[Federal Register Volume 70, Number 103 (Tuesday, May 31, 2005)]
[Proposed Rules]
[Pages 31214-31256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-10268]
[[Page 31213]]
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Part III
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;
Proposed Rule
Federal Register / Vol. 70, No. 103 / Tuesday, May 31, 2005 /
Proposed Rules
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 11
[REG-130241-04]
RIN 1545-BD52
Limitations on Benefits and Contributions Under Qualified Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed amendments to the regulations
under section 415 of the Internal Revenue Code regarding limitations on
benefits and contributions under qualified plans. The proposed
amendments would provide comprehensive guidance regarding the
limitations of section 415, including updates to the regulations for
numerous statutory changes since regulations were last published under
section 415. The proposed amendments would also make conforming changes
to regulations under sections 401(a)(9), 401(k), 403(b), and 457, and
would make other minor corrective changes to regulations under section
457. These regulations will affect administrators of, participants in,
and beneficiaries of qualified employer plans and certain other
retirement plans. This document also provides notice of a public
hearing on these proposed regulations.
DATES: Written or electronic comments must be received by July 25,
2005. Requests to speak and outlines of topics to be discussed at the
public hearing scheduled for August 17, 2005, at 10 a.m., must be
received by July 27, 2005.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-130241-04), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
130241-04), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington DC. Alternatively, taxpayers may submit
comments electronically directly to the IRS Internet site at http://www.irs.gov/regs. The public hearing will be held in the Auditorium,
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington,
DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Vernon S.
Carter at (202) 622-6060 or Linda S. F. Marshall at (202) 622-6090;
concerning submissions and the hearing and/or to be placed on the
building access list to attend the hearing, Richard A. Hurst at (202)
622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR Parts 1 and 11) under section 415 of the Internal
Revenue Code (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)(9), 401(k), 403(b), and 457 of the Code, as well as
minor corrective changes to the regulations under section 457.
Section 415 was added to the Internal Revenue Code by the Employee
Retirement Income Security Act of 1974 (ERISA), and has been amended
many times since. Section 415 provides a series of limits on benefits
under qualified defined benefit plans and 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
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 Internal
Revenue 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%
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)(2), 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)(3), 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% 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-
[[Page 31215]]
554 (114 Stat. 2763), 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), and the Working Families Tax Relief Act
of 2004, Public Law 108-311 (118 Stat. 1166).
Although two minor 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 C.B. 360) provides guidance on
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 C.B. 536) 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 C.B. 458) 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. 95-6 (1995-1 C.B. 80) and Rev. Rul. 2001-62
(2001-2 C.B. 632) (superseding Rev. Rul. 95-6) provide 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.
Rev. Rul. 95-29 (1995-1 C.B. 81) and Rev. Rul. 98-1 (1998-
1 C.B. 249) (modifying and superseding Rev. Rul. 95-29) provide
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 C.B. 326) 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 C.B. 1340) 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 the Community Renewal Tax
Relief Act of 2000.
Rev. Rul. 2001-51 (2001-2 C.B. 427) 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.
Notice 2002-2 (2002-1 C.B. 285) provides guidance
regarding the treatment of reinvested ESOP dividends under section
415(c), to reflect changes made by SBJPA.
Rev. Rul. 2002-27 (2002-1 C.B. 925) 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 C.B. 116) 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 (2004-48 I.R.B. 879) provides guidance
regarding the actuarial assumptions that must be used for distributions
with annuity starting dates occurring during plan years beginning in
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.
These guidance items are reflected in the proposed regulations with
some modifications. In addition, the proposed regulations reflect other
statutory changes not previously addressed by guidance, and include
some other changes and clarifications to the existing final
regulations. Treasury 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. To the
extent practicable, this preamble identifies and explains substantive
changes from the existing final regulations or existing guidance.
Explanation of Provisions
Overview
A. Reflection of Statutory Changes
These proposed 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 proposed regulations are
as follows:
The current statutory limitations under section
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 for benefit adjustments under defined
benefit plans. The proposed regulations also specify the parameters
under which a benefit payable in a form other than a straight life
annuity is adjusted in order to determine the actuarially equivalent
annual benefit that is subject to the limitations of section 415(b).
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, multiemployer plans, and
certain other collectively bargained 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) limitation on
the combination of a defined benefit plan and a defined contribution
plan.
[[Page 31216]]
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 the Working Families Tax Relief Act of 2004.
Changes to section 415(c) under which certain types of
arrangements are no longer subject to the limitations of section 415(c)
(e.g., individual retirement accounts other than SEPs) and other types
of arrangements have become subject to the limitations of section
415(c) (e.g., certain individual medical accounts).
The inclusion in compensation (for purposes of section
415) of certain salary reduction amounts not included in gross income.
B. Other Significant Changes
The proposed regulations contain new rules for determining the
annual benefit under a defined benefit plan where there has been more
than one annuity starting date (e.g., where benefits under a plan are
aggregated with benefits under another plan under which distributions
previously commenced). These rules would resolve the numerous issues
that have arisen in determining the annual benefit under a plan where
the application of the section 415(b) limitations must take into
account prior distributions as well as currently commencing
distributions.
The proposed regulations also 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), section 403(b), or
section 457(b). These rules would resolve issues that have arisen with
respect to payments made after the end of employment. The proposed
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 within
2\1/2\ months following severance from employment. These exceptions
apply to payments (such as regular compensation, and payments for
overtime, commissions, and bonuses) that would have been payable if
employment had not terminated, and to payments with respect to leave
that would have been available for use if employment had not
terminated. This notice of proposed rulemaking includes corresponding
changes to the regulations under sections 401(k), 403(b), and 457 that
would provide that amounts receivable following severance from
employment can only be deferred if those amounts meet these conditions.
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.
Section 1.415(a)-1: General Rules
Section 1.415(a)-1 of these proposed 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, and governmental plans. In addition, this section 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, and rules
that apply in other special situations.
Section 1.415(b)-1: Limitations Applicable to Defined Benefit Plans
Section 1.415(b)-1 of these proposed regulations sets forth rules
for applying the limitations on benefits under a defined benefit plan.
Under these limitations, the annual benefit must not be greater than
the lesser of $160,000 (as adjusted pursuant to section 415(d)) or 100%
of the participant's average compensation for the participant's high 3
consecutive years. 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 dollar limitation under section
415(b)(1)(A) is actuarially adjusted for benefit payments that commence
before age 62 or after age 65. The proposed regulations clarify that,
in addition to applying to benefits payable to participants and
beneficiaries, the limitations of section 415(b) apply to accrued
benefits and benefits payable from an annuity contract distributed to a
participant. Thus, the limitations of section 415(b) apply to a
participant's entire accrued benefit, regardless of whether the benefit
is vested. 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. In
addition, the proposed regulations provide a number of other updates,
clarifications, and other changes to the existing regulations, as
described below.
A. Actuarial Assumptions Used to Convert Benefit to a Straight Life
Annuity
The proposed 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 (including, for plan years beginning in 2004 and 2005, the
use of a 5.5% interest rate for benefits that are subject to the
present value rules of section 417(e)(3),\1\ as set forth in PFEA), as
well as published guidance that has been issued since 1981. In addition
to setting forth rules for adjusting forms of benefit other than
straight life annuities, the proposed regulations would permit the IRS
to issue published guidance setting forth simplified methods for making
these adjustments.
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\1\ 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 the proposed 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 is actuarially equivalent to a particular
optional form of benefit is overridden only when the optional form of
benefit is more valuable than the corresponding straight
[[Page 31217]]
life annuity when compared using statutorily specified actuarial
assumptions.
The rules in the proposed 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
form of benefit that is not subject to the minimum present value rules
of section 417(e)(3). Under the simplified calculation, instead of
determining the actuarial assumptions used under the plan and 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), however, because under the plan
those forms of benefit may be determined as the actuarial equivalent of
the deferred annuity, rather than as the actuarial equivalent of the
immediate straight life annuity.
B. Inclusion of Social Security Supplements in Annual Benefit
The proposed 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 QSUPP within the meaning of
Sec. 1.401(a)(4)-12.
C. Determination of High 3 Average Compensation
The proposed regulations would make two changes that would have a
significant effect on the determination of a participant's average
compensation for the participant's high 3 consecutive years. Consistent
with the provisions of section 415(b)(3), the proposed regulations
would restrict compensation used for this purpose to compensation
earned in periods during which the participant was an active
participant in the plan. In addition, the proposed regulations under
Sec. 1.415(c)-2 would clarify 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 may not base
benefit accruals on compensation in excess of the limitation 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 2005 at age 75 (so that the adjusted dollar limitation
could be as high as $379,783), and the participant had compensation in
excess of the applicable section 401(a)(17) limit for 2002, 2003, and
2004, 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) (i.e., $201,667, or the average of $200,000, $200,000, and
$205,000).
The proposed regulations set forth rules for computing the
limitation of section 415(b)(1)(B) of 100% of the participant's
compensation for the period of the participant's high 3 years of
service for a participant who is employed with the employer while an
active participant for less than 3 consecutive calendar years. For such
a participant, the period of a participant's high 3 years of service is
the actual number of consecutive years of employment (including
fractions of years) while an active participant in the plan. In such a
case, the limitation of section 415(b)(1)(B) of 100% of the
participant's 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
employment while a plan participant over the actual period of service
(including fractions of years, but not less than one year).
D. Treatment of Benefits Paid Partially in the Form of a QJSA
Under section 415(b)(2)(B), the 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). The proposed regulations would 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 the
proposed 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 that 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, the proposed
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.
The proposed 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. Under these
rules, to the extent that a forfeiture does not occur upon the
participant's death, no adjustment is made to reflect the probability
of the participant's death during the relevant time period, and to the
extent a forfeiture occurs upon the participant's death, an adjustment
must be applied to reflect the probability of the participant's death
during the relevant time period. These rules generally are consistent
with the guidance provided in Notice 83-10.
The proposed regulations would also provide a simplified method for
applying this rule. 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
[[Page 31218]]
treatment for adjustments that apply both before age 62 and after age
65.
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), the proposed
regulations would provide that the early retirement reduction does not
apply to certain participants in plans of state 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 or political
subdivision of a state 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 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. The proposed regulations would clarify that the
application of this rule depends on whether the employer is a police
department or fire department of the state or political subdivision,
rather than on the job classification of the individual participant.
G. Application of $10,000 Exception
Pursuant to section 415(b)(4), the benefits payable with respect to
a participant 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. The proposed regulations would
clarify that the section 415(b)(4) alternative $10,000 limitation 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
The proposed regulations would retain the rules under existing
final 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 section 411 does
not apply to the plan) because, depending upon the investment
performance of plan assets, employer contributions may be needed to pay
a portion of the participant's benefit that is conditioned upon these
employee contributions. The rules covering mandatory employee
contributions do not extend to voluntary contributions because
voluntary employee contributions (plus earnings thereon) are treated as
a separate defined contribution plan rather than as part of a defined
benefit plan.
The proposed regulations would retain the rule under the existing
regulations that the annual benefit attributable to mandatory employee
contributions is determined using the factors described in section
411(c)(2)(B) and the regulations thereunder, regardless of whether
section 411 applies to the plan. The proposed regulations also would
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.
I. Exclusion of Annual Benefit Attributable to Rollover Contributions
From Annual Benefit
The proposed regulations would clarify that the annual benefit does
not include the annual benefit attributable to rollover contributions
made to a defined benefit plan (i.e., 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) treating the rollover
contributions as employee contributions (regardless of whether section
411 applies 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 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 would reflect the excess of those
annuity payments over the amounts that would be payable using the
factors specified in section 411(c)(3).
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
The proposed regulations would modify the rules of the existing
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 are designed to ensure that transferred benefits are not
counted twice by the same employer toward the limitations of section
415(b) and, similarly, to prevent the circumvention of the limitations
of section 415(b) through benefit transfers to plans of unrelated
employers. Under the proposed regulations, 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), then the transferred
benefits are included in determining the annual benefit under the
transferee plan and are
[[Page 31219]]
disregarded in determining the annual benefit under the transferor
plan. Accordingly, in such a case, the annual benefit under each plan
is determined taking into account the actual benefits provided under
that plan after the transfer.
In contrast, if 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), then the assets associated with those transferred
liabilities (other than surplus assets) are treated by the transferor
plan as distributed as a single-sum distribution. This will occur, for
example, if the employer sponsoring the transferor plan is a
predecessor employer with respect to the participant whose benefits are
transferred to the transferee plan, where 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). Although such a transfer
is treated as a distribution 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 included as a distribution in
determining the annual benefit under the transferor plan. In most such
cases, however, 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 that plan (in combination with the
transferred benefits).
K. 10-Year Phase-In of Limitations Based on Years of Participation and
Years of Service
The proposed regulations would 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 would modify the rules set forth
in final regulations for applying the 10-year phase-in of the
compensation limit based on years of service. The proposed regulations
follow the guidance set forth in Notice 87-21 for determining years of
participation, and apply analogous rules for determining years of
service for this purpose.
Section 1.415(b)-2: Multiple Annuity Starting Dates
Section 1.415(b)-2 of the proposed regulations sets forth rules
that apply in computing the annual benefit under one or more defined
benefit plans in the case of multiple annuity starting dates (i.e., in
cases in which a participant has received one or more distributions in
limitation years prior to an increase in the accrued benefit occurring
during the current limitation year or prior to the annuity starting
date for a distribution that commences during the current limitation
year). These rules apply, for example, where benefit distributions to a
participant have previously commenced under a plan that is aggregated
with a plan from which the participant receives current accruals, or
where a new distribution election is effective during the current
limitation year with respect to a distribution that commenced in a
prior limitation year. These rules also apply where benefit payments
are increased as a result of plan terms applying a cost-of-living
adjustment pursuant to an adjustment of the dollar limit of section
415(b)(1)(A) made pursuant to section 415(d), if the plan does not
provide for application of the safe harbor methodology set forth in the
proposed regulations for determining the adjusted amount of the
benefit.
