount of 
compensation paid to a participant for any period is the amount of such 
participant's compensation (within the meaning of section 415(c)(3)) 
for such period. Under section 414(q)(4), for purposes of determining 
whether an employee is a highly compensated employee within the meaning 
of section 414(q), the term compensation has the meaning given such 
term by section 415(c)(3). Section 414(s), which defines the term 
compensation for purposes of certain qualification requirements, 
generally provides that the term compensation has the meaning given 
such term by section 415(c)(3). Under section 416(c)(2), allocations to 
participants who are non-key employees under a top-heavy plan that is a 
defined contribution plan are required to be at least 3 percent of the 
participant's compensation (within the meaning of section 415(c)(3)). 
Pursuant to section 457(e)(5), the term includible compensation, which 
is used in limiting the amount that can be deferred for a participant 
under an eligible deferred compensation plan as defined in section 
457(b), has the same meaning as the term participant's compensation 
under section 415(c)(3).
    Comprehensive regulations regarding section 415 were last issued in 
1981. See TD 7748, published in the Federal Register on January 7, 1981 
(46 FR 1687). Since then, changes to section 415 have been made in the 
Economic Recovery Tax Act of 1981, Public Law 97-34 (95 Stat. 320) 
(ERTA), the Tax Equity and Fiscal Responsibility Act of 1982, Public 
Law 97-248 (96 Stat. 623) (TEFRA), the Deficit Reduction Act of 1984, 
Public Law 98-369 (98 Stat. 494) (DEFRA), the Tax Reform Act of 1986, 
Public Law 99-514 (100 Stat. 2481) (TRA '86), the Technical and 
Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342) 
(TAMRA), the Uruguay Round Agreements Act of 1994, Public Law 103-465 
(108 Stat. 4809) (GATT), the Small Business Job Protection Act of 1996, 
Public Law 104-188 (110 Stat. 1755) (SBJPA), the Community Renewal Tax 
Relief Act of 2000, Public Law 106-554 (114 Stat. 2763) (CRA), the 
Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 
107-16 (115 Stat. 38) (EGTRRA), the Job Creation and Worker Assistance 
Act of 2002, Public Law 107-147 (116 Stat. 21) (JCWAA), the Pension 
Funding Equity Act of 2004, Public Law 108-218 (118 Stat. 596) (PFEA), 
the Working Families Tax Relief Act of 2004, Public Law 108-311 (118 
Stat. 1166) (WFTRA), the Gulf Opportunity Zone Act of 2005, Public Law 
109-135 (119 Stat. 2577) (GOZA), and the Pension Protection Act of 
2006, Public Law 109-280 (120 Stat. 780) (PPA '06).
    Although some limited changes to the regulations were made after 
1981, most of the statutory changes made since that time are not 
reflected in the regulations, but in IRS notices, revenue rulings, and 
other guidance of general applicability, as follows:
     Notice 82-13 (1982-1 CB 360) (see Sec.  601.601(d)(2)) 
provides guidance on

[[Page 16879]]

deductible employee contributions (including guidance under section 
415) to reflect the addition of provisions relating to deductible 
employee contributions in ERTA.
     Notice 83-10 (1983-1 CB 536) (see Sec.  601.601(d)(2)) 
provides guidance on the changes to section 415 made by TEFRA. The 
TEFRA changes were extensive, and included reductions of the dollar 
limits on annual benefits under a defined benefit plan and annual 
additions under a defined contribution plan, changes to the age and 
form adjustments made in the application of the limits under a defined 
benefit plan, and rules regarding the deductibility of contributions 
with respect to benefits that exceed the applicable limitations of 
section 415.
     Notice 87-21 (1987-1 CB 458) (see Sec.  601.601(d)(2)) 
provides guidance on the changes to section 415 made by TRA '86. The 
TRA '86 changes modified the rules for the indexing of the dollar limit 
on annual additions under a defined contribution plan, the treatment of 
employee contributions as annual additions, and the rules for age 
adjustments under defined benefit plans, and added a phase-in of the 
section 415(b)(1)(A) dollar limitation over 10 years of participation, 
as well as rules permitting the limitations of section 415 to be 
incorporated by reference under the terms of a plan.
     Rev. Rul. 98-1 (1998-1 CB 249) (modifying and superseding 
Rev. Rul. 95-29, 1995-1 CB 81) (see Sec.  601.601(d)(2)) provides 
guidance regarding certain form and age adjustments under a defined 
benefit plan pursuant to changes made by GATT (as modified under 
SBJPA), including transition rules relating to those adjustments.
     Notice 99-44 (1999-2 CB 326) (see Sec.  601.601(d)(2)) 
provides guidance regarding the repeal under SBJPA of the limitation on 
the combination of a defined benefit plan and a defined contribution 
plan under former section 415(e).
     Notice 2001-37 (2001-1 CB 1340) (see Sec.  601.601(d)(2)) 
provides guidance regarding the inclusion of salary reduction amounts 
for qualified transportation fringe benefits in the definition of 
compensation for purposes of section 415, as provided under CRA.
     Rev. Rul. 2001-51 (2001-2 CB 427) (see Sec.  
601.601(d)(2)) provides guidance relating to the increases in the 
limitations of section 415 for both defined benefit and defined 
contribution plans, which were enacted as part of EGTRRA.
     Rev. Rul. 2001-62 (2001-2 CB 632) (superseding Rev. Rul. 
95-6, 1995-1 CB 80) (see Sec.  601.601(d)(2)) provides mortality tables 
to be used to make certain form adjustments to benefits under a defined 
benefit plan for purposes of applying the limitations of section 415, 
pursuant to the requirement to use a specified mortality table added by 
GATT.
     Notice 2002-2 (2002-1 CB 285) (see Sec.  601.601(d)(2)) 
provides guidance regarding the treatment of reinvested employee stock 
ownership plan (ESOP) dividends under section 415(c), to reflect 
changes made by SBJPA.
     Rev. Rul. 2002-27 (2002-1 CB 925) (see Sec.  
601.601(d)(2)) provides guidance pursuant to which a definition of 
compensation can be used for purposes of applying the limitations of 
section 415 even if that definition treats certain specified amounts 
that may not be available to an employee in cash as subject to section 
125 (and therefore included in compensation).
     Rev. Rul. 2002-45 (2002-2 CB 116) (see Sec.  
601.601(d)(2)) provides guidance regarding the treatment of certain 
payments to defined contribution plans to restore losses resulting from 
actions by a fiduciary for which there is a reasonable risk of 
liability for breach of a fiduciary duty (including the treatment of 
those payments under section 415).
     Notice 2004-78 (2004-2 CB 879) (see Sec.  601.601(d)(2)) 
provides guidance regarding the actuarial assumptions that must be used 
for distributions with annuity starting dates occurring during plan 
years beginning in years 2004 and 2005 to determine whether an amount 
payable under a defined benefit plan in a form that is subject to the 
minimum present value requirements of section 417(e)(3) satisfies the 
requirements of section 415. This guidance reflects changes made in 
PFEA.
    For copies of recently issued Revenue Procedures, Revenue Rulings, 
Notices, and other guidance published in the Internal Revenue Bulletin 
or the Cumulative Bulletin, please visit the IRS Web site at http://www.irs.gov.
    Some previously issued guidance has been superseded by subsequent 
statutory changes. For example, the simplified actuarial adjustment 
factors formerly permitted to be used to adjust certain forms of 
benefit for purposes of applying the limitations of section 415(b) 
pursuant to Rev. Rul. 80-253 (1980-2 CB 159) (see Sec.  601.601(d)(2)) 
were not permitted to be used after statutory changes imposed the use 
of specified actuarial assumptions to make these adjustments. In 
addition, the projected post-retirement adjustments to the section 
415(b)(1)(B) compensation limit that were required to be taken into 
account for purposes of sections 404 and 412 under Rev. Rul. 81-195 
(1981-2 CB 104) (see Sec.  601.601(d)(2)) were not required or 
permitted to be taken into account for those purposes following the 
addition of section 404(j) in TEFRA.
    The Treasury Department and the IRS believe that a single 
restatement of the section 415 rules serves the interests of plan 
sponsors, third-party administrators, plan participants, and plan 
beneficiaries. On May 31, 2005, a notice of proposed rulemaking (REG-
130241-04) was published in the Federal Register (70 FR 31214) to issue 
new regulations under section 415 (the proposed regulations). The 
guidance items described in this preamble were reflected in the 
proposed regulations with some modifications. In addition, the proposed 
regulations reflected other statutory changes not previously addressed 
by guidance, and included some other changes and clarifications to the 
1981 regulations. To the extent practicable, the preamble to the 
proposed regulations identified and explained substantive changes from 
the 1981 regulations or existing guidance.
    Following publication of the proposed regulations, comments were 
received and a public hearing was held on August 17, 2005. 
Subsequently, Notice 2005-87 (2005-2 CB 1097) (see Sec.  601.601(d)(2)) 
was issued to address certain concerns about the effective date 
provisions of the proposed regulations. After consideration of the 
comments received, the proposed regulations are adopted by this 
Treasury decision, subject to a number of changes that are summarized 
in the preamble.

Explanation of Provisions

Overview

    These regulations reflect the numerous statutory changes to section 
415 and related provisions that have been made since 1981. Some of the 
statutory changes reflected in the regulations are as follows:
     The current statutory limitations under sections 
415(b)(1)(A) and 415(c)(1) applicable for defined benefit and defined 
contribution plans, respectively, as most recently amended by EGTRRA.
     Changes to the rules for age adjustments to the applicable 
limitations under defined benefit plans, under which the dollar 
limitation is adjusted for commencement before age 62 or after age 65.
     Changes to the rules, including specification of 
parameters, for benefit adjustments under defined benefit plans.

[[Page 16880]]

     The phase-in of the dollar limitation under section 
415(b)(1)(A) over 10 years of participation, as added by TRA '86.
     The addition of the section 401(a)(17) limitation on 
compensation that is permitted to be taken into account in determining 
plan benefits, as added by TRA '86, and the interaction of this 
requirement with the limitations under section 415.
     Exceptions to the compensation-based limitation under 
section 415(b)(1)(B) for governmental plans and multiemployer plans.
     Changes to the aggregation rules under section 415(f) 
under which multiemployer plans are not aggregated with single-employer 
plans for purposes of applying the compensation-based limitation of 
section 415(b)(1)(B) to a single-employer plan.
     The repeal under SBJPA of the section 415(e) combined 
limitation on participation in a defined benefit plan and a defined 
contribution plan.
     The changes to section 415(c) that were made in 
conjunction with the repeal under EGTRRA of the exclusion allowance 
under section 403(b)(2).
     The current rounding and base period rules for annual 
cost-of-living adjustments pursuant to section 415(d), as most recently 
amended in EGTRRA and WFTRA.
     Changes to section 415(c) under which certain types of 
arrangements are no longer subject to the limitations of section 415(c) 
(such as individual retirement accounts other than SEPs) and other 
types of arrangements have become subject to the limitations of section 
415(c) (such as certain individual medical accounts).
     The inclusion in compensation (for purposes of section 
415) of certain salary reduction amounts not included in gross income.
     The modification for distributions with annuity starting 
dates in plan years beginning in years 2004 and 2005 made by PFEA with 
respect to the interest rate assumptions in section 415(b)(2)(E) for 
converting certain forms of benefits to an actuarially equivalent 
straight life annuity.
     The following modifications to section 415 that were made 
by PPA '06: (i) Changes to the interest rate assumptions in section 
415(b)(2)(E) that are used for converting certain forms of benefits to 
an equivalent straight life annuity (section 303 of PPA '06); (ii) 
elimination of the active participation requirement in determining a 
participant's high-3 years of service in section 415(b)(3) (section 832 
of PPA '06); (iii) exemption from the section 415(b)(1)(B) compensation 
limit for certain benefits provided under a defined benefit plan 
maintained by an organization described in section 3121(w)(3)(A) 
(section 867 of PPA '06); and (iv) expansion of the definition of 
qualified participant in section 415(b)(2)(H) to include certain 
participants in a defined benefit plan maintained by an Indian tribal 
government (section 906(b) of PPA '06).
    These regulations provide specific rules regarding when amounts 
received following severance from employment are considered 
compensation for purposes of section 415, and when such amounts are 
permitted to be deferred pursuant to section 401(k) or section 457(b). 
These regulations generally provide that amounts received following 
severance from employment are not considered to be compensation for 
purposes of section 415, but provide exceptions for certain payments 
made by the later of 2\1/2\ months following severance from employment 
or the end of the year in which the severance occurs. These regulations 
include corresponding changes to the regulations under sections 401(k) 
and 457 that provide that amounts payable following severance from 
employment can only be deferred if those amounts are within these same 
exceptions.\1\ The rule pursuant to which compensation received after 
severance from employment is not considered compensation for purposes 
of section 415 generally does not apply to payments to an individual in 
qualified military service. The rules governing amounts received 
following severance from employment are discussed in this preamble in 
more detail under the paragraph heading ``Sec.  1.415(c)-2: Definition 
of compensation.''
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    \1\ The proposed regulations also contained corresponding 
changes to regulations under section 403(b) with respect to amounts 
payable following severance from employment. These changes will be 
incorporated into regulations under section 403(b) when those 
regulations are finalized.
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Provisions of the Regulations

General Rules (Sec.  1.415(a)-1)
    Section 1.415(a)-1 of these regulations sets forth general rules 
relating to limitations under section 415 and provides an overview of 
the remaining regulations, including cross-references to special rules 
that apply to section 403(b) annuities, multiemployer plans, 
governmental plans, and plans that are not subject to the requirements 
of section 411. In addition, Sec.  1.415(a)-1 provides rules for a 
plan's incorporation by reference of the rules of section 415 pursuant 
to section 1106(h) of TRA '86 (including detailed guidelines regarding 
incorporation by reference of the annual cost-of-living adjustments to 
the statutory limits and the application of default rules), rules for 
plans maintained by more than one employer, a definition of the term 
``severance from employment,'' and rules that apply in other special 
situations. Section 1.415(a)-1 generally retains the rules set forth in 
the proposed regulations.
    The proposed regulations eliminated the rule under the 1981 
regulations under which a multiemployer plan could satisfy the 
limitations of section 415 separately with respect to benefits or 
contributions from each employer. Thus, the proposed regulations 
required the benefits or annual additions with respect to a participant 
under a multiemployer plan to satisfy the limitations of section 415 on 
an aggregate basis. Some commentators asked that the rule from the 1981 
regulations be retained. The IRS and the Treasury Department have 
determined that there is no statutory basis for permitting 
disaggregation of a multiemployer plan for this purpose. Furthermore, 
statutory changes made since the issuance of the 1981 regulations have 
made this permissive disaggregation rule from the 1981 regulations less 
needed and more conducive to significant abuses. In EGTRRA (and as made 
permanent in PPA '06), multiemployer plans were exempted from the 
limitation for defined benefit plans based on high-3 average 
compensation. This change eliminated the need for multiemployer plans 
to obtain compensation information with respect to each participant 
from multiple participating employers. In TRA '86, the phase-in period 
for the dollar limitation for defined benefit plans was changed from 10 
years of service to 10 years of plan participation. As a result of this 
change, the permissive disaggregation rule from the 1981 regulations 
allows for the multiplication of section 415 limits within a 
multiemployer plan that could not be otherwise achieved by simply 
establishing separate single employer plans. Accordingly, these final 
regulations retain the rule from the proposed regulations that does not 
allow disaggregation of a multiemployer plan. In this regard, see the 
discussion under the paragraph heading ``Sec.  1.415(c)-2: Definition 
of Compensation'' for a rule that treats all employers contributing to 
a multiemployer plan as a single employer for purposes of the 
restriction on the recognition of compensation paid after severance 
from employment with an employer.

[[Page 16881]]

    Section 1.415(a)-1(d)(3)(v) provides rules regarding a plan's 
incorporation by reference of cost-of-living increases in the 
applicable limitations pursuant to section 415(d), including default 
rules that apply in the absence of contrary plan provisions. In 
providing rules for incorporation by reference, the proposed 
regulations provided that annual increases in the applicable 
limitations pursuant to section 415(d) do not apply in limitation years 
beginning after the annuity starting date to a participant who has 
previously commenced receiving benefits unless the plan specifies that 
this annual increase applies to such a participant.
    One commentator pointed out that this provision in the proposed 
regulations modified the default treatment under the 1981 regulations 
(which provide that adjustments to the applicable limitations are not 
made after a participant's separation from service unless the plan so 
provides). In response to this comment, the final regulations retain 
the rule from the 1981 regulations under which the section 415(d) 
annual increases in the applicable limitations do not apply with 
respect to a participant for increases that become effective after the 
participant's severance from employment with the employer maintaining 
the plan (or, if earlier, after the annuity starting date in the case 
of a participant who has commenced receiving benefits) unless the plan 
specifies that this annual increase applies to such a participant. 
Thus, annual increases in the applicable limitations apply to a 
participant who has severed from employment with the employer 
maintaining the plan or who has commenced receiving benefits only if 
the plan specifies that those annual increases apply to such a 
participant.
Limitations Applicable to Defined Benefit Plans (Sec.  1.415(b)-1)
    Section 1.415(b)-1 of these regulations sets forth rules for 
applying the limitations on benefits under a defined benefit plan. 
Under these limitations, the annual benefit must not exceed the lesser 
of $160,000 (as adjusted pursuant to section 415(d)) and 100 percent of 
the participant's average compensation for the period of the 
participant's high-3 years of service. These regulations generally 
define the period of a participant's high-3 years of service as the 
period of 3 consecutive calendar years during which the employee had 
the greatest aggregate compensation from the employer. A retirement 
benefit payable in a form other than a straight life annuity is 
adjusted to an actuarially equivalent straight life annuity to 
determine the annual benefit payable under that form of distribution. 
In addition, the $160,000 dollar limitation under section 415(b)(1)(A) 
is actuarially adjusted for benefit payments that commence before age 
62 or after age 65. Section 1.415(b)-1 generally retains the rules set 
forth in the proposed regulations except as indicated below.
    The proposed regulations provided that, in addition to applying to 
benefits payable to participants and beneficiaries, the limitations of 
section 415(b) apply to accrued benefits (regardless of whether the 
benefit is vested) and benefits payable from an annuity contract 
distributed to a participant. Some commentators argued that it is 
inappropriate to apply the limitations of section 415(b) to a 
participant's accrued benefit in the case of a plan that is not subject 
to the requirements of section 411, since such a plan sometimes does 
not define an accrued benefit and benefits under such a plan can always 
be reduced if needed so that payments under the plan will satisfy the 
limitations of section 415. In response, these regulations provide that 
the rule applying section 415(b) to limit a participant's accrued 
benefit applies only to a plan that is subject to the requirements of 
section 411. However, a plan that is not subject to the requirements of 
section 411 is still subject to the requirements of section 415(b) with 
respect to the annual benefit payable to a participant at any time 
under the plan. As indicated in the preamble to the proposed 
regulations, where a participant's accrued benefit is computed pursuant 
to the fractional rule of section 411(b)(1)(C), the limitations of 
section 415(b) apply to the accrued benefit as of the end of the 
limitation year and, for ages prior to normal retirement age, are not 
required to be applied to the projected annual benefit commencing at 
normal retirement age from which the accrued benefit is computed.

A. Actuarial Assumptions Used to Convert Benefits to a Straight Life 
Annuity

    Pursuant to section 415(b)(2)(B) (which provides for benefits paid 
in a form other than a straight life annuity to be adjusted to an 
actuarially equivalent straight life annuity in accordance with 
Treasury regulations), these regulations provide rules under which a 
retirement benefit payable in any form other than a straight life 
annuity is converted to the straight life annuity that is actuarially 
equivalent to that other form to determine the annual benefit (which is 
used to demonstrate compliance with section 415) with respect to that 
form of distribution. These rules reflect statutory changes that 
specify the actuarial assumptions that are to be used for these 
equivalency calculations as well as published guidance that has been 
issued since the prior final regulations were published in 1981. The 
statutory changes reflected in these rules include, for plan years 
beginning in years 2004 and 2005, the use of a 5.5 percent interest 
rate for benefits that are subject to the present value rules of 
section 417(e)(3),\2\ as set forth in PFEA, as well as the 
modifications under section 303 of PPA '06 to the equivalency 
calculations for benefits that are subject to the present value rules 
of section 417(e)(3) (which are applicable to distributions with 
annuity starting dates in plan years beginning after December 31, 
2005). In addition to setting forth rules for adjusting forms of 
benefit other than straight life annuities, these regulations permit 
the IRS to issue published guidance setting forth simplified methods 
for making these adjustments.
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    \2\ Section 417(e)(3) provides minimum present value 
requirements for certain forms of benefit payable from a defined 
benefit plan under which payments cannot be less than the amount 
calculated using a specified interest rate and a specified mortality 
table. For forms of benefit that are subject to the minimum present 
value rules of section 417(e)(3), the limitations of section 415(b) 
apply to limit the amount of a distribution even if those 
limitations result in a lower distribution than would otherwise be 
required under the rules of section 417(e)(3). See Sec.  1.417(e)-
1(d)(1).
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    Under these regulations, the annual benefit is determined as the 
greater of the actuarially equivalent straight life annuity determined 
under the plan's actuarial assumptions or the actuarially equivalent 
straight life annuity determined under actuarial assumptions specified 
by statute. This methodology implements the policy reflected in section 
415(b)(2)(E), under which the plan's determination that a straight life 
annuity and a particular optional form of benefit are actuarially 
equivalent is overridden only when the optional form of benefit under 
the plan is more valuable than the corresponding straight life annuity 
when the two forms are compared using the statutorily specified 
actuarial assumptions.
    The rules in these regulations under which a retirement benefit 
payable in any form other than a straight life annuity is converted to 
a straight life annuity to determine the annual benefit with respect to 
that form of distribution generally follow the rules set forth in Rev. 
Rul. 98-1. However, the calculation of the actuarially equivalent 
straight life annuity determined using the plan's assumptions for 
actuarial equivalence has been simplified for a

[[Page 16882]]

form of benefit that is not subject to the minimum present value rules 
of section 417(e)(3). Under the simplified calculation, instead of 
first determining the actuarial assumptions used under the plan and 
then applying those assumptions to convert an optional form of benefit 
to an actuarially equivalent straight life annuity, the regulations use 
the straight life annuity, if any, that is payable at the same age 
under the plan. This straight life annuity is then compared to the 
straight life annuity that is the actuarial equivalent of the optional 
form of benefit (determined using the standardized assumptions), and 
the larger of the two straight life annuities is used for purposes of 
demonstrating compliance with section 415.
    This simplification has not been extended to forms of benefit that 
are subject to the minimum present value rules of section 417(e)(3), 
however, because under a plan those forms of benefit are often 
determined as the actuarial equivalent of the deferred annuity, rather 
than as the actuarial equivalent of the immediate straight life 
annuity. Instead, for a benefit paid in a form to which section 
417(e)(3) applies, pursuant to section 415(b)(2)(E), the actuarially 
equivalent straight life annuity benefit generally is determined as the 
greatest of three annual amounts. The first is the annual amount of the 
straight life annuity commencing at the annuity starting date that has 
the same actuarial present value as the particular form of benefit 
payable, computed using the interest rate and mortality table, or 
tabular factor, specified in the plan for actuarial equivalence. The 
second is the annual amount of the straight life annuity commencing at 
the annuity starting date that has the same actuarial present value as 
the particular form of benefit payable, computed using a 5.5 percent 
interest assumption and the applicable mortality table for the 
distribution under Sec.  1.417(e)-1(d)(2). The third is the annual 
amount of the straight life annuity commencing at the annuity starting 
date that has the same actuarial present value as the particular form 
of benefit payable (computed using the applicable interest rate for the 
distribution under Sec.  1.417(e)-1(d)(3) and the applicable mortality 
table for the distribution under Sec.  1.417(e)-1(d)(2)), divided by 
1.05. This rule reflects the amendment of section 415(b)(2)(E) by 
section 303 of PPA '06.
    One commentator asked whether the rules regarding adjustments for 
forms of benefit that are subject to the minimum present value 
standards of section 417(e)(3) apply to plans that are not subject to 
the requirements of section 417. Section 415(b)(2)(E) applies based on 
the form of the benefit, and not the status of the plan, and therefore 
the final regulations provide that these rules also apply to plans that 
are not subject to the requirements of section 417.
    Some commentators expressed concern that the examples illustrating 
the rules for actuarial adjustments converted optional forms of benefit 
into straight life annuities payable monthly, and they noted that had 
the conversion been to a straight life annuity payable on the first day 
of each year, the straight life annuity would have been smaller and 
therefore a greater benefit would have been permissible under section 
415(b). Under section 415(b)(2)(B), the Secretary is delegated 
authority to prescribe regulations for adjusting a benefit so that it 
is equivalent to a benefit payable annually in the form of a straight 
life annuity. These regulations provide that if a benefit is payable in 
the form of a straight life annuity, no adjustment is made to account 
for differences in the timing of payments during a year (for example, 
no adjustment is made on account of the annuity being payable in annual 
or monthly installments). Thus, if the section 415(b) dollar limit for 
a limitation year is $180,000, a plan is not permitted to provide for 
12 monthly payments of $15,583, which is actuarially equivalent to an 
annual benefit of $180,000 payable on the first day of the year. With 
respect to a benefit payable in a form other than a straight life 
annuity, the annual benefit is determined as the straight life annuity 
payable on the first day of each month that is actuarially equivalent 
to the benefit payable in such other form.
    Some commentators expressed concerns regarding the application of 
these actuarial adjustments in the case of annuity forms of benefit 
that are increased automatically each year pursuant to plan terms. 
Commentators argued that, in testing such a form of benefit for 
compliance with section 415, increases to the section 415(b) limits 
pursuant to section 415(d) should be taken into account. Thus, 
commentators asserted that a form of benefit with an automatic increase 
feature should satisfy section 415(b) so long as payments made pursuant 
to the benefit during each limitation year are less than the section 
415(b) limit in effect for the limitation year.
    In response to these comments, these final regulations provide 
that, for a form of benefit that is not subject to the requirements of 
section 417(e)(3), no adjustments are made to reflect these automatic 
increases if certain requirements are satisfied. Specifically, the form 
of benefit without regard to the automatic increase feature must 
satisfy the requirements of section 415(b), and the plan must provide 
that in no event will the amount payable to a participant under the 
form of benefit in any limitation year be greater than the section 
415(b) limit applicable at the annuity starting date, as increased in 
subsequent years pursuant to section 415(d). If these requirements are 
not satisfied, the annual benefit with respect to a benefit that is 
subject to automatic increases must reflect the value of these 
automatic increases under the rules described above.

B. Inclusion of Social Security Supplements in Annual Benefit

    As under the proposed regulations, these regulations clarify that a 
social security supplement is included in determining the annual 
benefit. Under section 415(b)(2)(B), the annual benefit does not 
include ancillary benefits that are not directly related to retirement 
benefits. However, because a social security supplement is payable upon 
retirement as a form of retirement income, it is a retirement benefit. 
Thus, a social security supplement is included in determining the 
annual benefit without regard to whether it is an ancillary benefit or 
a qualified social security supplement (QSUPP) within the meaning of 
Sec.  1.401(a)(4)-12.

C. Determination of High-3 Average Compensation

    The proposed regulations contained two new provisions that would 
have had a significant effect on the determination of a participant's 
average compensation for the participant's high-3 consecutive years. 
The first provision changed a rule in the 1981 final regulations by 
restricting the compensation used for this purpose to compensation 
earned in periods during which the participant was an active 
participant in the plan. Pursuant to the amendment of section 415(b)(3) 
made by section 832 of PPA '06 (which eliminated the active 
participation requirement for purposes of determining average 
compensation for years beginning after December 31, 2005), this change 
has not been incorporated into the final regulations.
    The second provision in the proposed regulations clarified the 
interaction of the requirements of section 401(a)(17) and the 
definition of compensation that must be used for purposes of 
determining a participant's average compensation for the participant's 
high-3 consecutive years. Because a plan is not permitted to base 
benefits on compensation in excess of the limitation

[[Page 16883]]

under section 401(a)(17), a plan's definition of compensation used for 
purposes of applying the limitations of section 415 is not permitted to 
reflect compensation in excess of the limitation under section 
401(a)(17). Thus, for example, where a participant commences receiving 
benefits in 2006 at age 75 (so that the age-adjusted dollar limitation 
could be as high as $390,953, depending on plan provisions), and the 
participant had compensation in excess of the applicable section 
401(a)(17) limit for years 2003, 2004, and 2005, the participant's 
benefit under the plan is limited by the average compensation for his 
highest three years as limited by section 401(a)(17), which is $205,000 
(the average of $200,000, $205,000, and $210,000).
    Commentators objected to this second provision. These regulations 
retain this provision from the proposed regulations because the IRS and 
the Treasury Department believe that this interpretation is based on 
the best reading of applicable statutory requirements. However, these 
regulations include a grandfather provision under which a defined 
benefit plan is considered to satisfy the limitations of section 415(b) 
for a participant with respect to benefits accrued or payable under the 
plan as of the end of the limitation year that is immediately prior to 
the effective date of these final regulations for the plan pursuant to 
plan provisions (including plan provisions relating to the plan's 
limitation year) that were both adopted and in effect before April 5, 
2007, but only if such plan provisions meet the requirements of 
statutory provisions, regulations, and other published guidance 
relating to section 415 in effect immediately before the effective date 
of these final regulations. In determining whether plan provisions meet 
the requirements of statutory provisions, regulations, and other 
published guidance relating to section 415 in effect immediately before 
the effective date of these final regulations, plan provisions are 
permitted to reflect compensation in excess of the section 401(a)(17) 
limit, and the benefits based on such compensation are eligible for the 
grandfather rules.
    These regulations set forth rules for computing the limitation of 
section 415(b)(1)(B) of 100 percent of the participant's average 
compensation for the period of the participant's high-3 years of 
service for a participant who is employed with the employer for less 
than 3 consecutive calendar years. For such a participant, the period 
of the participant's high-3 years of service is the actual number of 
consecutive years of service (including fractions of years, but not 
less than one year). In such a case, the limitation of section 
415(b)(1)(B) of 100 percent of the participant's average compensation 
for the period of the participant's high-3 years of service is computed 
by averaging the participant's compensation during the participant's 
longest consecutive period of service over the actual period of service 
(including fractions of years, but not less than one year). In a change 
from the proposed regulations, these regulations provide that, in the 
case of a participant who has had a severance from employment with the 
employer maintaining the plan and who is subsequently rehired by that 
employer, the period of the participant's high-3 years of service is 
calculated by excluding any years for which the participant performs no 
services for and receives no compensation from the employer maintaining 
the plan (the break period), and by treating the year of service 
immediately prior to and the year of service immediately after the 
break period as if the years were consecutive.
    These regulations also modify the proposed regulations by providing 
a rule that applies in the case of an employee who is rehired after 
severing employment. If the plan provides for the adjustment of a 
participant's compensation limit in accordance with section 415(d) for 
limitation years following the limitation year in which the employee 
severs employment, the rehired employee's compensation limit under 
section 415(b) is the greater of 100 percent of the participant's 
average compensation for the period of the participant's high-3 years 
of service, as determined prior to the employee's severance from 
employment and as adjusted pursuant to section 415(d), or 100 percent 
of the participant's average compensation for the period of the 
participant's high-3 years of service, taking into account service both 
before and after rehire. This rule was added because a participant's 
compensation limit should not be lower than it would otherwise be 
merely because the participant in rehired.

D. Treatment of Benefits Paid Partially in the Form of a QJSA

    Under section 415(b)(2)(B), the survivor annuity portion of any 
joint and survivor annuity that constitutes a qualified joint and 
survivor annuity (QJSA), as defined in section 417(b), is not taken 
into account in determining the annual benefit for purposes of applying 
the limitations of section 415(b). As under the proposed regulations, 
these regulations clarify how this exception from the limitations of 
section 415 for the survivor annuity portion of a QJSA applies to 
benefits paid partially in the form of a QJSA and partially in some 
other form. Under this clarification, the rule excluding the survivor 
portion of a QJSA from the annual benefit applies to the survivor 
annuity payments under the portion of a benefit that is paid in the 
form of a QJSA, even if another portion of the benefit is paid in some 
other form.

E. Dollar Limitation Applicable to Early or Late Commencement

    The determination of the age-adjusted dollar limitation under these 
regulations reflects the rules enacted in EGTRRA. As provided in Q&A-3 
of Rev. Rul. 2001-51, this determination generally follows the same 
steps and procedures as those used in Rev. Rul. 98-1, except that such 
determination takes into account the increased defined benefit dollar 
limitation enacted by EGTRRA and the adjustments for early or late 
commencement are no longer based on social security retirement age. 
Applying rules that are similar to those that are used for determining 
actuarial equivalence among forms of benefits, these regulations 
generally use the plan's determinations for actuarial equivalence of 
early or late retirement benefits, but override those determinations 
where the use of the specified statutory assumptions results in a lower 
limit. This methodology is retained from the proposed regulations 
because the IRS and the Treasury Department believe that generally a 
plan's actuarial equivalence for section 415 purposes should be the 
same as actuarial equivalence for other purposes and because of the 
need to have an administrable rule when a plan uses factors that are 
not explicitly based on an interest rate and mortality table.
    Some commentators expressed concern that these rules effectively 
result in no increase to the dollar limitation where a plan that is not 
subject to the requirements of section 411 does not increase the 
participant's benefit to reflect a delay in commencement beyond age 65. 
No change has been made to address this concern because the IRS and the 
Treasury Department believe it is not appropriate to increase the 
dollar limitation for commencement after age 65 where, under the plan 
terms, there is no increase to the participant's benefit on account of 
delayed commencement (so that any increase in a participant's benefit 
is solely on account of additional service or compensation). In 
response to other commentator

[[Page 16884]]

concerns, these regulations provide that an actuarial increase to a 
participant's benefit for commencement after age 65 is taken into 
account for this purpose even if the actuarial increase offsets 
additional benefit accruals under the plan.
    These regulations adopt rules for mortality adjustments used in 
computing the dollar limitation on a participant's annual benefit for 
distributions commencing before age 62 or after age 65 that are 
generally consistent with Notice 83-10 and Notice 87-21. Under these 
rules, to the extent that a forfeiture does not occur upon the 
participant's death before the annuity starting date, generally no 
adjustment is made to reflect the probability of the participant's 
death during the relevant time period (which is the period before age 
62 or after age 65), and to the extent a forfeiture occurs upon the 
participant's death before the annuity starting date, an adjustment 
must be applied to reflect the probability of the participant's death 
during the relevant time period.
    These regulations also provide a simplified method for applying 
these mortality adjustment rules. Under this simplified method, a plan 
is permitted to treat no forfeiture as occurring upon a participant's 
death if the plan does not charge participants for providing a 
qualified preretirement survivor annuity, but only if the plan applies 
this treatment for adjustments that apply both before age 62 and after 
age 65. This simplified method eliminates the need to determine the 
extent of a forfeiture upon death in the case where a plan provides for 
a qualified preretirement survivor annuity.
    One commentator asked whether, for purposes of adjusting the dollar 
limit for commencement prior to age 62, a plan is permitted to make a 
mortality adjustment for ages below age 62, even if the plan does not 
provide for a forfeiture upon the participant's death before the 
annuity starting date where it is before age 62. Recognizing that 
mortality adjustments would result in a lower limit in such a case, 
these regulations permit such an adjustment to be made if the plan so 
provides.
    Some commentators expressed concern that the application of the 
rules that adjust the section 415(b)(1)(A) dollar limit for pre-age 62 
benefit commencement as set forth in the proposed regulations could 
result in the limit decreasing as a participant ages under certain 
circumstances. To address this concern, these regulations provide that, 
notwithstanding the generally applicable rules for age adjustments to 
the dollar limitation, the age-adjusted section 415(b)(1)(A) dollar 
limit does not decrease on account of an increase in age or the 
performance of additional service.

F. Nonapplication of Adjustment to Dollar Limitation for Early 
Commencement With Respect to Police Department and Fire Department 
Employees

    Consistent with section 415(b)(2)(G) and (H), as amended by section 
906(b) of PPA '06, these regulations provide that the early retirement 
reduction does not apply to certain participants in plans of state, 
Indian tribal government, and local government units who are employees 
of a police department or fire department, or former members of the 
Armed Forces of the United States. This rule applies to any participant 
in a plan maintained by a state, Indian tribal government, or political 
subdivision thereof who is credited, for benefit accrual purposes, with 
at least 15 years of service as either (1) a full-time employee of any 
police department or fire department of the state, Indian tribal 
government, or political subdivision that provides police protection, 
firefighting services, or emergency medical services, or (2) a member 
of the Armed Forces of the United States. These regulations clarify 
that the application of this rule depends on whether the employer is a 
police department or fire department of the state, Indian tribal 
government, or political subdivision, rather than on the job 
classification of the individual participant. Also, this rule applies 
based on the function of an organization rather than based on the name 
of the organization.

G. Application of $10,000 Exception

    Pursuant to section 415(b)(4), the benefits payable with respect to 
a participant under a defined benefit plan satisfy the limitations of 
section 415(b) if the retirement benefits payable with respect to such 
a participant under the plan and all other defined benefit plans of the 
employer do not exceed $10,000 for the plan year or for any prior plan 
year, and the employer has not at any time maintained a defined 
contribution plan in which the participant participated. As under the 
proposed regulations, these regulations clarify that the alternative 
$10,000 limitation under section 415(b)(4) is applied to actual 
distributions made during each year. Thus, a distribution for a 
limitation year that exceeds $10,000 is not within the section 
415(b)(4) alternative limitation (and therefore will not be excepted 
from the otherwise applicable limits of section 415(b)), even if the 
distribution is a single-sum distribution that is the actuarial 
equivalent of an accrued benefit with annual payments that are less 
than $10,000.

H. Exclusion of Annual Benefit Attributable to Mandatory Employee 
Contributions From Annual Benefit

    These regulations retain the rules from the 1981 regulations that 
the annual benefit does not include the annual benefit attributable to 
mandatory employee contributions. For this purpose, the term mandatory 
employee contributions means amounts contributed to the plan by the 
employee that are required as a condition of employment, as a condition 
of participation in the plan, or as a condition of obtaining benefits 
(or additional benefits) under the plan attributable to employer 
contributions. See section 411(c)(2)(C). Employee contributions to a 
defined benefit plan that are not maintained in a separate account as 
described in section 414(k) constitute mandatory employee contributions 
(even if an employee can elect whether to make the contributions, and 
even if section 411 does not apply to the plan) because, depending upon 
the investment performance of plan assets, employer contributions may 
be needed to pay the portion of the participant's benefit that is 
conditioned upon these employee contributions. Any other employee 
contributions (plus earnings thereon) are treated as a separate defined 
contribution plan rather than as part of a defined benefit plan.
    These regulations retain the rule from the 1981 regulations that 
the annual benefit attributable to mandatory employee contributions is 
determined under the rules of section 411(c) and regulations 
promulgated under section 411, regardless of whether section 411 
applies to the plan. These regulations also clarify that the following 
are not treated as employee contributions: (1) Contributions that are 
picked up by a governmental employer as provided under section 
414(h)(2), (2) repayment of any loan made to a participant from the 
plan, and (3) repayment of any amount that was previously distributed. 
One commentator asked how to determine the annual benefit attributable 
to mandatory employee contributions under section 411(c) in the case of 
a plan that is not subject to the requirements of section 411 and 417, 
and suggested the use of the plan's factors for this purpose. This 
suggestion was not incorporated into these final regulations because 
the amount payable with respect to employee contributions

[[Page 16885]]

that is in excess of the amount that would be payable with respect to 
such contributions using the rules of section 411(c) is effectively a 
subsidy that should be included in determining the participant's annual 
benefit under the plan. These regulations also provide that, for 
purposes of determining the accumulated contributions described in 
section 411(c)(2)(C), where the plan is not subject to the requirements 
of section 411, the plan must determine what would have been the 
applicable effective date of section 411(a)(2) as if section 411 
applied to the plan, and in determining the annual benefit that is 
actuarially equivalent to these accumulated contributions, the plan 
must determine the interest rate that would have been required under 
section 417(e)(3) as if section 417 applied to the plan.
    Another commentator asked why the repayment of an employee 
contribution is not treated as an employee contribution under this 
rule. No change to the regulations has been made to reflect this 
concern because, while the repayment is not treated as an employee 
contribution for purposes of section 415, the original employee 
contribution is still considered an employee contribution for this 
purpose.

I. Exclusion of Annual Benefit Attributable to Rollover Contributions 
From Annual Benefit

    These regulations clarify that the annual benefit does not include 
the annual benefit attributable to rollover contributions made to a 
defined benefit plan (that is, rollover contributions that are not 
maintained in a separate account that is treated as a separate defined 
contribution plan under section 414(k)). In such a case, the annual 
benefit attributable to rollover contributions is determined by 
applying the rules of section 411(c) and treating the rollover 
contributions as employee contributions (regardless of whether sections 
411 and 417 apply to the plan). This will occur, for example, if a 
distribution is rolled over from a defined contribution plan to a 
defined benefit plan to provide an annuity distribution. Thus, in the 
case of rollover contributions from a defined contribution plan to a 
defined benefit plan to provide an annuity distribution, the annual 
benefit attributable to those rollover contributions for purposes of 
section 415 is determined by applying the rules of section 411(c), 
regardless of the assumptions used to compute the annuity distribution 
under the plan. Accordingly, in such a case, if the plan credits higher 
interest or uses more favorable factors than those specified in section 
411(c) to determine the amount of annuity payments arising from a 
rollover contribution, the annual benefit under the plan reflects the 
excess of those annuity payments over the amounts that would be payable 
using the rules of section 411(c) because such excess is effectively a 
subsidy which is included in determining the participant's annual 
benefit under the plan.
    These final regulations clarify that the rule that excludes the 
annual benefit attributable to rollover contributions applies to 
rollover contributions from an eligible retirement plan, as defined in 
section 402(c)(8)(B). Thus, the rule applicable to rollovers is not 
limited solely to rollovers from qualified plans.
    Rollover contributions to an account that is treated as a separate 
defined contribution plan under section 414(k) do not give rise to an 
annual benefit because the separate account is not treated as a defined 
benefit plan under section 415(b). Furthermore, under the rules 
relating to defined contribution plans, these rollover contributions to 
a separate account are excluded from the definition of annual additions 
to a defined contribution plan.

