[Federal Register: April 5, 2007 (Volume 72, Number 65)]
[Rules and Regulations]
[Page 16877-16931]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05ap07-20]
[[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
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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