In the case of multiple annuity starting dates, the annual benefit
that is subject to the limits of section 415(b) and Sec. 1.415(b)-1(a)
is equal to the sum of (1) the annual benefit determined with respect
to any accrued benefit with respect to which distribution has not yet
commenced as of the current determination date, computed pursuant to
the rules of Sec. 1.415(b)-1, (2) the annual benefit determined with
respect to any distribution with an annuity starting date that occurs
within the current limitation year and on or before the current
determination date, computed pursuant to the rules of Sec. 1.415(b)-1,
(3) the annual benefit determined with respect to the remaining amounts
payable under any distribution with an annuity starting date that
occurred during a prior limitation year, computed pursuant to the rules
of Sec. 1.415(b)-1, and (4) the annual benefit attributable to prior
distributions. For this purpose, the current determination date is the
last day of period for which an increase in the participant's benefit
accrues if an increase in the participant's accrued benefit occurs
during the limitation year, and if there is no such increase, the
current determination date is the annuity starting date for the
distribution that commences during the limitation year. The annual
benefit determined using this formula is tested for compliance with
section 415(b) as of the current determination date, applying the
dollar limitation (which is adjusted under section 415(d) to the
current determination date and is also adjusted for the participant's
age as of the current determination date) and the compensation
limitation applicable as of that date (which is adjusted under section
415(d) to the current determination date but is not adjusted based on
the participant's age).
Under the proposed regulations, the annual benefit attributable to
prior distributions is determined by adjusting the amounts of prior
distributions to an actuarially equivalent straight life annuity
commencing at the current determination date. The proposed regulations
apply rules that are analogous to the rules for adjusting other
benefits to determine the amount of the actuarially equivalent straight
life annuity for purposes of determining the annual benefit
attributable to prior distributions. Under these rules, the amount and
time of prior distributions made to the participant is taken into
account, and the prior distributions are adjusted to the actuarially
equivalent straight life annuity commencing at the current
determination date using interest and mortality assumptions that apply
generally for purposes of applying the limitations of section 415(b) to
a benefit in a form other than a straight life annuity. For this
purpose, the actuarially equivalent straight life annuity commencing at
the current determination date must reflect an actuarial increase to
the present value of payments to reflect that the participant has
survived during the interim period.
The actuarial assumptions used to calculate the annual benefit
attributable to a prior distribution are determined as of the current
determination date, and are based on the form of the prior
distribution. For a prior distribution to which section 417(e)(3) did
not apply, the annual benefit attributable to the prior distribution is
the greater of the annual amount of a straight life annuity commencing
at the current determination date that is the actuarial equivalent of
that prior distribution, computed using the actuarial factors specified
under the plan that provides for the current distribution or current
accrual that are used to determine offsets, if any, for prior
distributions, or the annual amount of a straight life annuity
commencing at the current determination date that is the actuarial
equivalent of that prior distribution, computed using the currently
applicable
[[Page 31220]]
statutory actuarial factors under section 415(b)(2)(E)(i) and (v).
Similarly, for a prior distribution to which section 417(e)(3) applied,
the annual benefit attributable to the prior distribution is the
greater of the annual amount of a straight life annuity commencing at
the current determination date that is the actuarial equivalent of that
prior distribution, computed using the actuarial factors specified
under the plan that provides for the current distribution or current
accrual that are used to determine offsets, if any, for prior
distributions, or the annual amount of a straight life annuity
commencing at the current determination date that is the actuarial
equivalent of that prior distribution, computed using the currently
applicable statutory actuarial factors under section 415(b)(2)(E)(ii)
and (v).
Apart from determining the actuarial factors applicable to
calculating the annual benefit attributable to prior distributions, the
form of the prior distribution does not otherwise affect the
determination of the annual benefit attributable to prior
distributions. Thus, for example, if a participant has received $50,000
per year for the past four years, the determination of the annual
benefit attributable to prior distributions will be the same if those
distributions are part of a 10-year certain and life annuity or are
part of a straight life annuity because both of those distribution
forms are subject to the same actuarial factors for determining the
annual benefit attributable to prior distributions. In either case, the
determination of the annual benefit attributable to prior distributions
will be determined by applying the interest and mortality assumptions
used under the plan to determine offsets, if any, for prior
distributions to determine a straight life annuity that is actuarially
equivalent to the four prior payments of $50,000, applying the
statutory actuarial assumptions to determine a straight life annuity
that is actuarially equivalent to the four prior payments of $50,000,
and then taking the greater of the two straight life annuity amounts.
Determining the annual benefit attributable to prior distributions on
the basis of the amount of distributions made rather than on the form
of those distributions (or on the basis of the accrued benefit that
underlies those distributions) is designed to simplify the application
of the multiple annuity starting date rules.
The proposed regulations provide that a prior distribution is not
reflected in the annual benefit attributable to prior distributions to
the extent the prior distribution has been repaid to the plan with
interest (because the amounts attributable to such a prior distribution
are reflected in the annual benefit in other ways). Thus, a prior
distribution that has been entirely repaid to the plan (with interest)
does not give rise to an annual benefit attributable to prior
distributions. Similarly, if a prior distribution was made, and a
repayment was subsequently made that was less than the amount of the
prior distribution (including reasonable interest), the annual benefit
attributable to prior distributions is determined by multiplying the
annual benefit attributable to the prior distribution by one minus a
fraction, the numerator of which is the amount of the repayment and the
denominator of which is the amount of the prior distribution plus
reasonable interest.
The proposed regulations provide an additional requirement that
applies where a stream of annuity payments is modified by a new
distribution election. This additional requirement is also imposed in
Sec. 1.401(a)(9)-6, Q&A-13(c)(3). Under this additional requirement,
which is intended to limit the extent to which benefits can increase as
a result of a change in market interest rates, if a stream of annuity
payments is modified by a new distribution election, the payments under
the annuity that are paid before the modification plus the modified
payments must satisfy the requirements of Sec. 1.415(b)-1 determined
as of the original annuity starting date, using the interest rates and
mortality table applicable to such date. Following the issuance of the
regulations under section 401(a)(9), commentators suggested that the
rule should be modified to permit a plan to reflect cost-of-living
adjustments under section 415(d) that occur between the original
annuity starting date and the date of modification in applying the
additional test. These proposed regulations adopt this suggestion, and
provide that a plan will not fail to satisfy the additional requirement
merely because payments reflect cost-of-living adjustments pursuant to
section 415(d) for payments no earlier than the time those adjustments
are effective and in amounts no greater than amounts determined under
Sec. 1.415(d)-1(a)(5). In addition, the proposed regulations include
an amendment to Sec. 1.401(a)(9)-6, Q&A-13(c)(3), to reflect this
change.
Section 1.415(c)-1: Limitations Applicable To Defined Contribution
Plans
Section 1.415(c)-1 of these proposed 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% 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 on defined contribution plans 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 accounts.
The proposed regulations reflect a number of statutory changes to
section 415(c) that were made after the issuance of existing final
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 plans. The proposed regulations also
would make some other changes to existing regulations, as discussed
below.
If annual additions under an annuity contract that otherwise
satisfies the requirements of section 403(b) exceed the limitations of
section 415(c), then the portion of the contract that includes that
excess annual addition fails to be a section 403(b) annuity contract
(and instead is a contract to which section 403(c) applies), and the
remaining portion of the contract is a section 403(b) annuity contract.
As under regulations recently proposed under section 403(b) (69 FR
67075, November 16, 2004), the proposed regulations include a provision
under which the status of the remaining portion of the contract as a
section 403(b) 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, consistent with
the change to section 403(b)(1) made in JCWAA, the proposed 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 (i.e., if the contract is a church plan that is covered
by the grandfather rule of section 251(e)(5) of TEFRA).
[[Page 31221]]
The proposed regulations clarify that the IRS will treat a sale or
exchange by the employee or the employer that transfers assets to a
plan where the consideration paid by the plan is less than the fair
market value of the assets transferred to the plan as giving rise to an
annual addition in the amount of the difference between the value of
the assets transferred and the consideration.
Consistent with Rev. Rul. 2002-45, the proposed 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
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. 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. The proposed
regulations provide that, in addition to payments to a plan made
pursuant to 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, restorative payments include 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. However,
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 contributions that give rise to annual additions and are
not restorative payments.
The proposed regulations would retain the rule for taxable
employers under existing regulations that the deadline for making a
contribution to the plan that is credited to a participant's account
for a limitation year for purposes of section 415(c). Under this rule,
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. The proposed
regulations would modify the corresponding rule for tax-exempt
employers. Under the proposed regulations, the deadline for a tax-
exempt employer to make a contribution to the plan that is credited to
a participant's account for a limitation year for purposes of section
415(c) is the 15th day of the tenth calendar month following the close
of the taxable year with or within which the particular limitation year
ends. This date corresponds to the due date for Form 5500 (with
extensions) in cases in which the taxable year coincides with the plan
year, and generally corresponds to the contribution due date for
taxable employers who request filing extensions. The deadline for
contributions for tax-exempt employers under the proposed regulations
would be an extension from the earlier deadline now applicable under
existing regulations (i.e., the 15th day of the sixth calendar month
following the close of the taxable year with or within which the
particular limitation year ends). 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 proposed 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. In addition, for any individual who is a
church employee performing any services for the church outside the
United States, 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 the greater of $3,000
or the employee's includible compensation. The proposed regulations
would 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 clarifies the interaction between the
generally applicable church employee rule and the rule for church
employees performing services outside the United States. In addition,
the proposed regulations would clarify that the special rule that
applies to services for a church performed abroad applies to the
employee's includible compensation only with respect to services for
the church outside the United States.
The correction mechanism in current Sec. 1.415-6(b)(6) for
handling excess annual additions is not included in the proposed
regulations. It is anticipated that this correction mechanism will be
included in the Employee Plans Compliance Resolution System (see Rev.
Proc. 2003-44 (2003-1 C.B. 1051)) in the future.
The proposed regulations generally would retain the rules under
existing 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, the proposed regulations would 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 existing regulations, which require 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 C.B. 125) 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% is used to
amortize waived contributions, the interest rate is 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.
Section 1.415(c)-2: Definition of Compensation
Section 1.415(c)-2 of these proposed 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. The
proposed regulations reflect a number of statutory changes to section
415(c)(3) that were
[[Page 31222]]
made after the issuance of existing final 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, the proposed
regulations would make some other changes to existing regulations, as
discussed below.
The proposed regulations provide specific guidelines regarding when
amounts received following severance from employment are considered
compensation for purposes of section 415. 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. Under the proposed regulations, the rule
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. This
notice of proposed rulemaking also contain corresponding proposed
amendments to the regulations under sections 401(k), 403(b), and 457
that would provide that amounts received following severance from
employment can be deferred only if they are considered compensation
under the rules of section 415.
Section 1.415(d)-1: Cost-of-Living Adjustments
Section 1.415(d)-1 of these proposed 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 Internal
Revenue Code. The proposed 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, the proposed regulations make several other
changes to existing final regulations, as discussed below.
The proposed regulations would 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 the proposed regulations, the adjusted dollar limitation is
applicable to current employees who are participants in a defined
benefit plan and 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 such benefits. A plan is permitted to provide that the annual
increase applies for a participant who has previously commenced
receiving benefits only 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 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.
The proposed regulations provide for a safe harbor 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). If such adjustments are made in accordance with this
safe harbor, the multiple annuity starting date rules of Sec.
1.415(b)-2 do not apply on account of such adjustments. Under this safe
harbor, if a participant has received one or more distributions under
an annuity stream that satisfies the requirements of section 415(b)
before the adjustment, the plan's benefits will satisfy the limitations
of section 415(b) if the amounts payable to the employee for the
limitation year and subsequent limitation years are not greater than
the amounts that would otherwise be payable under the annuity stream
without regard to the adjustment, multiplied by a fraction. The
numerator of this fraction is the limitation under section 415(b)
(i.e., 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 adjustment, and the denominator of this
fraction is such limitation under section 415(b) in effect for the
distribution immediately before the adjustment.
Section 1.415(f)-1: Combining and Aggregating Plans
Section 1.415(f)-1 of these proposed regulations sets forth rules
for combining and aggregating plans pursuant to section 415(f). Under
section 415(f) and these proposed regulations, for purposes of applying
the limitations of section 415(b) and (c), all defined benefit plans of
an employer are treated as one defined benefit plan, and all defined
contribution plans of 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 group rules of
section 414(m), and the leased employee rules of section 415(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).
The proposed regulations would also make various changes and
clarifications to the existing regulations. The proposed regulations
would 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. Pursuant to
section 414(a)(1), the proposed regulations would provide that, for
purposes of 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, but only if
that benefit is provided under the plan maintained by the employer. In
addition, the proposed regulations would provide
[[Page 31223]]
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, 425-429 (1996).
The proposed 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.
The proposed 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 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 addition to
applying the rules under existing final regulations for purposes of
determining control for purposes of section 415(f), the proposed
regulations would apply the rules under proposed Sec. 1.414(c)-5
(regarding aggregation rules for tax-exempt employers), as published in
the Federal Register on November 16, 2004 (69 FR 67075).
The proposed regulations also provide that a multiemployer plan, as
defined in section 414(f), is not aggregated with other multiemployer
plans for purposes of determining any section 415 limitation. In
addition, a multiemployer plan will not be aggregated with non-
multiemployer plans for purposes of applying the 100% of compensation
benefit limit to non-multiemployer plans under section 415(b)(1)(B). In
general, under the proposed regulations, benefits of all employers are
taken into account in applying the limitations of section 415 to a
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.
Section 1.415(g)-1: Disqualification of Plans and Trusts
Section 1.415(g)-1 of these proposed 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,
proposed Sec. 1.415(g)-1 replicates the rules of Sec. 1.415-9 of the
existing final regulations regarding ordering rules for disqualifying
plans and trusts that are aggregated for purposes of compliance with
section 415. In addition, the proposed regulations provide rules for
disqualification where an individual medical account (as described in
section 415(l)) and a post-retirement medical benefits account for key
employees (as described in section 419A(d)) is combined with a
qualified defined contribution plan for purposes of applying section
415(c). If the combined plan exceeds those limitations for a particular
limitation year, the qualified defined contribution plan (rather than
the medical account) is disqualified for the limitation year.
Section 1.415(j)-1: Limitation Year
Section 1.415(j)-1 of these proposed regulations sets forth rules
regarding limitation years that are used as the period for
demonstrating compliance with section 415. In addition to setting forth
general rules that generally correspond to rules under existing
regulations, the proposed 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 C.B.
165). 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 limitations years are aggregated, the
rules of section 415(c) 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).
Sections 415(m) and 415(n)
These proposed regulations do not contain provisions relating to
section 415(m) (regarding treatment of qualified governmental excess
benefit arrangements) and section 415(n) (regarding the purchase of
permissive service credit from a governmental defined benefit plan).
Comments are requested regarding the need for regulations or other
guidance on issues arising under these statutory provisions.