J. Treatment of Benefits Transferred Among Plans and Terminated Plans

    These regulations generally retain the provisions in the proposed 
regulations that modify the rules of the 1981 final regulations for 
determining the amount of transferred benefits that are excluded from 
the annual benefit under a defined benefit plan in the event of a 
transfer from another defined benefit plan. These modifications to the 
1981 final regulations are designed to ensure that transferred benefits 
are not counted more than once when the transferor plan and the 
transferee plan are aggregated under section 415(f) and Sec.  1.415(f)-
1, and to prevent the circumvention of the limitations of section 
415(b) through benefit transfers to plans of unrelated employers. The 
rules of section 415(b) that apply upon a transfer of benefits between 
plans operate independently from the requirements of section 414(l), 
and compliance with the requirements of section 414(l) does not ensure 
compliance with these rules.
    The proposed regulations provided that, if the transferee plan's 
benefits are required to be taken into account pursuant to section 
415(f) and Sec.  1.415(f)-1 in determining whether the transferor plan 
satisfies the limitations of section 415(b) for that limitation year, 
then the transferred benefits are disregarded in determining the annual 
benefit under the transferor plan. The final regulations modify this 
rule. This modification is being made in conjunction with modifications 
to the proposed regulations with respect to the aggregation of plans 
among formerly affiliated employers (discussed in more detail under the 
heading ``Sec.  1.415(f)-1: Aggregating plans''). Generally, under the 
modified section 415(f) aggregation rules, there are situations in 
which only a portion of the benefits provided under plans maintained by 
formerly affiliated employers is taken into account when applying 
section 415 on an aggregated basis to each employer. Given this 
modification to the aggregation rules, the determination of whether 
transferred benefits are nonetheless treated as provided by the 
transferor plan is properly based on whether the transferred benefits 
are included in the portion of the transferee plan that is aggregated 
with the transferor plan. Thus, the final regulations provide that, to 
the extent the benefits transferred to a transferee plan are otherwise 
required to be taken into account pursuant to section 415(f) and Sec.  
1.415(f)-1 in determining whether the transferor plan satisfies the 
limitations of section 415(b), the transferred benefits are not also 
treated as being provided under the transferor plan (because these 
benefits will be taken into account by the transferor plan when it is 
aggregated with the transferee plan).
    The proposed regulations provided that where there has been a 
transfer of liabilities between plans and the transferee plan's 
benefits are not required to be taken into account pursuant to section 
415(f) and Sec.  1.415(f)-1 in determining whether the transferor plan 
satisfies the limitations of section 415(b), the assets associated with 
those transferred liabilities (other than surplus assets) are treated 
by the transferor plan as distributed as a single-sum distribution. 
These final regulations modify this proposed transfer rule in two 
respects. First, for the reasons described in the paragraph above, this 
transfer rule is applicable only if the benefits transferred to the 
transferee plan are not otherwise required to be taken into account by 
the transferor plan pursuant to section 415(f) and Sec.  1.415(f)-1. 
Second, the final regulations modify this proposed rule in response to 
comments expressing concern with the administrative complexity 
associated with the calculation of the deemed single-sum distribution. 
Instead of treating the assets associated with the transferred 
liabilities as a deemed single-sum distribution, the final regulations 
treat the transferred liabilities as comprising a plan that must be 
aggregated with the

[[Page 16886]]

transferor plan, that had terminated with sufficient assets to pay 
benefit liabilities under the plan and had purchased annuities to 
provide plan benefits.
    Although such a transfer is treated as a plan termination in 
computing the annual benefit under the transferor plan, no 
corresponding adjustment to the annual benefit under the transferee 
plan is made to reflect the fact that some of the benefits provided 
under the transferee plan are attributable to the transfer. Thus, the 
actual benefit provided under the transferee plan is used to determine 
the annual benefit under the transferee plan even though the 
transferred amount is also included along with other benefits provided 
under the transferor plan in determining the participant's annual 
benefit under the transferor plan.
    While some commentators expressed concern that this resulted in 
double counting of benefits, in most such cases, a participant whose 
benefits have been transferred would accrue no additional benefit under 
the transferor plan that would be required to be tested under the 
transferor plan (in combination with the transferred benefits). 
Furthermore, these rules prevent the transferor plan from avoiding the 
limitations of section 415 for participants by spinning off the 
participants' benefits to a plan of an unrelated employer and then 
accruing additional benefits for the participants. For example, without 
these rules, the benefit of an executive in a plan maintained by the 
executive's employer could be transferred to a plan maintained by a 
business that is owned by the executive and that is not aggregated with 
the executive's employer for purposes of section 415, and the executive 
could accrue an additional benefit up to the section 415 limits under 
the plan maintained by the executive's employer.
    The final regulations provide rules specifying how to take into 
account benefits provided under a terminated plan. If a defined benefit 
plan is terminated with sufficient assets to pay accrued benefits and a 
participant in the plan has not yet commenced benefits under the plan, 
for purposes of satisfying section 415(b) with respect to the 
participant, the final regulations require that all other defined 
benefit plans maintained by the employer that maintained the terminated 
plan take into account the benefits provided pursuant to the annuities 
purchased to provide benefits under the terminated plan at each 
possible annuity starting date. The final regulations provide that if a 
defined benefit plan is terminated and there are not sufficient assets 
for the payment of the accrued benefit of all plan participants, all 
other defined benefit plans maintained by the employer that maintained 
the terminated plan are required to take into account the benefits that 
are actually provided under the terminated plan. For example, if the 
terminated plan is subject to Title IV of ERISA, the other plans 
maintained by the employer that maintained the terminated plan take 
into account the benefits that are provided by the Pension Benefit 
Guaranty Corporation. If the terminated plan was not subject to Title 
IV of ERISA, the other plans take into account the benefits that are 
actually paid by the terminated plan. The multiple annuity starting 
date rules apply to the extent that benefits from a terminated plan and 
an ongoing plan do not commence at the same time.
    These regulations clarify that if a participant elects to transfer 
a distributable benefit to a defined benefit plan pursuant to Sec.  
1.411(d)-4, A-3(c), the transfer is treated in the same manner as an 
amount that is distributed and then rolled over (specifically, the 
transferred benefit is treated by the transferor plan as a 
distribution, and the annual benefit provided by the transferee plan 
does not include the annual benefit attributable to the amount 
transferred). This rule applies regardless of whether the requirements 
of section 411 apply to the plan and, in the case of a transfer from a 
defined contribution plan that is not subject to the requirements of 
section 411 (such as a governmental plan) to a defined benefit plan, 
the rule applies even if the participant's benefits are not 
distributable from the defined contribution at the time of the 
transfer.

K. 10-Year Phase-in of Limitations Based on Years of Participation and 
Years of Service

    As under the proposed regulations, these regulations provide rules 
for applying the 10-year phase-in of the dollar limitation based on 
years of participation in the plan, as added by TRA '86, and modify the 
rules set forth in the 1981 regulations for applying the 10-year phase-
in of the compensation limit based on years of service. These 
regulations, like the proposed regulations, follow the guidance set 
forth in Notice 87-21 for applying the 10-year phase-in based on years 
of participation, and apply analogous rules for purposes of applying 
the 10-year phase-in based on years of service.

L. Exception to Compensation-Based Limit for Certain Church Plans

    The final regulations also reflect the amendment of section 
415(b)(11) by PPA '06. Under the amendment, the section 415(b)(1)(B) 
compensation-based limit that is generally applicable to defined 
benefit plans is not applicable to a participant in a plan maintained 
by a church described in section 3121(w)(3)(A) if the participant has 
never been a highly compensated employee (as defined in section 414(q)) 
of the church. These regulations provide that if such a participant 
later becomes a highly compensated employee of the church, the plan is 
not treated as failing to satisfy the compensation-based limit provided 
that no plan amendments increasing the participant's benefits are 
adopted in the year the participant becomes a highly compensated 
employee and there is no increase in the participant's accrued benefit 
derived from employer contributions in subsequent years.
Multiple Annuity Starting Dates (Sec.  1.415(b)-2)
    Section 1.415(b)-2 of the proposed regulations set forth rules for 
computing the annual benefit under one or more defined benefit plans in 
the case of multiple annuity starting dates. Multiple annuity starting 
dates exist, for example, where benefit distributions to a participant 
have previously commenced under a plan that is aggregated for purposes 
of section 415 with a plan for which the participant receives current 
accruals. In addition, the multiple annuity starting date rules apply 
for purposes of determining the annual benefit of a participant where a 
new distribution election is effective during the current limitation 
year with respect to a distribution that previously commenced. The 
multiple annuity starting date rules also apply when benefit payments 
are increased, unless the benefit increase complies with one of the 
safe harbors provided in the regulations.
    Numerous commentators raised concerns regarding these rules. Based 
on these comments, the IRS and the Treasury Department have determined 
that revisions to these rules are needed before these rules are adopted 
in final form. Accordingly, these regulations reserve a place for 
regulations regarding multiple annuity starting dates. The IRS and the 
Treasury Department are developing new proposed regulations regarding 
multiple annuity starting dates, and corresponding revisions to 
regulations under Sec.  1.401(a)(9)-6.

[[Page 16887]]

    In the interim, Sec.  1.415(b)-1 of these regulations provides that 
if a participant has or will have distributions commencing at more than 
one annuity starting date, the limitations of section 415 must be 
satisfied as of each of the annuity starting dates, taking into account 
the benefits that have been or will be provided at all of the annuity 
starting dates. In determining the annual benefit of a participant as 
of a particular annuity starting date, the plan is required to 
actuarially adjust past and future distributions with respect to the 
benefit that commenced at the other annuity starting dates.
Limitations Applicable to Defined Contribution Plans Sec.  1.415(c)-1
    Section 1.415(c)-1 of these regulations sets forth rules that apply 
to limitations on annual additions under a defined contribution plan. 
Under these limitations, annual additions must not be greater than the 
lesser of $40,000 (as adjusted pursuant to section 415(d)) or 100 
percent of the participant's compensation for the limitation year. The 
term annual additions generally means the sum for any year of employer 
contributions, employee contributions, and forfeitures. In addition to 
applying to qualified defined contribution plans, the limitations in 
section 415(c) and Sec.  1.415(c)-1 of the regulations apply to section 
403(b) annuity contracts, simplified employee pensions described in 
section 408(k), mandatory employee contributions to qualified defined 
benefit plans, and contributions to certain medical benefit accounts.
    These regulations reflect a number of statutory changes to section 
415(c) that were made after the issuance of the 1981 regulations. Among 
these changes are the revised limitation amounts under section 415(c), 
the revised rules applicable to employee stock ownership plans, and the 
rules applying the limitations of section 415(c) to certain medical 
benefit accounts. These regulations also make some other changes to the 
1981 regulations, as discussed below. Consistent with the change to 
section 403(b)(1) made in JCWAA, these regulations provide that the 
limitations under section 415(c) apply to any section 403(b) annuity 
contract, regardless of whether the contract satisfies the requirements 
of section 414(i) to be a defined contribution plan. Thus, the 
limitations under section 415(c) apply to a section 403(b) annuity 
contract even if the limitations of section 415(b) also apply to the 
contract. Section 415(b) applies to the contract if the contract is a 
church plan that is covered by the grandfather rule of section 
251(e)(5) of TEFRA.
    Consistent with Rev. Rul. 2002-45, the regulations provide that a 
restorative payment that is allocated to a participant's account does 
not give rise to an annual addition for any limitation year. For this 
purpose, restorative payments are payments made to restore losses to a 
plan resulting from actions by a fiduciary for which there is a 
reasonable risk of liability for breach of a fiduciary duty under Title 
I of ERISA, where plan participants who are similarly situated are 
treated similarly with respect to the payments. Commentators suggested 
that restorative payments should also include payments made to restore 
losses to a plan resulting from actions by a fiduciary for which there 
is a reasonable risk of liability for breach of a fiduciary duty under 
other applicable federal or state law, to take into account 
contributions under plans that are not subject to Title I of ERISA in 
appropriate circumstances. These regulations adopt this suggestion. 
Accordingly, payments to a defined contribution plan are restorative 
payments only if the payments are made in order to restore some or all 
of the plan's losses due to an action (or a failure to act) that 
creates a reasonable risk of liability for such a breach of fiduciary 
duty under Title I of ERISA or under other applicable federal or state 
law. The regulations specifically list certain payments that satisfy 
this rule, including payments to a plan made pursuant to a Department 
of Labor order or court-approved settlement to restore losses to a 
qualified defined contribution plan on account of the breach of 
fiduciary duty, and payments made pursuant to the Department of Labor's 
Voluntary Fiduciary Correction Program to restore losses to a qualified 
defined contribution plan on account of the breach of fiduciary duty.
    As under the proposed regulations, these final regulations provide 
that the Commissioner may in appropriate cases, considering all of the 
facts and circumstances, treat transactions between the plan and the 
employer, transactions between the plan and the employee, or certain 
allocations to participants' accounts as giving rise to annual 
additions. For example, in general, the Commissioner will treat 
payments made to a plan by an employer or another party to make up for 
losses due merely to market fluctuations and other payments that are 
not made on account of a reasonable risk of liability for breach of a 
fiduciary duty under Title I of ERISA or other Federal or state law 
generally as contributions that give rise to annual additions. As under 
the proposed regulations, these regulations clarify that where an 
employee or employer transfers assets to a plan in exchange for 
consideration that is less than the fair market value of the assets 
transferred to the plan, there is an annual addition in the amount of 
the difference between the value of the assets transferred and the 
consideration.
    For taxable employers, these regulations retain the rule under the 
1981 regulations that an employer contribution is not treated as 
credited to a participant's account for a particular limitation year 
unless the contribution is actually made to the plan no later than 30 
days after the end of the period described in section 404(a)(6) 
applicable to the taxable year with or within which the particular 
limitation year ends. The final regulations modify the corresponding 
rule for tax-exempt employers in the proposed regulations. Under the 
final regulations, a contribution to a plan by a tax-exempt employer is 
taken into account for a limitation year for purposes of section 415(c) 
if the contribution is credited to a participant's account no later 
than the 15th day of the tenth calendar month following the end of the 
calendar year or fiscal year (as applicable, depending on the basis on 
which the employer keeps its books) with or within which the particular 
limitation year ends. This date corresponds to the due date for Form 
5500, ``Annual Return/Report of Employee Benefit Plan,'' (with 
extensions) in cases in which the calendar or fiscal year coincides 
with the plan year and generally corresponds to the date for taxable 
employers who request filing extensions. The extent to which elective 
contributions constitute plan assets for purposes of the prohibited 
transaction provisions of section 4975 and Title I of ERISA is 
determined in accordance with regulations and rulings issued by the 
Department of Labor. See 29 CFR 2510.3-102.
    The final regulations clarify that if the allocation of an annual 
addition is dependent under the terms of the plan upon the satisfaction 
of a condition that has not been satisfied by the date as of which the 
annual addition is allocated, then the annual addition is considered 
allocated as of the date the condition is satisfied. This is a change 
from the proposed regulations, under which this rule only applied if 
the allocation was dependent upon participation in the plan as of a 
particular date. Additionally, the final regulations clarify that an 
annual addition that is made pursuant to a corrective amendment that 
complies with the requirements of Sec.  1.401(a)(4)-11(g) is

[[Page 16888]]

credited to the account of a participant for a particular limitation 
year if it is allocated to the participant's account under the terms of 
the corrective amendment as of any date within that limitation year.
    These regulations clarify the operation of the special increased 
limitation applicable to church plans under section 415(c)(7). Under 
this rule, notwithstanding the generally applicable limitations, annual 
additions for a section 403(b) annuity contract for a year with respect 
to an individual who is a church employee are treated as not exceeding 
the limitation of section 415(c) if such annual additions for the year 
are not in excess of $10,000. However, the total amount of additions 
with respect to any participant that are permitted to be taken into 
account for purposes of this rule for all years may not exceed $40,000. 
The regulations also reflect a special rule for church employees 
performing services outside the United States, as amended by GOZA. 
Under this special rule, for any individual who is a church employee 
performing any services for the church outside the United States during 
the limitation year, additions for a section 403(b) annuity contract 
for any year are not treated as exceeding the limitations of section 
415(c) if those annual additions for the year do not exceed $3,000 (but 
only if the individual's adjusted gross income does not exceed 
$17,000). These regulations clarify that the $40,000 cumulative total 
only applies to excesses over what would have been permitted to be 
contributed without regard to this special rule, and clarify the 
interaction between the generally applicable church employee rule and 
the rule for church employees performing services outside the United 
States.
    As under the proposed regulations, these regulations do not include 
the correction methods for excess annual additions applicable under 
Sec.  1.415-6(b)(6) of the 1981 regulations. Conforming changes have 
been made to Sec.  1.401(a)-2(b), Sec.  1.401(a)(9)-5, A-9(b)(1), and 
Sec.  1.402(c)-2, A-4(a) to reflect this deletion.
    Despite the deletion, the deleted correction methods are generally 
permitted under the Employee Plans Compliance Resolution System 
(EPCRS), Rev. Proc. 2006-27 (2006-22 IRB 945) (see Sec.  
601.601(d)(2)). In section 2.02(2) of Rev. Proc. 2006-27, comments were 
requested on whether the correction methods in former Sec.  1.415-
6(b)(6), including the maintenance of suspense accounts, should be 
retained as options under EPCRS. Pending the issuance of further 
guidance that takes into account those comments, plans that are 
eligible for the Self-Correction Program under section 4 of Rev. Proc. 
2006-27 may implement corrections using the methods in former Sec.  
1.415-6(b)(6), but only if the requirements of section 9 of Rev. Proc. 
2006-27 are satisfied, and those corrections will also be taken into 
account for purposes of the Voluntary Correction and Audit Closing 
Agreement Programs under EPCRS.
    These regulations generally retain the rules under the 1981 
regulations providing that a contribution to reduce accumulated funding 
deficiencies or a contribution made pursuant to a funding waiver 
relates to the limitation year of the initial funding obligation. 
However, these regulations, like the proposed regulations, provide that 
any interest paid by the employer with respect to such a contribution 
that is in excess of a reasonable amount is taken into account as an 
annual addition for the limitation year when the contribution is made 
(in contrast to the 1981 regulations, which required interest in excess 
of a reasonable amount to be taken into account as an annual addition 
for the limitation year for which the contribution was originally 
required). Rev. Rul. 78-223 (1978-1 CB 125) (see Sec.  601.601(d)(2)) 
provides a method for determining contributions required to amortize 
waived contributions under a defined contribution plan. The application 
of any of the methods described in Rev. Rul. 78-223 will result in 
reasonable interest payments for purposes of applying the rules of 
section 415 (provided that, if a fixed interest rate in excess of 5 
percent is used to amortize waived contributions, the interest rate 
must be reasonable). Thus, for example, the actual yield method (under 
which the adjusted account balance is increased or decreased 
periodically at the actual rate of investment return experienced by the 
plan for such period) can be used for this purpose.
Definition of Compensation (Sec.  1.415(c)-2)
    Section 1.415(c)-2 of these regulations defines the term 
``compensation,'' which is defined in section 415(c)(3) and used for 
purposes of applying the limitations of section 415 as well as for 
various other purposes specified under the Internal Revenue Code. These 
regulations reflect a number of statutory changes to section 415(c)(3) 
that were made after the issuance of the 1981 regulations. Among these 
changes are the inclusion in compensation of certain deemed amounts for 
disabled participants and nontaxable elective amounts for deferrals 
under sections 401(k), 403(b), and 457, cafeteria plan elections under 
section 125, and qualified transportation fringe elections under 
section 132(f)(4). In addition to these changes, these regulations make 
some other changes to the 1981 regulations, as discussed in this 
preamble.
    The proposed regulations provided specific guidelines regarding 
when amounts received following severance from employment are 
considered compensation for purposes of section 415. The proposed 
regulations provided that the following are types of post-severance 
payments that are not excluded from compensation because of timing if 
they are paid within 2\1/2\-months following severance from employment: 
(1) payments that, absent a severance from employment, would have been 
paid to the employee while the employee continued in employment with 
the employer and are regular compensation for services during the 
employee's regular working hours, compensation for services outside the 
employee's regular working hours (such as overtime or shift 
differential), commissions, bonuses, or other similar compensation; and 
(2) payments for accrued bona fide sick, vacation, or other leave, but 
only if the employee would have been able to use the leave if 
employment had continued.
    Commentators made a number of suggestions regarding the post-
severance compensation rules. Some commentators requested a lengthening 
of the 2\1/2\-month period to as long as a year, or exceptions from the 
2\1/2\-month rule under certain circumstances (such as teacher pay that 
is paid on a 12-month basis for each 9-month school year, or residual 
payments that are made to entertainment industry employees years after 
the services are performed). Some commentators requested changes to the 
types of compensation that are permitted or required to be taken into 
account for ease of plan administration.
    The final regulations lengthen the time during which certain post-
severance payments are taken into account from the 2\1/2\-month period 
under the proposed regulations. The final regulations provide that in 
order for payments after severance from employment to be treated as 
compensation within the meaning of section 415(c)(3), payments made for 
services provided to a former employer must be made by the later of 
2\1/2\-months after the severance from employment or the end of the 
limitation year that includes the date of severance from employment. In 
addition, a governmental plan (within the meaning

[[Page 16889]]

of section 414(d)) is permitted to provide that the calendar year that 
includes the date of severance from employment is substituted for the 
limitation year that includes the date of severance from employment for 
this purpose.
    The final regulations also provide that post-severance payments of 
accrued bona fide sick, vacation, and other leave that are paid within 
the timeframe described in the preceding paragraph are not included in 
compensation unless the plan specifically includes such payments. 
Additionally, the final regulations permit a plan to specify that a 
post-severance payment from a nonqualified unfunded deferred 
compensation plan may be included in compensation if the payment is 
made within the timeframe described in the preceding paragraph, but 
only if the payment would have been made at the same time if the 
employee had continued his or her employment and only to the extent 
that the payment is includible in the employee's gross income.
    As under the proposed regulations, the rule under the final 
regulations generally excluding payments after severance from 
employment from compensation does not apply to payments to an 
individual who does not currently perform services for the employer by 
reason of qualified military service (as that term is used in section 
414(u)(1)) to the extent those payments do not exceed the amounts the 
individual would have received if the individual had continued to 
perform services for the employer rather than entering qualified 
military service. The final regulations modify the proposed regulations 
by adding another exception to the post-severance timing rule for 
compensation paid to a permanently and totally disabled participant, 
provided certain conditions are satisfied. As provided under the 
proposed regulations, the final regulations also contain corresponding 
amendments to the regulations under sections 401(k) and 457 that 
provide that amounts received following severance from employment can 
be deferred only if they are considered compensation under the rules of 
section 415.
    Whether a person has a severance from employment with the employer 
that maintains a plan is determined for purposes of section 415 in the 
same manner as under Sec.  1.401(k)-1(d)(2), except that for purposes 
of determining the employer of an employee, the rules of section 415(h) 
are taken into account (under which the phrase ``more than 50 percent'' 
is substituted for the phrase ``at least 80 percent'' each place it 
appears in section 1563(a)(1) for purposes of applying section 414(b) 
and (c)). Thus, an employee has a severance when the employee ceases to 
be an employee of the employer maintaining the plan, and an employee 
does not have a severance from employment if, in connection with a 
change of employment, the employee's new employer maintains the plan 
with respect to the employee. In addition, the determination of whether 
an employee ceases to be an employee of the employer maintaining the 
plan is based on all of the relevant facts and circumstances. In the 
case of a multiemployer plan, a payment after severance from employment 
from an employer for whom services were provided is considered to be 
compensation within the meaning of section 415(c)(3) as long as the 
individual receiving the payment is employed by any employer 
maintaining the multiemployer plan. Thus, in the case of a 
multiemployer plan, an employee is treated as having a severance from 
employment only when the employee is no longer providing services to 
any employer maintaining the multiemployer plan. This rule is 
consistent with the treatment of a multiemployer plan as a single plan 
that is not disaggregated for purposes of applying the limitations of 
section 415.
    As noted above, the final regulations provide that a plan cannot 
take into account compensation in excess of the section 401(a)(17) 
limit. In addition, the final regulations provide that elective 
deferrals can only be made from compensation as defined in section 
415(c)(3). However, in applying these two rules, a plan is not required 
to determine a participant's compensation on the basis of the earliest 
payments of compensation during a year.
    Commentators also requested clarification as to the treatment of 
nonresident aliens under all of the alternative definitions of 
compensation that the regulations allow. Commentators had noted that 
the various alternative definitions of compensation permitted under the 
1981 regulations could be interpreted as including compensation paid to 
nonresident aliens, but the commentators observed that this issue was 
not sufficiently clear.
    These regulations provide that amounts paid to an individual as 
compensation for services do not fail to be treated as compensation 
merely because those amounts are not includible in the individual's 
gross income on account of the location of the services. Similarly, 
these regulations also provide that amounts paid to an individual as 
compensation for services do not fail to be treated as compensation 
merely because those amounts are paid by an employer with respect to 
which payments of compensation to the individual are excluded from 
gross income. Thus, for example, the determination of whether an amount 
is includible as compensation is made without regard to the exclusions 
from gross income under sections 872, 893, 894, 911, and 933.
    Under these modified rules, an employee who is a nonresident alien 
with no United States sourced income is not prevented from 
participating in a qualified plan sponsored by the employee's employer 
on account of the limitations of section 415 that relate to the 
employee's compensation. These rules, however, do not modify other 
requirements with respect to such an employee's participation in a 
qualified plan, such as the rules relating to the entity that is 
properly entitled to a deduction for contributions made to the plan on 
account of the employee's participation.
    These regulations also provide a rule of administrative convenience 
under which section 415 compensation does not include compensation paid 
to a nonresident alien, provided that the individual does not 
participate in the plan and the compensation is not effectively 
connected with the conduct of a trade or business within the United 
States, and only to the extent that the compensation is excludable from 
the individual's gross income either on account of the location of the 
services or because compensation paid by the employer is excludable 
from gross income. This is relevant for purposes of determining who is 
a key employee under the top heavy rules of section 416 and who is a 
highly compensated employee under the rules of section 414(q).
    Like the proposed regulations, these final regulations generally 
retain the rules in the 1981 regulations regarding section 415 
compensation and contributions to and distributions from plans of 
deferred compensation. Accordingly, these regulations provide that 
distributions from a plan of deferred compensation (whether or not 
qualified) are not compensation for section 415 purposes (but permit a 
plan to include as compensation amounts received by an employee 
pursuant to a nonqualified unfunded plan for the year in which the 
amounts are actually received) and provide that contributions made by 
an employer (other than elective contributions) to a plan of deferred 
compensation (whether or not

[[Page 16890]]

qualified) are not compensation to the extent that the contributions 
are not includible in the income of the employee for the taxable year 
in which contributed. The final regulations clarify that section 415 
compensation includes amounts that are includible in the gross income 
of an employee under the rules of section 409A or section 457(f)(1)(A) 
or because the amounts are constructively received by the employee. The 
final regulations also clarify that a plan is permitted to include as 
compensation amounts received by an employee pursuant to a nonqualified 
deferred compensation plan only to the extent such amounts are 
includible in gross income.
Cost-of-Living Adjustments (Sec.  1.415(d)-1)
    Section 1.415(d)-1 of these regulations sets forth rules that apply 
to cost-of-living adjustments to the various limitations of section 415 
pursuant to section 415(d). Section 415(d) provides for the dollar and 
compensation limitations on annual benefits and the dollar limitation 
on annual additions to be adjusted annually for increases in the cost 
of living based on adjustment procedures similar to the procedures used 
to adjust social security benefit amounts. These adjustments also apply 
for other purposes as specified in the Code. These regulations specify 
the manner in which these adjustments are determined each year, and 
reflect statutory changes to the adjustment methodology made after the 
1981 regulations were issued. In addition, these regulations make 
several other changes to the 1981 regulations, as discussed in this 
preamble. Section 1.415(d)-1 generally retains the rules set forth in 
the proposed regulations except as indicated in this preamble.
    These regulations specify the circumstances under which an adjusted 
limit is permitted to be applied to participants who have previously 
commenced receiving benefits under a defined benefit plan. Under these 
regulations, the adjusted dollar limitation is applicable to current 
employees who are participants in a defined benefit plan and is 
permitted to apply to former employees who have retired or otherwise 
terminated their service under the plan and have a nonforfeitable right 
to accrued benefits, regardless of whether they have actually begun to 
receive benefits. If a participant has commenced receiving benefits, 
the annual increase is only permitted to be applied to the extent that 
benefits have not been paid. Thus, for example, a plan cannot provide 
that this annual increase applies to a participant who has previously 
received the entire plan benefit in a single-sum distribution. However, 
a plan is permitted to provide for an increase in benefits to a 
participant to the extent the participant accrues additional benefits 
under the plan that could have been accrued without regard to the 
adjustment of the dollar limitation (including benefits that accrue as 
a result of a plan amendment) on or after the effective date of the 
adjusted limitation.
    These regulations retain the safe harbor set forth in the proposed 
regulations under which the annual benefit will satisfy the limitations 
of section 415(b) for the current limitation year following an 
adjustment to benefit payments that is made to reflect the cost-of-
living adjustment made pursuant to section 415(d). Under this safe 
harbor, if a plan incorporates by reference the annual section 415(d) 
cost-of-living adjustments to the limitations of section 415, a 
distribution that is increased solely as a result of the application of 
the section 415(d) cost-of-living adjustments to the applicable limits 
will be treated as continuing to satisfy the requirements of section 
415(b) and is not subject to the multiple annuity starting date rules. 
In connection with the changes discussed in the following paragraph, 
this safe harbor has been relocated to Sec.  1.415(a)-1(d)(3)(v).
    Commentators expressed concern that the safe harbor in the proposed 
regulations did not cover situations where benefits are increased 
periodically by plan amendments that reflect the section 415(d) cost-
of-living adjustments. After consideration of these comments, the IRS 
and the Treasury Department have determined that additional safe 
harbors are appropriate. Accordingly, under these final regulations, if 
a plan is amended to apply the adjusted section 415(b) limits in 
accordance with either of two safe harbors, a distribution that is 
increased pursuant to the amendment will be treated as continuing to 
satisfy the requirements of section 415(b).
    A plan amendment satisfies the first safe harbor if the employee 
has received one or more distributions that satisfy the requirements of 
section 415(b) before the date the adjustment to the applicable limits 
is effective, the increased distribution is solely as a result of the 
amendment of the plan to reflect the adjustment to the applicable 
limits pursuant to section 415(d), and the amounts payable to the 
employee on and after the effective date of the adjustment are not 
greater than the amounts that would otherwise be payable without regard 
to the adjustment, multiplied by a fraction determined for the 
limitation year, the numerator of which is the limitation under section 
415(b) (which is the lesser of the applicable dollar limitation under 
section 415(b)(1)(A), as adjusted for age at commencement, and the 
applicable compensation-based limitation under section 415(b)(1)(B)) in 
effect for the distribution following the section 415(d) adjustment, 
and the denominator of which is such limitation under section 415(b) in 
effect for the distribution immediately before the section 415(d) 
adjustment.
    A plan amendment satisfies the second safe harbor if the employee 
has received one or more distributions that satisfy the requirements of 
section 415(b) before the date on which the increased distribution is 
effective, and the amounts payable to the employee on and after the 
effective date for the increased distribution are not greater than the 
amounts that would otherwise be payable without regard to the increase, 
multiplied by the cumulative adjustment fraction. The cumulative 
adjustment fraction is equal to the product of all of the annual 
fractions (described in the first safe harbor) that would have applied 
after benefits commence if the plan had been amended each year to 
incorporate the section 415(d) adjustments to the applicable section 
415(b) limits in accordance with the first safe harbor. In determining 
the cumulative adjustment fraction, if for the limitation year for 
which the adjustment in the section 415(b)(1)(A) dollar limit pursuant 
to EGTRRA is first effective (generally, the first limitation year 
beginning after December 31, 2001), the section 415(b)(1)(A) dollar 
limit applicable to a participant is less than the section 415(b)(1)(B) 
compensation limit, then the annual fraction for such year is 1.0.
Aggregating Plans (Sec.  1.415(f)-1)
    Section 1.415(f)-1 of these regulations sets forth rules for 
aggregating plans pursuant to section 415(f). Section 1.415(f)-1 
generally retains the rules set forth in the proposed regulations 
except as indicated in this preamble. Under section 415(f) and these 
regulations, for purposes of applying the limitations of section 415(b) 
and (c), all defined benefit plans that have ever been maintained by an 
employer are treated as one defined benefit plan, and all defined 
contribution plans that have ever been maintained by an employer are 
treated as one defined contribution plan. The controlled group rules of 
section 414(b) and (c) (as modified by section 415(h)), the affiliated 
service

[[Page 16891]]

group rules of section 414(m), and the leased employee rules of section 
414(n) apply for purposes of determining whether a plan that is 
maintained by an entity other than the employer is considered 
maintained by the employer for purposes of applying the aggregation 
rules of section 415(f). These basic employer aggregation rules were 
also contained in the 1981 regulations.
    One commentator noted that the proposed regulations incorrectly 
reflected the rules of section 415(h) (which applies a 50 percent 
standard in lieu of an 80 percent standard for purposes of applying the 
control rules) by applying those rules in determining whether two or 
more organizations are a brother-sister group of trades or businesses 
under common control under the rules in Sec.  1.414(c)-2(c). These 
final regulations provide that the rules of section 415(h) do not apply 
for this purpose.
    These final regulations make various changes and clarifications to 
the 1981 regulations relating to aggregating plans. As under the 
proposed regulations, these final regulations clarify that an 
employer's plan must be aggregated with all plans maintained by a 
predecessor employer (see section 414(a)), regardless of whether any 
such plan is assumed by the employer.
    As under the proposed regulations, the final regulations provide 
that a former employer is a predecessor employer with respect to a 
participant in a plan maintained by an employer if the employer 
maintains a plan under which the participant had accrued a benefit 
while performing services for the former employer, but only if that 
benefit is provided under the plan maintained by the employer. In 
addition, as under the proposed regulations, these final regulations 
provide pursuant to section 414(a)(2) that, with respect to an employer 
of a participant, a former entity that antedates the employer is a 
predecessor employer with respect to the participant if, under the 
facts and circumstances, the employer constitutes a continuation of all 
or a portion of the trade or business of the former entity. This will 
occur, for example, where formation of the employer constitutes a mere 
formal or technical change in the employment relationship and 
continuity otherwise exists in the substance and administration of the 
business operations of the former entity and the employer. See Lear Eye 
Clinic, Ltd. v. Commissioner, 106 T.C. 418, 425 (1996).
    These final regulations make several other changes to the employer 
aggregation rules. These changes limit the extent to which a plan 
maintained by an employer must aggregate benefits accrued under a plan 
that was formerly maintained by the employer or that was maintained by 
an entity that was formerly affiliated with the employer under the 
employer aggregation rules of Sec.  1.415(a)-1(f)(1) and (2) (which 
provide that a plan maintained by any member of a controlled group of 
employers or an affiliated service group is deemed to be maintained by 
all members of the group). Under these final regulations, a ``formerly 
affiliated plan'' of an employer is treated as if it were a plan that 
terminated immediately prior to the ``cessation of affiliation'' with 
sufficient assets to pay benefit liabilities under the plan, and had 
purchased annuities to provide plan benefits. The final regulations 
define a formerly affiliated plan of an employer as a plan that, 
immediately prior to the cessation of affiliation, was actually 
maintained by one or more of the entities that constitute the employer 
(as determined under the employer affiliation rules of Sec.  1.415(a)-
1(f)(1) and (2)), and that, immediately after the cessation of 
affiliation, is not actually maintained by any of the entities that 
constitute the employer (as determined under the employer affiliation 
rules of Sec.  1.415(a)-1(f)(1) and (2)). The final regulations define 
a cessation of affiliation as the event that causes an entity to no 
longer be aggregated with one or more other entities as a single 
employer under the employer affiliation rules (such as a sale of a 
subsidiary) or an event that causes a plan to not actually be 
maintained by any of the entities that constitute the employer (such as 
a transfer of sponsorship of a plan to an unrelated employer).
    A similar rule is provided under these final regulations with 
respect to a plan (or portion of a plan) maintained by a predecessor 
employer that is not assumed by the successor employer. As under the 
proposed regulations, the final regulations provide that all plans ever 
maintained by an employer or predecessor employer are aggregated. For 
purposes of applying this aggregation rule, these final regulations 
limit the extent to which plans that are not maintained by an employer 
but that are maintained by the employer's predecessor employer are 
taken into account when aggregating the employer's plans. This limit 
provides that a plan that is not maintained by the employer and is 
maintained by the employer's predecessor employer is treated as if the 
plan terminated (with sufficient assets to pay benefit liabilities 
under the plan) immediately prior to the event giving rise to the 
predecessor employer relationship. The effect of these rules is that, 
for purposes of aggregating the predecessor employer's plans with plans 
maintained by the employer, benefits accrued after the transfer of 
benefits from the predecessor employer's plan to the employer's plan 
are excluded.
    These final regulations also add a rule that prevents the double 
counting of a participant's benefit when applying the aggregation 
rules. For example, in aggregating defined benefit plans of a 
predecessor employer with the defined benefit plans of an employer 
following a transfer of benefits to the plan maintained by the employer 
from the plan maintained by the predecessor employer, the transferee 
plan (maintained by the employer) does not double count a participant's 
benefit by taking into account both the transferred benefits and the 
portion of the transferor plan (maintained by the predecessor employer) 
that is deemed to have terminated on account of the transfer pursuant 
to Sec.  1.415(b)-1(b)(3)(i)(B). Instead, the transferee plan includes 
the benefits that are actually provided under the transferee plan when 
applying the aggregation rule.
    The proposed regulations provided rules for applying the 
requirements of section 415(f)(2) when an employer has more than one 
defined benefit plan. Pursuant to section 415(f)(2), the proposed 
regulations provided that the compensation limit of section 
415(b)(1)(B) is applied separately with respect to each plan, and in 
applying the compensation limit to the aggregated plans, the plans 
calculate a participant's average compensation for the participant's 
high 3 years of service by taking into account compensation for all 
years of active participation in the aggregated plans. Because the 
requirements of section 415(f)(2) have been rendered moot by the 
amendment to section 415(b)(3) made by section 832 of PPA '06, these 
rules have not been incorporated into the final regulations.
    These regulations provide rules for aggregating participation and 
service for purposes of the 10-year phase-in of the limitations on 
defined benefit plans. Under these rules, years of participation in all 
aggregated plans and years of service for employers maintaining all 
aggregated plans are counted for purposes of applying the 10-year 
phase-in rules.
    These regulations clarify the aggregation rules that apply to 
section 403(b) annuity contracts, other plans of the employer, and 
plans of related employers, in light of changes made in EGTRRA. 
Generally, a section 403(b) annuity contract is not aggregated with 
plans that are maintained by the

[[Page 16892]]

participant's employer because the section 403(b) annuity contract is 
deemed maintained by the participant and not the employer for purposes 
of section 415. However, if a participant on whose behalf a section 
403(b) annuity contract is purchased is in control of any employer for 
a limitation year, the annuity contract for the benefit of the 
participant is treated as a defined contribution plan maintained by 
both the controlled employer and the participant for that limitation 
year and accordingly, the section 403(b) annuity contract is aggregated 
with all other defined contribution plans maintained by the employer. 
Accordingly, the employer that contributes to the section 403(b) 
annuity contract must obtain information from participants regarding 
employers controlled by those participants and plans maintained by 
those controlled employers to monitor compliance with applicable 
limitations to comply with applicable reporting and withholding 
obligations.
    In general, under these regulations, the benefits provided by all 
plans maintained by all employers maintaining a multiemployer plan (as 
defined in section 414(f)) are taken into account in applying the 
limitations of section 415 to the multiemployer plan. However, a 
multiemployer plan is permitted to provide that, where a participating 
employer maintains both a plan which is not a multiemployer plan and a 
multiemployer plan, only the benefits provided by the employer under 
the multiemployer plan are aggregated with the benefits under the non-
multiemployer plan. By contrast, when a multiple employer plan is 
aggregated with a single employer plan maintained by the same employer, 
all of the benefits provided by the multiple employer plan must be 
taken into account in determining whether the aggregated plans satisfy 
section 415. These regulations also provide that a multiemployer plan 
is not aggregated with any other multiemployer plan for purposes of 
determining any section 415 limitation. In addition, a multiemployer 
plan is not aggregated with any other non-multiemployer plan for 
purposes of applying the 100 percent of compensation benefit limit to 
non-multiemployer plans under section 415(b)(1)(B).
Disqualification of Plans and Trusts (Sec.  1.415(g)-1)
    Section 1.415(g)-1 of these final regulations sets forth rules 
regarding disqualification of plans and trusts, including plans and 
trusts that are aggregated pursuant to Sec.  1.415(f)-1. In large part, 
Sec.  1.415(g)-1 of these regulations replicates the rules of Sec.  
1.415-9 of the 1981 regulations regarding ordering rules for 
disqualifying plans and trusts that are aggregated for purposes of 
compliance with section 415. In addition, the final regulations provide 
rules for disqualification where an individual medical benefit account 
(as described in section 415(l)) and a post-retirement medical benefits 
account for key employees (as described in section 419A(d)) is 
aggregated with a qualified defined contribution plan for purposes of 
applying section 415(c). If the total of the annual additions under 
both plans exceeds those limitations for a particular limitation year, 
the qualified defined contribution plan (rather than the medical 
benefit account) is disqualified for the limitation year.
Limitation Year (Sec.  1.415(j)-1)
    Section 1.415(j)-1 of the regulations sets forth rules regarding 
limitation years that are used as the period for demonstrating 
compliance with section 415. Section 1.415(j)-1 generally retains the 
rules set forth in the proposed regulations except as indicated in this 
preamble. In addition to setting forth general rules that generally 
correspond to rules under the 1981 regulations, these regulations 
provide specific guidelines with respect to overlapping limitation 
years for aggregated plans. These rules reflect the guidance provided 
in Rev. Rul. 79-5 (1979-1 CB 165) (see Sec.  601.601(d)(2)). Where 
defined contribution plans with different limitations years are 
aggregated, the rules of section 415(c) must be applied with respect to 
each limitation year of each such plan. For each such limitation year, 
the requirements of section 415(c) are applied to annual additions that 
are made for that time period with respect to the participant under all 
aggregated plans. Similarly, where defined benefit plans with different 
limitation years are aggregated, the rules of section 415(b) must be 
applied with respect to each limitation year of each such plan. Thus, 
for example, the dollar limitation of section 415(b)(1)(A) applicable 
to the limitation year for each plan must be applied to annual benefits 
under all aggregated plans to determine whether the plan satisfies the 
requirements of section 415(b).
    These final regulations add a rule that applies to a terminating 
defined contribution plan. If a defined contribution plan is terminated 
effective as of a date other than the last day of the plan's limitation 
year, the plan is deemed to have been amended to change its limitation 
year. As a result of this deemed amendment, the section 415(c)(1)(A) 
dollar limit must be pro-rated under the short limitation year rules.

Sections 415(m) and (n)

    Sections 415(m) and (n) have not been addressed in these 
regulations. Comments received concerning these provisions in response 
to the notice of proposed rulemaking that preceded these regulations 
will be considered for guidance at a later date.

Section 416 Regulations

    These regulations update the definition of compensation used for 
purposes of applying the top heavy rules of section 416. Pursuant to 
statutory amendments to the definition of compensation under section 
415(c)(3) under SBJPA and CRA (which were generally effective for years 
beginning after December 31, 1997), these regulations update the 
alternative definition of compensation permitted under the section 416 
regulations (which is based on compensation reported on Form W-2, 
``Wage and Tax Statement'') to include amounts that would be included 
on Form W-2 but for an election under sections 125, 132(f)(4), 401(k), 
403(b), 408(k), 408(p)(2)(A)(i), or 457(b).

Section 457 Regulations

    These regulations include revisions to the regulations under 
section 457 that are in addition to the revisions to reflect the 
treatment of compensation paid after severance from employment (Sec.  
1.457-4(d)). The additional revisions do not include any substantive 
changes, but merely make clarifications, including revisions in an 
example illustrating the section 457 catch-up rules (Sec.  1.457-5(d) 
Example 2) and a change in the rules relating to unforeseeable 
emergencies to reflect revisions in the definition of a dependent (made 
under WFTRA, which modified the definition of the term ``dependent'' 
under section 152) (Sec.  1.457-6(c)).

Effective Dates

In General

    These regulations generally apply to limitation years beginning on 
or after July 1, 2007. However, Sec.  1.401(k)-1(e)(8) applies with 
respect to compensation paid (or that would have been paid but for a 
cash or deferred election) in plan years beginning on or after July 1, 
2007, and the amendment to Sec.  1.457-4(d) applies to taxable years 
beginning on or after December 31, 2001 (see Sec.  1.457-12). See 
Sec. Sec.  1.457-6(c)(2)(i) and 1.457-12 for the applicability of the 
modifications to Sec. Sec.  1.457-5, 1.457-6, and 1.457-10. In

[[Page 16893]]

the case of a governmental plan (within the meaning of section 414(d)), 
Sec. Sec.  1.415(a)-1, 1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 
1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 apply to limitation years that 
begin more than 90 days after the close of the first regular 
legislative session of the legislative body with authority to amend the 
plan that begins on or after July 1, 2007. However, a governmental plan 
is permitted to apply the provisions of Sec. Sec.  1.415(a)-1, 
1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, 
and 1.415(j)-1 to limitation years beginning on or after July 1, 2007.
    In response to commentator concerns, and as provided in Notice 
2005-87, these regulations reflect revisions to the effective date 
provisions of the proposed regulations to expand the benefits that are 
grandfathered from the application of these regulations. Under these 
regulations, a defined benefit plan is considered to satisfy the 
limitations of section 415(b) for a participant with respect to 
benefits accrued or payable under the plan as of the end of the 
limitation year that is immediately prior to the effective date of 
these final regulations for the plan pursuant to plan provisions 
(including plan provisions relating to the plan's limitation year) that 
were both adopted and in effect before April 5, 2007, but only if such 
plan provisions meet the requirements of statutory provisions, 
regulations, and other published guidance in effect immediately before 
the effective date of these final regulations. For this purpose, plan 
provisions will not be treated as failing to satisfy the requirements 
of statutory provisions, regulations, and other published guidance in 
effect immediately before the effective date of these final regulations 
merely because the plan has not been amended to reflect changes to 
section 415(b) made by PFEA and PPA '06. In addition, for this purpose, 
plan provisions will not be treated as failing to satisfy the 
requirements of section 415(b)(1)(B) merely because the plan's 
definition of compensation for a limitation year that is used for 
purposes of applying the limitations of section 415(b)(1)(B) reflects 
compensation for a plan year that is in excess of the limitation under 
section 401(a)(17) that applies to that plan year. Thus, plans that 
were in compliance with the rules of section 415 as in effect for 
limitation years prior to the effective date of these regulations for 
the plan will not be disqualified based on benefits that arise pursuant 
to plan provisions that were both adopted and in effect before April 5, 
2007, and that accrue prior to the effective date of these regulations 
for the plan, even if those benefits no longer comply with the 
requirements of section 415 as set forth under these final regulations. 
However, such a plan will not be permitted to provide for the accrual 
of additional benefits for a participant on or after the effective date 
of these regulations for the plan unless such additional benefits, 
together with the participant's other accrued benefits, comply with 
these regulations.
    The preamble to the proposed regulations provided that, pending 
issuance of final regulations, taxpayers may rely on the modifications 
contained in the proposed regulations in Sec.  1.401(k)-1(e)(8), Sec.  
1.415(c)-2(e), and Sec.  1.457-4(d) regarding post-severance 
compensation payments and other compensation timing rules. Accordingly, 
taxpayers may apply those proposed amendments for periods prior to the 
effective date of these final regulations. The final regulations also 
provide that taxpayers may apply the post-severance compensation 
payments and other compensation timing rules contained in the final 
regulations in Sec.  1.415(c)-2(e) for years prior to the effective 
date of these final regulations. This early application also is used 
for purposes of determining compensation in Sec. Sec.  1.401(k)-1(e)(8) 
and 1.457-4(d).

