SUBCHAPTER A—INCOME TAX _CONTINUED_ by qingyunliuliu

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									                                                                                 SUBCHAPTER A—INCOME TAX (CONTINUED)

                                                                              PART 1—INCOME TAXES                            1.401(a)–20 Requirements of qualified joint
                                                                                                                                 and survivor annuity and qualified pre-
                                                                                   (CONTINUED)                                   retirement survivor annuity.
                                                                                                                             1.401(a)–21 Rules relating to the use of an
                                                                    NORMAL TAXES AND SURTAXES (CONTINUED)                        electronic medium to provide applicable
                                                                                                                                 notices and to make participant elec-
                                                                              DEFERRED COMPENSATION, ETC.                        tions.
                                                                      PENSION, PROFIT-SHARING, STOCK BONUS                   1.401(a)–30 Limit on elective deferrals.
                                                                                   PLANS, ETC.                               1.401(a)–50 Puerto Rican trusts; election to
                                                                                                                                 be treated as a domestic trust.
                                                                   Sec.                                                      1.401(a)(2)–1 Refund of mistaken employer
                                                                   1.401–0 Scope and definitions.                                contributions and withdrawal liability
                                                                   1.401–1 Qualified pension, profit-sharing,                    payments to multiemployer plans.
                                                                       and stock bonus plans.                                1.401(a)(4)–0 Table of contents.
                                                                   1.401–2 Impossibility of diversion under the              1.401(a)(4)–1 Nondiscrimination        require-
                                                                       trust instrument.                                         ments of section 401(a)(4).
                                                                   1.401–3 Requirements as to coverage.                      1.401(a)(4)–2 Nondiscrimination in amount
                                                                   1.401–4 Discrimination as to contributions                    of employer contributions under a de-
                                                                       or benefits (before 1994).                                fined contribution plan.
                                                                   1.401–5 Period for which requirements of
                                                                                                                             1.401(a)(4)–3 Nondiscrimination in amount
                                                                       section 401(a) (3), (4), (5), and (6) are ap-
                                                                                                                                 of employer-provided benefits under a de-
                                                                       plicable with respect to plans put into ef-
                                                                                                                                 fined benefit plan.
                                                                       fect before September 2, 1974.
                                                                                                                             1.401(a)(4)–4 Nondiscriminatory availability
                                                                   1.401–6 Termination of a qualified plan.
                                                                                                                                 of benefits, rights, and features.
                                                                   1.401–7 Forfeitures under a qualified pension
                                                                                                                             1.401(a)(4)–5 Plan amendments and plan ter-
                                                                       plan.
                                                                                                                                 minations.
                                                                   1.401–8 Custodial accounts prior to January
                                                                       1, 1974.                                              1.401(a)(4)–6 Contributory defined benefit
                                                                   1.401–9 Face-amount            certificates—non-              plans.
                                                                       transferable annuity contracts.                       1.401(a)(4)–7 Imputation of permitted dis-
                                                                   1.401–10 Definitions relating to plans cov-                   parity.
                                                                       ering self-employed individuals.                      1.401(a)(4)–8 Cross-testing.
                                                                   1.401–11 General rules relating to plans cov-             1.401(a)(4)–9 Plan aggregation and restruc-
                                                                       ering self-employed individuals.                          turing.
                                                                   1.401–12 Requirements for qualification of                1.401(a)(4)–10 Testing of former employees.
                                                                       trusts and plans benefiting owner-em-                 1.401(a)(4)–11 Additional rules.
                                                                       ployees.                                              1.401(a)(4)–12 Definitions.
                                                                   1.401–13 Excess contributions on behalf of                1.401(a)(4)–13 Effective dates and fresh-start
                                                                       owner-employees.                                          rules.
                                                                   1.401–14 Inclusion of medical benefits for re-            1.401(a)(5)–1 Special rules relating to non-
                                                                       tired employees in qualified pension or                   discrimination requirements.
                                                                       annuity plans.                                        1.401(a)(9)–0 Required minimum distribu-
                                                                   1.401(a)–1 Post-ERISA qualified plans and                     tions; table of contents.
                                                                       qualified trusts; in general.                         1.401(a)(9)–1 Minimum distribution require-
                                                                   1.401(a)–2 Impossibility of diversion under                   ment in general.
                                                                       qualified plan or trust.                              1.401(a)(9)–2 Distributions commencing dur-
                                                                   1.401(a)–4 Optional forms of benefit (before                  ing an employee’s lifetime.
                                                                       1994).                                                1.401(a)(9)–3 Death before required begin-
                                                                   1.401(a)–11 Qualified joint and survivor an-                  ning date.
                                                                       nuities.                                              1.401(a)(9)–4 Determination of the des-
                                                                   1.401(a)–12 Mergers and consolidations of                     ignated beneficiary.
                                                                       plans and transfers of plan assets.                   1.401(a)(9)–5 Required minimum distribu-
                                                                   1.401(a)–13 Assignment or alienation of ben-                  tions from defined contribution plans.
                                                                       efits.                                                1.401(a)(9)–6 Required minimum distribu-
                                                                   1.401(a)–14 Commencement of benefits under                    tions for defined benefit plans and annu-
                                                                       qualified trusts.                                         ity contracts.
                                                                   1.401(a)–15 Requirement that plan benefits                1.401(a)(9)–7 Rollovers and transfers.
                                                                       are not decreased on account of certain               1.401(a)(9)–8 Special rules.
                                                                       Social Security increases.                            1.401(a)(9)–9 Life expectancy and distribu-
                                                                   1.401(a)–16 Limitations on benefits and con-                  tion period tables.
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                                                                       tributions under qualified plans.                     1.401(a)(17)–1 Limitation on annual com-
                                                                   1.401(a)–19 Nonforfeitability in case of cer-                 pensation.
                                                                       tain withdrawals.                                     1.401(a)(26)–0 Table of contents.

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                                                                   Pt. 1                                                                   26 CFR Ch. I (4–1–11 Edition)
                                                                   1.401(a)(26)–1 Minimum participation re-                  1.402(a)–1 Taxability of beneficiary under a
                                                                       quirements.                                               trust which meets the requirements of
                                                                   1.401(a)(26)–2 Minimum participation rule.                    section 401(a).
                                                                   1.401(a)(26)–3 Rules applicable to a defined              1.402(a)(5)–1T Rollovers of partial distribu-
                                                                       benefit plan’s prior benefit structure.                   tions from qualified trusts and annuities.
                                                                   1.401(a)(26)–4 Testing former employees.                      (Temporary)
                                                                   1.401(a)(26)–5 Employees who benefit under a              1.402(b)–1 Treatment of beneficiary of a
                                                                       plan.                                                     trust not exempt under section 501(a).
                                                                   1.401(a)(26)–6 Excludable employees.                      1.402(c)–1 Taxability of beneficiary of cer-
                                                                   1.401(a)(26)–7 Testing methods.                               tain foreign situs trusts.
                                                                   1.401(a)(26)–8 Definitions.                               1.402(c)–2 Eligible rollover distributions;
                                                                   1.401(a)(26)–9 Effective dates and transition                 questions and answers.
                                                                       rules.                                                1.402(d)–1 Effect of section 402(d).
                                                                   1.401(a)(31)–1 Requirement to offer direct                1.402(e)–1 Certain plan terminations.
                                                                       rollover of eligible rollover distributions;          1.402(f)–1 Required explanation of eligible
                                                                       questions and answers.                                    rollover distributions; questions and an-
                                                                   1.401(a)(35)–1 Diversification requirements                   swers.
                                                                       for certain defined contribution plans.               1.402(g)–0 Limitation on exclusion for elec-
                                                                   1.401(b)–1 Certain retroactive changes in                     tive deferrals, table of contents.
                                                                       plan.                                                 1.402(g)–1 Limitation on exclusion for elec-
                                                                   1.401(e)–1 Definitions relating to plans cov-                 tive deferrals.
                                                                       ering self-employed individuals.                      1.402(g)–2 Increased limit for catch-up con-
                                                                   1.401(e)–2 General rules relating to plans                    tributions.
                                                                       covering self-employed individuals.                   1.402(g)(3)–1 Employer contributions to pur-
                                                                   1.401(e)–3 Requirements for qualification of                  chase a section 403(b) contract under a
                                                                       trusts and plans benefiting owner-em-                     salary reduction agreement.
                                                                       ployees.                                              1.402A–1 Designated Roth Accounts.
                                                                   1.401(e)–4 Contributions for premiums on                  1.402A–2 Reporting and recordkeeping re-
                                                                       annuity, etc., contracts and transitional                 quirements with respect to designated
                                                                       rule for certain excess contributions.                    Roth accounts.
                                                                   1.401(e)–5 Limitation of contribution and                 1.403(a)–1 Taxability of beneficiary under a
                                                                       benefit bases to first $100,000 of annual                 qualified annuity plan.
                                                                       compensation in case of plans covering                1.403(a)–2 Capital gains treatment for cer-
                                                                       self-employed individuals.                                tain distributions.
                                                                   1.401(e)–6 Special rules for shareholder-em-              1.403(b)–0 Taxability under an annuity pur-
                                                                       ployers.                                                  chased by a section 501(c)(3) organization
                                                                   1.401(f)–1 Certain custodial accounts and an-                 or a public school.
                                                                       nuity contracts.                                      1.403(b)–1 General overview of taxability
                                                                   1.401(k)–0 Table of contents.                                 under an annuity contract purchased by
                                                                   1.401(k)–1 Certain cash or deferred arrange-                  a section 501(c)(3) organization or a pub-
                                                                       ments.                                                    lic school.
                                                                   1.401(k)–2 ADP test.                                      1.403(b)–2 Definitions.
                                                                   1.401(k)–3 Safe harbor requirements.                      1.403(b)–3 Exclusion for contributions to
                                                                   1.401(k)–4 SIMPLE 401(k) plan require-                        purchase section 403(b) contracts.
                                                                       ments.                                                1.403(b)–4 Contribution limitations.
                                                                   1.401(k)–5 Special rules for mergers, acquisi-            1.403(b)–5 Nondiscrimination rules.
                                                                       tions and similar events. [Reserved]                  1.403(b)–6 Timing of distributions and bene-
                                                                   1.401(k)–6 Definitions.                                       fits.
                                                                   1.401(l)–0 Table of contents.                             1.403(b)–7 Taxation of distributions and ben-
                                                                   1.401(l)–1 Permitted disparity in employer-                   efits.
                                                                       provided contributions or benefits.                   1.403(b)–8 Funding.
                                                                   1.401(l)–2 Permitted disparity for defined                1.403(b)–9 Special rules for church plans.
                                                                       contribution plans.                                   1.403(b)–10 Miscellaneous provisions.
                                                                   1.401(l)–3 Permitted disparity for defined                1.403(b)–11 Applicable dates.
                                                                       benefit plans.                                        1.403(c)–1 Taxability of beneficiary under a
                                                                   1.401(l)–4 Special rules for railroad plans.                  nonqualified annuity.
                                                                   1.401(l)–5 Overall permitted disparity limits.            1.404(a)–1 Contributions of an employer to
                                                                   1.401(l)–6 Effective dates and transition                     an employees’ trust or annuity plan and
                                                                       rules.                                                    compensation under a deferred payment
                                                                   1.401(m)–0 Table of contents.                                 plan; general rule.
                                                                   1.401(m)–1 Employee        contributions    and           1.404(a)–1T Questions and answers relating
                                                                       matching contributions.                                   to deductibility of deferred compensation
                                                                   1.401(m)–2 ACP test.                                          and deferred benefits for employees.
                                                                   1.401(m)–3 Safe harbor requirements.                          (Temporary)
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                                                                   1.401(m)–4 Special rules for mergers, acqui-              1.404(a)–2 Information to be furnished by
                                                                       sitions and similar events. [Reserved]                    employer claiming deductions; taxable
                                                                   1.401(m)–5 Definitions.                                       years ending before December 31, 1971.

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                                                                   Internal Revenue Service, Treasury                                                                  Pt. 1
                                                                   1.404(a)–2A Information to be furnished by                    application of section 404(a) (8), (9), and
                                                                       employer; taxable years ending on or                      (10) and section 404 (e) and (f).
                                                                       after December 31, 1971, and before De-               1.404(e)–1A Contributions on behalf of a self-
                                                                       cember 31, 1975.                                          employed individual to or under a quali-
                                                                   1.404(a)–3 Contributions of an employer to                    fied pension, annuity, or profit-sharing
                                                                       or under an employees’ pension trust or                   plan.
                                                                       annuity plan that meets the require-                  1.404(g)–1 Deduction of employer liability
                                                                       ments of section 401(a); application of                   payments.
                                                                       section 404(a)(1).                                    1.404(k)–1T Questions and answers relating
                                                                   1.404(a)–4 Pension and annuity plans; limi-                   to the deductibility of certain dividend
                                                                       tations under section 404(a)(1)(A).                       distributions. (Temporary)
                                                                   1.404(a)–5 Pension and annuity plans; limi-               1.404(k)–3 Disallowance of deduction for re-
                                                                       tations under section 404(a)(1)(B).                       acquisition payments.
                                                                   1.404(a)–6 Pension and annuity plans; limi-               1.405–1 Qualified bond purchase plans.
                                                                       tations under section 404(a)(1)(C).                   1.405–2 Deduction of contributions to quali-
                                                                   1.404(a)–7 Pension and annuity plans; con-                    fied bond purchase plans.
                                                                       tributions in excess of limitations under             1.405–3 Taxation of retirement bonds.
                                                                       section 404(a)(1); application of section             1.406–1 Treatment of certain employees of
                                                                       404(a)(1)(D).                                             foreign subsidiaries as employees of the
                                                                   1.404(a)–8 Contributions of an employer                       domestic corporation.
                                                                       under an employees’ annuity plan which                1.407–1 Treatment of certain employees of
                                                                       meets the requirements of section 401(a);                 domestic subsidiaries engaged in busi-
                                                                       application of section 404(a)(2).                         ness outside the United States as em-
                                                                   1.404(a)(8)–1T Deductions for plan contribu-                  ployees of the domestic parent corpora-
                                                                       tions on behalf of self-employed individ-                 tion.
                                                                       uals. (Temporary)                                     1.408–1 General rules.
                                                                   1.404(a)–9 Contributions of an employer to                1.408–2 Individual retirement accounts.
                                                                       an employees’ profit-sharing or stock                 1.408–3 Individual retirement annuities.
                                                                       bonus trust that meets the requirements               1.408–4 Treatment of distributions from in-
                                                                       of section 401(a); application of section                 dividual retirement arrangements.
                                                                       404(a)(3)(A).                                         1.408–5 Annual reports by trustees or
                                                                   1.404(a)–10 Profit-sharing plan of an affili-                 issuers.
                                                                       ated group; application of section                    1.408–6 Disclosure statements for individual
                                                                       404(a)(3)(B).                                             retirement arrangements.
                                                                   1.404(a)–11 Trusts created or organized out-              1.408–7 Reports on distributions from indi-
                                                                       side the United States; application of                    vidual retirement plans.
                                                                       section 404(a)(4).                                    1.408–8 Distribution requirements for indi-
                                                                   1.404(a)–12 Contributions of an employer                      vidual retirement plans.
                                                                       under a plan that does not meet the re-               1.408–11 Net income calculation for returned
                                                                       quirements of section 401(a); application                 or recharacterized IRA contributions.
                                                                       of section 404(a)(5).                                 1.408(q)–1 Deemed IRAs in qualified em-
                                                                   1.404(a)–13 Contributions of an employer                      ployer plans.
                                                                       where deductions are allowable under                  1.408A–0 Roth IRAs; table of contents.
                                                                       section 404(a) (1) or (2) and also under              1.408A–1 Roth IRAs in general.
                                                                       section 404(a)(3); application of section             1.408A–2 Establishing Roth IRAs.
                                                                       404(a)(7).                                            1.408A–3 Contributions to Roth IRAs.
                                                                   1.404(a)–14 Special rules in connection with              1.408A–4 Converting amounts to Roth IRAs.
                                                                       the Employee Retirement Income Secu-                  1.408A–5 Recharacterized contributions.
                                                                       rity Act of 1974.                                     1.408A–6 Distributions.
                                                                   1.404(b)–1 Method of contribution, etc., hav-             1.408A–7 Reporting.
                                                                       ing the effect of a plan; effect of section           1.408A–8 Definitions.
                                                                       404(b).                                               1.408A–9 Effective date.
                                                                   1.404(b)–1T Method or arrangement of con-                 1.408A–10 Coordination between designated
                                                                       tributions, etc., deferring the receipt of                Roth accounts and Roth IRAs.
                                                                       compensation or providing for deferred                1.409–1 Retirement bonds.
                                                                       benefits. (Temporary)                                 1.409A–0 Table of contents.
                                                                   1.404(c)–1 Certain negotiated plans; effect of            1.409A–1 Definitions and covered plans.
                                                                       section 404(c).                                       1.409A–2 Deferral elections.
                                                                   1.404(d)–1T Questions and answers relating                1.409A–3 Permissible payments
                                                                       to deductibility of deferred compensation             1.409A–4 Calculation of income inclusion
                                                                       and deferred benefits for independent                     [Reserved]
                                                                       contractors. (Temporary)                              1.409A–5 Funding [Reserved]
                                                                   1.404(e)–1 Contributions on behalf of a self-             1.409A–6 Application of section 409A and ef-
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                                                                       employed individual to or under a pen-                    fective dates.
                                                                       sion, annuity, or profit-sharing plan                 1.409(p)–1 Prohibited allocation of securities
                                                                       meeting the requirements of section 401;                  in an S corporation.

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                                                                   Pt. 1                                                                   26 CFR Ch. I (4–1–11 Edition)
                                                                   1.409(p)–1T Prohibited allocation of securi-              1.411(b)(5)–1 Reduction in rate of benefit ac-
                                                                       ties in an S corporation (temporary).                     crual under a defined benefit plan.
                                                                   1.410(a)–1 Minimum participation stand-                   1.411(c)–1 Allocation of accrued benefits be-
                                                                       ards; general rules.                                      tween employer and employee contribu-
                                                                   1.410(a)–2 Effective dates.                                   tions.
                                                                   1.410(a)–3 Minimum age and service condi-                 1.411(d)–1 Coordination of vesting and dis-
                                                                       tions.                                                    crimination requirements. [Reserved]
                                                                   1.410(a)–3T Minimum age and service condi-                1.411(d)–2 Termination or partial termi-
                                                                       tions (temporary).                                        nation; discontinuance of contributions.
                                                                   1.410(a)–4 Maximum age conditions and                     1.411(d)–3 Other special rules.
                                                                       time of participation.                                1.411(d)–4 Section 411(d)(6) protected bene-
                                                                   1.410(a)–5 Year of service; break in service.                 fits.
                                                                   1.410(a)–6 Amendment of break in service                  1.411(d)–5 Class year plans; plan years begin-
                                                                       rules; transition period.                                 ning after October 22, 1986.
                                                                   1.410(a)–7 Elapsed time.                                  1.412(b)–2 Amortization of experience gains
                                                                   1.410(a)–8 Five consecutive 1-year breaks in                  in connection with certain group de-
                                                                       service, transitional rules under the Re-                 ferred annuity contracts.
                                                                       tirement Equity Act of 1984.                          1.412(b)–5 Election of the alternative amor-
                                                                   1.410(a)–8T Year of service; break in service                 tization method of funding.
                                                                       (temporary).                                          1.412(c)(1)–1 Determinations to be made
                                                                   1.410(a)–9 Maternity and paternity absence.                   under funding method—terms defined.
                                                                   1.410(a)–9T Elapsed time (temporary).                     1.412(c)(1)–2 Shortfall method.
                                                                   1.410(b)–0 Table of contents.
                                                                                                                             1.412(c)(1)–3 Applying the minimum funding
                                                                   1.410(b)–1 Minimum coverage requirements
                                                                                                                                 requirements to restored plans.
                                                                       (before 1994).
                                                                                                                             1.412(c)(1)–3T Applying the minimum fund-
                                                                   1.410(b)–2 Minimum coverage requirements
                                                                                                                                 ing requirements to restored plans (tem-
                                                                       (after 1993).
                                                                                                                                 porary).
                                                                   1.410(b)–3 Employees and former employees
                                                                                                                             1.412(c)(2)–1 Valuation of plan assets; rea-
                                                                       who benefit under a plan.
                                                                                                                                 sonable actuarial valuation methods.
                                                                   1.410(b)–4 Nondiscriminatory classification
                                                                                                                             1.412(c)(3)–1 Reasonable funding methods.
                                                                       test.
                                                                                                                             1.412(c)(3)–2 Effective dates and transitional
                                                                   1.410(b)–5 Average benefit percentage test.
                                                                   1.410(b)–6 Excludable employees.                              rules relating to reasonable funding
                                                                   1.410(b)–7 Definition of plan and rules gov-                  methods.
                                                                       erning plan disaggregation and aggrega-               1.412(i)–1 Certain insurance contract plans.
                                                                       tion.                                                 1.412(l)(7)–1 Mortality tables used to deter-
                                                                   1.410(b)–8 Additional rules.                                  mine current liability.
                                                                   1.410(b)–9 Definitions.                                   1.413–1 Special rules for collectively bar-
                                                                   1.410(b)–10 Effective dates and transition                    gained plans.
                                                                       rules.                                                1.413–2 Special rules for plans maintained
                                                                   1.410(d)–1 Election by church to have par-                    by more than one employer.
                                                                       ticipation, vesting, funding, etc. provi-             1.414(b)–1 Controlled group of corporations.
                                                                       sions apply.                                          1.414(c)–1 Commonly controlled trades or
                                                                   1.411(a)–1 Minimum vesting standards; gen-                    businesses.
                                                                       eral rules.                                           1.414(c)–2 Two or more trades or businesses
                                                                   1.411(a)–2 Effective dates.                                   under common control.
                                                                   1.411(a)–3 Vesting in employer-derived bene-              1.414(c)–3 Exclusion of certain interests or
                                                                       fits.                                                     stock in determining control.
                                                                   1.411(a)–3T Vesting      in   employer-derived            1.414(c)–4 Rules for determining ownership.
                                                                       benefits (temporary).                                 1.414(c)–5 Certain tax-exempt organizations.
                                                                   1.411(a)–4 Forfeitures, suspensions, etc.                 1.414(c)–6 Effective date.
                                                                   1.411(a)–4T Forfeitures, suspensions, etc.                1.414(e)–1 Definition of church plan.
                                                                       (temporary).                                          1.414(f)–1 Definition of multiemployer plan.
                                                                   1.411(a)–5 Service included in determination              1.414(g)–1 Definition of plan administrator.
                                                                       of nonforfeitable percentage.                         1.414(l)–1 Mergers and consolidations of
                                                                   1.411(a)–6 Year of service; hours of service;                 plans or transfers of plan assets.
                                                                       breaks in service.                                    1.414(q)–1 Highly compensated employee.
                                                                   1.411(a)–7 Definitions and special rules.                 1.414(q)–1T Highly compensated employee
                                                                   1.411(a)–8 Changes in vesting schedule.                       (temporary).
                                                                   1.411(a)–8T Changes in vesting schedule                   1.414(r)–0 Table of contents.
                                                                       (temporary).                                          1.414(r)–1 Requirements applicable to quali-
                                                                   1.411(a)–9 Amendment of break in service                      fied separate lines of business.
                                                                       rules; transitional period.                           1.414(r)–2 Line of business.
                                                                   1.411(a)–11 Restriction and valuation of dis-             1.414(r)–3 Separate line of business.
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                                                                       tributions.                                           1.414(r)–4 Qualified separate line of busi-
                                                                   1.411(a)(13)–1 Statutory hybrid plans.                        ness—fifty-employee and notice require-
                                                                   1.411(b)–1 Accrued benefit requirements.                      ments.

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                                                                   Internal Revenue Service, Treasury                                                                  Pt. 1
                                                                   1.414(r)–5 Qualified separate line of busi-               1.422–1 Incentive stock options; general
                                                                       ness—administrative scrutiny require-                     rules.
                                                                       ment—safe harbors.                                    1.422–2 Incentive stock options defined.
                                                                   1.414(r)–6 Qualified separate line of busi-               1.422–3 Stockholder approval of incentive
                                                                       ness—administrative scrutiny require-                     stock option plans.
                                                                       ment—individual determinations.                       1.422–4 $100,000 limitation for incentive
                                                                   1.414(r)–7 Determination of the employees of                  stock options.
                                                                       an employer’s qualified separate lines of             1.423–1 Applicability of section 421(a).
                                                                       business.                                             1.423–2 Employee stock purchase plan de-
                                                                   1.414(r)–8 Separate application of section                    fined.
                                                                       410(b).                                               1.424–1 Definitions and special rules applica-
                                                                   1.414(r)–9 Separate application of section                    ble to statutory options.
                                                                       401(a)(26).                                           1.426–1.429 [Reserved]
                                                                   1.414(r)–10 Separate application of section               1.430(d)–1 Determination of target normal
                                                                       129(d)(8). [Reserved]                                     cost and funding target.
                                                                   1.414(r)–11 Definitions and special rules.                1.430(f)–1 Effect of prefunding balance and
                                                                   1.414(s)–1 Definition of compensation.                        funding standard carryover balance.
                                                                   1.414(v)–1 Catch-up contributions.                        1.430(g)–1 Valuation date and valuation of
                                                                   1.414(w)–1 Permissible withdrawals from eli-                  plan assets.
                                                                       gible automatic contribution arrange-                 1.430(h)(2)–1 Interest rates used to deter-
                                                                       ments.                                                    mine present value.
                                                                   1.415(a)–1 General rules with respect to lim-             1.430(h)(3)–1 Mortality tables used to deter-
                                                                       itations on benefits and contributions                    mine present value.
                                                                       under qualified plans.                                1.430(h)(3)–2 Plan-specific substitute mor-
                                                                   1.415(b)–1 Limitations for defined benefit                    tality tables used to determine present
                                                                       plans.                                                    value.
                                                                   1.415(b)–2 Multiple annuity starting dates                1.430(i)–1 Special rules for plans in at-risk
                                                                       [Reserved].                                               status.
                                                                   1.415(c)–1 Limitations for defined contribu-              1.431(c)(6)–1 Mortality tables used to deter-
                                                                       tion plans.                                               mine current liability.
                                                                   1.415(c)–2 Compensation.                                  1.432–1.435 [Reserved]
                                                                   1.415(d)–1 Cost-of-living adjustments.                    1.436–0 Table of contents.
                                                                   1.415(f)–1 Aggregating plans.                             1.436–1 Limits on benefits and benefit accru-
                                                                   1.415(g)–1 Disqualification of plans and                      als under single employer defined benefit
                                                                       trusts.                                                   plans.
                                                                   1.415(j)–1 Limitation year.                               1.437–1.440 [Reserved]
                                                                   1.416–1 Questions and answers on top-heavy                  AUTHORITY: 26 U.S.C. 401(m)(9) and 26
                                                                       plans.                                                U.S.C. 7805.
                                                                   1.417(a)(3)–1 Required explanation of quali-                Section 1.401–12 also issued under 26 U.S.C.
                                                                       fied joint and survivor annuity and quali-            401(d)(1).
                                                                       fied preretirement survivor annuity.                    Section 1.401(a)–1 also issued under 26
                                                                   1.417(e)–1 Restrictions and valuations of dis-            U.S.C. 401
                                                                       tributions from plans subject to sections               Section 1.401(a)(2)–1 also issued under Mul-
                                                                       401(a)(11) and 417.                                   tiemployer Pension Plan Amendments Act,
                                                                   1.417(e)–1T Restrictions and valuations of                Public Law 96–364, 410, (94 Stat. 1208,
                                                                       distributions from plans subject to sec-              1308)(1980).
                                                                       tions 401(a)(11) and 417. (Temporary)                   Section 1.401(a)(5)–1 also issued under 26
                                                                   1.419–1T Treatment of welfare benefit funds.              U.S.C. 401(a)(5).
                                                                       (Temporary)                                             Section 1.401(a)(9)–1 also issued under 26
                                                                   1.419A–1T Qualified asset account limita-                 U.S.C. 401(a)(9).
                                                                       tion of additions to account. (Tem-                     Section 1.401(a)(9)–2 also issued under 26
                                                                       porary)                                               U.S.C. 401(a)(9).
                                                                   1.419A–2T Qualified asset account limita-                   Section 1.401(a)(9)–3 also issued under 26
                                                                       tion for collectively bargained funds.                U.S.C. 401(a)(9).
                                                                       (Temporary)                                             Section 1.401(a)(9)–4 also issued under 26
                                                                   1.419A(f)(6)–1 Exception for 10 or more em-               U.S.C. 401(a)(9).
                                                                       ployer plan.                                            Section 1.401(a)(9)–5 also issued under 26
                                                                   1.420–1 Significant reduction in retiree                  U.S.C. 401(a)(9).
                                                                       health coverage during the cost mainte-                 Section 1.401(a)(9)–6 also issued under 26
                                                                       nance period.                                         U.S.C. 401(a)(9).
                                                                                                                               Section 1.401(a)(9)–7 also issued under 26
                                                                                CERTAIN STOCK OPTIONS
                                                                                                                             U.S.C. 401(a)(9).
                                                                   1.421–1 Effective dates and meaning and use                 Section 1.401(a)(9)–8 also issued under 26
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                                                                       of certain terms.                                     U.S.C. 401(a)(9).
                                                                   1.421–1 Meaning and use of certain terms.                   Section 1.401(a)(9)–9 also issued under 26
                                                                   1.421–2 General rules.                                    U.S.C. 401(a)(9).