Other Changes: Section 457 Regulations
These proposed regulations also 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. The additional revisions do not include any substantive
changes, but would merely make clarifications, including corrections in
an example illustrating the section 457 catch-up rules and a correction
in the rules relating to unforeseeable emergencies to reflect recent
revisions in the definition of a dependent (made under the Working
Families Tax Relief Act of 2004, which modified the definition of the
term dependent under section 152).
Proposed Effective Dates
The regulations under section 415 are proposed to apply to
limitation years beginning on or after January 1, 2007. Except as
described below, until these regulations are issued as final
regulations, the existing regulations remain in effect (to the extent
not modified by statutory changes). A defined benefit plan that was
adopted and effective before May 31, 2005, will be considered to
satisfy the limitations of section 415(b) for a participant with
[[Page 31224]]
respect to benefits accrued or payable under the plan as of the
effective date of final regulations implementing these proposed
regulations pursuant to plan provisions adopted and in effect on May
31, 2005, but only if such plan provisions meet the requirements of
statutory provisions, regulations, and other published guidance in
effect on May 31, 2005. Thus, plans that were in compliance with the
rules of section 415 as in effect prior to the finalization of these
regulations will not be disqualified based on benefits that arise
pursuant to plan provisions that were adopted and in effect on May 31,
2005, and that accrue prior to the effective date of final regulations
implementing these proposed regulations, even if those benefits no
longer comply with the requirements of section 415 as set forth under
those 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 final regulations implementing these
proposed regulations unless such additional benefits, together with the
participant's other accrued benefits, comply with those new final
regulations.
Reliance on Compensation Timing Rules and Changes to Regulations Under
Sections 401(a)(9) and 457
Pending issuance of final regulations, taxpayers may rely on the
modifications in these proposed regulations contained 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, Sec. 1.401(a)(9)-6 regarding certain changes in form of
payment, and Sec. Sec. 1.457-5, -6, and -10 providing corrective and
clarifying changes. Pursuant to this reliance, taxpayers may apply the
proposed amendments described in this paragraph for periods prior to
the effective date of final regulations.
Sunset of EGTRRA Changes
The proposed regulations do not provide rules for the application
of the EGTRRA sunset provision (section 901 of EGTRRA), under which the
provisions of EGTRRA do not apply to taxable, plan, or limitation years
beginning after December 31, 2010. Unless the EGTRRA sunset provision
is repealed before it becomes effective, additional guidance will be
needed to clarify its application.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It 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, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The IRS and Treasury Department specifically request comments on
the clarity of the proposed regulations and how they may be made easier
to understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for August 17, 2005 at 10 a.m.
in the auditorium, Internal Revenue Building, 1111 Constitution Avenue,
NW., Washington, DC. Due to building security procedures, visitors must
use the main building entrance on Constitution Avenue. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing
starts. For more information about having your name placed on the list
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section
of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
(signed original and eight (8) copies) or electronic comments and an
outline of the topics to be discussed and the time to be devoted to
each topic by July 27, 2005. A period of 10 minutes will be allotted to
each person for making comments. An agenda showing the scheduling of
the speakers will be prepared after the deadline for receiving outlines
has passed. Copies of the agenda will be available free of charge at
the hearing.
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). However, other personnel
from the IRS and Treasury 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 11 are proposed to be amended as
follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Par. 2. Section 1.401(a)(9)-6, Q&A-13(c)(3) is revised to read as
follows:
Sec. 1.401(a)(9)-6 Required minimum distributions for defined benefit
plans and annuity contracts.
A-13. * * *
(c) * * *
(3) In accordance with Sec. 1.415(b)-2(c), after taking into
account the modification, the payments under the annuity that are paid
before the modification plus the modified payments must satisfy the
requirements of Sec. 1.415(b)-1 determined as of the original annuity
starting date, using the interest rates and mortality table applicable
to such date, except that, for this purpose, payments will not fail to
satisfy the requirements of Sec. 1.415(b)-1 determined as of the
original annuity starting date merely because the payments are adjusted
to reflect cost-of-living adjustments pursuant to section 415(d) that
are determined in accordance with Sec. 1.415(d)-1(a)(5); and
* * * * *
Par. 3. 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. 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
[[Page 31225]]
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)) can make a cash or deferred election
with respect to an amount paid after severance from employment, unless
the amount is paid within 2\1/2\ months following the eligible
employee's severance from employment and is described in Sec.
1.415(c)-2(e)(3)(ii).
* * * * *
Par. 4. Section 1.403(b)-3, as proposed to be revised on November
16, 2004 (69 FR 67086), is further proposed to be amended by adding
text to paragraph (b)(4)(ii) to read as follows:
Sec. 1.403(b)-3 Exclusion for contributions to purchase section
403(b) contracts.
(b) * * *
(4) * * *
(ii) Exceptions. The exclusion from gross income provided by
section 403(b) applies to contributions made for former employees with
respect to compensation described in Sec. 1.415(c)-2(e)(3)(ii)
(relating to certain compensation paid within 2\1/2\ months following
severance from employment), compensation described in Sec. 1.415(c)-
2(g)(4) (relating to compensation paid to participants who are
permanently and totally disabled), and compensation relating to
qualified military service under section 414(u).
* * * * *
Sec. 1.415-1 thru Sec. 1.415-10 [Removed]
Par. 5. Sections 1.415-1 through 1.415-10 are removed.
Par. 6. 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 (taking into account
the rules of Sec. 1.415(b)-2);
(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; or
(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 (taking into account the rules of
Sec. 1.415(b)-2);
(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; or
(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--(i) In
general. If the contributions and other additions under an annuity
contract that otherwise satisfies the requirements of section 403(b)
with respect to any participant for any limitation year exceed the
limitations of section 415(c) and Sec. 1.415(c)-1, then the portion of
the contract that includes such excess annual addition fails to be a
section 403(b) contract (and instead is a contract to which section
403(c) applies), and the remaining portion of the contract is a section
403(b) contract. The status of the remaining portion of the contract as
a section 403(b) 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. See also Sec. 1.403(b)-
3(c)(3).
(ii) Defined benefit plans. If the annual benefit under an annuity
contract that otherwise satisfies the requirements of section 403(b)
and that is 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) (taking into account the rules of Sec. 1.415(b)-2), then the
portion of the contract that includes such excess annual benefit fails
to be a section 403(b) annuity contract (and instead is a contract to
which section 403(c) applies), and the remaining portion of the
contract is a section 403(b) annuity contract. 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.
(3) Section 403(b) annuity contract. For purposes of section 415
and regulations thereunder, the term section 403(b) annuity contract
includes arrangements that are treated as annuity contracts for
purposes of section 403(b). For example, 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 limit
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 limit
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 additional rules for section 403(b) annuity
contracts. For additional 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 such annuity contracts);
(ii) Section 1.415(f)-1(g) (relating to rules for such annuity
contracts for purposes of combining plans);
(iii) Section 1.415(g)-1(b)(3)(iv)(C) (regarding disqualification
of section 403(b) annuity contract aggregated with a qualified defined
contribution plan if the combined plans exceed the limitations of
section 415(c));
(iv) Section 1.415(g)-1(e) (relating to the plan year for such
annuity contracts); and
(v) Section 1.415(j)-1(e) (relating to the limitation year for such
annuity contracts).
(3) Cross references to additional rules for governmental plans.
For additional rules relating to governmental plans, see--
[[Page 31226]]
(i) 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);
(ii) Section 1.415(b)-1(a)(7)(ii) (regarding a special limitation
for governmental plans making an election during 1990);
(iii) Section 1.415(b)-1(b)(4) (regarding qualified governmental
excess benefit arrangements);
(iv) Section 1.415(b)-1(d)(3) and (4) (regarding age adjustments to
the dollar limit of section 415(b)(1)(A) in the case of employees of
police departments and fire departments and former members of the
United States Armed Forces, and in the case of survivor and disability
benefits);
(v) 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);
and
(vi) Section 1.415(c)-1(b)(3)(iii) (regarding amounts not treated
as annual additions).
(4) Cross references to additional rules for multiemployer plans.
For additional rules relating to multiemployer plans, 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) Section 1.415(b)-1(a)(6)(ii) (providing an exception from the
compensation-based limit for multiemployer plans);
(iii) 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);
(iv) Section 1.415(f)-1(h) (providing special rules for aggregating
multiemployer plans with other plans); and
(v) 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 combined plans exceed the limitations of
section 415).
(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 accrual, distribution, or annual
addition will exceed the limitations of section 415. For example, a
plan may include provisions that automatically freeze or reduce the
rate of benefit accrual (in the case of a defined benefit plan) or the
annual addition (in the case of a defined contribution plan) to a level
necessary to prevent the limitations 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).
(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 (i.e., 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 GATT apply (as permitted by Q&A-12 of Rev. Rul. 98-1 (1998-1 C.B.
249) (see Sec. 601.601(d) of this chapter), which reflects the
amendments to section 767 of GATT made by section 1449 of SBJPA), 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 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 cannot incorporate by reference
formerly applicable requirements of section 415 that are no longer in
force (such as the limits of former section 415(e)).
(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 the annual
benefit 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
[[Page 31227]]
period before the annual increase becomes 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.
Pursuant to Sec. 1.415(d)-1(a)(3), the increase in each limit that is
adjusted pursuant to section 415(d) is effective as of January 1 of
each calendar year, and applies with respect to limitation years ending
with or within that calendar year. Thus, where an increase in the
dollar limitation under section 415(b)(1)(A) results in an increase to
the participant's accrued benefit, the increase to the accrued benefit
is permitted to occur as of a date no earlier than January 1 of the
calendar year for which the increase in the dollar limitation is
effective.
(C) Application of increase in defined benefit dollar limit to
participants who have commenced receiving benefits. The annual increase
under section 415(d) of the dollar limitation described in section
415(b)(1)(A) does 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. Similarly, the annual increase under
section 415(d) of the compensation-based limitation described in
section 415(b)(1)(B) does 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.
(D) Treatment of cost-of-living adjustments for funding 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 for purposes of applying sections 404 and 412, regardless of
whether the plan is amended to reflect the increase or the plan
reflects the increase automatically through operation of plan
provisions. 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, 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 and 412.
(e) Rules for plans maintained by more than one employer. Except as
provided in Sec. 1.415(f)-1(h)(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 such a
participant, the total compensation received by the participant from
all of the employers maintaining the plan is permitted to be taken into
account under any such plan if the plan so provides.
(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 Sec. Sec. 1.414(c)-1 through 1.414(c)-
6, 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) 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), in Sec. 1.414(c)-2, and in Sec. 1.414(c)-5.
(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 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% 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 an employee 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) 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.
(6) 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
[[Page 31228]]
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,
Sec. Sec. 1.415(a)-1, 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 apply to limitation
years beginning on or after January 1, 2007.
(2) Option to apply regulations earlier. A plan that was adopted
and in effect before January 1, 2007, is permitted to apply the
provisions of Sec. Sec. 1.415(a)-1, 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 to
limitation years beginning after the date final regulations are
published in the Federal Register.
(3) Grandfather rule for preexisting benefits. A defined benefit
plan that was adopted and effective before May 31, 2005, 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
effective date of final regulations under Sec. Sec. 1.415(a)-1,
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 (as provided under paragraph (g)(1) and (2)
of this section) pursuant to plan provisions that were adopted and in
effect on May 31, 2005, but only if such plan provisions meet the
requirements of statutory provisions, regulations, and other published
guidance in effect on May 31, 2005.
(4) Sunset of EGTRRA amendments. Sections 1.415(a)-1, 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 do not address the application of section 901 of the
Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law
107-16, 115 Stat. 38 (under which the amendments made by that Act do
not apply to limitation years beginning after December 31, 2010).
Par. 7. 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 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% 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 thereunder, 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) contract that is not described in section 414(i) is treated as a
defined benefit plan for purposes of section 415 and regulations
thereunder.
(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, 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 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) Period of high 3 years of service--(i) In general. 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 during which the employee was an active
participant in the plan and had the greatest aggregate compensation (as
defined in Sec. 1.415(c)-2) from the employer. 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 may not
base benefit accruals (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 limitation year that is used
for purposes of applying the limitations of section 415 is not
permitted to reflect compensation for a plan year that is in excess of
the limitation under section 401(a)(17) that applies to that plan year.
(ii) Short periods of service. For those employees who are employed
with the employer while an active participant for less than 3
consecutive calendar years, the period of a participant's high 3 years
of service is the actual number of consecutive years of employment
(including fractions of years) while an active participant in the plan.
In such a case, the limitation of section 415(b)(1)(B) of 100% of the
participant's 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 employment while
a plan participant by the number of years in that period (including
fractions of years, but not less than one year).
(iii) Examples: The following examples illustrate the rules of this
paragraph (a)(5):
Example 1. (i) Plan A, which was established on January 1,
2004, covers Participant M, who was hired on January 1, 2000. The
limitation year for Plan A is the calendar year. Participant M's
compensation (as defined in Sec. 1.415(c)-2) from the employer
maintaining the plan is $120,000 for 2000, $120,000 for 2001,
$120,000 for 2002, $120,000 for 2003, $100,000 for 2004, $100,000
for 2005, $100,000 for 2006, and $80,000 for 2007. Plan A does not
specify a
[[Page 31229]]
period other than the calendar year for determining the period of a
participant's high 3 years of service while a plan participant.
(ii) As of the end of the 2004 limitation year, the period of
M's highest 3 consecutive years of service while a plan participant
(or fewer, if applicable) runs from January 1, 2004, through
December 31, 2004. As of the end of the 2005 limitation year, the
period of M's highest 3 consecutive years of service while a plan
participant (or fewer, if applicable) runs from January 1, 2004,
through December 31, 2005. As of the end of the 2006 limitation year
and the 2007 limitation year, the period of M's highest 3
consecutive years of service while a plan participant (or fewer, if
applicable) runs from January 1, 2004, through December 31, 2006.
For all of those periods, M's average compensation is $100,000.
Thus, the limitation under section 415(b)(1)(B) for 2004 through
2007 is applied using $100,000 as M's average compensation for the
period of M's high 3 consecutive years of service while a plan
participant (or fewer, if applicable).
Example 2. (i) Participant P has participated in Plan A,
maintained by Employer M, for more than 10 years. P's average
compensation for P's high 3 years while a participant in Plan A
(determined before the application of section 401(a)(17)) is
$220,000. On January 1, 2007, P commences receiving benefits from
Plan A at the age of 75, 10 years after attaining P's normal
retirement age under Plan A. Distributions to P under Plan A are
actuarially adjusted to reflect commencement 10 years after normal
retirement age using a 5% interest rate and the applicable mortality
table under section 417(e)(3) that applies as of January 1, 2003.