Plan Amendment Timing

    Generally, a provision of a plan that results in a failure of the 
plan to satisfy these final regulations is a disqualifying provision 
described in Sec.  1.401(b)-1(b)(3)(i). Therefore, the remedial 
amendment period rules of Sec.  1.401(b)-1 apply. For example, in the 
case of a plan with a calendar plan year and a calendar limitation year 
that is maintained by an employer with a calendar taxable year (and the 
plan is not a governmental plan), the plan's remedial amendment period 
with respect to a disqualifying plan provision as a result of these 
final regulations ends on the date prescribed by law for the filing of 
the employer's income tax return (including extensions) for the 2008 
taxable year. In addition, special timing rules apply in the case of 
certain plan amendments made pursuant to changes made to section 415 by 
PFEA and PPA '06.
    Under section 101(c) of PFEA (prior to amendment by PPA '06), a 
plan amendment to reflect the 5.5 percent interest rate assumption that 
is generally required to be used for distributions with annuity 
starting dates in plan years beginning in years 2004 and 2005 under 
section 101(b)(4) of PFEA (for determining the actuarially equivalent 
straight life annuity for a form of benefit that is subject to section 
417(e)) must be made on or before the last day of the first plan year 
beginning on or after January 1, 2006. Section 301(c) of PPA '06 
modified section 101(c) of PFEA by extending the due date for the 
amendment required under section 101(b)(4) of PFEA to on or before the 
last day of the first plan year beginning on or after January 1, 2008. 
Thus, pursuant to section 101(c) of PFEA (as amended by PPA '06), in 
the case of an amendment to a plan with a calendar year plan year to 
reflect the interest rate assumption specified by section 101(b)(4) of 
PFEA, the plan is treated as having been operated in accordance with 
its terms and the amendment does not violate section 411(d)(6), 
provided that the plan is operated in conformity with the amendment and 
the amendment is adopted no later than December 31, 2008.
    Under section 1107 of PPA '06, a plan amendment that is made 
pursuant to PPA '06 (or a regulation issued by the Secretary under PPA 
'06) must be made on or before the last day of the first plan year 
beginning on or after January 1, 2009 (January 1, 2011, in the case of 
a governmental plan within the meaning of section 414(d)). Under 
section 1107 of PPA '06, if the plan is amended by such date and the 
plan is operated in conformity with the amendment, the plan is treated 
as having been operated in accordance with its terms and the amendment 
does not cause the plan to fail to meet the requirements of section 
411(d)(6). A plan amendment is treated as an amendment that is made 
pursuant to a statutory amendment made by PPA '06 (or a regulation 
issued by the Secretary under PPA '06) if the amendment is: (i) A plan 
amendment to reflect the changes to the assumptions in section 
415(b)(2)(E) that are used for converting certain forms of benefits to 
an equivalent straight life annuity in a limitation year beginning on 
or after January 1, 2006 (section 303 of PPA '06); (ii) a plan 
amendment to reflect the modifications to the purchase of permissive 
service credit rules of section 415(n) (section 821 of PPA '06); (iii) 
a plan amendment to incorporate the exemption from the section 
415(b)(1)(B) compensation limit for certain benefits provided under a 
defined benefit plan maintained by an organization described in section 
3121(w)(3)(A) (section 867 of PPA '06); and (iv) a plan amendment to 
reflect the expansion of the definition of qualified participant in 
section 415(b)(2)(H) to include certain participants in a defined 
benefit plan maintained by an Indian tribal government (section 906(b) 
of PPA '06). However, section 1107 of PPA '06

[[Page 16894]]

does not apply for other amendments required by these regulations, 
unless such amendments are pursuant to a provision of PPA '06 that did 
not amend section 415 (for example, section 906 of PPA '06, relating to 
the definition of governmental plan in section 414(d)). Accordingly, 
there is no extension of the remedial amendment period for such 
amendments, and such amendments are subject to the requirements of 
section 411(d)(6).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also 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 
regulations do 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, the notice of proposed 
rulemaking that preceded these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal authors of these regulations are Vernon S. Carter and 
Linda S. F. Marshall, Office of Division Counsel/Associate Chief 
Counsel (Tax Exempt and Government Entities), and Christopher A. 
Crouch, formerly of the Office of Division Counsel/Associate Chief 
Counsel (Tax Exempt and Government Entities). However, other personnel 
from the IRS and the Treasury Department participated in the 
development of these regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 11

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 11 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

0
Par. 2. For each section set forth in the table, remove the text that 
appears in the column labeled ``Remove'' and add the text that appears 
in the column labeled ``Add'' in its place.

------------------------------------------------------------------------
         Regulation cite                Remove                Add
------------------------------------------------------------------------
Sec.   1.401(a)-1(b)(1)(iii)....  1.415-1(d)(1).....  1.415(a)-1(d)(1)
Sec.   1.401(a)(4)-2(c)(2)(ii)..  1.415-6(b)(2)(i)..  1.415(c)-1(b)(4)
Sec.   1.414(s)-1(c)(2).........  1.415-2(d)(2) and   1.415(c)-2(b) and
                                   (d)(3).             (c)
Sec.   1.414(s)-1(c)(2).........  1.415-2(d)(10) and  1.415(c)-2(d)(2),
                                   (d)(11).            (d)(3) and (d)(4)
Sec.   1.414(s)-1(c)(2).........  1.415-2(d)(13)....  1.415(c)-2(d)(1)
Sec.   1.924(c)-1(d)(6).........  paragraphs (d)(1)   Sec.   1.415(c)-
                                   and (2) of Sec.     2(b) and (c)
                                   1.415-2.
------------------------------------------------------------------------


0
Par. 3. Section 1.401(a)-2(b) is revised to read as follows:


Sec.  1.401(a)-2  Impossibility of diversion under qualified plan or 
trust.

* * * * *
    (b) Section 415 suspense account. Notwithstanding paragraph (a) of 
this section, a plan, or trust forming part of a plan, may provide for 
the reversion to the employer, upon termination of the plan, of amounts 
contributed to the plan that exceed the limitations imposed under 
section 415(c), to the extent set forth in rules prescribed by the 
Commissioner in revenue rulings, notices, or other guidance published 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter).

0
Par. 4. Section 1.401(a)(9)-5, A-9(b)(1) is revised to read as follows:


Sec.  1.401(a)(9)-5  Required minimum distributions from defined 
contribution plans.

* * * * *
    A-9. * * *
    (b) * * *
    (1) Elective deferrals (as defined in section 402(g)(3)) and 
employee contributions that, pursuant to rules prescribed by the 
Commissioner in revenue rulings, notices, or other guidance published 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter), are returned to the employee (together with the income 
allocable thereto) in order to comply with the section 415 limitations.
* * * * *

0
Par. 5. Section 1.401(k)-1 is amended by adding paragraph (e)(8) to 
read as follows:


Sec.  1.401(k)-1  Certain cash or deferred arrangements.

* * * * *
    (e) * * *
    (8) Section 415 compensation required. With respect to compensation 
that is paid (or would have been paid but for a cash or deferred 
election) in plan years beginning on or after July 1, 2007, a cash or 
deferred arrangement satisfies this paragraph (e) only if cash or 
deferred elections can only be made with respect to amounts that are 
compensation within the meaning of section 415(c)(3) and Sec.  
1.415(c)-2. Thus, for example, the arrangement is not a qualified cash 
or deferred arrangement if an eligible employee who is not in qualified 
military service (as that term is defined in section 414(u)) and who is 
not permanently and totally disabled (as defined in section 22(e)(3)) 
can make a cash or deferred election with respect to an amount paid 
after severance from employment, unless the amount is paid by the later 
of 2\1/2\ months after severance from employment or the end of the year 
that includes the date of severance from employment and is described in 
Sec.  1.415(c)-2(e)(3)(ii) or (iii).
* * * * *

0
Par. 6. Section 1.402(c)-2, A-4(a) is revised to read as follows:


Sec.  1.402(c)-2  Eligible rollover distributions; questions and 
answers.

* * * * *
    A-4 * * *
    (a) Elective deferrals (as defined in section 402(g)(3)) and 
employee contributions that, pursuant to rules prescribed by the 
Commissioner in revenue rulings, notices, or other guidance published 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2) of this 
chapter), are returned to the employee (together with the income 
allocable thereto) in order to comply with the section 415 limitations.
* * * * *

[[Page 16895]]

Sec. Sec.  1.415-1 through 1.415-10  [Removed]

0
Par. 7. Sections 1.415-1 through 1.415-10 are removed.

0
Par. 8. Section 1.415(a)-1 is added to read as follows:


Sec.  1.415(a)-1  General rules with respect to limitations on benefits 
and contributions under qualified plans.

    (a) Trusts. Under sections 415 and 401(a)(16), a trust that forms 
part of a pension, profit-sharing, or stock bonus plan will not be 
qualified under section 401(a) if any of the following conditions 
exists:
    (1) In the case of a defined benefit plan, the annual benefit with 
respect to any participant for any limitation year exceeds the 
limitations of section 415(b) and Sec.  1.415(b)-1.
    (2) In the case of a defined contribution plan, the annual 
additions credited with respect to any participant for any limitation 
year exceed the limitations of section 415(c) and Sec.  1.415(c)-1.
    (3) The trust has been disqualified under section 415(g) and Sec.  
1.415(g)-1 for any year.
    (b) Certain annuities and accounts--(1) In general. Under section 
415, an employee annuity plan described in section 403(a), an annuity 
contract described in section 403(b), or a simplified employee pension 
described in section 408(k) will not be considered to be described in 
the otherwise applicable section if any of the following conditions 
exists:
    (i) The annual benefit under a defined benefit plan with respect to 
any participant for any limitation year exceeds the limitations of 
section 415(b) and Sec.  1.415(b)-1.
    (ii) The contributions and other additions credited under a defined 
contribution plan with respect to any participant for any limitation 
year exceed the limitations of section 415(c) and Sec.  1.415(c)-1.
    (iii) The employee annuity plan, annuity contract, or simplified 
employee pension has been disqualified under section 415(g) and Sec.  
1.415(g)-1 for any year.
    (2) Special rule for section 403(b) annuity contracts. If the 
contributions and other additions under an annuity contract that 
otherwise satisfies the requirements of section 403(b) exceed the 
limitations of section 415(c) and Sec.  1.415(c)-1 with respect to any 
participant for any limitation year (regardless of whether the annuity 
contract is a defined contribution plan or a defined benefit plan), 
then the portion of the contract that includes such excess annual 
addition fails to be a section 403(b) annuity contract, and the 
remaining portion of the contract is a section 403(b) annuity contract. 
However, the status of the remaining portion of the contract as a 
section 403(b) annuity contract is not retained unless, for the year of 
the excess and each year thereafter, the issuer of the contract 
maintains separate accounts for each such portion. In addition, if the 
benefit under an annuity contract that is a defined benefit plan and 
that otherwise satisfies the requirements of section 403(b) exceeds the 
limitations of section 415(b) and Sec.  1.415(b)-1 with respect to any 
participant for any limitation year, then the contract fails to be a 
section 403(b) annuity contract.
    (3) Section 403(b) annuity contract. For purposes of section 415 
and regulations promulgated under section 415, the term section 403(b) 
annuity contract includes arrangements that are treated as annuity 
contracts for purposes of section 403(b). Thus, such term includes 
custodial accounts described in section 403(b)(7) and retirement income 
accounts described in section 403(b)(9).
    (c) Regulations--(1) In general. This section provides general 
rules regarding the application of section 415. For further rules 
regarding the application of section 415, see--
    (i) Section 1.415(b)-1 (for general rules regarding the limits 
applicable to defined benefit plans);
    (ii) Section 1.415(b)-2 (for special rules for defined benefit 
plans where a participant has multiple annuity starting dates);
    (iii) Section 1.415(c)-1 (for general rules regarding the limits 
applicable to defined contribution plans);
    (iv) Section 1.415(c)-2 (for rules regarding the definition of 
compensation for purposes of section 415);
    (v) Section 1.415(d)-1 (for rules regarding cost-of-living 
adjustments to the various limits of section 415);
    (vi) Section 1.415(f)-1 (for rules for aggregating plans for 
purposes of section 415);
    (vii) Section 1.415(g)-1 (for rules regarding disqualification of 
plans that fail to satisfy the requirements of section 415); and
    (viii) Section 1.415(j)-1 (for rules regarding limitation years).
    (2) Cross references to special rules for section 403(b) annuity 
contracts. For special rules relating to section 403(b) annuity 
contracts, see--
    (i) Section 1.415(c)-2(g)(1) and (3) (relating to the definition of 
compensation for section 403(b) annuity contracts);
    (ii) Section 1.415(f)-1(f) (relating to rules for section 403(b) 
annuity contracts for purposes of aggregating plans);
    (iii) Section 1.415(g)-1(b)(3)(iv)(C) (regarding disqualification 
of a section 403(b) annuity contract aggregated with a qualified 
defined contribution plan if the aggregated plans exceed the 
limitations of section 415(c));
    (iv) Section 1.415(g)-1(c) (relating to the plan year for section 
403(b) annuity contracts); and
    (v) Section 1.415(j)-1(e) (relating to the limitation year for 
section 403(b) annuity contracts).
    (3) Cross references to special rules for governmental plans. For 
special rules relating to governmental plans, see--
    (i) Paragraph (f)(4) of this section (regarding permissive service 
credits);
    (ii) Paragraph (g)(2) of this section (providing a delayed 
effective date for governmental plans);
    (iii) Section 1.415(b)-1(a)(6)(i) (providing an exception from the 
compensation-based limit of section 415(b)(1)(B) for governmental 
plans);
    (iv) Section 1.415(b)-1(a)(7)(ii) (regarding a special limitation 
for certain governmental plans making an election during 1990);
    (v) Section 1.415(b)-1(b)(4) (regarding qualified governmental 
excess benefit arrangements);
    (vi) Section 1.415(b)-1(d)(3) and (4) (regarding age adjustments to 
the dollar limit of section 415(b)(1)(A) for employees of police and 
fire departments and members of the Armed Forces of the United States, 
and for survivor and disability benefits);
    (vii) Section 1.415(b)-1(g)(3) (regarding adjustments to applicable 
limitations for years of participation, and adjustments to applicable 
limitations for years of service for survivor and disability benefits 
under governmental plans);
    (viii) Section 1.415(c)-1(b)(2)(ii) and (3)(iii) (regarding amounts 
not treated as annual additions under governmental plans); and
    (ix) Section 1.415(c)-2(e)(5) (providing an alternative rule for 
inclusion of compensation after a severance from employment for 
governmental plans).
    (4) Cross references to special rules for multiemployer plans. For 
special rules relating to multiemployer plans as defined in section 
414(f), see--
    (i) Paragraph (e) of this section (regarding benefits or 
contributions taken into account where a plan is maintained by more 
than one employer);
    (ii) Paragraph (f)(5)(ii) of this section (providing a special 
definition of severance from employment for multiemployer plans);

[[Page 16896]]

    (iii) Section 1.415(b)-1(a)(6)(ii) (providing an exception from the 
compensation-based limit for multiemployer plans);
    (iv) Section 1.415(b)-1(f)(3) (regarding the application of the 
minimum $10,000 limitation on benefits in the case of a multiemployer 
plan);
    (v) Section 1.415(f)-1(g) (providing special rules for aggregating 
multiemployer plans with other plans); and
    (vi) Section 1.415(g)-1(b)(3)(ii) (regarding plan disqualification 
rules where a multiemployer plan is aggregated with a plan that is not 
a multiemployer plan and the aggregated plans exceed the limitations of 
section 415).
    (5) Cross references to special rules for plans that are not 
subject to the requirements of section 411. For special rules relating 
to plans that are not subject to the requirements of section 411, see--
    (i) Paragraph (d)(1) of this section and Sec.  1.415(b)-
1(a)(7)(iii) (providing that the rule limiting accruals to the section 
415(b) limits does not apply to plans that are not subject to the 
requirements of section 411); and
    (ii) Section 1.415(b)-1(b)(2)(iii) (providing rules for applying 
the section 411(c) factors in determining the annual benefit 
attributable to employee contributions for plans that are not subject 
to the requirements of section 411).
    (6) Cross references to special rules for plans maintained by 
churches. For special rules relating to plans maintained by churches as 
defined in section 3121(w)(3)(A), see Sec. Sec.  1.415(b)-1(a)(6)(iv) 
and 1.415(b)-1(a)(7)(iv) (providing an exception from the compensation-
based limit for participants who have never been a highly compensated 
employee of the church).
    (d) Plan provisions--(1) In general. Although no specific plan 
provision is required under section 415 in order for a plan to 
establish or maintain its qualification, the plan provisions must 
preclude the possibility that any distribution under a defined benefit 
plan or annual addition under a defined contribution plan will exceed 
the limitations of section 415. In addition, a defined benefit plan 
that is subject to the requirements of section 411 must preclude the 
possibility that any accrual under the plan will exceed the limitations 
of section 415. A defined benefit plan may include provisions that 
automatically freeze or reduce the rate of benefit accrual (or limit 
the benefit payable in the case of a plan that is not subject to the 
requirements of section 411), and a defined contribution plan may 
include provisions that automatically limit the annual addition to a 
level necessary to prevent the limitations of section 415 from being 
exceeded with respect to any participant. For rules relating to this 
type of plan provision and the definitely determinable benefit 
requirement for pension plans, see Sec.  1.401(a)-1(b)(1)(iii). Because 
Sec.  1.401(a)-1(b)(1)(iii) requires that the operation of such a 
provision preclude discretion by the employer, if two defined benefit 
plans that are aggregated under the rules of section 415(f) would 
otherwise provide for aggregate benefits that might exceed the limits 
of section 415(b), the plan provisions must specify (without involving 
employer discretion) how benefits will be limited to prevent a 
violation of section 415(b).
    (2) Special rule for profit-sharing and stock bonus plans. A 
provision of a profit-sharing or stock bonus plan that automatically 
freezes or reduces the amount of annual additions to ensure that the 
limitations of section 415 will not be exceeded must comply with the 
requirement set forth in Sec.  1.401-1(b)(1)(ii) or (iii) (as 
applicable) that such plans provide a definite predetermined formula 
for allocating the contributions made to the plan among the 
participants. If the operation of a provision that automatically 
freezes or reduces the amount of annual additions to ensure that the 
limitations of section 415 are not exceeded does not involve 
discretionary action on the part of the employer, the definite 
predetermined allocation formula requirement is not violated by the 
provision. If the operation of such a provision involves discretionary 
action on the part of the employer, the definite predetermined 
allocation formula requirement is violated. For example, if two profit-
sharing plans of one employer otherwise provide for aggregate 
contributions which may exceed the limits of section 415(c), the plan 
provisions must specify (without involving employer discretion) under 
which plan contributions and allocations will be reduced to prevent an 
excess annual addition and how the reduction will occur.
    (3) Incorporation by reference--(i) In general. A plan is permitted 
to incorporate by reference the limitations of section 415, and will 
not fail to meet the definitely determinable benefit requirement or the 
definite predetermined allocation formula requirement, whichever 
applies to the plan, merely because it incorporates the limits of 
section 415 by reference.
    (ii) Section 415 can be applied in more than one manner, but a 
statutory or regulatory default rule exists. Where a provision of 
section 415 is permitted to be applied in more than one manner but is 
to be applied in a specified manner in the absence of contrary plan 
provisions (in other words, a default rule exists), if a plan 
incorporates the limitations of section 415 by reference with respect 
to that provision of section 415 and does not specifically vary from 
the default rule, then the default rule applies. With respect to a 
provision of section 415 for which a default rule exists, if the 
limitations of section 415 are to be applied in a manner other than 
using the default rule, the plan must specify the manner in which the 
limitation is to be applied in addition to generally incorporating the 
limitations of section 415 by reference. For example, if a plan 
generally incorporates the limitations of section 415 by reference and 
does not restrict the accrued benefits to which the amendments to 
section 415(b)(2)(E) made by the Uruguay Round Agreements Act of 1994, 
Public Law 103-465 (108 Stat. 4809) (GATT), apply (as permitted by Q&A-
12 of Rev. Rul. 98-1 (1998-1 CB 249) (see Sec.  601.601(d)(2) of this 
chapter), which reflects the amendments to section 767 of GATT made by 
section 1449 of the Small Business Job Protection Act of 1996, Public 
Law 104-188 (110 Stat. 1755)), then the amendments to section 
415(b)(2)(E) made by GATT apply to all benefits under the plan.
    (iii) Section 415 can be applied in more than one manner with no 
statutory or regulatory default. If a limitation of section 415 may be 
applied in more than one manner, and if there is no governing principle 
pursuant to which that limitation is applied in the absence of contrary 
plan provisions, then the plan must specify the manner in which the 
limitation is to be applied in addition to generally incorporating the 
limitations of section 415 by reference. For example, if an employer 
maintains two profit-sharing plans, and if any participant participates 
in more than one such plan, then both plans must specify (in a 
consistent manner) under which of the employer's two profit-sharing 
plans annual additions must be reduced if aggregate annual additions 
would otherwise exceed the limitations of section 415(c).
    (iv) Former requirements. A plan is not permitted to incorporate by 
reference formerly applicable requirements of section 415 that are no 
longer in force (such as the limits of former section 415(e)).

[[Page 16897]]

    (v) Cost-of-living adjustments--(A) In general. A plan is permitted 
to incorporate by reference the annual adjustments to the limitations 
of section 415 that are made pursuant to section 415(d). See Sec.  
1.415(d)-1 for additional rules relating to cost-of-living adjustments 
under section 415(d).
    (B) Cost-of-living adjustments not included in accrued benefit 
until effective. Notwithstanding that a plan incorporates the increases 
to the applicable limits under section 415(d) by reference, the accrued 
benefit of a participant for purposes of section 411 and any amount 
payable to a participant for purposes of Sec.  1.415(b)-1(a)(1) are not 
permitted to reflect increases pursuant to the annual increase under 
section 415(d) of the dollar limitation described in section 
415(b)(1)(A) or the compensation limit described in section 
415(b)(1)(B) for any period before the annual increase becomes 
effective. See Sec.  1.415(d)-1(a)(3) for rules relating to when the 
annual adjustments to the dollar and compensation limitations are 
effective. A plan amendment does not violate the requirements of 
section 411(d)(6) merely because it eliminates the incorporation by 
reference of the increases under section 415(d) with respect to 
increases that have not yet occurred.
    (C) Application of increase in defined benefit dollar limit to 
participants who have incurred a severance from employment or commenced 
receiving benefits. If a plan incorporates by reference the annual 
adjustments to the limitations of section 415 pursuant to this 
paragraph (d)(3)(v), the plan will be treated as applying the section 
415(d) cost-of-living adjustments to the maximum extent permitted under 
the safe harbor described in Sec.  1.415(d)-1(a)(5), except to the 
extent provided in this paragraph (d)(3)(v)(C). Thus, such a plan is 
not subject to the requirements of Sec.  1.415(b)-1(b)(1)(iii) 
(providing special rules for determining the annual benefit of an 
employee in the case of multiple annuity starting dates) with respect 
to benefit increases that result solely from an increase in the section 
415(b) limits pursuant to section 415(d). If a plan incorporates by 
reference the annual adjustments to the limitations of section 415 
pursuant to this paragraph (d)(3)(v), the annual increase under section 
415(d) of the dollar limitation described in section 415(b)(1)(A) does 
not apply with respect to a participant if the increase is effective 
after the participant's severance from employment with the employer 
maintaining the plan (or, if earlier, after the annuity starting date 
in the case of a participant who has commenced receiving benefits), 
unless the plan specifies that this annual increase applies. Similarly, 
if a plan incorporates by reference the annual adjustments to the 
limitations of section 415 pursuant to this paragraph (d)(3)(v), the 
annual increase under section 415(d) of the compensation-based 
limitation described in section 415(b)(1)(B) does not apply with 
respect to a participant for increases that are effective after the 
participant's severance from employment with the employer maintaining 
the plan (or, if earlier, after the annuity starting date in the case 
of a participant who has commenced receiving benefits), unless the plan 
specifies that this annual increase applies.
    (D) Treatment of cost-of-living adjustments for funding and 
deduction purposes. In general, the annual increase under section 
415(d) of the dollar limitation described in section 415(b)(1)(A) and 
the compensation limitation described in section 415(b)(1)(B) is 
treated as a plan amendment, regardless of whether the plan reflects 
the increase automatically through operation of plan provisions in 
accordance with this paragraph (d)(3)(v) or the plan is amended to 
reflect the increase (pursuant to Sec.  1.415(d)-1(a)(5)). However, 
where a plan reflects the annual increase under section 415(d) of the 
dollar limitation described in section 415(b)(1)(A) or the compensation 
limitation described in section 415(b)(1)(B) automatically through 
operation of plan provisions pursuant to this paragraph (d)(3)(v), the 
funding method for the plan is permitted to provide for this annual 
increase to be treated as an experience loss for purposes of applying 
sections 404, 412, and 431.
    (e) Rules for plans maintained by more than one employer. Except as 
provided in Sec.  1.415(f)-1(g)(2)(i) (regarding aggregation of 
multiemployer plans with plans other than multiemployer plans), for 
purposes of applying the limitations of section 415 with respect to a 
participant in a plan maintained by more than one employer, benefits 
and contributions attributable to such participant from all of the 
employers maintaining the plan must be taken into account. Furthermore, 
in applying the limitations of section 415 with respect to a 
participant in such a plan, the total compensation received by the 
participant from all of the employers maintaining the plan is taken 
into account under the plan, unless the plan specifies otherwise.
    (f) Special rules--(1) Affiliated employers. Pursuant to section 
414(b) and Sec.  1.414(b)-1, all employees of all corporations that are 
members of a controlled group of corporations (within the meaning of 
section 1563(a), as modified by section 1563(f)(5), and determined 
without regard to section 1563(a)(4) and (e)(3)(C)) are treated as 
employed by a single employer for purposes of section 415. Similarly, 
pursuant to section 414(c) and regulations promulgated under section 
414(c), all employees of trades or businesses that are under common 
control are treated as employed by a single employer. Thus, any defined 
benefit plan or defined contribution plan maintained by any member of a 
controlled group of corporations (within the meaning of section 414(b)) 
or by any trade or business (whether or not incorporated) that is part 
of a group of trades or businesses that are under common control 
(within the meaning of section 414(c)) is deemed maintained by all such 
members or such trades or businesses. Pursuant to section 415(h), for 
purposes of section 415, sections 414(b) and 414(c) are applied by 
using the phrase ``more than 50 percent'' instead of the phrase ``at 
least 80 percent'' each place the latter phrase appears in section 
1563(a)(1) and in the regulations under section 414(c) (except for 
purposes of determining whether two or more organizations are a 
brother-sister group of trades or businesses under common control under 
the rules in Sec.  1.414(c)-2(c)).
    (2) Affiliated service groups. Any defined benefit plan or defined 
contribution plan maintained by any member of an affiliated service 
group (within the meaning of section 414(m)) is deemed maintained by 
all members of that affiliated service group.
    (3) Leased employees--(i) In general. Pursuant to section 414(n), 
except as provided in paragraph (f)(3)(ii) of this section, with 
respect to any person (referred to as the recipient) for whom a leased 
employee (within the meaning of section 414(n)(2)) performs services, 
the leased employee is treated as an employee of the recipient, but 
contributions or benefits provided by the leasing organization that are 
attributable to services performed for the recipient are treated as 
provided under a plan maintained by the recipient.
    (ii) Exception for leased employees covered by safe harbor plans. 
Pursuant to section 414(n)(5), the rule of paragraph (f)(3)(i) of this 
section does not apply to a leased employee with respect to services 
performed for a recipient if--
    (A) The leased employee is covered by a plan that is maintained by 
the leasing organization and that meets the

[[Page 16898]]

requirements of section 414(n)(5)(B); and
    (B) Leased employees (determined without regard to this paragraph 
(f)(3)(ii)) do not constitute more than 20 percent of the recipient's 
nonhighly compensated workforce.
    (4) Permissive service credit under governmental plans. See section 
415(n) for rules regarding the application of the limitations of 
sections 415(b) and (c) where a participant makes contributions 
(including a transfer described in section 403(b)(13) or section 
457(e)(17)) to a defined benefit governmental plan to purchase 
permissive service credit under the plan.
    (5) Definition of severance from employment--(i) General rule. For 
purposes of this section and Sec. Sec.  1.415(b)-1, 1.415(b)-2, 
1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 
1.415(j)-1, whether an employee has a severance from employment with 
the employer that maintains a plan is determined in the same manner as 
under Sec.  1.401(k)-1(d)(2) except that, for purposes of determining 
the employer of an employee, the modifications provided under section 
415(h) (described in paragraph (f)(1) of this section) to the employer 
aggregation rules apply. Thus, an employee has a severance from 
employment when the employee ceases to be an employee of the employer 
maintaining the plan, and an employee does not have a severance from 
employment if, in connection with a change of employment, the 
employee's new employer maintains such plan with respect to the 
employee. The determination of whether an employee ceases to be an 
employee of the employer maintaining the plan is based on all of the 
relevant facts and circumstances.
    (ii) Multiemployer plans. A participant in a multiemployer plan 
(within the meaning of section 414(f)) is not treated as having 
incurred a severance from employment with the employer maintaining the 
multiemployer plan for purposes of this section and Sec. Sec.  
1.415(b)-1, 1.415(b)-2, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 
1.415(g)-1, and 1.415(j)-1 if the participant continues to be an 
employee of another employer maintaining the multiemployer plan.
    (6) Qualified domestic relations orders. A benefit provided to an 
alternate payee (as defined in section 414(p)(8)) of a participant 
pursuant to a qualified domestic relations order (as defined in section 
414(p)(1)(A)) is treated as if it were provided to the participant for 
purposes of applying the limitations of section 415. See Sec.  
1.401(a)-13(g)(4)(iv).
    (7) Effect on other requirements. Except as provided in Sec.  
1.417(e)-1(d)(1), the application of section 415 does not relieve a 
plan from the obligation to satisfy other applicable qualification 
requirements. Accordingly, the terms of the plan must provide for the 
plan to satisfy section 415 as well as all other applicable 
requirements. For example, if a defined benefit plan has a normal 
retirement age of 62, and if a participant's benefit remains unchanged 
between the ages of 62 and 65 because of the application of the section 
415(b)(1)(A) dollar limit, the plan satisfies the requirements of 
section 411 only if the plan either commences distribution of the 
participant's benefit at normal retirement age (without regard to 
severance from employment) or provides for a suspension of benefits at 
normal retirement age that satisfies the requirements of section 
411(a)(3)(B) and 29 CFR 2530.203-3. Similarly, if the increase to a 
participant's benefit under a defined benefit plan in a year after the 
participant has attained normal retirement age is less than the 
actuarial increase to the participant's previously accrued benefit 
because of the application of the section 415(b)(1)(B) compensation 
limitation (which is not adjusted for commencement after age 65), the 
plan satisfies the requirements of section 411 only if the plan either 
commences distribution of the participant's benefit at normal 
retirement age (without regard to severance from employment) or 
provides for a suspension of benefits at normal retirement age that 
satisfies the requirements of section 411(a)(3)(B) and 29 CFR 2530.203-
3.
    (g) Effective date--(1) General rule. Except as otherwise provided, 
this section and Sec. Sec.  1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 
1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 apply to limitation 
years beginning on or after July 1, 2007.
    (2) Governmental plans. In the case of a governmental plan as 
defined in section 414(d), this section and Sec. Sec.  1.415(b)-1, 
1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 
1.415(j)-1 apply to limitation years that begin more than 90 days after 
the close of the first regular legislative session of the legislative 
body with authority to amend the plan that begins on or after July 1, 
2007. A governmental plan is permitted to apply the provisions of this 
section and Sec. Sec.  1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 
1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 to limitation years beginning on 
or after July 1, 2007, provided the plan applies all the applicable 
provisions of this section and Sec. Sec.  1.415(b)-1, 1.415(c)-1, 
1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 for such 
limitation years.
    (3) Option to apply regulations earlier. A plan may apply the rules 
in Sec.  1.415(c)-2(e) regarding post-severance compensation payments 
for limitation years prior to the effective date described in 
paragraphs (g)(1) and (2) of this section. This early application 
affects the rules relating to the definition of compensation in Sec.  
1.401(k)-1(e)(8) and Sec.  1.457-4(d).
    (4) Grandfather rule for preexisting benefits. A defined benefit 
plan is considered to satisfy the limitations of section 415(b) for a 
participant with respect to benefits accrued or payable under the plan 
as of the end of the limitation year that is immediately prior to the 
effective date of final regulations under this section and Sec. Sec.  
1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, 
and 1.415(j)-1 (as provided under paragraph (g)(1) or (2) of this 
section) pursuant to plan provisions (including plan provisions 
relating to the plan's limitation year) that were both adopted and in 
effect before April 5, 2007, but only if such plan provisions meet the 
applicable requirements of statutory provisions, regulations, and other 
published guidance relating to section 415 in effect immediately before 
the effective date of final regulations under this section and 
Sec. Sec.  1.415(b)-1, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 
1.415(g)-1, and 1.415(j)-1 (as provided under paragraph (g)(1) or (2) 
of this section). Plan provisions will not be treated as failing to 
satisfy these requirements merely because the plan has not been amended 
to reflect changes to section 415(b) made by the Pension Funding Equity 
Act of 2004, Public Law 108-218 (118 Stat. 596), and the Pension 
Protection Act of 2006, Public Law 109-280 (120 Stat. 780). In 
addition, plan provisions will not be treated as failing to satisfy 
these requirements merely because the plan's definition of compensation 
for a limitation year that is used for purposes of applying the 
limitations of section 415(b)(1)(B) reflects compensation for a plan 
year that is in excess of the limitation under section 401(a)(17) that 
applies to that plan year. If benefits under a plan are accrued after 
the applicable effective date under paragraph (g)(1) or (2) of this 
section, then the sum of the benefits grandfathered under the first 
sentence of this paragraph (g)(4) and benefits accrued after the 
applicable effective date must satisfy the requirements of section 415, 
taking into account the requirements of this section and Sec. Sec.  
1.415(b)-1, 1.415(c)-1, 1.415(c)-2,

[[Page 16899]]

1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1.


0
Par. 9. Section 1.415(b)-1 is added to read as follows:


Sec.  1.415(b)-1  Limitations for defined benefit plans.

    (a) General rules--(1) Maximum limitations. Except as otherwise 
provided under this section, a defined benefit plan fails to satisfy 
the requirements of section 415(a) for a limitation year if, during the 
limitation year, either the annual benefit (as defined in paragraph 
(b)(1)(i) of this section) accrued by a participant (whether or not the 
benefit is vested) or the annual benefit payable to a participant at 
any time under the plan exceeds the lesser of--
    (i) $160,000 (as adjusted pursuant to section 415(d), Sec.  
1.415(d)-1(a), and this section); or
    (ii) 100 percent of the participant's average compensation for the 
period of the participant's high-3 years of service (as adjusted 
pursuant to section 415(d), Sec.  1.415(d)-1(a), and this section).
    (2) Defined benefit plan. For purposes of section 415 and 
regulations promulgated under section 415, a defined benefit plan is 
any plan, contract, or account to which section 415 applies pursuant to 
Sec.  1.415(a)-1(a) or (b) (or any portion thereof) that is not a 
defined contribution plan within the meaning of Sec.  1.415(c)-1(a)(2). 
In addition, a section 403(b) annuity contract that is not described in 
section 414(i) is treated as a defined benefit plan for purposes of 
section 415 and regulations promulgated under section 415.
    (3) Plan provisions. As required in Sec.  1.415(a)-1(d)(1), in 
order to satisfy the limitations on benefits under this section, the 
plan provisions (including the provisions of any annuity) must preclude 
the possibility that any annual benefit exceeding these limitations 
will be accrued (except as provided in paragraph (a)(7)(iii) of this 
section), distributed, or otherwise payable in any optional form of 
benefit (including the normal form of benefit) at any time (from the 
plan, from an annuity contract that will make distributions to the 
participant on behalf of the plan, or from an annuity contract that has 
been distributed under the plan). Thus, for example, a plan that is 
subject to the requirements of section 411 will fail to satisfy the 
limitations of this section if the plan does not contain terms that 
preclude the possibility that any annual benefit exceeding these 
limitations will be accrued or payable in any optional form of benefit 
(including the normal form of benefit) at any time, even though no 
participant has actually accrued a benefit in excess of these 
limitations.
    (4) Adjustments to dollar limitation for commencement before age 62 
or after age 65. The age-adjusted section 415(b)(1)(A) dollar limit 
computed pursuant to paragraph (d) or (e) of this section is used in 
place of the dollar limitation described in section 415(b)(1)(A) and 
paragraph (a)(1)(i) of this section in the case of a benefit with an 
annuity starting date that occurs before the participant attains age 62 
or after the participant attains age 65.
    (5) Average compensation for period of high-3 years of service--(i) 
In general. Except as otherwise provided in this paragraph (a)(5), for 
purposes of applying the limitation on benefits described in this 
section, the period of a participant's high-3 years of service is the 
period of 3 consecutive calendar years (taking into account the rule in 
paragraph (a)(5)(iii) of this section) during which the employee had 
the greatest aggregate compensation (as defined in Sec.  1.415(c)-2) 
from the employer, and the average compensation for the period of a 
participant's high-3 years of service is determined by dividing the 
aggregate compensation for this period by 3. For purposes of this 
paragraph (a)(5), in determining a participant's high-3 years of 
service, the plan may use any 12-month period to determine a year of 
service instead of the calendar year, provided that it is uniformly and 
consistently applied in a manner that is specified under the terms of 
the plan. As provided under Sec.  1.415(c)-2(f), because a plan is not 
permitted to base benefits on compensation in excess of the limitation 
under section 401(a)(17), a plan's definition of compensation for a 
year that is used for purposes of applying the limitations of section 
415 is not permitted to reflect compensation for a year that is in 
excess of the limitation under section 401(a)(17) that applies to that 
year. See Sec. Sec.  1.401(a)(17)-1(a)(3)(i) and 1.401(a)(17)-
1(b)(3)(ii) for rules regarding the effective date of increases in the 
section 401(a)(17) compensation limitation for a plan year and for a 
12-month period other than the plan year.
    (ii) Short periods of service. For a participant who is employed 
with an employer for less than 3 consecutive years, the period of the 
participant's high-3 years of service is the actual number of 
consecutive years of service (including fractions of years, but not 
less than one year). In such a case, the limitation of section 
415(b)(1)(B) of 100 percent of the participant's average compensation 
for the period of the participant's high-3 years of service is computed 
by dividing the participant's compensation during the participant's 
longest consecutive period of service by the number of years in that 
period (including fractions of years, but not less than one year). The 
rule in paragraph (a)(5)(iii) of this section is used for purposes of 
determining a participant's consecutive years of service.
    (iii) Break in service. In the case of a participant who has had a 
severance from employment with an employer that maintains the plan and 
who is subsequently rehired by the employer, the period of the 
participant's high-3 years of service is calculated by excluding all 
years for which the participant performs no services for and receives 
no compensation from the employer maintaining the plan (referred to as 
the break period), and by treating the year of service immediately 
prior to and the year of service immediately after the break period as 
if such years of service were consecutive. See Sec.  1.415(d)-
1(a)(2)(iii) for a special rule for determining a rehired participant's 
section 415(b)(1)(B) compensation limit in the case of a plan that 
adjusts the compensation limit for limitation years after the 
limitation year in which the participant incurs a severance from 
employment.
    (iv) Examples. For purposes of these examples, except as otherwise 
stated, the plan year and the limitation year are the calendar year, 
and the plan uses the calendar year for purposes of determining the 
period of high-3 years of service. In addition, except as otherwise 
stated, it is assumed that the plan's normal retirement age is 65, and 
all participants discussed in these examples have at least ten years of 
service with the employer and at least ten years of participation in 
the plan at issue. It is also assumed that none of the plans in the 
examples are governmental plans. The following examples illustrate the 
rules of this paragraph (a)(5):

    Example 1. (i) Facts. Plan A, which was established on January 
1, 2008, covers Participant M, who was hired on January 1, 1990. 
Participant M's compensation (as defined in Sec.  1.415(c)-2) from 
the employer maintaining the plan is $140,000 each year for 1990 
through 1992, is $120,000 each year for 1993 through 2007, and is 
$165,000 for 2008 and 2009. Assume that for Plan A's 2008 and 2009 
limitation years, the section 415(b)(1)(A) age-adjusted dollar limit 
for M is $185,000 and $190,000, respectively, prior to the reduction 
of the age-adjusted dollar limit pursuant to paragraph (g)(1) of 
this section (which requires a reduction in the dollar limit if a 
participant has less than 10 years of participation in the plan).

[[Page 16900]]

    (ii) Conclusion. As of the end of the 2008 limitation year, the 
period of M's high-3 consecutive years of service runs from January 
1, 1990, through December 31, 1992, and M's average compensation for 
this period is $140,000. Thus, the limitation under section 
415(b)(1)(B) for the 2008 limitation year is $140,000. As of the end 
of the 2009 limitation year, the period of M's high-3 consecutive 
years of service runs from January 1, 2007, through December 31, 
2009, and M's average compensation for this period is $150,000. 
Thus, the limitation under section 415(b)(1)(B) for the 2009 
limitation year is $150,000.

    Example 2 (i) Facts. Participant N is a participant in Plan B. 
N's compensation for 2008, 2009, and 2010 is $300,000 for each year. 
N's average compensation for the period of N's high-3 years of 
service (determined before the application of section 401(a)(17)) is 
$300,000, based on N's compensation for 2008, 2009, and 2010. For 
all years before 2008, Participant N's compensation was less than 
the then-applicable section 401(a)(17) limit. On January 1, 2011, N 
commences receiving benefits from Plan B at the age of 75, 10 years 
after attaining N's normal retirement age under Plan B, when the 
age-adjusted section 415(b)(1)(A) dollar limit for benefits 
commencing at that age is $293,453.
    (ii) Conclusion. Pursuant to Sec.  1.415(c)-2(f) and section 
401(a)(17), Plan B is not permitted to provide for a definition of 
compensation that includes compensation for a year that is in excess 
of the limitation under section 401(a)(17) that applies to that 
year. Accordingly, the limitation under section 415(b)(1)(B) based 
on N's average compensation for the period of N's high three years 
of service must not reflect compensation for a year that is in 
excess of the limitation under section 401(a)(17) that applies to 
that year. Thus, if the limitation under section 401(a)(17) for 
years beginning in 2008, 2009, and 2010 is $230,000, $235,000, and 
$240,000, respectively, then the limitation under section 
415(b)(1)(B) based on N's average compensation for the period of N's 
high three years of service is $235,000.

    Example 3. (i) Facts. The facts are the same as in Example 2, 
except that N commences receiving benefits from Plan B on January 1, 
2008, at the age of 75, 10 years after attaining N's normal 
retirement age under Plan B. In addition, N's period of high three 
years of service is from January 1, 2003, through December 31, 2005, 
and N's average compensation for this period is $300,000. The 
section 401(a)(17) limits for 2003, 2004 and 2005 are $200,000, 
$205,000, and $210,000, respectively. As of December 31, 2007, 
pursuant to plan provisions adopted and in effect on January 1, 
2007, N's accrued benefit under Plan B, payable in the form of a 
straight life annuity, actuarially adjusted to reflect commencement 
10 years after normal retirement age, is $300,000. Plan B has not 
been amended during 2007, and that as of December 31, 2007, Plan B 
satisfied all of the requirements of section 415(b) with respect to 
N's accrued benefit, pursuant to statutory provisions, regulations, 
and other published guidance in effect immediately before the 
limitation year beginning on January 1, 2008.
    (ii) Conclusion. Under Sec.  1.415(a)-1(g)(4), Plan B is 
considered to satisfy the section 415(b)(1)(B) compensation limit 
with respect to N's benefit payable at age 75 of $300,000 (which N 
accrued prior to January 1, 2008), for limitation years beginning 
after December 31, 2007. This is because Sec.  1.415(a)-1(g)(4) 
provides that plan provisions will not be treated as failing to 
satisfy the requirements of section 415(b)(1)(B) merely because the 
plan's definition of compensation that is used for purposes of 
applying the limitations of section 415(b)(1)(B) reflects 
compensation in excess of the section 401(a)(17) limitation for 
limitation years beginning before January 1, 2008. N, however, 
cannot accrue any additional benefits under Plan B for limitation 
years beginning after December 31, 2007, until N's section 
415(b)(1)(B) compensation limit, as limited by Sec.  1.415(c)-2(f) 
and section 401(a)(17), increases above $300,000.