                                                                                                                         9



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                                                                   § 1.401–0                                                               26 CFR Ch. I (4–1–11 Edition)
                                                                     Section 1.401(a)(17)–1 also issued under 26               Section 1.410(b)–8 also issued under 26
                                                                   U.S.C. 401(a)(17).                                        U.S.C. 410(b)(6).
                                                                     Sections 1.401(a)(26)–1 through (a)(26)–9 also            Section 1.410(b)–9 also issued under 26
                                                                   issued under 26 U.S.C. 401(a)(26).                        U.S.C. 410(b)(6).
                                                                     Section 1.401(a)(35)–1 is also issued under 26            Section 1.410(b)–10 also issued under 26
                                                                   U.S.C. 401(a)(35).                                        U.S.C. 410(b)(6).
                                                                     Section 1.401(a)–21 also issued under 26                  Section 1.411(a)–7 also issued under 26
                                                                   U.S.C. 401 and section 104 of the Electronic              U.S.C. 411(a)(7)(B)(i).
                                                                   Signatures in Global and National Com-                      Section 1.411(a)(13)–1 also issued under 26
                                                                   merce Act, Public Law 106–229 (114 Stat. 464).            U.S.C. 411(a)(13).
                                                                     Section 1.401(b)–1 also issued under 26                   Section 1.411(b)(5)–1 also issued under 26
                                                                   U.S.C. 401(b).                                            U.S.C. 411(b)(5).
                                                                     Section 1.401(k)–3 is also issued under 26                Section 1.411(d)–3 also issued under 26
                                                                   U.S.C. 401(m)(9).                                         U.S.C. 411(d)(6) and section 645(b) of the Eco-
                                                                     Section 1.401(l)–0 through 1.401(l)–6 also              nomic Growth and Tax Relief Reconciliation
                                                                   issued under 26 U.S.C. 401(l).                            Act of 2001, Public Law 107–16 (115 Stat. 38).
                                                                     Section 1.402A–1 is also issued under 26                  Section 1.411(d)–4 also issued under 26
                                                                   U.S.C. 402A                                               U.S.C. 411(d)(6).
                                                                     Section 1.403(b)–6 also issued under 26                   Section 1.411(d)–6 issued under Reorganiza-
                                                                   U.S.C. 403(b)(10).                                        tion Plan No. 4 of 1978, 29 U.S.C. 1001nt.
                                                                     Section 1.408–2 also issued under 26 U.S.C.               §§ 1.414(c)–1 through 1.414(c)–5 also issued
                                                                   408(a) and 26 U.S.C. 408(q).                              under 26 U.S.C. 414(c).
                                                                     Section 1.404(k)–3 is also issued under sec-              Section 1.414(c)–5 also issued under 26
                                                                   tions 26 U.S.C. 162(k) and 404(k)(5)(A).                  U.S.C. 414(b), (c), and (o).
                                                                     Section 1.408–4 also issued under 26 U.S.C.               Section 1.414(q)–1T also issued under 26
                                                                   408.                                                      U.S.C. 414(q).
                                                                                                                               Sections 1.414(r)–0 through 1.414(r)–7 also
                                                                     Section 1.408–8 also issued under 26 U.S.C.
                                                                                                                             issued under 26 U.S.C. 414(r).
                                                                   408(a)(6) and (b)(3).
                                                                                                                               Section 1.414(r)–8 also issued under 26
                                                                     Section 1.408–11 also issued under 26 U.S.C.
                                                                                                                             U.S.C. 410(b) and 414(r).
                                                                   408.
                                                                                                                               Section 1.414(r)–9 also issued under 26
                                                                     Section 1.408(q)–1 also issued under 26
                                                                                                                             U.S.C. 401(a)(26) and 414(r).
                                                                   U.S.C. 408(q).
                                                                                                                               Section 1.414(r)–10 also issued under 26
                                                                     Section 1.408A–1 also issued under 26 U.S.C.
                                                                                                                             U.S.C. 129 and 414(r).
                                                                   408A.                                                       Section 1.414(r)–1 also issued under 26
                                                                     Section 1.408A–2 also issued under 26 U.S.C.            U.S.C. 414(r).
                                                                   408A.                                                       Section 1.414(s)–1 also issued under 26
                                                                     Section 1.408A–3 also issued under 26 U.S.C.            U.S.C. 414(s).
                                                                   408A.                                                       Section 1.417(e)–1 also issued under 26
                                                                     Section 1.408A–4 also issued under 26 U.S.C.            U.S.C. 417(e)(3)(A)(ii)(II).
                                                                   408A.                                                       Section 1.417(e)–1T also issued under 26
                                                                     Section 1.408A–5 also issued under 26 U.S.C.            U.S.C. 417(e)(3)(A)(ii)(II).
                                                                   408A.                                                       Section 1.419A(f)(6)–1 also issued under 26
                                                                     Section 1.408A–6 also issued under 26 U.S.C.            U.S.C. 419A(i).
                                                                   408A.                                                       Section 1.420–1 also issued under 26 U.S.C.
                                                                     Section 1.408A–7 also issued under 26 U.S.C.            420(c)(3)(E).
                                                                   408A.
                                                                     Section 1.408A–8 also issued under 26 U.S.C.             DEFERRED COMPENSATION, ETC.
                                                                   408A.
                                                                     Section 1.408A–9 also issued under 26 U.S.C.            PENSION, PROFIT-SHARING, STOCK BONUS
                                                                   408A.                                                                  PLANS, ETC.
                                                                     Section 1.409(p)–1 is also issued under 26
                                                                   U.S.C. 409(p)(7).                                         § 1.401–0 Scope and definitions.
                                                                     Section 1.410(b)–2 also issued under 26
                                                                   U.S.C. 410(b)(6).                                            (a) In general. Sections 1.401 through
                                                                     Section 1.410(b)–3 also issued under 26                 1.401–14 (inclusive) reflect the provi-
                                                                   U.S.C. 410(b)(6).                                         sions of section 401 prior to amendment
                                                                     Section 1.410(b)–4 also issued under 26                 by the Employee Retirement Income
                                                                   U.S.C. 410(b)(6).                                         Security Act of 1974. The sections fol-
                                                                     Section 1.410(b)–5 also issued under 26                 lowing      § 1.401–14   and     preceding
                                                                   U.S.C. 410(b)(6).                                         § 1.402(a)–1 (hereafter referred to in this
                                                                     Section 1.410(b)–6 also issued under 26
                                                                   U.S.C. 410(b)(6) and section 664 of the Eco-
                                                                                                                             section as the ‘‘Post-ERISA Regula-
                                                                   nomic Growth and Tax Relief Reconciliation                tions’’) reflect the provisions of section
                                                                                                                             401 after amendment by such Act.
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                                                                   Act of 2001 (Public Law 107–16, 115 Stat. 38).
                                                                     Section 1.410(b)–7 also issued under 26                    (b) Definitions. For purposes of the
                                                                   U.S.C. 410(b)(6).                                         Post-ERISA regulations—

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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–1

                                                                     (1) Qualified plan. The term ‘‘quali-                   employer, but also in the profits of an
                                                                   fied plan’’ means a plan which satisfies                  affiliated employer who is entitled to
                                                                   the requirements of section 401(a).                       deduct his contributions to the plan
                                                                     (2) Qualified trust. The term ‘‘quali-                  under section 404(a)(3)(B) (see para-
                                                                   fied trust’’ means a trust which satis-                   graph (b)(1)(iii) of this section).
                                                                   fies the requirements of section 401(a).                    (3) In order for a trust forming part
                                                                   (Sec. 411 Internal Revenue Code of 1954 (88               of a pension, profit-sharing, or stock
                                                                   Stat. 901; 26 U.S.C. 411))                                bonus plan to constitute a qualified
                                                                   [T.D. 7501, 42 FR 42320, Aug. 23, 1977]                   trust under section 401(a), the fol-
                                                                                                                             lowing tests must be met:
                                                                   § 1.401–1 Qualified       pension,  profit-                 (i) It must be created or organized in
                                                                         sharing, and stock bonus plans.                     the United States, as defined in section
                                                                      (a) Introduction. (1) Sections 401                     7701(a)(9), and it must be maintained at
                                                                   through 405 relate to pension, profit-                    all times as a domestic trust in the
                                                                   sharing, stock bonus, and annuity                         United States;
                                                                   plans, compensation paid under a de-                        (ii) It must be part of a pension, prof-
                                                                   ferred-payment plan, and bond pur-                        it-sharing, or stock bonus plan estab-
                                                                   chase plans. Section 401(a) prescribes                    lished by an employer for the exclusive
                                                                   the requirements which must be met                        benefit of his employees or their bene-
                                                                   for qualification of a trust forming                      ficiaries (see paragraph (b)(2) through
                                                                   part of a pension, profit-sharing, or                     (5) of this section);
                                                                   stock bonus plan.                                           (iii) It must be formed or availed of
                                                                      (2) A qualified pension, profit-shar-                  for the purpose of distributing to the
                                                                   ing, or stock bonus plan is a definite                    employees or their beneficiaries the
                                                                   written program and arrangement                           corpus and income of the fund accumu-
                                                                   which is communicated to the employ-                      lated by the trust in accordance with
                                                                   ees and which is established and main-                    the plan, and, in the case of a plan
                                                                   tained by an employer—                                    which covers (as defined in paragraph
                                                                      (i) In the case of a pension plan, to                  (a)(2) of § 1.401–10) any self-employed in-
                                                                   provide for the livelihood of the em-                     dividual, the time and method of such
                                                                   ployees or their beneficiaries after the                  distribution must satisfy the require-
                                                                   retirement of such employees through                      ments of section 401(a)(9) with respect
                                                                   the payment of benefits determined                        to each employee covered by the plan
                                                                   without regard to profits (see para-                      (see paragraph (e) of § 1.401–11);
                                                                   graph (b)(1)(i) of this section);
                                                                      (ii) In the case of a profit-sharing                     (iv) It must be impossible under the
                                                                   plan, to enable employees or their                        trust instrument at any time before
                                                                   beneficiaries to participate in the prof-                 the satisfaction of all liabilities with
                                                                   its of the employer’s trade or business,                  respect to employees and their bene-
                                                                   or in the profits of an affiliated em-                    ficiaries under the trust, for any part
                                                                   ployer who is entitled to deduct his                      of the corpus or income to be used for,
                                                                   contributions to the plan under section                   or diverted to, purposes other than for
                                                                   404(a)(3)(B), pursuant to a definite for-                 the exclusive benefit of the employees
                                                                   mula for allocating the contributions                     or their beneficiaries (see § 1.401–2);
                                                                   and for distributing the funds accumu-                      (v) It must be part of a plan which
                                                                   lated under the plan (see paragraph                       benefits prescribed percentages of the
                                                                   (b)(1)(ii) of this section); and                          employees, or which benefits such em-
                                                                      (iii) In the case of a stock bonus plan,               ployees as qualify under a classifica-
                                                                   to provide employees or their bene-                       tion set up by the employer and found
                                                                   ficiaries benefits similar to those of                    by the Commissioner not to be dis-
                                                                   profit-sharing plans, except that such                    criminatory in favor of certain speci-
                                                                   benefits are distributable in stock of                    fied classes of employees (see § 1.401–3
                                                                   the employer, and that the contribu-                      and, in addition, see § 1.401–12 for spe-
                                                                   tions by the employer are not nec-                        cial rules as to plans covering owner-
                                                                   essarily dependent upon profits. If the                   employees);
                                                                   employer’s contributions are dependent                      (vi) It must be part of a plan under
                                                                   upon profits, the plan may enable em-                     which contributions or benefits do not
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                                                                   ployees or their beneficiaries to par-                    discriminate in favor of certain speci-
                                                                   ticipate not only in the profits of the                   fied classes of employees (see § 1.401–4);

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                                                                   § 1.401–1                                                               26 CFR Ch. I (4–1–11 Edition)

                                                                     (vii) It must be part of a plan which                   benefits not customarily included in a
                                                                   provides the nonforfeitable rights de-                    pension plan such as layoff benefits or
                                                                   scribed in section 401(a)(7) (see § 1.401–                benefits for sickness, accident, hos-
                                                                   6);                                                       pitalization, or medical expenses (ex-
                                                                     (viii) If the trust forms part of a pen-                cept medical benefits described in sec-
                                                                   sion plan, the plan must provide that                     tion 401(h) as defined in paragraph (a)
                                                                   forfeitures must not be applied to in-                    of § 1.401–14).
                                                                   crease the benefits any employee would                       (ii) A profit-sharing plan is a plan es-
                                                                   receive under such plan (see § 1.401–7);                  tablished and maintained by an em-
                                                                     (ix) It must, if the plan benefits any                  ployer to provide for the participation
                                                                   self-employed individual who is an                        in his profits by his employees or their
                                                                   owner-employee, satisfy the additional                    beneficiaries. The plan must provide a
                                                                   requirements for qualification con-                       definite predetermined formula for al-
                                                                   tained in section 401(a)(10) and (d).                     locating the contributions made to the
                                                                     (4) For taxable years beginning after                   plan among the participants and for
                                                                   December 31, 1962, self-employed indi-                    distributing the funds accumulated
                                                                   viduals may be included in qualified                      under the plan after a fixed number of
                                                                   plans. See §§ 1.401–10 through 1.401–13.                  years, the attainment of a stated age,
                                                                     (b) General rules. (1)(i) A pension plan                or upon the prior occurrence of some
                                                                   within the meaning of section 401(a) is                   event such as layoff, illness, disability,
                                                                   a plan established and maintained by                      retirement, death, or severance of em-
                                                                   an employer primarily to provide sys-                     ployment. A formula for allocating the
                                                                   tematically for the payment of defi-                      contributions among the participants
                                                                   nitely determinable benefits to his em-                   is definite if, for example, it provides
                                                                   ployees over a period of years, usually                   for an allocation in proportion to the
                                                                   for life, after retirement. Retirement                    basic compensation of each partici-
                                                                   benefits generally are measured by,                       pant. A plan (whether or not it con-
                                                                   and based on, such factors as years of                    tains a definite predetermined formula
                                                                   service and compensation received by                      for determining the profits to be shared
                                                                   the employees. The determination of                       with the employees) does not qualify
                                                                   the amount of retirement benefits and                     under section 401(a) if the contribu-
                                                                   the contributions to provide such bene-                   tions to the plan are made at such
                                                                   fits are not dependent upon profits.                      times or in such amounts that the plan
                                                                   Benefits are not definitely deter-                        in operation discriminates in favor of
                                                                   minable if funds arising from forfeit-                    officers, shareholders, persons whose
                                                                   ures on termination of service, or other                  principal duties consist in supervising
                                                                   reason, may be used to provide in-                        the work of other employees, or highly
                                                                   creased benefits for the remaining par-                   compensated employees. For the rules
                                                                   ticipants (see § 1.401–7, relating to the                 with respect to discrimination, see
                                                                   treatment of forfeitures under a quali-                   §§ 1.401–3 and 1.401–4. A profit-sharing
                                                                   fied pension plan). A plan designed to                    plan within the meaning of section 401
                                                                   provide benefits for employees or their                   is primarily a plan of deferred com-
                                                                   beneficiaries to be paid upon retire-                     pensation, but the amounts allocated
                                                                   ment or over a period of years after re-                  to the account of a participant may be
                                                                   tirement will, for the purposes of sec-                   used to provide for him or his family
                                                                   tion 401(a), be considered a pension                      incidental life or accident or health in-
                                                                   plan if the employer contributions                        surance.
                                                                   under the plan can be determined actu-                       (iii) A stock bonus plan is a plan es-
                                                                   arially on the basis of definitely deter-                 tablished and maintained by an em-
                                                                   minable benefits, or, as in the case of                   ployer to provide benefits similar to
                                                                   money purchase pension plans, such                        those of a profit-sharing plan, except
                                                                   contributions are fixed without being                     that the contributions by the employer
                                                                   geared to profits. A pension plan may                     are not necessarily dependent upon
                                                                   provide for the payment of a pension                      profits and the benefits are distribut-
                                                                   due to disability and may also provide                    able in stock of the employer company.
                                                                   for the payment of incidental death                       For the purpose of allocating and dis-
                                                                   benefits through insurance or other-                      tributing the stock of the employer
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                                                                   wise. However, a plan is not a pension                    which is to be shared among his em-
                                                                   plan if it provides for the payment of                    ployees or their beneficiaries, such a

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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–1

                                                                   plan is subject to the same require-                      benefited may be persons who are offi-
                                                                   ments as a profit-sharing plan.                           cers and shareholders. However, a plan
                                                                     (iv) As to inclusion of full-time life                  is not for the exclusive benefit of em-
                                                                   insurance salesmen within the class of                    ployees in general if, by any device
                                                                   persons considered to be employees, see                   whatever, it discriminates either in eli-
                                                                   section 7701(a)(20).                                      gibility requirements, contributions, or
                                                                     (2) The term ‘‘plan’’ implies a perma-                  benefits in favor of employees who are
                                                                   nent as distinguished from a temporary                    officers, shareholders, persons whose
                                                                   program. Thus, although the employer                      principal duties consist in supervising
                                                                   may reserve the right to change or ter-                   the work of other employees, or the
                                                                   minate the plan, and to discontinue                       highly compensated employees. See
                                                                   contributions thereunder, the abandon-                    section 401(a) (3), (4), and (5). Similarly,
                                                                   ment of the plan for any reason other                     a stock bonus or profit-sharing plan is
                                                                   than business necessity within a few                      not a plan for the exclusive benefit of
                                                                   years after it has taken effect will be                   employees in general if the funds
                                                                   evidence that the plan from its incep-                    therein may be used to relieve the em-
                                                                   tion was not a bona fide program for                      ployer from contributing to a pension
                                                                   the exclusive benefit of employees in                     plan operating concurrently and cov-
                                                                   general. Especially will this be true if,                 ering the same employees. All of the
                                                                   for example, a pension plan is aban-                      surrounding      and      attendant     cir-
                                                                   doned soon after pensions have been                       cumstances and the details of the plan
                                                                   fully funded for persons in favor of                      will be indicative of whether it is a
                                                                   whom discrimination is prohibited                         bona fide stock bonus, pension, or prof-
                                                                   under section 401(a). The permanency                      it-sharing plan for the exclusive ben-
                                                                   of the plan will be indicated by all of                   efit of employees in general. The law is
                                                                   the    surrounding     facts    and    cir-               concerned not only with the form of a
                                                                   cumstances, including the likelihood of                   plan but also with its effects in oper-
                                                                   the employer’s ability to continue con-                   ation. For example, section 401(a)(5)
                                                                   tributions as provided under the plan.                    specifies certain provisions which of
                                                                   In the case of a profit-sharing plan,                     themselves are not discriminatory.
                                                                   other than a profit-sharing plan which                    However, this does not mean that a
                                                                   covers employees and owner-employees                      plan containing these provisions may
                                                                   (see section 401(d)(2)(B)), it is not nec-                not be discriminatory in actual oper-
                                                                   essary that the employer contribute                       ation.
                                                                   every year or that he contribute the                        (4) A plan is for the exclusive benefit
                                                                   same amount or contribute in accord-                      of employees or their beneficiaries
                                                                   ance with the same ratio every year.                      even though it may cover former em-
                                                                   However, merely making a single or                        ployees as well as present employees
                                                                   occasional contribution out of profits                    and employees who are temporarily on
                                                                   for employees does not establish a plan                   leave, as, for example, in the Armed
                                                                   of profit-sharing. To be a profit-sharing                 Forces of the United States. A plan
                                                                   plan, there must be recurring and sub-                    covering only former employees may
                                                                   stantial contributions out of profits for                 qualify under section 401(a) if it com-
                                                                   the employees. In the event a plan is                     plies with the provisions of section
                                                                   abandoned,     the    employer      should                401(a)(3)(B), with respect to coverage,
                                                                   promptly notify the district director,                    and section 401(a)(4), with respect to
                                                                   stating the circumstances which led to                    contributions and benefits, as applied
                                                                   the discontinuance of the plan.                           to all of the former employees. The
                                                                     (3) If the plan is so designed as to                    term ‘‘beneficiaries’’ of an employee
                                                                   amount to a subterfuge for the dis-                       within the meaning of section 401 in-
                                                                   tribution of profits to shareholders, it                  cludes the estate of the employee, de-
                                                                   will not qualify as a plan for the exclu-                 pendents of the employee, persons who
                                                                   sive benefit of employees even though                     are the natural objects of the employ-
                                                                   other employees who are not share-                        ee’s bounty, and any persons des-
                                                                   holders are also included under the                       ignated by the employee to share in
                                                                   plan. The plan must benefit the em-                       the benefits of the plan after the death
                                                                   ployees in general, although it need                      of the employee.
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                                                                   not provide benefits for all of the em-                     (5)(i) No specific limitations are pro-
                                                                   ployees. Among the employees to be                        vided in section 401(a) with respect to

                                                                                                                        13



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                                                                   § 1.401–2                                                               26 CFR Ch. I (4–1–11 Edition)

                                                                   investments which may be made by the                      with respect to such income. See para-
                                                                   trustees of a trust qualifying under                      graph (e) of § 1.6012–2 and paragraph
                                                                   section 401(a). Generally, the contribu-                  (a)(5) of § 1.6012–3 for requirements with
                                                                   tions may be used by the trustees to                      respect to such returns. For informa-
                                                                   purchase any investments permitted by                     tion required to be furnished periodi-
                                                                   the trust agreement to the extent al-                     cally by an employer with respect to
                                                                   lowed by local law. However, such a                       the qualification of a plan, see
                                                                   trust will be subject to tax under sec-                   §§ 1.404(a)–2, 1.404(a)–2A, and 1.6033–
                                                                   tion 511 with respect to any ‘‘unrelated                  2(a)(2)(ii)(i).
                                                                   business taxable income’’ (as defined in
                                                                   section 512) realized by it from its in-                  [T.D. 6500, 25 FR 11670, Nov. 26, 1960, as
                                                                                                                             amended by T.D. 6675, 28 FR 10118, Sept. 17,
                                                                   vestments.
                                                                                                                             1963; T.D. 6722, 29 FR 5071, Apr. 14, 1964; T.D.
                                                                      (ii) Where the trust funds are in-                     7168, 37 FR 5024, Mar. 9, 1972; T.D. 7428, 41 FR
                                                                   vested in stock or securities of, or                      34619, Aug. 16, 1976]
                                                                   loaned to, the employer or other person
                                                                   described in section 503(b), full disclo-                 § 1.401–2 Impossibility of diversion
                                                                   sure must be made of the reasons for                           under the trust instrument.
                                                                   such arrangement and the conditions
                                                                                                                               (a) In general. (1) Under section
                                                                   under which such investments are
                                                                                                                             401(a)(2) a trust is not qualified unless
                                                                   made in order that a determination
                                                                                                                             under the trust instrument it is impos-
                                                                   may be made whether the trust serves
                                                                                                                             sible (in the taxable year and at any
                                                                   any purpose other than constituting
                                                                                                                             time thereafter before the satisfaction
                                                                   part of a plan for the exclusive benefit
                                                                                                                             of all liabilities to employees or their
                                                                   of employees. The trustee shall report
                                                                                                                             beneficiaries covered by the trust) for
                                                                   any of such investments on the return
                                                                                                                             any part of the trust corpus or income
                                                                   which under section 6033 it is required
                                                                   to file and shall with respect to any                     to be used for, or diverted to, purposes
                                                                   such investment furnish the informa-                      other than for the exclusive benefit of
                                                                   tion required by such return. See                         such employees or their beneficiaries.
                                                                   § 1.6033–1.                                               This section does not apply to funds of
                                                                      (c) Portions of years. A qualified sta-                the trust which are allocated to pro-
                                                                   tus must be maintained throughout the                     vide medical benefits described in sec-
                                                                   entire taxable year of the trust in                       tion 401(h) as defined in paragraph (a)
                                                                   order for the trust to obtain any ex-                     of § 1.401–14. For the rules prohibiting
                                                                   emption for such year. But see section                    diversion of such funds and the require-
                                                                   401(a)(6) and § 1.401–3.                                  ment of reversion to the employer after
                                                                      (d) Plan of several employers. A trust                 satisfaction of all liabilities under the
                                                                   forming part of a plan of several em-                     medical benefits account, see para-
                                                                   ployers for their employees will be                       graph (c) (4) and (5) of § 1.401–14. For
                                                                   qualified if all the requirements are                     rules permitting reversion to the em-
                                                                   otherwise satisfied.                                      ployer of amounts held in a section 415
                                                                      (e) Determination of exemptions and re-                suspense acount, see § 1.401(a)–2(b).
                                                                   turns. (1) An employees’ trust may re-                      (2) As used in section 401(a)(2), the
                                                                   quest a determination letter as to its                    phrase ‘‘if under the trust instrument
                                                                   qualification under section 401 and ex-                   it is impossible’’ means that the trust
                                                                   emption under section 501. For the pro-                   instrument must definitely and affirm-
                                                                   cedure for obtaining such a determina-                    atively make it impossible for the non-
                                                                   tion letter see paragraph (l) of § 601.201                exempt diversion or use to occur,
                                                                   of this chapter (Statement of Proce-                      whether by operation or natural termi-
                                                                   dural Rules).                                             nation of the trust, by power of revoca-
                                                                      (2) A trust which qualifies under sec-                 tion or amendment, by the happening
                                                                   tion 401(a) and which is exempt under                     of a contingency, by collateral arrange-
                                                                   section 501(a) must file a return in ac-                  ment, or by any other means. Although
                                                                   cordance with section 6033 and the reg-                   it is not essential that the employer re-
                                                                   ulations thereunder. See §§ 1.6033–1 and                  linquish all power to modify or termi-
                                                                   1.6033–2(a)(3). In case such a trust real-                nate the rights of certain employees
                                                                   izes any unrelated business taxable in-                   covered by the trust, it must be impos-
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                                                                   come, as defined in section 512, such                     sible for the trust funds to be used or
                                                                   trust is also required to file a return                   diverted for purposes other than for the

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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–3

                                                                   exclusive benefit of his employees or                     result of an erroneous actuarial com-
                                                                   their beneficiaries.                                      putation.
                                                                     (3) As used in section 401(a)(2), the                      (2) The term ‘‘liabilities’’ as used in
                                                                   phrase ‘‘purposes other than for the ex-                  section 401(a)(2) includes both fixed and
                                                                   clusive benefit of his employees or                       contingent obligations to employees.
                                                                   their beneficiaries’’ includes all objects                For example, if 1,000 employees are
                                                                   or aims not solely designed for the                       covered by a trust forming part of a
                                                                   proper satisfaction of all liabilities to                 pension plan, 300 of whom have satis-
                                                                   employees or their beneficiaries cov-                     fied all the requirements for a monthly
                                                                   ered by the trust.                                        pension, while the remaining 700 em-
                                                                     (b) Meaning of ‘‘liabilities’’. (1) The in-             ployees have not yet completed the re-
                                                                   tent and purpose in section 401(a)(2) of                  quired period of service, contingent ob-
                                                                   the phrase ‘‘prior to the satisfaction of                 ligations to such 700 employees have
                                                                   all liabilities with respect to employ-                   nevertheless arisen which constitute
                                                                   ees and their beneficiaries under the                     ‘‘liabilities’’ within the meaning of
                                                                   trust’’ is to permit the employer to re-                  that term. It must be impossible for
                                                                   serve the right to recover at the termi-                  the employer (or other non employee)
                                                                   nation of the trust, and only at such                     to recover any amounts other than
                                                                   termination, any balance remaining in                     such amounts as remain in the trust
                                                                   the trust which is due to erroneous ac-                   because of ‘‘erroneous actuarial com-
                                                                   tuarial computations during the pre-                      putations’’ after the satisfaction of all
                                                                   vious life of the trust. A balance due to                 fixed and contingent obligations. Fur-
                                                                   an ‘‘erroneous actuarial computation’’                    thermore, the trust instrument must
                                                                   is the surplus arising because actual                     contain a definite affirmative provision
                                                                   requirements differ from the expected                     to this effect, irrespective of whether
                                                                   requirements even though the latter                       the obligations to employees have their
                                                                   were based upon previous actuarial                        source in the trust instrument itself, in
                                                                   valuations of liabilities or determina-                   the plan of which the trust forms a
                                                                   tions of costs of providing pension ben-                  part, or in some collateral instrument
                                                                   efits under the plan and were made by                     or arrangement forming a part of such
                                                                   a person competent to make such de-                       plan, and regardless of whether such
                                                                   terminations in accordance with rea-                      obligations are, technically speaking,
                                                                   sonable assumptions as to mortality,                      liabilities of the employer, of the trust,
                                                                   interest, etc., and correct procedures                    or of some other person forming a part
                                                                   relating to the method of funding. For                    of the plan or connected with it.
                                                                   example, a trust has accumulated as-                      [T.D. 6500, 25 FR 11672, Nov. 26, 1960, as
                                                                   sets of $1,000,000 at the time of liquida-                amended by T.D. 6722, 29 FR 5072, Apr. 14,
                                                                   tion, determined by acceptable actu-                      1964; T.D. 7748, 46 FR 1695, Jan. 7, 1981]
                                                                   arial procedures using reasonable as-
                                                                   sumptions as to interest, mortality,                      § 1.401–3 Requirements as to coverage.
                                                                   etc., as being necessary to provide the                      (a)(1) In order to insure that stock
                                                                   benefits in accordance with the provi-                    bonus, pension, and profit-sharing
                                                                   sions of the plan. Upon such liquida-                     plans are utilized for the welfare of em-
                                                                   tion it is found that $950,000 will satisfy               ployees in general, and to prevent the
                                                                   all of the liabilities under the plan. The                trust device from being used for the
                                                                   surplus of $50,000 arises, therefore, be-                 principal benefit of shareholders, offi-
                                                                   cause of the difference between the                       cers, persons whose principal duties
                                                                   amounts actuarially determined and                        consist in supervising the work of
                                                                   the amounts actually required to sat-                     other employees, or highly paid em-
                                                                   isfy the liabilities. This $50,000, there-                ployees, or as a means of tax avoid-
                                                                   fore, is the amount which may be re-                      ance, a trust will not be qualified un-
                                                                   turned to the employer as the result of                   less it is part of a plan which satisfies
                                                                   an erroneous actuarial computation. If,                   the coverage requirements of section
                                                                   however, the surplus of $50,000 had been                  401(a)(3). However, if the plan covers
                                                                   accumulated as a result of a change in                    any individual who is an owner-em-
                                                                   the benefit provisions or in the eligi-                   ployee, as defined in section 401(c)(3),
                                                                   bility requirements of the plan, the                      the requirements of section 401(a)(3)
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                                                                   $50,000 could not revert to the employer                  and this section are not applicable to
                                                                   because such surplus would not be the                     such plan, but the plan must satisfy

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                                                                   § 1.401–3                                                                                                 26 CFR Ch. I (4–1–11 Edition)

                                                                   the requirements of section 401(d) (see                                                       (c) Since, for the purpose of section
                                                                   § 1.401–12).                                                                                401, a profit-sharing plan is a plan
                                                                      (2) The percentage requirements in                                                       which provides for distributing the
                                                                   section 401(a)(3)(A) refer to a percent-                                                    funds accumulated under the plan after
                                                                   age of all the active employees, includ-                                                    a fixed number of years, the attain-
                                                                   ing employees temporarily on leave,                                                         ment of a stated age, or upon the prior
                                                                   such as those in the Armed Forces of                                                        occurrence of some event such as ill-
                                                                   the United States, if such employees                                                        ness, disability, retirement, death, lay-
                                                                   are eligible under the plan.                                                                off, or severance of employment, em-
                                                                      (3) The application of section
                                                                                                                                                               ployees who receive the amounts allo-
                                                                   401(a)(3)(A) may be illustrated by the
                                                                                                                                                               cated to their accounts before the expi-
                                                                   following example:
                                                                                                                                                               ration of such a period of time or the
                                                                     Example. A corporation adopts a plan at a                                                 occurrence of such a contingency shall
                                                                   time when it has 1,000 employees. The plan                                                  not be considered covered by a profit-
                                                                   provides that all full-time employees who
                                                                                                                                                               sharing plan in determining whether
                                                                   have been employed for a period of two years
                                                                   and have reached the age of 30 shall be eligi-                                              the plan meets the coverage require-
                                                                   ble to participate. The plan also requires                                                  ments of section 401(a)(3) (A) and (B).
                                                                   participating employees to contribute 3 per-                                                Thus, in case a plan permits employees
                                                                   cent of their monthly pay. At the time the                                                  to receive immediately the amounts al-
                                                                   plan is made effective 100 of the 1,000 employ-                                             located to their accounts, or to have
                                                                   ees had not been employed for a period of
                                                                                                                                                               such amounts paid to a profit- sharing
                                                                   two years. Fifty of the employees were sea-
                                                                   sonal employees whose customary employ-                                                     plan for them, the employees who re-
                                                                   ment did not exceed five months in any cal-                                                 ceive the shares immediately shall not,
                                                                   endar year. Twenty-five of the employees                                                    for the purpose of section 401, be con-
                                                                   were part-time employees whose customary                                                    sidered covered by a profit-sharing
                                                                   employment did not exceed 20 hours in any                                                   plan.
                                                                   one week. One hundred and fifty of the full-
                                                                                                                                                                 (d) Section 401(a)(5) sets out certain
                                                                   time employees who had been employed for
                                                                   two years or more had not yet reached age                                                   classifications that will not in them-
                                                                   30. The requirements of section 401(a)(3)(A)                                                selves be considered discriminatory.
                                                                   will be met if 540 employees are covered by                                                 However, those so designated are not
                                                                   the plan, as shown by the following computa-                                                intended to be exclusive. Thus, plans
                                                                   tion:                                                                                       may qualify under section 401(a)(3)(B)
                                                                   (i) Total employees with respect to whom the per-
                                                                       centage requirements are applicable (1,000
                                                                                                                                                               even though coverage thereunder is
                                                                       minus 175 (100 plus 50 plus 25) ) .....................                      825        limited to employees who have either
                                                                   (ii) Employees not eligible to participate because                                          reached a designated age or have been
                                                                       of age requirements ...........................................              150
                                                                                                                                                               employed for a designated number of
                                                                   (iii) Total employees eligible to participate ............                       675        years, or who are employed in certain
                                                                   (iv) Percentage of employees in item (i) eligible to                                        designated departments or are in other
                                                                       participate ...........................................................    81+%
                                                                   (v) Minimum number of participating employees                                               classifications, provided the effect of
                                                                       to qualify the plan (80 percent of 675) ..............                       540        covering only such employees does not
                                                                                                                                                               discriminate in favor of officers, share-
                                                                   If only 70 percent, or 578, of the 825 employ-
                                                                   ees satisfied the age and service require-
                                                                                                                                                               holders, employees whose principal du-
                                                                   ments, then 462 (80 percent of 578) partici-                                                ties consist in supervising the work of
                                                                   pating employees would satisfy the percent-                                                 other employees, or highly com-
                                                                   age requirements.                                                                           pensated employees. For example, if
                                                                     (b) If a plan fails to qualify under the                                                  there are 1,000 employees, and the plan
                                                                   percentage requirements of section                                                          is written for only salaried employees,
                                                                   401(a)(3)(A), it may still qualify under                                                    and consequently only 500 employees
                                                                   section 401(a)(3)(B) provided always                                                        are covered, that fact alone will not
                                                                   that (as required by section 401(a) (3)                                                     justify the conclusion that the plan
                                                                   and (4)) the plan’s eligibility condi-                                                      does not meet the coverage require-
                                                                   tions, benefits, and contributions do                                                       ments of section 401(a)(3)(B). Con-
                                                                   not discriminate in favor of employees                                                      versely, if a contributory plan is of-
                                                                   who are officers, shareholders, persons                                                     fered to all of the employees but the
                                                                   whose principal duties consist in super-                                                    contributions required of the employee
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                                                                   vising the work of other employees, or                                                      participants are so burdensome as to
                                                                   the highly compensated employees.                                                           make the plan acceptable only to the

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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–3