The limitation year and the plan year for Plan A are the calendar
year.
(ii) Pursuant to Sec. 1.415(c)-2(f) and section 401(a)(17),
Plan A is not permitted to provide for a definition of compensation
that includes compensation for a plan year that is in excess of the
limitation under section 401(a)(17) that applies to that plan year.
Accordingly, the limitation under section 415(b)(1)(B) based on P's
average compensation for P's high three consecutive years must not
reflect compensation for any plan year that is in excess of the
limitation under section 401(a)(17) that applies to that plan year.
Thus, for example, if the limitation under section 401(a)(17) for
plan years beginning in 2004, 2005, and 2006 is $205,000, and if P
had compensation in excess of $205,000 in each of those years, then
the limitation under section 415(b)(1)(B) based on P's average
compensation for P's high three consecutive years is $205,000.
(6) Exceptions from compensation limit. The limit under paragraph
(a)(1)(ii) of this section (i.e., 100% of the participant's average
compensation for his 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)); or
(iii) A collectively bargained plan that is described in section
415(b)(7).
(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).
(b) Annual benefit--(1) In general--(i) Definition of annual
benefit. For purposes of this section and Sec. 1.415(b)-2, the term
annual benefit means a benefit that is payable annually in the form of
a straight life annuity. 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 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), and 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. See Sec. 1.415(b)-2 for rules regarding the
determination of the annual benefit from one or more plans in cases in
which a participant has received one or more distributions in
limitation years prior to an increase in the accrued benefit occurring
during the current limitation year or prior to the annuity starting
date for a distribution that commences during the current limitation
year. The rules of Sec. 1.415(b)-2 apply, for example, to multiple
annuity starting dates that result from the commencement of an
additional distribution and to multiple annuity starting dates that
result from a new distribution election with respect to a distribution
that commenced in a prior limitation year. For purposes of 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).
(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); and
(D) Repayment of a withdrawal of employee contributions as provided
under section 411(a)(3)(D).
(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 the regulations thereunder to those contributions to
determine the amount of a straight life annuity commencing at the
annuity starting date, regardless of whether section 411 applies to
that 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 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.
[[Page 31230]]
(v) Annual benefit attributable to rollover contributions. The
annual benefit attributable to rollover contributions from another
qualified plan (for example, a contribution received pursuant to a
direct rollover under section 401(a)(31)) 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 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 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)(3). 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)
Transferor plan and transferee plan aggregated. For the limitation year
that includes the date of a transfer between defined benefit plans, 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 included in
determining the annual benefit under the transferee plan and are
disregarded in determining the annual benefit 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).
Similarly, with respect to a transfer between defined benefit plans
that occurred in a previous limitation year, 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), then the transferred
benefits are included in determining the annual benefit under the
transferee plan and are disregarded in determining the annual benefit
under the transferor plan for the current limitation year. Accordingly,
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 the
limitation year with respect to a transfer occurring in the current
limitation year or a prior limitation year, no adjustment is made to
the benefits actually provided under either plan for purposes of
determining the annual benefit under the plans as aggregated.
(B) Transferor plan and transferee plan not aggregated. When there
has been a transfer of liabilities from one qualified plan to another,
the benefits associated with those transferred liabilities are treated
by the transferor plan as distributed as a single-sum distribution in
an amount determined under paragraph (b)(3)(ii) of this section if 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).
Although such a transfer is treated as a distribution in computing the
annual benefit under the transferor plan, no adjustment is made to
reflect the transfer for purposes of determining the annual benefit
under the transferee plan. This will occur, for example, if the
employer sponsoring the transferor plan is a predecessor employer with
respect to the participant whose benefits are transferred to the
transferee plan, where 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).
(ii) Amount of deemed distribution on account of transfer of
benefits--(A) In general. Where there has been a transfer of
liabilities from one qualified defined benefit plan to another, the
amount of the single-sum distribution that is deemed distributed from
the transferor plan pursuant to paragraph (b)(3)(i)(B) of this section
is the amount of the assets transferred (other than surplus assets
transferred). Thus, where the fair market value of assets transferred
from another defined benefit plan in connection with the transfer of
liabilities equals or exceeds the actuarial present value of
liabilities transferred, the annual benefit attributable to the
liabilities transferred is determined taking into account the entire
amount of liabilities transferred as a single-sum distribution.
(B) Amount of assets transferred. Where assets are transferred with
respect to more than one participant, the assets transferred with
respect to each participant (other than surplus assets transferred) are
determined as the actuarial present value of the straight life annuity
that is actuarially equivalent to the amount the participant would
receive if the plan terminated immediately before the transfer (if the
plan had then terminated) under the rules of section 414(l) or Subtitle
E of Title IV of ERISA, whichever applies to the transferor plan. If
neither the rules of section 414(l) nor the rules of Subtitle E of
Title IV of ERISA apply to the plan, then the assets transferred with
respect to each participant are determined as the actuarial present
value of the straight life annuity that is actuarially equivalent to
the amount the participant would receive if the plan terminated
immediately before the transfer, determined by allocating the assets,
to the extent possible, so that employees who are not officers,
shareholders, or highly compensated employees receive from the plan at
least the same proportion of the present value of their accrued
benefits (whether or not nonforfeitable) as employees who are officers,
shareholders, or highly compensated employees.
(iii) Transfer of immediately distributable amount. Where an
immediately distributable amount is transferred from either a defined
contribution plan or a defined benefit plan to a defined benefit plan
(see Sec. 1.411(d)-4, Q&A-3(c) regarding certain elective transfers of
immediately distributable benefits), the annual benefit attributable to
the benefits transferred is determined pursuant to the rules of
paragraph (b)(2)(v) of this section regarding rollover contributions.
(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 and Sec. 1.415(b)-2, the annual benefit does not
include benefits provided under a qualified governmental excess benefit
arrangement, as defined in section 415(m)(3).
(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
[[Page 31231]]
annuity beginning at the same time for purposes of determining the
annual benefit described in paragraph (b) of this section. 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
for a guaranteed number of payments. Paragraph (c)(2) of this section
describes how to adjust a form of benefit to which section 417(e)(3)
does not apply. Paragraph (c)(3) of this section describes how to
adjust a form of benefit 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 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) of this chapter.
(2) Benefits to which section 417(e)(3) does not apply. For a
benefit 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 annuity starting date that has the same actuarial present value as
the particular form of benefit payable, computed using a 5% interest
assumption and the applicable mortality table described in Sec.
1.417(e)-1(d)(2) for that annuity starting date.
(3) Benefits to which section 417(e)(3) applies--(i) In general.
Except as provided in paragraph (c)(3)(ii) of this section, for a
benefit to which section 417(e) applies, 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 the applicable
interest rate for the distribution under Sec. 1.417(d)-1(d)(3) and the
applicable mortality table for the distribution under Sec. 1.417(e)-
1(d)(2).
(ii) Special rule for 2004 and 2005. For distributions to which
section 417(e) applies and which have annuity starting dates beginning
in 2004 or 2005, except as provided in section 101(d)(3) of the Pension
Funding Equity Act of 2004 (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% 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; and
(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) QJSAs combined with other distributions. If benefits are paid
partly in the form of a qualified joint and survivor annuity 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) 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%
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)
for relevant time periods is 5.25% and that the mortality table that
applies under section 417(e)(3) 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, 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 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 using 5% interest and the applicable mortality table
under section 417(e)(3) as of January 1, 2003, and the present value
using the applicable interest rate and the applicable mortality
table under section 417(e). 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. Participant M retires at age 65 with
a formula benefit of $152,619 and elects to receive a distribution
in the form of a single sum. Under the plan formula, and before the
application of section 415 under the plan, the amount of the single
sum is $1,800,002 (which is based on the 5% interest rate and
applicable mortality table as of January 1, 2003, since that is
greater than the amount that would have been determined using the
5.25% interest rate and the applicable mortality table).
(ii) For purposes of this section, the annual benefit is the
greater of the annual amount of the actuarially equivalent straight
life annuity commencing at the same age (determined using the plan's
actuarial factors), 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). Based on the factors used in the plan to determine
the actuarially equivalent lump sum (in this case,
[[Page 31232]]
an interest rate of 5% 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. Based on the applicable interest rate and the applicable
mortality table, $1,800,002 payable as a single sum is actuarially
equivalent to an immediate straight life annuity at age 65 of
$155,853. With respect to the single-sum distribution, M's annual
benefit is equal to the greater of the two resulting amounts
($152,619 and $155,853), or $155,853.
Example 2. (i) 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 determined using 5% interest and the applicable
mortality table as of January 1, 2003, the benefit payable in this
form is $146,100.
(ii) For purposes of this section, the annual benefit 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% interest rate and the applicable mortality
table. 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) The facts are the same as in Example 1.
Participant N retires at age 62 with a formula benefit, after
application of the plan's early retirement factors, of $100,000 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) 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% interest rate and the
applicable mortality table. 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.
Example 4. (i) Plan B is a defined benefit plan that provides a
benefit equal to 100% of a participant's compensation for the
participant's high 3 years of service while a participant, 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% survivor annuity benefit that is reduced from the
straight life annuity and is a QJSA within the meaning of section
417. 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 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% survivor annuity. Participant O elects, with spousal consent, a
single-sum distribution.
(ii) 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 the
actuarial equivalent of a straight life annuity that is greater than
100% of a participant's compensation for his high 3 years, the
limitation of section 415(b)(1)(B) has been exceeded.
Example 5. (i) Plan C is a defined benefit plan that provides an
option to receive the benefit in the form of a joint and 100%
survivor annuity with a 10-year certain feature, where the survivor
beneficiary is the participant's spouse.
(ii) For a participant at age 65, the annual benefit with
respect to the joint and 100% survivor annuity with a 10-year
certain feature is determined 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% 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%
interest assumption and the applicable mortality table described in
Sec. 1.417(e)-1(d)(2) for that 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% interest rate and the applicable mortality table.
Example 6. (i) 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% 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% of the
participant's average compensation for the participant's high 3
consecutive years of service while a plan participant or 84% of the
section 415(b)(1)(A) dollar limit (which is assumed to be $170,000).
Participant P's retires at age 65, at which time P's average
compensation for P's high 3 consecutive years of service is
$165,000. Accordingly, P commences receiving benefits in the form of
a life annuity of $138,600 with a fixed increase of 2% per year.
(ii) Because Plan D does not provide for a straight life
annuity, 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% per year, where actuarial
equivalence is determined using a 5% interest rate and the
applicable mortality table. In order to satisfy the requirements of
section 415 and this section, this annual benefit must not exceed
100% of average compensation for the participant's high 3
consecutive years, or $165,000. Using a 5% interest rate and the
section 417(e)(3) mortality table, 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 7. (i) Plan E provides a benefit at age 65 of a straight
life annuity equal to the lesser of 90% of the participant's average
compensation for the participant's highest 3 consecutive years of
service while a plan participant 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% 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% interest
assumption and the section 417(e)(3) mortality table in effect on
January 1, 2003, and the single sum calculated using the section
417(e)(3) interest rate and the section 417(e)(3) mortality table)
to 50% of the annual payments under the straight life annuity.
Participant Q retires at age 65. Q's average compensation for Q's
highest 3 consecutive years 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) Q's annual benefit under Plan E 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) 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) The annual benefit attributable to the single sum portion
of the distribution is
[[Page 31233]]
determined as the greater of the annual amount of the actuarially
equivalent straight life annuity commencing at the same age
(determined using the plan's actuarial factors), 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). 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, and the
actuarially equivalent straight life annuity commencing at the same
age determined using the applicable interest rate and the applicable
mortality table is equal to $45,954. Thus, the annual benefit
attributable to the single sum portion of the benefit is $45,954.
(v) Q's annual benefit under the optional form of benefit 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 $90,954. Because Q's
average compensation for Q's highest 3 consecutive years is
$100,000, the distribution satisfies the compensation limit of
section 415(b)(1)(B).
Example 8. (i) R is a participant in a defined benefit plan
maintained by A'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) 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 does not have to be
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).
(d) Adjustment to section 415(b)(1)(A) dollar limit for
commencement before age 62--(1) General rule. 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 is
determined as the lesser of--
(i) The section 415(b)(1)(A) dollar limit (as adjusted pursuant to
section 415(d) and Sec. 1.415(d)-1(a) for the limitation year)
multiplied by the ratio of the annual amount of the immediately
commencing straight life annuity under the plan (if any) to the annual
amount of the straight life annuity under the plan commencing at age
62, if any (with both annual amounts determined without applying the
rules of section 415); or
(ii) 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), and where the
actuarially equivalent straight life annuity is computed using a 5%
interest rate and the applicable mortality table under Sec. 1.417(e)-
1(d)(2) that is effective for that annuity starting date.
(2) Mortality adjustments--(i) In general. For purposes of
determining the amount described in paragraph (d)(1)(ii) of this
section, to the extent that a forfeiture does not occur upon the
participant's death, 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. To the extent that a forfeiture
occurs upon the participant's death, 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 QPSA 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 (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 between the
annuity starting date and the participant's attainment of age 62 or
between the age of 65 and 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 or
local 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 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 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 after age 60 for a participant if--
(i) The participant is a commercial airline pilot;
(ii) The participant separates from service 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) 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% for each year
that the early retirement age is less than age 65. Participant M
retires at age 60 after 30 years of service with a benefit (prior to
the application of section 415) in the form of a
[[Page 31234]]
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 between the annuity
starting date and the participant's attainment of age 62 or between
the age of 65 and 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
straight life annuity payable at age 60 that is actuarially
equivalent, using 5% interest and the applicable mortality table, to
the deferred annuity payable at age 62. 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% 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
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) 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% interest and the applicable mortality table, to
the deferred annuity payable at age 62. 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 $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% interest and the
applicable mortality table).
Example 3. (i) Participant O is a full-time civilian employee of
the State of X Police Department who performs clerical services. 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 15 years of service working for the State of X Police
Department.
(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 4. (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 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.
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% of the
periodic payments that would be made under the immediately
commencing straight life annuity. Annual payments to M are 97% of
$80,000, or $77,600. As in Example 1, the age-adjusted section
415(b)(1)(A) dollar limit at age 60 is $156,229.