    Example 4. (i) Facts. Participant O participates in Plan C, 
maintained by Employer X. Plan C does not adjust a participant's 
section 415(b)(1)(B) compensation limit for limitation years after 
the limitation year in which the participant incurs a severance from 
employment. Prior to separating from employment with X in 2010, O's 
average compensation for O's period of high-3 years of service is 
$50,000, based on O's compensation for 2007, 2008, and 2009, which 
was $50,000 for each year. O's compensation for 2010 was $45,000. 
O's compensation is $0 for 2011. In 2012, O is rehired by X and 
resumes participation in Plan C. O's compensation in 2012 is 
$45,000, and is $70,000 in 2013.
    (ii) Conclusion. As of the end of the 2013 limitation year, O's 
average compensation for O's period of high-3 years of service is 
$53,333, based on O's compensation in 2010, 2012, and 2013. See 
paragraph (a)(5)(iii) of this section.

    Example 5. (i) Facts. The facts are the same as in Example 4, 
except that, in accordance with Sec.  1.415(a)-1(d)(3)(v), Plan C 
incorporates by reference section 415(d) adjustments to a 
participant's section 415(b)(1)(B) compensation limit for limitation 
years after the limitation year in which the participant incurs a 
severance from employment. Assume that the annual adjustment factor 
described in Sec.  1.415(d)-1(a)(2)(ii) for 2011 through 2013 is 
1.03 for each year. Thus, disregarding O's rehire by X, O's average 
compensation for O's period of high-3 years of service for the 2013 
limitation year is equal to $54,636 ($50,000 * 1.03 * 1.03 * 1.03).
    (ii) Conclusion. Under Sec.  1.415(d)-1(a)(2)(iii), O's average 
compensation for O's period of high-3 years of service for the 2013 
limitation year is $54,636.

    (6) Exceptions from compensation limit. The limit under paragraph 
(a)(1)(ii) of this section (100 percent of the participant's average 
compensation for the participant's high-3 years of service) does not 
apply to--
    (i) A governmental plan (as defined in section 414(d));
    (ii) A multiemployer plan (as defined in section 414(f));
    (iii) A collectively bargained plan that is described in section 
415(b)(7); or
    (iv) A participant in a plan maintained by an organization 
described in section 3121(w)(3)(A) who has never been a highly 
compensated employee (within the meaning of section 414(q)) of the 
organization.
    (7) Special rules--(i) Total benefits not in excess of $10,000. See 
section 415(b)(4) and paragraph (f) of this section for an exception 
from the limits of section 415(b)(1) and paragraph (a)(1) of this 
section with respect to retirement benefits that do not exceed $10,000 
for the limitation year.
    (ii) Governmental plans electing during 1990. For a special 
limitation applicable to certain governmental plans electing the 
application of this rule during the first plan year beginning after 
December 31, 1989, see section 415(b)(10).
    (iii) Defined benefit plans not subject to the requirements of 
section 411. In the case of a defined benefit plan that is not subject 
to the requirements of section 411, the limitations described in this 
paragraph (a) are not required to be applied to the annual benefit 
accrued by a participant before the benefit is payable. However, such a 
defined benefit plan is subject to the limitations described in this 
paragraph (a) with respect to the annual benefit payable to a 
participant at any time under the plan.
    (iv) Application of compensation limitation exception to a church 
employee who becomes a highly compensated employee--(A) In general. If 
a participant who was described in paragraph (a)(6)(iv) of this section 
for a prior limitation year later becomes a highly compensated employee 
(within the meaning of section 414(q)) of the organization that 
maintains the defined benefit plan, the plan is not treated as failing 
to satisfy the compensation-based limitation described in paragraph 
(a)(1)(ii) of this section with respect to the participant if the 
requirements of paragraph (a)(7)(iv)(B) of this section are satisfied 
with respect to the participant.
    (B) Limitation on accruals. The requirements of this paragraph 
(a)(7)(iv)(B) are satisfied with respect to a participant if no plan 
amendments increasing the participant's benefits are adopted during the 
limitation year in which the participant first becomes a highly 
compensated employee (within the meaning of section 414(q)) of the 
organization that maintains the plan, and there is no increase in the 
participant's accrued benefit derived from employer contributions 
(including increases as a result of increased compensation or service) 
in subsequent limitation years.

[[Page 16901]]

    (b) Annual benefit--(1) In general--(i) Definition of annual 
benefit--(A) Straight life annuities. For purposes of this section and 
Sec.  1.415(b)-2, the term annual benefit means a benefit that is 
payable in the form of a straight life annuity. A straight life annuity 
means an annuity payable in equal installments for the life of the 
participant that terminates upon the participant's death. Examples of 
benefits that are not in the form of a straight life annuity include an 
annuity with a post-retirement death benefit and an annuity providing a 
guaranteed number of payments. If a benefit is payable in the form of a 
straight life annuity, no adjustment is made to the benefit to account 
for differences in the timing of payments during a year (for example, 
no adjustment is made on account of the annuity being payable in annual 
or monthly installments).
    (B) Other benefit forms. With respect to a benefit payable in a 
form other than a straight life annuity, the annual benefit is 
determined as the straight life annuity payable on the first day of 
each month that is actuarially equivalent to the benefit payable in 
such other form, determined under the rules of paragraph (c) of this 
section.
    (ii) Rules for determination of annual benefit. The annual benefit 
does not include the annual benefit attributable to either employee 
contributions or rollover contributions (as described in sections 
401(a)(31), 402(c)(1), 403(a)(4), 403(b)(8), 408(d)(3), and 
457(e)(16)), determined pursuant to the rules of paragraph (b)(2) of 
this section. The treatment of transferred benefits is determined under 
the rules of paragraph (b)(3) of this section. Paragraph (b)(4) of this 
section discusses the treatment of qualified governmental excess 
benefit arrangements.
    (iii) Determination of annual benefit in the case of multiple 
annuity starting dates--(A) General rule. If a participant has or will 
have distributions commencing at more than one annuity starting date, 
then the limitations of section 415 must be satisfied as of each of the 
annuity starting dates, taking into account the benefits that have been 
or will be provided at all of the annuity starting dates. This will 
happen, for example, where benefit distributions to a participant have 
previously commenced under a plan that is aggregated for purposes of 
section 415 with a plan under which the participant receives current 
accruals. In determining the annual benefit for such a participant as 
of a particular annuity starting date, the plan must actuarially adjust 
the past and future distributions with respect to the benefits that 
commenced at the other annuity starting dates. For limitation years to 
which Sec.  1.415(b)-2 applies, these adjustments must be made using 
the rules of Sec.  1.415(b)-2. For purposes of this paragraph 
(b)(1)(iii) and Sec.  1.415(b)-2, the determination of whether a new 
annuity starting date has occurred is made without regard to the rule 
of Sec.  1.401(a)-20, Q&A-10(d) (under which the commencement of 
certain distributions may not give rise to a new annuity starting 
date).
    (B) Scope of multiple annuity starting date rules. The rules 
provided in this paragraph (b)(1)(iii) and Sec.  1.415(b)-2 apply for 
purposes of determining the annual benefit of a participant where a new 
distribution election is effective during the current limitation year 
with respect to a distribution that previously commenced. The rules of 
this paragraph (b)(1)(iii) and Sec.  1.415(b)-2 also apply for 
determining the annual benefit of a participant for purposes of 
applying the limitations of section 415(b) and this section where 
benefit payments are increased as a result of plan terms or a plan 
amendment applying a cost-of-living adjustment or similar benefit 
increase, unless the increase is described in paragraph (b)(1)(iii)(C) 
of this section.
    (C) Safe harbors for certain benefit increases. An increase to 
benefit payments as a result of plan terms or a plan amendment applying 
a cost-of-living adjustment or similar benefit increase is described in 
this paragraph (b)(1)(iii)(C) if the increase--
    (1) Has previously been accounted for as part of the annual benefit 
under the rules of paragraph (c) of this section;
    (2) Is not required to be accounted for as part of the annual 
benefit, pursuant to the exception for certain automatic benefit 
increase features under paragraph (c)(5) of this section;
    (3) Is pursuant to a plan provision that automatically incorporates 
section 415(d) cost-of-living adjustments under Sec.  1.415(a)-
1(d)(3)(v); or
    (4) Complies with one of the safe harbors described in Sec.  
1.415(d)-1(a)(5) or (6) (providing safe harbors for annual and other 
periodic adjustments to distributions).
    (2) Determination of annual benefit attributable to employee 
contributions and rollover contributions--(i) In general. If employee 
contributions (other than contributions described in paragraph 
(b)(2)(ii) of this section) or rollover contributions are made to the 
plan, the annual benefit attributable to these contributions is 
determined as provided in this paragraph (b)(2).
    (ii) Certain employee contributions disregarded. For purposes of 
this paragraph (b)(2), the following are not treated as employee 
contributions:
    (A) Contributions that are picked up by a governmental employer as 
provided under section 414(h)(2).
    (B) Repayment of any loan made to a participant from the plan.
    (C) Repayment of a previously distributed amount as described in 
section 411(a)(7)(B) in accordance with section 411(a)(7)(C).
    (D) Repayment of a withdrawal of employee contributions as provided 
under section 411(a)(3)(D).
    (E) Repayments that would have been described in paragraph 
(b)(2)(ii)(C) or (b)(2)(ii)(D) of this section except that the plan 
does not restrict the timing of repayments to the maximum extent 
permitted by section 411(a).
    (iii) Annual benefit attributable to mandatory employee 
contributions. In the case of mandatory employee contributions as 
defined in section 411(c)(2)(C) and Sec.  1.411(c)-1(c)(4) (or 
contributions that would be mandatory employee contributions if section 
411 applied to the plan), the annual benefit attributable to those 
contributions is determined by applying the factors applicable to 
mandatory employee contributions as described in section 411(c)(2)(B) 
and (C) and regulations promulgated under section 411 to those 
contributions to determine the amount of a straight life annuity 
commencing at the annuity starting date, regardless of whether the 
requirements of sections 411 and 417 apply to that plan. For purposes 
of applying such factors to a plan that is not subject to the 
requirements of section 411, the applicable effective date of section 
411(a)(2) (which is used under Sec.  1.411(c)-1(c)(3) to determine the 
beginning date from which statutorily specified interest must be 
credited to mandatory employee contributions) must be determined as if 
section 411 applied to the plan, and in determining the annual benefit 
that is actuarially equivalent to these accumulated contributions, the 
plan must determine the interest rate that would have been required 
under section 417(e)(3) as if section 417 applied to the plan. See 
Sec.  1.415(c)-1(a)(2)(ii)(B) and (b)(3) for rules regarding treatment 
of mandatory employee contributions to a defined benefit plan as annual 
additions under a defined contribution plan.
    (iv) Voluntary employee contributions. If voluntary employee 
contributions are made to the plan, the portion of the plan to which 
voluntary employee contributions are made is treated as a defined 
contribution plan pursuant to section 414(k) and, accordingly, is a 
defined contribution

[[Page 16902]]

plan pursuant to Sec.  1.415(c)-1(a)(2)(i). Accordingly, the portion of 
a plan to which voluntary employee contributions are made is not a 
defined benefit plan within the meaning of paragraph (a)(2) of this 
section and is not taken into account in determining the annual benefit 
under the portion of the plan that is a defined benefit plan.
    (v) Annual benefit attributable to rollover contributions. The 
annual benefit attributable to rollover contributions from an eligible 
retirement plan, as defined in section 402(c)(8)(B) (for example, a 
contribution received pursuant to a direct rollover under section 
401(a)(31)(A)), is determined in the same manner as the annual benefit 
attributable to mandatory employee contributions if the plan provides 
for a benefit derived from the rollover contribution (other than a 
benefit derived from a separate account to be maintained with respect 
to the rollover contribution and actual earnings and losses thereon). 
Thus, in the case of rollover contributions from a defined contribution 
plan to a defined benefit plan to provide an annuity distribution, the 
annual benefit attributable to those rollover contributions for 
purposes of section 415(b) is determined by applying the rules of 
section 411(c) as described in paragraph (b)(2)(iii) of this section, 
regardless of the assumptions used to compute the annuity distribution 
under the plan and regardless of whether the plan is subject to the 
requirements of sections 411 and 417. Accordingly, in such a case, if 
the plan uses more favorable factors than those specified in section 
411(c) to determine the amount of annuity payments arising from 
rollover contributions, the annual benefit under the plan would reflect 
the excess of those annuity payments over the amounts that would be 
payable using the factors specified in section 411(c). See Sec.  
1.415(c)-1(b)(3)(i) for rules excluding rollover contributions 
maintained in a separate account that is treated as a defined 
contribution plan pursuant to section 414(k) from annual additions to a 
defined contribution plan.
    (3) Treatment of transferred benefits--(i) In general--(A) 
Treatment of transferor plan if transferred benefits are aggregated 
with transferor plan. Except as provided in paragraph (b)(3)(ii) of 
this section, when there has been a transfer of benefits from one 
defined benefit plan to another plan, to the extent the benefits 
transferred to the transferee plan are otherwise required to be taken 
into account pursuant to section 415(f) and Sec.  1.415(f)-1 in 
determining whether the transferor plan satisfies the limitations of 
section 415(b) for a limitation year, the transferred benefits are not 
treated as being provided under the transferor plan. This will occur, 
for example, if the employer sponsoring the transferor plan and the 
employer sponsoring the transferee plan are in the same controlled 
group within the meaning of section 414(b).
    (B) Treatment of transferor plan if transferred benefits are not 
aggregated with transferor plan. Except as provided in paragraph 
(b)(3)(ii) of this section, when there has been a transfer of benefits 
from one defined benefit plan to another plan, to the extent the 
benefits transferred to the transferee plan are not otherwise required 
to be taken into account pursuant to section 415(f) and Sec.  1.415(f)-
1 in determining whether the transferor plan satisfies the limitations 
of section 415(b) for a limitation year, the transferred benefits are 
treated by the transferor plan as if such benefits were provided under 
annuities purchased to provide benefits under a plan that must be 
aggregated with the transferor plan and that terminated immediately 
prior to the transfer with sufficient assets to pay all benefit 
liabilities under the plan, in accordance with the rules of paragraph 
(b)(5)(i) of this section. This will occur, for example, in the case of 
a transfer of benefits between defined benefit plans maintained by 
employers that are not required to be aggregated under sections 414(b) 
and (c) (as modified by section 415(h)) or sections 414(m).
    (C) Treatment of transferee plan. Except as provided in paragraph 
(b)(3)(ii) of this section, where there has been a transfer of benefits 
from one defined benefit plan to another defined benefit plan, the 
transferee plan must take into account the transferred benefits in 
determining whether it satisfies the limitations of section 415(b).
    (ii) Elective transfer of distributable benefit. Where, as 
described in Sec.  1.411(d)-4, Q&A-3(c) (permitting certain elective 
transfers of distributable benefits), a distributable benefit is 
transferred to a defined benefit plan from either a defined 
contribution plan or a defined benefit plan, the amount transferred is 
treated as a benefit paid from the transferor plan, and the annual 
benefit provided by the transferee defined benefit plan does not 
include the annual benefit attributable to the amount transferred 
(determined as if the transferred amount were a rollover contribution 
subject to the rules of paragraph (b)(2)(v) of this section). The rule 
in the preceding sentence applies regardless of whether the 
requirements of section 411 apply to the plan and, in the case of a 
transfer from a defined contribution plan that is not subject to the 
requirements of section 411 (such as a governmental plan) to a defined 
benefit plan, the rule applies even if the participant's benefits are 
not distributable from the defined contribution plan at the time of the 
transfer.
    (4) Treatment of qualified governmental excess benefit 
arrangements. Pursuant to section 415(m), in determining whether a 
governmental plan (as defined in section 414(d)) meets the requirements 
of this section, the annual benefit does not include benefits provided 
under a qualified governmental excess benefit arrangement, as defined 
in section 415(m)(3). Thus, the limitation of section 415(b) does not 
apply to benefits to the extent the benefits are provided under a 
qualified governmental excess benefit arrangement.
    (5) Treatment of benefits provided under a terminated plan--(i) 
Terminated plan with sufficient assets. If a defined benefit plan is 
terminated with sufficient assets for the payment of the benefit 
liabilities of all plan participants and a participant in the plan has 
not yet commenced benefits under the plan, for purposes of satisfying 
section 415(b) with respect to the participant, all other defined 
benefit plans maintained by the employer that maintained the terminated 
plan are required to take into account the benefits provided pursuant 
to the annuities purchased to provide benefits under the terminated 
plan at each possible annuity starting date. In such a case, see 
paragraph (b)(1)(iii) of this section for rules regarding the 
determination of a participant's annual benefit if the participant 
commences receiving benefits under the terminated plan.
    (ii) Terminated plan with insufficient assets. If a defined benefit 
plan is terminated and there are not sufficient assets for the payment 
of the benefit liabilities of all plan participants, for purposes of 
satisfying section 415(b) with respect to a participant, all other 
defined benefit plans maintained by the employer that maintained the 
terminated plan are required to take into account the benefits that are 
actually provided to the participant under the terminated plan. For 
example, in the case of a plan that is subject to Title IV of the 
Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public 
Law 93-406 (ERISA), and that terminates with insufficient assets for 
the payment of the benefit liabilities of all plan participants, all 
other defined benefit plans maintained by the employer that maintained 
the

[[Page 16903]]

terminating plan must take into account benefits that are paid by the 
Pension Benefit Guaranty Corporation. In such a case, see paragraph 
(b)(1)(iii) of this section for rules regarding the determination of a 
participant's annual benefit if the participant commences receiving 
benefits under the terminated plan.
    (iii) Other guidance. The Commissioner may provide guidance 
regarding the rules applicable to terminated plans (and plans that are 
deemed to have been terminated pursuant to paragraph (b)(3)(i)(B) of 
this section) in revenue rulings, notices, and other guidance published 
in the Internal Revenue Bulletin. See Sec.  601.601(d) of this chapter.
    (c) Adjustment to form of benefit for forms other than a straight 
life annuity--(1) In general. This paragraph (c) provides rules for 
adjusting a form of benefit other than a straight life annuity to an 
actuarially equivalent straight life annuity beginning at the same time 
for purposes of determining the annual benefit described in paragraph 
(b) of this section. Paragraph (c)(2) of this section describes how to 
adjust a benefit paid in a form to which section 417(e)(3) does not 
apply. Paragraph (c)(3) of this section describes how to adjust a 
benefit paid in a form to which section 417(e)(3) applies. Paragraph 
(c)(4) of this section describes benefit forms for which no adjustment 
is required. Paragraph (c)(5) of this section provides an exception 
from the requirements of this paragraph (c) with respect to certain 
automatic benefit increase features. Paragraph (c)(6) of this section 
sets forth examples illustrating the application of this paragraph (c). 
The Commissioner may, in revenue rulings, notices, or other guidance 
published in the Internal Revenue Bulletin set forth simplified methods 
for adjusting a form of benefit other than a straight life annuity to 
an actuarially equivalent straight life annuity beginning at the same 
time for purposes of determining the annual benefit described in 
paragraph (b) of this section. See Sec.  601.601(d)(2) of this chapter.
    (2) Benefits paid in a form to which section 417(e)(3) does not 
apply. For a benefit paid in a form to which section 417(e)(3) does not 
apply, the actuarially equivalent straight life annuity benefit is the 
greater of--
    (i) The annual amount of the straight life annuity (if any) payable 
to the participant under the plan commencing at the same annuity 
starting date as the form of benefit payable to the participant; or
    (ii) The annual amount of the straight life annuity commencing at 
the same annuity starting date that has the same actuarial present 
value as the form of benefit payable to the participant, computed using 
a 5 percent interest assumption and the applicable mortality table 
described in Sec.  1.417(e)-1(d)(2) for that annuity starting date.
    (3) Benefits paid in a form to which section 417(e)(3) applies--(i) 
In general. Except as otherwise provided in this paragraph (c)(3), for 
a benefit paid in a form to which section 417(e)(3) applies, the 
actuarially equivalent straight life annuity benefit is the greatest 
of:--
    (A) The annual amount of the straight life annuity commencing at 
the annuity starting date that has the same actuarial present value as 
the particular form of benefit payable, computed using the interest 
rate and mortality table, or tabular factor, specified in the plan for 
actuarial equivalence;
    (B) The annual amount of the straight life annuity commencing at 
the annuity starting date that has the same actuarial present value as 
the particular form of benefit payable, computed using a 5.5 percent 
interest assumption and the applicable mortality table for the 
distribution under Sec.  1.417(e)-1(d)(2); or
    (C) The annual amount of the straight life annuity commencing at 
the annuity starting date that has the same actuarial present value as 
the particular form of benefit payable (computed using the applicable 
interest rate for the distribution under Sec.  1.417(e)-1(d)(3) and the 
applicable mortality table for the distribution under Sec.  1.417(e)-
1(d)(2)), divided by 1.05.
    (ii) Special rule for distributions in plan years beginning in 2004 
and 2005. For a distribution to which section 417(e)(3) applies and 
which has an annuity starting date occurring in plan years beginning in 
2004 or 2005, except as provided in section 101(d)(3) of the Pension 
Funding Equity Act of 2004, Public Law 108-218 (118 Stat. 596), the 
actuarially equivalent straight life annuity benefit is the greater 
of--
    (A) The annual amount of the straight life annuity commencing at 
the annuity starting date that has the same actuarial present value as 
the particular form of benefit payable, computed using the interest 
rate and mortality table, or tabular factor, specified in the plan for 
actuarial equivalence; or
    (B) The annual amount of the straight life annuity commencing at 
the annuity starting date that has the same actuarial present value as 
the particular form of benefit payable, computed using a 5.5 percent 
interest assumption and the applicable mortality table for the 
distribution under Sec.  1.417(e)-1(d)(2).
    (4) Certain benefit forms for which no adjustment is required--(i) 
In general. For purposes of the adjustments described in this paragraph 
(c), the following benefits are not taken into account:
    (A) Survivor benefits payable to a surviving spouse under a 
qualified joint and survivor annuity (as defined in section 417(b)) to 
the extent that such benefits would not be payable if the participant's 
benefit were not paid in the form of a qualified joint and survivor 
annuity.
    (B) Ancillary benefits that are not directly related to retirement 
benefits, such as preretirement disability benefits not in excess of 
the qualified disability benefit, preretirement incidental death 
benefits (including a qualified preretirement survivor annuity), and 
post-retirement medical benefits.
    (ii) Rules of application--(A) Social security supplements. 
Although a social security supplement described in section 411(a)(9) 
and Sec.  1.411(a)-7(c)(4) may be an ancillary benefit, it is included 
in determining the annual benefit because it is payable upon retirement 
and therefore is directly related to retirement income benefits.
    (B) Qualified joint and survivor annuities combined with other 
distributions. If benefits are paid partly in the form of a qualified 
joint and survivor annuity (QJSA) and partly in some other form (such 
as a single-sum distribution), the rule of paragraph (c)(4)(i)(A) of 
this section (under which survivor benefits are not included in 
determining the annual benefit) applies to the survivor annuity 
payments under the portion of the benefit that is paid in the form of a 
QJSA.
    (5) Exception for certain automatic benefit increase features--(i) 
General rule. Notwithstanding paragraph (b)(1)(i)(B) of this section, 
no adjustment is required to a benefit that is paid in a form that is 
not a straight life annuity to take into account the inclusion in that 
form of an automatic benefit increase feature, as described in 
paragraph (c)(5)(ii) of this section, if:
    (A) The benefit is paid in form to which section 417(e)(3) does not 
apply.
    (B) The plan satisfies the requirements of paragraph (c)(5)(iii) of 
this section.
    (ii) Definition of automatic benefit increase feature. An automatic 
benefit increase feature is included in a form of benefit if that form 
provides for automatic, periodic increases to the benefits paid in that 
form, such as a form of benefit that automatically increases the 
benefit paid under that form annually according to a specified 
percentage or objective index, or a form of benefit that automatically 
increases the benefit paid in that form to share

[[Page 16904]]

favorable investment returns on plan assets.
    (iii) Requirements. A plan satisfies the requirements of this 
paragraph (c)(5)(iii) with respect to a form of benefit that includes 
an automatic benefit increase feature if the form of benefit without 
regard to the automatic benefit increase feature satisfies the 
requirements of section 415(b) and this section, and the plan provides 
that in no event will the amount payable to the participant under the 
form of benefit in any limitation year be greater than the section 
415(b) limit applicable at the annuity starting date (which is the 
lesser of the age-adjusted section 415(b)(1)(A) dollar limit described 
in paragraph (a)(1)(i) of this section or the section 415(b)(1)(B) 
compensation limit described in paragraph (a)(1)(ii) of this section), 
as increased in subsequent years pursuant to section 415(d) and Sec.  
1.415(d)-1. If the form of benefit without regard to the automatic 
benefit increase feature is not a straight life annuity, then the 
preceding sentence is applied by reducing the section 415(b) limit 
applicable at the annuity starting date to an actuarially equivalent 
amount (determined using the assumptions specified in paragraph 
(c)(2)(ii) of this section) that takes into account the death benefits 
under the form of benefit (other than the survivor portion of a QJSA).
    (6) Examples. The following examples illustrate the provisions of 
this paragraph (c). For purposes of these examples, except as otherwise 
stated, actuarial equivalence under the plan is determined using a 5 
percent interest assumption and the mortality table that applies under 
section 417(e)(3) as of January 1, 2003. It is assumed for purposes of 
these examples that the interest rate that applies under section 
417(e)(3) and Sec.  1.417(e)-1(d)(3) for relevant time periods is 5.25 
percent and that the mortality table that applies under section 
417(e)(3) and Sec.  1.417(e)-1(d)(2) for relevant time periods is the 
mortality table that applies under section 417(e)(3) as of January 1, 
2003. In addition, it is assumed that all participants discussed in 
these examples have at least ten years of service with the employer and 
at least ten years of participation in the plan at issue, all payments 
other than a payment of a single sum are made monthly, on the first day 
of each calendar month, and each plan's normal retirement age is 65. 
The examples are as follows:

    Example 1. (i) Facts. Plan A provides a single-sum distribution 
determined as the actuarial present value of the straight life 
annuity payable at the actual retirement date. Plan A provides that 
a participant's single sum is determined as the greater of the 
present value determined using the otherwise applicable actuarial 
assumptions of the plan and the present value determined using the 
applicable interest rate and the applicable mortality table for the 
distribution under section 417(e)(3). In accordance with Sec.  
1.417(e)-1(d)(1), Plan A also provides that the single sum is not 
less than the actuarial present value of the accrued benefit payable 
at normal retirement age, determined using the applicable interest 
rate and the applicable mortality table under section 417(e)(3) and 
Sec.  1.417(e)-1(d). Participant M retires at age 65 with a benefit 
under the plan formula (and before the application of section 415) 
of $152,619 and elects to receive a distribution in the form of a 
single sum. Under the plan and before the application of section 
415, the amount of the single sum is $1,800,002 (which is based on 
the 5 percent interest rate and applicable mortality table as of 
January 1, 2003, since that present value is greater than the 
present value that would have been determined using the applicable 
interest rate (5.25 percent) and the applicable mortality table (the 
January 1, 2003, table) for the distribution under section 
417(e)(3)).
    (ii) Conclusion. For purposes of this section, the annual 
benefit is the greatest of the annual amount of the actuarially 
equivalent straight life annuity commencing at the same age 
(determined using the plan's actuarial factors), the annual amount 
of the actuarially equivalent straight life annuity commencing at 
the same age (determined using a 5.5 percent interest assumption and 
the applicable mortality table for the distribution under Sec.  
1.417(e)-1(d)(2)), and the annual amount of the actuarially 
equivalent straight life annuity commencing at the same age 
(determined using the applicable interest rate and applicable 
mortality table for the distribution under Sec. Sec.  1.417(e)-
1(d)(2) and (d)(3)) divided by 1.05. Based on the factors used in 
the plan to determine the actuarially equivalent lump sum (in this 
case, an interest rate of 5 percent and the applicable mortality 
table as of January 1, 2003), $1,800,002 payable as a single sum is 
actuarially equivalent to an immediate straight life annuity at age 
65 of $152,619. A single sum payment of $1,800,002 is actuarially 
equivalent to an immediate straight life annuity at age 65 of 
$159,105, using a 5.5 percent interest assumption and the applicable 
mortality table under Sec.  1.417(e)-1(d)(2). Based on the 
applicable interest rate and the applicable mortality table for the 
distribution under Sec. Sec.  1.417(e)-1(d)(2) and (d)(3), 
$1,800,002 payable as a single sum is actuarially equivalent to an 
immediate straight life annuity at age 65 of $155,853. $148,432 is 
the result when this annual amount is divided by 1.05. With respect 
to the single-sum distribution, M's annual benefit for purposes of 
section 415(b) is equal to the greatest of the three resulting 
amounts ($152,619, $159,105, and $148,432), or $159,105.

    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that Participant M elects to receive his benefit in the form 
of a 10-year certain and life annuity. Applying the plan's actuarial 
equivalence factors, the benefit payable in this form is $146,100.
    (ii) Conclusion. Since the form of benefit elected by M is a 
form of benefit to which section 417(e)(3) does not apply, the 
annual benefit for purposes of this section is the greater of the 
annual amount of the plan's straight life annuity commencing at the 
same age or the annual amount of the actuarially equivalent straight 
life annuity commencing at the same age, determined using a 5 
percent interest rate and the applicable mortality table described 
in Sec.  1.417(e)-1(d)(2) for that annuity starting date. In this 
case, the straight life annuity payable under the plan commencing at 
the same age is $152,619. Because the plan's factors for actuarial 
equivalence in this case are the same standardized actuarial factors 
required to be applied to determine the actuarially equivalent 
straight life annuity, the actuarially equivalent straight life 
annuity using the required standardized factors is also $152,619. 
With respect to the 10-year certain and life annuity distribution, 
M's annual benefit is equal to the greater of the two resulting 
amounts ($152,619 and $152,619), or $152,619.

    Example 3. (i) Facts. The facts are the same as in Example 1. 
Participant M retires at age 62 with a benefit under the plan 
(before the application of section 415) of $100,000 (after 
application of the plan's early retirement factors) and a Social 
Security supplement of $10,000 per year payable until age 65. N 
chooses to receive the accrued benefit in the form of a straight 
life annuity. The Plan has no provisions under which the actuarial 
value of the Social Security supplement can be paid as a level 
annuity for life.
    (ii) Conclusion. Because the form of benefit elected by M is a 
form of benefit to which section 417(e)(3) does not apply and 
because the plan does not provide for a straight life annuity 
beginning at age 62, the annual benefit for purposes of this section 
is the annual amount of the straight life annuity commencing at age 
62 that is actuarially equivalent to the distribution stream of 
$110,000 for three years and $100,000 thereafter, where actuarial 
equivalence is determined using a 5 percent interest rate and the 
applicable mortality table described in Sec.  1.417(e)-1(d)(2) for 
the annuity starting date. In this case, the actuarially equivalent 
straight life annuity is $102,180. Accordingly, with respect to this 
distribution stream, N's annual benefit is equal to $102,180. The 
results are the same without regard to whether the Social Security 
supplement is a QSUPP (as defined in Sec.  1.401(a)(4)-12).

    Example 4. (i) Facts. Plan B is a defined benefit plan that 
provides a benefit equal to 100 percent of a participant's average 
compensation for the period of the participant's high-3 years of 
service, payable as a straight life annuity. For a married 
participant who does not elect another form of benefit, the benefit 
is payable in the form of a joint and 100 percent survivor annuity 
benefit that is a QJSA within the meaning of section 417 and that is 
reduced from the straight life annuity. For purposes of determining 
the amount of this QJSA, the plan provides that the reduction is 
only half of the reduction that would normally apply

[[Page 16905]]

under the actuarial assumptions specified in the plan for 
determining actuarial equivalence of optional forms. The plan also 
provides that a married participant can elect to receive the plan 
benefits as a straight life annuity, or in the form of a single sum 
distribution that is the actuarial equivalent of the joint and 100 
percent survivor annuity determined using the applicable interest 
rate and the applicable mortality table under section 417(e)(3) and 
Sec.  1.417(e)-1(d). Participant O elects, with spousal consent, a 
single-sum distribution.
    (ii) Conclusion. The special rule that disregards the value of 
the survivor portion of a QJSA set forth in paragraph (c)(4)(i) of 
this section only applies to a benefit that is payable in the form 
of a qualified joint and survivor annuity. Any other form of benefit 
must be adjusted to a straight life annuity in accordance with 
paragraph (c)(1) of this section. Accordingly, because the benefit 
payable under the plan in the form of a single-sum distribution is 
actuarially equivalent to a straight life annuity that is greater 
than 100 percent of a participant's average compensation for the 
period of the participant's high-3 years of service, the limitation 
of section 415(b)(1)(B) has been exceeded.

    Example 5. (i) Facts. Plan C is a defined benefit plan that 
provides an option to receive the benefit in the form of a joint and 
100 percent survivor annuity with a 10-year certain feature, where 
the survivor beneficiary is the participant's spouse.
    (ii) Conclusion. Since this form of benefit is not subject to 
section 417(e)(3), for a participant at age 65, the annual benefit 
with respect to the joint and 100 percent survivor annuity with a 
10-year certain feature is determined for purposes of this section 
as the greater of the annual amount of the straight life annuity 
payable to the participant under the plan at age 65 (if any), or the 
annual amount of the straight life annuity commencing at age 65 that 
has the same actuarial present value as the joint and 100 percent 
survivor annuity with a 10-year certain feature (but excluding the 
survivor annuity payments pursuant to paragraph (c)(4)(i)(A) of this 
section), computing using a 5 percent interest assumption and the 
applicable mortality table described in Sec.  1.417(e)-1(d)(2) for 
the annuity starting date. This latter amount is equal to the 
product of the annual payments under this optional form of benefit 
and the factor that provides for actuarial equivalence between a 
straight life annuity and a 10-year certain and life annuity (with 
no annuity for the survivor) computed using a 5 percent interest 
rate and the applicable mortality table described in Sec.  1.417(e)-
1(d)(2) for the annuity starting date.

    Example 6. (i) Facts. Plan E provides a benefit at age 65 of a 
straight life annuity equal to the lesser of 90 percent of the 
participant's average compensation for the period of the 
participant's high-3 years of service and $148,500. Upon retirement 
at age 65, the optional forms of benefit available to a participant 
include payment of a QJSA with annual payments equal to 50 percent 
of the annual payments under the straight life annuity, along with a 
single-sum distribution that is actuarially equivalent (determined 
as the greater of the single sum calculated using a 5 percent 
interest assumption and the section 417(e)(3)(A)(ii)(I) mortality 
table in effect on January 1, 2003, and the single sum calculated 
using the section 417(e)(3)(A)(ii)(II) applicable interest rate and 
the section 417(e)(3)(A)(ii)(I) applicable mortality table for the 
distribution) to 50 percent of the annual payments under the 
straight life annuity. Participant Q retires at age 65. Q's average 
compensation for the period of Q's high-3 years of service is 
$100,000. Q elects to receive a distribution in the optional form of 
benefit described above, under which the annual payments under the 
QJSA are $45,000 and the single-sum distribution is equal to 
$530,734. Q's spouse is 3 years younger than Q.
    (ii) Determination of annual benefit. Q's annual benefit under 
Plan E for purposes of section 415(b) is determined as the sum of 
the annual benefit attributable to the QJSA portion of the 
distribution and the annual benefit attributable to the single-sum 
portion of the distribution.
    (iii) Annual benefit attributable to QJSA portion. Because 
survivor benefits are not taken into account in determining the 
annual benefit attributable to the QJSA portion of the distribution, 
the annual benefit attributable to the QJSA portion of the 
distribution is determined as if that distribution were a straight 
life annuity of $45,000 per year commencing at age 65. Thus, no form 
adjustment is needed to determine the annual benefit attributable to 
the QJSA portion of the distribution, and the annual benefit 
attributable to the QJSA portion of the benefit is $45,000.
    (iv) Annual benefit attributable to single sum portion. The 
annual benefit attributable to the single sum portion of the 
distribution is determined as the greatest of the annual amount of 
the actuarially equivalent straight life annuity commencing at the 
same age (determined using the plan's actuarial factors), the annual 
amount of the actuarially equivalent straight life annuity 
commencing at the same age (determined using a 5.5 percent interest 
assumption and the applicable mortality table under Sec.  1.417(e)-
1(d)(2) for the distribution), and the annual amount of the 
actuarially equivalent straight life annuity commencing at the same 
age (determined using the applicable interest rate and applicable 
mortality table under section 417(e)(3) and Sec. Sec.  1.417(e)-
1(d)(2) and (d)(3) for the distribution) divided by 1.05. With 
respect to the single-sum distribution, the annual amount of the 
actuarially equivalent straight life annuity commencing at the same 
age determined using the plan's actuarial factors is equal to 
$45,954. The annual amount of the actuarially equivalent straight 
life annuity commencing at the same age determined using a 5.5 
percent interest assumption and the applicable mortality table under 
Sec.  1.417(e)-1(d)(2) for the distribution is $46,912. The 
actuarially equivalent straight life annuity commencing at the same 
age determined using the applicable interest rate and the applicable 
mortality table under section 417(e)(3) and Sec. Sec.  1.417(e)-
1(d)(2) and (d)(3) for the distribution is equal to $45,954. This 
amount divided by 1.05 is equal to $43,766. Thus, the annual benefit 
attributable to the single sum portion of the benefit is $46,912.
    (v) Conclusion. Q's annual benefit under the optional form of 
benefit for purposes of section 415(b) is equal to the sum of the 
annual benefit attributable to the QJSA portion of the distribution 
and the annual benefit attributable to the single sum portion of the 
distribution, or $91,912. Because Q's average compensation for the 
period of Q's high-3 years of service is $100,000, the distribution 
satisfies the compensation limit of section 415(b)(1)(B).
    Example 7. (i) Facts. Plan D is a defined benefit plan with a 
normal retirement age of 65. The normal retirement benefit under 
Plan D (and the only life annuity available under Plan D) is a life 
annuity with a fixed increase of 2 percent per year. The increase 
applies to the benefit provided in the prior year and is thus 
compounded. The plan provides that the benefit is limited to the 
lesser of 84 percent of the participant's average compensation for 
the period of the participant's high-3 years of service or 84 
percent of the age-adjusted section 415(b)(1)(A) dollar limit (which 
is assumed to be $180,000 at age 65). Plan D does not incorporate 
the section 415(d) cost-of-living adjustments to the section 415(b) 
limits for limitation years following the limitation year in which a 
participant incurs a severance from employment. Participant P 
retires at age 65, at which time P's average compensation for the 
period of P's high-3 years of service is $165,000. Under Plan D, P 
commences receiving benefits in the form of a life annuity of 
$138,600 with a fixed increase of 2 percent per year.
    (ii) Conclusion. Because Plan D does not provide for a straight 
life annuity and the form of benefit is not subject to section 
417(e)(3), P's annual benefit for purposes of section 415(b) is the 
annual amount of the straight life annuity, commencing at age 65, 
that is actuarially equivalent to the distribution stream of 
$138,600 with a fixed increase of 2 percent per year, where 
actuarial equivalence is determined using a 5 percent interest rate 
and the applicable mortality table for the distribution under 
section 417(e)(3) and Sec.  1.417(e)-1(d)(2). In order to satisfy 
the requirements of section 415 and this section, this annual 
benefit must not exceed 100 percent of the average compensation for 
the period of the participant's high-3 years of service, or 
$165,000. Using a 5 percent interest rate and the section 417(e)(3) 
applicable mortality table for the distribution, the actuarially 
equivalent straight life annuity is $165,453, which exceeds 
$165,000. Accordingly, the plan fails to satisfy the compensation-
based limitation of section 415(b)(1)(B).

    Example 8. (i) Facts. The facts are the same as in Example 7, 
except that Plan D incorporates by reference the section 415(d) 
cost-of-living adjustments to the section 415(b) limits as described 
in Sec.  1.415(a)-1(d)(3)(v) and Plan D provides that the benefit is 
limited to the applicable section 415(b) limit. Under Plan D, P 
commences receiving benefits at age 65 in the form of a life annuity 
of $138,221 with a fixed increase of 2 percent per year.

[[Page 16906]]

    (ii) Conclusion. Because Plan D does not provide for a straight 
life annuity and the form of benefit is not subject to section 
417(e)(3), P's annual benefit for purposes of section 415(b) is the 
annual amount of the straight life annuity, commencing at age 65, 
that is actuarially equivalent to the distribution stream of 
$138,221 with a fixed increase of 2 percent per year, where 
actuarial equivalence is determined using a 5 percent interest rate 
and the applicable mortality table for P's annuity starting date 
under section 417(e)(3) and Sec.  1.417(e)-1(d)(2). In order to 
satisfy the requirements of section 415(b) and this section, this 
annual benefit must not exceed 100 percent of P's average 
compensation for the period of P's high-3 years of service, or 
$165,000. Using a 5 percent interest rate and the section 417(e)(3) 
applicable mortality table for the distribution, the actuarially 
equivalent straight life annuity is $165,000, which does not exceed 
$165,000. Accordingly, the plan satisfies the compensation-based 
limitation of section 415(b)(1)(B).
    (iii) Section 415(d) adjustments. In addition to the fixed 2 
percent per year automatic increase, P's benefit will be increased 
in limitation years following the limitation year in which P retires 
in accordance with the plan provisions that incorporate by reference 
the section 415(d) cost-of-living adjustments to the section 415(b) 
limits (or, if Plan D did not incorporate by reference the section 
415(d) adjustments, P's benefit may be increased pursuant to plan 
amendments that comply with the safe harbors provided in Sec.  
1.415(d)-1(a)(5) or (6)), and such increases will not cause P's 
benefit to violate the requirements of section 415(b). For example, 
if in a later limitation year the applicable section 415(b) limit is 
increased by 3 percent pursuant to section 415(d) and Sec.  
1.415(d)-1, P's benefit payable under Plan D will be increased by 
both the fixed automatic 2 percent per year increase and by the 3 
percent section 415(d) cost-of-living adjustment. The effect of the 
combined increases may result in P's benefits for a year exceeding 
the then applicable dollar limit under section 415(b), but the plan 
will not violate section 415(b).

    Example 9. (i) Facts. The facts are the same as in Example 7, 
except that the plan provides that benefits are limited to the 
lesser of 100 percent of the participant's average compensation for 
the period of the participant's high-3 years of service or 100 
percent of the age-adjusted section 415(b)(1)(A) dollar limit. 
Assume that P retires at age 65 with a benefit in the form of a life 
annuity of $165,000 per year with a fixed increase of 2 percent per 
year. Additionally, assume that Plan D incorporates by reference the 
section 415(d) cost-of-living adjustments to the section 415(b) 
limits as described in Sec.  1.415(a)-1(d)(3)(v) and the plan 
provides pursuant to paragraph (c)(5) of this section that in no 
event will a benefit payable from the plan, as increased by the 
fixed increase of 2 percent per year, be greater than the section 
415(b) limit applicable as of the annuity starting date for the 
benefit (increased pursuant to the rules of section 415(d) and Sec.  
1.415(d)-1).
    (ii) Conclusion. The benefit payable to P at age 65 is not 
required to be adjusted to take into account the fixed increase of 2 
percent per year. This is because the benefit payable to P satisfies 
the requirements of section 415(b) without regard to the fixed 
increase of 2 percent per year, and pursuant to paragraph (c)(5) of 
this section, the plan provides that the benefit payable to P, as 
increased by the fixed increase of 2 percent per year, will never be 
greater than the section 415(b) limit applicable as of P's annuity 
starting date (increased in subsequent limitation years pursuant to 
the rules of section 415(d) and Sec.  1.415(d)-1).
    (iii) Section 415(d) adjustments. In addition to the fixed 2 
percent per year automatic increase, P's benefit will be increased 
in limitation years following the limitation year in which P retires 
in accordance with the plan provisions that incorporate by reference 
the section 415(d) cost-of-living adjustments to the section 415(b) 
limits (or, if Plan D did not incorporate by reference the section 
415(d) adjustments, P's benefit may be increased pursuant to plan 
amendments that comply with the safe harbors provided in Sec.  
1.415(d)-1(a)(5) or (6)), and such increases will not cause P's 
benefit to violate the requirements of section 415(b). However, 
pursuant to paragraph (c)(5)(iii) of this section, P's benefit 
during any limitation year, as increased by the 2 percent per year 
automatic increase feature and any plan provisions that incorporate 
by reference the section 415(d) cost-of-living adjustments or any 
plan amendments that increase P's benefits, cannot exceed the then 
applicable section 415(b) limit (as increased pursuant to section 
415(d) and Sec.  1.415(d)-1).