                                                                   highly paid employees, the classifica-                    mately offset by the old-age, survivors,
                                                                   tion will be considered discriminatory                    and disability insurance benefits which
                                                                   in favor of such highly paid employees.                   are provided by the Social Security Act
                                                                     (e)(1) Section 401(a)(5) contains a pro-                and which are not attributable to em-
                                                                   vision to the effect that a classifica-                   ployee contributions under the Federal
                                                                   tion shall not be considered discrimi-                    Insurance Contributions Act, the plan
                                                                   natory within the meaning of section                      will be considered to be properly inte-
                                                                   401(a)(3)(B) merely because all employ-                   grated with the Social Security Act
                                                                   ees whose entire annual remuneration                      and will, therefore, not be considered
                                                                   constitutes ‘‘wages’’ under section                       discriminatory.
                                                                   3121(a)(1) (for purposes of the Federal                     (2)(i) For purposes of determining
                                                                   Insurance Contributions Act, chapter                      whether a plan is properly integrated
                                                                   21 of the Code) are excluded from the                     with the Social Security Act, the
                                                                   plan. A reference to section 3121(a)(1)                   amount of old-age, survivors, and dis-
                                                                   for years after 1954 shall be deemed a                    ability insurance benefits which may
                                                                   reference to section 1426(a)(1) of the In-                be considered as attributable to em-
                                                                   ternal Revenue Code of 1939 for years                     ployer contributions under the Federal
                                                                   before 1955. This provision, in conjunc-                  Insurance Contributions Act is com-
                                                                   tion with section 401(a)(3)(B), is in-                    puted on the basis of the following:
                                                                   tended to permit the qualification of                       (A) The rate at which the maximum
                                                                   plans which supplement the old-age,                       monthly old-age insurance benefit is
                                                                   survivors, and disability insurance ben-                  provided under the Social Security Act
                                                                   efits under the Social Security Act (42                   is considered to be the average of (1)
                                                                   U.S.C. ch. 7). Thus, a classification                     the rate at which the maximum benefit
                                                                   which excludes all employees whose en-                    currently payable under the Act (i.e.,
                                                                   tire remuneration constitutes ‘‘wages’’                   in 1971) is provided to an employee re-
                                                                   under section 3121(a)(1), will not be                     tiring at age 65, and (2) the rate at
                                                                   considered discriminatory merely be-
                                                                                                                             which the maximum benefit ultimately
                                                                   cause of such exclusion. Similarly, a
                                                                                                                             payable under the Act (i.e., in 2010) is
                                                                   plan which includes all employees will
                                                                                                                             provided to an employee retiring at age
                                                                   not be considered discriminatory solely
                                                                                                                             65. The resulting figure is 43 percent of
                                                                   because the contributions or benefits
                                                                                                                             the average monthly wage on which
                                                                   based on that part of their remunera-
                                                                                                                             such benefit is computed.
                                                                   tion which is excluded from wages
                                                                   under section 3121(a)(1) differ from the                    (B) The total old-age, survivors, and
                                                                   contributions or benefits based on that                   disability insurance benefits with re-
                                                                   part of their remuneration which is not                   spect to an employee is considered to
                                                                   so excluded. However, in making his                       be 162 percent of the employee’s old-
                                                                   determination with respect to dis-                        age insurance benefits. The resulting
                                                                   crimination in classification under sec-                  figure is 70 percent of the average
                                                                   tion 401(a)(3)(B), the Commissioner will                  monthly wage on which it is computed.
                                                                   consider whether the total benefits re-                     (C) In view of the fact that social se-
                                                                   sulting to each employee under the                        curity benefits are funded through
                                                                   plan and under the Social Security                        equal contributions by the employer
                                                                   Act, or under the Social Security Act                     and employee, 50 percent of such bene-
                                                                   only, establish an integrated and cor-                    fits is considered attributable to em-
                                                                   related retirement system satisfying                      ployer contributions. The resulting fig-
                                                                   the tests of section 401(a). If, therefore,               ure is 35 percent of the average month-
                                                                   a classification of employees under a                     ly wage on which the benefit is com-
                                                                   plan results in relatively or proportion-                 puted.
                                                                   ately greater benefits for employees                      Under these assumptions, the max-
                                                                   earning above any specified salary                        imum old-age, survivors, and disability
                                                                   amount or rate than for those below                       insurance benefits which may be at-
                                                                   any such salary amount or rate, it may                    tributed to employer contributions
                                                                   be found to be discriminatory within                      under the Federal Insurance Contribu-
                                                                   the meaning of section 401(a)(3)(B). If,                  tions Act is an amount equal to 35 per-
                                                                   however, the relative or proportionate                    cent of the earnings on which they are
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                                                                   differences in benefits which result                      computed. These computations take
                                                                   from such classification are approxi-                     into account all amendments to the

                                                                                                                        17



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                                                                   § 1.401–3                                                               26 CFR Ch. I (4–1–11 Edition)

                                                                   Society Security Act through the So-                      actuarially equivalent to benefit pay-
                                                                   cial Security Amendments of 1971 (85                      ments under the normal form.
                                                                   Stat. 6). It is recognized, however, that                   (F) In the case of any employee who
                                                                   subsequent amendments to this Act                         reaches normal retirement age before
                                                                   may increase the percentages described                    completion of 15 years of service with
                                                                   in (A) or (B) of this subdivision (i), or                 the employer, the rate at which normal
                                                                   both. If this occurs, the method used in                  annual retirement benefits are pro-
                                                                   this subparagraph for determining the                     vided for him with respect to his aver-
                                                                   integration formula may result in a                       age annual compensation in excess of
                                                                   figure under (C) of this subdivision (i)                  the plan’s integration level applicable
                                                                   which is greater than 35 percent and a                    to him does not exceed 21⁄2 percent for
                                                                   plan could be amended to adopt such                       each year of service.
                                                                   greater figure in its benefit formula. In                   (G) Normal retirement age is not
                                                                   order to minimize future plan amend-                      lower than age 65.
                                                                   ments of this nature, an employer may                       (H) Benefits payable in case of retire-
                                                                   anticipate future changes in the Social                   ment or any other severance of em-
                                                                   Security Act by immediately utilizing                     ployment before normal retirement age
                                                                   such a higher figure, but not in excess                   cannot exceed the actuarial equivalent
                                                                   of 371⁄2 percent, in developing its ben-                  of the maximum normal retirement
                                                                   efit formula.                                             benefits, which might be provided in
                                                                     (ii) Under the rules provided in this
                                                                                                                             accordance with (A) through (G) of this
                                                                   subparagraph, a classification of em-
                                                                                                                             subdivision (ii), multiplied by a frac-
                                                                   ployees under a noncontributory pen-
                                                                                                                             tion, the numerator of which is the ac-
                                                                   sion or annuity plan which limits cov-
                                                                                                                             tual number of years of service of the
                                                                   erage to employees whose compensa-
                                                                                                                             employee at retirement or severance,
                                                                   tion exceeds the applicable integration
                                                                                                                             and the denominator of which is the
                                                                   level under the plan will not be consid-
                                                                                                                             total number of years of service he
                                                                   ered discriminatory within the mean-
                                                                                                                             would have had if he had remained in
                                                                   ing of section 401(a)(3)(B), where:
                                                                                                                             service until normal retirement age. A
                                                                     (A) The integration level applicable
                                                                                                                             special disabled life mortality table
                                                                   to an employee is his covered com-
                                                                   pensation, or is (1) in the case of an ac-                shall not be used in determining the
                                                                   tive employee, a stated dollar amount                     actuarial equivalent in the case of sev-
                                                                   uniformly applicable to all active em-                    erance due to disability.
                                                                   ployees which is not greater than the                       (iii) (A) If a plan was properly inte-
                                                                   covered compensation of any active                        grated with old-age and survivors in-
                                                                   employee, and (2) in the case of a re-                    surance benefits on July 5, 1968 (herein-
                                                                   tired employee an amount which is not                     after referred to as an ‘‘existing plan’’),
                                                                   greater than his covered compensation.                    then, notwithstanding the fact that
                                                                   (For rules relating to determination of                   such plan does not satisfy the require-
                                                                   an employee’s covered compensation,                       ments of subdivision (ii) of this sub-
                                                                   see subdivision (iv) of this subpara-                     paragraph, it will continue to be con-
                                                                   graph.)                                                   sidered properly integrated with such
                                                                     (B) The rate at which normal annual                     benefits until January 1, 1972. Such
                                                                   retirement benefits are provided for                      plan will be considered properly inte-
                                                                   any employee with respect to his aver-                    grated after December 31, 1971, so long
                                                                   age annual compensation in excess of                      as the benefits provided under the plan
                                                                   the plan’s integration level applicable                   for each employee equal the sum of—
                                                                   to him does not exceed 371⁄2 percent.                       (1) The benefits to which he would be
                                                                     (C) Average annual compensation is                      entitled under a plan which, on July 5,
                                                                   defined to mean the average annual                        1968, would have been considered prop-
                                                                   compensation over the highest 5 con-                      erly integrated with old-age and sur-
                                                                   secutive years.                                           vivors insurance benefits, and under
                                                                     (D) There are no benefits payable in                    which benefits are provided at the
                                                                   case of death before retirement.                          same (or a lesser) rate with respect to
                                                                     (E) The normal form of retirement                       the same portion of compensation with
                                                                   benefits is a straight life annuity, and                  respect to which benefits are provided
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                                                                   if there are optional forms, the benefit                  under the existing plan, multiplied by
                                                                   payments under each optional form are                     the percentage of his total service with

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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–3

                                                                   the employer performed before a speci-                    described in subdivision (ii) or (iii)
                                                                   fied date not later than January 1, 1972;                 (whichever is applicable) of this sub-
                                                                   and                                                       paragraph, or providing benefits re-
                                                                     (2) The benefits to which he would be                   lated to years of service, or providing
                                                                   entitled under a plan satisfying the re-                  benefits purchasable by stated em-
                                                                   quirements of subdivision (ii) of this                    ployer contributions, or under the
                                                                   subparagraph, multiplied by the per-                      terms of which the employees con-
                                                                   centage of his total service with the                     tribute, or providing a combination of
                                                                   employer performed on and after such                      any of the foregoing variations, the
                                                                   specified date.                                           plan will be considered to be properly
                                                                     (B) A plan which, on July 5, 1968, was                  integrated only if, as determined by
                                                                   properly integrated with old-age and                      the Commissioner, the benefits pro-
                                                                   survivors insurance benefits will not be                  vided thereunder by employer con-
                                                                   considered not to be properly inte-                       tributions cannot exceed in value the
                                                                   grated with such benefits thereafter                      benefits described in subdivision (ii) or
                                                                   merely because such plan provides a                       (iii) (whichever is applicable) of this
                                                                   minimum benefit for each employee                         subparagraph. Similar principles will
                                                                   (other than an employee who owns, di-                     govern in determining whether a plan
                                                                   rectly or indirectly, stock possessing                    is properly integrated if participation
                                                                   more than 10 percent of the total com-                    therein is limited to employees earning
                                                                   bined voting power or value of all                        in excess of amounts other than those
                                                                   classes of stock of the employer cor-                     specified in subdivision (iv) of this sub-
                                                                   poration) equal to the benefit to which                   paragraph, or if it bases benefits or
                                                                   he would be entitled under the plan as                    contributions on compensation in ex-
                                                                   in effect on July 5, 1968, if he continued                cess of such amounts, or if it provides
                                                                   to earn annually until retirement the                     for an offset of benefits otherwise pay-
                                                                   same amount of compensation as he                         able under the plan on account of old-
                                                                   earned in 1967.                                           age, survivors, and disability insurance
                                                                     (C) If a plan was properly integrated                   benefits. Similar principles will govern
                                                                   with old-age and survivors insurance                      in determining whether a profit-shar-
                                                                   benefits on May 17, 1971, notwith-                        ing or stock bonus plan is properly in-
                                                                   standing the fact that such plan does                     tegrated with the Social Security Act.
                                                                   not satisfy the requirements of subdivi-                     (3) A plan supplementing the Social
                                                                   sion (ii) of this subparagraph, it will                   Security Act and excluding all employ-
                                                                   continue to be considered properly in-                    ees whose entire annual remuneration
                                                                   tegrated with such benefits until Janu-                   constitutes ‘‘wages’’ under section
                                                                   ary 1, 1972.                                              3121(a)(1) will not, however, be deemed
                                                                     (iv) For purposes of this subpara-                      discriminatory merely because, for ad-
                                                                   graph, an employee’s covered com-                         ministrative convenience, it provides a
                                                                   pensation is the amount of compensa-                      reasonable minimum benefit not to ex-
                                                                   tion with respect to which old-age in-                    ceed $20 a month.
                                                                   surance benefits would be provided for                       (4) Similar considerations, to the ex-
                                                                   him under the Social Security Act (as                     tent applicable in any case, will govern
                                                                   in effect at any uniformly applicable                     classifications       under     a     plan
                                                                   date occurring before the employee’s                      supplementing the benefits provided by
                                                                   separation from the service) if for each                  other Federal or State laws. See sec-
                                                                   year until he attains age 65 his annual                   tion 401(a)(5).
                                                                   compensation is at least equal to the                        (5) If a plan provides contributions or
                                                                   maximum amount of earnings subject                        benefits for a self-employed individual,
                                                                   to tax in each such year under the Fed-                   the rules relating to the integration of
                                                                   eral Insurance Contributions Act. A                       such a plan with the contributions or
                                                                   plan may provide that an employee’s                       benefits under the Social Security Act
                                                                   covered compensation is the amount                        are set forth in paragraph (c) of § 1.401–
                                                                   determined under the preceding sen-                       11 and paragraph (h) of § 1.401–12.
                                                                   tence rounded to the nearest whole                           (6) This paragraph (e) does not apply
                                                                   multiple of a stated dollar amount                        to plan years beginning on or after
                                                                   which does not exceed $600.                               January 1, 1989.
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                                                                     (v) In the case of an integrated plan                      (f) An employer may designate sev-
                                                                   providing benefits different from those                   eral trusts or a trust or trusts and an

                                                                                                                        19



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                                                                   § 1.401–4                                                               26 CFR Ch. I (4–1–11 Edition)

                                                                   annuity plan or plans as constituting                     amount allocated to an employee
                                                                   one plan which is intended to qualify                     which is withdrawn before the expira-
                                                                   under section 401(a)(3), in which case                    tion of such a period of time or the oc-
                                                                   all of such trusts and plans taken as a                   currence of such a contingency shall
                                                                   whole may meet the requirements of                        not be considered in determining
                                                                   such section. The fact that such com-                     whether the contributions under the
                                                                   bination of trusts and plans fails to                     plan discriminate in favor of officers,
                                                                   qualify as one plan does not prevent                      shareholders, employees whose prin-
                                                                   such of the trusts and plans as qualify                   cipal duties consist in supervising the
                                                                   from meeting the requirements of sec-                     work of other employees, or highly
                                                                   tion 401(a).                                              compensated employees. Thus, in case
                                                                     (g) It is provided in section 401(a)(6)                 a plan permits employees to receive
                                                                   that a plan will satisfy the require-                     immediately the whole or any part of
                                                                   ments of section 401(a)(3), if on at least                the amounts allocated to their ac-
                                                                   one day in each quarter of the taxable                    counts, or to have the whole or any
                                                                   year of the plan it satisfies such re-                    part of such amounts paid to a profit-
                                                                   quirements. This makes it possible for                    sharing plan for them, any amounts
                                                                   a new plan requiring contributions                        which are received immediately shall
                                                                   from employees to qualify if by the end                   not, for the purpose of section 401, be
                                                                   of the quarter-year in which the plan is                  considered contributed to a profit-shar-
                                                                   adopted it secures sufficient contrib-                    ing plan.
                                                                   uting participants to meet the require-                     (iii) Funds in a stock bonus or profit-
                                                                   ments of section 401(a)(3). It also af-                   sharing plan arising from forfeitures on
                                                                   fords a period of time in which new                       termination of service, or other reason,
                                                                   participants may be secured to replace
                                                                                                                             must not be allocated to the remaining
                                                                   former participants, so as to meet the
                                                                                                                             participants in such a manner as will
                                                                   requirements of either subparagraph
                                                                                                                             effect the prohibited discrimination.
                                                                   (A) or (B) of section 401(a)(3).
                                                                                                                             With respect to forfeitures in a pension
                                                                   [T.D. 6500, 25 FR 11672, Nov. 26, 1960, as                plan, see § 1.401–7.
                                                                   amended by T.D. 6675, 28 FR 10119, Sept. 17,                (2)(i) Section 401(a)(5) sets out cer-
                                                                   1963; T.D. 6982, 33 FR 16499, Nov. 13, 1968; T.D.         tain provisions which will not in and of
                                                                   7134, 36 FR 13592, July 22, 1971; 36 FR 13990,
                                                                   July 29, 1971; T.D. 8359, 56 FR 47614, Sept. 19,
                                                                                                                             themselves be discriminatory within
                                                                   1991]                                                     the meaning of section 401 a) (3) or (4).
                                                                                                                             See § 1.401–3. Thus, a plan will not be
                                                                   § 1.401–4 Discrimination as to con-                       considered discriminatory merely be-
                                                                        tributions or benefits (before 1994).                cause the contributions or benefits
                                                                     (a)(1)(i) In order to qualify under sec-                bear a uniform relationship to total
                                                                   tion 401(a), a trust must not only meet                   compensation or to the basic or regular
                                                                   the coverage requirements of section                      rate of compensation, or merely be-
                                                                   401(a)(3), but, as provided in section                    cause the contributions or benefits
                                                                   401(a)(4), it must also be part of a plan                 based on that part of the annual com-
                                                                   under which there is no discrimination                    pensation of employees which is sub-
                                                                   in contributions or benefits in favor of                  ject to the Federal Insurance Contribu-
                                                                   officers, shareholders, employees whose                   tions Act (chapter 21 of the Code) differ
                                                                   principal duties consist in supervising                   from the contributions or benefits
                                                                   the work of other employees, or highly                    based on any excess of such annual
                                                                   compensated employees as against                          compensation over such part. With re-
                                                                   other employees whether within or                         gard to the application of the rules of
                                                                   without the plan.                                         section 401(a)(5) in the case of a plan
                                                                     (ii) Since, for the purpose of section                  which benefits a self-employed indi-
                                                                   401, a profit-sharing plan is a plan                      vidual, see paragraph (c) of § 1.401–11.
                                                                   which provides for distributing the                         (ii) The exceptions specified in sec-
                                                                   funds accumulated under the plan after                    tion 401(a)(5) are not an exclusive enu-
                                                                   a fixed number of years, the attain-                      meration, but are merely a recital of
                                                                   ment of a stated age, or upon the prior                   provisions      frequently   encountered
                                                                   occurrence of some event such as ill-                     which will not of themselves constitute
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                                                                   ness, disability, retirement, death, lay-                 forbidden discrimination in contribu-
                                                                   off, or severance of employment, any                      tions or benefits.

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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–4

                                                                     (iii) Variations in contributions or                    porated in the plan to prevent the dis-
                                                                   benefits may be provided so long as the                   crimination that may arise because of
                                                                   plan, viewed as a whole for the benefit                   an early termination of the plan, the
                                                                   of employees in general, with all its at-                 plan may in operation result in the dis-
                                                                   tendant circumstances, does not dis-                      crimination prohibited by section
                                                                   criminate in favor of employees within                    401(a)(4), unless other provisions are
                                                                   the enumerations with respect to                          later incorporated in the plan. Any
                                                                   which discrimination is prohibited.                       pension plan containing a provision de-
                                                                   Thus, benefits in a stock bonus or prof-                  scribed in this paragraph shall not fail
                                                                   it-sharing plan which vary by reason of                   to satisfy section 411(a), (d)(2) and (d)(3)
                                                                   an allocation formula which takes into                    merely by reason of such a plan provi-
                                                                   consideration years of service, or other                  sion. Paragraph (c)(7) of this section
                                                                   factors, are not prohibited unless they                   sets forth special early termination
                                                                   discriminate in favor of such employ-                     rules applicable to certain qualified de-
                                                                   ees.                                                      fined benefit plans for plan years af-
                                                                     (b) A plan which excludes all employ-                   fected by the Employee Retirement In-
                                                                   ees whose entire remuneration con-                        come Security Act of 1974 (‘‘ERISA’’).
                                                                   stitutes wages under section 3121(a)(1)                   Paragraph (c)(7) of this section does
                                                                   (relating to the Federal Insurance Con-                   not contain all the rules required by
                                                                   tributions Act), or a plan under which                    the enactment of ERISA.
                                                                   the contributions or benefits based on                      (2)(i) If employer contributions under
                                                                   that part of an employee’s remunera-                      a qualified pension plan may be used
                                                                   tion which is excluded from ‘‘wages’’                     for the benefit of an employee who is
                                                                   under such act differs from the con-                      among the 25 highest paid employees of
                                                                   tributions or benefits based on that                      the employer at the time the plan is es-
                                                                   part of the employee’s remuneration                       tablished and whose anticipated annual
                                                                   which is not so excluded, or a plan                       pension under the plan exceeds $1,500,
                                                                   under which the contributions or bene-                    such plan must provide that upon the
                                                                   fits differ because of any retirement                     occurrence of the conditions described
                                                                   benefit created under State or Federal                    in subdivision (ii) of this subparagraph,
                                                                   law, will not be discriminatory because                   the employer contributions which are
                                                                   of such exclusion or difference, pro-                     used for the benefit of any such em-
                                                                   vided the total benefits resulting under                  ployee are restricted in accordance
                                                                   the plan and under such law establish                     with subdivision (iii) of this subpara-
                                                                   an integrated and correlated retire-
                                                                                                                             graph.
                                                                   ment system satisfying the tests of
                                                                                                                               (ii) The restrictions described in sub-
                                                                   section 401(a).
                                                                                                                             division (iii) of this subparagraph be-
                                                                     (c)(1) Although a qualified plan may
                                                                   provide for termination at will by the                    come applicable if—
                                                                   employer or discontinuance of con-                          (A) The plan is terminated within 10
                                                                   tributions thereunder, this will not of                   years after its establishment,
                                                                   itself prevent a trust from being a                         (B) The benefits of an employee de-
                                                                   qualified trust. However, a qualified                     scribed in subdivision (i) of this sub-
                                                                   pension plan must expressly incor-                        paragraph become payable within 10
                                                                   porate provisions which comply with                       years after the establishment of the
                                                                   the restrictions contained in subpara-                    plan, or
                                                                   graph (2) of this paragraph at the time                     (C) The benefits of an employee de-
                                                                   the plan is established, unless (i) it is                 scribed in subdivision (i) of this sub-
                                                                   reasonably certain at the inception of                    paragraph become payable after the
                                                                   the plan that such restrictions would                     plan has been in effect for 10 years, and
                                                                   not affect the amount of contributions                    the full current costs of the plan for
                                                                   which may be used for the benefit of                      the first 10 years have not been funded.
                                                                   any employee, or (ii) the Commissioner                    In the case of an employee described in
                                                                   determines that such provisions are                       (B) of this subdivision, the restrictions
                                                                   not necessary to prevent the prohibited                   will remain applicable until the plan
                                                                   discrimination that may occur in the                      has been in effect for 10 years, but if at
                                                                   event of any early termination of the                     that time the full current costs have
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                                                                   plan. Although these provisions are the                   been funded the restrictions will no
                                                                   only provisions required to be incor-                     longer apply to the benefits payable to

                                                                                                                        21



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                                                                   § 1.401–4                                                               26 CFR Ch. I (4–1–11 Edition)

                                                                   such an employee. In the case of an em-                   employee still in the employer’s serv-
                                                                   ployee described in (B) or (C) of this                    ice.
                                                                   subdivision, if at the end of the first 10                  (vi) The following terms are defined
                                                                   years the full current costs are not                      for purposes of this subparagraph—
                                                                   met, the restrictions will continue to                      (A) The term ‘‘benefits’’ includes any
                                                                   apply until the full current costs are                    periodic income, any withdrawal values
                                                                   funded for the first time.                                payable to a living employee, and the
                                                                     (iii) The restrictions required under                   cost of any death benefits which may
                                                                   subdivision (i) of this subparagraph                      be payable after retirement on behalf
                                                                   must provide that the employer con-                       of an employee, but does not include
                                                                   tributions which may be used for the                      the cost of any death benefits with re-
                                                                   benefit of an employee described in                       spect to an employee before retirement
                                                                   such subdivision shall not exceed the                     nor the amount of any death benefits
                                                                   greater of $20,000, or 20 percent of the                  actually payable after the death of an
                                                                   first $50,000 of the annual compensation                  employee whether such death occurs
                                                                   of such employee multiplied by the                        before or after retirement.
                                                                   number of years between the date of                         (B) The term full current costs means
                                                                   the establishment of the plan and—                        the normal cost, as defined in § 1.404(a)–
                                                                     (A) The date of the termination of                      6, for all years since the effective date
                                                                   the plan,                                                 of the plan, plus interest on any un-
                                                                                                                             funded liability during such period.
                                                                     (B) In the case of an employee de-
                                                                                                                               (C) The term annual compensation of
                                                                   scribed in subdivision (ii)(B) of this
                                                                                                                             an employee means either such em-
                                                                   subparagraph, the date the benefit of
                                                                                                                             ployee’s average regular annual com-
                                                                   the employee becomes payable, if be-
                                                                                                                             pensation, or such average compensa-
                                                                   fore the date of the termination of the
                                                                                                                             tion over the last five years, or such
                                                                   plan, or
                                                                                                                             employee’s last annual compensation if
                                                                     (C) In the case of an employee de-                      such compensation is reasonably simi-
                                                                   scribed in subdivision (ii)(C) of this                    lar to his average regular annual com-
                                                                   subparagraph, the date of the failure to                  pensation for the five preceding years.
                                                                   meet the full current costs of the plan.                    (3) The amount of the employer con-
                                                                   However, if the full current costs of the                 tributions which can be used for the
                                                                   plan have not been met on the date de-                    benefit of a restricted employee may be
                                                                   scribed in (A) or (B) of this subdivision,                limited either by limiting the annual
                                                                   whichever is applicable, then the date                    amount of the employer contributions
                                                                   of the failure to meet such full current                  for the designated employee during the
                                                                   costs shall be substituted for the date                   period affected by the limitation, or by
                                                                   referred to in (A) or (B) of this subdivi-                limiting the amount of funds under the
                                                                   sion. For purposes of determining the                     plan which can be used for the benefit
                                                                   contributions which may be used for                       of such employee, regardless of the
                                                                   the benefit of an employee when (b) of                    amount of employer contributions.
                                                                   this subdivision applies, the number of                     (4) The restrictions contained in sub-
                                                                   years taken into account may be re-                       paragraph (2) of this paragraph may be
                                                                   computed for each year if the full cur-                   exceeded for the purpose of making
                                                                   rent costs of the plan are met for such                   current retirement income benefit pay-
                                                                   year.                                                     ments to retired employees who would
                                                                     (iv) For purposes of this subpara-                      otherwise be subject to such restric-
                                                                   graph, the employer contributions                         tions, if—
                                                                   which, at a given time, may be used for                     (i) The employer contributions which
                                                                   the benefits of an employee include                       may be used for any such employee in
                                                                   any unallocated funds which would be                      accordance with the restrictions con-
                                                                   used for his benefits if the plan were                    tained in subparagraph (2) of this para-
                                                                   then terminated or the employee were                      graph are applied either (A) to provide
                                                                   then to withdraw from the plan, as well                   level amounts of annuity in the basic
                                                                   as all contributions allocated up to                      form of benefit provided for under the
                                                                   that time exclusively for his benefits.                   plan for such employee at retirement
                                                                     (v) The provisions of this subpara-                     (or, if he has already retired, beginning
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                                                                   graph apply to a former or retired em-                    immediately), or (B) to provide level
                                                                   ployee of the employer, as well as to an                  amounts of annuity in an optional

                                                                                                                        22



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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–4

                                                                   form of benefit provided under the plan                   the case of an early termination of a
                                                                   if the level amount of annuity under                      qualified pension plan during any such
                                                                   such optional form of benefit is not                      taxable year, the employer contribu-
                                                                   greater than the level amount of annu-                    tions which may be used for the benefit
                                                                   ity under the basic form of benefit pro-                  of any employee must conform to the
                                                                   vided under the plan;                                     requirements of this paragraph. How-
                                                                     (ii) The annuity thus provided is sup-                  ever, any pension plan which is quali-
                                                                   plemented, to the extent necessary to                     fied on September 30, 1963, will not be
                                                                   provide the full retirement income ben-                   disqualified merely because it does not
                                                                   efits in the basic form called for under                  expressly include the provisions pre-
                                                                   the plan, by current payments to such                     scribed in this paragraph.
                                                                   employee as such benefits come due;                          (7)(i) A qualified defined benefit plan
                                                                   and                                                       subject to section 412 (without regard
                                                                     (iii) Such supplemental payments are                    to section 412(h)(2)) shall not be re-
                                                                   made at any time only if the full cur-                    quired to contain the restriction de-
                                                                   rent costs of the plan have then been                     scribed in paragraph (c)(2)(ii)(c) of this
                                                                   met, or the aggregate of such supple-                     section applicable to an employee in a
                                                                   mental payments for all such employ-                      plan whose full current costs for the
                                                                   ees does not exceed the aggregate em-                     first 10 years have not been funded.
                                                                   ployer contributions already made                            (ii) A qualified defined benefit plan
                                                                   under the plan in the year then cur-                      covered by section 4021(a) of ERISA
                                                                   rent.                                                     (‘‘qualified Title IV plan’’) shall satisfy
                                                                   If disability income benefits are pro-                    the restrictions in paragraph (c)(2) of
                                                                   vided under the plan, the plan may                        this section only if the plan satisfies
                                                                   contain like provisions with respect to                   this paragraph (c)(7). A plan satisfies
                                                                   the current payment of such benefits.                     this paragraph (c)(7) by providing that
                                                                     (5) If a plan has been changed so as to                 employer contributions which may be
                                                                   increase substantially the extent of                      used for the benefit of an employee de-
                                                                   possible discrimination as to contribu-                   scribed in paragraph (c)(2) of this sec-
                                                                   tions and as to benefits actually pay-                    tion who is a substantial owner, as de-
                                                                   able in event of the subsequent termi-                    fined in section 4022(b)(5) of ERISA,
                                                                   nation of the plan or the subsequent                      shall not exceed the greater of the dol-
                                                                   discontinuance of contributions there-                    lar amount described in paragraph
                                                                   under, then the provisions of this para-                  (c)(2)(iii) of this section or a dollar
                                                                   graph shall be applied to the plan as so                  amount which equals the present value
                                                                   changed as if it were a new plan estab-                   of the benefit guaranteed for such em-
                                                                   lished on the date of such change. How-                   ployee under section 4022 of ERISA, or
                                                                   ever, the provision in subparagraph                       if the plan has not terminated, the
                                                                   (2)(iii) of this paragraph that the unre-                 present value of the benefit that would
                                                                   stricted amount of employer contribu-                     be guaranteed if the plan terminated
                                                                   tions on behalf of any employee is at                     on the date the benefit commences, de-
                                                                   least $20,000 is applicable to the aggre-                 termined in accordance with regula-
                                                                   gate amount contributed by the em-                        tions of the Pension Benefit Guaranty
                                                                   ployer on behalf of such employee from                    Corporation (‘‘PBGC’’).
                                                                   the date of establishment of the origi-                      (iii) A plan satisfies this paragraph
                                                                   nal plan, and, for purposes of deter-                     (c)(7) by providing that employer con-
                                                                   mining if the employee’s anticipated                      tributions which may be used for the
                                                                   annual pension exceeds $1,500, both the                   benefit of all employees described in
                                                                   employer contributions on the employ-                     paragraph (c)(2) of this section (other
                                                                   ee’s behalf prior to the date of the                      than an employee who is a substantial
                                                                   change in the plan and those expected                     owner as defined in section 4022(b)(5) of
                                                                   to be made on his behalf subsequent to                    ERISA) shall not exceed the greater of
                                                                   the date of the change (based on the                      the dollar amount described in para-
                                                                   employee’s rate of compensation on the                    graph (c)(2)(iii) of this section or a dol-
                                                                   date of the change) are to be taken into                  lar amount which equals the present
                                                                   account.                                                  value of the maximum benefit de-
                                                                     (6) This paragraph shall apply to tax-                  scribed in section 4022(b)(3)(B) of
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                                                                   able years of a qualified plan com-                       ERISA (determined on the date the
                                                                   mencing after September 30, 1963. In                      plan terminates or on the date benefits

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                                                                   § 1.401–5                                                               26 CFR Ch. I (4–1–11 Edition)