(ii) For purposes of this section, the annual benefit 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% interest rate and the applicable mortality
table. In this case, the straight life annuity payable under the
plan commencing at the same age is $80,000. The annual amount of the
actuarially equivalent straight life annuity determined by applying
the required standardized factors (i.e., a 5% interest assumption
and the applicable mortality under section 417(e)(3)) 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.
(e) Adjustment to section 415(b)(1)(A) dollar limit for
commencement after age 65--(1) General rule. 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 is determined
as the lesser of--
(i) 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 (if any) to 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 (i.e., with no actuarial increases for commencement after age
65) as the participant receiving the distribution (with both annual
amounts determined without applying the rules of section 415); or
(ii) 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 415(b)(1)(A), and where actuarially equivalent
straight life annuity is computed using a 5% interest rate and the
applicable mortality table under Sec. 1.417(e)-1(d)(2) that is
effective for that annuity starting date.
(2) Mortality adjustments--(i) In general. For purposes of
determining the amount described in paragraph (e)(1)(ii) of this
section, to the extent that a forfeiture does not occur upon the
participant's death, 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, 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
qualified preretirement survivor annuity on the participant's death.
(3) Example. The following example illustrates the application of
this paragraph (e):
Example. (i) Plan A provides that monthly benefits payable upon
commencement after normal retirement age (which is age 65) are
increased by 0.5% 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. Participant M retires at age 70 on January 1, 2007, after 30
years of service with a benefit (prior to the application of section
415) that is payable monthly in the form of a straight
[[Page 31235]]
life annuity of $195,000, which reflects the actuarial increase of
30% applied to the accrued benefit of $150,000.
(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 annuity payable at age 70 to the annuity that
would be payable at age 65 based on the same accrued benefit (both
determined before the application of section 415), or the straight
life annuity payable at age 70 that is actuarially equivalent, using
5% interest and the applicable mortality table, to the straight life
annuity payable at age 65. In this case, the age-adjusted section
415(b)(1)(A) dollar limit at age 70 is $234,000 (the lesser of
$234,000 ($180,000* $195,000/$150,000) and $264,109 (the straight
life annuity at age 70 that is actuarially equivalent to an annuity
of $180,000 commencing at age 65, determined using 5% interest and
the applicable mortality table, without a mortality decrement for
the period between 65 and 70)).
(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)) for the
limitation year, or for any prior limitation year; and
(ii) The employer (or a predecessor employer) has not at any time,
either before or after the effective date of section 415, 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 (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 a plan for a
limitation year reflect all amounts payable under the plan for the
limitation year, 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 is applicable 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. For
purposes of paragraph (f)(1)(ii) of this section, mandatory employee
contributions under a defined benefit plan are not considered a
separate defined contribution plan maintained by the employer. Thus, a
contributory defined benefit plan may utilize the special dollar
limitation provided for in this paragraph (f). 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 B's high 3 consecutive years of service while a
participant in the plan is $6,000. The plan does not provide for
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 normal retirement age were age 60, or if the plan
provided for 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 that the amount of the single sum that is the actuarial
equivalent of the straight life annuity payable to B (i.e., $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 to be 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
[[Page 31236]]
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).
(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).
(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), 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).
(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 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), the term year of service is to 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.
(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 a year of 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 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 provision 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 C's high 3 consecutive 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 his high 3 years 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 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 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 D has never maintained a defined
contribution plan. 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
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 $180,000.
(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 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 $108,000 ($180,000
multiplied by \6/10\).
(h) RPA '94 transition rules. For special rules affecting the
actuarial adjustment for form of benefit under
[[Page 31237]]
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 Retirement Protection Act of
1994, as amended by section 1449(a) of the Small Business Job
Protection Act of 1996. 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.
Par. 8. Section 1.415(b)-2 is added to read as follows:
Sec. 1.415(b)-2 Multiple annuity starting dates.
(a) Determination of annual benefit where distributions have
occurred before the current determination date--(1) In general. This
section provides rules for determining the annual benefit of a
participant for purposes of applying the limitations of section 415(b)
and Sec. 1.415(b)-1 in cases in which a participant has received one
or more distributions in limitation years prior to an increase in the
accrued benefit occurring during the current limitation year or prior
to the annuity starting date for a distribution that commences during
the current limitation year. This section applies, 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 from
which the participant receives current accruals, or where a new
distribution election is effective during the current limitation year
with respect to a distribution that commenced in a prior limitation
year. This section also applies where benefit payments are increased as
a result of plan terms applying a cost-of-living adjustment pursuant to
an increase of the dollar limit of section 415(b)(1)(A), if the plan
does not provide for application of the rules of Sec. 1.415(d)-1(a)(5)
to determine the adjusted amount of the benefit. Paragraph (b) of this
section provides rules for computing the annual benefit in the case of
multiple annuity starting dates as described in this paragraph (a)(1).
Paragraph (c) of this section provides an additional rule for multiple
annuity starting dates that occur when a stream of annuity payments is
modified by a new distribution election. Paragraph (d) of this section
provides examples to illustrate the rules of this section.
(2) Annuity starting date. For purposes of this section, the
determination of whether a new annuity starting date has occurred is
made pursuant to the rules of Sec. 1.401(a)-20, Q&A-10, but 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).
(3) Annual benefit--(i) In general. Where a participant has
received one or more distributions before a current accrual or before
the annuity starting date for a currently payable distribution, except
as provided in paragraph (a)(3)(iii) of this section (regarding
mandatory employee contributions and rollover contributions), the
annual benefit that is subject to the limits of section 415(b) and
Sec. 1.415(b)-1(a) is equal to the sum of--
(A) The annual benefit determined with respect to any accrued
benefit with respect to which distribution has not yet commenced as of
the current determination date, computed pursuant to the rules of Sec.
1.415(b)-1(b) and (c);
(B) The annual benefit determined with respect to any distribution
with an annuity starting date that occurs within the current limitation
year and on or before the current determination date, computed pursuant
to the rules of Sec. 1.415(b)-1(b) and (c);
(C) The annual benefit determined with respect to the remaining
amounts payable under any distribution with an annuity starting date
that occurred during a prior limitation year, computed pursuant to the
rules of Sec. 1.415(b)-1(b) and (c) (subject to paragraph (a)(3)(ii)
of this section); and
(D) The annual benefit attributable to prior distributions
(computed pursuant to the rules of paragraph (b) of this section).
(ii) Determining actuarial equivalence with respect to remaining
amounts payable. For purposes of computing the annual benefit
determined with respect to the remaining amounts payable under any
distribution with an annuity starting date that occurred during a prior
limitation year under paragraph (a)(3)(i)(C) of this section, Sec.
1.415(b)-1(c)(2) is applied by substituting for the amount described in
Sec. 1.415(b)-1(c)(2)(i) the annual amount of a 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 for the particular form of benefit
payable.
(iii) Mandatory employee contributions and rollover contributions.
If mandatory employee contributions or rollover contributions have been
made to the plan with respect to a distribution that commenced before
the current determination date, the annual benefit is determined by
applying the rules of paragraph (a)(3)(i)(C) and (D) of this section
and then subtracting the annual benefit attributable to mandatory
employee contributions computed pursuant to Sec. 1.415(b)-1(b)(2)(iii)
and the annual benefit attributable to rollover contributions computed
pursuant to Sec. 1.415(b)-1(b)(2)(v), with both amounts computed as of
the annuity starting date for the distribution.
(iv) Repayments of prior distributions--(A) Total repayments. A
prior distribution that has been repaid to the plan with interest does
not give rise to an annual benefit attributable to prior distributions
for purposes of paragraph (a)(3)(i)(D) of this section (because amounts
attributable to those repayments are reflected instead in amounts
included in the annual benefit pursuant to paragraphs (a)(3)(i)(A),
(B), and (C) of this section).
(B) Partial repayments. If a prior distribution was made, and a
repayment was subsequently made that was less than the amount of the
prior distribution (including reasonable interest), the annual benefit
attributable to prior distributions is determined by multiplying the
annual benefit attributable to the prior distribution (computed
assuming that no repayment occurred) by one minus a fraction, the
numerator of which is the amount of the repayment and the denominator
of which is the amount of the prior distribution plus reasonable
interest.
(b) Annual benefit attributable to prior distributions--(1) In
general--(i) Adjustment to actuarially equivalent straight life
annuity--(A) Method of adjustment. To compute the annual benefit
attributable to a prior distribution, the prior distribution is
adjusted to an actuarially equivalent straight life annuity commencing
at the current determination date in accordance with the rules of
paragraph (b)(2) of this section (for a prior distribution to which
section 417(e)(3) did not apply) or paragraph (b)(3) of this section
(for a prior distribution to which section 417(e)(3) applied).
(B) Current determination date. The current determination date is
the last day of period for which an increase in the participant's
benefit accrues if an increase in the participant's accrued benefit
occurs during the limitation year. If there is no such increase, the
current determination date is the annuity starting date for the
distribution that commences during the limitation year.
[[Page 31238]]
(ii) Rules of application--(A) Amount of distribution taken into
account. In applying the rules of paragraphs (b)(2) and (3) of this
section to compute the annual benefit attributable to a prior
distribution, only the actual amount received as a prior distribution
(without regard to either the form of benefits paid, or the form or
amount of remaining payments under the prior distribution) is taken
into account. Thus, for example, in determining the annual benefit
attributable to a prior distribution of $100,000 per year over the past
four years, paragraph (b)(2) of this section will apply if the
distribution was part of a 10-year certain and life annuity, and
paragraph (b)(3) of this section will apply if the distribution was
part of installment payments over 10 years. However, in both instances,
the amounts taken into account in determining the annual benefit
attributable to the prior distribution are the four $100,000 payments
already made, without regard to remaining payments.
(B) Application of mortality adjustments--(1) Application of
mortality adjustments when standardized assumptions are used. Under the
rules of paragraphs (b)(2)(ii), (b)(3)(i)(B), and (b)(3)(ii)(B) of this
section (under which standardized actuarial assumptions are applied), a
prior distribution is adjusted to an actuarially equivalent straight
life annuity commencing at the current determination date using the
specified interest and mortality assumptions to convert the payment
stream to an actuarially equivalent straight life annuity commencing at
the current determination date. For this purpose, the actuarially
equivalent straight life annuity commencing at the current
determination date must reflect an actuarial increase to the present
value of payments to reflect that the participant has survived during
the interim period.
(2) Application of mortality adjustments when the plan's
assumptions for computing offsets are used. Under the rules of
paragraphs (b)(2)(i), (b)(3)(i)(A), and (b)(3)(ii)(A) of this section
(under which the plan's assumptions for computing offsets for prior
distributions are applied), the actuarially equivalent straight life
annuity must reflect mortality adjustment in the same manner as those
mortality adjustments are reflected in computing offsets for prior
distributions.
(2) Prior distributions to which section 417(e)(3) did not apply.
For a prior distribution to which section 417(e)(3) did not apply, the
actuarially equivalent straight life annuity commencing at the current
determination date is the greater of--
(i) The annual amount of a straight life annuity commencing at the
current determination date that is the actuarial equivalent of that
prior distribution, computed using the interest rate and mortality
table specified under the plan that provides for the current
distribution or current accrual that are used to determine offsets, if
any, for prior distributions; and
(ii) The annual amount of a straight life annuity commencing at the
current determination date that is the actuarial equivalent of that
prior distribution, computed using a 5% interest assumption and the
applicable mortality table described in Sec. 1.417(e)-1(d)(2) that
would apply to a distribution to which section 417(e) applies with an
annuity starting date of the current determination date.
(3) Prior distributions to which section 417(e)(3) applied--(i) In
general. For a prior distribution to which section 417(e)(3) applied,
the actuarially equivalent straight life annuity commencing at the
current determination date is the greater of--
(A) The annual amount of a straight life annuity commencing at the
current determination date that is the actuarial equivalent of that
prior distribution, computed using the interest rate and mortality
table specified under the plan that provides for the current
distribution or current accrual that are used to determine offsets, if
any, for prior distributions; and
(B) The annual amount of a straight life annuity commencing at the
current determination date that is the actuarial equivalent of that
prior distribution, computed using the applicable interest rate under
Sec. 1.417(e)-1(d)(3) and the applicable mortality table under Sec.
1.417(e)-1(d)(2) that would apply to a distribution with an annuity
starting date of the current determination date.
(ii) Special rule for 2004 and 2005. For a prior distribution to
which section 417(e)(3) applied, and for current determination dates or
current accruals in 2004 and 2005, except as provided in section
101(d)(3) of the Pension Funding Equity Act of 2004, the actuarially
equivalent straight life annuity commencing at the current
determination date is the greater of--
(A) The annual amount of a straight life annuity commencing at the
current determination date that is the actuarial equivalent of that
prior distribution, computed using the interest rate and mortality
table specified under the plan that provides for the current
distribution or current accrual that are used to determine offsets, if
any, for prior distributions; and
(B) The annual amount of a straight life annuity commencing at the
current determination date that is the actuarial equivalent of that
prior distribution, computed using a 5.5% interest assumption and the
applicable mortality table under Sec. 1.417(e)-1(d)(2) that would
apply to a distribution with an annuity starting date of the current
determination date.
(4) Benefit forms for which no adjustment is required. The annual
benefit attributable to prior distributions is computed disregarding
the portion of prior distributions described in Sec. 1.415(b)-1(c)(4)
(regarding benefits for which no adjustment is required). Thus, for
example, the annual benefit attributable to prior distributions is
computed disregarding the payment of preretirement disability benefits
not in excess of the qualified disability benefit.
(c) Change in distribution form--(1) In general. If a stream of
annuity payments is modified by a new distribution election, the
requirements of this section are applied treating the modification as a
new annuity starting date. In addition, in such a case, the
requirements of paragraph (c)(2) of this section must be satisfied.
(2) Test total annuity stream as of original annuity starting date.
If a stream of annuity payments is modified by a new distribution
election, the payments under the annuity that are paid before the
modification plus the modified payments must satisfy the requirements
of Sec. 1.415(b)-1 determined as of the original annuity starting
date, using the interest rates and mortality table applicable to such
date. A plan will not fail to satisfy the requirements of this
paragraph (c)(2) merely because payments reflect cost-of-living
adjustments pursuant to section 415(d) determined in accordance with
Sec. 1.415(d)-1(a)(5).