    Example 10. (i) Facts. Employer T maintains a defined benefit 
plan. Under the terms of the plan, all benefits in pay status (other 
than single sum payments) are adjusted upwards or downwards annually 
depending on an annual comparison of actual return on plan assets 
and an assumed interest rate of 4 percent. Thus, the plan does not 
offer a straight life annuity form of benefit, and the plan must 
determine for purposes of applying the section 415(b) limits the 
actuarially equivalent straight life annuity for benefits provided 
under the plan.
    (ii) Conclusion. Benefits under the plan are paid in a form to 
which section 417(e)(3) does not apply. In determining the 
actuarially equivalent straight life annuity of benefits that are 
subject to the annual investment performance adjustment, the plan 
must assume a 5 percent return on plan assets. See paragraph (c)(2) 
of this section. Therefore, in determining the actuarially 
equivalent straight life annuity, the plan must assume that the form 
of benefit payable under the plan will be an annuity that increases 
annually by a factor equal to 1.05 divided by 1.04. This increasing 
annuity is then converted to an actuarially equivalent straight life 
annuity under paragraph (c)(2) of this section using a 5 percent 
interest rate and the applicable mortality table described in Sec.  
1.417(e)-1(d)(2) for the relevant annuity starting date.

    Example 11. (i) Facts. R is a participant in a defined benefit 
plan maintained by R's employer. Under the terms of the plan, R must 
make contributions to the plan in a stated amount to accrue benefits 
derived from employer contributions.
    (ii) Conclusion. R's contributions are mandatory employee 
contributions within the meaning of section 411(c)(2)(C) and, thus, 
the annual benefit attributable to these contributions is not taken 
into account for purposes of testing the annual benefit derived from 
employer contributions against the applicable limitation on 
benefits. However, these contributions are treated as contributions 
to a defined contribution plan maintained by R's employer for 
purposes of section 415(c). See Sec.  1.415(c)-1(a)(2)(ii)(B). 
Accordingly, with respect to the current limitation year, the 
limitation on benefits (as described in paragraph (a)(1) of this 
section) is applicable to the annual benefit attributable to 
employer contributions to the defined benefit plan, and the 
limitation on contributions and other additions (as described in 
Sec.  1.415(c)-1) is applicable to the portion of the plan treated 
as a defined contribution plan, which consists of R's mandatory 
contributions. These same limitations would also apply if, instead 
of providing for mandatory employee contributions, the plan 
permitted voluntary employee contributions, because the portion of 
the plan attributable to voluntary employee contributions and 
earnings thereon is treated as a defined contribution plan 
maintained by the employer pursuant to section 414(k), and thus is 
not subject to the limitations of section 415(b).

    Example 12. (i) Facts. V is a participant in a defined benefit 
plan maintained by V's employer. Under the terms of the plan, V must 
make contributions to the plan in a stated amount to accrue benefits 
derived from employer contributions. V's contributions are mandatory 
employee contributions within the meaning of section 411(c)(2)(C). 
Thus, the annual benefit attributable to these contributions is not 
taken into account for purposes of testing the annual benefit 
derived from employer contributions against the applicable 
limitation on benefits. V terminates employment and receives a 
distribution from the plan that includes V's mandatory employee 
contributions. Subsequently, V resumes employment with the employer 
maintaining the plan. V recommences participation in the plan and 
repays the prior distribution from the plan (including the portion 
of the distribution that included V's prior mandatory employee 
contributions to the plan) with reasonable interest.
    (ii) Conclusion. In determining V's annual benefit under the 
plan for purposes of applying the limitations of section 415(b), no 
portion of V's repayment of the prior distribution is treated as 
employee contributions. See paragraphs (b)(2)(ii)(C), (D) and (E) of 
this section. However, V's annual benefit under the plan is 
determined by excluding the portion of the annual benefit 
attributable to V's employee contributions to the plan made both 
prior to the first distribution and during V's subsequent 
recommencement of plan participation.

    (d) Adjustment to section 415(b)(1)(A) dollar limit for 
commencement before age 62--(1) General rule--(i)

[[Page 16907]]

Calculation using statutory factors. For a distribution with an annuity 
starting date that occurs before the participant attains the age of 62, 
the age-adjusted section 415(b)(1)(A) dollar limit generally is 
determined as the actuarial equivalent of the annual amount of a 
straight life annuity commencing at the annuity starting date that has 
the same actuarial present value as a deferred straight life annuity 
commencing at age 62, where annual payments under the straight life 
annuity commencing at age 62 are equal to the dollar limitation of 
section 415(b)(1)(A) (as adjusted pursuant to section 415(d) and Sec.  
1.415(d)-1 for the limitation year), and where the actuarially 
equivalent straight life annuity is computed using a 5 percent interest 
rate and the applicable mortality table under Sec.  1.417(e)-1(d)(2) 
that is effective for that annuity starting date (and expressing the 
participant's age based on completed calendar months as of the annuity 
starting date). However, if the plan has an immediately commencing 
straight life annuity payable both at age 62 and the age of benefit 
commencement, then the age-adjusted section 415(b)(1)(A) dollar limit 
is equal to the lesser of--
    (A) The limit as otherwise determined under this paragraph 
(d)(1)(i); and
    (B) The amount determined under paragraph (d)(1)(ii) of this 
section.
    (ii) Calculation using plan factors. The amount determined under 
this paragraph (d)(1)(ii) is equal to the section 415(b)(1)(A) dollar 
limit (as adjusted pursuant to section 415(d) and Sec.  1.415(d)-1 for 
the limitation year) multiplied by the ratio of the annual amount of 
the immediately commencing straight life annuity under the plan to the 
annual amount of the straight life annuity under the plan commencing at 
age 62, with both annual amounts determined without applying the rules 
of section 415.
    (2) Mortality adjustments--(i) In general. For purposes of 
determining the actuarially equivalent amount described in paragraph 
(d)(1)(i) of this section, to the extent that a forfeiture does not 
occur upon the participant's death before the annuity starting date, no 
adjustment is made to reflect the probability of the participant's 
death between the annuity starting date and the participant's 
attainment of age 62, unless the plan provides for such an adjustment. 
To the extent that a forfeiture occurs upon the participant's death 
before the annuity starting date, an adjustment must be made to reflect 
the probability of the participant's death between the annuity starting 
date and the participant's attainment of age 62.
    (ii) No forfeiture deemed to occur where qualified preretirement 
survivor annuity payable. For purposes of paragraphs (d)(2)(i) and 
(e)(2)(i) of this section, a plan is permitted to treat no forfeiture 
as occurring upon a participant's death if the plan does not charge 
participants for providing a qualified preretirement survivor annuity 
(QPSA) (as defined in section 417(c)) on the participant's death, but 
only if the plan applies this treatment both for adjustments before age 
62 and adjustments after age 65. Thus, in such a case, the plan is 
permitted to provide that, in computing the adjusted dollar limitation 
under section 415(b)(1)(A), no adjustment is made to reflect the 
probability of a participant's death after the annuity starting date 
and before age 62 or after age 65 and before the annuity starting date.
    (3) Exception for certain participants of certain governmental 
plans. Pursuant to section 415(b)(2)(G) and (H), no age adjustment is 
made to the dollar limit for commencement before age 62 for any 
qualified participant. For this purpose, a qualified participant is a 
participant in a defined benefit plan that is maintained by a state, 
Indian tribal government (as defined in section 7701(a)(40)), or any 
political subdivision of a state or Indian tribal government with 
respect to whom the service taken into account in determining the 
amount of the benefit under the defined benefit plan includes at least 
15 years of service of the participant--
    (i) As a full-time employee of any police department or fire 
department that is organized and operated by the state, Indian tribal 
government, or political subdivision maintaining such defined benefit 
plan to provide police protection, firefighting services, or emergency 
medical services for any area within the jurisdiction of such state, 
Indian tribal government, or political subdivision; or
    (ii) As a member of the Armed Forces of the United States.
    (4) Exception for survivor and disability benefits under 
governmental plans. Pursuant to section 415(b)(2)(I), no age adjustment 
is made to the dollar limit for commencement before age 62 for a 
distribution from a governmental plan (as defined in section 414(d)) on 
account of the participant's becoming disabled by reason of personal 
injuries or sickness, or as a result of the death of the participant.
    (5) Special rule for commercial airline pilots. Pursuant to section 
415(b)(9), no age adjustment is made to the dollar limit for early 
commencement on or after age 60 for a participant if--
    (i) The participant is a commercial airline pilot;
    (ii) The participant separates from service upon or after attaining 
age 60; and
    (iii) As of the time of the participant's retirement, regulations 
prescribed by the Federal Aviation Administration require an individual 
to separate from service as a commercial airline pilot after attaining 
any age occurring on or after age 60 and before age 62.
    (6) No decrease in age-adjusted section 415(b)(1)(A) dollar limit 
on account of age or service. Notwithstanding any other provision of 
this paragraph (d), the age-adjusted section 415(b)(1)(A) dollar limit 
applicable to a participant does not decrease on account of an increase 
in age or the performance of additional service.
    (7) Examples. The following examples illustrate the application of 
this paragraph (d). For purposes of these examples, it is assumed that 
the dollar limitation under section 415(b)(1)(A) for all relevant years 
is $180,000, that the normal form of benefit under the plan is a 
straight life annuity payable beginning at age 65, and that all 
payments other than a payment of a single sum are made monthly, on the 
first day of each calendar month. The examples are as follows:

Example 1. (i) Plan A provides that early retirement benefits are 
determined by reducing the accrued benefit by 4 percent for each 
year that the early retirement age is less than age 65. Participant 
M retires at age 60 with exactly 30 years of service with a benefit 
(prior to the application of section 415) in the form of a straight 
life annuity of $100,000 payable at age 65, and is permitted to 
elect to commence benefits at any time between M's retirement and 
M's attainment of age 65. For example, M can elect to commence 
benefits at age 60 in the amount of $80,000, can wait until age 62 
and commence benefits in the amount of $88,000, or can wait until 
age 65 and commence benefits in the amount of $100,000. Plan A 
provides a QPSA to all married participants without charge. Plan A 
provides (consistent with paragraph (d)(2)(ii) of this section) 
that, for purposes of adjusting the dollar limitation under section 
415(b)(1)(A) for commencement before age 62 or after age 65, no 
forfeiture is treated as occurring upon a participant's death before 
retirement and, therefore, in computing the adjusted dollar 
limitation under section 415(b)(1)(A), no adjustment is made to 
reflect the probability of a participant's death after the annuity 
starting date and before age 62 or after age 65 and before the 
annuity starting date.
    (ii) The age-adjusted section 415(b)(1)(A) dollar limit that 
applies for commencement of M's benefit at age 60 is the lesser of 
the section 415(b)(1)(A) dollar limit multiplied by the ratio of the 
annuity payable at age 60 to the annuity payable at age 62, or the

[[Page 16908]]

straight life annuity payable at age 60 that is actuarially 
equivalent, using 5 percent interest and the applicable mortality 
table effective for that annuity starting date under section 
417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2), to the deferred 
annuity payable at age 62 of $180,000 per year. In this case, the 
age-adjusted section 415(b)(1)(A) dollar limit at age 60 is $156,229 
(the lesser of $163,636 ($180,000* $80,000/$88,000) and $156,229 
(the straight life annuity at age 60 that is actuarially equivalent 
to a deferred annuity of $180,000 commencing at age 62, determined 
using 5 percent interest and the applicable mortality table, without 
a mortality decrement for the period between 60 and 62)).

    Example 2. (i) The facts are the same as in Example 1, except 
that participant M elects to retire at age 60, 6 months, and 21 
days.
    (ii) Under paragraph (d)(1)(i) of this section, M is treated as 
age 60 and 6 months (or, age 60.5). Absent the rule provided in 
paragraph (d)(6) of this section, the age-adjusted section 
415(b)(1)(A) dollar limit that applies for commencement of M's 
benefit at age 60.5 is the lesser of the section 415(b)(1)(A) dollar 
limit multiplied by the ratio of the annuity payable at age 60.5 to 
the annuity payable at age 62, or the straight life annuity payable 
at age 60.5 that is actuarially equivalent, using 5 percent interest 
and the applicable mortality table for that annuity starting date 
under section 417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2), to the 
deferred annuity payable at age 62 of $180,000 per year. The age-
adjusted section 415(b)(1)(A) dollar limit at age 60.5 is $161,769 
(the lesser of $167,727 ($180,000* $82,000/$88,000) and $161,769 
(the straight life annuity at age 60.5 that is actuarially 
equivalent to a deferred annuity of $180,000 commencing at age 62, 
determined using 5 percent interest and the applicable mortality 
table, without a mortality decrement for the period between 60.5 and 
62).

    Example 3. (i) The facts are the same as in Example 1, except 
the plan provides that, if a participant has 30 or more years of 
service, no reduction applies for benefits commencing at age 62 and 
later.
    (ii) Absent the rule provided in paragraph (d)(6) of this 
section, the age-adjusted section 415(b)(1)(A) dollar limit that 
applies for commencement of M's benefit at age 60 is the lesser of 
the section 415(b)(1)(A) dollar limit multiplied by the ratio of the 
annuity payable at age 60 to the annuity payable at age 62, or the 
straight life annuity payable at age 60 that is actuarially 
equivalent, using 5 percent interest and the applicable mortality 
table for that annuity starting date under section 
417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2), to the deferred 
annuity payable at age 62 of $180,000 per year. In this case, 
because M has 30 years of service and would be eligible for the 
unreduced early retirement benefit at age 62, the age-adjusted 
section 415(b)(1)(A) dollar limit at age 60 would be $144,000 (the 
lesser of $144,000 ($180,000* $80,000/$100,000) and $156,229 (the 
straight life annuity at age 60 that is actuarially equivalent to a 
deferred annuity of $180,000 commencing at age 62, determined using 
5 percent interest and the applicable mortality table, without a 
mortality decrement for the period between 60 and 62)).
    (iii) However, at age 59 11/12 with 29 11/12 years of service, 
the age-adjusted section 415(b)(1)(A) dollar limit for M is $155,311 
(the lesser of $162,955 ($180,000* $79,667/$88,000) and $155,311 
(the straight life annuity at age 59 11/12 that is actuarially 
equivalent to a deferred annuity of $180,000 commencing at age 62, 
determined using 5 percent interest and the applicable mortality 
table, without a mortality decrement for the period between 59 and 
62)). Thus, after applying the rule provided in paragraph (d)(6) of 
this section, the age-adjusted section 415(b)(1)(A) dollar limit 
that applies for commencement of M's benefit at age 60 is $155,311.

    Example 4. (i) The facts are the same as in Example 1, except 
that the plan provides that, if a participant has 30 or more years 
of service, then no reduction is made in early retirement benefits 
if the early retirement age is at least age 62 and, in the case of 
an early retirement age before age 62, the early retirement benefit 
is determined by reducing the accrued benefit by 4 percent for each 
year that the early retirement age is less than age 62.
    (ii) The age-adjusted section 415(b)(1)(A) dollar limit that 
applies for commencement of M's benefit at age 60 is the lesser of 
the section 415(b)(1)(A) dollar limit multiplied by the ratio of the 
annuity payable at age 60 to the annuity payable at age 62, or the 
straight life annuity payable at age 60 that is actuarially 
equivalent, using 5 percent interest and the applicable mortality 
table for that annuity starting date under section 
417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2), to the deferred 
annuity payable at age 62 of $180,000 per year. In this case, 
because M has 30 years of service and would be eligible for the 
unreduced early retirement benefit at age 62, the age-adjusted 
section 415(b)(1)(A) dollar limit at age 60 is $156,229 (the lesser 
of $165,600 ($180,000* $92,000/$100,000) and $156,229 (the straight 
life annuity at age 60 that is actuarially equivalent to a deferred 
annuity of $180,000 commencing at age 62, determined using 5 percent 
interest and the applicable mortality table, without a mortality 
decrement for the period between 60 and 62)).

    Example 5. (i) The facts are the same as in Example 1, except 
that Participant M chooses to receive benefits in the form of a 10-
year certain and life annuity under which payments are 97 percent of 
the periodic payments that would be made under the immediately 
commencing straight life annuity. Annual payments to M are 97 
percent of $80,000, or $77,600. Additionally, M's average 
compensation for the period of M's high-3 years of service is 
$120,000. As in Example 1, the age-adjusted section 415(b)(1)(A) 
dollar limit at age 60 is $156,229.
    (ii) In the case of a form of benefit to which section 417(e)(3) 
does not apply, the annual benefit for purposes of this section is 
the greater of the annual amount of the plan's straight life annuity 
commencing at the same age or the annual amount of the actuarially 
equivalent straight life annuity commencing at the same age, 
determined using a 5 percent interest rate and the applicable 
mortality table for that annuity starting date under section 
417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2). In this case, the 
straight life annuity payable under the plan commencing at the same 
age is $80,000. The annual amount of the straight life annuity that 
is actuarially equivalent to the $77,600 benefit payable as a 10-
year certain and life annuity is determined by applying the required 
standardized factors (a 5 percent interest assumption and the 
applicable mortality under section 417(e)(3)(A)(ii)(I) and Sec.  
1.417(e)-1(d)(2), and is $79,416. With respect to the 10-year 
certain and life annuity commencing at age 62, M's annual benefit is 
equal to the greater of the two resulting amounts ($80,000 and 
$79,416), or $80,000. Because M's annual benefit is less than the 
age-adjusted section 415(b)(1)(A) dollar limit and is less than the 
section 415(b)(1)(B) compensation limit, M's benefit satisfies 
section 415.

    Example 6. (i) Participant O is a full-time civilian employee of 
the Harbor Police Division of the State of X Port Authority. The 
Harbor Police Division provides police protection services. O 
performs clerical services for the Harbor Police Division. O is a 
participant in the defined benefit plan that is maintained by the 
State of X with respect to whom the years of service taken into 
account in determining the amount of the benefit under the plan 
includes 10 years of service working for the Harbor Police Division 
and 5 years of service as a member of the Armed Forces of the United 
States.
    (ii) For a distribution with an annuity starting date that 
occurs before O attains the age of 62, there is no age adjustment to 
the section 415(b)(1)(A) dollar limit.

    Example 7. (i) Participant R is a full-time employee of the 
Emergency Medical Service Department of County Y (which is not a 
part of a police or fire department) who performs services as a 
driver of an ambulance. R is a participant in the defined benefit 
plan that is maintained by County Y with respect to whom the years 
of service taken into account in determining the amount of the 
benefit under the plan includes 15 years of service working for 
County Y. R does not have service credit for time in the Armed 
Forces of the United States.
    (ii) The age adjustments to the limitations of section 
415(b)(1)(A) pursuant to section 415(b)(2)(C) and (D) will apply if 
R commences receiving a distribution at an age to which either of 
those adjustments applies.

    (e) Adjustment to section 415(b)(1)(A) dollar limit for 
commencement after age 65--(1) General rule--(i) Calculation using 
statutory factors. For a distribution with an annuity starting date 
that occurs after the participant attains the age of 65, the age-
adjusted section 415(b)(1)(A) dollar limit generally is determined as 
the actuarial equivalent of the annual amount of a straight life 
annuity commencing at the annuity starting date that has the same 
actuarial present value as a straight life annuity commencing at age 
65, where annual payments under the straight life annuity commencing at 
age 65 are equal to the dollar limitation of section

[[Page 16909]]

415(b)(1)(A) (as adjusted pursuant to section 415(d) and Sec.  
1.415(d)-1 for the limitation year), and where the actuarially 
equivalent straight life annuity is computed using a 5 percent interest 
rate and the applicable mortality table under Sec.  1.417(e)-1(d)(2) 
that is effective for that annuity starting date (and expressing the 
participant's age based on completed calendar months as of the annuity 
starting date). However, if the plan has an immediately commencing 
straight life annuity payable as of the annuity starting date and an 
immediately commencing straight life annuity payable at age 65, then 
the age-adjusted section 415(b)(1)(A) dollar limit is equal to the 
lesser of--
    (A) The limit as otherwise determined under this paragraph 
(e)(1)(i); and
    (B) The amount determined under paragraph (e)(1)(ii) of this 
section.
    (ii) Calculation using plan factors. The amount determined under 
this paragraph (e)(1)(ii) is equal to the section 415(b)(1)(A) dollar 
limit (as adjusted pursuant to section 415(d) and Sec.  1.415(d)-1 for 
the limitation year) multiplied by the adjustment ratio described in 
paragrap. (e)(2)(i) of this section.
    (2) Adjustment ratio--(i) General rule. For purposes of applying 
the rule of paragraph (e)(1)(ii) of this section, the adjustment ratio 
is equal to the ratio of the annual amount of the adjusted immediately 
commencing straight life annuity under the plan described in paragraph 
(e)(2)(ii) of this section to the adjusted age 65 straight life annuity 
described in paragraph (e)(2)(iii) of this section.
    (ii) Adjusted immediately commencing straight life annuity. The 
adjusted immediately commencing straight life annuity that is used for 
purposes of paragraph (e)(2)(i) of this section is the annual amount of 
the immediately commencing straight life annuity payable to the 
participant, computed disregarding the participant's accruals after age 
65 but including actuarial adjustments even if those actuarial 
adjustments are applied to offset accruals. For this purpose, the 
annual amount of the immediately commencing straight life annuity is 
determined without applying the rules of section 415.
    (iii) Adjusted age 65 straight life annuity. The adjusted age 65 
straight life annuity that is used for purposes of paragraph (e)(2)(i) 
of this section is the annual amount of the straight life annuity that 
would be payable under the plan to a hypothetical participant who is 65 
years old and has the same accrued benefit (with no actuarial increases 
for commencement after age 65) as the participant receiving the 
distribution (determined disregarding the participant's accruals after 
age 65 and without applying the rules of section 415).
    (3) Mortality adjustments--(i) In general. For purposes of 
determining the actuarially equivalent amount described in paragraph 
(e)(1)(i) of this section, to the extent that a forfeiture does not 
occur upon the participant's death before the annuity starting date, no 
adjustment is made to reflect the probability of the participant's 
death between the participant's attainment of age 65 and the annuity 
starting date. To the extent that a forfeiture occurs upon the 
participant's death before the annuity starting date, an adjustment 
must be made to reflect the probability of the participant's death 
between the participant's attainment of age 65 and the annuity starting 
date.
    (ii) No forfeiture deemed to occur where QPSA payable. See 
paragraph (d)(2)(ii) of this section for a rule deeming no forfeiture 
to occur if the plan does not charge participants for providing a QPSA 
on the participant's death.
    (4) Examples. The following examples illustrate the application of 
this paragraph (e):

    Example 1. (i) Plan A provides that monthly benefits payable 
upon commencement after normal retirement age (which is age 65) are 
increased by 0.5 percent for each month of delay in commencement 
after attainment of normal retirement age. Plan A provides a QPSA to 
all married participants without charge. Plan A provides (consistent 
with paragraph (d)(2)(ii) of this section) that, for purposes of 
adjusting the dollar limitation under section 415(b)(1)(A) for 
commencement before age 62 or after age 65, no adjustment is made to 
reflect the probability of a participant's death between the annuity 
starting date and the participant's attainment of age 62 or between 
the age of 65 and the annuity starting date. The normal form of 
benefit under Plan A is a straight life annuity commencing at age 
65. Plan A does not provide additional benefit accruals once a 
participant is credited with 30 years of service. Participant M was 
credited with 30 years of service under Plan A when M attained age 
65. M retires at age 70 on January 1, 2008, with a benefit (prior to 
the application of section 415) that is payable monthly in the form 
of a straight life annuity of $195,000, which reflects the actuarial 
increase of 30 percent applied to the accrued benefit of $150,000. 
It is assumed that all payments under Plan A, other than a payment 
of a single sum, are made monthly, on the first day of each calendar 
month. It is also assumed that the dollar limit in 2008 is $185,000.
    (ii) The age-adjusted section 415(b)(1)(A) dollar limit at age 
70 is the lesser of the section 415(b)(1)(A) dollar limit multiplied 
by the ratio of the adjusted immediately commencing straight life 
annuity payable at age 70 (computed disregarding the rules of 
section 415 and accruals after age 65, but including actuarial 
adjustments) to the adjusted age 65 straight life annuity (computed 
disregarding the rules of section 415 and any accruals after age 
65), or the straight life annuity payable at age 70 that is 
actuarially equivalent, using 5 percent interest and the applicable 
mortality table for that annuity starting date under section 
417(e)(3)(A)(ii)(I) and Sec.  1.417(e)-1(d)(2), to the straight life 
annuity payable at age 65, where annual payments under the straight 
life annuity payable at age 65 are equal to the dollar limitation of 
section 415(b)(1)(A). In this case, the age-adjusted section 
415(b)(1)(A) dollar limit at age 70 is $240,500 (the lesser of 
$240,500 ($185,000* $195,000/$150,000) and $271,444 (the straight 
life annuity at age 70 that is actuarially equivalent to an annuity 
of $185,000 commencing at age 65, determined using 5 percent 
interest and the applicable mortality table, without a mortality 
decrement for the period between 65 and 70)).

    Example 2. (i) The facts are the same as in Example 1, except 
that Plan A does not limit benefit accruals to 30 years of credited 
service, and thus M accrues benefits between ages 65 and 70.
    (ii) Since M's accruals after attaining age 65 are disregarded 
for purposes of determining the age-adjusted section 415(b)(1)(A) 
dollar limit applicable to M at age 70, the result is the same as in 
Example 1.
    Example 3. (i) The facts are the same as in Example 1, except 
that Plan A does not limit benefit accruals to 30 years of credited 
service. However, benefit accruals after an employee has reached 
normal retirement age (age 65), are offset by the actuarial increase 
that the plan provides for commencement of benefits after normal 
retirement age.
    (ii) The result is the same as in Example 1, even if the 
actuarial increases for post-age 65 benefit commencement provided 
under Plan A do or do not fully offset M's benefit accruals after 
attaining age 65. This is because benefit accruals after age 65 are 
disregarded for purposes of determining the age-adjusted section 
415(b)(1)(A) dollar limit applicable to M after age 65.

    (f) Total annual payments not in excess of $10,000--(1) In general. 
Pursuant to section 415(b)(4), the annual benefit (without regard to 
the age at which benefits commence) payable with respect to a 
participant under any defined benefit plan is not considered to exceed 
the limitations on benefits described in section 415(b)(1) and in 
paragraph (a)(1) of this section if--
    (i) The benefits (other than benefits not taken into account in the 
computation of the annual benefit under the rules of paragraph (b) or 
(c) of this section) payable with respect to the participant under the 
plan and all other defined benefit plans of the employer do not in the 
aggregate exceed $10,000 (as adjusted under paragraph (g) of this

[[Page 16910]]

section) for the limitation year, or for any prior limitation year; and
    (ii) The employer (or a predecessor employer) has not at any time 
maintained a defined contribution plan in which the participant 
participated.
    (2) Computation of benefits for purposes of applying the $10,000 
amount. For purposes of paragraph (f)(1)(i) of this section, the 
benefits payable with respect to the participant under a plan for a 
limitation year reflect all amounts payable under the plan for the 
limitation year (other than benefits not taken into account in the 
computation of the annual benefit under the rules of paragraph (b) or 
(c) of this section), and are not adjusted for form of benefit or 
commencement date.
    (3) Special rule with respect to participants in multiemployer 
plans. The special $10,000 exception set forth in paragraph (f)(1) of 
this section applies to a participant in a multiemployer plan described 
in section 414(f) without regard to whether that participant ever 
participated in one or more other plans maintained by an employer who 
also maintains the multiemployer plan, provided that none of such other 
plans were maintained as a result of collective bargaining involving 
the same employee representative as the multiemployer plan.
    (4) Special rule with respect to employee contributions. 
Notwithstanding Sec. Sec.  1.415(c)-1(a)(2)(ii)(B) and 1.415(c)-
1(b)(3), mandatory employee contributions under a defined benefit plan 
described in paragraph (b)(2)(iii) of this section are not considered a 
separate defined contribution plan maintained by the employer for 
purposes of paragraph (f)(1)(ii) of this section. Thus, the special 
dollar limitation provided for in this paragraph (f) applies to a 
contributory defined benefit plan.
    Similarly, for purposes of this paragraph (f), an individual 
medical account under section 401(h) or an account for postretirement 
medical benefits established pursuant to section 419A(d)(1) is not 
considered a separate defined contribution plan maintained by the 
employer.
    (5) Examples. The application of this paragraph (f) may be 
illustrated by the following examples. For purposes of these examples, 
it is assumed that each participant has 10 years of participation in 
the plan and service with the employer. The examples are as follows:

    Example 1. (i) B is a participant in a defined benefit plan 
maintained by X Corporation, which provides for a benefit payable in 
the form of a straight life annuity beginning at age 65. B's average 
compensation for the period of B's high-3 years of service is 
$6,000. The plan does not provide for mandatory employee 
contributions, and at no time has B been a participant in a defined 
contribution plan maintained by X. With respect to the current 
limitation year, B's benefit under the plan (before the application 
of section 415) is $9,500.
    (ii) Because annual payments under B's benefit do not exceed 
$10,000, and because B has at no time participated in a defined 
contribution plan maintained by X, the benefits payable under the 
plan are not considered to exceed the limitation on benefits 
otherwise applicable to B ($6,000).
    (iii) This result would remain the same even if, under the terms 
of the plan, B's benefit of $9,500 were payable at age 60, or if the 
plan provided for mandatory employee contributions.
    Example 2. (i) The facts are the same as in Example 1, except 
that the plan provides for a benefit payable in the form of a life 
annuity with a 10-year certain feature with annual payments of 
$9,500. Assume that, after the adjustment described in paragraph (c) 
of this section, B's actuarially equivalent straight life annuity 
(which is the annual benefit used for demonstrating compliance with 
section 415) for the current limitation year is $10,400.
    (ii) For purposes of applying the special rule provided in this 
paragraph for total benefits not in excess of $10,000, there is no 
adjustment required if the retirement benefit payable under the plan 
is not in the form of a straight life annuity. Therefore, because 
B's retirement benefit does not exceed $10,000, B may receive the 
full $9,500 benefit without the otherwise applicable benefit 
limitations of this section being exceeded.

    Example 3. (i) The facts are the same as in Example 1, except 
that the plan provides for a benefit payable in the form of a single 
sum and the amount of the single sum that is the actuarial 
equivalent of the straight life annuity payable to B ($9,500 
annually), determined in accordance with the rules of section 
417(e)(3) and Sec.  1.417(e)-1(d), is $95,000.
    (ii) Because the amount payable to B for the limitation year 
would exceed $10,000, the rule of this paragraph (f) does not 
provide an exception from the generally applicable limits of section 
415(b)(1) for the single-sum distribution. Thus, the otherwise 
applicable limits apply to the single-sum distribution, and a 
single-sum distribution of $95,000 would not satisfy the 
requirements of section 415(b). Limiting the single-sum distribution 
to $60,000 (the present value of the annuity that complies with the 
compensation-based limitation of section 415(b)(1)(B)) in order to 
satisfy section 415 would be an impermissible forfeiture under the 
requirements of section 411(a). Accordingly, the plan should not 
provide for a single-sum distribution in these circumstances.

    (g) Special rule for participation or service of less than 10 
years--(1) Proration of dollar limit based on years of participation--
(i) In general. Pursuant to section 415(b)(5)(A), where a participant 
has less than 10 years of participation in the plan, the dollar limit 
described in paragraph (a)(1)(i) of this section (as adjusted pursuant 
to section 415(d), Sec.  1.415(d)-1, and paragraphs (d) and (e) of this 
section) is reduced by multiplying the otherwise applicable limitation 
by a fraction--
    (A) The numerator of which is the number of years of participation 
in the plan (or 1, if greater); and
    (B) The denominator of which is 10.
    (ii) Years of participation. The following rules apply for purposes 
of determining a participant's years of participation for purposes of 
this paragraph (g)(1)--
    (A) A participant is credited with a year of participation 
(computed to fractional parts of a year) for each accrual computation 
period for which the participant is credited with at least the number 
of hours of service (or period of service if the elapsed time method is 
used for benefit accrual purposes) required under the terms of the plan 
in order to accrue a benefit for the accrual computation period, and 
the participant is included as a plan participant under the eligibility 
provisions of the plan for at least one day of the accrual computation 
period. If these two conditions are met, the portion of a year of 
participation credited to the participant is equal to the amount of 
benefit accrual service credited to the participant for such accrual 
computation period. For example, if under the terms of a plan, a 
participant receives 1/10 of a year of benefit accrual service for an 
accrual computation period for each 200 hours of service, and the 
participant is credited with 1,000 hours of service for the period, the 
participant is credited with 1/2 a year of participation for purposes 
of section 415(b)(5)(A) and this paragraph (g)(1).
    (B) A participant who is permanently and totally disabled within 
the meaning of section 415(c)(3)(C)(i) for an accrual computation 
period is credited with a year of participation with respect to that 
period for purposes of section 415(b)(5)(A) and this paragraph (g)(1).
    (C) For a participant to receive a year of participation (or part 
thereof) for an accrual computation period for purposes of section 
415(b)(5)(A) and this paragraph (g)(1), the plan must be established no 
later than the last day of such accrual computation period.
    (D) No more than one year of participation may be credited for any 
12-month period for purposes of section 415(b)(5)(A) and this paragraph 
(g)(1).
    (2) Proration of compensation limit and special rule for total 
annual payments less than $10,000 based on years of service--(i) In 
general. Pursuant to section 415(b)(5)(B), where a participant has less 
than 10 years of

[[Page 16911]]

service with the employer, the compensation limit described in 
paragraph (a)(1)(ii) of this section and the $10,000 amount under the 
special rule for small annual payments under paragraph (f) of this 
section are reduced by multiplying the otherwise applicable limitation 
by a fraction--
    (A) The numerator of which is the number of years of service with 
the employer (or 1, if greater); and
    (B) The denominator of which is 10.
    (ii) Years of service--(A) In general. For purposes of applying 
this paragraph (g)(2), years of service must be determined on a 
reasonable and consistent basis. A plan is considered to be determining 
years of service on a reasonable and consistent basis for this purpose 
if, subject to the limits of paragraph (g)(2)(ii)(B) of this section, a 
participant is credited with a year of service (computed to fractional 
parts of a year) for each accrual computation period for which the 
participant is credited with at least the number of hours of service 
(or period of service if the elapsed time method is used for benefit 
accrual purposes) required under the terms of the plan in order to 
accrue a benefit for the accrual computation period.
    (B) Rules of application. No more than one year of service may be 
credited for any 12-month period for purposes of section 415(b)(5)(B). 
In addition, only the participant's service with the employer or a 
predecessor employer (as defined in Sec.  1.415(f)-1(c)) may be taken 
into account in determining the participant's years of service for this 
purpose. Thus, if an employer does not maintain a former employer's 
plan, a participant's service with the former employer may be taken 
into account in determining the participant's years of service for 
purposes of this paragraph (g)(2) only if the former employer is a 
predecessor employer with respect to the employer pursuant to Sec.  
1.415(f)-1(c)(2) (which defines predecessor employer to include, under 
certain circumstances, a former entity that antedates the employer).
    (C) Period of disability. Notwithstanding the rules of paragraph 
(g)(2)(ii)(B) of this section, a plan is permitted to provide that a 
participant who is permanently and totally disabled within the meaning 
of section 415(c)(3)(C)(i) for an accrual computation period is 
credited with service with respect to that period for purposes of 
section 415(b)(5)(B).
    (3) Exception for survivor and disability benefits under 
governmental plans. The requirements of this paragraph (g) (regarding 
participation or service of less than 10 years) do not apply to a 
distribution from a governmental plan (as defined in section 414(d)) on 
account of the participant's becoming disabled by reason of personal 
injuries or sickness, or as a result of the death of the participant.
    (4) Examples. The provisions of this paragraph (g) may be 
illustrated by the following examples:

    Example 1. (i) C begins employment with Employer A on January 1, 
2005, at the age of 58. Employer A maintains only a noncontributory 
defined benefit plan which provides for a straight life annuity 
beginning at age 65 and uses the calendar year for the limitation 
and plan year. Employer A has never maintained a defined 
contribution plan. C becomes a participant in Employer A's plan on 
January 1, 2006, and works through December 31, 2011, when C is age 
65. C begins to receive benefits under the plan in 2012. C's average 
compensation for the period of C's high-3 years of service is 
$40,000. Furthermore, under the terms of Employer A's plan, for 
purposes of computing C's nonforfeitable percentage in C's accrued 
benefit derived from employer contributions, C has only 7 years of 
service with Employer A (2005-2011).
    (ii) Because C has only 7 years of service with Employer A at 
the time he begins to receive benefits under the plan, the maximum 
permissible annual benefit payable with respect to C is $28,000 
($40,000 multiplied by 7/10).

    Example 2. (i) The facts are the same as in Example 1, except 
that C's average compensation for the period of his high-3 years of 
service is $8,000.
    (ii) Because C has only 7 years of service with Employer A at 
the time he begins to receive benefits, the maximum benefit payable 
with respect to C would be reduced to $5,600 ($8,000 multiplied by 
7/10). However, the special rule for total benefits not in excess of 
$10,000, provided in paragraph (f) of this section, is applicable in 
this case. Accordingly, C may receive an annual benefit of $7,000 
($10,000 multiplied by 7/10) without the benefit limitations of this 
section being exceeded.

    Example 3. (i) Employer B maintains a defined benefit plan. 
Benefits under the plan are computed based on months of service 
rather than years of service. Accordingly, for purposes of applying 
the reduction based on years of service less than 10 to the 
limitations under section 415(b), the plan provides that the 
otherwise applicable limitation is multiplied by a fraction, the 
numerator of which is the number of completed months of service with 
the employer (but not less than 12 months), and the denominator of 
which is 120. The plan further provides that months of service are 
computed in the same manner for this purpose as for purposes of 
computing plan benefits.
    (ii) The manner in which the plan applies the reduction based on 
years of service less than 10 to the limitations under section 
415(b) is consistent with the requirements of this paragraph (g).

    Example 4. (i) G begins employment with Employer D on January 1, 
2003, at the age of 58. Employer D maintains a noncontributory 
defined benefit plan which provides for a straight life annuity 
beginning at age 65 and uses the calendar year for the limitation 
and plan year. G becomes a participant in Employer D's plan on 
January 1, 2004, and works through December 31, 2009, when G is age 
65. G performs sufficient service to be credited with a year of 
service under the plan for each year during 2003 through 2009 
(although G is not credited with a year of service for 2003 because 
G is not yet a plan participant). G begins to receive benefits under 
the plan during 2010. The plan's accrual computation period is the 
plan year. The plan provides that, for purposes of applying the 
rules of section 415(b)(5)(B), a participant is credited with a year 
of service (computed to fractional parts of a year) for each plan 
year for which the participant is credited with sufficient service 
to accrue a benefit for the plan year. G's average compensation for 
the period of G's high-3 years of service is $200,000. It is assumed 
for purposes of this example that the dollar limitation of section 
415(b)(1)(A) for limitation years ending in 2010 is $195,000.
    (ii) G has 7 years of service and 6 years of participation in 
the plan at the time G begins to receive benefits under the plan. 
Accordingly, the limitation under section 415(b)(1)(B) based on G's 
average compensation for the period of G's high-3 years of service 
that applies pursuant to the adjustment required under section 
415(b)(5)(B) is $140,000 ($200,000 multiplied by 7/10), and the 
dollar limitation under section 415(b)(1)(A) that applies to G 
pursuant to the adjustment required under section 415(b)(5)(A) is 
$117,000 ($195,000 multiplied by 6/10).

    (h) Retirement Protection Act of 1994 transition rules. For special 
rules affecting the actuarial adjustment for form of benefit under 
paragraph (c) of this section and the adjustment to the dollar limit 
for early or late commencement under paragraphs (d) and (e) of this 
section for certain plans adopted and in effect before December 8, 
1994, see section 767(d)(3)(A) of the Uruguay Round Agreements Act of 
1994, Public Law 103-465 (108 Stat. 4809) as amended by section 1449(a) 
of the Small Business Job Protection Act of 1996, Public Law 104-188 
(110 Stat. 1755). The Commissioner may provide guidance regarding these 
special rules in revenue rulings, notices, and other guidance published 
in the Internal Revenue Bulletin. See Sec.  601.601(d) of this chapter.


0
Par. 10. Section 1.415(b)-2 is added and reserved.


Sec.  1.415(b)-2 Multiple annuity starting dates.  [Reserved].


0
Par. 11. Section 1.415(c)-1 is added to read as follows:

[[Page 16912]]

Sec.  1.415(c)-1  Limitations for defined contribution plans.