                                                                   commence, whichever is earlier and de-                    ginning on or after January 1, 1996, see
                                                                   termined in accordance with regula-                       §§ 1.401(a)(4)–1 through 1.401(a)(4)–13.
                                                                   tions of PBGC) without regard to any                      (Secs. 411 (d)(2) and (3) and 7805 of the Inter-
                                                                   other limitations in section 4022 of                      nal Revenue Code of 1954 (68A Stat. 917, 88
                                                                   ERISA.                                                    Stat. 912; 26 U.S.C. 411(d)(2) and (3) and 7805))
                                                                      (iv) A plan provision satisfying this                  [T.D. 6500, 25 FR 11674, Nov. 26, 1960, as
                                                                   paragraph (c)(7) may be adopted by                        amended by T.D. 6675, 28 FR 10119, Sept. 17,
                                                                   amendment or by incorporation at the                      1963; T.D. 7934, 49 FR 1183, Jan. 10, 1984; 49 FR
                                                                   time of establishment. Any allocation                     2104, Jan. 18, 1984; T.D. 8360, 56 FR 47536,
                                                                                                                             Sept. 19, 1991; T.D. 8485, 58 FR 46778, Sept. 3,
                                                                   of assets attributable to employer con-                   1993]
                                                                   tributions to an employee which ex-
                                                                   ceeds the dollar limitation in this                       § 1.401–5 Period for which require-
                                                                   paragraph (c)(7) may be reallocated to                         ments of section 401(a) (3), (4), (5),
                                                                   prevent prohibited discrimination.                             and (6) are applicable with respect
                                                                                                                                  to plans put into effect before Sep-
                                                                      (v) The early termination rules in the                      tember 2, 1974.
                                                                   preceding subparagraphs (1) through (6)
                                                                   apply to a qualified Title IV plan ex-                       A pension, profit-sharing, stock
                                                                   cept where such rules are determined                      bonus, or annuity plan shall be consid-
                                                                                                                             ered as satisfying the requirements of
                                                                   by the Commissioner to be inconsistent
                                                                                                                             section 401(a) (3), (4), (5), and (6) for the
                                                                   with the rules of this paragraph (c)(7),
                                                                                                                             period beginning with the date on
                                                                   § 1.411(d)–2, and section 4044(b)(4) of                   which it was put into effect and ending
                                                                   ERISA. The early termination rules of                     with the 15th day of the third month
                                                                   this paragraph (c)(7) contain some of                     following the close of the taxable year
                                                                   the rules under section 401(a)(4) and                     of the employer in which the plan was
                                                                   (a)(7), as in effect on September 2, 1974,                put into effect, if all the provisions of
                                                                   and section 411(d) (2) and (3). Section                   the plan which are necessary to satisfy
                                                                   1.411(d)–2 also contains certain dis-                     such requirements are in effect by the
                                                                   crimination and vesting rules which                       end of such period and have been made
                                                                   are applicable to plan terminations.                      effective for all purposes with respect
                                                                      (vi) Paragraph (c)(7) of this section                  to the whole of such period. Thus, if an
                                                                   applies to plan terminations occurring                    employer in 1954 adopts such a plan as
                                                                   on or after March 12, 1984. For distribu-                 of January 1, 1954, and makes a return
                                                                   tions not on account of plan termi-                       on the basis of the calendar year, he
                                                                   nations, paragraph (c)(7) applies to dis-                 will have until March 15, 1955, to
                                                                   tributions in plan years beginning after                  amend his plan so as to make it satisfy
                                                                                                                             the requirements of section 401(a) (3),
                                                                   December 31, 1983. However, a plan may
                                                                                                                             (4), (5), and (6) for the calendar year
                                                                   elect to apply that paragraph to dis-
                                                                                                                             1954 provided that by March 15, 1955, all
                                                                   tributions not on account of plan ter-                    provisions of such plan necessary to
                                                                   mination on or after January 10, 1984.                    satisfy such requirements are in effect
                                                                      (d)(1) Except as provided in para-                     and have been made retroactive for all
                                                                   graph (d)(2) of this section, the provi-                  purposes to January 1, 1954, the effec-
                                                                   sions of this section do not apply to                     tive date of the plan. If an employer is
                                                                   plan years beginning on or after Janu-                    on a fiscal year basis, for example,
                                                                   ary 1, 1994. For rules applicable to plan                 April 1 to March 31, and in 1954 adopts
                                                                   years beginning on or after January 1,                    such a plan effective as of April 1, 1954,
                                                                   1994,     see    §§ 1.401(a)(4)–1 through                 he will have until June 15, 1955, to
                                                                   1.401(a)(4)–13.                                           amend his plan so as to make it satisfy
                                                                      (2) In the case of plans maintained by                 the requirements of section 401(a) (3),
                                                                   organizations exempt from income tax-                     (4), (5), and (6) for the fiscal year begin-
                                                                   ation under section 501(a), including                     ning April 1, 1954, provided that by
                                                                   plans subject to section 403(b)(12)(A)(i)                 June 15, 1955, all provisions of such
                                                                                                                             plan necessary to satisfy such require-
                                                                   (nonelective plans), the provisions of
                                                                                                                             ments are in effect and have been made
                                                                   this section do not apply to plan years
                                                                                                                             retroactive for all purposes to April 1,
                                                                   beginning on or after January 1, 1996.                    1954, the effective date of the plan. It
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                                                                   For rules applicable to plan years be-                    should be noted that under section
                                                                                                                             401(b) the period in which a plan may

                                                                                                                        24



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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–6

                                                                   be amended to qualify under section                       allocation may be satisfactory if pri-
                                                                   401(a) ends before the date on which                      ority is given to benefits for employees
                                                                   taxpayers other than corporations are                     over the age of 50 at the time of the
                                                                   required to file income tax returns. See                  termination of the plan, or those who
                                                                   section 6072. This section shall not                      then have at least 10 years of service, if
                                                                   apply to any pension, profit-sharing,                     there is no possibility of discrimina-
                                                                   stock bonus, or annuity plan put into                     tion in favor of employees who are offi-
                                                                   effect after September 1, 1974, and shall                 cers, shareholders, employees whose
                                                                   not apply with respect to any disquali-                   principal duties consist in supervising
                                                                   fying provision to which § 1.401(b)–1 ap-                 the work of other employees, or highly
                                                                   plies.                                                    compensated employees.
                                                                   [T.D. 6500, 25 FR 11674, Nov. 26, 1960; as                   (iii) Subdivisions (i) and (ii) of this
                                                                   amended by T.D. 7436, 41 FR 42653, Sept. 28,              subparagraph do not require the alloca-
                                                                   1976]                                                     tion of amounts to the account of any
                                                                                                                             employee if such amounts are not re-
                                                                   § 1.401–6 Termination of a qualified                      quired to be used to satisfy the liabil-
                                                                         plan.                                               ities with respect to employees and
                                                                      (a) General rules. (1) In order for a                  their beneficiaries under the plan (see
                                                                   pension, profit-sharing, or stock bonus                   section 401(a)(2)).
                                                                   trust to satisfy the requirements of                         (b) Termination defined. (1) Whether a
                                                                   section 401, the plan of which such                       plan is terminated is generally a ques-
                                                                   trust forms a part must expressly pro-                    tion to be determined with regard to
                                                                   vide that, upon the termination of the                    all the facts and circumstances in a
                                                                   plan or upon the complete discontinu-                     particular case. For example, a plan is
                                                                   ance of contributions under the plan,                     terminated when, in connection with
                                                                   the rights of each employee to benefits                   the winding up of the employer’s trade
                                                                   accrued to the date of such termi-                        or business, the employer begins to dis-
                                                                   nation or discontinuance, to the extent                   charge his employees. However, a plan
                                                                   then funded, or the rights of each em-                    is not terminated, for example, merely
                                                                   ployee to the amounts credited to his                     because an employer consolidates or
                                                                   account at such time, are nonforfeit-                     replaces that plan with a comparable
                                                                   able. As to what constitutes nonforfeit-                  plan. Similarly, a plan is not termi-
                                                                   able rights of an employee, see para-                     nated merely because the employer
                                                                   graph (a)(2) of § 1.402(b)–1.                             sells or otherwise disposes of his trade
                                                                      (2)(i) A qualified plan must also pro-                 or business if the acquiring employer
                                                                   vide for the allocation of any pre-                       continues the plan as a separate and
                                                                   viously unallocated funds to the em-                      distinct plan of its own, or consolidates
                                                                   ployees covered by the plan upon the                      or replaces that plan with a com-
                                                                   termination of the plan or the com-                       parable plan. See paragraph (d)(4) of
                                                                   plete discontinuance of contributions                     § 1.381(c)(11)–1 for the definition of com-
                                                                   under the plan. Such provision may be                     parable plan. In addition, the Commis-
                                                                   incorporated in the plan at its incep-                    sioner may determine that other plans
                                                                   tion or by an amendment made prior to                     are comparable for purposes of this sec-
                                                                   the termination of the plan or the dis-                   tion.
                                                                   continuance of contributions there-                          (2) For purposes of this section, the
                                                                   under.                                                    term termination includes both a partial
                                                                      (ii) Any provision for the allocation                  termination and a complete termi-
                                                                   of unallocated funds is acceptable if it                  nation of a plan. Whether or not a par-
                                                                   specifies the method to be used and                       tial termination of a qualified plan oc-
                                                                   does not conflict with the provisions of                  curs when a group of employees who
                                                                   section 401(a)(4) and the regulations                     have been covered by the plan are sub-
                                                                   thereunder.       The      allocation  of                 sequently excluded from such coverage
                                                                   unallocated funds may be in cash or in                    either by reason of an amendment to
                                                                   the form of other benefits provided                       the plan, or by reason of being dis-
                                                                   under the plan. However, the allocation                   charged by the employer, will be deter-
                                                                   of the funds contributed by the em-                       mined on the basis of all the facts and
                                                                   ployer among the employees need not                       circumstances. Similarly, whether or
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                                                                   necessarily benefit all the employees                     not a partial termination occurs when
                                                                   covered by the plan. For example, an                      benefits or employer contributions are

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                                                                   § 1.401–7                                                               26 CFR Ch. I (4–1–11 Edition)

                                                                   reduced, or the eligibility or vesting                    are reallocated to prevent the discrimi-
                                                                   requirements under the plan are made                      nation prohibited by section 401(a)(4)
                                                                   less liberal, will be determined on the                   (see paragraph (c) of § 1.401–4).
                                                                   basis of all the facts and cir-                             (e) Effective date. This section shall
                                                                   cumstances. However, if a partial ter-                    apply to taxable years of a qualified
                                                                   mination of a qualified plan occurs, the                  plan commencing after September 30,
                                                                   provisions of section 401(a)(7) and this                  1963. In the case of the termination or
                                                                   section apply only to the part of the                     complete discontinuance (as defined in
                                                                   plan that is terminated.                                  this section) of any qualified plan dur-
                                                                     (c) Complete discontinuance defined. (1)                ing any such taxable year, the rights
                                                                   For purposes of this section, a com-                      accorded to each employee covered
                                                                   plete discontinuance of contributions                     under the plan must conform to the re-
                                                                   under the plan is contrasted with a sus-                  quirements of this section. However, a
                                                                   pension of contributions under the                        plan which is qualified on September
                                                                   plan, which is merely a temporary ces-                    30, 1963, will not be disqualified merely
                                                                   sation of contributions by the em-                        because it does not expressly include
                                                                   ployer. A complete discontinuance of                      the provisions prescribed by this sec-
                                                                   contributions may occur although                          tion.
                                                                   some amounts are contributed by the
                                                                                                                             [T.D. 6675, 28 FR 10120, Sept. 17, 1963]
                                                                   employer under the plan if such
                                                                   amounts are not substantial enough to                     § 1.401–7 Forfeitures under a qualified
                                                                   reflect the intent on the part of the                          pension plan.
                                                                   employer to continue to maintain the
                                                                   plan. The determination of whether a                        (a) General rules. In the case of a trust
                                                                   complete discontinuance of contribu-                      forming a part of a qualified pension
                                                                   tions under the plan has occurred will                    plan, the plan must expressly provide
                                                                   be made with regard to all the facts                      that forfeitures arising from severance
                                                                   and circumstances in the particular                       of employment, death, or for any other
                                                                   case, and without regard to the amount                    reason, must not be applied to increase
                                                                   of any contributions made under the                       the benefits any employee would other-
                                                                   plan by employees.                                        wise receive under the plan at any time
                                                                     (2) In the case of a pension plan, a                    prior to the termination of the plan or
                                                                   suspension of contributions will not                      the complete discontinuance of em-
                                                                   constitute a discontinuance if—                           ployer contributions thereunder. The
                                                                     (i) The benefits to be paid or made                     amounts so forfeited must be used as
                                                                   available under the plan are not af-                      soon as possible to reduce the employ-
                                                                   fected at any time by the suspension,                     er’s contributions under the plan. How-
                                                                   and                                                       ever, a qualified pension plan may an-
                                                                     (ii) The unfunded past service cost at                  ticipate the effect of forfeitures in de-
                                                                   any time (which includes the unfunded                     termining the costs under the plan.
                                                                   prior normal cost and unfunded inter-                     Furthermore, a qualified plan will not
                                                                   est on any unfunded cost) does not ex-                    be disqualified merely because a deter-
                                                                   ceed the unfunded past service cost as                    mination of the amount of forfeitures
                                                                   of the date of establishment of the                       under the plan is made only once dur-
                                                                   plan, plus any additional past service                    ing each taxable year of the employer.
                                                                   or supplemental costs added by amend-                       (b) Examples. The rules of paragraph
                                                                   ment.                                                     (a) of this section may be illustrated by
                                                                     (3) In any case in which a suspension                   the following examples:
                                                                   of a profit-sharing plan is considered a                    Example 1. The B Company Pension Trust
                                                                   discontinuance, the discontinuance be-                    forms a part of a pension plan which is fund-
                                                                   comes effective not later than the last                   ed by individual level annual premium annu-
                                                                   day of the taxable year of the employer                   ity contracts. The plan requires ten years of
                                                                   following the last taxable year of such                   service prior to obtaining a vested right to
                                                                   employer for which a substantial con-                     benefits under the plan. One of the com-
                                                                                                                             pany’s employees resigns his position after
                                                                   tribution was made under the profit-
                                                                                                                             two years of service. The insurance company
                                                                   sharing plan.                                             paid to the trustees the cash surrender value
                                                                     (d) Contributions or benefits which re-
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                                                                                                                             of the contract—$750. The B Company must
                                                                   main forfeitable. The provisions of this                  reduce its next contribution to the pension
                                                                   section do not apply to amounts which                     trust by this amount.

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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–8
                                                                     Example 2. The C Corporation’s trusteed                 treated for taxable years beginning
                                                                   pension plan has been in existence for 20                 after December 31, 1962, as a qualified
                                                                   years. It is funded by individual contracts               trust under section 401 if such account
                                                                   issued by an insurance company, and the
                                                                   premiums thereunder are paid annually.
                                                                                                                             meets the following requirements de-
                                                                   Under such plan, the annual premium ac-                   scribed in subdivisions (i) through (iii)
                                                                   crued for the year 1966 is due and is paid on             of this subparagraph:
                                                                   January 2, 1966, and on July 1 of the same                   (i) The custodial account must sat-
                                                                   year the plan is terminated due to the liq-               isfy all the requirements of section 401
                                                                   uidation of the employer. Some forfeitures                that are applicable to qualified trusts.
                                                                   were incurred and collected by the trustee                See subparagraph (2) of this paragraph.
                                                                   with respect to those participants whose em-                 (ii) The custodian of the custodial ac-
                                                                   ployment terminated between January 2 and
                                                                   July 1. The plan provides that the amount of
                                                                                                                             count must be a bank.
                                                                   such forfeitures is to be applied to provide                 (iii) The custodial agreement pro-
                                                                   additional annuity benefits for the remain-               vides that the investment of the funds
                                                                   ing employees covered by the plan. The pen-               in the account is to be made—
                                                                   sion plan of the C Corporation satisfies the                 (A) Solely in stock of one or more
                                                                   provisions of section 401(a)(8). Although for-            regulated investment companies which
                                                                   feitures are used to increase benefits in this            is registered in the name of the custo-
                                                                   case, this use of forfeitures is permissible
                                                                                                                             dian or its nominee and with respect to
                                                                   since no further contributions will be made
                                                                   under the plan.                                           which an employee who is covered by
                                                                                                                             the plan is the beneficial owner, or
                                                                     (c) Effective date. This section applies                   (B) Solely in annuity, endowment, or
                                                                   to taxable years of a qualified plan                      life insurance contracts, issued by an
                                                                   commencing after September 30, 1963.                      insurance company and held by the
                                                                   However, a plan which is qualified on                     custodian until distributed pursuant to
                                                                   September 30, 1963, will not be disquali-                 the terms of the plan. For purposes of
                                                                   fied merely because it does not ex-                       the preceding sentence, a face-amount
                                                                   pressly include the provisions pre-                       certificate described in section 401(g)
                                                                   scribed by this section.                                  and § 1.401–9 is treated as an annuity
                                                                   [T.D. 6675, 28 FR 10121, Sept. 17, 1963]                  issued by an insurance company.
                                                                                                                             See subparagraphs (3) and (4) of this
                                                                   § 1.401–8 Custodial accounts prior to                     paragraph.
                                                                        January 1, 1974.                                        (2) As a result of the requirement de-
                                                                      (a) Treatment of a custodial account as                scribed in subparagraph (1)(i) of this
                                                                   a qualified trust. For taxable years of a                 paragraph (relating to the require-
                                                                   plan beginning after December 31, 1962,                   ments applicable to qualified trusts),
                                                                   a custodial account may be used, in                       the custodial account must, for exam-
                                                                   lieu of a trust, under any pension, prof-                 ple, be created pursuant to a written
                                                                   it-sharing, or stock bonus plan, de-                      agreement which constitutes a valid
                                                                   scribed in section 401 if the require-                    contract under local law. In addition,
                                                                   ments of paragraph (b) of this section                    the terms of the contract must make it
                                                                   are met. A custodial account may be                       impossible, prior to the satisfaction of
                                                                   used under such a plan, whether the                       all liabilities with respect to the em-
                                                                   plan covers common-law employees,                         ployees and their beneficiaries covered
                                                                   self-employed individuals who are                         by the plan, for any part of the funds of
                                                                   treated as employees by reason of sec-                    the custodial account to be used for, or
                                                                   tion 401(c), or both. The use of a custo-                 diverted to, purposes other than for the
                                                                   dial account as part of a plan does not                   exclusive benefit of the employees or
                                                                   preclude the use of a trust or another                    their beneficiaries as provided for in
                                                                   custodial account as part of the same                     the plan (see paragraph (a) of § 1.401–2).
                                                                   plan. A plan under which a custodial                         (3) The requirement described in sub-
                                                                   account is used may be considered in                      paragraph (1)(iii) of this paragraph, re-
                                                                   connection with other plans of the em-                    lating to the investment of the funds of
                                                                   ployer in determining whether the re-                     the plan, applies, for example, to the
                                                                   quirements of section 401 are satisfied.                  employer contributions under the plan,
                                                                   For regulations relating to the period                    any employee contributions under the
                                                                   after December 31, 1973, see § 1.401(f)–11.               plan, and any earnings on such con-
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                                                                      (b) Rules applicable to custodial ac-                  tributions. Such requirement also ap-
                                                                   counts. (1) A custodial account shall be                  plies to capital gains realized upon the

                                                                                                                        27



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                                                                   § 1.401–9                                                               26 CFR Ch. I (4–1–11 Edition)

                                                                   sale of stock described in (A) of such                    custodial account will not thereafter
                                                                   subdivision, to any capital gain divi-                    be treated as a separate legal person,
                                                                   dends received in connection with such                    and the funds in such account shall be
                                                                   stock, and to any refunds described in                    treated as made available within the
                                                                   section 852(b)(3)(D)(ii) (relating to un-                 meaning of section 402(a)(1) to the em-
                                                                   distributed capital gains of a regulated                  ployees for whom they are held.
                                                                   investment company) which is received                       (e) Definitions. For purposes of this
                                                                   in connection with such stock. How-                       section—
                                                                   ever, since such requirement relates                        (1) The term bank means a bank as
                                                                   only to the investment of the funds of                    defined in section 401(d)(1).
                                                                   the plan, the custodian may deposit                         (2) The term regulated investment com-
                                                                   funds with a bank, in either a checking                   pany means any domestic corporation
                                                                   or savings account, while accumulating                    which issues only redeemable stock
                                                                   sufficient funds to make additional in-                   and is a regulated investment company
                                                                   vestments or while awaiting an appro-                     within the meaning of section 851(a)
                                                                   priate time to make additional invest-                    (but without regard to whether such
                                                                   ments.                                                    corporation meets the limitations of
                                                                     (4) The requirement in subparagraph                     section 851(b)).
                                                                   (1)(iii)(A) of this paragraph that an em-                 (Secs. 401(f)(2), 7805, Internal Revenue Code
                                                                   ployee covered by the plan be the bene-                   of 1954 (88 Stat. 939 and 68A Stat. 917; 26
                                                                   ficial owner of the stock does not mean                   U.S.C. 401(f)(2), 7805))
                                                                   that the employee who is the beneficial                   [T.D. 6675, 28 FR 10121, Sept. 17, 1963, as
                                                                   owner must have a nonforfeitable in-                      amended by T.D. 7565, 43 FR 41204, Sept. 15,
                                                                   terest in the stock. Thus, a plan may                     1978. Redesignated and amended by T.D. 7748,
                                                                   provide for forfeitures of an employee’s                  46 FR 1695, Jan. 7, 1981]
                                                                   interest in such stock in the same
                                                                   manner as plans which use a trust. In                     § 1.401–9 Face-amount       certificates—
                                                                   the event of a forfeiture of an employ-                        nontransferable annuity contracts.
                                                                   ee’s beneficial ownership in the stock                       (a) Face-amount certificates treated as
                                                                   of a regulated investment company,                        annuity contracts. Section 401(g) pro-
                                                                   the beneficial ownership of such stock                    vides that a face-amount certificate (as
                                                                   must pass to another employee covered                     defined in section 2(a)(15) of the Invest-
                                                                   by the plan.                                              ment Company Act of 1940 (15 U.S.C.
                                                                     (c) Effects of qualification. (1) Any cus-              sec. 80a–2) ) which is not transferable
                                                                   todial account which satisfies the re-                    within the meaning of paragraph (b)(3)
                                                                   quirements of section 401(f) shall be                     of this section shall be treated as an
                                                                   treated as a qualified trust for all pur-                 annuity contract for purposes of sec-
                                                                   poses of the Internal Revenue Code of                     tions 401 through 404 for any taxable
                                                                   1954. Accordingly, such a custodial ac-                   year of a plan subject to such sections
                                                                   count shall be treated as a separate                      beginning after December 31, 1962. Ac-
                                                                   legal person which is exempt from the                     cordingly, there may be established for
                                                                   income tax by section 501(a). On the                      any such taxable year a qualified plan
                                                                   other hand, such a custodial account is                   under which such face-amount certifi-
                                                                   required to file the returns described in                 cates are purchased for the partici-
                                                                   sections 6033 and 6047 and to supply any                  pating employees without the creation
                                                                   other information which a qualified                       of a trust or custodial account. How-
                                                                   trust is required to furnish.                             ever, for such a plan to qualify, the
                                                                     (2) In determining whether the funds                    plan must satisfy all the requirements
                                                                   of a custodial account are distributed                    applicable to a qualified annuity plan
                                                                   or made available to an employee or                       (see section 403(a) and the regulations
                                                                   his beneficiary, the rules which under                    thereunder).
                                                                   section 402(a) are applicable to trusts                      (b) Nontransferability of face-amount
                                                                   will also apply to the custodial account                  certificates and annuity contracts. (1)(i)
                                                                   as though it were a separate legal per-                   Section 401(g) provides that, in order
                                                                   son and not an agent of the employee.                     for any face-amount certificate, or any
                                                                     (d) Effect of loss of qualification. If a               other contract issued after December
                                                                   custodial account which has qualified                     31, 1962, to be subject to any provision
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                                                                   under section 401 fails to qualify under                  under sections 401 through 404 which is
                                                                   such section for any taxable year, such                   applicable to annuity contracts, as

                                                                                                                        28



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                                                                   Internal Revenue Service, Treasury                                                              § 1.401–9

                                                                   compared to other forms of invest-                        which it is a part, contains a provision
                                                                   ment, such certificate or contract must                   permitting the employee to designate a
                                                                   be nontransferable at any time when it                    beneficiary to receive the proceeds of
                                                                   is held by any person other than the                      the certificate or contract in the event
                                                                   trustee of a trust described in section                   of his death, or contains a provision
                                                                   401(a) and exempt under section 501(a).                   permitting the employee to elect to re-
                                                                   Thus, for example, in order for a group                   ceive a joint and survivor annuity, or
                                                                   or individual retirement income con-                      contains other similar provisions.
                                                                   tract to be treated as an annuity con-                      (4) A material modification in the
                                                                   tract, if such contract is not held by                    terms of an annuity contract con-
                                                                   the trustee of an exempt employees’                       stitutes the issuance of a new contract
                                                                   trust, it must satisfy the requirements                   regardless of the manner in which it is
                                                                   of this section. Furthermore, a face-                     made.
                                                                   amount certificate or an annuity con-                       (c) Examples. The rules of this section
                                                                   tract will be subject to the tax treat-                   may be illustrated by the following ex-
                                                                   ment under section 403(b) only if it sat-                 amples:
                                                                   isfies the requirements of section 401(g)
                                                                   and this section. Any certificate or                        Example 1. The P Employees’ Annuity Plan
                                                                   contract in order to satisfy the provi-                   is a nontrusteed plan which is funded by in-
                                                                   sions of this section must expressly                      dividual annuity contracts issued by the Y
                                                                                                                             Insurance Company. Each annuity contract
                                                                   contain the provisions that are nec-
                                                                                                                             issued by such company after December 31,
                                                                   essary to make such certificate or con-                   1962, provides, on its face, that it is ‘‘NOT
                                                                   tract not transferable within the mean-                   TRANSFERABLE’’. The terms of each such con-
                                                                   ing of this paragraph.                                    tract further provide that, ‘‘This contract
                                                                     (ii) In the case of any group contract                  may not be sold, assigned, discounted, or
                                                                   purchased by an employer under a plan                     pledged as collateral for a loan or as security
                                                                   to which sections 401 through 404 apply,                  for the performance of an obligation or for
                                                                   the restriction on transferability re-                    any other purpose, to any person other than
                                                                                                                             this company.’’ The annuity contracts of the
                                                                   quired by section 401(g) and this sec-
                                                                                                                             P Employees’ Annuity Plan satisfy the re-
                                                                   tion applies to the interest of the em-                   quirements of section 401(g) and this section.
                                                                   ployee participants under such group                        Example 2. The R Company Pension Trust
                                                                   contract but not to the interest of the                   forms a part of a pension plan which is fund-
                                                                   employer under such contract.                             ed by individual level premium annuity con-
                                                                     (2) If a trust described in section                     tracts. Such contracts are purchased by the
                                                                   401(a) which is exempt from tax under                     trustee of the R Company Pension Trust
                                                                   section 501(a) distributes any annuity,                   from the Y Insurance Company. The trustee
                                                                   endowment, retirement income, or life                     of the R Company Pension Trust is the legal
                                                                                                                             owner of each such contract at all times
                                                                   insurance contract, then the rules re-
                                                                                                                             prior to the distribution of such contract to
                                                                   lating to the taxability of the dis-                      a qualifying annuitant. The trustee pur-
                                                                   tributee of any such contract are set                     chases such a contract on January 3, 1963, in
                                                                   forth in paragraph (a)(2) of § 1.402(a)–1.                the name of an employee who qualifies on
                                                                     (3) A face-amount certificate or an                     that date for coverage under the plan. At the
                                                                   annuity contract is transferable if the                   time such contract is purchased, and while
                                                                   owner can transfer any portion of his                     the contract is held by the trustee of the R
                                                                   interest in the certificate or contract                   Company Pension Trust, the contract does
                                                                                                                             not contain any restrictions with respect to
                                                                   to any person other than the issuer
                                                                                                                             its transferability. The annuity contract
                                                                   thereof. Accordingly, such a certificate                  purchased by the trustee of the R Company
                                                                   or contract is transferable if the owner                  Pension Trust satisfies the requirements of
                                                                   can sell, assign, discount, or pledge as                  section 401(g) and this section while it is held
                                                                   collateral for a loan or as security for                  by the trustee.
                                                                   the performance of an obligation or for                     Example 3. A is the trustee of the X Cor-
                                                                   any other purpose his interest in the                     poration’s Employees’ Pension Trust. The
                                                                   certificate or contract to any person                     trust forms a part of a pension plan which is
                                                                   other than the issuer thereof. On the                     funded by individual level premium annuity
                                                                                                                             contracts. The trustee is the legal owner of
                                                                   other hand, for purposes of section
                                                                                                                             such contracts, but the employees covered
                                                                   401(g), a face-amount certificate or an-                  under the plan obtain beneficial interests in
                                                                   nuity contract is not considered to be
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                                                                                                                             such contracts after ten years of service with
                                                                   transferable merely because such cer-                     the X Corporation. On January 15, 1980, A
                                                                   tificate or contract, or the plan of                      distributes to D an annuity contract issued

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                                                                   § 1.401–10                                                              26 CFR Ch. I (4–1–11 Edition)
                                                                   to A in D’s name on June 25, 1959, and dis-               under the qualified plan and ending
                                                                   tributes to E an annuity contract issued to A             when there are no longer funds under
                                                                   in E’s name on September 30, 1963. The con-               the plan which can be used to provide
                                                                   tract issued to D need not be nontransfer-
                                                                   able, but the contract issued to E must be                him or his beneficiaries with benefits.
                                                                   nontransferable in order to satisfy the re-                  (b) Treatment of a self-employed indi-
                                                                   quirements of section 401(g) and this section.            vidual as an employee. (1) For purposes
                                                                      Example 4. The corpus of the Y Corpora-                of section 401, a self-employed indi-
                                                                   tion’s Employees’ Pension Plan consists of                vidual who receives earned income
                                                                   individual insurance contracts in the names               from an employer during a taxable
                                                                   of the covered employees and an auxiliary
                                                                   fund which is used to convert such policies               year of such employer beginning after
                                                                   to annuity contracts at the time a bene-                  December 31, 1962, shall be considered
                                                                   ficiary of such trust retires. F retires on               an employee of such employer for such
                                                                   June 15, 1963, and the trustee converts the in-           taxable year. Moreover, such an indi-
                                                                   dividual insurance contract on F’s life to a              vidual will be considered an employee
                                                                   life annuity which is distributed to him. The             for a taxable year if he would otherwise
                                                                   life annuity issued on F’s life must be non-
                                                                                                                             be treated as an employee but for the
                                                                   transferable in order to satisfy the require-
                                                                   ments of section 401(g) and this section.                 fact that the employer did not have net
                                                                                                                             profits for that taxable year. Accord-
                                                                   [T.D. 6675, 28 FR 10122, Sept. 17, 1963]                  ingly, the employer may cover such an
                                                                   § 1.401–10 Definitions relating to plans                  individual under a qualified plan dur-
                                                                        covering self-employed individuals.                  ing years of the plan beginning with or
                                                                                                                             within a taxable year of the employer
                                                                      (a) In general. (1) Certain self-em-                   beginning after December 31, 1962.
                                                                   ployed individuals may be covered by a
                                                                                                                                (2) If a self-employed individual is en-
                                                                   qualified pension, annuity, or profit-
                                                                                                                             gaged in more than one trade or busi-
                                                                   sharing plan for taxable years begin-
                                                                                                                             ness, each such trade or business shall
                                                                   ning after December 31, 1962. This sec-
                                                                                                                             be considered a separate employer for
                                                                   tion contains definitions relating to
                                                                   plans covering self-employed individ-                     purposes of applying the provisions of
                                                                   uals. The provisions of §§ 1.401–1                        sections 401 through 404 to such indi-
                                                                   through 1.401–9, relating to require-                     vidual. Thus, if a qualified plan is es-
                                                                   ments which are applicable to all                         tablished for one trade or business but
                                                                   qualified plans, are also generally ap-                   not the others, the individual will be
                                                                   plicable to any plan covering a self-em-                  considered an employee only if he re-
                                                                   ployed individual. However, in addition                   ceived earned income with respect to
                                                                   to such requirements, any plan cov-                       such trade or business and only the
                                                                   ering a self-employed individual is sub-                  amount of such earned income derived
                                                                   ject to the rules contained in §§ 1.401–11                from that trade or business shall be
                                                                   through 1.401–13. Section 1.401–11 con-                   taken into account for purposes of the
                                                                   tains general rules which are applica-                    qualified plan.
                                                                   ble to any plan covering a self-em-                          (3)(i) The term employee, for purposes
                                                                   ployed individual who is an employee                      of section 401, does not include a self-
                                                                   within the meaning of paragraph (b) of                    employed individual when the term
                                                                   this section. Section 1.401–12 contains                   ‘‘common-law’’ employee is used or
                                                                   special rules which are applicable to                     when the context otherwise requires
                                                                   plans covering self-employed individ-                     that the term ‘‘employee’’ does not in-
                                                                   uals when one or more of such individ-                    clude a self-employed individual. The
                                                                   uals is an owner-employee within the                      term ‘‘common- law’’ employee also in-
                                                                   meaning of paragraph (d) of this sec-                     cludes an individual who is treated as
                                                                   tion. Section 1.401–13 contains rules re-                 an employee for purposes of section 401
                                                                   lating to excess contributions by, or                     by reason of the provisions of section
                                                                   for, an owner-employee. The provisions                    7701(a)(20), relating to the treatment of
                                                                   of this section and of §§ 1.401–11 through                certain full-time life insurance sales-
                                                                   1.401–13 are applicable to taxable years                  men as employees. Furthermore, an in-
                                                                   beginning after December 31, 1962.                        dividual who is a common-law em-
                                                                      (2) A self-employed individual is cov-                 ployee is not a self-employed indi-
                                                                   ered under a qualified plan during the                    vidual with respect to income attrib-
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                                                                   period beginning with the date a con-                     utable to such employment, even
                                                                   tribution is first made by, or for, him                   though such income constitutes net