(d) Examples. The following examples illustrate the application of
this section. For purposes of these examples, except as otherwise
stated, actuarial equivalence under the plan (including for purposes of
determining offsets for prior distributions and for purposes of
determining the amount of annuity distributions commencing after normal
retirement age) is determined using a 6% interest assumption and the
mortality table that applies under section 417(e)(3) as of January 1,
2003, and all payments other than a payment of a single sum are made
monthly, on the first day of each calendar month. It is assumed for
purposes of these examples that the interest rate that applies under
section 417(e)(3) for
[[Page 31239]]
relevant time periods is 5.25% and that the mortality table that
applies under section 417(e)(3) 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, and that the
dollar limitation of section 415(b)(1)(A) as adjusted pursuant to
section 415(d) for 2008 is equal to $180,000. It is further assumed
that the product of the annual adjustment factors that apply in
adjusting the compensation limitation of section 415(b)(1)(B) for 2005,
2006, 2007, and 2008 is 1.1. The examples are as follows:
Example 1. (i) Employer A previously maintained Plan D, a
qualified defined benefit plan. Upon the termination of Plan D on
January 1, 1997, Participant M received a single-sum distribution of
$537,055 at the age of 54. As of January 1, 2008, Participant M has
participated in Plan E (another defined benefit plan maintained by
Employer A) for more than 10 years. On January 1, 2008, M retires at
the age of 65 and receives a distribution from Plan E.
(ii) Pursuant to section 415(f) and Sec. 1.415(f)-1,
distributions to M from Plan D and Plan E are aggregated for
purposes of applying section 415(b). Pursuant to paragraph (a)(3) of
this section, M's annual benefit that is subject to the limits of
section 415(b) and Sec. 1.415(b)-1(a) is equal to the sum of the
annual benefit determined with respect to the distribution
commencing on January 1, 2008, and the annual benefit attributable
to prior distributions (computed pursuant to the rules of paragraph
(b) of this section).
(iii) M's annual benefit attributable to prior distributions is
computed by adjusting the single-sum distribution made in 1995 to an
actuarially equivalent straight life annuity commencing on January
1, 2008, in accordance with the rules set forth in paragraph (b)(3)
of this section. Pursuant to those rules, that actuarially
equivalent straight life annuity is computed using either the plan's
actuarial assumptions for applying offsets for prior distributions
(here, a 6% interest rate and the mortality table that applies under
section 417(e)(3) as of January 1, 2003), or the applicable interest
rate and the applicable mortality table under section 417(e)(3),
both determined as of January 1, 2008, whichever set of actuarial
assumptions produces the greater actuarially equivalent annuity. The
actuarially equivalent straight life annuity computed using the
plan's assumptions used for computing offsets is $100,027 per year,
and the actuarially equivalent straight life annuity computed using
the applicable interest rate and the applicable mortality table as
of January 1, 2008, is $87,035 per year. Thus, M's annual benefit
attributable to prior distributions is $100,027.
(iv) To comply with the limitations of section 415, M's annual
benefit determined with respect to the distribution commencing on
January 1, 2008, must be no greater than the otherwise applicable
limit on the annual benefit (i.e., the lesser of $180,000 or 100% of
M's average compensation for the period of the participant's high 3
years of service) minus $100,027. Thus, for example, to comply with
the dollar limitation of section 415(b)(1)(A), M's annual benefit
determined with respect to the distribution commencing on January 1,
2008, must be no greater than $79,973.
Example 2. (i) Employer B maintains Plan F, a qualified defined
benefit plan. On January 1, 2002, at the age of 59, Participant N
separated from service and commenced receiving a benefit of $80,000
per year for ten years from Plan F. As of January 1, 2008, Plan F is
amended to increase N's accrued benefit. N is offered a new QJSA
election with respect to the new accrual.
(ii) Pursuant to paragraph (a)(3) of this section, as of January
1, 2008, N's annual benefit that is subject to the limits of section
415(b) and Sec. 1.415(b)-1(a) is equal to the sum of the annual
benefit determined with respect to remaining amounts payable under
the distribution that commenced on January 1, 2002, the annual
benefit determined with respect to the accrued benefit with respect
to which distribution has not yet commenced, and the annual benefit
attributable to prior distributions (computed pursuant to the rules
of paragraph (b) of this section).
(iii) N's annual benefit determined with respect to the
remaining four annual payments of $80,000 is determined pursuant to
Sec. 1.415(b)-1(c)(3) as the greater of the annual amount of a
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 for the particular form of benefit payable, or the
annual amount of a 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 and the applicable mortality table under section
417(e)(3). Using the plan's factors for actuarial equivalence, the
actuarially equivalent straight life annuity is $26,334, and using
the section 417(e)(3) factors for actuarial equivalence, the
actuarially equivalent straight life annuity is $25,109.
Accordingly, N's annual benefit determined with respect to the
remaining four annual payments of $80,000 is equal to $26,334.
(iv) N's annual benefit attributable to prior distributions is
computed by adjusting the six annual payments of $80,000 per year
already made before January 1, 2008, to an actuarially equivalent
straight life annuity commencing on January 1, 2008, in accordance
with the rules set forth in paragraph (b)(3) of this section.
Pursuant to those rules, that actuarially equivalent straight life
annuity is computed using either the plan's actuarial assumptions
for applying offsets for prior distributions (here, a 6% interest
rate and the mortality table that applies under section 417(e)(3) as
of January 1, 2003), or the applicable interest rate and the
applicable mortality table under section 417(e)(3), both determined
as of January 1, 2008, whichever set of actuarial assumptions
produces the greater actuarially equivalent annuity. The actuarially
equivalent straight life annuity computed using the plan's
assumptions used for computing offsets is $54,494 per year, and the
actuarially equivalent straight life annuity computed using the
applicable interest rate and the applicable mortality table as of
January 1, 2006, is $50,103 per year. Thus, N's annual benefit
attributable to prior distributions is $54,494.
(v) To comply with the limitations of section 415, N's annual
benefit determined with respect to the accrued benefit with respect
to which distribution has not yet commenced must be no greater than
the otherwise applicable limit on the annual benefit (i.e., the
lesser of $180,000 or 100% of N's average compensation for period of
N's high 3 years of service) minus $80,828 (the $26,334 annual
benefit attributable to the remaining payments under the existing
form of distribution, plus the $54,494 annual benefit attributable
to prior distributions). Thus, for example, to comply with the
dollar limitation of section 415(b)(1)(A), N's annual benefit
determined with respect to the accrued benefit with respect to which
distribution has not yet commenced must be no greater than $99,172.
Example 3. (i) The facts are the same as in Example 2, except
that, instead of receiving a benefit of $80,000 per year for ten
years from Plan F, N receives annual payments of $80,000 under a 10-
year certain and life annuity from Plan F.
(ii) Pursuant to paragraph (a)(3) of this section, as of January
1, 2008, N's annual benefit that is subject to the limits of section
415(b) and Sec. 1.415(b)-1(a) is equal to the sum of the annual
benefit determined with respect to remaining amounts payable under
the distribution that commenced on January 1, 2002, the annual
benefit determined with respect to the accrued benefit with respect
to which distribution has not yet commenced, and the annual benefit
attributable to prior distributions (computed pursuant to the rules
of paragraph (b) of this section).
(iii) N's annual benefit determined with respect to the
remaining portion of the existing annuity (i.e., a four-year certain
and life annuity) is determined pursuant to Sec. 1.415(b)-1(c)(2)
as the greater of the annual amount of a 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 for the particular
form of benefit payable, or the annual amount of a 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 an interest rate of 5% and the applicable mortality
table under section 417(e)(3). Using the plan's factors for
actuarial equivalence, the actuarially equivalent straight life
annuity is $80,608, and using the statutory factors for actuarial
equivalence, the actuarially equivalent straight life annuity is
$80,577. Accordingly, N's annual benefit determined with respect
[[Page 31240]]
to the remaining 4-year certain and life annuity is equal to
$80,608.
(iv) N's annual benefit attributable to prior distributions is
computed by adjusting the six annual payments of $80,000 per year
already made before January 1, 2008, to an actuarially equivalent
straight life annuity commencing on January 1, 2008, in accordance
with the rules set forth in paragraph (b)(3) of this section.
Pursuant to those rules, that actuarially equivalent straight life
annuity is computed using either the plan's actuarial assumptions
for applying offsets for prior distributions (here, a 6% interest
rate and the mortality table that applies under section 417(e)(3) as
of January 1, 2003), or the applicable interest rate and the
applicable mortality table under section 417(e)(3), both determined
as of January 1, 2008, whichever set of actuarial assumptions
produces the greater actuarially equivalent annuity. The actuarially
equivalent straight life annuity computed using the plan's
assumptions used for computing offsets is $54,494 per year, and the
actuarially equivalent straight life annuity computed using the
applicable interest rate and the applicable mortality table as of
January 1, 2008, is $48,689 per year. Thus, N's annual benefit
attributable to prior distributions is $54,494.
(v) To comply with the limitations of section 415, N's annual
benefit determined with respect to the accrued benefit with respect
to which distribution has not yet commenced must be no greater than
the otherwise applicable limit on the annual benefit (i.e., the
lesser of $180,000 or 100% of N's average compensation for the
highest 3 years) minus $135,102 (the $80,608 annual benefit
attributable to the remaining payments under the existing form of
distribution, plus the $54,494 annual benefit attributable to prior
distributions). Thus, for example, to comply with the dollar
limitation of section 415(b)(1)(A), N's annual benefit determined
with respect to the accrued benefit with respect to which
distribution has not yet commenced must be no greater than $44,898.
Example 4. (i) Participant P retired on January 1, 2004, at age
65, with average compensation for the period of P's high 3 years
service of $190,000. P commenced receiving a straight life annuity
of $165,000 from Plan E as of January 1, 2004. Plan E adjusts
benefit payments to reflect increases in the applicable limitations
of section 415(b) in accordance with the safe harbor methodology set
forth in Sec. 1.415(d)-1(a)(5). As of January 1, 2005, pursuant to
an adjustment under section 415(d) that applies to P's benefit
payments under the terms of the plan, annual payments to P from Plan
E are adjusted to $170,000, and as of January 1, 2007, pursuant to
another such adjustment (under which the section 415(b)(1)(A) dollar
limit is assumed to increase to $175,000 for 2007), annual payments
to P from Plan E are adjusted to $175,000. On December 1, 2007, P
elected to change the form of the remainder of the benefit payable
to P under Plan E to a single-sum distribution payable as of January
1, 2008. P receives a single-sum distribution of $1,769,157 on
January 1, 2008. It is assumed for purposes of this example that the
section 417(e)(3) interest rate that applies to a distribution from
Plan E as of January 1, 2004, is 5.25%, and that the section
417(e)(3) interest rate that applies to a distribution from Plan E
as of January 1, 2008, is 6%. The normal form of benefit under Plan
E is a straight life annuity. Plan E provides a QPSA to all married
participants without charge. Plan E provides 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 participant's attainment of age 65 and the annuity starting
date. Under Plan E, benefits commencing after the age of 65 are
actuarially adjusted to reflect the later commencement date using
the plan's generally applicable assumptions for actuarial
equivalence.
(ii) To comply with the limitations of section 415 for the 2008
limitation year, Plan E must satisfy two requirements. First, under
paragraph (c)(1) of this section, Plan E must limit payments to P so
that the sum of the annual benefit attributable to the currently
commencing distribution plus the annual benefit attributable to
prior distributions is within the limitations of section 415(b) that
apply to a benefit commencing at the annuity starting date for the
distribution that commences in 2008. Second, under paragraph (c)(2)
of this section, the payments under the annuity that are paid before
January 1, 2008, plus the single-sum distribution made on January 1,
2008, must satisfy the requirements of Sec. 1.415(b)-1 determined
as of January 1, 2004, using the interest rates and mortality table
applicable as of January 1, 2004. Pursuant to paragraph (c)(2) of
this section, Plan E does not fail to satisfy this latter
requirement if payments reflect cost-of-living adjustments pursuant
to section 415(d) for payments no earlier than the time those
adjustments are effective and in amounts no greater than amounts
determined under Sec. 1.415(d)-1(a)(5).
(iii) To satisfy the second requirement described in paragraph
(ii) of this Example 4, the payments under the annuity that are paid
before January 1, 2008 (i.e., $165,000 during 2004, $170,000 during
2005, $170,000 during 2006, and $175,000 during 2007), plus the
single-sum distribution of $1,769,157 made on January 1, 2008, must
satisfy the requirements of Sec. 1.415(b)-1 determined as of
January 1, 2004, using the interest rates and mortality table
applicable as of January 1, 2004. As of January 1, 2004, the
actuarially equivalent straight life annuity with respect to those
payments is $176,698 using the applicable interest rate (assumed to
be 5.25%) and the applicable mortality table for that date. As of
January 1, 2004, the actuarially equivalent straight life annuity
with respect to those payments is $170,239 using the plan's
actuarial assumptions (a 6% interest rate and the applicable
mortality table as of January 1, 2003). The annual benefit
attributable to those payments is the greater of the two amounts, or
$176,698. This amount exceeds the applicable dollar limitation as of
January 1, 2004 (i.e., $165,000). Accordingly, without application
of the special rule for cost-of-living adjustments, Plan E would
fail to satisfy this second requirement.
(iv) Pursuant to the special rule for cost-of-living adjustments
under paragraph (c)(2) of this section, Plan E does not fail to
satisfy the second requirement described in paragraph (ii) of this
Example 4 if payments reflect cost-of-living adjustments pursuant to
section 415(d) for payments no earlier than the time those
adjustments are effective and in amounts no greater than amounts
determined under Sec. 1.415(d)-1(a)(5). Accordingly, the payment
stream that must satisfy the requirements of Sec. 1.415(b)-1
determined as of January 1, 2004, using the interest rates and
mortality table applicable as of January 1, 2004, is the payment
stream consisting of $165,000 paid each year during 2004 through
2007, and $1,621,727 ($1,769,157 multiplied by 165,000/180,000) paid
on January 1, 2008. As of January 1, 2004, the actuarially
equivalent straight life annuity with respect to those payments is
$158,930 using the applicable interest rate (assumed to be 5.25%)
and the applicable mortality table for that date. As of January 1,
2004, the actuarially equivalent straight life annuity with respect
to those payments is $165,000 using the plan's actuarial assumptions
(a 6% interest rate and the applicable mortality table as of January
1, 2003). The annual benefit attributable to those payments is the
greater of the two amounts, or $165,000, which satisfies the
applicable limitations as of January 1, 2004. Accordingly, Plan E
satisfies the second requirement described in paragraph (ii) of this
Example 4 using the special rule for cost-of-living adjustments
under paragraph (c)(2) of this section.