    (a) General rules--(1) Maximum limitations. Under section 415(c) 
and this section, to satisfy the provisions of section 415(a) for any 
limitation year, except as provided by paragraph (a)(3) of this 
section, the annual additions (as defined in paragraph (b) of this 
section) credited to the account of a participant in a defined 
contribution plan for the limitation year must not exceed the lesser 
of--
    (i) $40,000 (adjusted pursuant to section 415(d) and Sec.  
1.415(d)-1(b)); or
    (ii) 100 percent of the participant's compensation (as defined in 
Sec.  1.415(c)-2) for the limitation year.
    (2) Defined contribution plan--(i) Definition. For purposes of 
section 415 and regulations promulgated under section 415, the term 
defined contribution plan means a defined contribution plan within the 
meaning of section 414(i) (including the portion of a plan treated as a 
defined contribution plan under the rules of section 414(k)) that is--
    (A) A plan described in section 401(a) which includes a trust which 
is exempt from tax under section 501(a);
    (B) An annuity plan described in section 403(a); or
    (C) A simplified employee pension described in section 408(k).
    (ii) Additional plans treated as defined contribution plans--(A) In 
general. Contributions to the types of arrangements described in 
paragraphs (a)(2)(ii)(B) through (D) of this section are treated as 
contributions to defined contribution plans for purposes of section 415 
and regulations promulgated under section 415.
    (B) Employee contributions to a defined benefit plan. Mandatory 
employee contributions (as defined in section 411(c)(2)(C) and Sec.  
1.411(c)-1(c)(4), regardless of whether the plan is subject to the 
requirements of section 411) to a defined benefit plan are treated as 
contributions to a defined contribution plan. For this purpose, 
contributions that are picked up by the employer as described in 
section 414(h)(2) are not considered employee contributions.
    (C) Individual medical benefit accounts under section 401(h). 
Pursuant to section 415(l)(1), contributions allocated to any 
individual medical benefit account which is part of a pension or 
annuity plan established pursuant to section 401(h) are treated as 
contributions to a defined contribution plan.
    (D) Post-retirement medical accounts for key employees. Pursuant to 
section 419A(d)(2), amounts attributable to medical benefits allocated 
to an account established for a key employee (any employee who, at any 
time during the plan year or any preceding plan year, is or was a key 
employee as defined in section 416(i)) pursuant to section 419A(d)(1) 
are treated as contributions to a defined contribution plan.
    (iii) Section 403(b) annuity contracts. Annual additions under an 
annuity contract described in section 403(b) are treated as annual 
additions under a defined contribution plan for purposes of this 
section.
    (3) Alternative contribution limitations--(i) Church plans. For 
alternative contribution limitations relating to church plans, see 
paragraph (d) of this section.
    (ii) Special rules for medical benefits. For additional rules 
relating to certain medical benefits, see paragraph (e) of this 
section.
    (iii) Employee stock ownership plans. For additional rules relating 
to employee stock ownership plans, see paragraph (f) of this section.
    (b) Annual additions--(1) In general--(i) General definition. The 
term annual addition means, for purposes of this section, the sum, 
credited to a participant's account for any limitation year, of--
    (A) Employer contributions;
    (B) Employee contributions; and
    (C) Forfeitures.
    (ii) Certain excess amounts treated as annual additions. 
Contributions do not fail to be annual additions merely because they 
are excess contributions (as described in section 401(k)(8)(B)) or 
excess aggregate contributions (as described in section 401(m)(6)(B)), 
or merely because excess contributions or excess aggregate 
contributions are corrected through distribution.
    (iii) Direct transfers. The direct transfer of a benefit or 
employee contributions from a qualified plan to a defined contribution 
plan does not give rise to an annual addition.
    (iv) Reinvested employee stock ownership plan dividends. The 
reinvestment of dividends on employer securities under an employee 
stock ownership plan pursuant to section 404(k)(2)(A)(iii)(II) does not 
give rise to an annual addition.
    (2) Employer contributions--(i) Amounts treated as an annual 
addition. For purposes of paragraph (b)(1)(i)(A) of this section, the 
term annual addition includes employer contributions credited to the 
participant's account for the limitation year and other allocations 
described in paragraph (b)(4) of this section that are made during the 
limitation year. See paragraph (b)(6) of this section for timing rules 
applicable to annual additions with respect to employer contributions.
    (ii) Amounts not treated as annual additions--(A) Certain 
restorations of accrued benefits. The restoration of an employee's 
accrued benefit by the employer in accordance with section 411(a)(3)(D) 
or section 411(a)(7)(C) or resulting from the repayment of cashouts (as 
described in section 415(k)(3)) under a governmental plan (as defined 
in section 414(d)) is not considered an annual addition for the 
limitation year in which the restoration occurs. This treatment of a 
restoration of an employee's accrued benefit as not giving rise to an 
annual addition applies regardless of whether the plan restricts the 
timing of repayments to the maximum extent allowed by section 411(a).
    (B) Catch-up contributions. A catch-up contribution made in 
accordance with section 414(v) and Sec.  1.414(v)-1 does not give rise 
to an annual addition.
    (C) Restorative payments. A restorative payment that is allocated 
to a participant's account does not give rise to an annual addition for 
any limitation year. For this purpose, restorative payments are 
payments made to restore losses to a plan resulting from actions by a 
fiduciary for which there is reasonable risk of liability for breach of 
a fiduciary duty under Title I of the Employee Retirement Income 
Security Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA) or under 
other applicable federal or state law, where plan participants who are 
similarly situated are treated similarly with respect to the payments. 
Generally, payments to a defined contribution plan are restorative 
payments only if the payments are made in order to restore some or all 
of the plan's losses due to an action (or a failure to act) that 
creates a reasonable risk of liability for such a breach of fiduciary 
duty (other than a breach of fiduciary duty arising from failure to 
remit contributions to the plan). This includes payments to a plan made 
pursuant to a Department of Labor order, the Department of Labor's 
Voluntary Fiduciary Correction Program, or a court-approved settlement, 
to restore losses to a qualified defined contribution plan on account 
of the breach of fiduciary duty (other than a breach of fiduciary duty 
arising from failure to remit contributions to the plan). Payments made 
to a plan to make up for losses due merely to market fluctuations and 
other payments that are not made on account of a reasonable risk of 
liability for breach of a fiduciary duty under Title I of ERISA are not 
restorative payments and generally constitute

[[Page 16913]]

contributions that give rise to annual additions under paragraph (b)(4) 
of this section.
    (D) Excess deferrals. Excess deferrals that are distributed in 
accordance with Sec.  1.402(g)-1(e)(2) or (3) do not give rise to 
annual additions.
    (3) Employee contributions. For purposes of paragraph (b)(1)(i)(B) 
of this section, the term annual addition includes mandatory employee 
contributions (as defined in section 411(c)(2)(C) and regulations 
promulgated under section 411) as well as voluntary employee 
contributions. The term annual addition does not include--
    (i) Rollover contributions (as described in sections 401(a)(31), 
402(c)(1), 403(a)(4), 403(b)(8), 408(d)(3), and 457(e)(16));
    (ii) Repayments of loans made to a participant from the plan;
    (iii) Repayments of amounts described in section 411(a)(7)(B) (in 
accordance with section 411(a)(7)(C)) and section 411(a)(3)(D) or 
repayment of contributions to a governmental plan (as defined in 
section 414(d)) as described in section 415(k)(3);
    (iv) Repayments that would have been described in paragraph 
(b)(3)(iii) of this section except that the plan does not restrict the 
timing of repayments to the maximum extent permitted by section 411(a); 
or
    (v) Employee contributions to a qualified cost of living 
arrangement within the meaning of section 415(k)(2)(B).
    (4) Transactions with plan. The Commissioner may in an appropriate 
case, considering all of the facts and circumstances, treat 
transactions between the plan and the employer, transactions between 
the plan and the employee, or certain allocations to participants' 
accounts as giving rise to annual additions. Further, where an employee 
or employer transfers assets to a plan in exchange for consideration 
that is less than the fair market value of the assets transferred to 
the plan, there is an annual addition in the amount of the difference 
between the value of the assets transferred and the consideration. A 
transaction described in this paragraph (b)(4) may constitute a 
prohibited transaction with the meaning of section 4975(c)(1).
    (5) Contributions other than cash. For purposes of this paragraph 
(b), a contribution by the employer or employee of property rather than 
cash is considered to be a contribution in an amount equal to the fair 
market value of the property on the date the contribution is made. For 
this purpose, the fair market value is the price at which the property 
would change hands between a willing buyer and a willing seller, 
neither being under any compulsion to buy or to sell and both having 
reasonable knowledge of relevant facts. In addition, a contribution 
described in this paragraph (b)(5) may constitute a prohibited 
transaction within the meaning of section 4975(c)(1).
    (6) Timing rules--(i) In general--(A) Date of allocation. For 
purposes of this paragraph (b), an annual addition is credited to the 
account of a participant for a particular limitation year if it is 
allocated to the participant's account under the terms of the plan as 
of any date within that limitation year. Similarly, an annual addition 
that is made pursuant to a corrective amendment that complies with the 
requirements of Sec.  1.401(a)(4)-11(g) is credited to the account of a 
participant for a particular limitation year if it is allocated to the 
participant's account under the terms of the corrective amendment as of 
any date within that limitation year. However, if the allocation of an 
annual addition is dependent upon the satisfaction of a condition (such 
as continued employment or the occurrence of an event) that has not 
been satisfied by the date as of which the annual addition is allocated 
under the terms of the plan, then the annual addition is considered 
allocated for purposes of this paragraph (b) as of the date the 
condition is satisfied.
    (B) Date of employer contributions. For purposes of this paragraph 
(b), employer contributions are not treated as credited to a 
participant's account for a particular limitation year unless the 
contributions are actually made to the plan no later than 30 days after 
the end of the period described in section 404(a)(6) applicable to the 
taxable year with or within which the particular limitation year ends. 
If, however, contributions are made by an employer exempt from Federal 
income tax (including a governmental employer), the contributions must 
be made to the plan no later than the 15th day of the tenth calendar 
month following the end of the calendar year or fiscal year (as 
applicable, depending on the basis on which the employer keeps its 
books) with or within which the particular limitation year ends. If 
contributions are made to a plan after the end of the period during 
which contributions can be made and treated as credited to a 
participant's account for a particular limitation year, allocations 
attributable to those contributions are treated as credited to the 
participant's account for the limitation year during which those 
contributions are made.
    (C) Date of employee contributions. For purposes of this paragraph 
(b), employee contributions, whether voluntary or mandatory, are not 
treated as credited to a participant's account for a particular 
limitation year unless the contributions are actually made to the plan 
no later than 30 days after the close of that limitation year.
    (D) Date for forfeitures. A forfeiture is treated as an annual 
addition for the limitation year that contains the date as of which it 
is allocated to a participant's account as a forfeiture.
    (E) Treatment of elective contributions as plan assets. The extent 
to which elective contributions constitute plan assets for purposes of 
the prohibited transaction provisions of section 4975 and Title I of 
ERISA, is determined in accordance with regulations and rulings issued 
by the Department of Labor. See 29 CFR 2510.3-102.
    (ii) Special timing rules--(A) Corrective contributions. For 
purposes of this section, if, in a particular limitation year, an 
employer allocates an amount to a participant's account because of an 
erroneous forfeiture in a prior limitation year, or because of an 
erroneous failure to allocate amounts in a prior limitation year, the 
corrective allocation will not be considered an annual addition with 
respect to the participant for that particular limitation year, but 
will be considered an annual addition for the prior limitation year to 
which it relates. An example of a situation in which an employer 
contribution might occur under the circumstances described in the 
preceding sentence is a retroactive crediting of service for an 
employee under 29 CFR 2530.200b-2(a)(3) in accordance with an award of 
back pay. For purposes of this paragraph (b)(6)(ii), if the amount so 
contributed in the particular limitation year takes into account actual 
investment gains attributable to the period subsequent to the year to 
which the contribution relates, the portion of the total contribution 
that consists of such gains is not considered as an annual addition for 
any limitation year.
    (B) Contributions for accumulated funding deficiencies and 
previously waived contributions--(1) Accumulated funding deficiency. In 
the case of a defined contribution plan to which the rules of section 
412 apply, a contribution made to reduce an accumulated funding 
deficiency will be treated as if it were timely made for purposes of 
determining the limitation year in which the annual additions arising 
from the contribution are made,

[[Page 16914]]

but only if the contribution is allocated to those participants who 
would have received an annual addition if the contribution had been 
timely made.
    (2) Previously waived contributions. In the case of a defined 
contribution plan to which the rules of section 412 apply and for which 
there has been a waiver of the minimum funding standard in a prior 
limitation year in accordance with section 412(d), that portion of an 
employer contribution in a subsequent limitation year which, if not for 
the waiver, would have otherwise been required in the prior limitation 
year under section 412(a) will be treated as if it were timely made 
(without regard to the funding waiver) for purposes of determining the 
limitation year in which the annual additions arising from the 
contribution are made, but only if the contribution is allocated to 
those participants who would have received an annual addition if the 
contribution had been timely made (without regard to the funding 
waiver).
    (3) Interest. For purposes of determining the amount of the annual 
addition under paragraphs (b)(6)(ii)(B)(1) and (2) of this section, a 
reasonable amount of interest paid by the employer is disregarded. 
However, any interest paid by the employer that is in excess of a 
reasonable amount, as determined by the Commissioner, is taken into 
account as an annual addition for the limitation year during which the 
contribution is made.
    (C) Simplified employee pensions. For purposes of this paragraph 
(b), amounts contributed to a simplified employee pension described in 
section 408(k) are treated as allocated to the individual's account as 
of the last day of the limitation year ending with or within the 
taxable year for which the contribution is made.
    (D) Treatment of certain contributions made pursuant to veterans' 
reemployment rights. If, in a particular limitation year, an employer 
contributes an amount to an employee's account with respect to a prior 
limitation year and such contribution is required by reason of such 
employee's rights under chapter 43 of title 38, United States Code, 
resulting from qualified military service, as specified in section 
414(u)(1), then such contribution is not considered an annual addition 
with respect to the employee for that particular limitation year in 
which the contribution is made, but, in accordance with section 
414(u)(1)(B), is considered an annual addition for the limitation year 
to which the contribution relates.
    (c) Examples. The following examples illustrate the rules of 
paragraphs (a) and (b) of this section:

    Example 1. (i) P is a participant in a qualified profit-sharing 
plan maintained by his employer, ABC Corporation. The limitation 
year for the plan is the calendar year. P's compensation (as defined 
in Sec.  1.415(c)-2) for the current limitation year is $30,000.
    (ii) Because the compensation limitation described in section 
415(c)(1)(B) applicable to P for the current limitation year is 
lower than the dollar limitation described in section 415(c)(1)(A), 
the maximum annual addition which can be allocated to P's account 
for the current limitation year is $30,000 (100 percent of $30,000).

    Example 2. (i) The facts are the same as in Example 1, except 
that P's compensation for the current limitation year is $140,000.
    (ii) The maximum amount of annual additions that may be 
allocated to P's account in the current limitation year is the 
lesser of $140,000 (100 percent of P's compensation) or the dollar 
limitation of section 415(c)(1)(A) as in effect as of January 1 of 
the calendar year in which the current limitation year ends. If, for 
example, the dollar limitation of section 415(c)(1)(A) in effect as 
of January 1 of the calendar year in which the current limitation 
year ends is $45,000, then the maximum annual addition that can be 
allocated to P's account for the current limitation year is $45,000.

    Example 3. (i) Employer N maintains a qualified profit-sharing 
plan that uses the calendar year as its plan year and its limitation 
year. N's taxable year is a fiscal year beginning June 1 and ending 
May 31. Under the terms of the profit-sharing plan maintained by N, 
employer contributions are made to the plan two months after the 
close of N's taxable year and are allocated as of the last day of 
the plan year ending within the taxable year (and are not dependent 
on the satisfaction of a condition). Thus, employer contributions 
for the 2008 calendar year limitation year are made on July 31, 2009 
(the date that is two months after the close of N's taxable year 
ending May 31, 2009) and are allocated as of December 31, 2008.
    (ii) Because the employer contributions are actually made to the 
plan no later than 30 days after the end of the period described in 
section 404(a)(6) with respect to N's taxable year ending May 31, 
2009, the contributions will be considered annual additions for the 
2008 calendar year limitation year.

    Example 4. (i) The facts are the same as in Example 3, except 
that the plan year for the profit-sharing plan maintained by N is 
the 12-month period beginning on February 1 and ending on January 
31. The limitation year continues to be the calendar year. Under the 
terms of the plan, an employer contribution which is made to the 
plan on July 31, 2009, is allocated to participants' accounts as of 
January 31, 2009.
    (ii) Because the last day of the plan year is in the 2009 
calendar year limitation year, and because, under the terms of the 
plan, employer contributions are allocated to participants' accounts 
as of the last day of the plan year, the contributions are 
considered annual additions for the 2009 calendar year limitation 
year.

    Example 5. (i) XYZ Corporation maintains a profit-sharing plan 
to which a participant may make voluntary employee contributions for 
any year not to exceed 10 percent of the participant's compensation 
for the year. The plan permits a participant to make retroactive 
make-up contributions for any year for which the participant 
contributed less than 10 percent of compensation. XYZ uses the 
calendar year as the plan year and the limitation year. Under the 
terms of the plan, voluntary employee contributions are credited to 
a participant's account for a particular limitation year if such 
contributions are allocated to the participant's account as of any 
date within that limitation year. Participant A's compensation is as 
follows--

------------------------------------------------------------------------
                     Limitation year                       Compensation
------------------------------------------------------------------------
2008....................................................         $30,000
2009....................................................         $32,000
2010....................................................         $34,000
2011....................................................         $36,000
------------------------------------------------------------------------

    (ii) Participant A makes no voluntary employee contributions 
during limitation years 2008, 2009, and 2010. On October 1, 2011, 
participant A makes a voluntary employee contribution of $13,200 (10 
percent of A's aggregate compensation for limitation years 2008, 
2009, 2010, and 2011 of $132,000). Under the terms of the plan, 
$3,000 of this 2011 contribution is allocated to A's account as of 
limitation year 2008; $3,200 is allocated to A's account of 
limitation year 2009; $3,400 is allocated to A's account as of 
limitation year 2010, and $3,600 is allocated to A's account as of 
limitation year 2011.
    (iii) Under the rule set forth in paragraph (b)(6)(i)(C) of this 
section, employee contributions will not be considered credited to a 
participant's account for a particular limitation year for section 
415 purposes unless the contributions are actually made to the plan 
no later than 30 days after the close of that limitation year. Thus, 
A's voluntary employee contribution of $13,200 made on October 1, 
2011, would be considered as credited to A's account only for the 
2011 calendar year limitation year, notwithstanding the plan 
provisions.

    (d) Special rules relating to church plans--(1) Alternative 
contribution limitation--(i) In general. Pursuant to section 
415(c)(7)(A), notwithstanding the general rule of paragraph (a)(1) of 
this section, additions for a section 403(b) annuity contract for a 
year with respect to a participant who is an employee of a church or a 
convention or association of churches, including an organization 
described in section 414(e)(3)(B)(ii), when expressed as an annual 
addition to such participant's account, are treated as not exceeding 
the limitation of paragraph (a)(1) of this section if such annual 
additions for the year are not in excess of $10,000.

[[Page 16915]]

    (ii) $40,000 aggregate limitation. With respect to any participant, 
the total amount of annual additions that are in excess of the 
limitation of paragraph (a)(1) of this section but, pursuant to the 
rule of paragraph (d)(1)(i) of this section, are treated as not 
exceeding that limitation (taking into account the rule of paragraph 
(d)(3) of this section) cannot exceed $40,000. Thus, the aggregate of 
annual additions for all limitation years that would exceed the 
limitation of this section but for this paragraph (d)(1) is limited to 
$40,000.
    (2) Years of service taken into account for duly ordained, 
commissioned, or licensed ministers or lay employees. For purposes of 
this paragraph (d)--
    (i) All years of service by an individual as an employee of a 
church, or a convention or association of churches, including an 
organization described in section 414(e)(3)(B)(ii), are considered as 
years of service for one employer; and
    (ii) All amounts contributed for annuity contracts by each such 
church (or convention or association of churches) during such years for 
the employee are considered to have been contributed by one employer.
    (3) Foreign missionaries. Pursuant to section 415(c)(7)(C), in the 
case of any individual described in paragraph (d)(1) of this section 
performing any services for the church outside the United States during 
the limitation year, additions for an annuity contract under section 
403(b) for any year are not treated as exceeding the limitation of 
paragraph (a)(1) of this section if such annual additions for the year 
do not exceed $3,000. The preceding sentence shall not apply with 
respect to any taxable year to any individual whose adjusted gross 
income for such taxable year (determined separately and without regard 
to community property law) exceeds $17,000.
    (4) Church, convention or association of churches. For purposes of 
this paragraph (d), the terms ``church'' and ``convention or 
association of churches'' have the same meaning as when used in section 
414(e).
    (5) Examples. The following examples illustrate the rules of this 
paragraph (d):

    Example 1. (i) E is an employee of ABC Church earning $7,000 
during each calendar year. E participates in a section 403(b) 
annuity contract maintained by ABC Church beginning in the year 
2008. E's taxable year is the calendar year, and the limitation year 
for the plan coincides with the calendar year. ABC Church 
contributes $10,000 to be allocated to E's account under the plan 
for the year 2008.
    (ii) Under paragraph (d)(1) of this section, this allocation is 
treated as not violating the limits established in paragraph (a)(1) 
of this section because it does not exceed $10,000. Moreover, since 
an annual addition of $10,000 would otherwise exceed the limitation 
of paragraph (a)(1) of this section by $3,000, $3,000 is counted 
toward the aggregate limitation specified in paragraph (d)(1)(ii) of 
this section for year 2008. Accordingly, ABC Church may make such 
allocations for 13 years (for example, for years 2008 through 2020) 
without exceeding the aggregate limitation of $40,000 specified in 
paragraph (d) of this section. For the fourteenth year, ABC Church 
could allocate only $8,000 to E's account (the sum of the $7,000 
limitation computed under paragraph (a)(1)(ii) of this section and 
the remaining $1,000 of the $40,000 aggregate limitation under 
paragraph (d)(1)(ii) of this section on annual additions in excess 
of the limits under paragraph (a)(1) of this section).

    Example 2. (i) F is an employee of XYZ Church and F's taxable 
year is the calendar year. F earns $2,000 during each calendar year 
for services he provides to XYZ Church, all of which are performed 
outside the United States during each calendar year. F participates 
in a section 403(b) annuity contract maintained by ABC Church 
beginning in the year 2008. The limitation year for the plan 
coincides with the calendar year. ABC Church contributes $10,000 to 
be allocated to F's account under the plan for the year 2008. F's 
adjusted gross income for each taxable year (determined separately 
and without regard to community property law) does not exceed 
$17,000.
    (ii) Under paragraph (d)(1) of this section, this allocation is 
treated as not violating the limits established in paragraph (a)(1) 
of this section because it does not exceed $10,000. Moreover, since 
an annual addition of $10,000 would otherwise exceed the limitation 
of paragraph (a)(1) of this section by $7,000 (the excess of $10,000 
over the greater of the $2,000 compensation limitation under section 
415(c)(1)(B) or the $3,000 section 415(c)(7)(C) amount), XYZ Church 
may make such allocations for 5 years (for example, for years 2008 
through 2012) without exceeding the aggregate limitation of $40,000 
specified in paragraph (d) of this section. In year 2013, XYZ church 
may contribute $8,000 to be allocated to F's account under the plan 
(the sum of the $3,000 limitation computed under paragraph (d)(3) of 
this section and the remaining $5,000 of the $40,000 aggregate 
limitation under paragraph (d)(1)(ii) of this section on annual 
additions in excess of the limits under paragraph (a)(1) of this 
section). For years after 2013, pursuant to paragraph (d)(3) of this 
section, XYZ Church could allocate $3,000 per year to F's account.

    (e) Special rules for medical benefits. The limit under paragraph 
(a)(1)(ii) of this section (100 percent of the participant's 
compensation for the limitation year) does not apply to--
    (1) An individual medical benefit account (as defined in section 
415(l)); or
    (2) A post-retirement medical benefits account for a key employee 
(as defined in section 419A(d)(1)).
    (f) Special rules for employee stock ownership plans--(1) In 
general. Special rules apply to employee stock ownership plans, as 
provided in paragraphs (f)(2) through (f)(4) of this section.
    (2) Determination of annual additions for leveraged employee stock 
ownership plans--(i) In general. Except as provided in this paragraph 
(f) of this section, in the case of an employee stock ownership plan to 
which an exempt loan as described in Sec.  54.4975-7(b) of this chapter 
has been made, the amount of employer contributions that is considered 
an annual addition for the limitation year is calculated with respect 
to employer contributions of both principal and interest used to repay 
that exempt loan for the limitation year.
    (ii) Employer stock that has decreased in value. A plan may provide 
that, in lieu of computing annual additions in accordance with 
paragraph (f)(2)(i) of this section, annual additions with respect to a 
loan repayment described in paragraph (f)(2)(i) of this section are 
determined as the fair market value of shares released from the 
suspense account on account of the repayment and allocated to 
participants for the limitation year if that amount is less than the 
amount determined in accordance with paragraph (f)(2)(i) of this 
section.
    (3) Exclusions from annual additions for certain employee stock 
ownership plans that allocate to a broad range of participants--(i) 
General rule. Pursuant to section 415(c)(6), in the case of an employee 
stock ownership plan (as described in section 4975(e)(7)) that meets 
the requirements of paragraph (f)(3)(ii) of this section for a 
limitation year, the limitations imposed by this section do not apply 
to--
    (A) Forfeitures of employer securities (within the meaning of 
section 409(l)) under such an employee stock ownership plan if such 
securities were acquired with the proceeds of a loan (as described in 
section 404(a)(9)(A)); or
    (B) Employer contributions to such an employee stock ownership plan 
which are deductible under section 404(a)(9)(B) and charged against the 
participant's account.
    (ii) Employee stock ownership plans to which the special exclusion 
applies. An employee stock ownership plan meets the requirements of 
this paragraph (f)(3)(ii) for a limitation year if no more than one-
third of the employer contributions for the limitation year that are 
deductible under section 404(a)(9) are allocated to highly compensated 
employees (within the meaning of section 414(q)).

[[Page 16916]]

    (4) Gratuitous transfers under section 664(g)(1). The amount of any 
qualified gratuitous transfer (as defined in section 664(g)(1)) 
allocated to a participant for any limitation year is not taken into 
account in determining whether any other annual addition exceeds the 
limitations imposed by this section, but only if the amount of the 
qualified gratuitous transfer does not exceed the limitations imposed 
by section 415.


0
Par. 12. Section 1.415(c)-2 is added to read as follows:


Sec.  1.415(c)-2  Compensation.

    (a) General definition. Except as otherwise provided in this 
section, compensation from the employer within the meaning of section 
415(c)(3), which is used for purposes of section 415 and regulations 
promulgated under section 415, means all items of remuneration 
described in paragraph (b) of this section, but excludes the items of 
remuneration described in paragraph (c) of this section. Paragraph (d) 
of this section provides safe harbor definitions of compensation that 
are permitted to be provided in a plan in lieu of the generally 
applicable definition of compensation. Paragraph (e) of this section 
provides timing rules relating to compensation. Paragraph (f) of this 
section provides rules regarding the application of the rules of 
section 401(a)(17) to the definition of compensation for purposes of 
section 415. Paragraph (g) of this section provides special rules 
relating to the determination of compensation, including rules for 
determining compensation for a section 403(b) annuity contract, rules 
for determining the compensation of employees of controlled groups or 
affiliated service groups, rules for disabled employees, rules relating 
to foreign compensation, rules regarding deemed section 125 
compensation, rules for employees in qualified military service, and 
rules relating to back pay.
    (b) Items includible as compensation. For purposes of applying the 
limitations of section 415, except as otherwise provided in this 
section, the term compensation means remuneration for services of the 
following types--
    (1) The employee's wages, salaries, fees for professional services, 
and other amounts received (without regard to whether or not an amount 
is paid in cash) for personal services actually rendered in the course 
of employment with the employer maintaining the plan, to the extent 
that the amounts are includible in gross income (or to the extent 
amounts would have been received and includible in gross income but for 
an election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 
402(k), or 457(b)). These amounts include, but are not limited to, 
commissions paid to salespersons, compensation for services on the 
basis of a percentage of profits, commissions on insurance premiums, 
tips, bonuses, fringe benefits, and reimbursements or other expense 
allowances under a nonaccountable plan as described in Sec.  1.62-2(c).
    (2) In the case of an employee who is an employee within the 
meaning of section 401(c)(1) and regulations promulgated under section 
401(c)(1), the employee's earned income (as described in section 
401(c)(2) and regulations promulgated under section 401(c)(2)), plus 
amounts deferred at the election of the employee that would be 
includible in gross income but for the rules of section 402(e)(3), 
402(h)(1)(B), 402(k), or 457(b).
    (3) Amounts described in section 104(a)(3), 105(a), or 105(h), but 
only to the extent that these amounts are includible in the gross 
income of the employee.
    (4) Amounts paid or reimbursed by the employer for moving expenses 
incurred by an employee, but only to the extent that at the time of the 
payment it is reasonable to believe that these amounts are not 
deductible by the employee under section 217.
    (5) The value of a nonstatutory option (which is an option other 
than a statutory option as defined in Sec.  1.421-1(b)) granted to an 
employee by the employer, but only to the extent that the value of the 
option is includible in the gross income of the employee for the 
taxable year in which granted.
    (6) The amount includible in the gross income of an employee upon 
making the election described in section 83(b).
    (7) Amounts that are includible in the gross income of an employee 
under the rules of section 409A or section 457(f)(1)(A) or because the 
amounts are constructively received by the employee.
    (c) Items not includible as compensation. The term compensation 
does not include--
    (1) Contributions (other than elective contributions described in 
section 402(e)(3), section 408(k)(6), section 408(p)(2)(A)(i), or 
section 457(b)) made by the employer to a plan of deferred compensation 
(including a simplified employee pension described in section 408(k) or 
a simple retirement account described in section 408(p), and whether or 
not qualified) to the extent that the contributions are not includible 
in the gross income of the employee for the taxable year in which 
contributed. In addition, any distributions from a plan of deferred 
compensation (whether or not qualified) are not considered as 
compensation for section 415 purposes, regardless of whether such 
amounts are includible in the gross income of the employee when 
distributed. However, if the plan so provides, any amounts received by 
an employee pursuant to a nonqualified unfunded deferred compensation 
plan are permitted to be considered as compensation for section 415 
purposes in the year the amounts are actually received, but only to the 
extent such amounts are includible in the employee's gross income.
    (2) Amounts realized from the exercise of a nonstatutory option 
(which is an option other than a statutory option as defined in Sec.  
1.421-1(b)), or when restricted stock or other property held by an 
employee either becomes freely transferable or is no longer subject to 
a substantial risk of forfeiture (see section 83 and regulations 
promulgated under section 83).
    (3) Amounts realized from the sale, exchange, or other disposition 
of stock acquired under a statutory stock option (as defined in Sec.  
1.421-1(b)).
    (4) Other amounts that receive special tax benefits, such as 
premiums for group-term life insurance (but only to the extent that the 
premiums are not includible in the gross income of the employee and are 
not salary reduction amounts that are described in section 125).
    (5) Other items of remuneration that are similar to any of the 
items listed in paragraphs (c)(1) through (c)(4) of this section.
    (d) Safe harbor rules with respect to plan's definition of 
compensation--(1) In general. Paragraphs (d)(2) through (4) of this 
section contain safe harbor definitions of compensation that are 
automatically considered to satisfy section 415(c)(3) if specified in 
the plan. The Commissioner may, in revenue rulings, notices, and other 
guidance of general applicability published in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2) of this chapter), provide additional 
definitions of compensation that are treated as satisfying section 
415(c)(3).
    (2) Simplified compensation. The safe harbor definition of 
compensation under this paragraph (d)(2) includes only those items 
specified in paragraph (b)(1) or (2) of this section and excludes all 
those items listed in paragraph (c) of this section.
    (3) Section 3401(a) wages. The safe harbor definition of 
compensation under this paragraph (d)(3) includes wages within the 
meaning of section 3401(a) (for purposes of income tax withholding at 
the source), plus

[[Page 16917]]

amounts that would be included in wages but for an election under 
section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b). 
However, any rules that limit the remuneration included in wages based 
on the nature or location of the employment or the services performed 
(such as the exception for agricultural labor in section 3401(a)(2)) 
are disregarded for this purpose.
    (4) Information required to be reported under sections 6041, 6051 
and 6052. The safe harbor definition of compensation under this 
paragraph (d)(4) includes amounts that are compensation under the safe 
harbor definition of paragraph (d)(3) of this section, plus all other 
payments of compensation to an employee by his employer (in the course 
of the employer's trade or business) for which the employer is required 
to furnish the employee a written statement under sections 6041(d), 
6051(a)(3), and 6052. See Sec. Sec.  1.6041-1(a), 1.6041-2(a)(1), 
1.6052-1, and 1.6052-2, and also see Sec.  31.6051-1(a)(1)(i)(C) of 
this chapter. This safe harbor definition of compensation may be 
modified to exclude amounts paid or reimbursed by the employer for 
moving expenses incurred by an employee, but only to the extent that, 
at the time of the payment, it is reasonable to believe that these 
amounts are deductible by the employee under section 217.
    (e) Timing rules--(1) In general--(i) Payment during the limitation 
year. Except as otherwise provided in this paragraph (e), in order to 
be taken into account for a limitation year, compensation within the 
meaning of section 415(c)(3) must be actually paid or made available to 
an employee (or, if earlier, includible in the gross income of the 
employee) within the limitation year. For this purpose, compensation is 
treated as paid on a date if it is actually paid on that date or it 
would have been paid on that date but for an election under section 
125, 132(f)(4), 401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 457(b).
    (ii) Payment prior to severance from employment. Except as 
otherwise provided in this paragraph (e), in order to be taken into 
account for a limitation year, compensation within the meaning of 
section 415(c)(3) must be paid or treated as paid to the employee (in 
accordance with the rules of paragraph (e)(1)(i) of this section) prior 
to the employee's severance from employment with the employer 
maintaining the plan. See Sec.  1.415(a)-1(f)(5) for the definition of 
severance from employment.
    (2) Certain minor timing differences. Notwithstanding the 
provisions of paragraph (e)(1)(i) of this section, a plan may provide 
that compensation for a limitation year includes amounts earned during 
that limitation year but not paid during that limitation year solely 
because of the timing of pay periods and pay dates if--
    (i) These amounts are paid during the first few weeks of the next 
limitation year;
    (ii) The amounts are included on a uniform and consistent basis 
with respect to all similarly situated employees; and
    (iii) No compensation is included in more than one limitation year.
    (3) Compensation paid after severance from employment--(i) In 
general. Any compensation described in paragraph (e)(3)(ii) of this 
section does not fail to be compensation (within the meaning of section 
415(c)(3)) pursuant to the rule of paragraph (e)(1)(ii) of this section 
merely because it is paid after the employee's severance from 
employment with the employer maintaining the plan, provided the 
compensation is paid by the later of 2\1/2\ months after severance from 
employment with the employer maintaining the plan or the end of the 
limitation year that includes the date of severance from employment 
with the employer maintaining the plan. In addition, the plan may 
provide that amounts described in paragraph (e)(3)(iii) of this section 
are included in compensation (within the meaning of section 415(c)(3)) 
if--
    (A) Those amounts are paid by the later of 2\1/2\ months after 
severance from employment with the employer maintaining the plan or the 
end of the limitation year that includes the date of severance from 
employment with the employer maintaining the plan; and
    (B) Those amounts would have been included in the definition of 
compensation if they were paid prior to the employee's severance from 
employment with the employer maintaining the plan.
    (ii) Regular pay after severance from employment. An amount is 
described in this paragraph (e)(3)(ii) if--
    (A) The payment is regular compensation for services during the 
employee's regular working hours, or compensation for services outside 
the employee's regular working hours (such as overtime or shift 
differential), commissions, bonuses, or other similar payments; and
    (B) The payment would have been paid to the employee prior to a 
severance from employment if the employee had continued in employment 
with the employer.
    (iii) Leave cashouts and deferred compensation. An amount is 
described in this paragraph (e)(3)(iii) if the amount is either--
    (A) Payment for unused accrued bona fide sick, vacation, or other 
leave, but only if the employee would have been able to use the leave 
if employment had continued; or
    (B) Received by an employee pursuant to a nonqualified unfunded 
deferred compensation plan, but only if the payment would have been 
paid to the employee at the same time if the employee had continued in 
employment with the employer and only to the extent that the payment is 
includible in the employee's gross income.
    (iv) Other post-severance payments. Any payment that is not 
described in paragraph (e)(3)(ii) or (iii) of this section is not 
considered compensation under paragraph (e)(3)(i) of this section if 
paid after severance from employment with the employer maintaining the 
plan, even if it is paid within the time period described in paragraph 
(e)(3)(i) of this section. Thus, compensation does not include 
severance pay, or parachute payments within the meaning of section 
280G(b)(2), if they are paid after severance from employment with the 
employer maintaining the plan, and does not include post-severance 
payments under a nonqualified unfunded deferred compensation plan 
unless the payments would have been paid at that time without regard to 
the severance from employment.
    (4) Salary continuation payments for military service and disabled 
participants. The rule of paragraph (e)(1)(ii) of this section does not 
apply to payments to an individual who does not currently perform 
services for the employer by reason of qualified military service (as 
that term is used in section 414(u)(1)) to the extent those payments do 
not exceed the amounts the individual would have received if the 
individual had continued to perform services for the employer rather 
than entering qualified military service, but only if the plan so 
provides. In addition, the rule of paragraph (e)(1)(ii) of this section 
does not apply to compensation paid to a participant who is permanently 
and totally disabled (as defined in section 22(e)(3)) if the conditions 
set forth in paragraph (g)(4)(ii)(A) of this section are satisfied 
(applied by substituting a continuation of compensation for the 
continuation of contributions), but only if the plan so provides.
    (5) Special rule for governmental plans. For purposes of applying 
the rules of paragraph (e)(3) of this section, a governmental plan (as 
defined in section 414(d)) may provide for the substitution of the 
calendar year in

[[Page 16918]]

which the severance from employment with the employer maintaining the 
plan occurs for the limitation year in which the severance from 
employment with the employer maintaining the plan occurs.
    (6) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1. (i) Facts. Participant A was a common law employee of 
Employer X, performing services as a script writer for Employer X 
from January 1, 2005 to December 31, 2005. Pursuant to a collective 
bargaining agreement, Employer X, Employer Y and Employer Z maintain 
and contribute to Plan T, a multiemployer plan (as defined in 
section 414(f)) in which Participant A participates. Under the 
collective bargaining agreement, Participant A is entitled to 
residual payments whenever television shows that Participant A wrote 
are re-used commercially (These residual payments constitute 
compensation described in paragraph (b) of this section and do not 
constitute compensation described in paragraph (c) of this 
section.). In the year 2008, Participant A receives residual 
payments from Employer X for television programs using the scripts 
that Participant A wrote in the year 2005 that were rebroadcast in 
the year 2008. In the years 2006, 2007, and 2008, Participant A was 
a common law employee of Employer Y, and did not perform any 
services for Employer X.
    (ii) Conclusion. The residual payments received from Employer X 
by Participant A in the year 2008 are compensation for purposes of 
section 415(c)(3). The payments are not treated as made after 
severance from employment because Plan T is a multiemployer plan (as 
defined in section 414(f)) and Participant A continues to be 
employed by an employer maintaining Plan T.

    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that Participant A: ceased employment with Employer Y in the 
year 2006; subsequently moved away from the area in which A formerly 
worked; performs no services as an employee for any employer; and 
commenced receiving distributions under Plan T in March, 2006.
    (ii) Conclusion. Based on the facts and circumstances, A has 
ceased employment with any employer maintaining Plan T. Pursuant to 
paragraph (e)(1)(ii) of this section, compensation must be paid 
prior to an employee's severance from employment with the employer 
maintaining the plan. Accordingly, the residual payments received by 
Participant A in the year 2008 are not compensation for purposes of 
section 415(c)(3).

    (f) Interaction with section 401(a)(17). Because a plan may not 
base allocations (in the case of a defined contribution plan) or 
benefits (in the case of a defined benefit plan) on compensation in 
excess of the limitation under section 401(a)(17), a plan's definition 
of compensation for a year that is used for purposes of applying the 
limitations of section 415 is not permitted to reflect compensation for 
a year that is in excess of the limitation under section 401(a)(17) 
that applies to that year. See Sec. Sec.  1.401(a)(17)-1(a)(3)(i) and 
1.401(a)(17)-1(b)(3)(ii) for rules regarding the effective date of 
increases in the section 401(a)(17) compensation limitation for a plan 
year and for a 12-month period other than the plan year.
    (g) Special rules--(1) Compensation for section 403(b) annuity 
contract. In the case of an annuity contract described in section 
403(b), the term participant's compensation means the participant's 
includible compensation determined under section 403(b)(3). 
Accordingly, the rules for determining a participant's compensation 
pursuant to section 415(c)(3) (other than section 415(c)(3)(E)) and 
this section do not apply to a section 403(b) annuity contract.
    (2) Employees of controlled groups of corporations, etc. In the 
case of an employee of two or more corporations which are members of a 
controlled group of corporations (as defined in section 414(b) as 
modified by section 415(h)), the term compensation for such employee 
includes compensation from all employers that are members of the group, 
regardless of whether the employee's particular employer has a 
qualified plan. This special rule is also applicable to an employee of 
two or more trades or businesses (whether or not incorporated) that are 
under common control (as defined in section 414(c) as modified by 
section 415(h)), to an employee of two or more members of an affiliated 
service group as defined in section 414(m), and to an employee of two 
or more members of any group of employers who must be aggregated and 
treated as one employer pursuant to section 414(o).
    (3) Aggregation of section 403(b) annuity with qualified plan of 
controlled employer. If a section 403(b) annuity contract is aggregated 
with a qualified plan of a controlled employer in accordance with Sec.  
1.415(f)-1(f)(2), then, in applying the limitations of section 415(c) 
in connection with the aggregation of the section 403(b) annuity with a 
qualified plan, the total compensation from both employers is permitted 
to be taken into account.
    (4) Permanent and total disability of defined contribution plan 
participant--(i) In general. Pursuant to section 415(c)(3)(C), if the 
conditions set forth in paragraph (g)(4)(ii) of this section are 
satisfied, then, in the case of a participant in any defined 
contribution plan who is permanently and totally disabled (as defined 
in section 22(e)(3)), the participant's compensation means the 
compensation the participant would have received for the year if the 
participant was paid at the rate of compensation paid immediately 
before becoming permanently and totally disabled, if such compensation 
is greater than the participant's compensation determined without 
regard to this paragraph (g)(4).
    (ii) Conditions for deemed disability compensation. The rule of 
paragraph (g)(4)(i) of this section applies only if the following 
conditions are satisfied--
    (A) Either the participant is not a highly compensated employee (as 
defined in section 414(q)) immediately before becoming disabled, or the 
plan provides for the continuation of contributions on behalf of all 
participants who are permanently and totally disabled for a fixed or 
determinable period;
    (B) The plan provides that the rule of this paragraph (g)(4) 
(treating certain amounts as compensation for a disabled participant) 
applies with respect to the participant; and
    (C) Contributions made with respect to amounts treated as 
compensation under this paragraph (g)(4) are nonforfeitable when made.
    (5) Foreign compensation, etc.--(i) In general. Amounts paid to an 
individual as compensation for services do not fail to be treated as 
compensation under paragraphs (b)(1) and (2) of this section (and are 
not excluded from the definition of compensation pursuant to paragraph 
(c)(4) of this section) merely because those amounts are not includible 
in the individual's gross income on account of the location of the 
services. Similarly, compensation for services do not fail to be 
treated as compensation under paragraphs (b)(1) and (2) of this section 
(and are not excluded from the definition of compensation pursuant to 
paragraph (c)(4) of this section) merely because those amounts are paid 
by an employer with respect to which all compensation paid to the 
participant by such employer is excluded from gross income. Thus, for 
example, the determination of whether an amount is treated as 
compensation under paragraph (b)(1) or (2) of this section is made 
without regard to the exclusions from gross income under sections 872, 
893, 894, 911, 931, and 933.
    (ii) Exclusion of non-participant compensation by the plan. With 
respect to a nonresident alien who is not a participant in a plan, the 
plan may provide that the compensation described in paragraph (g)(5)(i) 
of this section is not treated as compensation for purposes of 
paragraphs (b)(1) and (b)(2) of this section to the extent the

[[Page 16919]]

compensation is excludable from gross income and is not effectively 
connected with the conduct of a trade or business within the United 
States, but only if the plan applies this rule uniformly to all such 
employees. For purposes of this paragraph (g)(5)(ii), nonresident alien 
has the same meaning as in section 7701(b)(1)(B).
    (6) Deemed section 125 compensation--(i) General rule. A plan is 
permitted to provide that deemed section 125 compensation (as defined 
in paragraph (g)(6)(ii) of this section) is compensation within the 
meaning of section 415(c)(3), but only if the plan applies this rule 
uniformly to all employees with respect to whom amounts subject to 
section 125 are included in compensation.
    (ii) Definition of deemed section 125 compensation. Deemed section 
125 compensation is an amount that is excludable from the income of the 
participant under section 106 that is not available to the participant 
in cash in lieu of group health coverage under a section 125 
arrangement solely because that participant is not able to certify that 
the participant has other health coverage. Under this definition, 
amounts are deemed section 125 compensation only if the employer does 
not otherwise request or collect information regarding the 
participant's other health coverage as part of the enrollment process 
for the health plan.
    (7) Employees in qualified military service. See section 414(u)(7) 
for special rules regarding compensation of employees who are in 
qualified military service within the meaning of section 414(u)(5).
    (8) Back pay. Payments awarded by an administrative agency or court 
or pursuant to a bona fide agreement by an employer to compensate an 
employee for lost wages are compensation within the meaning of section 
415(c)(3) for the limitation year to which the back pay relates, but 
only to the extent such payments represent wages and compensation that 
would otherwise be included in compensation under this section.

    Par. 13. Section 1.415(d)-1 is added to read as follows:


Sec.  1.415(d)-1  Cost of living adjustments.

