[Code of Federal Regulations] [Title 26, Volume 5] [Revised as of April 1, 2002] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR1.401(a)(4)-1] [Page 93-96] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) DEFERRED COMPENSATION, ETC.--Table of Contents Sec. 1.401(a)(4)-1 Nondiscrimination requirements of section 401(a)(4). (a) In general. Section 401(a)(4) provides that a plan is a qualified plan only if the contributions or the benefits provided under the plan do not discriminate in favor of HCEs. Whether a plan satisfies this requirement depends on the form of the plan and on its effect in operation. In making this determination, intent is irrelevant. This section sets forth the exclusive rules for determining whether a plan satisfies section 401(a)(4). A plan that complies in form and operation with the rules in this section therefore satisfies section 401(a)(4). (b) Requirements a plan must satisfy--(1) In general. In order to satisfy section 401(a)(4), a plan must satisfy each of the requirements of this paragraph (b). (2) Nondiscriminatory amount of contributions or benefits--(i) General rule. Either the contributions or the benefits provided under the plan must be nondiscriminatory in amount. It need not be shown that both the contributions and the benefits provided are nondiscriminatory in amount, but only that either the contributions alone or the benefits alone are nondiscriminatory in amount. (ii) Defined contribution plans--(A) General rule. A defined contribution plan satisfies this paragraph (b)(2) if the contributions allocated under the plan (including forfeitures) are nondiscriminatory in amount under Sec. 1.401(a)(4)-2. Alternatively, a defined contribution plan (other than an ESOP) satisfies this paragraph (b)(2) if the equivalent benefits provided under the plan are nondiscriminatory in amount under Sec. 1.401(a)(4)-8(b). Section 1.401(a)(4)-8(b) includes a safe-harbor testing method for contributions provided under a target benefit plan. [[Page 94]] (B) Section 401(k) plans and section 401(m) plans. A section 401(k) plan is deemed to satisfy this paragraph (b)(2) because Sec. 1.410(b)-9 defines a section 401(k) plan as a plan consisting of elective contributions under a qualified cash or deferred arrangement (i.e., one that satisfies section 401(k)(3), the nondiscriminatory amount requirement applicable to qualified cash or deferred arrangements). A section 401(m) plan satisfies this paragraph (b)(2) only if the plan satisfies Secs. 1.401(m)-1(b) and 1.401(m)-2. Contributions under a nonqualified cash or deferred arrangement, elective contributions described in Sec. 1.401(k)-1(b)(4)(iv) that fail to satisfy the allocation and compensation requirements of Sec. 1.401(k)-1(b)(4)(i), matching contributions that fail to satisfy Sec. 1.401(m)- 1(b)(4)(ii)(A), and qualified nonelective contributions treated as elective or matching contributions for certain purposes under Secs. 1.401(k)-1(b)(5) and 1.401(m)-1(b)(5), respectively, are not subject to the special rule in this paragraph (b)(2)(ii)(B), because they are not treated as part of a section 401(k) plan or section 401(m) plan as those terms are defined in Sec. 1.410(b)-9. The contributions described in the preceding sentence must satisfy paragraph (b)(2)(ii)(A) of this section. (iii) Defined benefit plans. A defined benefit plan satisfies this paragraph (b)(2) if the benefits provided under the plan are nondiscriminatory in amount under Sec. 1.401(a)(4)-3. Alternatively, a defined benefit plan satisfies this paragraph (b)(2) if the equivalent allocations provided under the plan are nondiscriminatory in amount under Sec. 1.401(a)(4)-8(c). Section 1.401(a)(4)-8(c) includes a safe- harbor testing method for benefits provided under a cash balance plan. In addition, Sec. 1.401(a)(4)-8(d) provides a safe-harbor testing method for benefits provided under a defined benefit plan that is part of a floor-offset arrangement. (3) Nondiscriminatory availability of benefits, rights, and features. All benefits, rights, and features provided under the plan must be made available in the plan in a nondiscriminatory manner. Rules for determining whether this requirement is satisfied are set forth in Sec. 1.401(a)(4)-4. (4) Nondiscriminatory effect of plan amendments and terminations. The timing of plan amendments must not have the effect of discriminating significantly in favor of HCEs. Rules for determining whether this requirement is satisfied are set forth in Sec. 1.401(a)(4)-5(a). Section 1.401(a)(4)-5(b) provides additional requirements regarding plan terminations. (c) Application of requirements--(1) In general. The requirements of paragraph (b) of this section must be applied in accordance with the rules set forth in this paragraph (c). (2) Interpretation. The provisions of Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13 must be interpreted in a reasonable manner consistent with the purpose of preventing discrimination in favor of HCEs. (3) Plan-year basis of testing. The requirements of paragraph (b) of this section are generally applied on the basis of the plan year and on the basis of the terms of the plan in effect during the plan year. Thus, unless otherwise provided, the compensation, contributions, benefit accruals, and other items used to apply these requirements must be determined with respect to the plan year being tested. However, Sec. 1.401(a)(4)-11(g) provides rules allowing for corrective amendments made after the close of the plan year to be taken into account in satisfying certain requirements under paragraph (b) of this section. (4) Application of section 410(b) rules--(i) Relationship between sections 401(a)(4) and 410(b). To be a qualified plan, a plan must satisfy both sections 410(b) and 401(a)(4). Section 410(b) requires that a plan benefit a nondiscriminatory group of employees, and section 401(a)(4) requires that the contributions or benefits provided to employees benefiting under the plan not discriminate in favor of HCEs. Consistent with this requirement, the definition of a plan subject to testing under section 401(a)(4) is the same as the