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–10

                                                                   earnings from self-employment as de-                         (c) Definition of earned income—(1)
                                                                   fined in section 1402(a). Thus, for exam-                 General rule. For purposes of section 401
                                                                   ple, a minister who is a common-law                       and      the    regulations   thereunder,
                                                                   employee is not a self-employed indi-                     ‘‘earned income’’ means, in general,
                                                                   vidual with respect to income attrib-                     net earnings from self-employment (as
                                                                   utable to such employment, even                           defined in section 1402(a)) to the extent
                                                                   though such income constitutes net                        such net earnings constitute compensa-
                                                                   earnings from self-employment as de-                      tion for personal services actually ren-
                                                                   fined in section 1402(a).                                 dered within the meaning of section
                                                                     (ii) An individual may be treated as                    911(b).
                                                                   an employee within the meaning of sec-                       (2) Net earnings from self-employment.
                                                                   tion 401(c)(1) of one employer even                       (i) The computation of the net earnings
                                                                   though such individual is also a com-                     from self-employment shall be made in
                                                                   mon-law employee of another em-                           accordance with the provisions of sec-
                                                                   ployer. For example, an attorney who                      tion 1402(a) and the regulations there-
                                                                   is a common-law employee of a cor-                        under, with the modifications and ex-
                                                                   poration and who, in the evenings                         ceptions described in subdivisions (ii)
                                                                   maintains an office in which he prac-                     through (iv) of this subparagraph.
                                                                                                                             Thus, an individual may have net earn-
                                                                   tices law as a self-employed individual
                                                                                                                             ings from self-employment, as defined
                                                                   is an employee within the meaning of
                                                                                                                             in section 1402(a), even though such in-
                                                                   section 401(c)(1) with respect to the law
                                                                                                                             dividual does not have self-employ-
                                                                   practice. This example would not be al-
                                                                                                                             ment income, as defined in section
                                                                   tered by the fact that the corporation
                                                                                                                             1402(b), and, therefore, is not subject to
                                                                   maintained a qualified plan under
                                                                                                                             the tax on self-employment income im-
                                                                   which the attorney is benefited as a
                                                                                                                             posed by section 1401.
                                                                   common-law employee.                                         (ii) Items which are not included in
                                                                     (4) For the purpose of determining                      gross income for purposes of chapter 1
                                                                   whether an employee within the mean-                      of the Code and the deductions prop-
                                                                   ing of section 401(c)(1) satisfies the re-                erly attributable to such items must be
                                                                   quirements for eligibility under a                        excluded from the computation of net
                                                                   qualified plan established by an em-                      earnings from self-employment even
                                                                   ployer, such an employer may take                         though the provisions of section 1402(a)
                                                                   into account past services rendered by                    specifically require the inclusion of
                                                                   such an employee both as a self-em-                       such items. For example, if an indi-
                                                                   ployed individual and as a common-law                     vidual is a resident of Puerto Rico, so
                                                                   employee if past services rendered by                     much of his net earnings from self-em-
                                                                   other employees, including common-                        ployment as are excluded from gross
                                                                   law employees, are similarly taken                        income under section 933 must not be
                                                                   into account. However, an employer                        taken into account in computing his
                                                                   cannot take into account only past                        net earnings from self-employment
                                                                   services rendered by employees within                     which are earned income for purposes
                                                                   the meaning of section 401(c)(1) if past                  of section 401.
                                                                   services rendered to such employer by                        (iii) In computing net earnings from
                                                                   individuals who are, or were, common-                     self-employment for the purpose of de-
                                                                   law employees are not taken into ac-                      termining earned income, a self-em-
                                                                   count. Past service as described in this                  ployed individual may disregard only
                                                                   subparagraph may be taken into ac-                        deductions for contributions made on
                                                                   count for the purpose of determining                      his own behalf under a qualified plan.
                                                                   whether an individual who is, or was,                     However, such computation must take
                                                                   an employee within the meaning of sec-                    into account the deduction allowed by
                                                                   tion 401(c)(1) satisfies the requirements                 section 404 or 405 for contributions
                                                                   for eligibility even if such service was                  under a qualified plan on behalf of the
                                                                   rendered prior to January 1, 1963. On                     common-law employees of the trade or
                                                                   the other hand, past service cannot be                    business.
                                                                   taken into account for purposes of de-                       (iv) For purposes of determining
                                                                   termining the contributions which may                     whether an individual has net earnings
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                                                                   be made on such an individual’s behalf                    from      self-employment    and,    thus,
                                                                   under a qualified plan.                                   whether he is an employee within the

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                                                                   § 1.401–10                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   meaning of section 401(c)(1), the excep-                  income-producing factors. (i) If a self-em-
                                                                   tions in section 1402(c) (4) and (5) shall                ployed individual renders personal
                                                                   not apply. Thus, certain ministers, cer-                  services on a full-time, or substantially
                                                                   tain members of religious orders, doc-                    full-time, basis to only one trade or
                                                                   tors of medicine, and Christian Science                   business, and if with respect to such
                                                                   practitioners are treated for purposes                    trade or business capital is a material
                                                                   of section 401 as being engaged in a                      income-producing factor, then the
                                                                   trade or business from which net earn-                    amount of such individual’s earned in-
                                                                   ings from self-employment are derived.                    come from the trade or business is con-
                                                                   In addition, the exceptions in section                    sidered to be not less than so much of
                                                                   1402(c)(2) shall not apply in the case of                 his share in the net profits of such
                                                                   any individual who is treated as an em-                   trade or business as does not exceed
                                                                   ployee under section 3121(d)(3) (A), (C),                 $2,500.
                                                                   or (D). Therefore, such individuals are
                                                                                                                                (ii) If a self-employed individual ren-
                                                                   treated, for purposes of section 401, as
                                                                                                                             ders substantial personal services to
                                                                   being engaged in a trade or business
                                                                                                                             more than one trade or business, and if
                                                                   from which net earnings from self-em-
                                                                   ployment may be derived.                                  with respect to all such trades or busi-
                                                                     (3) Compensation for personal services                  nesses such self-employed individual
                                                                   actually rendered. (i) For purposes of                    actually renders personal services on a
                                                                   section 401, the term ‘‘earned income’’                   full-time, or substantially full-time,
                                                                   includes only that portion of an indi-                    basis, then the earned income of the
                                                                   vidual’s net earnings from self-employ-                   self-employed individual from trades or
                                                                   ment which constitutes earned income                      businesses for which he renders sub-
                                                                   as defined in section 911(b) and the reg-                 stantial personal services and in which
                                                                   ulations thereunder. Thus, such term                      both personal services and capital are
                                                                   includes only professional fees and                       material income-producing factors is
                                                                   other amounts received as compensa-                       considered to be not less than—
                                                                   tion for personal services actually ren-                     (A) So much of such individual’s
                                                                   dered by the individual. There is ex-                     share of the net profits from all trades
                                                                   cluded from ‘‘earned income’’ the                         or businesses in which he renders sub-
                                                                   amount of any item of income, and any                     stantial personal services as does not
                                                                   deduction properly attributable to such                   exceed $2,500, reduced by.
                                                                   item, if such amount is not received as                      (B) Such individual’s share of the net
                                                                   compensation for personal services ac-                    profits of any trade or business in
                                                                   tually rendered. Therefore, an indi-                      which only personal services is a mate-
                                                                   vidual who renders no personal services                   rial income-producing factor.
                                                                   has no ‘‘earned income’’ even though
                                                                                                                             However, in no event shall the share of
                                                                   such an individual may have net earn-
                                                                                                                             the net profits of any trade or business
                                                                   ings from self-employment from a
                                                                                                                             in which capital is a material income-
                                                                   trade or business.
                                                                                                                             producing factor be reduced below the
                                                                     (ii) If a self-employed individual is
                                                                   engaged in a trade or business in which                   amount which would, without regard
                                                                   capital is a material income-producing                    to the provisions of this subdivision, be
                                                                   factor, then, under section 911(b), his                   treated as the earned income derived
                                                                   earned income is only that portion of                     from such trade or business under sec-
                                                                   the net profits from the trade or busi-                   tion 911(b). In making the computation
                                                                   ness which constitutes a reasonable al-                   required by this subdivision, any trade
                                                                   lowance as compensation for personal                      or business with respect to which the
                                                                   services actually rendered. However,                      individual renders substantial personal
                                                                   such individual’s earned income cannot                    services shall be taken into account ir-
                                                                   exceed 30 percent of the net profits of                   respective of whether a qualified plan
                                                                   such trade or business. The net profits                   has been established by such trade or
                                                                   of the trade or business is not nec-                      business.
                                                                   essarily the same as the net earnings                        (iii) If the provisions of subdivision
                                                                   from self-employment derived from                         (ii) of this subparagraph apply in deter-
                                                                   such trade or business.                                   mining the earned income of a self-em-
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                                                                     (4) Minimum earned income when both                     ployed individual, and such individual
                                                                   personal services and capital are material                is engaged in two or more trades or

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–11

                                                                   businesses in which capital and per-                      ered a distributive share of partnership
                                                                   sonal services are material income-pro-                   income for such purpose. See section
                                                                   ducing factors, then the total amount                     704(b), relating to the determination of
                                                                   treated as the earned income shall be                     the distributive share by the income or
                                                                   allocated to each such trade or busi-                     loss ratio, and the regulations there-
                                                                   ness for which he performs substantial                    under. In the absence of a provision in
                                                                   personal services in the same propor-                     the partnership agreement, a partner’s
                                                                   tion as his share of net profits from                     capital interest in a partnership shall
                                                                   each such trade or business bears to his                  be determined on the basis of his inter-
                                                                   share of the total net profits from all                   est in the assets of the partnership
                                                                   such trades or businesses. Thus, in such                  which would be distributable to such
                                                                   case, the amount of earned income at-                     partner upon his withdrawal from the
                                                                   tributable to any such trade or busi-                     partnership, or upon liquidation of the
                                                                   ness is computed by multiplying the                       partnership, whichever is the greater.
                                                                   total earned income as determined                           (e) Definition of employer. (1) For pur-
                                                                   under subdivision (ii) of this subpara-                   poses of section 401, a sole proprietor is
                                                                   graph by the individual’s net profits                     considered to be his own employer, and
                                                                   from such trade or business and divid-                    the partnership is considered to be the
                                                                   ing that product by the individual’s                      employer of each of the partners. Thus,
                                                                   total net profits from all such trades or                 an individual partner is not an em-
                                                                   businesses.                                               ployer who may establish a qualified
                                                                     (iv) For purposes of this subpara-                      plan with respect to his services to the
                                                                   graph, the determination of whether an                    partnership.
                                                                   individual renders personal services on                     (2) Regardless of the provision of
                                                                   a full-time, or substantially full-time,                  local law, a partnership is deemed, for
                                                                   basis is to be made with regard to the                    purposes of section 401, to be con-
                                                                   aggregate of the trades and businesses                    tinuing until such time as it is termi-
                                                                   with respect to which the employee                        nated within the meaning of section
                                                                   renders substantial personal services as                  708, relating to the continuation of a
                                                                   a common-law employee or as a self-                       partnership.
                                                                   employed individual. However, for all                     [T.D. 6675, 28 FR 10123, Sept. 17, 1963]
                                                                   other purposes in applying the rules of
                                                                   this subparagraph, a trade or business                    § 1.401–11 General rules relating to
                                                                   with respect to which an individual is a                       plans covering self-employed indi-
                                                                   common-law employee shall be dis-                              viduals.
                                                                   regarded.                                                    (a) Introduction. This section provides
                                                                     (d) Definition of owner-employee. For                   certain rules which supplement, and
                                                                   purposes of section 401 and the regula-                   modify, the rules of §§ 1.401–1 through
                                                                   tions thereunder, the term ‘‘owner-em-                    1.401–9 in the case of a qualified pen-
                                                                   ployee’’ means a proprietor of a propri-                  sion, annuity, or profit-sharing plan
                                                                   etorship, or, in the case of a partner-                   which covers a self-employed indi-
                                                                   ship, a partner who owns either more                      vidual who is an employee within the
                                                                   than 10 percent of the capital interest,                  meaning of section 401(c)(1). The provi-
                                                                   or more than 10 percent of the profits                    sions of this section apply to taxable
                                                                   interest, of the partnership. Thus, an                    years beginning after December 31,
                                                                   individual who owns only 2 percent of                     1962. Except as otherwise provided,
                                                                   the profits interest but 11 percent of                    paragraphs (b) through (m) of this sec-
                                                                   the capital interest of a partnership is                  tion apply to taxable years beginning
                                                                   an owner-employee. A partner’s inter-                     after December 31, 1962. Paragraph (n)
                                                                   est in the profits and the capital of the                 of this section applies to plan years de-
                                                                   partnership shall be determined by the                    termined in accordance with paragraph
                                                                   partnership agreement. In the absence                     (n)(1) of this section.
                                                                   of any provision regarding the sharing                       (b) General rules. (1) If the amount of
                                                                   of profits, the interest in profits of the                employer contributions for common-
                                                                   partners will be determined in the                        law employees covered under a quali-
                                                                   same manner as their distributive                         fied plan is related to the earned in-
                                                                   shares of partnership taxable income.                     come (as defined in section 401(c)(2)) of
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                                                                   However, a guaranteed payment (as de-                     a self-employed individual, or group of
                                                                   scribed in section 707(c)) is not consid-                 self-employed individuals, such a plan

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                                                                   § 1.401–11                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   is a profit-sharing plan (as described in                 such an individual’s behalf. In view of
                                                                   paragraph (b)(1)(ii) of § 1.401–1) since                  these restrictions on the tax benefits
                                                                   earned income is dependent upon the                       extended to any self-employed indi-
                                                                   profits of the trade or business with re-                 vidual, a self-employed individual par-
                                                                   spect to which the plan is established.                   ticipating in a qualified plan may not
                                                                   Thus, for example, a plan, which pro-                     participate in any forfeitures. There-
                                                                   vides that the employer will contribute                   fore, in the case of a qualified plan
                                                                   10 percent of the earned income of a                      which covers any self-employed indi-
                                                                   self-employed individual but no more                      vidual, a separate account must be es-
                                                                   than $2,500, and that the employer con-                   tablished for each self-employed indi-
                                                                   tribution on behalf of common-law em-                     vidual to which no forfeitures can be
                                                                   ployees shall be the same percentage of                   allocated.
                                                                   their salaries as the contribution on                        (c) Requirements as to coverage. (1) In
                                                                   behalf of the self-employed individual                    general, section 401(a)(3) and the regu-
                                                                   bears to his earned income, is a profit-                  lations thereunder prescribe the cov-
                                                                   sharing plan, since the amount of the                     erage requirements which a qualified
                                                                   employer’s contribution for common-                       plan must satisfy. However, if such a
                                                                   law employees covered under the plan                      plan covers self-employed individuals
                                                                   is related to the earned income of a                      who are not owner-employees, it must,
                                                                   self-employed individual and thereby                      in addition to satisfying such require-
                                                                   to the profits of the trade or business.                  ments, satisfy the requirements of this
                                                                   On the other hand, for example, a plan                    paragraph. If any owner-employee is
                                                                   which defines the compensation of any                     covered under a qualified plan, the pro-
                                                                   self-employed individual as his earned                    visions of this paragraph do not apply,
                                                                   income and which provides that the                        but the provisions of section 401(d), in-
                                                                   employer will contribute 10 percent of                    cluding section 401(d)(3), do apply (see
                                                                   the compensation of each employee                         § 1.401–12).
                                                                   covered under the plan is a pension                          (2)(i) Section 401(a)(3)(B) provides
                                                                   plan since the contribution on behalf of                  that a plan may satisfy the coverage
                                                                   common-law employees is fixed with-                       requirements for qualification if it cov-
                                                                   out regard to whether the self-em-                        ers such employees as qualify under a
                                                                   ployed individual has earned income or                    classification which is found not to dis-
                                                                   the amount thereof.                                       criminate in favor of employees who
                                                                     (2) The Self-Employed Individuals                       are officers, shareholders, persons
                                                                   Tax Retirement Act of 1962 (76 Stat.                      whose principal duties consist in super-
                                                                   809) permits self-employed individuals                    vising the work of other employees, or
                                                                   to be treated as employees and there-                     highly compensated employees. Sec-
                                                                   fore included in qualified plans, but it                  tion 401(a)(5) sets forth certain classi-
                                                                   is clear that such law requires such                      fications that will not in themselves be
                                                                   self-employed individuals to provide                      considered discriminatory. Under such
                                                                   benefits for their employees on a non-                    section, a classification which excludes
                                                                   discriminatory basis. Self-employed in-                   all employees whose entire remunera-
                                                                   dividuals will not be considered as pro-                  tion constitutes ‘‘wages’’ under section
                                                                   viding contributions or benefits for an                   3121(a)(1), will not be considered dis-
                                                                   employee to the extent that the wages                     criminatory merely because of such ex-
                                                                   or salary of the employee covered                         clusion. Similarly, a plan which in-
                                                                   under the plan are reduced at or about                    cludes all employees will not be consid-
                                                                   the time the plan is adopted.                             ered discriminatory solely because the
                                                                     (3) In addition to permitting self-em-                  contributions or benefits based on that
                                                                   ployed individuals to participate in                      part of their remuneration which is ex-
                                                                   qualified plans, the Self-Employed In-                    cluded from ‘‘wages’’ under section
                                                                   dividuals Tax Retirement Act of 1962                      3121(a)(1) differ from the contributions
                                                                   extends to such individuals some of the                   or benefits based on that part of their
                                                                   tax benefits allowed common-law em-                       remuneration which is not so excluded.
                                                                   ployee-participants in such plans. How-                   However, in determining if a classifica-
                                                                   ever, the tax benefits allowed a self-                    tion is discriminatory under section
                                                                   employed individual are restricted by                     401(a)(3)(B), consideration will be given
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                                                                   the limits which are placed on the de-                    to whether the total benefits resulting
                                                                   ductions allowed for contributions on                     to each employee under the plan and

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–11

                                                                   under the Social Security Act, or under                   cers, shareholders, supervisors, or high-
                                                                   the Social Security Act only, establish                   ly compensated, as against other em-
                                                                   an integrated and correlated retire-                      ployees whether within or without the
                                                                   ment system satisfying the tests of                       plan. A self-employed individual, by
                                                                   section 401(a). A plan which covers self-                 reason of the contingent nature of his
                                                                   employed individuals, none of whom is                     compensation, is considered to be a
                                                                   an owner-employee, may also be inte-                      highly-compensated       employee,   and
                                                                   grated with the contributions or bene-                    thus is a member of the group in whose
                                                                   fits under the Social Security Act. In                    favor discrimination is prohibited. In
                                                                   such a case, the portion of the earned                    determining whether the prohibited
                                                                   income (as defined in section 401(c)(2))                  discrimination exists, the total em-
                                                                   of such an individual which does not                      ployer contribution on behalf of a self-
                                                                   exceed the maximum amount which                           employed individual shall be taken
                                                                   may be treated as self-employment in-                     into account regardless of the fact that
                                                                   come under section 1402(b)(1), and                        only a portion of such contribution is
                                                                   which is derived from the trade or busi-                  allowed as a deduction. For additional
                                                                   ness with respect to which the plan is                    rules relating to discrimination as to
                                                                   established,    shall   be    treated    as               contributions or benefits with regard
                                                                   ‘‘wages’’ under section 3121(a)(1) sub-                   to plans covering any owner-employee,
                                                                   ject to the tax imposed by section 3111                   see § 1.401–12.
                                                                   (relating to the tax on employers) for                      (2) Base for computing contributions or
                                                                   purposes of applying the rules of para-                   benefits. (i) A plan which is otherwise
                                                                   graph (e)(2) of § 1.401–3, relating to the                qualified is not considered discrimina-
                                                                   determination of whether a plan is                        tory merely because the contributions
                                                                   properly integrated. However, if the                      or benefits provided under the plan
                                                                   plan covers an owner-employee, the                        bear a uniform relationship to the
                                                                   rules relating to the integration of the                  total compensation, basic compensa-
                                                                   plan with the contributions or benefits                   tion, or regular rate of compensation of
                                                                   under the Social Security Act con-                        the employees, including self-employed
                                                                   tained in paragraph (b) of § 1.401–12                     individuals, covered under the plan.
                                                                   apply.                                                      (ii) In the case of a self-employed in-
                                                                     (ii) Certain of the classifications enu-                dividual who is covered under a quali-
                                                                   merated in section 401(a)(5) do not                       fied plan, the total compensation of
                                                                   apply to plans which provide contribu-                    such individual is the earned income
                                                                   tions or benefits for any self-employed                   (as defined in section 401(c)(2)) which
                                                                   individual. Since self-employed indi-                     such individual derives from the em-
                                                                   viduals are not salaried or clerical em-                  ployer’s trade or business, or trades or
                                                                   ployees, the provision in section                         businesses, with respect to which the
                                                                   401(a)(5) permitting a plan, in certain                   qualified plan is established. Thus, for
                                                                   cases to cover only this type of em-                      example, in the case of a partner, his
                                                                   ployee is inapplicable to plans which                     total compensation includes both his
                                                                   cover any self-employed individual.                       distributive share of partnership in-
                                                                     (iii) The classifications enumerated                    come, whether or not distributed, and
                                                                   in section 401(a)(5) are not exclusive,                   guaranteed payments described in sec-
                                                                   and it is not necessary that a qualified                  tion 707(c) made to him by the partner-
                                                                   plan cover all employees or all full-                     ship establishing the plan, to the ex-
                                                                   time employees. Plans may qualify                         tent that such income constitutes
                                                                   even though coverage is limited in ac-                    earned income as defined in section
                                                                   cordance with a particular classifica-                    401(c)(2).
                                                                   tion incorporated in the plan, provided                     (iii)(A) The basic or regular rate of
                                                                   the effect of covering only such em-                      compensation of any self-employed in-
                                                                   ployees as satisfy such eligibility re-                   dividual is that portion of his earned
                                                                   quirement does not result in the pro-                     income which bears the same ratio to
                                                                   hibited discrimination.                                   his total earned income derived from
                                                                     (d) Discrimination as to contributions or               the trade or business, or trades or busi-
                                                                   benefits—(1) In general. In order for a                   nesses, with respect to which the quali-
                                                                   plan to be qualified, there must be no                    fied plan is established as the aggre-
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                                                                   discrimination in contributions or ben-                   gate basic or regular compensation of
                                                                   efits in favor of employees who are offi-                 all common-law employees covered

                                                                                                                        35



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                                                                   § 1.401–11                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   under the plan bears to the aggregate                     which such trust is a part expressly
                                                                   total compensation of such employees                      provides that the entire interest of
                                                                   derived from such trade or business, or                   each employee, including any common-
                                                                   trades or businesses.                                     law employee, will be distributed in ac-
                                                                     (B) If an employer establishes two or                   cordance with the provisions of sub-
                                                                   more plans which satisfy the require-                     paragraph (2) or (3) of this paragraph.
                                                                   ments of section 401(a) separately, and                     (2) Unless the provisions of subpara-
                                                                   only one such plan covers a self-em-                      graph (3) of this paragraph apply, the
                                                                   ployed individual, the determination of                   entire interest of each employee (in-
                                                                   the basic or regular rate of compensa-                    cluding contributions he has made on
                                                                   tion of such self-employed individual is                  his own behalf, contributions made on
                                                                   made with regard to the compensation                      his behalf by his employer, and interest
                                                                   of common-law employees covered
                                                                                                                             thereon) must be actually distributed
                                                                   under the plan which provides con-
                                                                                                                             to such employee—
                                                                   tributions or benefits for such self-em-
                                                                   ployed individual. On the other hand, if                    (i) In the case of an employee, other
                                                                   two or more plans must be considered                      than an individual who is, or has been,
                                                                   together in order to satisfy the require-                 an owner-employee under the plan, not
                                                                   ments of section 401(a), the computa-                     later than the last day of the taxable
                                                                   tion of the basic or regular rate of com-                 year of such employee in which he at-
                                                                   pensation of a self-employed individual                   tains the age of 701⁄2, or not later than
                                                                   must be made with regard to the com-                      the last day of the taxable year in
                                                                   pensation of the common-law employ-                       which such employee retires, which-
                                                                   ees covered by so many of such plans as                   ever is later, and
                                                                   are required to be taken together in                        (ii) In the case of an employee who is,
                                                                   order to satisfy the qualification re-                    or has been, an owner-employee under
                                                                   quirements of section 401(a).                             the plan, not later than the last day of
                                                                     (3) Discriminatory contributions. If a                  the taxable year in which he attains
                                                                   discriminatory contribution is made                       the age of 701⁄2.
                                                                   by, or for, a self-employed individual                      (3) In lieu of distributing an employ-
                                                                   who is an employee within the meaning                     ee’s entire interest in a qualified plan
                                                                   of section 401(c)(1) because of an erro-                  as provided in subparagraph (2) of this
                                                                   neous assumption as to the earned in-                     paragraph, such interest may be dis-
                                                                   come of such individual, the plan will                    tributed commencing no later than the
                                                                   not be considered discriminatory if                       last taxable year described in such sub-
                                                                   adequate adjustment is made to re-                        paragraph (2). In such case, the plan
                                                                   move such discrimination. In the case                     must expressly provide that the entire
                                                                   of any self-employed individual who is                    interest of such an employee shall be
                                                                   an owner-employee, the amount of any                      distributed to him and his bene-
                                                                   excess contribution to be returned and                    ficiaries, in a manner which satisfies
                                                                   the manner in which it is to be repaid                    the requirements of subparagraph (5) of
                                                                   are determined by the provisions of                       this paragraph, over any of the fol-
                                                                   section 401(d)(8) and (e). However, if                    lowing periods (or any combination
                                                                   any self-employed individual, including                   thereof)—
                                                                   any owner-employee, has not made the                        (i) The life of the employee, or
                                                                   full contribution permitted to be made
                                                                                                                               (ii) The lives of the employee and his
                                                                   on his behalf as an employee, then, if
                                                                                                                             spouse, or
                                                                   the plan expressly provides, so much of
                                                                   any excess contribution by such self-                       (iii) A period certain not longer than
                                                                   employed individual’s employer as                         the life expectancy of the employee, or
                                                                   may, under the provisions of the plan,                      (iv) A period certain not longer than
                                                                   be treated as a contribution made by                      the joint life and last survivor expect-
                                                                   such individual as an employee can be                     ancy of the employee and his spouse.
                                                                   so treated.                                                 (4) For purposes of subparagraphs (3)
                                                                     (e) Distribution of entire interest. (1) If             and (5) of this paragraph, the deter-
                                                                   a trust forms part of a plan which cov-                   mination of the life expectancy of the
                                                                   ers a self-employed individual, such                      employee or the joint life and last sur-
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                                                                   trust shall constitute a qualified trust                  vivor expectancy of the employee and
                                                                   under section 401 only if the plan of                     his spouse is to be made either (i) only

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–12

                                                                   once, at the time the employee re-                        who has already attained age 701⁄2.
                                                                   ceives the first distribution of his en-                  However, a distribution of benefits at-
                                                                   tire interest under the plan, or (ii) peri-               tributable to contributions made on be-
                                                                   odically, in a consistent manner. Such                    half of an owner-employee in a taxable
                                                                   life expectancy or joint life and last                    year beginning after the taxable year
                                                                   survivor expectancy cannot exceed the                     in which he attains the age of 701⁄2
                                                                   period computed by the use of the ex-                     must satisfy the requirements of sub-
                                                                   pected return multiples in § 1.72–9, or,                  paragraph (3) of this paragraph. Thus,
                                                                   in the case of payments under a con-                      if an owner-employee has already at-
                                                                   tract issued by an insurance company,                     tained the age of 701⁄2 at the time the
                                                                   the period computed by use of the life                    first contribution is made on his be-
                                                                   expectancy tables of such company.                        half, the distribution of his entire in-
                                                                      (5) If an employee’s entire interest is                terest must commence in the year in
                                                                   to be distributed over a period de-                       which such contribution is first made
                                                                   scribed in subparagraph (3) of this                       on his behalf.
                                                                   paragraph, then the amount to be dis-                       (8) This paragraph shall not apply
                                                                   tributed each year must be at least an                    and an otherwise qualified trust will
                                                                   amount equal to the quotient obtained                     not be disqualified if the method of dis-
                                                                   by dividing the entire interest of the                    tribution under the plan is one which
                                                                   employee under the plan at the time                       was designated by a common-law em-
                                                                   the distribution is made (expressed in                    ployee prior to October 10, 1962, and
                                                                   either dollars or units) by the life ex-                  such method of distribution is not in
                                                                   pectancy of the employee, or joint life                   accordance with the provisions of sec-
                                                                   and last survivor expectancy of the em-                   tion 401(a)(9). Such exception applies
                                                                   ployee and his spouse (whichever is ap-                   regardless of whether the actual dis-
                                                                   plicable), determined in accordance                       tribution of the entire interest of an
                                                                   with the provisions of subparagraph (4)                   employee making such a designation,
                                                                   of this paragraph. However, no dis-                       or any portion of such interest, has
                                                                   tribution need be made in any year, or                    commenced prior to October 10, 1962.
                                                                   a lesser amount may be distributed, if
                                                                   the aggregate amounts distributed by                      [T.D. 6675, 28 FR 10124, Sept. 17, 1963, as
                                                                   the end of that year are at least equal                   amended by T.D. 6982, 33 FR 16500, Nov. 13,
                                                                   to the aggregate of the minimum                           1968]
                                                                   amounts required by this subparagraph
                                                                   to have been distributed by the end of                    § 1.401–12 Requirements for qualifica-
                                                                                                                                  tion of trusts and plans benefiting
                                                                   such year.                                                     owner-employees.
                                                                      (6) If an employee’s entire interest is
                                                                   distributed in the form of an annuity                        (a) Introduction. This section pre-
                                                                   contract, then the requirements of sec-                   scribes the additional requirements
                                                                   tion 401(a)(9) are satisfied if the dis-                  which must be met for qualification of
                                                                   tribution of such contract takes place                    a trust forming part of a pension or
                                                                   before the end of the latest taxable                      profit-sharing plan, or of an annuity
                                                                   year described in subparagraph (2) of                     plan, which covers any self-employed
                                                                   this paragraph, and if the employee’s                     individual who is an owner-employee as
                                                                   interest will be paid over a period de-                   defined in section 401(c)(3). However, to
                                                                   scribed in subparagraph (3) of this                       the extent that the provisions of
                                                                   paragraph and at a rate which satisfies                   § 1.401–11 are not modified by the provi-
                                                                   the requirements of subparagraph (5) of                   sions of this section, such provisions
                                                                   this paragraph.                                           are also applicable to a plan which cov-
                                                                      (7) The requirements of section                        ers an owner-employee. The provisions
                                                                   401(a)(9) do not preclude contributions                   of this section apply to taxable years
                                                                   from being made on behalf of an owner-                    beginning after December 31, 1962. Ex-
                                                                   employee under a qualified plan subse-                    cept as otherwise provided, paragraphs
                                                                   quent to the taxable year in which the                    (b) through (m) of this section apply to
                                                                   distribution of his entire interest is re-                taxable years beginning after Decem-
                                                                   quired to commence. Thus, if all other                    ber 31, 1962. Paragraph (n) of this sec-
                                                                   requirements for qualification are sat-                   tion applies to plan years determined
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                                                                   isfied, a qualified plan may provide                      in accordance with paragraph (n)(1) of
                                                                   contributions for an owner-employee                       the section.