    (a) Defined benefit plans--(1) Dollar limitation--(i) Determination 
of adjusted limit. Under section 415(d)(1)(A), the dollar limitation 
described in section 415(b)(1)(A) applicable to defined benefit plans 
is adjusted annually to take into account increases in the cost of 
living. The adjustment of the dollar limitation is made by multiplying 
the adjustment factor for the year, as described in paragraph 
(a)(1)(ii)(A) of this section, by $160,000, and rounding the result in 
accordance with paragraph (a)(1)(iii) of this section. The adjusted 
dollar limitation is prescribed by the Commissioner and published in 
the Internal Revenue Bulletin. See Sec.  601.601(d)(2) of this chapter.
    (ii) Determination of adjustment factor--(A) Adjustment factor. The 
adjustment factor for a calendar year is equal to a fraction, the 
numerator of which is the value of the applicable index for the 
calendar quarter ending September 30 of the preceding calendar year, 
and the denominator of which is the value of such index for the base 
period. The applicable index is determined consistent with the 
procedures used to adjust benefit amounts under section 215(i)(2)(A) of 
the Social Security Act, Public Law 92-336 (86 Stat. 406), as amended. 
If, however, the value of that fraction is less than one for a calendar 
year, then the adjustment factor for the calendar year is equal to one.
    (B) Base period. For the purpose of adjusting the dollar limitation 
pursuant to paragraph (a)(1)(ii)(A) of this section, the base period is 
the calendar quarter beginning July 1, 2001.
    (iii) Rounding. Any increase in the $160,000 amount specified in 
section 415(b)(1)(A) which is not a multiple of $5,000 is rounded to 
the next lowest multiple of $5,000.
    (2) Average compensation for high-3 years of service limitation--
(i) Determination of adjusted limit. Under section 415(d)(1)(B), with 
regard to participants who have had a severance from employment with 
the employer maintaining the plan, the compensation limitation 
described in section 415(b)(1)(B) is permitted to be adjusted annually 
to take into account increases in the cost of living. For any 
limitation year beginning after the severance occurs, the adjustment of 
the compensation limitation is made by multiplying the annual 
adjustment factor (as defined in paragraph (a)(2)(ii) of this section) 
by the compensation limitation applicable to the participant in the 
prior limitation year. The annual adjustment factor is prescribed by 
the Commissioner and published in the Internal Revenue Bulletin. See 
Sec.  601.601(d)(2) of this chapter.
    (ii) Annual adjustment factor. The annual adjustment factor for a 
calendar year is equal to a fraction, the numerator of which is the 
value of the applicable index for the calendar quarter ending September 
30 of the preceding calendar year, and the denominator of which is the 
value of such index for the calendar quarter ending September 30 of the 
calendar year prior to that preceding calendar year. The applicable 
index is determined consistent with the procedures used to adjust 
benefit amounts under section 215(i)(2)(A) of the Social Security Act. 
If the value of the fraction described in the first sentence of this 
paragraph (a)(2)(ii) is less than one for a calendar year, then the 
adjustment factor for the calendar year is equal to one. In such a 
case, the annual adjustment factor for future calendar years will be 
determined in accordance with revenue rulings, notices, or other 
published guidance prescribed by the Commissioner and published in the 
Internal Revenue Bulletin. See Sec.  601.601(d)(2) of this chapter.
    (iii) Special rule for rehired employees. If, after having a 
severance from employment with the employer maintaining the plan, an 
employee is rehired by the employer maintaining the plan, the 
employee's compensation limit under section 415(b)(1)(B) is the greater 
of--
    (A) 100 percent of the participant's average compensation for the 
period of the participant's high-3 years of service, as determined 
prior to the employee's severance from employment with the employer 
maintaining the plan, as adjusted pursuant to paragraph (a)(2)(i) of 
this section (if the plan so provides); or
    (B) 100 percent of the participant's average compensation for the 
period of the participant's high-3 years of service, with the period of 
the participant's high-3 years of service determined pursuant to Sec.  
1.415(b)-1(a)(5)(iii).
    (3) Effective date of adjustment. The adjusted dollar limitation 
applicable to defined benefit plans and the adjusted compensation limit 
applicable to a participant are effective as of January 1 of each 
calendar year and apply with respect to limitation years ending with or 
within that calendar year. However, benefit payments (and, in the case 
of plans that are subject to the requirements of section 411, accrued 
benefits for a limitation year) cannot exceed the currently applicable 
dollar limitation or compensation limitation (as in effect before the 
January 1 adjustment) prior to January 1. Thus, where there is an 
increase in the limitation under section 415(b)(1), any increase in a 
participant's benefits associated with the limitation increase is 
permitted to occur as of a date no earlier than January 1 of the 
calendar year for which the increase in the limitation is effective, 
and can only be applied for payments due on or after

[[Page 16920]]

January 1 of such calendar year. For example, assume that a participant 
in a defined benefit plan is currently receiving a benefit in the form 
of a straight life annuity, payable monthly, in an amount equal to the 
section 415(b)(1)(A) dollar limit, and the defined benefit plan has a 
limitation year that runs from July 1 to June 30. If the plan is 
amended to reflect the section 415(d) increase to the section 
415(b)(1)(A) dollar limit that is effective as of January 1, 2009, the 
associated increase in the participant's monthly benefit payments is 
only effective for payments due on or after January 1, 2009, and the 
participant's benefit cannot be increased to reflect the section 415(d) 
increase that is effective January 1, 2009, with respect to any monthly 
payment due prior to January 1, 2009.
    (4) Application of adjusted figure--(i) In general. If the dollar 
limitation of section 415(b)(1)(A) or the compensation limitation of 
section 415(b)(1)(B) is adjusted pursuant to section 415(d) for a 
limitation year, the adjustment is applied as provided in this 
paragraph (a)(4).
    (ii) Application of adjusted limitations to benefits that have not 
commenced. An adjustment to the dollar limitation of section 
415(b)(1)(A) is permitted to be applied to a participant who has not 
commenced benefits before the date on which the adjustment is 
effective. Annual adjustments to the compensation limit of section 
415(b)(1)(B) as described in paragraph (a)(2) of this section are 
permitted to be made for all limitation years that begin after the 
participant's severance from employment, and apply to distributions 
that commence after the effective dates of such adjustments. However, 
no adjustment to the compensation limit of section 415(b)(1)(B) is made 
for any limitation year that begins on or before the date of the 
participant's severance from employment with the employer maintaining 
the plan.
    (iii) Application of adjusted dollar limitation to remaining 
payments under benefits that have commenced. With respect to a 
distribution of accrued benefits that commenced before the date on 
which an adjustment to the section 415(b)(1)(A) dollar limitation is 
effective, a plan is permitted to apply the adjusted limitations to 
that distribution, but only to the extent that benefits have not been 
paid. Thus, for example, a plan cannot provide that the adjusted dollar 
limitation applies to a participant who has previously received the 
entire plan benefit in a single-sum distribution. However, a plan can 
provide for an increase in benefits to a participant who accrues 
additional benefits under the plan that could have been accrued without 
regard to the adjustment of the dollar limitation (including benefits 
that accrue as a result of a plan amendment) on or after the effective 
date of the adjusted limitation.
    (iv) Manner of adjustment for benefits that have commenced. If a 
plan is amended to increase benefits payable under the plan in 
accordance with paragraphs (a)(5) or (a)(6) of this section (or the 
plan is treated as applying paragraph (a)(5) of this section because 
the plan incorporates the section 415(d) cost-of-living adjustments 
automatically by reference pursuant to Sec.  1.415(a)-1(d)(3)(v)), or 
if benefits payable under the plan are increased pursuant to a form of 
benefit that is described in Sec.  1.415(b)-1(c)(5), then the 
distribution as increased will be treated as continuing to satisfy the 
requirements of section 415(b). If benefits payable under a plan are 
increased in a manner other than as described in the preceding 
sentence, the plan must satisfy the requirements of Sec.  1.415(b)-
1(b)(1)(iii), treating the commencement of the additional benefit as 
the commencement of a new distribution that gives rise to a new annuity 
starting date.
    (5) Safe harbor for annual adjustments to distributions. An 
amendment to a plan to incorporate adjustments to the section 415(b) 
limits that increases a distribution that has previously commenced is 
described in this paragraph (a)(5) if--
    (i) The employee has received one or more distributions that 
satisfy the requirements of section 415(b) before the date the 
adjustment to the applicable limits is effective (as determined under 
paragraph (a)(3) of this section);
    (ii) The increased distribution is solely as a result of the 
amendment of the plan to reflect the adjustment to the applicable 
limits pursuant to section 415(d); and
    (iii) The amounts payable to the employee on and after the 
effective date of the adjustment (as determined under paragraph (a)(3) 
of this section) are not greater than the amounts that would otherwise 
be payable without regard to the adjustment, multiplied by a fraction 
determined for the limitation year, the numerator of which is the 
limitation under section 415(b) (which is the lesser of the applicable 
dollar limitation under section 415(b)(1)(A), as adjusted for age at 
commencement, and the applicable compensation-based limitation under 
section 415(b)(1)(B)) in effect with respect to the distribution taking 
into account the section 415(d) adjustment, and the denominator of 
which is the limitation under section 415(b) in effect for the 
distribution immediately before the adjustment.
    (6) Safe harbor for periodic adjustments to distributions--(i) 
General rule. An amendment to a plan that increases a distribution that 
has previously commenced is made using the safe harbor methodology of 
this paragraph (a)(6) if--
    (A) The employee has received one or more distributions that 
satisfy the requirements of section 415(b) before the date on which the 
increase is effective; and
    (B) The amounts payable to the employee on and after the effective 
date of the increase are not greater than the amounts that would 
otherwise be payable without regard to the increase, multiplied by the 
cumulative adjustment fraction.
    (ii) Cumulative adjustment fraction. The cumulative adjustment 
fraction for purposes of this paragraph (a)(6) is equal to the product 
of all of the fractions described in paragraph (a)(5)(iii) of this 
section that would have applied after benefits commence if the plan had 
been amended each year to incorporate the section 415(d) adjustments to 
the applicable section 415(b) limits and had otherwise satisfied the 
safe harbor methodology described in paragraph (a)(5) of this section. 
For purposes of the preceding sentence, if for the limitation year for 
which the increase to the section 415(b)(1)(A) dollar limitation 
pursuant to section 611(a)(1)(A) of the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (115 Stat. 38), Public Law 107-16 (EGTRRA), 
is first effective (generally, the first limitation year beginning 
after December 31, 2001), the section 415(b)(1)(A) dollar limit 
applicable to a participant is less than the section 415(b)(1)(B) 
compensation limit for the participant, then the fraction described in 
paragraph (a)(5)(iii) of this section for that limitation year is 1.0.
    (7) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example 1. (i) X is a participant in a qualified defined benefit 
plan maintained by X's employer. The plan has a calendar year 
limitation year. Under the terms of the plan, X is entitled to a 
benefit consisting of a straight life annuity equal to 100 percent 
of X's average compensation for the period of X's high-3 years of 
service. X's average compensation for the period of X's high-3 years 
of service is $50,000. X incurs a severance from employment with the 
employer maintaining the plan on October 3,

[[Page 16921]]

2007, at age 65 with a nonforfeitable right to the accrued benefit 
after more than 10 years of participation in the plan. X begins to 
receive annual benefit payments (payable monthly) of $50,000, 
commencing on November 1, 2007. The dollar limitation for the 2007 
limitation year (as adjusted pursuant to section 415(d)) is 
$180,000. Assume that the dollar limitation for the 2008 limitation 
year (as adjusted pursuant to section 415(d)) is $185,000 and the 
annual adjustment factor for adjusting the compensation limitation 
of section 415(b)(1)(B) for the 2008 limitation year is 1.0334. 
Effective January 1, 2008, the plan is amended to incorporate these 
adjustments to the dollar and compensation limitations, and 
accordingly, X's annual benefit payment is increased, effective for 
payments due on or after January 1, 2008. Prior to the plan 
amendment incorporating the application of the adjusted dollar and 
compensation limitations, X has received one or more distributions 
that satisfy the requirements of section 415(b). In addition, the 
adjustment to X's annual benefit payments is solely on account of 
the plan amendment incorporating the adjusted limitations.
    (ii) For the limitation year beginning January 1, 2008, the 
dollar limit applicable to X under section 415(b)(1)(A) is $185,000, 
and the compensation limit applicable to X under section 
415(b)(1)(B) is $51,670 ($50,000 multiplied by the annual adjustment 
factor of 1.0334). Accordingly, the adjustment to X's benefit 
satisfies the safe harbor for cost-of-living adjustments under 
paragraph (a)(5) of this section if, after the adjustment, X's 
benefit payable in the 2008 limitation year is no greater than 
$50,000 multiplied by $51,670 (X's section 415(b) limitation for 
2008)/$50,000 (X's section 415(b) limitation for 2007).

    Example 2. (i) The facts are the same as in Example 1, except 
that X's average compensation for the period of X's high-3 
consecutive years of service is $200,000. Consequently, X's annual 
benefit payments commencing on November 1, 2007, are limited to 
$180,000.
    (ii) For the limitation year beginning January 1, 2008, the 
dollar limit applicable to X under section 415(b)(1)(A) is $185,000, 
and the compensation limit applicable to X under section 
415(b)(1)(B) is $206,680 ($200,000 multiplied by the annual 
adjustment factor of 1.0334). Accordingly, the adjustment to X's 
benefit satisfies the safe harbor for cost-of-living adjustments 
under paragraph (a)(5) of this section if, after the adjustment, X's 
benefit payable in 2008 is no greater than $180,000 multiplied by 
$185,000 (X's section 415(b) limitation for 2008)/$180,000 (X's 
section 415(b) limitation for 2007).

    Example 3. (i) X is a participant in Plan T, a qualified defined 
benefit plan maintained by X's employer. In the year 2008, X 
receives a single-sum distribution of X's entire accrued benefit 
under the plan. At the time that X receives the single-sum 
distribution, X's accrued benefit under Plan T is limited by the 
section 415(b)(1)(A) age-adjusted dollar limit. X accrues no further 
benefits under Plan T after X receives the single-sum distribution. 
In the 2009 limitation year, pursuant to section 415(d) and Sec.  
1.415(d)-1, the section 415(b)(1)(A) dollar limit is increased.
    (ii) In the 2009 limitation year, Plan T may not provide 
additional benefits to X on account of the increase in the section 
415(b)(1)(A) dollar limit pursuant to section 415(d) and Sec.  
1.415(d)-1.

    Example 4. (i) X is a participant in Plan T, a qualified defined 
benefit plan maintained by X's employer, Employer S. Plan T has a 
calendar limitation year. In 2008, X incurs a severance from 
employment with Employer S and X commences receiving distributions 
from Plan T in the form of a single life annuity in an annual amount 
of $30,000. At the time that X commences receiving distributions 
from Plan T, X's accrued benefit under Plan T is limited by the 
section 415(b)(1)(B) compensation limit. In 2009, the annual 
adjustment factor described in paragraph (a)(2) of this section 
(which is the factor for adjusting the compensation limit described 
in section 415(b)(1)(B)) is 1.03. Employer S amends Plan T, 
effective as of January 1, 2009, to increase the annual benefit of 
all participants who, prior to January 1, 2009, incurred a severance 
from employment with Employer S and who have commenced receiving 
benefits from Plan T by a factor of 1.015. Assume that for 
limitation years prior to 2009, X's distributions from Plan T 
satisfy the requirements of section 415(b).
    (ii) The increase in X's annual benefit pursuant to the 
amendment effective January 1, 2009, is within the safe harbor 
described in paragraph (a)(6) of this section. This is because the 
amount payable to X under Plan T for the 2009 limitation year and 
limitation years thereafter (as increased by the amendment effective 
January 1, 2009) is not greater than the product of the amount 
payable to X under Plan T for such limitation years (as determined 
without regard to the amendment increasing X's benefit effective 
January 1, 2009) and the cumulative adjustment fraction (which, in 
X's case, is 1.03). Thus, X's annual benefit, as increased by the 
amendment, is not determined pursuant to the rules of Sec.  
1.415(b)-1(b)(1)(iii).

    Example 5. (i) Participant P participated in Plan A, maintained 
by Employer M, for more than 10 years. Plan A uses a calendar year 
limitation year and Plan A automatically adjusts a participant's 
section 415(b)(1)(B) compensation limit for limitation years after 
the limitation year in which the participant incurs a severance from 
employment as described in Sec.  1.415(a)-1(d)(3)(v). Prior to 
separating from employment with M in 2010, P's average compensation 
for P's period of high-3 years while a participant in Plan A is 
$50,000, based on P's compensation for 2007, 2008, and 2009, which 
was $50,000 for each year. P's compensation for year 2010 was 
$45,000. In year 2012, P is rehired by M and resumes participation 
in Plan A. P's compensation in year 2012 is $45,000, and is $70,000 
in year 2013. Assume that the annual adjustment factor described in 
Sec.  1.415(d)-1(a)(2)(ii) for the limitation years 2011 through 
2013 is 1.03 for each year. Thus, disregarding P's rehire by M, P's 
average compensation for P's period of high-3 years while a 
participant in Plan A for the 2013 limitation year would be equal to 
$54,636 (or 1.03 * 1.03 * 1.03 * $50,000). See Sec.  1.415(b)-
1(a)(5)(iii).
    (ii) Under Sec.  1.415(d)-1(a)(2)(iii), P's average compensation 
for P's period of high-3 years while a participant in Plan A for the 
2013 limitation year is $54,636.
    (b) Defined contribution plans--(1) In general. Under section 
415(d)(1)(C), the dollar limitation described in section 
415(c)(1)(A) is adjusted annually to take into account increases in 
the cost of living. The adjusted dollar limitation is prescribed by 
the Commissioner and published in the Internal Revenue Bulletin. See 
Sec.  601.601(d)(2) of this chapter.
    (2) Determination of adjusted limit--(i) Base period. The base 
period taken into account for purposes of adjusting the dollar 
limitation pursuant to paragraph (b)(2)(ii) of this section is the 
calendar quarter beginning July 1, 2001.
    (ii) Method of adjustment--(A) In general. The dollar limitation 
is adjusted with respect to a calendar year based on the increase in 
the applicable index for the calendar quarter ending September 30 of 
the preceding calendar year over such index for the base period. 
Adjustment procedures similar to the procedures used to adjust 
benefit amounts under section 215(i)(2)(A) of the Social Security 
Act will be used.
    (B) Rounding. Any increase in the $40,000 amount specified in 
section 415(c)(1)(A) which is not a multiple of $1,000 shall be 
rounded to the next lowest multiple of $1,000.
    (iii) Effective date of adjustment. The adjusted dollar 
limitation applicable to defined contribution plans is effective as 
of January 1 of each calendar year and applies with respect to 
limitation years ending with or within that calendar year. Annual 
additions for a limitation year cannot exceed the currently 
applicable dollar limitation (as in effect before the January 1 
adjustment) prior to January 1. However, after a January 1 
adjustment is made, annual additions for the entire limitation year 
are permitted to reflect the dollar limitation as adjusted on 
January 1.
    (c) Application of rounding rules to other cost-of-living 
adjustments. Pursuant to section 415(d)(4)(A), the $5,000 rounding 
methodology of paragraph (a)(1)(iii) of this section is used for 
purposes of any provision of chapter 1 of subtitle A of the Internal 
Revenue Code that provides for adjustments in accordance with 
section 415(d), except to the extent provided by that provision. 
Thus, the $5,000 rounding methodology of paragraph (a)(1)(iii) of 
this section is used for purposes of--
    (1) Determining the level of compensation specified in section 
414(q)(1)(B) that is used to determine whether an employee is a 
highly compensated employee;
    (2) Calculating the amounts used pursuant to section 
409(o)(1)(C) to determine the maximum period over which 
distributions from an employee stock ownership plan may be made 
without participant consent; and
    (3) Determining the levels of compensation specified in Sec.  
1.61-21(f)(5)(i) and (iii) used in determining whether an employee 
is a control employee of a nongovernmental employer for purposes of 
the commuting valuation rule of Sec.  1.61-21(f).

[[Page 16922]]

    (d) Implementation of cost-of-living adjustments. A plan is 
permitted to be amended to reflect any of the adjustments described 
in this section at any time after those limitations become 
applicable. Alternatively, a plan is permitted to incorporate by 
reference any of the adjustments described in this section in 
accordance with the rules of Sec.  1.415(a)-1(d)(3)(v). Because the 
accrued benefit of a participant can reflect increases in the 
applicable limitations only after those increases become effective, 
a pattern of repeated plan amendments increasing annual benefits to 
reflect the increases in the section 415(b) limitations pursuant to 
section 415(d) does not result in any protection under section 
411(d)(6) for future increases to reflect increases in the section 
415(b) limitations pursuant to Sec.  1.411(d)-4, Q&A-1(c)(1). Thus, 
a plan does not violate the requirements of section 411(d)(6) merely 
because the plan has been amended annually for a number of years to 
increase annual benefits to reflect the increases in the section 
415(b) limitations pursuant to section 415(d) and subsequently is 
not amended to reflect later increases in the section 415(b) 
limitations.

    Par. 14. Section 1.415(f)-1 is added to read as follows:


Sec.  1.415(f)-1  Aggregating plans.

    (a) In general. Except as provided in paragraph (g) of this section 
(regarding multiemployer plans), and taking into account the rules of 
paragraph (b)(2) (regarding the break-up of affiliated employers and 
affiliated service groups), paragraph (c) (regarding predecessor 
employers), and paragraph (d)(1) (regarding nonduplication rules) of 
this section, section 415(f) and this section require that for purposes 
of applying the limitations of sections 415(b) and (c) applicable to a 
participant for a particular limitation year--
    (1) All defined benefit plans (without regard to whether a plan has 
been terminated) ever maintained by the employer (or a predecessor 
employer within the meaning of paragraphs (c)(1) and (c)(2) of this 
section) under which the participant has accrued a benefit are treated 
as one defined benefit plan;
    (2) All defined contribution plans (without regard to whether a 
plan has been terminated) ever maintained by the employer (or a 
predecessor employer within the meaning of paragraphs (c)(1) and (c)(2) 
of this section) under which the participant receives annual additions 
are treated as one defined contribution plan; and
    (3) All section 403(b) annuity contracts purchased by an employer 
(including plans purchased through salary reduction contributions) for 
the participant are treated as one section 403(b) annuity contract.
    (b) Affiliated employers, affiliated service groups, and leased 
employees--(1) General rule. See Sec.  1.415(a)-1(f)(1) and (2) for 
rules regarding aggregation of employers in the case of affiliated 
employers and affiliated service groups. See Sec.  1.415(a)-1(f)(3) for 
rules regarding the treatment of leased employees.
    (2) Special rule in the case of the break-up of an affiliated 
employer or an affiliated service group--(i) In general. A formerly 
affiliated plan of an employer is taken into account for purposes of 
applying paragraph (a) of this section to the employer, but the 
formerly affiliated plan is treated as if it had terminated immediately 
prior to the cessation of affiliation with sufficient assets to pay 
benefit liabilities under the plan, and had purchased annuities to 
provide plan benefits. See Sec.  1.415(b)-1(b)(5)(i) for rules 
determining annual benefits under a terminated defined benefit plan 
under which annuities are purchased to provide plan benefits.
    (ii) Definitions. For purposes of this paragraph (b)(2), a formerly 
affiliated plan of an employer is a plan that, immediately prior to the 
cessation of affiliation, was actually maintained by one or more of the 
entities that constitute the employer (as determined under the employer 
affiliation rules described in Sec.  1.415(a)-1(f)(1) and (2)), and 
immediately after the cessation of affiliation, is not actually 
maintained by any of the entities that constitute the employer (as 
determined under the employer affiliation rules described in Sec.  
1.415(a)-1(f)(1) and (2)). For purposes of this paragraph (b)(2), a 
cessation of affiliation means the event that causes an entity to no 
longer be aggregated with one or more other entities as a single 
employer under the employer affiliation rules described in Sec.  
1.415(a)-1(f)(1) and (2) (such as the sale of a subsidiary outside a 
controlled group), or that causes a plan to not actually be maintained 
by any of the entities that constitute the employer under the employer 
affiliation rules of Sec.  1.415(a)-1(f)(1) and (2) (such as a transfer 
of plan sponsorship outside of a controlled group).
    (c) Predecessor employer--(1) Where plan is maintained by 
successor. For purposes of section 415 and regulations promulgated 
under section 415, a former employer is a predecessor employer with 
respect to a participant in a plan maintained by an employer if the 
employer maintains a plan under which the participant had accrued a 
benefit while performing services for the former employer (for example, 
the employer assumed sponsorship of the former employer's plan, or the 
employer's plan received a transfer of benefits from the former 
employer's plan), but only if that benefit is provided under the plan 
maintained by the employer. In such a case, in applying the limitations 
of section 415 to a participant in a plan maintained by the employer, 
paragraph (a) of this section requires the plan to take into account 
benefits provided to the participant under plans that are maintained by 
the predecessor employer and that are not maintained by the employer. 
For this purpose, the formerly affiliated plan rules in paragraph 
(b)(2) of this section apply as if the employer and predecessor 
employer constituted a single employer under the rules described in 
Sec.  1.415(a)-1(f)(1) and (2) immediately prior to the cessation of 
affiliation (and as if they constituted two, unrelated employers under 
the rules described in Sec.  1.415(a)-1(f)(1) and (2) immediately after 
the cessation of affiliation) and cessation of affiliation was the 
event that gives rise to the predecessor employer relationship, such as 
a transfer of benefits or plan sponsorship.
    (2) Where plan is not maintained by successor. With respect to an 
employer of a participant, a former entity that antedates the employer 
is a predecessor employer with respect to the participant if, under the 
facts and circumstances, the employer constitutes a continuation of all 
or a portion of the trade or business of the former entity. This will 
occur, for example, where formation of the employer constitutes a mere 
formal or technical change in the employment relationship and 
continuity otherwise exists in the substance and administration of the 
business operations of the former entity and the employer.
    (d) Special rules--(1) Nonduplication. In applying the limitations 
of section 415 to a plan maintained by an employer, if the plan is 
aggregated with another plan pursuant to the aggregation rules of 
paragraph (a) of this section, a participant's benefits are not counted 
more than once in determining the participant's aggregate annual 
benefit or annual additions. For example, if a defined benefit plan is 
treated as if it terminated immediately prior to a cessation of 
affiliation under paragraph (b)(2) of this section, the plans 
maintained by the employer (as determined after the cessation of 
affiliation) that actually maintains the plan do not double count the 
annual benefit provided under the plan by aggregating under paragraph 
(a) of this section both the participant's annual benefit provided 
under the plan and the participant's annual benefit under the plan as a 
formerly affiliated plan (which is a plan that the employers formerly 
affiliated with the employer must take

[[Page 16923]]

into account as a terminated plan under the rules of paragraph (b)(2) 
of this section). Instead, the plans maintained by the employer include 
the annual benefit provided to the participant under the actual plan 
that the employer maintains. Similarly, if a defined benefit plan 
maintained by an employer (the transferee plan) receives a transfer of 
benefits from a defined benefit plan maintained by a predecessor 
employer (the transferor plan) and the transfer is described in Sec.  
1.415(b)-1(b)(3)(i)(B) (which requires the transferred benefits to be 
treated by the transferor plan as if the benefits were provided under a 
plan that must be aggregated with the transferor plan that terminated 
immediately prior to the transfer), the transferee plan does not double 
count the transferred benefits under paragraph (a) of this section by 
taking into account both the actual benefit provided under the 
transferee plan and the benefit provided under the deemed terminated 
plan that the predecessor employer is treated as maintaining (and that 
otherwise would have to be taken into account by the transferee plan 
under the predecessor employer aggregation rules of paragraph (a) of 
this section). Instead, the transferee plan takes into account the 
transferred benefits that are actually provided under transferee plan 
(see Sec.  1.415(b)-1(b)(3)(i)(C)) and, pursuant to paragraph (c)(1) of 
this section, any nontransferred benefits provided under plans 
maintained by the predecessor employer with respect to a participant 
whose benefits have been transferred to the transferee plan.
    (2) Determination of years of participation for multiple plans. If 
two or more defined benefit plans are aggregated under section 415(f) 
and this section for a particular limitation year, in applying the 
reduction for participation of less than ten years (as described in 
section 415(b)(5)(A)) to the dollar limitation under section 
415(b)(1)(A), time periods that are counted as years of participation 
under any of the plans are counted in computing the limitation of the 
aggregated plans under this section.
    (3) Determination of years of service for multiple plans. If two or 
more defined benefit plans are aggregated under section 415(f) and this 
section for a particular limitation year, in applying the reduction for 
service of less than ten years (as described in section 415(b)(5)(B)) 
to the compensation limitation under section 415(b)(1)(B), time periods 
that are counted as years of service under any of the plans are counted 
in computing the limitation of the aggregated plans under this section.
    (e) Previously unaggregated plans--(1) In general. This paragraph 
(e) provides rules for those situations in which two or more existing 
plans, which previously were not required to be aggregated pursuant to 
section 415(f) and this section, are aggregated during a particular 
limitation year and, as a result, the limitations of section 415(b) or 
(c) are exceeded for that limitation year. Paragraph (e)(2) of this 
section provides rules for defined contribution plans that are first 
required to be aggregated pursuant to section 415(f) and this section 
in a plan year. Paragraph (e)(3) of this section provides rules for 
defined benefit plans that are first required to be aggregated pursuant 
to section 415(f) and this section, and for defined benefit plans under 
which a participant's benefit is frozen following aggregation.
    (2) Defined contribution plans. Two or more defined contribution 
plans that are not required to be aggregated pursuant to section 415(f) 
and this section as of the first day of a limitation year do not fail 
to satisfy the requirements of section 415 with respect to a 
participant for the limitation year merely because they are aggregated 
later in that limitation year, provided that no annual additions are 
credited to the participant's account after the date on which the plans 
are required to be aggregated.
    (3) Defined benefit plans--(i) First year of aggregation. Two or 
more defined benefit plans that are not required to be aggregated 
pursuant to section 415(f) and this section as of the first day of a 
limitation year do not fail to satisfy the requirements of section 415 
for the limitation year merely because they are aggregated later in 
that limitation year, provided that no plan amendments increasing 
benefits with respect to the participant under either plan are made 
after the occurrence of the event causing the plan to be aggregated.
    (ii) All years of aggregation in which accrued benefits are frozen. 
Two or more defined benefit plans that are required to be aggregated 
pursuant to section 415(f) and this section during a limitation year 
subsequent to the limitation year during which the plans were first 
aggregated do not fail to satisfy the requirements of section 415 with 
respect to a participant for the limitation year merely because they 
are aggregated if there have been no increases in the participant's 
accrued benefit derived from employer contributions (including 
increases as a result of increased compensation or service) under any 
of the plans within the period during which the plans have been 
aggregated.
    (f) Section 403(b) annuity contracts--(1) In general. In the case 
of a section 403(b) annuity contract, except as provided in paragraph 
(f)(2) of this section, the participant on whose behalf the annuity 
contract is purchased is considered for purposes of section 415 to have 
exclusive control of the annuity contract. Accordingly, except as 
provided in paragraph (f)(2) of this section, the participant, and not 
the participant's employer who purchased the section 403(b) annuity 
contract, is deemed to maintain the annuity contract, and such a 
section 403(b) annuity contract is not aggregated with a qualified plan 
that is maintained by the participant's employer.
    (2) Special rules under which the employer is deemed to maintain 
the annuity contract--(i) In general. Where a participant on whose 
behalf a section 403(b) annuity contract is purchased is in control of 
any employer for a limitation year as defined in paragraph (f)(2)(ii) 
of this section (regardless of whether the employer controlled by the 
participant is the employer maintaining the section 403(b) annuity 
contract), the annuity contract for the benefit of the participant is 
treated as a defined contribution plan maintained by both the 
controlled employer and the participant for that limitation year. 
Accordingly, where a participant on whose behalf a section 403(b) 
annuity contract is purchased is in control of any employer for a 
limitation year, the section 403(b) annuity contract is aggregated with 
all other defined contribution plans maintained by that employer. In 
addition, in such a case, the section 403(b) annuity contract is 
aggregated with all other defined contribution plans maintained by the 
employee or any other employer that is controlled by the employee. 
Thus, for example, if a doctor is employed by a non-profit hospital to 
which section 501(c)(3) applies and which provides him with a section 
403(b) annuity contract, and the doctor also maintains a private 
practice as a shareholder owning more than 50 percent of a professional 
corporation, then any qualified defined contribution plan of the 
professional corporation must be aggregated with the section 403(b) 
annuity contract for purposes of applying the limitations of section 
415(c) and Sec.  1.415(c)-1. For purposes of this paragraph (f)(2), it 
is immaterial whether the section 403(b) annuity contract is purchased 
as a result of a salary reduction agreement between the employer and 
the participant.

[[Page 16924]]

    (ii) Determination of when a participant is in control of an 
employer. For purposes of paragraph (f)(2)(i) of this section, a 
participant is in control of an employer for a limitation year if, 
pursuant to Sec.  1.415(a)-1(f)(1) and (2), a plan maintained by that 
employer would have to be aggregated with a plan maintained by an 
employer that is 100 percent owned by the participant. Thus, for 
example, if a participant owns 60 percent of the common stock of a 
corporation, the participant is considered to be in control of that 
employer for purposes of applying paragraph (f)(2)(i) of this section.
    (3) Aggregation of section 403(b) annuity with qualified plan of 
controlled employer. If a section 403(b) annuity contract is aggregated 
with a qualified plan of a controlled employer in accordance with 
paragraph (f)(2) of this section, the plans must satisfy the 
limitations of section 415(c) both separately and on an aggregate 
basis. In applying separately the limitations of section 415 to the 
qualified plan and to the section 403(b) annuity contract, compensation 
from the controlled employer may not be aggregated with compensation 
from the employer purchasing the section 403(b) annuity contract (that 
is, without regard to Sec.  1.415(c)-2(g)(3)).
    (g) Multiemployer plans--(1) Multiemployer plan aggregated with 
another multiemployer plan. Pursuant to section 415(f)(3)(B), 
multiemployer plans, as defined in section 414(f), are not aggregated 
with other multiemployer plans for purposes of applying the limits of 
section 415.
    (2) Multiemployer plan aggregated with other plan--(i) Aggregation 
only for benefits provided by the employer. Notwithstanding the rule of 
Sec.  1.415(a)-1(e), a multiemployer plan, as defined in section 
414(f), is permitted to provide that only the benefits under that 
multiemployer plan that are provided by an employer are aggregated with 
benefits under plans maintained by that employer that are not 
multiemployer plans. If the multiemployer plan so provides, then, where 
an employer maintains both a plan which is not a multiemployer plan and 
a multiemployer plan, only the benefits under the multiemployer plan 
that are provided by the employer are aggregated with benefits under 
the employer's plans other than multiemployer plans (in lieu of 
including benefits provided by all employers under the multiemployer 
plan pursuant to the generally applicable rule of Sec.  1.415(a)-1(e)).
    (ii) Exception from aggregation for purposes of applying section 
415(b)(1)(B) compensation limit. Pursuant to section 415(f)(3)(A), a 
multiemployer plan, as defined in section 414(f), is not aggregated 
with any other plan that is not a multiemployer plan for purposes of 
applying the compensation limit of section 415(b)(1)(B) and Sec.  
1.415(b)-1(a)(1)(ii).
    (h) Special rules for aggregating certain plans, etc. If a plan, 
annuity contract or arrangement is subject to a special limitation in 
addition to, or instead of, the regular limitations described in 
section 415(b) or (c), and is aggregated under this section with a plan 
which is subject only to the regular section 415(b) or (c) limitations, 
the following rules apply:
    (1) Each plan, annuity contract or arrangement which is subject to 
a special limitation must meet its own applicable limitation and each 
plan subject to the regular limitations of section 415 must meet its 
applicable limitation.
    (2) The limitation for the aggregated plans is the larger of the 
applicable limitations for the separate plans.
    (i) [Reserved.]
    (j) Examples. The following examples illustrate the rules of this 
section. Except to the extent otherwise stated in an example, each 
entity is not and has never been affiliated with another entity under 
the employer affiliation rules of Sec.  1.415(a)-1(f)(1) and (2), each 
entity has never maintained a qualified plan (other than the plans 
specifically mentioned in the example), and the limitation year for 
each qualified plan is the calendar year.

    Example 1. (i) Facts. M was formerly an employee of ABC 
Corporation and is currently an employee of XYZ Corporation. ABC 
maintains a qualified defined benefit plan (Plan ABC) and a 
qualified defined contribution plan in which M participates and XYZ 
maintains a qualified defined benefit plan (Plan XYZ) and a 
qualified defined contribution plan in which M participates. ABC 
Corporation owns 60 percent of XYZ Corporation.
    (ii) Treatment as a single employer. ABC Corporation and XYZ 
Corporation are members of a controlled group of corporations within 
the meaning of section 414(b) as modified by section 415(h). Because 
ABC Corporation and XYZ Corporation are members of a controlled 
group of corporations within the meaning of section 414(b) as 
modified by section 415(h), M is treated as being employed by a 
single employer under Sec.  1.415(a)-1(f)(1).
    (iii) Plan aggregation. Under paragraph (a)(1) of this section, 
the sum of M's annual benefit under Plan ABC and M's annual benefit 
under Plan XYZ is not permitted to exceed the limitations of section 
415(b) and Sec.  1.415(b)-1; and, under paragraph (a)(2) of this 
section, the sum of the annual additions to M's account under the 
defined contribution plans maintained by ABC and XYZ may not exceed 
the limitations of section 415(c) and Sec.  1.415(c)-1. For purposes 
of determining the limitations of section 415(b) and Sec.  1.415(b)-
1 for the aggregated plans, a year of service for either employer is 
considered as a year of service for purposes of Sec.  1.415(b)-
1(g)(2) (phase-in rules for the compensation limit) and a year of 
participation under either plan is considered as a year of 
participation for purposes of Sec.  1.415(b)-1(g)(1) (phase-in rules 
for the dollar limit).

    Example 2. (i) Facts. The facts are the same as in Example 1, 
except that ABC Corporation and XYZ Corporation do not maintain 
defined contribution plans. In addition, Participant O was formerly 
an employee of ABC Corporation and is currently an employee of XYZ 
Corporation. Participant O has an accrued benefit under the ABC 
Plan, but Participant O has no accrued benefit under the XYZ Plan. 
Effective January 1, 2010, ABC Corporation sells all of its shares 
of stock of XYZ Corporation to an unaffiliated entity, LMN 
Corporation (the 2010 stock sale). After the 2010 stock sale, XYZ 
Corporation continues to maintain Plan XYZ. LMN Corporation 
maintains a qualified defined benefit plan (Plan LMN). After the 
2010 stock sale, M begins to accrue benefits under Plan LMN, but O 
does not participate in Plan LMN.
    (ii) Affiliated employer status of the corporations. Immediately 
after the 2010 stock sale, ABC Corporation and XYZ Corporation are 
no longer members of a controlled group of corporations under 
section 414(b) (as modified by section 414(h)) and accordingly are 
no longer treated as a single employer under the employer 
affiliation rules of Sec.  1.415(a)-1(f)(1). Immediately after the 
2010 stock sale, LMN Corporation and XYZ Corporation are members of 
a controlled group of corporations under section 414(b) (as modified 
by section 414(h)) and accordingly are treated as a single employer 
under the employer affiliation rules of Sec.  1.415(a)-1(f)(1).
    (iii) Treatment of plans maintained by ABC Corporation after the 
2010 stock sale. Under Sec.  1.415(a)-1(f)(1), any plan maintained 
by any member of a controlled group of corporations is deemed 
maintained by all members of the controlled group, and paragraph 
(a)(1) of this section requires that, for purposes of applying the 
limitations of section 415(b), all defined benefit plans ever 
maintained by an employer (as determined under the affiliation rules 
of Sec.  1.415(a)-1(f)(1) and (2)) are treated as one defined 
benefit plan. Therefore, defined benefit plans maintained by ABC 
Corporation must take into account the annual benefit of a 
participant provided under Plan XYZ in applying the limitations of 
section 415(b) to the participant because Plan XYZ is a plan that 
had once been maintained by ABC Corporation. However, beginning with 
the 2010 limitation year, the aggregation of the annual benefit 
accrued by a participant under Plan XYZ for purposes of testing 
defined benefit plans maintained by ABC Corporation is limited to 
the annual benefit accrued by the participant under Plan XYZ 
immediately

[[Page 16925]]

prior to the 2010 stock sale. This is because paragraph (b)(2)(i) of 
this section provides that a formerly affiliated plan of an employer 
is treated as if it had terminated immediately prior to the 
cessation of affiliation with sufficient assets to pay benefit 
liabilities under the plan, and had purchased annuities to provide 
plan benefits. The 2010 stock sale is a cessation of affiliation 
under paragraph (b)(2)(ii) of this section because this event caused 
XYZ Corporation to no longer be affiliated with ABC Corporation 
under the employer affiliation rules of Sec.  1.415(a)-1(f)(1) and 
(2). Immediately after the 2010 stock sale, Plan XYZ is a formerly 
affiliated plan with respect to ABC Corporation under paragraph 
(b)(2)(ii) of this section because immediately prior to the 
cessation of affiliation, Plan XYZ was actually maintained by XYZ 
Corporation (which together with ABC Corporation constituted a 
single employer under the employer affiliation rules of Sec.  
1.415(a)-1(f)(1) and (2)), and immediately after the cessation of 
affiliation, Plan XYZ is not actually maintained by ABC Corporation 
or any other entity affiliated with it.
    (iv) Application of rules to Participants M and O with respect 
to plans maintained by ABC Corporation after the 2010 stock sale. In 
applying the limitations of section 415(b) to Participant M for the 
2010 limitation year and later limitation years, Plan ABC must take 
into account the annual benefit provided under Plan ABC to 
Participant M and the annual benefit provided under Plan XYZ to 
Participant M, but treating Plan XYZ as if it had terminated 
immediately prior to the 2010 stock sale with sufficient assets to 
pay benefit liabilities under the plan, and had purchased annuities 
to provide plan benefits. The aggregation of Plan XYZ with Plan ABC 
is irrelevant for purposes of Participant O because Participant O 
does not have any accrued benefit under Plan XYZ (as determined 
prior to the 2010 stock sale).
    (v) Treatment of plans maintained by LMN Corporation and XYZ 
Corporation after the 2010 stock sale. Under Sec.  1.415(a)-1(f)(1) 
and paragraph (a)(1) of this section, when applying the limitations 
of section 415(b) to a participant under Plans LMN and XYZ for the 
2010 limitation year and later years, the annual benefit provided to 
the participant under Plans LMN, XYZ and ABC must be aggregated. 
Benefits under Plan ABC must be included in this aggregation because 
XYZ Corporation is deemed to have once maintained Plan ABC pursuant 
to Sec.  1.415(a)-1(f)(1), and since LMN Corporation and XYZ 
Corporation constitute a single employer under Sec.  1.415(a)-
1(f)(1), paragraph (a)(1) of this section requires the aggregation 
of all defined benefit plans ever maintained by LMN Corporation and 
XYZ Corporation. However, in performing this aggregation, a 
participant's annual benefit under Plan ABC is limited to the annual 
benefit accrued by the participant immediately prior to the 2010 
stock sale. This is because, pursuant to paragraph (b)(2)(i) of this 
section, Plan ABC is a formerly affiliated plan of LMN Corporation 
and XYZ Corporation.
    (vi) Application of rules to Participants M and O with respect 
to plans maintained by LMN Corporation and XYZ Corporation after the 
2010 stock sale. In applying the limitation of section 415(b) to 
Participant M for the 2010 limitation year and later limitation 
years, Plan LMN and Plan XYZ must take into account the annual 
benefit provided under Plans LMN and XYZ to Participant M and the 
annual benefit provided under Plan ABC to Participant M as if Plan 
ABC had terminated immediately prior to the 2010 stock sale with 
sufficient assets to pay benefit liabilities under the plan, and had 
purchased annuities to provide plan benefits. Participant O does not 
have an accrued benefit under Plan LMN or Plan XYZ, so the 
aggregation of Plan ABC with Plans LMN and XYZ is currently 
irrelevant with respect to Participant O. However, if Participant O 
were to ever participate in Plans LMN or XYZ after the 2010 stock 
sale, Participant O's annual benefit under Plan ABC (determined as 
if Plan ABC terminated immediately prior to the 2010 stock sale) 
would have to be aggregated with any annual benefit that Participant 
O accrues under Plan LMN or Plan XYZ.
    (vii) Application of nonduplication rule. In applying paragraph 
(a)(1) of this section to plans maintained by ABC Corporation after 
2010 stock sale, plans maintained by ABC Corporation do not take 
into account the deemed termination of Plan ABC since ABC 
Corporation maintains Plan ABC after the cessation of affiliation. 
Similarly, in applying paragraph (a)(1) of this section to plans 
maintained by LMN Corporation and XYZ Corporation after the 2010 
stock sale, plans maintained by LMN Corporation and XYZ Corporation 
do not take into account the deemed termination of Plan XYZ since 
XYZ Corporation maintains Plan XYZ after the cessation of 
affiliation. See paragraph (d)(1) of this section.

    Example 3. (i) Facts. The facts are the same as in Example 2, 
except that on January 1, 2009, Plan ABC transfers Participant M's 
benefit to Plan XYZ.
    (ii) Treatment of plans maintained by ABC Corporation. Pursuant 
to Sec.  1.415(b)-1(b)(3)(i)(A), M's benefit that is transferred 
from Plan ABC to Plan XYZ is not treated as being provided under 
Plan ABC for the limitation year in which the transfer occurs 
(2009). This is because M's transferred benefit is otherwise 
required to be taken into account by Plan ABC for the 2009 
limitation year since Plan XYZ must be aggregated with Plan ABC 
pursuant to paragraph (a)(1) of this section. This result does not 
change for the 2010 limitation year and later limitation years, 
where pursuant to paragraph (b)(2)(i) of this section, Plan XYZ 
becomes a formerly affiliated plan with respect to ABC Corporation 
due to the 2010 stock sale. Under paragraph (b)(2)(i) of this 
section, Plan XYZ (the formerly affiliated plan) is treated from the 
perspective of plans maintained by ABC Corporation (Plan ABC) as if 
Plan XYZ terminated immediately prior to the 2010 stock sale with 
sufficient assets to pay benefit liabilities under the plan, and had 
purchased annuities to provide plan benefits. However, the pre-2010 
stock sale benefits of Plan XYZ include the January 1, 2009, 
transfer of Participant M's benefit. Thus, in the 2010 limitation 
year, M's transferred benefit is still otherwise required to be 
taken into account by Plan ABC on account of the aggregation of Plan 
XYZ with Plan ABC pursuant to paragraph (a)(1) of this section, and 
therefore the transferred benefit is not treated as being provided 
by Plan ABC.
    (iii) Treatment of plans maintained by LMN Corporation and XYZ 
Corporation. Pursuant to Sec.  1.415(b)-1(b)(3)(i)(C), Participant 
M's benefit that is transferred to Plan XYZ from Plan ABC must be 
treated as provided under Plan XYZ for purposes of applying the 
limitations of section 415 to Plan XYZ with respect to Participant M 
for the limitation year in which the transfer occurs and later 
years. This result does not change on account of the 2010 stock 
sale. When applying the limitation of section 415 to Plans LMN and 
XYZ for the 2010 limitation year and later years, Plans LMN and XYZ 
must aggregate the annual benefit provided to a participant under 
each plan along with the participant's benefit under Plan ABC 
pursuant to Sec.  1.415(a)-1(f)(1) and paragraph (a)(1) of this 
section. However, under paragraph (b)(2)(i) of this section, for the 
2010 limitation year and later years, this aggregation of M's Plan 
ABC benefit only includes the annual benefit attributable to a 
participant's accrued benefit under Plan ABC immediately prior to 
the 2010 stock sale, which (due to the 2009 transfer) is zero.