definition of a plan subject to testing under section 410(b), i.e., the plan determined after applying the mandatory disaggregation rules of Sec. 1.410(b)-7(c) and the permissive aggregation rules of Sec. 1.410(b)-7(d). In addition, whichever testing option is used for the [[Page 95]] plan year under Sec. 1.410(b)-8(a) (e.g., quarterly testing) must also be used for purposes of determining whether the plan satisfies section 401(a)(4) for the plan year. (ii) Special rules for certain aggregated plans. Special rules are set forth in Sec. 1.401(a)(4)-9(b) for applying the nondiscriminatory amount and availability requirements of paragraphs (b)(2) and (b)(3) of this section to a plan that includes one or more defined benefit plans and one or more defined contribution plans that have been permissively aggregated under Sec. 1.410(b)-7(d). (iii) Restructuring. In certain circumstances, a plan may be restructured on the basis of employee groups and treated as comprising two or more plans, each of which is treated as a separate plan that must independently satisfy sections 401(a)(4) and 410(b). Rules relating to restructuring plans for purposes of applying the requirements of paragraph (b) of this section are set forth in Sec. 1.401(a)(4)-9(c). (iv) References to section 410(b). Except as otherwise specifically provided, references to satisfying section 410(b) in Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13 mean satisfying Sec. 1.410(b)-2 (taking into account any special rules available in satisfying that section, other than the permissive aggregation rules of Sec. 1.410(b)-7(d)). In the case of a plan described in section 410(c)(1) that has not made the election described in section 410(d) and is not subject to section 403(b)(12)(A)(i), references in Secs. 1.401(a)(4)-1 through 1.401(a)(4)- 13 to satisfying section 410(b) mean satisfying section 410(c)(2). (5) Collectively-bargained plans. The requirements of paragraph (b) of this section are treated as satisfied by a collectively-bargained plan that automatically satisfies section 410(b) under Sec. 1.410(b)- 2(b)(7). (6) Former employees. In applying the nondiscriminatory amount and availability requirements of paragraphs (b)(2) and (b)(3) of this section, former employees are tested separately from active employees, unless otherwise provided. Rules for applying paragraphs (b)(2) and (b)(3) of this section to former employees are set forth in Sec. 1.401(a)(4)-10. (7) Employee-provided contributions and benefits. In applying the nondiscriminatory amount requirement of paragraph (b)(2) of this section, employee-provided contributions and benefits are tested separately from employer-provided contributions and benefits, unless otherwise provided. Rules for determining the amount of employer- provided benefits under a defined benefit plan that include employee contributions not allocated to separate accounts are set forth in Sec. 1.401(a)(4)-6(b), and rules for applying paragraph (b)(2) of this section to employee contributions under such a plan are set forth in Sec. 1.401(a)(4)-6(c). See paragraph (b)(2)(ii)(B) of this section for rules applicable to employee contributions allocated to separate accounts. (8) Allocation of earnings. Notwithstanding any other provision in Secs. 1.401(a)(4)-1 through 1.401(a)(4)-13, a defined contribution plan does not satisfy paragraph (b)(2) of this section if the manner in which income, expenses, gains, or losses are allocated to accounts under the plan discriminates in favor of HCEs or former HCEs. (9) Rollovers, transfers, and buybacks. In applying the requirements of paragraph (b) of this section, rollover (including direct rollover) contributions described in section 402(c), 402(e)(6), 403(a)(4), 403(a)(5), or 408(d)(3), elective transfers described in Sec. 1.411(d)- 4, Q&A-3(b), transfers of assets and liabilities described in section 414(l), and employee buybacks are treated in accordance with the rules set forth in Sec. 1.401(a)(4)-11(b). (10) Vesting. A plan does not satisfy the nondiscriminatory amount requirement of paragraph (b)(2) of this section unless it satisfies Sec. 1.401(a)(4)-11(c) with respect to the manner in which employees vest in their accrued benefits. (11) Crediting service. A plan does not satisfy paragraphs (b)(2) and (b)(3) of this section unless it satisfies Sec. 1.401(a)(4)-11(d) with respect to the manner in which employees' service is credited under the plan. Service other than actual service with the employer may not be taken into account in determining whether the plan satisfies [[Page 96]] paragraphs (b)(2) and (b)(3) of this section except as provided in Sec. 1.401(a)(4)-11(d). (12) Governmental plans. The rules of this section apply to a governmental plan within the meaning of section 414(d), except as provided in Secs. 1.401(a)(4)-11(f) and 1.401(a)(4)-13(b). (13) Employee stock ownership plans. [Reserved] (14) Section 401(h) benefits. In applying the requirements of paragraph (b) of this section, the portion of a plan providing benefits described in section 401(h) is tested separately from the portion of the same plan providing retirement benefits, and thus is not required to satisfy this section. Rules applicable to section 401(h) benefits are set forth in Sec. 1.401-14(b)(2). (15) Definitions. In applying the requirements of this section, the definitions in Sec. 1.401(a)(4)-12 govern. (16) Effective dates and fresh-start rules. In applying the requirements of this section, the effective dates set forth in Sec. 1.401(a)(4)-13 govern. Section 1.401(a)(4)-13 also provides certain transition and fresh-start rules that apply for purposes of this section. (d) Additional guidance. The Commissioner may, in revenue rulings, notices, and other guidance, published in the Internal Revenue Bulletin, provide any additional guidance that may be necessary or appropriate in applying the nondiscrimination requirements of section 401(a)(4), including additional safe harbors and alternative methods and procedures for satisfying those requirements. See Sec. 601.601(d)(2)(ii)(b) of this chapter. [T.D. 8485, 58 FR 46780, Sept. 3, 1993]