(v) For purposes of determining compliance with the first
requirement described in paragraph (ii) of this Example 4, P's
annual benefit attributable to prior distributions is computed by
adjusting the annual payments already received ($165,000 for 2004,
$170,000 for 2005, $170,000 for 2006, and $175,000 for 2007) already
made before January 1, 2008, to an actuarially equivalent straight
life annuity commencing on January 1, 2008, in accordance with the
rules set forth in paragraph (b)(3) of this section. Pursuant to
those rules, that actuarially equivalent straight life annuity is
computed using either the plan's actuarial assumptions for applying
offsets for prior distributions (here, a 6% interest rate and the
mortality table that applies under section 417(e)(3) as of January
1, 2003), or an interest rate of 5% and the applicable mortality
table under section 417(e)(3), both determined as of January 1,
2008, whichever set of actuarial assumptions produces the greater
actuarially equivalent annuity. The actuarially equivalent straight
life annuity computed using the plan's assumptions used for
computing offsets is $80,453 per year, and the actuarially
equivalent straight life annuity computed using a 5% interest rate
and the applicable mortality table as of January 1, 2008, is $75,046
per year. Thus, P's annual benefit attributable to prior
distributions is $80,453.
(vi) P's annual benefit attributable to the single-sum
distribution made on January 1,
[[Page 31241]]
2008, is determined as the greater of the annual amount of the
actuarially equivalent straight life annuity commencing at the same
age (determined using the plan's actuarial factors), 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). Based on the factors used in
the plan to determine the actuarially equivalent lump sum (in this
case, an interest rate of 6% and the applicable mortality table as
of January 1, 2003), $1,769,157 payable as a single sum at age 69 is
actuarially equivalent to an immediate straight life annuity at age
69 of $180,000. Based on the applicable interest rate and the
applicable mortality table, $1,769,157 payable as a single sum at
age 69 is actuarially equivalent to an immediate straight life
annuity at age 69 of $170,451. With respect to the single-sum
distribution, P's annual benefit is equal to the greater of the two
resulting amounts, or $180,000.
(vii) To satisfy the first requirement described in paragraph
(ii) of this Example 4, P's annual benefit attributable to prior
distributions plus P's annual benefit attributable to the single-sum
distribution, determined as of January 1, 2008, must not exceed the
applicable limitations. The sum of those annual benefits is
$260,453. The age-adjusted dollar limitation as of January 1, 2008,
is determined as the lesser of the section 415(b)(1)(A) dollar limit
multiplied by the ratio of the annuity payable at age 69 to the
annuity that would be payable at age 65 based on the same accrued
benefit (both determined before the application of section 415), or
the straight life annuity payable at age 69 that is actuarially
equivalent, using 5% interest and the applicable mortality table, to
the straight life annuity payable at age 65. In this case, the age-
adjusted section 415(b)(1)(A) dollar limit at age 69 is $244,013,
which is the lesser of 265,320 (the straight life annuity at age 69
that is actuarially equivalent to an annuity of $180,000 commencing
at age 65, determined using the plan's interest rate of 6% and the
applicable mortality table that applies as of January 1, 2003,
without a mortality decrement for the period between 65 and 69) and
$244,013 (the straight life annuity at age 69 that is actuarially
equivalent to an annuity of $180,000 commencing at age 65,
determined using 5% interest and the applicable mortality table,
without a mortality decrement for the period between 65 and 69)).
The compensation-based limitation of section 415(b)(1)(B) for P in
2008 is $209,000 ($190,000 multiplied by the product of the annual
adjustment factors for 2005 through 2008, or 1.1). Accordingly, the
limitation under section 415(b) for P as of January 1, 2008, is
$209,000 (the lesser of the dollar limitation and the compensation
limitation as of that date).
(viii) Because the sum of P's annual benefit attributable to
prior distributions plus P's annual benefit attributable to the
single-sum distribution ($260,453) exceeds the limitation under
section 415(b) determined as of January 1, 2008 ($209,000), the plan
fails to satisfy the requirements of section 415(b). In addition, if
the plan limits the amount of the single-sum distribution in order
to satisfy the requirements of section 415(b) in this case, there
may be a forfeiture of a participant's accrued benefit in violation
of section 411(a) in some cases where a participant converts annuity
payments to a single-sum distribution.
Par. 9. Section 1.415(c)-1 is added to read as follows:
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% 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 thereunder, a 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 thereunder.
(B) Employee contributions to a defined benefit plan. Mandatory
employee contributions 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 accounts under section 401(h). Pursuant to
section 415(l)(1), contributions allocated to any individual medical
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 (i.e., 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 alternative
contribution limitations 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 between defined contribution plans. The
direct transfer of funds or employee contributions from one defined
contribution plan to another defined contribution plan does not give
rise to an annual addition.
(iv) Reinvested ESOP 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 annual
additions. For purposes of paragraph (b)(1)(i)(A) of this section, the
term annual additions includes employer contributions credited to the
participant's account for the limitation year and other allocations
described in paragraph (b)(4) of this
[[Page 31242]]
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 benefits by the employer in accordance with section
411(a)(3)(D) or section 411(a)(7)(C) or resulting from the repayment of
cashouts under a governmental plan (as described in section 415(k)(3))
is not considered an annual addition for the limitation year in which
the restoration occurs. (See Sec. 1.411(a)-7(d)(6)(iii)(B).)
(B) Catch-up contributions. Catch-up contributions made in
accordance with section 414(v) and Sec. 1.414(v)-1 do not give rise to
annual additions.
(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 ERISA, 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). However, 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 contributions that give rise to annual
additions and are not restorative payments.
(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 additions includes mandatory employee
contributions (as defined in section 411(c)(2)(C) and the regulations
thereunder) as well as voluntary employee contributions. The term
``annual additions'' 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) (see
Sec. 1.411(a)-7(d)(6)(iii)(B)) or repayment of contributions to a
governmental plan as described in section 415(k)(3); or
(iv) 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, the Commissioner
will treat a sale or exchange by the employee or the employer that
transfers assets to a plan where the consideration paid by the plan is
less than the fair market value of the assets transferred to the plan
as giving rise to 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, the 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. However, if the allocation is
dependent upon participation in the plan as of any date subsequent to
the date as of which it is allocated, it is considered allocated only
at the end of the period of participation upon which the allocation is
conditioned.
(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 close of the taxable year 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
the Employee Retirement Income Security Act of 1974 (88 Stat. 829),
Public Law 93-406 (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
[[Page 31243]]
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 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, 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), 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 (SEPs). 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% of $30,000).
Example 2. (i) Assume the same facts 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% 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 $44,000, then the maximum annual addition that can be
allocated to P's account for the current limitation year is $44,000.
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
conditioned on future participation). Thus, employer contributions
for the 2007 calendar year limitation year are made on July 31, 2008
(the date that is two months after the close of N's taxable year
ending May 31, 2008) and are allocated as of December 31, 2007.
(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,
2008, the contributions will be considered annual additions for the
2007 calendar year limitation year.
Example 4. (i) Assume the same facts 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, 2008, is allocated to participants' accounts as of
January 31, 2008.
(ii) Because the last day of the plan year is in the 2008
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 2008 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% 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% 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
------------------------------------------------------------------------
2007.................................................. $30,000
2008.................................................. 32,000
2009.................................................. 34,000
2010.................................................. 36,000
------------------------------------------------------------------------
(ii) Participant A makes no voluntary employee contributions
during limitation years 2007, 2008, and 2009. On October 1, 2010,
participant A makes a voluntary employee contribution of $13,200
(10% of A's aggregate compensation for limitation years 2007, 2008,
2009, and 2010 of $132,000). Under the terms of the plan, $3,000 of
this 2010 contribution is allocated
[[Page 31244]]
to A's account as of limitation year 2007; $3,200 is allocated to
A's account of limitation year 2008; $3,400 is allocated to A's
account as of limitation year 2009, and $3,600 is allocated to A's
account as of limitation year 2010.
(iii) Under the rule set forth in paragraph (c)(6)(ii)(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, 2010 would be considered as credited to A's account only
for the 2010 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.
(ii) $40,000 aggregate limitation. The total amount of annual
additions with respect to any participant that are treated as not
exceeding the limitation of paragraph (a)(1) of this section (taking
into account the rule of paragraph (d)(3) of this section) pursuant to
the rule of paragraph (d)(1)(i) of this section even though those
annual additions would otherwise exceed that limitation cannot exceed
$40,000. Thus, the aggregate of amounts 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 the greater of $3,000 or the employee's includible
compensation with respect to services for the church performed outside
the United States during the limitation year.
(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 2007. 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 2007.
(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 2007. Accordingly, ABC Church may make such
allocations for 13 years (e.g., for 2007 through 2019) 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 (i.e., the $7,000 limitation
computed under paragraph (a)(1)(ii) of this section, plus 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. 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 2007. 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 2007.
(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 (i.e., 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 (e.g., for 2006 through
2010) without exceeding the aggregate limitation of $40,000
specified in paragraph (d) of this section. In 2012, XYZ church may
contribute $8,000 to be allocated to F's account under the plan
(i.e., the $3,000 limitation computed under paragraph (d)(3) of this
section, plus 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 2012, 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 (i.e., 100% of the participant's
compensation for the limitation year) does not apply to--
(1) An individual medical account (as defined in section 415(l));
or
(2) A post-retirement medical benefits account for key employees
(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 ESOP--(i) In
general. Except as provided in this paragraph (f), in the case of an
employee stock ownership plan to which an exempt loan as described in
Sec. 54.4975-7(b) 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 ESOPs 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--
[[Page 31245]]
(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)).
(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.
Par. 10. 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 applied for purposes of section 415 and regulations
thereunder, 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, and rules for employees in
qualified military service.
(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 deferred at the election of the employee would be includible in
gross income but for the rules of section 402(e)(3), 402(h)(1)(B),
402(k), 125(a), 132(f)(4), 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 the regulations thereunder, the
employee's earned income (as described in section 401(c)(2) and the
regulations thereunder), 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 nonqualified option 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).
(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. Additionally, 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 an unfunded nonqualified plan are permitted to
be considered as compensation for section 415 purposes in the year the
amounts are actually received.
(2) Amounts realized from the exercise of a nonqualified option, 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 the regulations thereunder).
(3) Amounts realized from the sale, exchange, or other disposition
of stock acquired under a qualified stock option.
(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) 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
[[Page 31246]]
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 amounts deferred at the election of the employee that
would be included in wages if not deferred pursuant to the rules of
section 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
401(k), 403(b), 408(k), 408(p)(2)(A)(i), 457(b), 132(f), or 125.
(ii) Payment prior to severance from employment. 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 severance from employment (within the meaning of
section 401(k)(2)(B)(i)(I)) with the employer maintaining the plan.
(2) Certain de minimis timing differences. Notwithstanding the
provisions of paragraph (e)(1) 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 that is paid within 2\1/2\ months after an employee's severance
from employment 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.
(ii) Certain payments made within 2\1/2\ months after severance
from employment. 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--
(A) 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
(B) 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.
(iii) Other post-severance payments are not compensation. Any
payment that is not described in paragraph (e)(3)(ii) of this section
is not considered compensation if paid after severance from employment,
even if it is paid within 2\1/2\ months following severance from
employment. Thus, for example, compensation does not include amounts
paid after severance from employment that are severance pay, unfunded
nonqualified deferred compensation, or parachute payments within the
meaning of section 280G(b)(2).
(4) Certain military service. 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.
(f) Interaction with section 401(a)(17). Because a plan may not
base allocations (in the case of a defined contribution plan) or
benefit accruals (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 limitation year that is used
for purposes of applying the limitations of section 415 is not
permitted to reflect compensation for a plan year that is in excess of
the limitation under section 401(a)(17) that applies to that 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) and Sec.
1.403(b)-2(a)(11). 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).
[[Page 31247]]
(3) Aggregation of section 403(b) annuity with qualified plan of
controlled employer. If a section 403(b) annuity contract is combined
or 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 combining 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. Compensation described in paragraphs
(b)(1) and (2) of this section includes foreign earned income (as
defined in section 911(b)), whether or not excludable from gross income
under section 911. Compensation described in paragraph (b)(1) of this
section is to be determined without regard to the exclusions from gross
income in sections 931 and 933. Similar principles are to be applied
with respect to income subject to sections 931 and 933 in determining
compensation described in paragraph (b)(2) of this section.
(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), provided that 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).
Par. 11. 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) 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 separated from service with a
nonforfeitable right to an accrued benefit, the compensation limitation
described in section 415(b)(1)(B) is adjusted annually to take into
account increases in the cost of living. For any limitation year
beginning after the separation 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) 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 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) of this chapter.
(3) Effective date of adjustment. The adjusted dollar limitation
applicable to
[[Page 31248]]
defined benefit 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. Benefit payments and accrued benefits for a
limitation year cannot exceed the currently applicable dollar
limitation (as in effect before the January 1 adjustment) prior to
January 1.
(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) applies to any distribution of accrued benefits that did
not commence before the beginning of the limitation year for 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 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 benefits that
have commenced. With respect to a distribution of accrued benefits that
commenced before the beginning of the limitation year, 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 adjusts benefits to reflect increases in the applicable
limitations pursuant to section 415(d) for a limitation year after the
limitation year during which payment of the benefit commenced using the
safe harbor methodology described in paragraph (a)(5) of this section,
the distribution will be treated as continuing to satisfy the
requirements of section 415(b). If a plan adjusts benefits to reflect
increases in the applicable limitations pursuant to section 415(d) for
a limitation year after the limitation year during which payment of the
benefit commenced in a manner other than the manner described in
paragraph (a)(5) of this section, the plan must satisfy the
requirements of Sec. 1.415(b)-2, 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 adjustments to benefit payments resulting from
cost-of-living adjustments. An adjustment to a distribution that is
made on account of an increase to the applicable limits pursuant to
section 415(d) is made using the safe harbor methodology of this
paragraph (a)(5) if--
(i) The participant has received one or more distributions that
satisfy the requirements of section 415(b) before the date the increase
to the applicable limits is effective;
(ii) The adjusted distribution is solely as a result of the
application of the increase to the applicable limits pursuant to
section 415(d); and
(iii) The amount payable to the employee for the limitation year
and subsequent limitation years is not greater than the amounts that
would otherwise be payable without regard to the adjustment, multiplied
by a fraction, the numerator of which is the limitation under section
415(b) (i.e., 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) increase, and
the denominator of which is such limitation under section 415(b) in
effect for the distribution immediately before the increase.