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                                                                   § 1.401–12                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                     (b) General rules. (1) The qualified                    time an owner-employee is first cov-
                                                                   plan and trust of an unincorporated                       ered under such plan.
                                                                   trade or business does not have to sat-                     (2) The term bank as used in this
                                                                   isfy the additional requirements for                      paragraph means—
                                                                   qualification merely because an owner-                      (i) A bank as defined in section 581;
                                                                   employee derives earned income (as de-                      (ii) A corporation which, under the
                                                                   fined in section 401(c)(2)) from the                      laws of the State of its incorporation
                                                                   trade or business with respect to which                   or under the laws of the District of Co-
                                                                   the plan is established. Such additional                  lumbia, is subject to both the super-
                                                                   requirements need be satisfied only if
                                                                                                                             vision of, and examination by, the au-
                                                                   an owner-employee is actually covered
                                                                                                                             thority in such jurisdiction in charge
                                                                   under the plan of the employer. An
                                                                                                                             of the administration of the banking
                                                                   owner-employee may only be covered
                                                                   under a plan of an employer if such                       laws;
                                                                   owner-employee has so consented.                            (iii) In the case of a trust created or
                                                                   However, the consent of the owner-em-                     organized outside of the United States,
                                                                   ployee may be either expressed or im-                     that is, outside the States and the Dis-
                                                                   plied. Thus, for example, if contribu-                    trict of Columbia, a bank or trust com-
                                                                   tions are, in fact, made on behalf of an                  pany, wherever incorporated, exer-
                                                                   owner-employee, such owner-employee                       cising fiduciary powers and subject to
                                                                   is considered to have impliedly con-                      both supervision and examination by
                                                                   sented to being covered under the plan.                   governmental authority;
                                                                     (2) A qualified plan covering an                          (iv) Beginning on January 1, 1974, an
                                                                   owner-employee must be a definite                         insured credit union (within the mean-
                                                                   written program and arrangement set-                      ing of section 101 (6) of the Federal
                                                                   ting forth all provisions essential for                   Credit Union Act, 12 U.S.C. 1752 (6)).
                                                                   qualification at the time such plan is                      (3) Although a bank is required to be
                                                                   established. Therefore, for example,                      the trustee of a qualified trust, another
                                                                   even though the owner-employee is the                     person, including the employer, may be
                                                                   only employee covered under the plan                      granted the power in the trust instru-
                                                                   at the time the plan is established, the                  ment to control the investment of the
                                                                   plan must incorporate all the provi-                      trust funds either by directing invest-
                                                                   sions relating to the eligibility and                     ments, including reinvestments, dis-
                                                                   benefits of future employees.                             posals, and exchanges, or by dis-
                                                                     (c) Bank trustee. (1)(i) If a trust cre-                approving proposed investments, in-
                                                                   ated after October 9, 1962, is to form a                  cluding reinvestments, disposals, or ex-
                                                                   part of a qualified pension or profit-                    changes.
                                                                   sharing plan covering an owner-em-                          (4)(i) This paragraph does not apply
                                                                   ployee, or if a trust created before Oc-                  to a trust created or organized outside
                                                                   tober 10, 1962, but not exempt from tax
                                                                                                                             the States and the District of Columbia
                                                                   on October 9, 1962, is to form part of
                                                                                                                             before October 10, 1962, if, on October 9,
                                                                   such a plan, the trustee of such trust
                                                                                                                             1962, such trust is described in section
                                                                   must be a bank as defined in paragraph
                                                                                                                             402(c) as an organization treated as if it
                                                                   (c)(2) of this section, unless an excep-
                                                                                                                             was a trust exempt from tax under sec-
                                                                   tion contained in paragraph (c)(4) of
                                                                   this section applies, or paragraph (n) of                 tion 501(a).
                                                                   this section applies.                                       (ii) In addition, the requirement that
                                                                     (ii) The provisions of this paragraph                   the trustee must be a bank does not
                                                                   do not apply to an employees’ trust                       apply to a qualified trust forming a
                                                                   created prior to October 10, 1962, if such                part of a pension or profit-sharing plan
                                                                   trust was exempt from tax on October                      if—
                                                                   9, 1962, even though the plan of which                      (A) The investments of all the funds
                                                                   such trust forms a part is amended                        in such trust are in annuity, endow-
                                                                   after December 31, 1962, to cover any                     ment, or life insurance contracts,
                                                                   owner-employee. Although the trustee                      issued by a company which is a life in-
                                                                   of a trust described in the preceding                     surance company as defined in section
                                                                   sentence need not be a bank, all other                    801(a) during the taxable year imme-
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                                                                   requirements for the qualification of                     diately preceding the year that such
                                                                   such a trust must be satisfied at the                     contracts are originally purchased;

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–12

                                                                      (B) All the proceeds which are, or                     profits. On the other hand, a formula
                                                                   may become, payable under the con-                        which, for example, specifies that prof-
                                                                   tract are payable directly to the em-                     its for plan purposes are not to exceed
                                                                   ployee or his beneficiary;                                the cash on hand at the time the em-
                                                                      (C) The plan contains a provision to                   ployer contribution is made is not a
                                                                   the effect that the employer is to sub-                   definite formula. The requirement that
                                                                   stitute a bank as a trustee or custodian                  the plan formula be definite is satisfied
                                                                   of the contracts if the employer is noti-                 if such formula limits the amount to be
                                                                   fied by the district director that such                   contributed on behalf of all employees
                                                                   substitution is required because the                      covered under the plan to the amount
                                                                   trustee is not keeping such records, or                   which permits self-employed individ-
                                                                   making such returns, or rendering such                    uals to obtain the maximum deduction
                                                                   statements, as are required by forms or                   under section 404(a). However, even
                                                                   regulations.                                              though the plan formula is definite, the
                                                                   However, a qualified trust may only                       plan must satisfy all the other require-
                                                                   purchase insurance protection to the                      ments for qualification, including the
                                                                   extent permitted under a qualified plan                   requirement that the contributions
                                                                   (see paragraph (b)(1) (i) and (ii) of                     under the plan not discriminate in
                                                                   § 1.401–1).                                               favor of any self-employed individual,
                                                                      (5) An employer may designate sev-                     and the requirement that the plan be
                                                                   eral trusts (or custodial accounts) or a                  for the exclusive benefit of the employ-
                                                                   trust or trusts and an annuity plan or                    ees in general.
                                                                   plans as constituting parts of a single                      (2) A definite contribution formula
                                                                   plan which is intended to satisfy the                     constitutes an integral part of a quali-
                                                                   requirements for qualification. How-
                                                                                                                             fied profit-sharing plan and may not be
                                                                   ever, each trust (or custodial account)
                                                                                                                             amended except for a valid business
                                                                   so designated which is part of a plan
                                                                                                                             reason.
                                                                   covering an owner-employee must sat-
                                                                   isfy the requirements of this para-                          (3) The requirement that a profit-
                                                                   graph. Thus, for example, if all other                    sharing plan contain a definite formula
                                                                   requirements for qualification are sat-                   for determining the amount of con-
                                                                   isfied by the plan, a qualified profit-                   tributions to be made on behalf of em-
                                                                   sharing plan may provide that a por-                      ployees does not apply to contributions
                                                                   tion of the contributions under the                       which are made on behalf of owner-em-
                                                                   plan will be paid to a custodial ac-                      ployees. However, such contributions
                                                                   count, the custodian of which is a                        are subject to the requirement that
                                                                   bank, for investment in stock of a reg-                   they be nondiscriminatory with respect
                                                                   ulated investment company, and the                        to other employees and must not ex-
                                                                   remainder of such contributions will be                   ceed the limitations on allowable and
                                                                   paid to a trust, the trustee of which is                  deductible contributions which may be
                                                                   not a bank, for investment in annuity                     made by owner-employees.
                                                                   contracts.                                                   (e) Requirements as to coverage—(1)
                                                                      (d) Profit-sharing plan. (1) A profit-                 Coverage of all employees. The coverage
                                                                   sharing plan, as defined in paragraph                     requirements contained in section
                                                                   (b)(1)(ii) of § 1.401–1, which covers any                 401(a)(3) do not apply to a plan which
                                                                   owner-employee must contain a defi-                       covers any owner-employee. However,
                                                                   nite formula for determining the con-                     such a plan must satisfy the coverage
                                                                   tributions to be made by the employer                     requirements of section 401(d), includ-
                                                                   on behalf of employees, other than                        ing section 401(d)(3). Accordingly, a
                                                                   owner-employees. A formula to be defi-                    plan which covers an owner-employee
                                                                   nite must specify the portion of profits                  must benefit each employee of the
                                                                   to be contributed to the trust and must                   trade or business (other than any
                                                                   also define profits for plan purposes. A                  owner-employee who does not consent
                                                                   definite formula may contain a vari-                      to be covered under the plan) whose
                                                                   able factor, if the value of such factor                  customary period of employment has
                                                                   may not vary at the discretion of the                     been for more than 20 hours a week for
                                                                   employer. For example, the percentage                     more than five months during each of
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                                                                   of profits to be contributed each year                    three consecutive periods of twelve cal-
                                                                   may differ depending on the amount of                     endar months. Therefore, a plan may

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                                                                   § 1.401–12                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   not provide, for example, that an em-                     discriminatory is determined by the
                                                                   ployee, other than an owner-employee,                     actual operation of the plan as well as
                                                                   is ineligible to participate because he                   by its formal provisions.
                                                                   does not consent to be a participant or                      (2) The provisions of section 401(a)(5),
                                                                   because he does not consent to make                       relating to certain plan provisions
                                                                   reasonable contributions under the                        which will not in and of themselves be
                                                                   plan.                                                     considered discriminatory, are not ap-
                                                                     (2) Period of service. (i) In determining               plicable to any plan which covers any
                                                                   whether an employee renders service to                    owner-employee. Such a plan must, in-
                                                                   the same employer, and, therefore,                        stead, satisfy the requirements of sec-
                                                                   must be covered under the plan of such                    tion 401(a)(10) and section 401(d)(6). Ac-
                                                                   employer, a partnership is considered                     cordingly, a plan is not discriminatory
                                                                   to be one employer during the entire                      within the meaning of section 401(a)(4)
                                                                   period prior to the time it is termi-                     merely because the contributions or
                                                                   nated within the meaning of section 708                   benefits provided for the employees
                                                                   (see paragraph (e)(2) of § 1.401–10).                     covered under the plan bear a uniform
                                                                     (ii) In the case of a common-law em-                    relationship to the total compensation,
                                                                   ployee who becomes an employee with-                      or to the basic or regular rate of com-
                                                                   in the meaning of section 401(c)(1) with                  pensation, of such employees. The total
                                                                   respect to the same trade or business,                    compensation or the basic or regular
                                                                   his period of employment is the aggre-                    rate of compensation of an owner-em-
                                                                   gate of his service as a common-law                       ployee is computed in accordance with
                                                                   employee and an employee within the                       the provisions of paragraph (d)(2) of
                                                                   meaning of section 401(c)(1).                             § 1.401–11.
                                                                     (iii) In determining whether any em-                       (3) Even though the contributions
                                                                   ployee, including any owner-employee,                     under the plan do not bear a uniform
                                                                   has three years of service, past service                  relationship to the total compensation,
                                                                   of any such employee may be taken                         or the basic or regular rate of com-
                                                                   into account as provided in paragraph                     pensation, of the employees covered
                                                                   (b) of § 1.401–10. Thus, if an employer                   thereunder and the plan would other-
                                                                   takes into account past service for any                   wise be considered discriminatory
                                                                   owner-employee, he must take into ac-                     within the meaning of section 401(a)(4),
                                                                   count the past service of all his other                   the plan shall not be considered dis-
                                                                   employees to the same extent. How-                        criminatory if such variation is due to
                                                                   ever, a plan may provide for coverage                     employer contributions on behalf of
                                                                   after a period of service which is short-                 any owner-employee which are re-
                                                                   er than three years, but in no case may                   quired, under the plan, to be applied to
                                                                   the plan require a waiting period for                     pay premiums or other consideration
                                                                   employees which is longer than that                       on one or more level premium con-
                                                                   required for the owner-employees.                         tracts described in section 401(e)(3)(A).
                                                                     (f) Discrimination in contributions or                  In a taxable year to which the fore-
                                                                   benefits. (1) Variations in contributions                 going exception applies and, therefore,
                                                                   or benefits may be provided under the                     one in which the contributions under
                                                                   plan so long as the plan does not dis-                    the plan would otherwise be discrimi-
                                                                   criminate, either as to contributions or                  natory, the employer contributions to
                                                                   benefits, in favor of officers, employees                 pay such premiums or other consider-
                                                                   whose principal duties consist in super-                  ation must be the only employer con-
                                                                   vising the work of other employees, or                    tributions made for the owner-em-
                                                                   highly compensated employees, as                          ployee, and the contributions for such
                                                                   against other employees (see § 1.401–4).                  taxable year under such plan must not
                                                                   For the purpose of determining wheth-                     be in excess of the amount permitted
                                                                   er the provisions of a plan which pro-                    to be paid toward the purchase of such
                                                                   vide contributions or benefits for an                     a contract under the provisions of sec-
                                                                   owner-employee result in the prohib-                      tion 401(e)(3). Furthermore, the excep-
                                                                   ited discrimination, an owner-em-                         tion described in this subparagraph
                                                                   ployee, like other self-employed indi-                    only applies to contributions made
                                                                   viduals, is considered a highly com-                      under a plan which otherwise satisfies
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                                                                   pensated employee (see paragraph (d)                      the requirements of section 401(a)(4)
                                                                   of § 1.401–11). Whether or not a plan is                  and the regulations thereunder. Thus,

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–12

                                                                   if a plan provides for the purchase, in                   nonforfeitable interest to the portion
                                                                   accordance with section 401(e)(3), of a                   of the funds under the plan which is al-
                                                                   level premium contract for an owner-                      locable to the employer contributions
                                                                   employee, then such plan must provide                     made under the plan on his behalf.
                                                                   either that the benefits for all employ-                    (2) The provisions of subparagraph (1)
                                                                   ees are nondiscriminatory or, in the                      of this paragraph do not apply to the
                                                                   case of a money-purchase type of plan,                    extent that employer contributions on
                                                                   that the contributions for all employ-                    behalf of any employee must remain
                                                                   ees are based on compensation deter-                      forfeitable in order to satisfy the re-
                                                                   mined in a non-discriminatory manner.                     quirements of paragraph (c) of § 1.401–4.
                                                                   For example, since the contributions                      However, employer contributions on
                                                                   on behalf of the owner-employee are                       behalf of employees whose rights are
                                                                   based on his earned income during the                     required to remain forfeitable to sat-
                                                                   period preceding the purchase of the                      isfy such requirements must be non-
                                                                   contract, the contributions for other                     forfeitable except for such contin-
                                                                   employees must be based on their com-                     gency.
                                                                   pensation during the same period if                         (h) Integration with social security. (1)
                                                                   this will result in larger contributions                  If a qualified plan covers any owner-
                                                                   on their behalf.                                          employee, then the rules relating to
                                                                      (4) In the case of a plan which covers                 the integration of such plan with the
                                                                   any owner-employee, the contributions                     contributions or benefits under the So-
                                                                   or benefits provided under the plan                       cial Security Act are provided in this
                                                                   cannot vary with respect to years of                      paragraph. Accordingly, the provisions
                                                                   service except as provided in subpara-                    of paragraph (e) of § 1.401–3 and para-
                                                                   graph (5) of this paragraph.                              graph (c) of § 1.401–11 do not apply to
                                                                      (5) The provisions of section 401(d)(3)                such a plan. In the case of a plan which
                                                                   do not preclude the coverage of em-                       provides contributions or benefits for
                                                                   ployees with less than three years of                     any owner-employee, integration of the
                                                                   service if such coverage is provided on                   plan with the Social Security Act for
                                                                   a nondiscriminatory basis. However, a                     any taxable year of the employer can
                                                                   plan will not be disqualified merely be-                  take place only if not more than one-
                                                                   cause the contributions or benefits for                   third of the employer contributions
                                                                   employees who have less than three                        under the plan which are deductible
                                                                   years of service are not as favorable as                  under section 404 for that year are
                                                                   the contributions or benefits for em-                     made on behalf of the owner-employ-
                                                                   ployees having more than three years                      ees. If such requirement is satisfied,
                                                                   of service.                                               then the plan may be integrated with
                                                                      (g) Nonforfeitable rights. (1)(i) Except               the contributions or benefits under the
                                                                   as provided in subparagraph (2) of this                   Social Security Act in accordance with
                                                                   paragraph, if an owner-employee is                        the rules of subparagraph (3) of this
                                                                   covered under the plan of his employer,                   paragraph.
                                                                   each employee’s rights to the contribu-                     (2)(i) For purposes of subparagraph
                                                                   tions, or to the benefits derived from                    (1) of this paragraph, in determining
                                                                   the contributions, of such employer                       the total amount of employer contribu-
                                                                   must be nonforfeitable at the time                        tions which are deductible under sec-
                                                                   such contributions are paid to, or                        tion 404, the provisions of section
                                                                   under, the plan. The employees who                        404(a), including the provisions of sec-
                                                                   must obtain such nonforfeitable rights                    tion 404(a)(9) (relating to plans bene-
                                                                   include the self-employed individuals                     fiting self-employed individuals), and
                                                                   who are covered under the plan. As to                     section 404(e) (relating to the special
                                                                   what constitutes nonforfeitable rights                    limitations for self-employed individ-
                                                                   of an employee, see paragraph (a)(2) of                   uals) are taken into account, but the
                                                                   § 1.402(b)–1.                                             provisions of section 404(a)(10) (relating
                                                                      (ii) Under section 401(d)(2), it is nec-               to the special limitation on the
                                                                   essary that each employee obtain non-                     amount allowed as a deduction for self-
                                                                   forfeitable rights to the employer con-                   employed individuals) are not taken
                                                                   tributions under the plan on his behalf                   into account.
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                                                                   from the time such contributions are                        (ii) The amount of deductible em-
                                                                   paid. Thus, each employee must have a                     ployer contributions which are made

                                                                                                                        41



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                                                                   § 1.401–12                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   on behalf of all owner-employees for                      requires that a plan which covers any
                                                                   the year is compared with the amount                      owner-employee must contain provi-
                                                                   of deductible employer contributions                      sions which restrict the employer con-
                                                                   for the year made on behalf of all em-                    tributions that may be made on behalf
                                                                   ployees covered under the plan (includ-                   of any owner-employee for each tax-
                                                                   ing self-employed individuals who are                     able year to an amount no greater than
                                                                   not owner-employees and owner-em-                         that which is deductible under section
                                                                   ployees) for the purpose of determining                   404. In computing the amount deduct-
                                                                   whether the deductible contributions                      ible under section 404 for purposes of
                                                                   by the employer on behalf of owner-em-                    section 401(d)(5) and this paragraph,
                                                                   ployees are not more than one-third of                    the limitations contained in section
                                                                   the total deductible contributions.                       404(a)(9) and (e), relating to special lim-
                                                                     (3) If a plan covering an owner-em-                     itations for self-employed individuals,
                                                                   ployee satisfies the requirement of sub-
                                                                                                                             are taken into account, but such
                                                                   paragraph (1) of this paragraph, and if
                                                                                                                             amount is determined without regard
                                                                   the employer wishes to integrate such
                                                                                                                             to section 404(a)(10), relating to the
                                                                   plan with the contributions or benefits
                                                                                                                             special limitation on the amount al-
                                                                   under the Social Security Act, then—
                                                                     (i) The employer contributions under                    lowed as a deduction for self-employed
                                                                   the plan on behalf of any owner-em-                       individuals. Accordingly, a qualified
                                                                   ployee shall be reduced by an amount                      plan which covers any owner-employee
                                                                   determined by multiplying the earned                      cannot permit employer contributions
                                                                   income of such owner-employee which                       to be made on behalf of such owner-em-
                                                                   is derived from the trade or business                     ployee in excess of 10 percent of the
                                                                   with respect to which the plan is estab-                  earned income which is derived by such
                                                                   lished and which does not exceed the                      owner-employee from the trade or busi-
                                                                   maximum amount which may be treat-                        ness with respect to which the plan is
                                                                   ed as self-employment income under                        established, or permit the employer to
                                                                   section 1402(b)(1), by the rate of tax im-                contribute more than $2,500 on behalf
                                                                   posed under section 1401(a); and                          of any such owner-employee for any
                                                                     (ii) The employer contributions                         taxable year.
                                                                   under the plan on behalf of any em-                          (2)(i) In determining whether the
                                                                   ployee other than an owner-employee                       plan permits contributions to be made
                                                                   may be reduced by an amount not in                        in excess of the limitations of subpara-
                                                                   excess of the amount determined by                        graph (1) of this paragraph, employer
                                                                   multiplying the employee’s wages                          contributions under the plan which are
                                                                   under section 3121(a)(1) by the rate of                   allocable to the purchase of life, acci-
                                                                   tax imposed under section 3111(a). For                    dent, health, or other insurance are not
                                                                   purposes of this subdivision, the earned                  to be taken into account. To determine
                                                                   income of a self-employed individual                      the amount of employer contributions
                                                                   which is derived from the trade or busi-                  under the plan which are allocable to
                                                                   ness with respect to which the plan is                    the purchase of life, accident, health,
                                                                   established and which is treated as
                                                                                                                             or other insurance, see paragraph (f) of
                                                                   self-employment income under section
                                                                                                                             § 1.404(e)–1 and paragraph (b) of § 1.72–16.
                                                                   1402(b)(1), shall be treated as ‘‘wages’’
                                                                                                                             However, contributions for such insur-
                                                                   under section 3121(a)(1).
                                                                                                                             ance can be made only to the extent
                                                                     (4) A money purchase pension plan or
                                                                   a profit-sharing plan may provide that                    otherwise permitted under sections 401
                                                                   such plan will be integrated with the                     through 404 and the regulations there-
                                                                   Social Security Act only for such tax-                    under.
                                                                   able years of the employer in which the                      (ii) A further exception to the limit
                                                                   requirements for integration are satis-                   on the amount of contributions which
                                                                   fied. However, a qualified plan cannot                    an employer may make under the plan
                                                                   provide that employer contributions                       on behalf of an owner-employee is
                                                                   are only to be made for taxable years                     made in the case of contributions
                                                                   in which the integration requirements                     which are required, under the plan, to
                                                                   are satisfied.                                            be applied to pay premiums or other
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                                                                     (i) Limit on contributions on behalf of                 consideration for one or more annuity,
                                                                   an owner-employee. (1) Section 401(d)(5)                  endowment, or life insurance contracts

                                                                                                                        42



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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–12

                                                                   described in section 401(e)(3) (see sec-                  plan is established is a prohibited
                                                                   tion 401(e)(3) and the regulations there-                 transaction between such trust and the
                                                                   under).                                                   employer-grantor of such trust (see
                                                                     (j) Excess contributions. The provisions                section 503(g) prior to its repeal by sec.
                                                                   of section 401(e) define the term ‘‘ex-                   2003(b)(5) of the Employee Retirement
                                                                   cess contribution’’ and indicate the                      Income Security Act of 1974 (88 Stat.
                                                                   consequences of making such a con-                        978)).
                                                                   tribution (see § 1.401–13). However, sec-                   (2) A contribution of property, other
                                                                   tion 401(d)(8) provides that a qualified                  than money, prior to January 1, 1975,
                                                                   plan which provides contributions or                      to a qualified trust by an owner-em-
                                                                   benefits for any owner-employee must                      ployee who controls, or a member of a
                                                                   contain certain provisions which com-                     group of owner-employees who to-
                                                                   plement the rules contained in section                    gether control, the trade or business
                                                                   401(e). Under section 401(d)(8), a quali-                 with respect to which the plan is estab-
                                                                   fied plan must provide that—                              lished, or a contribution of property,
                                                                     (1) The net amount of any excess con-                   other than money, to a qualified trust
                                                                   tribution (determined in accordance                       by a member of such an owner-employ-
                                                                   with the provisions of § 1.401–13) must                   ee’s family (as defined in section
                                                                   be returned to the owner-employee on                      267(c)(4)), is a prohibited transaction.
                                                                   whose behalf it is made, together with                    (See section 503(g) prior to its repeal by
                                                                   the net income earned on such excess                      section 2003(b)(5) of the Employee Re-
                                                                   contribution;                                             tirement Income Security Act of 1974
                                                                     (2) For each taxable year for which                     (88 Stat. 978)).
                                                                   the trust is considered to be a non-                        (3) See section 4975 and the regula-
                                                                   qualified trust with respect to an                        tions thereunder with respect to rules
                                                                   owner-employee under section 401(e)(2)                    relating to the contribution of prop-
                                                                   because the net amount of an excess                       erty, other than money, made after De-
                                                                   contribution and the earnings thereon                     cember 31, 1974.
                                                                   have not been returned to such owner-                       (l) Controlled trades or businesses—(1)
                                                                   employee, the income of the trust for                     Plans covering an owner-employee who
                                                                   that taxable year attributable to the                     controls another trade or business. (i) A
                                                                   interest of such owner-employee is to                     plan must not cover any owner-em-
                                                                   be paid to him.                                           ployee, or group of two or more owner-
                                                                     (3) If an excess contribution is deter-                 employees, if such owner-employee, or
                                                                   mined to be willfully made (within the                    group of owner-employees, control
                                                                   meaning of section 401(e)(2)(E)), the en-                 (within the meaning of subparagraph
                                                                   tire interest of the owner-employee on                    (3) of this paragraph) any other trade
                                                                   whose behalf such contribution was                        or business, unless the employees of
                                                                   made is required to be distributed to                     such other trade or business controlled
                                                                   such owner-employee. Furthermore,                         by such owner-employee, or such group
                                                                   the plan must require the distribution                    of owner-employees, are included in a
                                                                   of an owner-employee’s entire interest                    plan which satisfies the requirements
                                                                   under the plan if a willful excess con-                   of section 401(a), including the quali-
                                                                   tribution is determined to have been                      fication requirements of section 401(d).
                                                                   made under any other plan in which                        The employees who must be covered
                                                                   the owner-employee is covered as an                       under the plan of the trade or business
                                                                   owner-employee.                                           which is controlled include the self-em-
                                                                     (k) Contributions of property under a                   ployed individuals who are not owner-
                                                                   qualified plan. (1) The contribution of                   employees and the owner-employees
                                                                   property, other than money, prior to                      who consent to be covered by such
                                                                   January 1, 1975, by the person who is                     plan. Accordingly, the employer must
                                                                   the employer (within the meaning of                       determine whether any owner-em-
                                                                   section 401(c)(4)) to a qualified trust                   ployee, or group of owner-employees,
                                                                   forming a part of a plan which covers                     who may participate in the plan which
                                                                   employees some or all of whom are                         is established by such employer con-
                                                                   owner-employees who control (within                       trols any other trade or business, and
                                                                   the meaning of section 401(d)(9)(B) and                   whether the requirements of this sub-
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                                                                   the regulations thereunder) the trade                     paragraph are satisfied with respect to
                                                                   or business with respect to which the                     the plan established in such other

                                                                                                                        43



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                                                                   § 1.401–12                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   trade or business. The plan of an em-                     trade or business which he does not
                                                                   ployer may exclude an owner-employee                      control.
                                                                   who controls another trade or business                      (2) Owner-employees who control more
                                                                   from coverage under the plan even                         than one trade or business. If the plan
                                                                   though such owner-employee consents                       provides contributions or benefits for
                                                                   to be covered, if a plan which satisfies                  an owner-employee who controls, or
                                                                   the requirements of subdivision (ii) of                   group of owner-employees who to-
                                                                   this subparagraph has not been estab-                     gether control, the trade or business
                                                                   lished in the trade or business which                     with respect to which the plan is estab-
                                                                   such owner-employee controls.                             lished, and such owner-employee, or
                                                                     (ii) The qualified plan which the                       group of owner-employees, also control
                                                                   owner-employee, or owner-employees,                       as owner-employees one or more other
                                                                   are required to provide for the employ-                   trades or businesses, plans must be es-
                                                                   ees of the trade or business which they                   tablished with respect to such con-
                                                                   control must provide contributions and                    trolled trades or businesses so that
                                                                   benefits which are not less favorable                     when taken together they form a single
                                                                   than the contributions and benefits                       plan which satisfies the requirements
                                                                   provided for the owner-employee, or                       of section 401 (a) and (d) with respect to
                                                                   owner-employees, under the plan of                        the employees of all the controlled
                                                                   any trade or business which they do                       trades or businesses.
                                                                   not control. Thus, for example, if the                      (3) Control defined. (i) For purposes of
                                                                   contributions or benefits for the owner-                  this paragraph, an owner-employee, or
                                                                   employee under the plan of the trade or                   a group of two or more owner-employ-
                                                                   business which he does not control are                    ees, shall be considered to control a
                                                                   computed on the basis of his total (as                    trade or business if such owner-em-
                                                                   compared to basic or regular rate) of                     ployee, or such group of two or more
                                                                   compensation, then the contributions                      owner-employees together—
                                                                   or benefits for employees covered                           (A) Own the entire interest in an un-
                                                                   under the plan of the trade or business                   incorporated trade or business, or
                                                                   which the owner controls must be com-                       (B) In the case of a partnership, own
                                                                   puted on the basis of their total com-                    more than 50 percent of either the cap-
                                                                   pensation. However, the requirements                      ital interest or the profits interest in
                                                                   of this subdivision cannot be satisfied                   such partnership.
                                                                   if the benefits and contributions pro-                    In determining whether an owner-em-
                                                                   vided under the plan for the employees                    ployee, or group of owner-employees,
                                                                   of the trade or business which is con-                    control a trade or business within the
                                                                   trolled are not comparable to those                       meaning of the preceding sentence, it
                                                                   provided under the plan covering the                      is immaterial whether or not such indi-
                                                                   owner-employee, or group of owner-em-                     viduals could be covered under a plan
                                                                   ployees, in the trade or business which                   established with respect to the trade or
                                                                   they do not control. Thus, for example,                   business. For example, if an individual
                                                                   if the owner-employee is covered by a                     who is an owner-employee has a 60-per-
                                                                   pension plan in the trade or business                     cent capital interest in another trade
                                                                   which he does not control, he may not                     or business, such individual controls
                                                                   satisfy the requirements of this sub-                     such trade or business and the provi-
                                                                   division by establishing a profit-shar-                   sions of this paragraph apply even
                                                                   ing plan in the trade or business which                   though the individual derives no
                                                                   he does control.                                          earned income, as defined in section
                                                                     (iii) If an individual is covered as an                 401(c)(2), from the controlled trade or
                                                                   owner-employee under the plans of two                     business. For purposes of determining
                                                                   or more trades or businesses which he                     the ownership interest of an owner-em-
                                                                   does not control and such individual                      ployee, or group of owner-employees,
                                                                   controls a trade or business, then the                    an owner-employee, or group of owner-
                                                                   contributions or benefits of the em-                      employees, is treated as owning any in-
                                                                   ployees under the plan of the trade or                    terest in a partnership which is owned,
                                                                   business which he does control must be                    directly or indirectly, by a partnership
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                                                                   as favorable as those provided for him                    controlled by such owner-employee, or
                                                                   under the most favorable plan of the                      group of owner-employees.