    Example 4. (i) Facts. The facts are the same as in Example 2, 
except that on January 1, 2011, Plan ABC transfers Participant M's 
benefit to Plan XYZ.
    (ii) Treatment of plans maintained by ABC Corporation for the 
2011 limitation year and later years. Pursuant to Sec.  1.415(b)-
1(b)(3)(i)(B), M's benefit that is transferred from Plan ABC to Plan 
XYZ during the 2011 limitation year is treated by Plan ABC for the 
2011 limitation year and later years as if the transferred benefit 
were provided under a plan that must be aggregated with Plan ABC 
that terminated immediately prior to the transfer with sufficient 
assets to pay benefit liabilities under the plan, and had purchased 
annuities to provide plan benefits. This is because M's transferred 
benefit is not otherwise required to be taken into account by Plan 
ABC for the 2011 limitation year and later years pursuant to 
paragraphs (a)(1) and (b)(2)(i) of this section. While Plan ABC must 
take into account Participant M's annual benefit under Plan XYZ 
under paragraph (a)(1) of this section, Participant M's annual 
benefit for this purpose is limited under paragraph (b)(2)(i) of 
this section to M's accrued benefit under Plan XYZ immediately prior 
to the 2010 stock sale, and Participant M's pre-2010 stock sale 
accrued benefit under Plan XYZ excludes the 2011 transfer.
    (iii) Treatment of plans maintained by LMN Corporation and XYZ 
Corporation for the 2011 limitation year and later years. Pursuant 
to Sec.  1.415(b)-1(b)(3)(i)(C), Participant M's benefit that is 
transferred to Plan XYZ from Plan ABC must be treated as provided 
under Plan XYZ for purposes of applying the limitations of section 
415 to Plan XYZ with respect to Participant M for the limitation 
year in which the transfer occurs and later years. In applying the 
limitations of section 415(b) to Plans LMN and XYZ with respect to 
Participant M for the 2010 limitation year and later years, the

[[Page 16926]]

annual benefit of Participant M under Plans ABC, LMN, and XYZ must 
be aggregated pursuant to Sec.  1.415(a)-1(f)(1) and paragraph 
(a)(1) of this section, but for this purpose, Participant M's 
benefit under Plan ABC is treated as if it were provided under a 
plan that terminated immediately prior to the cessation of 
affiliation of ABC Corporation and XYZ Corporation with sufficient 
assets to pay benefit liabilities under the plan, and had purchased 
an annuity to provide Participant M's benefits. (See paragraph 
(b)(2)(i) of this section and Example 2.) In applying the 
limitations of section 415(b) to Plans LMN and XYZ with respect to 
Participant M for the 2011 limitation year and later years, the 
annual benefit of Participant M under Plans ABC, LMN, and XYZ still 
must be aggregated pursuant to Sec.  1.415(a)-1(f)(1) and paragraph 
(a)(1) of this section. However, beginning with the 2011 limitation 
year, ABC Corporation is a predecessor employer with respect to LMN 
Corporation and XYZ Corporation with respect to Participant M on 
account of the transfer of benefits from Plan ABC to Plan XYZ, 
pursuant to paragraph (c)(1) of this section. Therefore, Plans LMN 
and XYZ must take into account benefits that Participant M accrued 
under Plan ABC after the January 1, 2010, cessation of affiliation 
of ABC Corporation and XYZ Corporation that were not transferred to 
Plan XYZ on January 1, 2011, pursuant to paragraphs (c)(1) and 
(d)(1) of this section. Since all of Participant M's benefit in Plan 
ABC is transferred to Plan XYZ on January 1, 2011, Participant M's 
annual benefit from Plan ABC for purposes of aggregating Plan ABC 
with Plans LMN and XYZ is zero.

    Example 5. (i) Facts. The facts are the same as in Example 2, 
except that instead of the 2010 stock sale, XYZ Corporation sells 
some of its operating assets to LMN Corporation (and, under the 
facts and circumstances, the sale does not result in XYZ Corporation 
constituting a predecessor employer of LMN Corporation under the 
rules of paragraph (c)(2) of this section), and in connection with 
the asset sale, LMN Corporation assumes sponsorship of Plan XYZ in 
place of XYZ Corporation, effective January 1, 2010.
    (ii) Treatment of plans maintained by ABC Corporation and XYZ 
Corporation. Pursuant to paragraph (a)(1) of this section, all 
defined benefit plans ever maintained by ABC Corporation and XYZ 
Corporation must be aggregated as a single defined benefit plan for 
purposes of applying the limitations of section 415(b). However, for 
purposes of determining the annual benefit under Plan XYZ for the 
2010 limitation year and later years, the aggregation of a 
participant's benefit under Plan XYZ is limited to the participant's 
annual benefit accrued immediately prior to the January 1, 2010, 
transfer of sponsorship of Plan XYZ. This is because paragraph 
(b)(2)(i) of this section provides that a formerly affiliated plan 
of an employer is treated as if it were a plan that terminated 
immediately prior to the cessation of affiliation with sufficient 
assets to pay benefit liabilities under the plan, and had purchased 
annuities to provide plan benefits. The January 1, 2010, transfer of 
sponsorship of Plan XYZ is a cessation of affiliation under 
paragraph (b)(2)(ii) of this section because this event causes Plan 
XYZ to no longer actually be maintained by either ABC Corporation or 
XYZ Corporation. Effective immediately after the January 1, 2010, 
transfer of sponsorship, Plan XYZ is a formerly affiliated plan with 
respect to ABC Corporation and XYZ Corporation under paragraph 
(b)(2)(ii) of this section because immediately prior to the 
cessation of affiliation, Plan XYZ was actually maintained by XYZ 
Corporation, and immediately after the cessation of affiliation, 
Plan XYZ is not actually maintained by either XYZ Corporation or ABC 
Corporation. Therefore, in applying the limitation of section 415(b) 
to Participant M for the 2010 limitation year and later limitation 
years, Plan ABC must take into account the annual benefit provided 
under Plan ABC to Participant M and the annual benefit provided 
under Plan XYZ to Participant M as if Plan XYZ had terminated 
immediately prior to the 2010 stock sale with sufficient assets to 
pay benefit liabilities under the plan, and had purchased annuities 
to provide plan benefits. The aggregation of Plan XYZ with Plan ABC 
is irrelevant for purposes of Participant O because Participant O 
does not have any accrued benefit under Plan XYZ (as determined 
prior to the 2010 transfer of sponsorship).
    (iii) Treatment of plans maintained by LMN Corporation. Under 
paragraph (a)(1) of this section, all defined benefit plans ever 
maintained by LMN Corporation or a predecessor employer must be 
aggregated as a single plan for purposes of applying the limitations 
of section 415(b). ABC Corporation and XYZ Corporation constitute a 
predecessor employer pursuant to paragraph (c)(1) of this section 
with respect to the participants who participate in Plan XYZ on the 
date of the transfer of sponsorship of Plan XYZ (the transferred 
participants) from XYZ Corporation to LMN Corporation, such as 
Participant M. This is because, effective with the January 1, 2010, 
transfer of sponsorship, LMN Corporation maintains a plan (Plan XYZ) 
under which the participants accrued a benefit while performing 
services for XYZ Corporation (which is in turn affiliated with ABC 
Corporation under Sec.  1.415(a)-1(f)(1)) and such benefits are 
provided under a plan maintained by LMN Corporation. Therefore, for 
the 2010 limitation year and later years, the annual benefit under 
Plan ABC of the transferred participants (such as Participant M) 
must be aggregated with the annual benefit provided to such 
participants under Plans XYZ and LMN for purposes of determining 
whether Plan LMN or Plan XYZ satisfies the limitations of section 
415(b). However, the aggregation of the transferred participants' 
Plan ABC annual benefits is limited to the annual benefit accrued 
under Plan ABC immediately prior to January 1, 2010, transfer of 
sponsorship. This is because, pursuant to paragraph (c)(1) of this 
section, Plan ABC is treated from the perspective of plans 
maintained by LMN Corporation as if Plan ABC had terminated 
immediately prior to the transfer of sponsorship of Plan ABC to LMN 
Corporation with sufficient assets to pay benefit liabilities under 
the plan, and had purchased annuities to provide plan benefits. ABC 
Corporation and XYZ Corporation do not constitute a predecessor 
employer with respect to Participant O. Thus, if Participant O is a 
participant in Plan LMN or becomes a participant in Plan XYZ after 
the 2010 transfer of sponsorship, neither plan aggregates 
Participant O's Plan ABC benefits for purposes of satisfying section 
415(b). In applying paragraph (a)(1) of this section to a 
participant, plans maintained by LMN Corporation do not double count 
the participant's annual benefit. See paragraph (d)(1) of this 
section. Thus, such plans do not aggregate the annual benefit 
provided under Plan XYZ with the annual benefit from the deemed 
termination of Plan XYZ that LMN Corporation's predecessor employer 
(which is ABC and XYZ Corporations) must take into account in 
applying paragraph (a)(1) of this section, and instead consider the 
annual benefit actually provided under Plan XYZ.

    Example 6. (i) Facts. N is employed by a hospital which 
purchases an annuity contract described in section 403(b) on N's 
behalf for the current limitation year. N is in control of the 
hospital within the meaning of section 414(b) or (c), as modified by 
section 415(h). The hospital also maintains a qualified defined 
contribution plan during the current limitation year in which N 
participates.
    (ii) Conclusion. Under section 415(k)(4), the hospital, as well 
as N, is considered to maintain the annuity contract. Accordingly, 
for N the sum of the annual additions under the qualified defined 
contribution plan and the annuity contract must satisfy the 
limitations of section 415(c) and Sec.  1.415(c)-1.

    Example 7. (i) Facts. The facts are the same as in Example 6, 
except that instead of being in control of the hospital, N is the 
100 percent owner of a professional corporation P, which maintains a 
qualified defined contribution plan in which N participates.
    (ii) Conclusion. Under section 415(k)(4), the professional 
corporation, as well as N, is considered to maintain the annuity 
contract. Accordingly, the sum of the annual additions under the 
qualified defined contribution plan maintained by professional 
corporation P and the annuity contract must satisfy the limitations 
of section 415(c) and Sec.  1.415(c)-1. See Sec.  1.415(g)-
1(b)(3)(iv)(C)(2) for an example of the treatment of a contribution 
to a section 403(b) annuity contract that exceeds the limits of 
section 415(c) by reason of the aggregation required by this 
section.

    Example 8. (i) Facts. J is an employee of two corporations, N 
and M, each of which has employed J for more than 10 years. N and M 
are not required to be aggregated pursuant to section 415(f) and 
this section. Each corporation has a qualified defined benefit plan 
in which J has participated for more than 10 years. Each plan 
provides a benefit which is equal to 75 percent of a participant's 
average compensation for the period of the participant's high-3 
years of service and is payable in the form of a straight life 
annuity beginning at age 65. J's average compensation for the period 
of his high-3 years of service from each corporation is $160,000. In 
July 2008, N Corporation becomes a wholly owned subsidiary of M 
Corporation.

[[Page 16927]]

    (ii) Plan aggregation analysis. As a result of the acquisition 
of N Corporation by M Corporation, J is treated as being employed by 
a single employer under section 414(b). Therefore, because section 
415(f)(1)(A) requires that all defined benefit plans of an employer 
be treated as one defined benefit plan, the two plans must be 
aggregated for purposes of applying the limitations of section 415. 
However, under paragraph (e)(3)(i) of this section, since the plans 
were not aggregated as of the first day of the 2008 limitation year 
(January 1, 2008), they will not be considered aggregated until the 
limitation year beginning January 1, 2009, provided that no plan 
amendment increasing benefits with respect to participant J is made 
after the acquisition of N by M.
    (iii) Application to Participant J. J has a total benefit under 
the two plans of $240,000, which, as a result of the plan 
aggregation, is in excess of the section 415(b) limit. However, 
under paragraph (e)(3)(ii) of this section, the limitations of 
section 415(b) and Sec.  1.415(b)-1 applicable to J may be exceeded 
in this situation without plan disqualification so long as J's 
accrued benefit derived from employer contributions is not increased 
(that is, J's accrued benefit does not increase on account of 
increased compensation, service, participation, or other accruals) 
during the period within which the limitations are being exceeded.

    Example 9. (i) Facts. A, age 30, owns all of the stock of X 
Corporation and also owns 10 percent of the stock of Z Corporation. 
F, A's father, directly owns 75 percent of the stock of Z 
Corporation. Both corporations have qualified defined contribution 
plans in which A participates. A's compensation (within the meaning 
of Sec.  1.415(c)-2) for 2008 is $20,000 from Z Corporation and 
$150,000 from X Corporation. During the period January 1, 2008 
through June 30, 2008, annual additions of $20,000 are credited to 
A's account under the plan of Z Corporation, while annual additions 
of $40,000 are credited to A's account under the plan of X 
Corporation. In both instances, the amount of annual additions 
represent the maximum allowable under section 415(c) and Sec.  
1.415(c)-1. On July 15, 2008, F dies, and A inherits all of F's 
stock in Z in 2008.
    (ii) Conclusion. As of July 15, 2008, A is considered to be in 
control of X and Z Corporations, and the two plans must be 
aggregated for purposes of applying the limitations of section 415. 
However, even though A's total annual additions for 2008 are 
$60,000, the limitations of section 415(c) and Sec.  1.415(c)-1 are 
not violated for 2008, provided no annual additions are credited to 
A's accounts after July 15, 2008 (the date that A is first in 
control of Z) for the remainder of the 2008 limitation year.

    Example 10. (i) Facts. P is a key employee of employer XYZ who 
participates in a qualified defined contribution plan (Plan X). P is 
also provided post-retirement medical benefits, and XYZ has taken 
into account a reserve for those benefits under section 419A(c)(2). 
In the 2008 limitation year, P's compensation is $30,000 and P's 
annual additions under Plan X are $5,000. Pursuant to section 
419A(d), a separate account is maintained for P, and that account is 
credited with an allocation of $32,000 for the 2008 limitation year. 
It is assumed that the section 415(c)(1)(A) dollar limit for 2008 is 
$46,000.
    (ii) Separate testing analysis. Under paragraph (h)(1) of this 
section, Plan X and the individual medical account must separately 
satisfy the requirements of section 415(c), taking into account any 
special limit applicable to that arrangement. In this case, the 
contributions to Plan X separately satisfy the limitations of 
section 415(c). While the individual medical account is treated as a 
defined contribution plan subject to the rules of section 415(c), it 
is not subject to the 100 percent of compensation limit of section 
415(c)(1)(B), so the contributions to that account satisfy the 
limitations of section 415(c).
    (iii) Aggregation analysis. The sum of the annual additions 
under Plan X and the amounts contributed to the separate account on 
P's behalf must satisfy the requirements of section 415(c). Under 
paragraph (h)(2) of this section, the limit applicable to the 
aggregated plan is equal to the greater of the limits applicable to 
the separate plans. In this case, the limit applicable to the 
medical account is $46,000 (which is greater than the limit of 
$30,000 applicable to the qualified plan), so the limit that applies 
to the aggregated plan is $46,000, and the aggregated plan satisfies 
the requirements of section 415.


0
Par. 15. Section 1.415(g)-1 is added to read as follows:


Sec.  1.415(g)-1  Disqualification of plans and trusts.

    (a) Disqualification of plans--(1) In general. Under section 415(g) 
and this section, with respect to a particular limitation year, a plan 
(and the trust forming part of the plan) is disqualified in accordance 
with the rules provided in paragraph (b) of this section, if the 
conditions described in paragraph (a)(2) or (a)(3) of this section 
apply. For purposes of this paragraph (a), the determination of whether 
a plan or a group of aggregated plans exceeds the limitations imposed 
by section 415 for a particular limitation year is, except as otherwise 
provided, made by taking into account the aggregation of plan rules 
provided in section 415(f) and Sec.  1.414(f)-1.
    (2) Defined contribution plans. A plan is disqualified in 
accordance with the rules provided in paragraph (b) of this section if 
annual additions (as defined in Sec.  1.415(c)-1(b)) with respect to 
the account of any participant in a defined contribution plan 
maintained by the employer exceed the limitations of section 415(c) and 
Sec.  1.415(c)-1.
    (3) Defined benefit plans. A plan is disqualified in accordance 
with the rules provided in paragraph (b) of this section if the annual 
benefit (as defined in Sec.  1.415(b)-1(b)(1)) of a participant in a 
defined benefit plan maintained by the employer exceeds the limitations 
of section 415(b) and Sec.  1.415(b)-1.
    (b) Rules for disqualification of plans and trusts--(1) In general. 
If any plan (including a trust which forms part of such plan) is 
disqualified for a particular limitation year under the rules set forth 
in this paragraph (b), then the disqualification is effective as of the 
first day of the first plan year containing any portion of the 
particular limitation year.
    (2) Single plan. In the case of a single qualified defined benefit 
plan (determined without regard to section 415(f) and Sec.  1.415(f)-1) 
maintained by the employer that provides an annual benefit (as defined 
in Sec.  1.415(b)-1(b)(1)) in excess of the limitations of section 
415(b) and Sec.  1.415(b)-1 for any particular limitation year, such 
plan is disqualified in that limitation year. Similarly, if the 
employer only maintains a single defined contribution plan (determined 
without regard to section 415(f) and Sec.  1.415(f)-1) under which 
annual additions (as defined in Sec.  1.415(c)-1(b)) allocated to the 
account of any participant exceed the limitations of section 415(c) and 
Sec.  1.415(c)-1 for any particular limitation year, such plan is also 
disqualified in that limitation year.
    (3) Multiple plans--(i) In general. If the limitations of section 
415(b) and Sec.  1.415(b)-1, or section 415(c) and Sec.  1.415(c)-1, 
are exceeded for a particular limitation year with respect to any 
participant solely because of the application of the aggregation rules 
of section 415(f)(1) and Sec.  1.415(f)-1 (taking into account the 
rules of Sec.  1.415(a)-1(f)), then one or more of the plans is 
disqualified in accordance with the ordering rules set forth in 
paragraph (b)(3)(ii) of this section, applied in accordance with the 
rules of application set forth in paragraph (b)(3)(iii) of this 
section, subject to the special rules set forth in paragraph (b)(3)(iv) 
of this section, until, without regard to annual benefits or annual 
additions under the disqualified plan or plans, the remaining plans 
satisfy the applicable limitations of section 415.
    (ii) Ordering rules--(A) Disqualification of ongoing plans other 
than multiemployer plans. If there are two or more plans that have not 
been terminated at any time including the last day of the particular 
limitation year, and if one or more of those plans is a multiemployer 
plan described in section 414(f), then one or more of the plans (as 
needed to satisfy the limitations of section 415) that has not been 
terminated and is not a multiemployer plan is disqualified in that 
limitation year. For purposes of the preceding

[[Page 16928]]

sentence, the determination of whether a plan is a multiemployer plan 
described in section 414(f) is made as of the last day of the 
particular limitation year.
    (B) Disqualification of ongoing multiemployer plans. If, after the 
application of paragraph (b)(3)(ii)(A) of this section, there are two 
or more plans and one or more of the plans has been terminated at any 
time including the last day of the particular limitation year, then one 
or more of the plans (as needed to satisfy the applicable limitations 
of section 415) that has not been so terminated (regardless of whether 
the plan is a multiemployer plan described in section 414(f)) is 
disqualified in that limitation year.
    (iii) Rules of application--(A) Employer elects which plan is 
disqualified. If there are two or more plans of an employer within a 
group of plans one or more of which is to be disqualified pursuant to 
paragraph (b)(3)(ii)(A) or (B) of this section, then the employer may 
elect, in a manner determined by the Commissioner, which plan or plans 
are disqualified. If those two or more plans are involved because of 
the application of Sec.  1.415(a)-1(f), the employers involved may 
elect, in a manner determined by the Commissioner, which plan or plans 
are disqualified. However, the election described in the preceding 
sentence is not effective unless made by all of those employers.
    (B) Commissioner determines which plan is disqualified. If the 
election described in paragraph (b)(3)(iii)(A) of this section is not 
made with respect to the two plans described in paragraph 
(b)(3)(iii)(A) of this section, then the Commissioner, taking into 
account all of the facts and circumstances, has the discretion to 
determine the plan that is disqualified in the particular limitation 
year. In making this determination, some of the factors that will be 
taken into account include, but are not limited to, the number of 
participants in each plan, the amount of benefits provided on an 
overall basis by each plan, and the extent to which benefits are 
distributed or retained in each plan.
    (iv) Special rules--(A) Simplified employee pensions. If there are 
two or more plans one or more of which is to be disqualified pursuant 
to paragraph (b)(3)(ii)(A) or (B) of this section, and if one of the 
plans is a simplified employee pension (as defined in section 408(k)), 
then the simplified employee pension is not disqualified until all of 
the other plans have been disqualified. However, if one of the plans 
has been terminated, then the simplified employee pension is 
disqualified before the terminated plan. For purposes of this paragraph 
(b)(3)(iv)(A), the disqualification of a simplified employee pension 
means that the simplified employee pension is no longer described under 
section 408(k).
    (B) Aggregating medical accounts with defined contribution plans. 
In the event that aggregating a medical account described in Sec.  
1.415(c)-1(a)(2)(ii)(C) or (D) and a defined contribution plan other 
than such a medical account causes the limitations of section 415(c) 
and Sec.  1.415(c)-1 applicable to a participant to be exceeded for a 
particular limitation year, the defined contribution plan other than 
the medical account is disqualified for the limitation year.
    (C) Aggregating section 403(b) annuity contract and qualified 
defined contribution plan--(1) In general. In the event that 
aggregating a section 403(b) annuity contract and a qualified defined 
contribution plan under the provisions of section 415(f)(1)(B) causes 
the limitations of section 415(c) and Sec.  1.415(c)-1 applicable to a 
participant under the aggregated defined contribution plans to be 
exceeded for a particular limitation year, the excess of the 
contributions to the annuity contract plus the annual additions to the 
qualified plan over such limitations is attributed to the annuity 
contract and therefore includable in the gross income of the 
participant for the taxable year with or within which that limitation 
year ends. See Sec.  1.415(a)-1(b)(2) for rules regarding the treatment 
of a contribution to a section 403(b) annuity contract that exceeds the 
limitations of section 415.
    (2) Example. The following example illustrates the application of 
this paragraph (b)(3)(iv)(C). It is assumed for purposes of this 
example that the dollar limitation under section 415(c)(1)(A) that 
applies for all relevant limitation years is $45,000. The example is as 
follows:

    Example. (i) N is employed by a hospital which purchases an 
annuity contract described in section 403(b) on N's behalf for the 
current limitation year. N is also the 100 percent owner of a 
professional corporation P that maintains a qualified defined 
contribution plan during the current limitation year in which N 
participates. (The facts of this example are the same as in Sec.  
1.415(f)-1(j) Example 7.) N's compensation (within the meaning of 
Sec.  1.415(c)-2) from the hospital for the current limitation year 
is $150,000. For the current limitation year, the hospital 
contributes $30,000 for the section 403(b) annuity contract on N's 
behalf, which is within the limitations applicable to N under the 
annuity contract (specifically, the limit under the annuity contract 
is $45,000)). Professional corporation P also contributes $20,000 to 
the qualified defined contribution plan on N's behalf for the 
current limitation year (which represents the only annual additions 
allocated to N's account under the plan for such year), which is 
within the $45,000 limitation of section 415(c)(1) applicable to N 
under the plan.
    (ii) Under section 415(k)(4), the professional corporation, as 
well as N, is considered to maintain the annuity contract. 
Accordingly, the sum of the annual additions under the qualified 
defined contribution plan maintained by professional corporation P 
and the annuity contract must satisfy the limitations of section 
415(c) and Sec.  1.415(c)-1.
    (iii) Because the total aggregate contributions ($50,000) exceed 
the section 415(c) limitation applicable to N ($45,000), $5,000 of 
the $30,000 contributed to the section 403(b) annuity contract is 
considered an excess contribution and therefore currently includable 
in N's gross income. The contract continues to be a section 403(b) 
annuity contract only if, for the current limitation year and all 
years thereafter, the issuer of the contract maintains separate 
accounts for each portion attributable to such excess contributions. 
See Sec. Sec.  1.415(a)-1(b)(2).

    (c) Plan year for certain annuity contracts and individual 
retirement plans. For purposes of this section, unless the plan under 
which the annuity contract or individual retirement plan is provided 
specifies that a different twelve-month period is considered to be the 
plan year--
    (1) An annuity contract described in section 403(b) is considered 
to have a plan year coinciding with the taxable year of the individual 
on whose behalf the contract has been purchased; and
    (2) A simplified employee pension described in section 408(k) is 
considered to have a plan year coinciding with the year under the plan 
that is used pursuant to section 408(k)(7)(C).


0
Par. 16. Section 1.415(j)-1 is added to read as follows:


Sec.  1.415(j)-1  Limitation year.

    (a) In general. Unless the terms of a plan provide otherwise, the 
limitation year, with respect to any qualified plan maintained by the 
employer, is the calendar year.
    (b) Alternative limitation year election. The terms of a plan may 
provide for the use of any other consecutive twelve month period as the 
limitation year. This includes a fiscal year with an annual period 
varying from 52 to 53 weeks, so long as the fiscal year satisfies the 
requirements of section 441(f). A plan may only provide for one 
limitation year regardless of the number or identity of the employers 
maintaining the plan.
    (c) Multiple limitation years--(1) In general. Where an employer 
maintains

[[Page 16929]]

more than one qualified plan, those plans may provide for different 
limitation years. The rule described in this paragraph (c) also applies 
to a controlled group of employers (within the meaning of section 
414(b) or (c), as modified by section 415(h)). If the plans of an 
employer (or a controlled group of employers whose plans are 
aggregated) have different limitation years, section 415 is applied in 
accordance with the rule of paragraphs (c)(2) and (3) of this section.
    (2) Testing rule for defined contribution plans. If a participant 
is credited with annual additions in only one defined contribution 
plan, in determining whether the requirements of section 415(c) are 
satisfied, only the limitation year applicable to that plan is 
considered. However, if a participant is credited with annual additions 
in more than one defined contribution plan, each such plan satisfies 
the requirements of section 415(c) only if the limitations of section 
415(c) are satisfied with respect to amounts that are annual additions 
for the limitation year with respect to the participant under the plan, 
plus amounts credited to the participant's account under all other 
plans required to be aggregated with the plan pursuant to section 
415(f) and Sec.  1.415(f)-1 that would have been considered annual 
additions for the limitation year under the plan if they had been 
credited under the plan rather than an aggregated plan.
    (3) Testing rule for defined benefit plans. If a participant has 
participated in only one defined benefit plan, in determining whether 
the requirements of section 415(b) are satisfied, only the limitation 
year applicable to that plan is considered. However, if a participant 
has participated in more than one defined benefit plan, a plan 
satisfies the requirements of section 415(b) only if the annual benefit 
under all plans required to be aggregated pursuant to section 415(f) 
and Sec.  1.415(f)-1 for the limitation year of that plan with respect 
to the participant satisfy the applicable limitations of section 
415(b). Thus, for example, the dollar limitation of section 
415(b)(1)(A) applicable to the limitation year for each plan must be 
applied to annual benefits under all aggregated plans to determine 
whether the plan satisfies the requirements of section 415(b).
    (d) Change of limitation year--(1) In general. Once established, 
the limitation year may be changed only by amending the plan. Any 
change in the limitation year must be a change to a 12-month period 
commencing with any day within the current limitation year. For 
purposes of this section, the limitations of section 415 are to be 
applied in the normal manner to the new limitation year.
    (2) Application to short limitation period. Where there is a change 
of limitation year, the limitations of section 415 are to be separately 
applied to a limitation period which begins with the first day of the 
current limitation year and which ends on the day before the first day 
of the first limitation year for which the change is effective. In the 
case of a defined contribution plan, the dollar limitation with respect 
to this limitation period is determined by multiplying the applicable 
dollar limitation for the calendar year in which the limitation period 
ends by a fraction, the numerator of which is the number of months 
(including any fractional parts of a month) in the limitation period, 
and the denominator of which is 12. In the case of a defined benefit 
plan, no adjustment is made to the section 415(b) limitations to 
reflect a short limitation period.
    (3) Deemed change of limitation year. If a defined contribution 
plan is terminated effective as of a date other than the last day of 
the plan's limitation year, the plan is treated for purposes of this 
section as if the plan was amended to change its limitation year. Thus, 
the rules of this paragraph (d) apply to the terminating plan's final 
limitation year.
    (e) Limitation year for individuals on whose behalf section 403(b) 
annuity contracts have been purchased. The limitation year of an 
individual on whose behalf a section 403(b) annuity contract has been 
purchased by an employer is determined in the following manner.
    (1) If the individual is not in control of any employer (within the 
meaning of Sec.  1.415(f)-1(f)(2)(ii)), the limitation year is the 
calendar year. However, the individual may elect to change the 
limitation year to another twelve-month period. To do this, the 
individual must attach a statement to his or her income tax return 
filed for the taxable year in which the change is made. Any change in 
the limitation year must comply with the rules set forth in paragraph 
(d) of this section.
    (2) If the individual is in control of an employer (within the 
meaning of Sec.  1.415(f)-1(f)(2)(ii)), the limitation year is the 
limitation year of that employer.
    (f) Limitation year for individuals on whose behalf individual 
retirement plans are maintained. The limitation year of an individual 
on whose behalf an individual retirement plan (within the meaning of 
section 7701(a)(37)) is maintained is determined in the manner 
described in paragraph (e) of this section.
    (g) Examples. The following examples illustrate the application of 
this section:

    Example 1. (i) Participant M is employed by both Employer A and 
Employer B, each of which maintains a qualified defined contribution 
plan. M participates in both of these plans. The limitation year for 
Employer A's plan is January 1 through December 31, and the 
limitation year for Employer B's plan is April 1 through March 31. 
Employer A and Employer B are both corporations, and Corporation X 
owns 100 percent of the stock of Employer A and Employer B.
    (ii) The two plans in which M participates are required under 
section 415(f) to be aggregated for purposes of applying the 
limitations of section 415(c) to annual additions made with respect 
to M. Thus, for example, for the limitation year of Employer A's 
plan that begins January 1, 2008, annual additions with respect to M 
that are subject to the limitations of section 415(c) include both 
amounts that are annual additions with respect to M under Employer 
A's plan for the period beginning January 1, 2008, and ending 
December 31, 2008, and amounts contributed to Employer B's plan with 
respect to M that would have been considered annual additions for 
the period beginning January 1, 2008, and ending December 31, 2008, 
under Employer A's plan if those amounts had instead been 
contributed to Employer A's plan.

    Example 2. In 2008, an employer with a qualified defined 
contribution plan using the calendar year as the limitation year 
elects to change the limitation year to a period beginning July 1 
and ending June 30. Because of this change, the plan must satisfy 
the limitations of section 415(c) for the limitation period 
beginning January 1, 2008, and ending June 30, 2008. In applying the 
limitations of section 415(c) to this limitation period, the amount 
of compensation taken into account may only include compensation for 
this period. Furthermore, the dollar limitation for this period is 
the otherwise applicable dollar limitation for calendar year 2008, 
multiplied by 6/12.


0
Par. 17. Section 1.416-1 is amended by revising Q&A T-21 to read as 
follows: Sec.  1.416-1 Questions and answers on top heavy plans.
* * * * *
    T-21. Q. For purposes of testing whether an individual has 
compensation of more than $150,000, what definition of compensation 
must be used?
    A. The definition of compensation to be used is the definition in 
Sec.  1.415(c)-2, however, compensation must be determined for a plan 
year, not a limitation year. Alternatively, compensation that would be 
stated on an employee's Form W-2, ``Wage and Tax Statement,'' for the 
calendar year that ends with or within the plan year may be used, 
although amounts that would have been stated on the employee's Form W-2 
but for an election under section 125, 132(f)(4),

[[Page 16930]]

401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 457(b) must be included. A 
plan must use the same definition of compensation for all top-heavy 
plan purposes for which the definition in this Q and A must be used.
* * * * *


0
Par. 18. Section 1.457-4 is amended by revising paragraph (d) to read 
as follows:


Sec.  1.457-4  Annual deferrals, deferral limitations, and deferral 
agreements under eligible plans.

* * * * *
    (d) Deferrals after severance from employment, including sick, 
vacation, and back pay under an eligible plan--(1) In general. An 
eligible plan may provide that a participant who has not had a 
severance from employment may elect to defer accumulated sick pay, 
accumulated vacation pay, and back pay under an eligible plan if the 
requirements of section 457(b) are satisfied. For example, the plan 
must provide, in accordance with paragraph (b) of this section, that 
these amounts may be deferred for any calendar month only if an 
agreement providing for the deferral is entered into before the 
beginning of the month in which the amounts would otherwise be paid or 
made available and the participant is an employee on the date the 
amounts would otherwise be paid or made available. For purposes of 
section 457, compensation that would otherwise be paid for a payroll 
period that begins before severance from employment is treated as an 
amount that would otherwise be paid or made available before an 
employee has a severance from employment. In addition, deferrals may be 
made for former employees with respect to compensation described in 
Sec.  1.415(c)-2(e)(3)(i) (relating to certain compensation paid by the 
later of 2\1/2\ months after severance from employment or the end of 
the limitation year that includes the date of severance from 
employment). For this purpose, the calendar year is substituted for the 
limitation year. In addition, compensation described in Sec.  1.415(c)-
2(e)(4), (g)(4), or (g)(7) (relating to compensation paid to 
participants who are permanently and totally disabled or compensation 
relating to qualified military service under section 414(u)), provided 
those amounts represent compensation described in Sec.  1.415(c)-
2(e)(3)(i).
    (2) Examples. The provisions of this paragraph (d) are illustrated 
by the following examples:

    Example 1. (i) Facts. Participant G, who is age 62 in year 2007, 
is an employee who participates in an eligible plan providing a 
normal retirement age of 65 and a bona fide sick leave and vacation 
pay program of the eligible employer. Under the terms of G's 
employer's eligible plan and the sick leave and vacation pay 
program, G is permitted to make a one-time election to contribute 
amounts representing accumulated sick pay to the eligible plan. G 
has a severance from employment on January 12, 2008, at which time 
G's accumulated sick and vacation pay that is payable on March 15, 
2008, totals $12,000. G elects, on February 4, 2008, to have the 
$12,000 of accumulated sick and vacation pay contributed to the 
eligible plan.
    (ii) Conclusion. Under the terms of the eligible plan and the 
sick and vacation pay program, G may elect before March 1, 2008, to 
defer the accumulated sick and vacation pay because the agreement 
providing for the deferral is entered into before the beginning of 
the month in which the amount is currently available and the amount 
is bona fide accumulated sick and vacation pay, as described in 
Sec.  1.415(c)-2(e)(3)(ii), and that is payable by the later of 2\1/
2\ months after severance from employment or the end of the calendar 
year that includes the date of severance from employment by G. Thus, 
under this section and Sec.  1.415(c)-2(e)(3)(ii), the $12,000 is 
included in G's includible compensation for purposes of determining 
G's includible compensation in year 2008.
    Example 2. (i) Facts. Same facts as in Example 1, except that 
G's severance from employment is on May 31, 2008, G's $12,000 of 
accumulated sick and vacation pay is payable on September 15, 2008 
(which is by the later of 2\1/2\ months after severance from 
employment or the end of the calendar year that includes the date of 
severance from employment by G), and G's election to defer the 
accumulated sick and vacation pay is made before May 1, 2008.
    (ii) Conclusion. Under this section and Sec.  1.415(c)-
2(e)(3)(ii), the $12,000 is included in G's includible compensation 
for purposes of determining G's includible compensation in year 
2008.
    Example 3. (i) Facts. Employer X maintains an eligible plan and 
a vacation leave plan. Under the terms of the vacation leave plan, 
employees generally accrue three weeks of vacation per year. Up to 
one week's unused vacation may be carried over from one year to the 
next, so that in any single year an employee may have a maximum of 
four weeks' vacation time. At the beginning of each calendar year, 
under the terms of the eligible plan (which constitutes an agreement 
providing for the deferral), the value of any unused vacation time 
from the prior year in excess of one week is automatically 
contributed to the eligible plan, to the extent of the employee's 
maximum deferral limitations. Amounts in excess of the maximum 
deferral limitations are forfeited.
    (ii) Conclusion. The value of the unused vacation pay 
contributed to X's eligible plan pursuant to the terms of the plan 
and the terms of the vacation leave plan is treated as an annual 
deferral to the eligible plan for January of the calendar year. No 
amounts contributed to the eligible plan will be considered made 
available to a participant in X's eligible plan.
* * * * *


0
Par. 19. Section 1.457-5 is amended by revising paragraph (d) Example 2 
to read as follows:


Sec.  1.457-5  Individual limitation for combined annual deferrals 
under multiple eligible plans.

* * * * *
    (d) * * *

    Example 2. (i) Facts. Participant E, who will turn 63 on April 
1, 2006, participates in four eligible plans during year 2006: Plan 
W which is an eligible governmental plan; and Plans X, Y, and Z 
which are each eligible plans of three different tax-exempt 
entities. For year 2006, the limitation that applies to Participant 
E under all four plans under Sec.  1.457-4(c)(1)(i)(A) is $15,000. 
For year 2006, the additional age 50 catch-up limitation that 
applies to Participant E under all four plans under Sec.  1.457-
4(c)(2) is $5,000. Further, for year 2006, different limitations 
under Sec.  1.457-4(c)(3) and (c)(3)(ii)(B) apply to Participant E 
under each of these plans, as follows: under Plan W, the 
underutilized limitation under Sec.  1.457-4(c)(3)(ii)(B) is $7,000; 
under Plan X, the underutilized limitation under Sec.  1.457-
4(c)(3)(ii)(B) is $2,000; under Plan Y, the underutilized limitation 
under Sec.  1.457-4(c)(3)(ii)(B) is $8,000; and under Plan Z, Sec.  
1.457-4(c)(3) is not applicable since normal retirement age is 62 
under Plan Z. Participant E's includible compensation is in each 
case in excess of any applicable deferral.
    (ii) Conclusion. For purposes of applying this section to 
Participant E for year 2006, Participant E could elect to defer 
$23,000 under Plan Y, which is the maximum deferral limitation under 
Sec.  1.457-4(c)(1) through (3), and to defer no amount under Plans 
W, X, and Z. The $23,000 maximum amount is equal to the sum of 
$15,000 plus $8,000, which is the catch-up amount applicable to 
Participant E under Plan Y and which is the largest catch-up amount 
applicable to Participant E under any of the four plans for year 
2006. Alternatively, Participant E could instead elect to defer the 
following combination of amounts: an aggregate total of $15,000 to 
Plans X, Y, and Z, if no contribution is made to Plan W; an 
aggregate total of $20,000 to any of the four plans; or $22,000 to 
Plan W and none to any of the other three plans.
    (iii) If the underutilized amount under Plans W, X, and Y for 
year 2006 were in each case zero (because E had always contributed 
the maximum amount or E was a new participant) or an amount not in 
excess of $5,000, the maximum exclusion under this section would be 
$20,000 for Participant E for year 2006 ($15,000 plus the $5,000 age 
50 catch-up amount), which Participant E could contribute to any of 
the plans.


0
Par. 20. Section 1.457-6 is amended by revising paragraphs (a) and (c) 
to read as follows:


Sec.  1.457-6  Timing of distributions under eligible plans.

    (a) In general. Except as provided in paragraph (c) of this section 
(relating to distributions on account of an

[[Page 16931]]

unforeseeable emergency), paragraph (e) of this section (relating to 
distributions of small accounts), Sec.  1.457-10(a) (relating to plan 
terminations), or Sec.  1.457-10(c) (relating to domestic relations 
orders), amounts deferred under an eligible plan may not be paid to a 
participant or beneficiary before the participant has a severance from 
employment with the eligible employer or when the participant attains 
age 70\1/2\, if earlier. For rules relating to loans, see paragraph (f) 
of this section. This section does not apply to distributions of excess 
amounts under Sec.  1.457-4(e). However, except to the extent set forth 
by the Commissioner in revenue rulings, notices, and other guidance 
published in the Internal Revenue Bulletin (see Sec.  601.601(d) of 
this chapter), this section applies to amounts held in a separate 
account for eligible rollover distributions maintained by an eligible 
governmental plan as described in Sec.  1.457-10(e)(2).
* * * * *
    (c) Rules applicable to distributions for unforeseeable 
emergencies--(1) In general. An eligible plan may permit a distribution 
to a participant or beneficiary for an unforeseeable emergency. The 
distribution must satisfy the requirements of paragraph (c)(2) of this 
section.
    (2) Requirements--(i) Unforeseeable emergency defined. An 
unforeseeable emergency must be defined in the plan as a severe 
financial hardship of the participant or beneficiary resulting from an 
illness or accident of the participant or beneficiary, the 
participant's or beneficiary's spouse, or the participant's or 
beneficiary's dependent (as defined in section 152, and, for taxable 
years beginning on or after January 1, 2005, without regard to section 
152(b)(1), (b)(2), and (d)(1)(B)); loss of the participant's or 
beneficiary's property due to casualty (including the need to rebuild a 
home following damage to a home not otherwise covered by homeowner's 
insurance, such as damage that is the result of a natural disaster); or 
other similar extraordinary and unforeseeable circumstances arising as 
a result of events beyond the control of the participant or the 
beneficiary. For example, the imminent foreclosure of or eviction from 
the participant's or beneficiary's primary residence may constitute an 
unforeseeable emergency. In addition, the need to pay for medical 
expenses, including non-refundable deductibles, as well as for the cost 
of prescription drug medication, may constitute an unforeseeable 
emergency. Finally, the need to pay for the funeral expenses of a 
spouse or a dependent (as defined in section 152, and, for taxable 
years beginning on or after January 1, 2005, without regard to section 
152(b)(1), (b)(2), and (d)(1)(B)) of a participant or beneficiary may 
also constitute an unforeseeable emergency. Except as otherwise 
specifically provided in this paragraph (c)(2)(i), the purchase of a 
home and the payment of college tuition are not unforeseeable 
emergencies under this paragraph (c)(2)(i).
    (ii) Unforeseeable emergency distribution standard. Whether a 
participant or beneficiary is faced with an unforeseeable emergency 
permitting a distribution under this paragraph (c) is to be determined 
based on the relevant facts and circumstances of each case, but, in any 
case, a distribution on account of unforeseeable emergency may not be 
made to the extent that such emergency is or may be relieved through 
reimbursement or compensation from insurance or otherwise, by 
liquidation of the participant's assets, to the extent the liquidation 
of such assets would not itself cause severe financial hardship, or by 
cessation of deferrals under the plan.
    (iii) Distribution necessary to satisfy emergency need. 
Distributions because of an unforeseeable emergency must be limited to 
the amount reasonably necessary to satisfy the emergency need (which 
may include any amounts necessary to pay for any federal, state, or 
local income taxes or penalties reasonably anticipated to result from 
the distribution).
* * * * *


0
Par. 21. Section 1.457-10 is amended by revising paragraph (b)(8) to 
read as follows:


Sec.  1.457-10  Miscellaneous provisions.

* * * * *
    (b) * * *
    (8) Purchase of permissive service credit by plan-to-plan transfers 
from an eligible governmental plan to a qualified plan--(i) General 
rule. An eligible governmental plan of a State may provide for the 
transfer of amounts deferred by a participant or beneficiary to a 
defined benefit governmental plan (as defined in section 414(d)), and 
no amount shall be includible in gross income by reason of the 
transfer, if the conditions in paragraph (b)(8)(ii) of this section are 
met. A transfer under this paragraph (b)(8) is not treated as a 
distribution for purposes of Sec.  1.457-6. Therefore, such a transfer 
may be made before severance from employment.
    (ii) Conditions for plan-to-plan transfers from an eligible 
governmental plan to a qualified plan. A transfer may be made under 
this paragraph (b)(8) only if the transfer is either--
    (A) For the purchase of permissive service credit (as defined in 
section 415(n)(3)(A)) under the receiving defined benefit governmental 
plan; or
    (B) A repayment to which section 415 does not apply by reason of 
section 415(k)(3).
    (iii) Example. The provisions of this paragraph (b)(8) are 
illustrated by the following example:

    Example. (i) Facts. Plan X is an eligible governmental plan 
maintained by County Y for its employees. Plan X provides for 
distributions only in the event of death, an unforeseeable 
emergency, or severance from employment with County Y (including 
retirement from County Y). Plan S is a qualified defined benefit 
plan maintained by State T for its employees. County Y is within 
State T. Employee A is an employee of County Y and is a participant 
in Plan X. Employee A previously was an employee of State T and is 
still entitled to benefits under Plan S. Plan S includes provisions 
allowing participants in certain plans, including Plan X, to 
transfer assets to Plan S for the purchase of service credit under 
Plan S and does not permit the amount transferred to exceed the 
amount necessary to fund the benefit resulting from the service 
credit. Although not required to do so, Plan X allows Employee A to 
transfer assets to Plan S to provide a service benefit under Plan S.

    (ii) Conclusion. The transfer is permitted under this paragraph 
(b)(8).
* * * * *

PART 11--TEMPORARY INCOME TAX REGULATIONS UNDER THE EMPLOYEE 
RETIREMENT INCOME SECURITY ACT OF 1974


0
Par. 22. The authority citation for part 11 continues to read in part 
as follows:

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


Sec.  11.415(c)(4)-1  [Removed]


0
Par. 23. Section 11.415(c)(4)-1 is removed.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
    Approved: March 20, 2007.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E7-5750 Filed 4-4-07; 8:45 am]
BILLING CODE 4830-01-P