(6) 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% of X's
average compensation for the period of X's high 3 years of service,
adjusted as of January 1 of each calendar year for increases in the
consumer price index. The plan provides that the annual increases in
both the dollar limit of section 415(b)(1)(A) and the compensation
limit under section 415(b)(1)(B) pursuant to section 415(d) apply to
participants who have commenced receiving benefits under the plan at
the earliest time at which that increase is permitted to become
effective. X's average compensation for X's high 3 years is $50,000.
X separates from the service of his employer on October 3, 2006, at
age 65 with a nonforfeitable right to the accrued benefit after more
than 10 years of service with the employer and 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,
2006. It is assumed for purposes of this Example 1 that the dollar
limitation for 2006 (as adjusted pursuant to section 415(d)) is
$170,000, that the dollar limitation for 2007 (as adjusted pursuant
to section 415(d)) is $175,000, and that the annual adjustment
factor for adjusting the limitation of section 415(b)(1)(B) for 2007
is 1.0220.
(ii) For the limitation year beginning January 1, 2007, the
dollar limit applicable to X under section 415(b)(1)(A) is $175,000,
and the compensation limit applicable to X under section
415(b)(1)(B) is $51,100 ($50,000 multiplied by the annual adjustment
factor of 1.0220). 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 2007 is no greater than $50,000 multiplied by
$51,100 (X's section 415(b) limitation for 2006)/$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, 2006, are limited to
$170,000.
(ii) For the limitation year beginning January 1, 2007, the
dollar limit applicable to X under section 415(b)(1)(A) is $175,000,
and the compensation limit applicable to X under section
415(b)(1)(B) is $204,400 ($200,000 multiplied by the annual
adjustment factor of 1.0220). 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 2007 is no greater than $170,000 multiplied by
$175,000 (X's section 415(b) limitation for 2006)/$170,000 (X's
section 415(b) limitation for 2007).
(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) 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
[[Page 31249]]
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).
(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 any of the
adjustments described in this section by reference 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. 12. Section 1.415(f)-1 is added to read as follows:
Sec. 1.415(f)-1 Combining and aggregating plans.
(a) In general. Under section 415(f) and this section, except as
provided in paragraph (g) of this section (regarding multiemployer
plans), for purposes of applying the limitations of section 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 paragraph (c) of this section) under
which the participant has ever 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 paragraph (c) 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. 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.
(c) Predecessor employer. For purposes of section 415 and the
regulations thereunder, 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, 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) Annual compensation taken into account where employer maintains
more than one defined benefit plan--(1) Determination of high 3 years
of compensation. If two or more defined benefit plans are aggregated
under section 415(f) and this section for a particular limitation year,
in applying the defined benefit compensation limitation (as described
in section 415(b)(1)(B)) to the annual benefit of a participant under
the aggregated plans, the participant's average compensation for the
participant's high 3 years of service is determined in accordance with
Sec. 1.415(c)-2(g)(2), and includes compensation for all years in
which the participant was an active participant in any of the
aggregated plans.
(2) Requirement of independent satisfaction of compensation limit.
If two or more defined benefit plans are aggregated under section
415(f) and this section for a particular limitation year, then,
pursuant to section 415(f)(1)(B), each such plan must also satisfy the
compensation limit of section 415(b)(1)(B) on a separate basis,
determining each participant's average compensation for the
participant's high 3 years of service using only compensation with
respect to periods of active participation in that separate plan.
(e) Years of participation and service taken into account where
employer maintains more than one defined benefit plan at different
times--(1) Determination of years of participation. If two or more
defined benefit plans are aggregated under section 415(f) and this
section for a particular limitation year,
[[Page 31250]]
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 combined plans under this section.
(2) Determination of years of service. 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 combined plans under this section.
(f) Previously unaggregated plans--(1) In general. This paragraph
(f) 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 (f)(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 (f)(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.
(g) Section 403(b) annuity contracts--(1) In general. In the case
of a section 403(b) annuity contract, except as provided in paragraph
(g)(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 (g)(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 (g)(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% of a professional
corporation, then any qualified defined contribution plan of the
professional corporation must be combined 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 (g)(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.
(ii) Definition of control. For purposes of paragraph (g)(2)(i) of
this section, a participant is in control of an employer for a
limitation year if, pursuant to paragraph (b) of this section, a plan
maintained by that employer would have to be aggregated with a plan
maintained by an employer that is 100% owned by the participant. Thus,
for example, if a participant owns 60% of the common stock of a
corporation, the participant is considered to be in control of that
employer for purposes of applying paragraph (g)(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 combined
or aggregated with a qualified plan of a controlled employer in
accordance with paragraph (g)(2) of this section, the plans must
satisfy the limitations of section 415(c) both separately and in
combination. In applying separately the limitations of section 415 to
the qualified plan and to the section 403(b) annuity, compensation from
the controlled employer may not be aggregated with compensation from
the employer purchasing the section 403(b) annuity (i.e., without
regard to Sec. 1.415(c)-2(g)(3)).
(h) Multiemployer plans--(1) Multiemployer plan combined 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 combined 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 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
[[Page 31251]]
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) Nonapplication of aggregation for purposes of applying section
415(b)(1)(B) compensation limit. Pursuant to section 415(f)(3)(A), a
multiemployer plan is not combined or 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).
(i) [Reserved]
(j) Special rules for combining 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 combined 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 combined limitation is the larger of the applicable
limitations.
(k) Examples. The following examples illustrate the rules of this
section:
Example 1. (i) M is an employee of ABC Corporation and XYZ
Corporation. ABC maintains a qualified defined benefit plan and a
qualified defined contribution plan in which M participates and XYZ
maintains a qualified defined benefit plan and a qualified defined
contribution plan in which M participates. ABC Corporation owns 60%
of XYZ Corporation.
(ii) 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.
(iii) The sum of M's annual benefit under the defined benefit
plan maintained by ABC and M's annual benefit under the defined
benefit plan maintained by XYZ is not permitted to exceed the
limitations of section 415(b) and Sec. 1.415(b)-1; and 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 satisfying the
requirements of section 415 on this aggregated basis, M's
compensation from both ABC and XYZ is taken into account and years
of service and participation under either defined benefit plan are
used.
(iv) M's annual benefit under the defined benefit plan
maintained by ABC and M's annual benefit under the defined benefit
plan maintained by XYZ also must be within the limitations of
section 415(b) and Sec. 1.415(b)1, determined without regard to the
aggregation of employers (i.e., by taking into account only
compensation and years of service and participation for the
respective employers).
Example 2. (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 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) Under section 415(k)(4), the hospital, as well as N, is
considered to maintain the annuity contract. Accordingly, 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 3. (i) The facts are the same as in Example 2, except
that instead of being in control of the hospital, N is the 100%
owner of a professional corporation P, which maintains a qualified
defined contribution plan in which N participates.
(ii) Under section 415(k)(4), the hospital, 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(c)(2) for an example of the treatment of a
contribution to an annuity contract that exceeds the limits of
section 415(c) by reason of the aggregation required by this
section.
Example 4. (i) 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% of a participant's average
compensation for his high 3 years of service and is payable in the
form of a straight life annuity beginning at age 65. J's average
compensation (within the meaning of Sec. 1.415(c)-2) for his high
three years of service from each corporation is $160,000. Each plan
uses the calendar year for the limitation and plan year. In July
2007, N Corporation becomes a wholly owned subsidiary of M
Corporation.
(ii) 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 (f)(3)(i) of this section, since the plans were not
aggregated as of the first day of the 2007 limitation year (January
1, 2007), they will not be considered aggregated until the
limitation year beginning January 1, 2008.)
(iii) As a result of such aggregation, J becomes entitled to a
combined benefit which is equal to $240,000, which is in excess of
the section 415(b) dollar limitation for 2005 of $170,000. However,
under paragraph (f)(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
(i.e., does not increase on account of increased compensation,
service, or other accruals) during the period within which the
limitations are being exceeded.
Example 5. (i) A, age 30, owns all of the stock of X Corporation
and also owns 10% of the stock of Z Corporation. F, A's father,
directly owns 75% of the stock of Z Corporation. Both corporations
have qualified defined contribution plans in which A participates
and both plans use the calendar year for the limitation and plan
year. A's compensation (within the meaning of Sec. 1.415(c)-2) for
2007 is $20,000 from Z Corporation and $150,000 from X Corporation.
During the period January 1, 2007 through June 30, 2007, 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, 2007, F dies, and A
inherits all of F's stock in Z in 2007.
(ii) As of July 15th 2007, 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 2007 are $60,000, the
limitations of section 415(c) and Sec. 1.415(c)-1 are not violated
for 2007, provided no annual additions are credited to A's accounts
after July 15, 2007 (the date that A is first in control of Z).
Example 6. (i) P is a key employee of employer XYZ who
participates in a qualified defined contribution plan with (Plan X)
a calendar year limitation year. 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 2007, 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 2007.
(ii) Under paragraph (j)(1) of this section, Plan X and the
individual medical account must separately satisfy the requirements
of
[[Page 31252]]
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). The individual
medical account is not subject to the 100% of compensation limit of
section 415(c), so the contributions to that account satisfy the
limitations of section 415(c).
(iii) 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 (j)(2)
of this section, the limit applicable to the combined plan is equal
to the greater of the limits applicable to the separate plan. In
this case, the limit applicable to the medical account is $40,000
(which is greater than the limit of $30,000 applicable to the
qualified plan), so the limit that applies to the aggregated plan is
$40,000 and the aggregated plans satisfy the requirements of section
415.
Par. 13. 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 combination of 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 sections 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), taking into account the
rules of Sec. 1.415(b)-2) 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), taking into account the rules of Sec.
1.415(b)-2) 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 (taking into account the rules of Sec.
1.415(b)-2), 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 or section 414(b) or (c), as modified by
section 415(h), then one or more of the plans is disqualified in
accordance with the ordering rules set forth in paragraphs (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 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 section 414(b) or (c), as modified by section
415(h), the employers of the controlled group 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 the employers within the controlled
group.
(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 (SEPs). 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
[[Page 31253]]
the simplified employee pension is no longer described under section
408(k).
(B) Combining medical accounts with defined contribution plans. In
the event that combining 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) Combining section 403(b) annuity contract and qualified defined
contribution plan--(1) In general. In the event that combining 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 combined 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
plan over such limitations is treated as a disqualified contribution 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) and Sec. 1.403(b)-
3(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 $42,000. 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 % 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 Example 3 of Sec.
1.415(f)-1(k)). 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
(i.e., $42,000)). Professional corporation P also contributes
$30,000 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 $42,000 limitation of section 415(c)(1)
applicable to N under the plan.
(ii) Under section 415(k)(4), the hospital, 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 combined contributions ($60,000) exceed
the section 415(c) limitation applicable to N under the plan
($42,000), under the special rules contained in this paragraph
(b)(3)(iv)(C), $20,000 of the $30,000 contributed to the section
403(b) annuity contract is considered a disqualified 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 disqualified contributions. See Sec. Sec. 1.415(a)-1(b)(2)
and 1.403(b)-3(c)(3).
(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).
Par. 14. 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 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
accrues a benefit or receives a distribution under 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 accrues a benefit or receives a
distribution under 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 twelve-month period
commencing with any day within the current limitation year. For
purposes of this section, the limitations of section 415 are to be
[[Page 31254]]
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.
(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 (within the meaning of
Sec. 1.415(f)-1(g)(2)(ii)) of any employer, 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 (within the meaning of Sec.
1.415(f)-1(g)(2)(ii)) of an employer, the limitation year is to be 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 shall be 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% 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 2007, 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, 2007, and ending June 30, 2007. 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 2007,
multiplied by 6/12.
Par. 15. Section 1.457-4 is amended by revising paragraph (d) to
read as follows:
Sec. 1.457-4 Annual deferrals, deferral limitations, and deferral
agreement 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)(ii) (relating to certain compensation paid
within 2\1/2\ months following severance from employment), compensation
described in Sec. 1.415(c)-2(g)(4) (relating to compensation paid to
participants who are permanently and totally disabled), and
compensation relating to qualified military service under section
414(u).
(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 2006, 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, 2007, at which time G's
accumulated sick and vacation pay that is payable on March 15, 2007
total $12,000. G elects, on February 4, 2007, 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, 2007 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 that would otherwise
be payable within 2\1/2\ months after G has a severance from
employment, as described in Sec. 1.415(c)-2(e)(3)(ii). 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 2007.
Example 2. (i) Facts. Same facts as in Example 1, except that
G's severance from employment is on December 1, 2006, G's $12,000 of
accumulated sick and vacation pay is payable on February 15, 2007
(which is within 2\1/2\ months after G's severance from employment),
and G's election to defer the accumulated sick and vacation pay is
made before February 1, 2007.
(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 2007.
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
[[Page 31255]]
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.
* * * * *
Par. 16. Section 1.457-5 is amended by revising Example 2 of
paragraph (d) to read as follows:
Sec. 1.457-5 Individual limitation for combined annual deferrals
under multiple eligible plans.
* * * * *
(d) Examples. * * *
Example (2). (i) Facts. Participant E, who will turn 63 on April
1, 2006, participates in four eligible plans during 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
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 2006, the
additional age 50 catch-up limitation that applies to Participant E
under Plan W under Sec. 1.457-4(c)(2) is $5,000. Further, for 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 age 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 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 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, assuming at
least $5,000 is contributed to Plan W; 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
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 2006 ($15,000 plus the $5,000 age 50
catch-up amount), which Participant E could contribute to any of the
plans assuming at least $5,000 is contributed to Plan W.
Par. 17. 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 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, 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 faced with 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, e.g., as a 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)) 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 any federal, state, or local
income taxes or penalties reasonably anticipated to result from the
distribution).
* * * * *
Par. 18. Section 1.457-10 is amended by revising paragraph (b)(8)
to read as follows:
Sec. 1.457-10 Miscellaneous provisions.
* * * * *
(b) Plan-to-plan transfers. * * *
(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
[[Page 31256]]
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--EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
Par. 19. The authority citation for part 11 is amended to read, in
part, as follows:
Authority: 26 U.S.C. 7805. * * *
* * * * *
Sec. 11.415(c)(4)-1 [Removed]
Par. 20. Section 11.415(c)(4)-1 is removed.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-10268 Filed 5-25-05; 8:45 am]
BILLING CODE 4830-01-P