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–12

                                                                      (ii) The provisions of subparagraphs                   then no contribution shall be made
                                                                   (1) and (2) of this paragraph apply only                  under the plan by, or for, such indi-
                                                                   if the owner-employee who controls, or                    vidual during any of the 5 taxable
                                                                   the group of owner-employees who con-                     years of the plan beginning after the
                                                                   trol, a trade or business, or trades or                   distribution is made.
                                                                   businesses, within the meaning of sub-                      (2)(i) The provisions of subparagraph
                                                                   division (i) of this subparagraph is the                  (1) of this paragraph preclude an
                                                                   same owner-employee, or group of                          owner-employee who is a participant in
                                                                   owner-employees, covered under the                        a qualified pension or profit-sharing
                                                                   plan intended to satisfy the require-                     plan of his employer from withdrawing
                                                                   ments for qualification. Thus, for ex-                    any part of the funds accumulated on
                                                                   ample, if A is a 50-percent partner in                    his behalf except as provided in such
                                                                   both the AB and AC partnership, and if                    subparagraph (1). However, the dis-
                                                                   the AB partnership wishes to establish                    tribution of an owner-employee’s inter-
                                                                   a plan covering A and B, the provisions                   est, or any portion of such interest,
                                                                   of subparagraphs (1) and (2) of this                      after he attains age 591⁄2 is determined
                                                                   paragraph do not apply, since A does                      by the provisions of the plan. Thus, for
                                                                   not control either partnership, and                       example, if a qualified pension plan
                                                                   since B has no interest in the AC part-                   provides that the normal retirement
                                                                   nership.                                                  age under the plan is age 65, an owner-
                                                                      (m) Distribution of benefits. (1)(i) Sec-              employee would not be entitled to a
                                                                   tion 401(d)(4)(B) requires that a quali-                  distribution of an amount under the
                                                                   fied plan which provides contributions
                                                                                                                             plan merely because he attained age
                                                                   or benefits for any owner-employee
                                                                                                                             591⁄2.
                                                                   must not provide for the payment of
                                                                                                                               (ii) The provisions of subparagraph
                                                                   benefits to such owner-employee at any
                                                                   time before he has attained age 591⁄2.                    (1) of this paragraph do not preclude
                                                                   An exception to the foregoing rule per-                   the establishment of a profit-sharing
                                                                   mits a qualified plan to provide for the                  plan which provides for the distribu-
                                                                   distribution of benefits to an owner-                     tion of all, or part, of participants’ ac-
                                                                   employee prior to the time he attains                     counts after a fixed number of years.
                                                                   age 591⁄2 if he is disabled. For taxable                  However, such a plan must not permit
                                                                   years beginning after December 31,                        a distribution of any amount to any
                                                                   1966, see section 72(m)(7) and paragraph                  owner-employee prior to the time the
                                                                   (f) of § 1.72–17 for the meaning of dis-                  owner-employee has attained age 591⁄2
                                                                   abled. For taxable years beginning be-                    or becomes disabled within the mean-
                                                                   fore January 1, 1967, see section                         ing of section 72(m)(7) or section
                                                                   213(g)(3) for the meaning of disabled. In                 213(g)(3), whichever is applicable. On
                                                                   general, both sections 72(m)(7) and                       the other hand, if a distribution would
                                                                   213(g)(3) provide that an individual is                   have been made under the plan to an
                                                                   considered disabled if he is unable to                    owner-employee but for the fact that
                                                                   engage in any substantial gainful ac-                     he had not attained age 591⁄2, then the
                                                                   tivity because of a medically deter-                      amount of such distribution (including
                                                                   minable physical or mental impair-                        any increment earned on such amount)
                                                                   ment which can be expected to result                      must be distributed to such owner-em-
                                                                   in death or to be of long-continued and                   ployee at such time as he attains age
                                                                   indefinite duration. In addition, sec-                    591⁄2.
                                                                   tion 401(d)(4)(B) does not preclude the                     (3) A qualified pension, annuity, or
                                                                   distribution of benefits to the estate or                 profit-sharing plan which covers an
                                                                   other beneficiary of a deceased owner-                    owner-employee must provide that the
                                                                   employee prior to the time the owner-                     distribution of an owner-employee’s en-
                                                                   employee would have attained age 591⁄2                    tire interest under the plan must begin
                                                                   if he had lived.                                          prior to the end of the taxable year in
                                                                      (ii) A qualified plan must provide                     which he attains the age of 701⁄2, and
                                                                   that if, despite the restrictions in the                  such distribution must satisfy the re-
                                                                   plan to the contrary, an amount is pre-                   quirements of section 401(a)(9) and
                                                                   maturely distributed, or made avail-                      paragraph (e) of § 1.401–11. Further-
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                                                                   able, to a participant in such plan who                   more, section 401(d)(7) provides that, if
                                                                   is, or has been, an owner-employee,                       an owner-employee dies prior to the

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                                                                   § 1.401–13                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   time his entire interest has been dis-                       (2) Under section 401(c)(1), certain
                                                                   tributed to him, such owner-employee’s                    self-employed individuals are treated
                                                                   entire remaining interest under the                       as employees for purposes of section
                                                                   plan must, in general, either be distrib-                 401. In addition, under section 401(c)(4),
                                                                   uted to his beneficiary, or bene-                         a proprietor is treated as his own em-
                                                                   ficiaries, within 5 years, or be used                     ployer, and the partnership is treated
                                                                   within that period to purchase an im-                     as the employer of the partners. Under
                                                                   mediate annuity for his beneficiary, or                   section 404, certain contributions on
                                                                   beneficiaries. However, a distribution                    behalf of a self-employed individual are
                                                                   within 5 years of the death of the                        treated as deductible and taken into
                                                                   owner-employee is not required if the                     consideration     in   determining     the
                                                                   distribution of his interest has com-                     amount allowed as a deduction under
                                                                   menced and such distribution is for a                     section 404(a). Such contributions are
                                                                   term certain over a period not extend-                    treated under section 401 and the regu-
                                                                   ing beyond the joint life and survivor                    lations thereunder as employer con-
                                                                   expectancy of the owner-employee and                      tributions on behalf of the self-em-
                                                                   his spouse. Thus, for example, an annu-                   ployed individual. However, in some
                                                                   ity for the joint life and survivor ex-                   cases, additional contributions may be
                                                                   pectancy of an owner-employee and his                     made on behalf of a self-employed indi-
                                                                   spouse which guarantees payments for                      vidual. Such contributions are not
                                                                   10 years is a distribution which is pay-                  taken into consideration in deter-
                                                                   able over a period which does not ex-                     mining the amount deductible under
                                                                   ceed the joint life and survivor expect-
                                                                                                                             section 404 and are not taken into con-
                                                                   ancy of the owner-employee and his
                                                                                                                             sideration in computing the amount al-
                                                                   spouse if such expectancy is at least 10
                                                                                                                             lowed as a deduction under section
                                                                   years at the time the distribution first
                                                                                                                             404(a). For purposes of section 401 and
                                                                   commences.
                                                                                                                             the regulations thereunder, such con-
                                                                   [T.D. 6675, 28 FR 10126, Sept. 17, 1963, as               tributions are treated as employee con-
                                                                   amended by T.D. 6982, 33 FR 16500, Nov. 13,               tributions by the self-employed indi-
                                                                   1968; T.D. 6985, 33 FR 19815, Dec. 27, 1968; T.D.         vidual. If a self-employed individual is
                                                                   7428, 41 FR 34619, Aug. 16, 1976; T.D. 7611, 44           an owner-employee within the meaning
                                                                   FR 23520, Apr. 20, 1979; T.D. 8635, 60 FR 65549,
                                                                   Dec. 20, 1995]                                            of section 401(c)(3) and paragraph (d) of
                                                                                                                             § 1.401–10, then this section prescribes
                                                                   § 1.401–13 Excess contributions on be-                    the rules applicable if contributions
                                                                        half of owner-employees.                             are made in excess of those permitted
                                                                      (a) Introduction. (1) The provisions of                to be made under section 401.
                                                                   this section prescribe the rules relating                    (b) Excess contributions defined. (1)(i)
                                                                   to the treatment of excess contribu-                      Except as provided in paragraph (c) re-
                                                                   tions made under a qualified pension,                     lating to contributions which are ap-
                                                                   annuity, or profit-sharing plan on be-                    plied to pay premiums on certain annu-
                                                                   half of a self-employed individual who                    ity, endowment, or life insurance con-
                                                                   is an owner-employee (as defined in                       tracts, an excess contribution is any
                                                                   paragraph (d) of § 1.401–10). Paragraph                   amount described in subparagraphs (2)
                                                                   (b) of this section defines the term                      through (4) of this paragraph.
                                                                   ‘‘excess contribution’’. Paragraph (c) of                    (ii) For purposes of determining if
                                                                   this section describes an exception to                    the amount of any contribution made
                                                                   the definition of an excess contribution                  under the plan on behalf of an owner-
                                                                   in the case of contributions which are                    employee is an excess contribution, the
                                                                   applied to pay premiums on certain an-                    amount of any contribution made
                                                                   nuity, endowment, or life insurance                       under the plan which is allocable to the
                                                                   contracts. Paragraph (d) of this section                  purchase of life, accident, health, or
                                                                   describes the effect of making an ex-                     other insurance is not taken into ac-
                                                                   cess contribution which is not deter-                     count. The amount of any contribution
                                                                   mined to have been willfully made, and                    which is allocable to the cost of insur-
                                                                   paragraph (e) of this section describes                   ance protection is determined in ac-
                                                                   the effect of making an excess con-                       cordance with the provisions of para-
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                                                                   tribution which is determined to have                     graph (f) of § 1.404 (e)–1 and paragraph
                                                                   been willfully made.                                      (b) of § 1.72–16.

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–13

                                                                      (2)(i) In the case of a taxable year of                who are not owner-employees, during
                                                                   the plan for which employer contribu-                     such taxable year of the plan.
                                                                   tions are made on behalf of only owner-                     (iii) An excess contribution is the
                                                                   employees, an excess contribution is                      amount of any employee contribution
                                                                   the amount of any contribution for                        made on behalf of an owner-employee
                                                                   such taxable year on behalf of such                       which exceeds the lesser of $2,500 or 10
                                                                   owner-employee which is not deduct-                       percent of the earned income (as de-
                                                                   ible under section 404 (determined                        fined in paragraph (c) of § 1.401–10) of
                                                                   without regard to section 404(a)(10)).                    such owner-employee for his taxable
                                                                   This rule applies irrespective of wheth-                  year in which such contributions are
                                                                   er the plan provides for contributions                    made.
                                                                   on behalf of common-law employees, or                       (iv) In the case of a taxable year of
                                                                   self-employed individuals who are not                     an owner-employee in which contribu-
                                                                   owner-employees, when such employ-                        tions are made on behalf of such owner-
                                                                   ees or individuals become eligible for                    employee under more than one plan, an
                                                                   coverage under the plan, and irrespec-                    excess contribution is the amount of
                                                                   tive of whether contributions are in                      any employee contribution made on be-
                                                                   fact made for such employees or such                      half of such owner-employee under all
                                                                   individuals for other taxable years of                    such plans during such taxable year
                                                                   the plan.                                                 which exceeds $2,500. If such an excess
                                                                      (ii) In the case of a taxable year of                  contribution is made, the amount of
                                                                   the plan for which employer contribu-                     the excess contribution made on behalf
                                                                   tions are made on behalf of both owner-                   of the owner-employee with respect to
                                                                   employees and either common-law em-                       any one of such plans is the amount by
                                                                   ployees or self-employed individuals                      which the employee contribution on
                                                                   who are not owner-employees, an ex-                       his behalf under such plan for the year
                                                                   cess contribution is the amount of any                    exceeds an amount which bears the
                                                                   employer contribution on behalf of any
                                                                                                                             same ratio to $2,500 as the earned in-
                                                                   owner-employee for such taxable year
                                                                                                                             come of the owner-employee derived
                                                                   which exceeds the amount deductible
                                                                                                                             from the trade or business with respect
                                                                   under section 404 (determined without
                                                                                                                             to which the plan is established bears
                                                                   regard to section 404(a)(10)) unless such
                                                                                                                             to his earned income derived from the
                                                                   amount may be treated as an employee
                                                                                                                             trades or businesses with respect to
                                                                   contribution under the plan in accord-
                                                                                                                             which all such plans are established.
                                                                   ance with the rules of paragraph (d)(3)
                                                                   of § 1.401–11 and is a permissible em-                      (4) An excess contribution is the
                                                                   ployee contribution under subpara-                        amount of any contribution on behalf
                                                                   graph (3) of this paragraph.                              of an owner-employee for any taxable
                                                                      (3)(i) In the case of a taxable year of                year of the plan with respect to which
                                                                   the plan for which employer contribu-                     the plan is treated, under section
                                                                   tions are made on behalf of both an                       401(e)(2), as not meeting the require-
                                                                   owner-employee and either common-                         ments of section 401(d) with respect to
                                                                   law employees or self-employed indi-                      such owner-employee.
                                                                   viduals who are not owner-employees,                        (c) Contributions for premiums on cer-
                                                                   employee contributions on behalf of an                    tain annuity, endowment, or life insur-
                                                                   owner-employee may be made for such                       ance contracts. (1) The term ‘‘excess
                                                                   taxable year of the plan. How-ever, the                   contribution’’ does not include the
                                                                   amount of such contributions, if any,                     amount of any employer contributions
                                                                   which is described in subdivisions (ii),                  on behalf of an owner-employee which,
                                                                   (iii), or (iv) of this subparagraph is an                 under the provisions of the plan, is ex-
                                                                   excess contribution.                                      pressly required to be applied (either
                                                                      (ii) An excess contribution is the                     directly or through a trustee) to pay
                                                                   amount of any employee contribution                       the premiums or other consideration
                                                                   made on behalf of any owner-employee                      for one or more annuity, endowment,
                                                                   during a taxable year of the plan at a                    or life insurance contracts, if—
                                                                   rate in excess of the rate of contribu-                     (i) The employer contributions so ap-
                                                                   tions which may be made as employee                       plied meet the requirements of sub-
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                                                                   contributions by common-law employ-                       paragraphs (2) through (4) of this para-
                                                                   ees, or by self-employed individuals                      graph, and

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                                                                   § 1.401–13                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                     (ii) The total employer contributions                      (4)(i) For any taxable year of the em-
                                                                   required to be applied annually to pay                    ployer, the amount of contributions by
                                                                   premiums on behalf of any owner-em-                       the employer on behalf of the owner-
                                                                   ployee for contracts described in this                    employee which is applied to pay pre-
                                                                   paragraph do not exceed $2,500. For                       miums under the contracts described in
                                                                   purposes of computing such $2,500                         this paragraph must not exceed the av-
                                                                   limit, the total employer contributions                   erage of the amounts deductible under
                                                                   includes amounts which are allocable                      section 404 (determined without regard
                                                                   to the purchase of life, accident,                        to section 404(a)(10)) by such employer
                                                                   health, or other insurance.                               on behalf of such owner-employee for
                                                                     (2)(i) The employer contributions                       the most recent three taxable years of
                                                                   must be paid under a plan which satis-                    the employer (ending prior to the date
                                                                   fies all the requirements for qualifica-                  the latest contract was entered into or
                                                                   tion. Accordingly, for example, con-                      modified to provide additional bene-
                                                                   tributions can be paid under the plan                     fits), in which the owner-employee de-
                                                                   for life insurance protection only to                     rived earned income from the trade or
                                                                   the extent otherwise permitted under                      business with respect to which the plan
                                                                   sections 401 through 404 and the regula-                  is established. However, if such owner-
                                                                   tions thereunder. However, certain of                     employee has not derived earned in-
                                                                   the requirements for qualification are                    come for at least three taxable years
                                                                   modified with respect to a plan de-                       preceding such date, then, in deter-
                                                                   scribed in this paragraph (see section                    mining the ‘‘average of the amounts
                                                                                                                             deductible’’, only so many of such tax-
                                                                   401(a)(10)(A)(ii) and (d)(5)).
                                                                                                                             able years as such owner-employee was
                                                                     (ii) A plan described in this para-
                                                                                                                             engaged in such trade or business and
                                                                   graph is not disqualified merely be-
                                                                                                                             derived earned income therefrom are
                                                                   cause a contribution is made on behalf                    taken into account.
                                                                   of an owner-employee by his employer                         (ii) For the purpose of making the
                                                                   during a taxable year of the employer                     computation described in subdivision
                                                                   for which the owner-employee has no                       (i) of this subparagraph, the taxable
                                                                   earned income. On the other hand, a                       years taken into account include those
                                                                   plan will fail to qualify if a contribu-                  years in which the individual derived
                                                                   tion is made on behalf of an owner-em-                    earned income from the trade or busi-
                                                                   ployee which results in the discrimina-                   ness but was not an owner-employee
                                                                   tion prohibited by section 401(a)(4) as                   with respect to such trade or business.
                                                                   modified by section 401(a)(10)(A)(ii) (see                Furthermore, taxable years of the em-
                                                                   paragraph (f)(3) of § 1.401–12).                          ployer preceding the taxable year in
                                                                     (3) The employer contributions must                     which a qualified plan is established
                                                                   be applied to pay premiums or other                       are taken into account. If such taxable
                                                                   consideration for a contract issued on                    years began prior to January 1, 1963,
                                                                   the life of the owner-employee. For                       the amount deductible is determined as
                                                                   purposes of this subparagraph, a con-                     if section 404 included section 404(a) (8),
                                                                   tract is not issued on the life of an                     (9), (10), and (e).
                                                                   owner-employee unless all the proceeds                       (5) The amount of any employer con-
                                                                   which are, or may become, payable                         tribution which is not deductible but
                                                                   under the contract are payable di-                        which is not treated as an excess con-
                                                                   rectly, or through a trustee of a trust                   tribution because of the provisions of
                                                                   described in section 401(a) and exempt                    this paragraph shall be taken into ac-
                                                                   from tax under section 501(a), to the                     count as an employee contribution
                                                                   owner-employee or to the beneficiary                      made on behalf of the owner-employee
                                                                   named in the contract or under the                        during the owner-employee’s taxable
                                                                   plan. Accordingly, for example, a non-                    year with, or within which, the taxable
                                                                   transferable face-amount certificate                      year of the person treated as his em-
                                                                   (as defined in section 401(g) and the                     ployer under section 401(c)(4) ends.
                                                                   regulations thereunder) is considered                     However, such contribution is only
                                                                   an annuity on the life of the owner-em-                   treated as an employee contribution
                                                                   ployee if the proceeds of such contract                   made on behalf of the owner-employee
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                                                                   are payable only to the owner-em-                         for the purpose of determining whether
                                                                   ployee or his beneficiary.                                any other employee contribution made

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–13

                                                                   on behalf of the owner-employee during                    terest of the owner-employee under the
                                                                   such period is an excess contribution                     plan’’ for such taxable year (deter-
                                                                   described in paragraph (b)(3) of this                     mined in accordance with the provi-
                                                                   section.                                                  sions of subparagraph (5)(ii) of this
                                                                     (d) Effect of an excess contribution                    paragraph) as the net amount of the
                                                                   which is not willfully made. (1) If an ex-                excess contribution bears to the aggre-
                                                                   cess contribution (as defined in para-                    gate amount standing to the account of
                                                                   graph (b) of this section) is made on be-                 the owner-employee at the end of that
                                                                   half of an owner-employee, and if such                    year (including the net amount of any
                                                                   contribution is not willfully made,                       excess contribution).
                                                                   then the provisions of this paragraph
                                                                                                                               (ii) The notice described in subdivi-
                                                                   describe the effect of such an excess
                                                                                                                             sion (i) of this subparagraph shall not
                                                                   contribution. However, if the excess
                                                                   contribution made on behalf of an                         be mailed prior to the time that the
                                                                   owner-employee is determined to have                      amount of the tax under chapter 1 of
                                                                   been willfully made, then the provi-                      the Code of the owner-employee to
                                                                   sions of paragraph (e) of this section                    whom the excess contribution is to be
                                                                   are applicable to such contribution.                      repaid has been finally determined for
                                                                     (2)(i) This paragraph does not apply                    his taxable year in which such excess
                                                                   to an excess contribution if the net                      contribution was made. For purposes of
                                                                   amount of such excess contribution (as                    this subdivision, a final determination
                                                                   defined in subparagraph (4) of this                       of the amount of tax liability of the
                                                                   paragraph) and the net income attrib-                     owner-employee includes—
                                                                   utable to such amount are repaid to                         (A)1 A decision by the Tax Court of
                                                                   the owner-employee on whose behalf                        the United States, or a judgment, de-
                                                                   the excess contribution was made at                       cree, or other order by any court of
                                                                   any time before the end of six months                     competent jurisdiction, which has be-
                                                                   beginning on the day on which the dis-                    come final;
                                                                   trict director sends notice (by certified                   (B) A closing agreement authorized
                                                                   or registered mail) of the amount of                      by section 7121; or
                                                                   the excess contribution to the trust,
                                                                                                                               (C) The expiration of the period of
                                                                   insurance company, or other person to
                                                                                                                             limitation on suits by the taxpayer for
                                                                   whom such excess contribution was
                                                                   paid. The net income attributable to                      refund, unless suit is instituted prior
                                                                   the net amount of the excess contribu-                    to the expiration of such period.
                                                                   tion is the aggregate of the amounts of                     (iii) For purposes of this subpara-
                                                                   net income attributable to the net                        graph, an amount is treated as repaid
                                                                   amount of the excess contribution for                     to an owner-employee if an adequate
                                                                   each year of the plan beginning with                      adjustment is made to the account of
                                                                   the taxable year of the plan within                       the owner-employee. An adequate ad-
                                                                   which the excess contribution is made                     justment is made to the account of an
                                                                   and ending with the close of the tax-                     owner-employee, for example, if the
                                                                   able year of the plan immediately pre-                    amount of the excess contribution
                                                                   ceding the taxable year of the plan in                    (without any reduction for any loading
                                                                   which the net amount of the excess                        or other administrative charge) and
                                                                   contribution is repaid. The amount of                     the net income attributable to such
                                                                   net income attributable to the net                        amount is taken into account as a con-
                                                                   amount of the excess contribution for                     tribution under the plan for the cur-
                                                                   each year is the amount of net income                     rent year. In such a case, the gross in-
                                                                   earned under the plan during the year                     come of the owner-employee for his
                                                                   which is allocated in a reasonable man-                   taxable year in which such adjustment
                                                                   ner to the net amount of the excess                       is made includes the amount of the net
                                                                   contribution. For example, the amount                     income attributable to the excess con-
                                                                   of net income earned under the plan for
                                                                                                                             tribution.
                                                                   the year which is attributable to the
                                                                   net amount of an excess contribution                        (iv) If the net amount of the excess
                                                                   can be computed as the amount which                       contribution and the net income at-
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                                                                   bears the same ratio to the amount of                     tributable thereto is repaid, within the
                                                                   the ‘‘net income attributable to the in-                  period described in subdivision (i) of

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                                                                   § 1.401–13                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   this subparagraph, to the owner-em-                       this section, reduced by the amount of
                                                                   ployee on whose behalf such contribu-                     any loading charge or other adminis-
                                                                   tion was made, then the net income at-                    trative charge ratably allocable to
                                                                   tributable to the excess contribution                     such excess contribution.
                                                                   is, pursuant to section 61(a), includible                   (5)(i) If a plan is considered as not
                                                                   in the gross income of the owner-em-                      meeting the requirements for qualifica-
                                                                   ployee for his taxable year in which                      tion with respect to an owner-employee
                                                                   such amount is distributed, or made                       by reason of the provisions of subpara-
                                                                   available, to him. However, such                          graph (3) of this paragraph for any tax-
                                                                   amount is not a distribution to which                     able year of the plan, such owner-em-
                                                                   section 402 or 403 and section 72 apply                   ployee’s gross income for any of his
                                                                   (see subparagraph (6) of this para-                       taxable years with or within which
                                                                   graph).                                                   such taxable year of the plan ends
                                                                     (3)(i) If the net amount of any excess                  shall, for purposes of chapter 1 of the
                                                                   contribution (as defined in subpara-                      Code, include the portion of the net in-
                                                                   graph (4) of this paragraph) and the net                  come earned under the plan for such
                                                                   income attributable to that excess con-                   taxable year of the plan which is at-
                                                                   tribution are not repaid to the owner-                    tributable to the interest of the owner-
                                                                   employee on whose behalf the excess                       employee under the plan.
                                                                   contribution was made before the end                        (ii) For purposes of this subpara-
                                                                   of the six-month period described in                      graph, the term ‘‘net income’’ means
                                                                   subparagraph (2)(i) of this paragraph,                    the net income earned under the plan
                                                                   the plan under which the excess con-                      determined in accordance with gen-
                                                                   tribution has been made is considered,                    erally accepted accounting principles
                                                                   for purposes of section 404, as not satis-                consistently applied, and the ‘‘net in-
                                                                   fying the requirements for qualifica-                     come attributable to the interest of the
                                                                   tion with respect to such owner-em-                       owner-employee under the plan’’ is the
                                                                   ployee for all taxable years of the plan                  amount which bears the same ratio to
                                                                   described in subdivision (ii) of this sub-                the aggregate amount of net income
                                                                   paragraph. However, such disqualifica-                    earned under the plan for the taxable
                                                                   tion only applies to the interest of the                  year of the plan as the amount stand-
                                                                   owner-employee on whose behalf an ex-                     ing to the account of the owner-em-
                                                                   cess contribution has been made and                       ployee at the end of that year (includ-
                                                                   does not disqualify the plan with re-                     ing the amount of any excess contribu-
                                                                   spect to the other participants there-                    tion which is credited to his account)
                                                                   under.                                                    bears to the aggregate amount of all
                                                                     (ii) The taxable years referred to in                   funds under the plan for all employees
                                                                   subdivision (i) of this subparagraph in-                  at the end of that year (including the
                                                                                                                             aggregate amount of excess contribu-
                                                                   clude the taxable year of the plan with-
                                                                                                                             tions credited to the accounts of all
                                                                   in which the excess contribution is
                                                                                                                             owner-employees for that year).
                                                                   made and each succeeding taxable year
                                                                                                                               (iii) The provisions of this subpara-
                                                                   of the plan until the beginning of the
                                                                                                                             graph may be illustrated by the fol-
                                                                   taxable year of the plan in which the
                                                                                                                             lowing example:
                                                                   trust, insurance company, or other per-
                                                                   son to whom such excess contribution                         Example. A is an owner-employee covered
                                                                   was paid repays to such owner-em-                         under the X Employees’ Pension Trust who
                                                                   ployee—                                                   files his return on the basis of a calendar
                                                                                                                             year. An excess contribution was made on
                                                                     (A) The net amount of the excess                        behalf of A during the plan year beginning
                                                                   contribution, and                                         on January 1, 1966. The net amount of the ex-
                                                                     (B) The amount of income attrib-                        cess contribution and the net income attrib-
                                                                   utable to his interest under the plan                     utable thereto was not repaid to A before the
                                                                   which is includible in his gross income                   end of the six-month period described in sub-
                                                                   for any taxable year by reason of the                     paragraph (2)(i) of this paragraph. Accord-
                                                                   provisions of subparagraph (5) of this                    ingly, the net income earned under the plan
                                                                                                                             during 1966 which is attributable to A’s in-
                                                                   paragraph.
                                                                                                                             terest is to be included in his gross income
                                                                     (4) For purposes of this paragraph,                     for 1966. Assume that the trust which forms
                                                                   the net amount of an excess contribu-
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                                                                                                                             a part of the pension plan of the X Company
                                                                   tion is the amount of such excess con-                    also files its returns on a calendar year
                                                                   tribution, as defined in paragraph (b) of                 basis, and that during 1966 the trust had a

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–13
                                                                   gross income of $4,000 (including a long-term             after the adjustment in such owner-em-
                                                                   capital gain of $2,500) and expenses of $500.             ployee’s account has taken place.
                                                                   Assume, further, that the amount standing
                                                                                                                               (8) Notwithstanding any other provi-
                                                                   to A’s account on December 31, 1966 (includ-
                                                                   ing the amount of the excess contribution),               sion of law, in any case in which the
                                                                   was $20,000, and that on that date the                    plan is treated as not satisfying the re-
                                                                   amount funded under the plan for all em-                  quirements for qualification with re-
                                                                   ployees (including A) is $140,000. Then the               spect to any owner-employee by reason
                                                                   net income of the trust for 1966 is $3,500                of the provisions of section 401(e), the
                                                                   ($4,000¥$500). The net income attributable to             period for assessing, with respect to
                                                                   the interest of A under the plan is $500 (the             such owner-employee, any deficiency
                                                                   amount which bears the same ratio to $3,500               arising by reason of—
                                                                   as $20,000 bears to $140,000). Accordingly, $500
                                                                   is included in A’s gross income in accordance               (i) The disallowance of any deduction
                                                                   with the provisions of section 401(e)(2)(B) as            under section 404 by reason of the pro-
                                                                   the ‘‘net income attributable to the interest             visions of subparagraph (3) of this para-
                                                                   of the owner-employee under the plan’’.                   graph, or
                                                                                                                               (ii) The inclusion of amounts in the
                                                                      (6) The provisions of section 402 or 403
                                                                                                                             gross income of the owner-employee by
                                                                   and section 72 do not apply to any
                                                                                                                             reason of the provisions of subpara-
                                                                   amount distributed, or made available,
                                                                                                                             graph (5) of this paragraph,
                                                                   to an owner-employee which is de-
                                                                   scribed in this paragraph. Accordingly,                   shall not expire prior to 18 months
                                                                   for example, the provisions of section                    after the day the district director
                                                                   72(m)(5)(A)(i), relating to amounts sub-                  mails the notice with respect to the ex-
                                                                   ject to the penalty tax imposed by sec-                   cess contribution (described in sub-
                                                                   tion 72(m), do not apply to the amount                    paragraph (2)(i) of this paragraph)
                                                                   of the net income attributable to the                     which gives rise to such disallowance
                                                                   interest of an owner-employee (as de-                     or inclusion. Thus, for example, not-
                                                                   fined in subparagraph (5)(ii) of this                     withstanding the provisions of section
                                                                   paragraph) which is includible in his                     6212(c) (relating to the restriction on
                                                                   gross income. Furthermore, in such a                      the determination of additional defi-
                                                                   case,    the    provisions    of   section                ciencies), if, after a final determination
                                                                   401(d)(5)(C) do not apply to such                         by the Tax Court of the income tax li-
                                                                   amount.                                                   ability of an owner-employee for a tax-
                                                                      (7) Certain adjustments will be re-                    able year in which an excess contribu-
                                                                   quired with respect to the interest of                    tion was made, the amount of such ex-
                                                                   an owner-employee after any amount                        cess contribution and the net income
                                                                   previously allocated to his account has                   attributable thereto is not paid to the
                                                                   been returned to him pursuant to the                      owner-employee before the end of the
                                                                   provisions of this paragraph. For exam-                   six-month period described in subpara-
                                                                   ple, if the determination of whether                      graph (2)(i) of this paragraph, an addi-
                                                                   life insurance benefits provided under                    tional deficiency assessment may be
                                                                   the plan are incidental is made, in                       made for such taxable year with re-
                                                                   part, with regard to the contributions                    spect to such excess contribution.
                                                                   allocated to the accounts of the par-                       (e) Effect of an excess contribution
                                                                   ticipants covered under the plan, an                      which is determined to have been willfully
                                                                   adjustment may have to be made with                       made. If an excess contribution (as de-
                                                                   respect to the life insurance purchased                   fined in paragraph (b) of this section)
                                                                   under the plan for any owner-employee                     on behalf of an owner-employee is de-
                                                                   after any amount previously allocated                     termined to have been willful ly made,
                                                                   to his account has been repaid to him.                    then—
                                                                   Furthermore, if, for example, an                            (1) Only the provisions of this para-
                                                                   owner-employee has received annuity                       graph apply to such contribution;
                                                                   payments which were taxable under                           (2) There shall be distributed to the
                                                                   the exclusion ratio rule of section 72,                   owner-employee on whose behalf such
                                                                   and if such exclusion ratio took into                     contribution was willfully made his en-
                                                                   account any amount credited to the ac-                    tire interest in all plans in which he is
                                                                   count of the owner-employee which is                      a participant as an owner-employee;
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                                                                   subsequently repaid to him, then such                       (3) The amount distributed under
                                                                   exclusion ratio must be recomputed                        each such plan is an amount to which

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                                                                   § 1.401–14                                                              26 CFR Ch. I (4–1–11 Edition)

                                                                   section 72 does apply (see section                        benefits provided under the pension
                                                                   72(m)(5)(A)(iii)); and                                    plan, or else be retired by an employer
                                                                      (4) For purposes of section 404, no                    providing such medical benefits by rea-
                                                                   plan in which such individual is cov-                     son of permanent disability. For pur-
                                                                   ered as an owner-employee shall be                        poses of the preceding sentence, an em-
                                                                   considered as meeting the require-                        ployee is not considered to be eligible
                                                                   ments for qualification with respect to                   to receive retirement benefits provided
                                                                   such owner-employee for any taxable                       under the plan if he is still employed
                                                                   year of the plan beginning with or                        by the employer and a separation from
                                                                   within the calendar year in which it is                   employment is a condition to receiving
                                                                   determined that the excess contribu-                      the retirement benefits.
                                                                   tion has been willfully made and with                       (2) Discrimination. A plan which pro-
                                                                   or within the five calendar years fol-                    vides medical benefits described in sec-
                                                                   lowing such year.                                         tion 401(h) must not discriminate in
                                                                      (f) Years to which this section applies.               favor of officers, shareholders, super-
                                                                   This section applies to contributions                     visory employees, or highly com-
                                                                   made in taxable years of employers be-                    pensated employees with respect to
                                                                   ginning before January 1, 1976. Thus,                     coverage and with respect to the con-
                                                                   for example, in the case of willful con-                  tributions or benefits under the plan.
                                                                   tributions made in taxable years of em-                   The determination of whether such a
                                                                   ployers beginning before January 1,                       plan so discriminates is made with ref-
                                                                   1976, paragraphs (e) (1), (2), and (3) of                 erence to the retirement portion of the
                                                                   this section apply to such taxable                        plan as well as the portion providing
                                                                   years beginning on or after such date.                    the medical benefits described in sec-
                                                                   However, in such a case, because the                      tion 401(h). Thus, for example, a plan
                                                                   application of paragraph (e)(4) of this                   will not be qualified under section 401
                                                                   section affects contributions made in                     if it discriminates in favor of employ-
                                                                   taxable years of employers beginning                      ees who are officers or shareholders
                                                                   on or after January 1, 1976, paragraph                    with respect to either portion of the
                                                                   (e)(4) of this section does not apply to                  plan.
                                                                   such taxable years; see paragraph (c) of                    (3) Funding medical benefits. Contribu-
                                                                   § 1.401(e)–4 (relating to transitional                    tions to provide the medical benefits
                                                                   rules for excess contributions).                          described in section 401(h) may be
                                                                   [T.D. 6676, 28 FR 10139, Sept. 17, 1963; as               made either on a contributory or non-
                                                                   amended by T.D. 7636, 44 FR 47053, Aug. 10,               contributory basis, without regard to
                                                                   1979]                                                     whether the contributions to fund the
                                                                                                                             retirement benefits are made on a
                                                                   § 1.401–14 Inclusion of medical bene-                     similar basis. Thus, for example, the
                                                                        fits for retired employees in quali-                 contributions to fund the medical ben-
                                                                        fied pension or annuity plans.                       efits described in section 401(h) may be
                                                                      (a) Introduction. Under section 401(h)                 provided for entirely out of employer
                                                                   a qualified pension or annuity plan                       contributions even though the retire-
                                                                   may make provision for the payment of                     ment benefits under the plan are deter-
                                                                   sickness, accident, hospitalization, and                  mined on the basis of both employer
                                                                   medical expenses for retired employ-                      and employee contributions.
                                                                   ees, their spouses, and their depend-                       (4) Definitions. For purposes of sec-
                                                                   ents. The term ‘‘medical benefits de-                     tion 401(h) and this section:
                                                                   scribed in section 401(h)’’ is used in this                 (i) The term dependent shall have the
                                                                   section to describe such payments.                        same meaning as that assigned to it by
                                                                      (b) In general—(1) Coverage. Under                     section 152, and
                                                                   section 401(h), a qualified pension or                      (ii) The term medical expense means
                                                                   annuity plan may provide for the pay-                     expenses for medical care as defined in
                                                                   ment of medical benefits described in                     section 213(e)(1).
                                                                   section 401(h) only for retired employ-                     (c) Requirements. The requirements
                                                                   ees, their spouses, or their dependents.                  which must be met for a qualified pen-
                                                                   To be ‘‘retired’’ for purposes of eligi-                  sion or annuity plan to provide medical
                                                                   bility to receive medical benefits de-                    benefits described in section 401(h) are
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                                                                   scribed in section 401(h), an employee                    set forth in subparagraphs (1) through
                                                                   must be eligible to receive retirement                    (5) of this paragraph.

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                                                                   Internal Revenue Service, Treasury                                                             § 1.401–14

                                                                      (1) Benefits. (i) The plan must specify                included in the plan ($20,000) or $65,000 does
                                                                   the medical benefits described in sec-                    not exceed 25 percent of $265,000, the aggre-
                                                                   tion 401(h) which will be available and                   gate of the contributions made in 1964 and
                                                                                                                             1965.
                                                                   must contain provisions for deter-
                                                                   mining the amount which will be paid.                        (2) Separate accounts. Where medical
                                                                   Such benefits, when added to any life                     benefits described in section 401(h) are
                                                                   insurance protection provided for                         provided for under a qualified pension
                                                                   under the plan, must be subordinate to                    or annuity plan, a separate account
                                                                   the retirement benefits provided by                       must be maintained with respect to
                                                                   such plan. For purposes of this section,                  contributions to fund such benefits.
                                                                   life insurance protection includes any                    The separation required by this section
                                                                   benefit paid under the plan on behalf of                  is for recordkeeping purposes only.
                                                                   an employee-participant as a result of                    Consequently, the funds in the medical
                                                                   the employee-participant’s death to                       benefits account need not be separately
                                                                   the extent such payment exceeds the                       invested. They may be invested with
                                                                   amount of the reserve to provide the                      funds set aside for retirement purposes
                                                                   retirement benefits for the employee-                     without identification of which invest-
                                                                   participant existing at his death. The                    ment properties are allocable to each
                                                                   medical benefits described in section                     account. However, where the invest-
                                                                   401(h) are considered subordinate to the                  ment properties are not allocated to
                                                                   retirement benefits if at all times the                   each account, the earnings on such
                                                                   aggregate of contributions (made after                    properties must be allocated to each
                                                                   the date on which the plan first in-                      account in a reasonable manner.
                                                                   cludes such medical benefits) to pro-                        (3) Reasonable and ascertainable. Sec-
                                                                   vide such medical benefits and any life                   tion 401(h) further requires that
                                                                   insurance protection does not exceed 25                   amounts contributed to fund medical
                                                                   percent of the aggregate contributions                    benefits therein described must be rea-
                                                                   (made after such date) other than con-                    sonable and ascertainable. For the
                                                                   tributions to fund past service credits.                  rules relating to the deduction of such
                                                                      (ii) The meaning of the term subordi-                  contributions, see paragraph (f) of
                                                                   nate may be illustrated by the fol-                       § 1.404(a)–3. The employer must, at the
                                                                   lowing example:                                           time he makes a contribution, des-
                                                                     Example. The X Corporation amends its                   ignate that portion of such contribu-
                                                                   qualified pension plan to provide medical                 tion allocable to the funding of medical
                                                                   benefits described in section 401(h) effective            benefits.
                                                                   for the taxable year 1964. The total contribu-               (4) Impossibility of diversion prior to
                                                                   tions under the plan (excluding those for                 satisfaction of all liabilities. Section
                                                                   past service credits) for the taxable year 1964           401(h) further requires that it must be
                                                                   are $125,000, allocated as follows: $100,000 for
                                                                                                                             impossible, at any time prior to the
                                                                   retirement benefits, $10,000 for life insurance
                                                                   protection, and $15,000 for medical benefits              satisfaction of all liabilities under the
                                                                   described in section 401(h). The medical ben-             plan to provide for the payment of
                                                                   efits described in section 401(h) are consid-             medical benefits described in section
                                                                   ered subordinate to the retirement benefits               401(h), for any part of the corpus or in-
                                                                   since the portion of the contributions allo-              come of the medical benefits account
                                                                   cated to the medical benefits described in                to be (within the taxable year or there-
                                                                   section 401(h) ($15,000) and to life insurance            after) used for, or diverted to, any pur-
                                                                   protection after such medical benefits were
                                                                                                                             pose other than the providing of such
                                                                   included in the plan ($10,000), or $25,000, does
                                                                   not exceed 25 percent of $125,000. For the tax-           benefits. Consequently, a plan which,
                                                                   able year 1965, the X Corporation contributes             for example, under its terms, permits
                                                                   $140,000 (exclusive of contributions for past             funds in the medical benefits account
                                                                   service credits) allocated as follows: $100,000           to be used for any retirement benefit
                                                                   for retirement benefits, $10,000 for life insur-          provided under the plan does not sat-
                                                                   ance protection, and $30,000 for medical bene-            isfy the requirements of section 401(h)
                                                                   fits described in section 401(h). The medical             and will not qualify under section
                                                                   benefits described in section 401(h) are con-
                                                                                                                             401(a). However, the payment of any
                                                                   sidered subordinate to the retirement bene-
                                                                   fits since the aggregate contributions allo-              necessary or appropriate expenses at-
                                                                                                                             tributable to the administration of the
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                                                                   cated to the medical benefits described in
                                                                   section 401(h) ($45,000) and to life insurance            medical benefits account does not af-
                                                                   protection after such medical benefits were               fect the qualification of the plan.

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                                                                   § 1.401(a)–1                                                            26 CFR Ch. I (4–1–11 Edition)

                                                                     (5) Reversion upon satisfaction of all li-              regulation is applicable except as oth-
                                                                   abilities. The plan must provide that                     erwise provided.
                                                                   any amounts which are contributed to                         (iii) The use of the type of plan provi-
                                                                   fund medical benefits described in sec-                   sion described in § 1.415(a)–1(d)(1) which
                                                                   tion 401(h) and which remain in the                       automatically freezes or reduces the
                                                                   medical benefits account upon the sat-                    rate of benefit accrual or the annual
                                                                   isfaction of all liabilities arising out of               addition to insure that the limitations
                                                                   the operation of the medical benefits                     of section 415 will not be exceeded, will
                                                                   portion of the plan are to be returned                    not be considered to violate the re-
                                                                   to the employer.                                          quirements of this subparagraph pro-
                                                                     (6) Forfeitures. The plan must ex-                      vided that the operation of such provi-
                                                                   pressly provide that in the event an in-                  sion precludes discretion by the em-
                                                                   dividual’s interest in the medical bene-                  ployer.
                                                                   fits account is forfeited prior to termi-
                                                                                                                                (2) Normal retirement age—(i) General
                                                                   nation of the plan an amount equal to
                                                                                                                             rule. The normal retirement age under
                                                                   the amount of the forfeiture must be
                                                                                                                             a plan must be an age that is not ear-
                                                                   applied as soon as possible to reduce
                                                                                                                             lier than the earliest age that is rea-
                                                                   employer contributions to fund the
                                                                                                                             sonably representative of the typical
                                                                   medical benefits described in section
                                                                   401(h).                                                   retirement age for the industry in
                                                                     (d) Effective date. This section applies                which the covered workforce is em-
                                                                   to taxable years of a qualified pension                   ployed.
                                                                   or annuity plan beginning after Octo-                        (ii) Age 62 safe harbor. A normal re-
                                                                   ber 23, 1962.                                             tirement age under a plan that is age
                                                                                                                             62 or later is deemed to be not earlier
                                                                   [T.D. 6722, 29 FR 5072, Apr. 14, 1964]                    than the earliest age that is reasonably
                                                                   § 1.401(a)–1 Post-ERISA qualified plans                   representative of the typical retire-
                                                                         and qualified trusts; in general.                   ment age for the industry in which the
                                                                                                                             covered workforce is employed.
                                                                      (a) Introduction—(1) In general. This
                                                                                                                                (iii) Age 55 to age 62. In the case of a
                                                                   section and the following regulation
                                                                   sections under section 401 reflect the                    normal retirement age that is not ear-
                                                                   provisions of section 401 after amend-                    lier than age 55 and is earlier than age
                                                                   ment by the Employee Retirement In-                       62, whether the age is not earlier than
                                                                   come Security Act of 1974 (Pub. L. 93–                    the earliest age that is reasonably rep-
                                                                   406) (‘‘ERISA’’).                                         resentative of the typical retirement
                                                                      (2) [Reserved]                                         age for the industry in which the cov-
                                                                      (b) Requirements for pension plans—(1)                 ered workforce is employed is based on
                                                                   Definitely determinable benefits. (i) In                  all of the relevant facts and cir-
                                                                   order for a pension plan to be a quali-                   cumstances.
                                                                   fied plan under section 401(a), the plan                     (iv) Under age 55. A normal retire-
                                                                   must be established and maintained by                     ment age that is lower than age 55 is
                                                                   an employer primarily to provide sys-                     presumed to be earlier than the ear-
                                                                   tematically for the payment of defi-                      liest age that is reasonably representa-
                                                                   nitely determinable benefits to its em-                   tive of the typical retirement age for
                                                                   ployees over a period of years, usually                   the industry in which the covered
                                                                   for life, after retirement or attainment                  workforce is employed, unless the
                                                                   of normal retirement age (subject to                      Commissioner determines that under
                                                                   paragraph (b)(2) of this section). A plan                 the facts and circumstances the normal
                                                                   does not fail to satisfy this paragraph                   retirement age is not earlier than the
                                                                   (b)(1)(i) merely because the plan pro-                    earliest age that is reasonably rep-
                                                                   vides, in accordance with section                         resentative of the typical retirement
                                                                   401(a)(36), that a distribution may be                    age for the industry in which the cov-
                                                                   made from the plan to an employee                         ered workforce is employed.
                                                                   who has attained age 62 and who is not                       (v) Age 50 safe harbor for qualified pub-
                                                                   separated from employment at the                          lic safety employees. A normal retire-
                                                                   time of such distribution.                                ment age under a plan that is age 50 or
                                                                      (ii) Section 1.401–1(b)(1)(i), a pre-                  later is deemed to be not earlier than
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                                                                   ERISA regulation, provides rules appli-                   the earliest age that is reasonably rep-
                                                                   cable to this requirement, and that                       resentative of the typical retirement

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                                                                   Internal Revenue Service, Treasury                                                           § 1.401(a)–4

                                                                   age for the industry in which the cov-                    tion is applicable except as otherwise
                                                                   ered workforce is employed if substan-                    provided.
                                                                   tially all of the participants in the plan                   (b) Section 415 suspense account. Not-
                                                                   are qualified public safety employees                     withstanding paragraph (a) of this sec-
                                                                   (within     the    meaning     of   section               tion, a plan, or trust forming part of a
                                                                   72(t)(10)(B)).                                            plan, may provide for the reversion to
                                                                      (3) Benefit distribution prior to retire-              the employer, upon termination of the
                                                                   ment. For purposes of paragraph                           plan, of amounts contributed to the
                                                                   (b)(1)(i) of this section, retirement does                plan that exceed the limitations im-
                                                                   not include a mere reduction in the                       posed under section 415(c), to the ex-
                                                                   number of hours that an employee                          tent set forth in rules prescribed by the
                                                                   works. Accordingly, benefits may not                      Commissioner in revenue rulings, no-
                                                                   be distributed prior to normal retire-                    tices, or other guidance published in
                                                                   ment age solely due to a reduction in                     the Internal Revenue Bulletin (see
                                                                   the number of hours that an employee                      § 601.601(d)(2) of this chapter).
                                                                   works.                                                    [T.D. 7748, 46 FR 1696, Jan. 7, 1981, as amend-
                                                                      (4) Effective date. Except as otherwise                ed by T.D. 9319, 72 FR 16894, Apr. 5, 2007]
                                                                   provided in this paragraph (b)(4), para-
                                                                   graphs (b)(2) and (3) of this section are                 § 1.401(a)–4 Optional forms of benefit
                                                                   effective May 22, 2007. In the case of a                       (before 1994).
                                                                   governmental plan (as defined in sec-                        Q–1: How does section 401(a)(4) apply
                                                                   tion 414(d)), paragraphs (b)(2) and (3) of                to optional forms of benefits?
                                                                   this section are effective for plan years                    A–1: (a) In general—(1) Scope. The
                                                                   beginning on or after January 1, 2009.                    nondiscrimination requirements of sec-
                                                                   In the case of a plan maintained pursu-                   tion 401(a)(4) apply to the amount of
                                                                   ant to one or more collective bar-                        contributions or benefits, optional
                                                                   gaining agreements that have been                         forms of benefit, and other benefits,
                                                                   ratified and are in effect on May 22,                     rights and features (e.g., actuarial as-
                                                                   2007, paragraphs (b)(2) and (3) of this                   sumptions, methods of benefit calcula-
                                                                   section do not apply before the first                     tion, loans, social security supple-
                                                                   plan year that begins after the last of                   ments, and disability benefits) under a
                                                                   such agreements terminate determined                      plan. This section addresses the appli-
                                                                   without regard to any extension there-                    cation of section 401(a)(4) only to op-
                                                                   of (or, if earlier, May 24, 2010. See                     tional forms of benefit under a plan.
                                                                   § 1.411(d)–4, A–12, for a special transi-                 Generally, the determination of wheth-
                                                                   tion rule in the case of a plan amend-                    er an optional form is nondiscrim-
                                                                   ment that increases a plan’s normal re-                   inatory under section 401(a)(4) is made
                                                                   tirement age pursuant to paragraph                        by reference to the availability of such
                                                                   (b)(2) of this section.                                   optional form, and not by reference to
                                                                   [T.D. 7748, 46 FR 1695, Jan. 7, 1981, as amend-           the utilization or actual receipt of such
                                                                   ed by T.D. 9319, 72 FR 16894, Apr. 5, 2007; T.D.          optional form. See Q&A–2 of this sec-
                                                                   9325, 72 FR 28606, May 22, 2007]                          tion. Even though an optional form of
                                                                                                                             benefit under a plan may be non-
                                                                   § 1.401(a)–2 Impossibility of diversion                   discriminatory under section 401(a)(4)
                                                                        under qualified plan or trust.                       and this § 1.401(a)–4 because the avail-
                                                                      (a) General rule. Section 401(a)(2) re-                ability of such optional form does not
                                                                   quires that in order for a trust to be                    impermissibly favor employees in the
                                                                   qualified, it must be impossible under                    highly compensated group, such plan
                                                                   the trust instrument (in the taxable                      may fail to satisfy section 401(a)(4)
                                                                   year and at any time thereafter before                    with respect to the amount of con-
                                                                   the satisfaction of all liabilities to em-                tributions or benefits or with respect
                                                                   ployees or their beneficiaries covered                    to other benefits, rights and features if,
                                                                   by the trust) for any part of the trust                   for example, the method of calculation
                                                                   corpus or income to be used for, or di-                   or the amount or value of benefits pay-
                                                                   verted to, purposes other than for the                    able     under   such    optional    form
                                                                   exclusive benefit of those employees or                   impermissibly favors the highly com-
                                                                   their beneficiaries. Section 1.401–2, a                   pensated group. See § 1.411(d)–4, Q&A–1
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                                                                   pre-ERISA regulation, provides rules                      for the definition of ‘‘optional form of
                                                                   under section 401(a)(2) and that regula-                  benefit.’’

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                                                                   § 1.401(a)–4                                                            26 CFR Ch. I (4–1–11 Edition)

                                                                      (2) Nondiscrimination requirements.                    Thus, an optional form of benefit that
                                                                   Each optional form of benefit provided                    satisfies the requirements of para-
                                                                   under a plan is subject to the non-                       graphs (a)(2) and (a)(3) of this Q&A–2 is
                                                                   discrimination requirement of section                     nondiscriminatory        under     section
                                                                   401(a)(4) and thus the availability of                    401(a)(2) even though the highly com-
                                                                   each optional form of benefit must not                    pensated group disproportionately uti-
                                                                   discriminate in favor of the employees                    lizes such optional form. However, the
                                                                   described in section 401(a)(4) in whose                   composition of the group of employees
                                                                   favor discrimination is prohibited (the                   who actually receive benefits in an op-
                                                                   ‘‘highly compensated group’’). See                        tional form may be relevant in deter-
                                                                   paragraph (b) of this Q&A–1 for a de-                     mining whether such optional form
                                                                   scription of the employees included in                    satisfies the requirement of paragraph
                                                                   such group. This is true without regard                   (a)(3) of this Q&A–2 with respect to ef-
                                                                   to whether a particular optional form                     fective availability.
                                                                   of benefit is the actuarial equivalent of                   (2) Current availability—(i) Plan years
                                                                   any other optional form of benefit                        prior to TRA ’86 effective date. Except as
                                                                   under the plan. Thus, for example, a                      provided in paragraph (a)(2)(iii) of this
                                                                   plan may not condition, or otherwise                      Q&A–2, for plan years prior to the ef-
                                                                   limit, the availability of a single sum                   fective date of the amendments made
                                                                   distribution of an employee’s benefit in                  to section 401(b) by section 1112(a) of
                                                                   a manner that impermissibly favors                        TRA ’86, the requirement of this para-
                                                                   the highly compensated group.                             graph (a)(2) is satisfied only if the
                                                                      (b) Highly compensated group. For                      group of employees to whom the op-
                                                                   plan years commencing prior to the ap-                    tional form is currently available sat-
                                                                   plicable effective date for the amend-                    isfies either the seventy percent test of
                                                                   ment made to section 401(a)(4) by sec-                    section 410(b)(1)(A) or the nondiscrim-
                                                                   tion 1114 of the Tax Reform Act of 1986                   inatory classification test of section
                                                                   (TRA ’86), the highly compensated                         410(b)(1)(B).
                                                                   group consists of those employees who                       (ii) Plan years commencing on or after
                                                                   are officers, shareholders, or highly                     TRA ’86 effective date. Except as pro-
                                                                   compensated. For plan years beginning                     vided in paragraph (a)(2)(iii) of this
                                                                   on or after the applicable effective date                 Q&A–2, for plan years commencing on
                                                                   of the amendments to section 401(a)(4)                    or after the effective date on which the
                                                                   made by TRA ’86, the highly com-                          amendments made to section 410(b) by
                                                                   pensated group consists of those em-                      section 1112(a) of TRA ’86 first apply to
                                                                   ployees who are highly compensated                        a plan, the requirement of this para-
                                                                   within the meaning of section 414(q).                     graph (a)(2) is satisfied only if the
                                                                   The amendment to section 401(a)(4)                        group of employees to whom the op-
                                                                   made by section 1114 of TRA ’86 is gen-                   tional form is currently available sat-
                                                                   erally effective for plan years com-                      isfies either the percentage test set
                                                                   mencing after December 31, 1988. See                      forth in section 410(b)(1)(A), the ratio
                                                                   section 1114(a) of TRA ’86.                               test set forth in section 410(b)(1)(B), or
                                                                      Q–2: How is it determined whether an                   the nondiscriminatory classification
                                                                   optional form of benefit satisfies the                    test set forth in section 410(b)(2)(A)(i).
                                                                   nondiscrimination requirements of sec-                    The employer need not satisfy the av-
                                                                   tion 401(a)(4)?                                           erage benefit percentage test in section
                                                                      A–2: (a) Nondiscrimination require-                    410(b)(2)(A)(ii) in order for the optional
                                                                   ment—(1) In general. An optional form                     form to be currently available to a
                                                                   of benefit under a plan is nondiscrim-                    nondiscriminatory group of employees.
                                                                   inatory under section 401(a)(4) only if                     (iii) Special rule for certain govern-
                                                                   the requirements of paragraphs (a)(2)                     mental or church plans. Plans described
                                                                   and (a)(3) of this Q&A–2 are satisfied                    in section 410(c) will be treated as sat-
                                                                   with respect to such optional form. The                   isfying the current availability test of
                                                                   determination of whether an optional                      this paragraph (a)(2) if the group of em-
                                                                   form of benefit satisfies these require-                  ployees with respect to whom the op-
                                                                   ments is made by reference to the                         tional form is currently available sat-
                                                                   availability of the optional form, and                    isfies the requirements of section
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                                                                   not by reference to the utilization or                    401(a)(3) as in effect on September 1,
                                                                   actual receipt of such optional form.                     1974.

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                                                                   Internal Revenue Service, Treasury                                                           § 1.401(a)–4

                                                                     (iv) Effective data for TRA ’86 amend-                    (3) Effective availability—(i) In general.
                                                                   ments to section 410(b). The amendments                   The requirement of this paragraph
                                                                   to section 410(b) made by section                         (a)(3) is satisfied only if, based on the
                                                                   1112(a) of TRA ’86 are generally effec-                   facts and circumstances, the group of
                                                                   tive for plan years commencing after                      employees to whom the optional form
                                                                   December 31, 1988. See section 1112(e)(1)                 is effectively available does not sub-
                                                                   of TRA ’86.                                               stantially favor the highly com-
                                                                     (v) Elimination of optional forms—(A)                   pensated group. This is the case even if
                                                                   In general. Notwithstanding paragraphs                    the optional form is, or has been, cur-
                                                                   (a)(2)(i) and (a)(2)(ii) of this Q&A–2, in                rently available to a group of employ-
                                                                   the case of an optional form of benefit                   ees that satisfies the applicable re-
                                                                   that has been eliminated under a plan                     quirements in paragraph (a)(2) (i) or (ii)
                                                                   with respect to specified employees for                   of this Q&A–2.
                                                                   benefits accrued after the later of the                     (ii) Examples. The provisions of para-
                                                                   eliminating     amendment’s       adoption                graph (a)(3)(i) of this Q&A–2 can be il-
                                                                   date or effective date, the determina-                    lustrated by the following examples:
                                                                   tion of whether such optional form sat-
                                                                   isfies this paragraph (a)(2) with respect                   Example 1. Employer X maintains a defined
                                                                   to such employees is to be made imme-                     benefit plan that covers both of the 2 highly
                                                                   diately prior to the elimination. Ac-                     compensated employees of the employer and
                                                                   cordingly, if, as of the later of the                     8 of the twelve nonhighly compensated em-
                                                                                                                             ployees of the employer. Plan X provides for
                                                                   adoption date or effective date of an
                                                                                                                             a normal retirement benefit payable as an
                                                                   amendment eliminating an optional                         annuity and based on a normal retirement
                                                                   form with respect to future benefit ac-                   age of 65, and an early retirement benefit
                                                                   cruals, the current availability of such                  payable upon termination in the form of an
                                                                   optional form immediately prior to                        annuity to employees who terminate from
                                                                   such amendment satisfies this para-                       service with the employer on or after age 55
                                                                   graph (a)(2), then the optional form                      with 30 or more years of service. Each of the
                                                                   will be treated as satisfying this para-                  2 employees of employer X who are in the
                                                                   graph (a)(2) for all subsequent years.                    highly compensated group currently meet
                                                                     (B) Example. A profit-sharing plan                      the age and service requirement, or will have
                                                                                                                             30 years of service by the time they reach
                                                                   that provides for a single sum distribu-
                                                                                                                             age 55. All but 2 of the 8 nonhighly com-
                                                                   tion available to all employees on ter-                   pensated employees of employer X who are
                                                                   mination of employment is amended                         covered by the plan were hired on or after
                                                                   January 1, 1990, to eliminate such sin-                   age 35 and thus, cannot qualify for the early
                                                                   gle sum optional form of benefit with                     retirement benefit provision. Even though
                                                                   respect to benefits accrued after Janu-                   the group of employees to whom the early
                                                                   ary 1, 1991. As of January 1, 1991, the                   retirement benefit is currently available
                                                                   single sum optional form of benefit is                    does not impermissibly favor the highly
                                                                   available to a group of employees that                    compensated group by reason of disregarding
                                                                   satisfies the percentage test of section                  age and service, these facts and cir-
                                                                   410(b)(1)(A). As of January 1, 1995, all                  cumstances indicate that the effective avail-
                                                                                                                             ability of the early retirement benefit in
                                                                   nonhighly compensated employees who                       plan X substantially favors the highly com-
                                                                   were entitled to the single sum op-                       pensated group.
                                                                   tional form of benefit have terminated                      Example 2. Assume the same facts as in Ex-
                                                                   from employment with the employer                         ample 1 except that the early retirement ben-
                                                                   and taken a distribution of their bene-                   efit is added by a plan amendment first
                                                                   fits. The only remaining employees                        adopted, announced and effective December
                                                                   who have a right to take a portion of                     1, 1991, and is available only to employees
                                                                   their benefits in the form of a single                    who terminate from employment with the
                                                                   sum distribution on termination of em-                    employer prior to December 15, 1991. Further
                                                                   ployment are highly compensated em-                       assume that all employees were hired prior
                                                                   ployees. Because the availability of the                  to attaining age 25, and that the group of
                                                                                                                             employees who have, or will have attained
                                                                   single sum optional form of benefit sat-                  age 55 with 30 years of service, by December
                                                                   isfied the current availability test as of                15, 1991, satisfies the ratio test of section
                                                                   January 1, 1991, the availability of such                 410(b)(1)(B). Finally, assume that the only
                                                                   optional form of benefit is deemed to
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                                                                                                                             employees who terminate from employment
                                                                   continue to satisfy the current avail-                    with the employer during the two week pe-
                                                                   ability test of this paragraph (a)(2).                    riod in which the early retirement benefit is

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                                                                   § 1.401(a)–4                                                            26 CFR Ch. I (4–1–11 Edition)
                                                                   available are employees in the highly com-                ee’s current net worth). Thus, for ex-
                                                                   pensated group. These facts and cir-                      ample, the fact that an employee may,
                                                                   cumstances indicate that the effective avail-             in the future, satisfy an eligibility con-
                                                                   ability of the early retirement benefit sub-
                                                                                                                             dition generally does not cause an op-
                                                                   stantially favors the highly compensated
                                                                   group. This is the case even though the limi-             tional form of benefit to be treated as
                                                                   tation of the early retirement benefit to a               currently available to such employee.
                                                                   specified period satisfies section 411(d)(6).               (ii) Exceptions for age, service, employ-
                                                                     Example 3. Employer Y amends plan Y on                  ment termination and certain other condi-
                                                                   June 30, 1990, to provide for a single sum dis-           tions—(A) Age and service conditions.
                                                                   tribution for employees who terminate from                For purposes of applying paragraph
                                                                   employment with the employer after June                   (a)(2) of this Q&A–2, except as provided
                                                                   30, 1990, and prior to January 1, 1991. The               in paragraph (b)(1)(ii)(B) of this Q&A–2,
                                                                   availability of this single sum distribution is
                                                                   conditioned on the employee having a par-
                                                                                                                             an age condition, a service condition,
                                                                   ticular disability at the time of termination             or both are to be disregarded. For ex-
                                                                   of employment. The only employee of the                   ample, an employer that maintains a
                                                                   employer who meets this disability require-               plan that provides for an early retire-
                                                                   ment at the time of the amendment and                     ment benefit payable as an annuity for
                                                                   thereafter through December 31, 1990, is a                employees in division A, subject to a
                                                                   highly compensated employee. Generally, a                 requirement that the employee has at-
                                                                   disability condition with respect to the                  tained his or her 55th birthday and has
                                                                   availability of a single sum distribution may
                                                                   be disregarded in determining whether the
                                                                                                                             at least twenty years of service with
                                                                   current availability of such optional form of             the employer, is to disregard the age
                                                                   benefit is discriminatory. However, these                 and service conditions in determining
                                                                   facts and circumstances indicate that the ef-             the group of employees to whom the
                                                                   fective availability of the optional form of              early retirement annuity benefit is
                                                                   benefit substantially favors the highly com-              currently available. Thus, the early re-
                                                                   pensated group.                                           tirement annuity benefit is treated as
                                                                     Example 4. Employer Z maintains a money                 currently available to all employees of
                                                                   purchase pension plan that covers all em-
                                                                                                                             division A, without regard to their ages
                                                                   ployees of the employer. The plan provides
                                                                   for distribution in the form of a joint and               or years of service and without regard
                                                                   survivor annuity, a life annuity, or equal in-            to whether they could potentially meet
                                                                   stallments over 10 years. During the 1992 cal-            the age and service conditions prior to
                                                                   endar year the employer winds up his busi-                attaining the plan’s normal retirement
                                                                   ness. In December of 1992, only two employ-               age.
                                                                   ees remain in the employment of the em-                     (B) Exception for certain age and serv-
                                                                   ployer, both of whom are highly com-                      ice conditions. Age and service condi-
                                                                   pensated. Employer Z then amends the plan
                                                                                                                             tions that must be satisfied within a
                                                                   to provide for a single sum distribution to
                                                                   employees who terminate from employment                   specified period of time may not be dis-
                                                                   on or after the date of the amendment. Both               regarded      pursuant    to     paragraph
                                                                   highly compensated employees terminate                    (b)(1)(ii)(A) of this Q&A–2. However, in
                                                                   from employment on December 31, 1992, tak-                determining the current availability of
                                                                   ing a single sum distribution of their bene-              an optional form of benefit subject to
                                                                   fits. These facts and circumstances indicate              such an age condition, service condi-
                                                                   that the effective availability of the single             tion, or both, an employer may project
                                                                   sum optional form of benefit substantially
                                                                                                                             the age and service of employees to the
                                                                   favors the highly compensated group.
                                                                                                                             last date on which the optional form of
                                                                     (b) Application of tests—(1) Current                    benefit subject to the age condition or
                                                                   availability—(i) In general. Except as                    service condition (or both) is available
                                                                   otherwise provided in this paragraph                      under the plan. An employer’s ability
                                                                   (b), in determining whether an optional                   to protect age and service to the last
                                                                   form of benefit that is subject to speci-                 date on which the optional form of ben-
                                                                   fied eligibility conditions is currently                  efit is available under the plan is not
                                                                   available to an employee for purposes                     cut off by a plan termination occurring
                                                                   of paragraph (a) of this Q&A–2, the de-                   prior to that date. Thus, for example,
                                                                   termination of current availability                       assume that an employer maintaining
                                                                   generally is to be based on the current                   a plan that permits employees termi-
                                                                   facts and circumstances with respect                      nating from employment on or after
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                                                                   to the employee (e.g., the employee’s                     age 55 between June 1, 1991 to May 31,
                                                                   current compensation or the employ-                       1992, to elect a single sum distribution,

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                                                                   Internal Revenue Service, Treasury                                                           § 1.401(a)–4

                                                                   decides to terminate the plan on De-                      of optional forms of benefit may be
                                                                   cember 31, 1991. In determining the                       treated as common only if they are
                                                                   group of employees to whom the single                     identical with respect to all character-
                                                                   sum optional form of benefit is cur-                      istics taken into account under Q&A–
                                                                   rently available, this employer may                       1(b) of § 1.411(d)–4. The availability of
                                                                   project employees’ ages through May                       each restructured optional form of ben-
                                                                   31, 1992.                                                 efit must satisfy the applicable non-
                                                                     (C) Certain other conditions dis-                       discrimination requirements of para-
                                                                   regarded. Conditions on the availability                  graph (a) of this Q&A–2.
                                                                   of optional forms of benefit requiring                       (ii) Example. A profit-sharing plan
                                                                   termination of employment, death, sat-                    covering all the employees of an em-
                                                                   isfaction of a specified health condition                 ployer provides a single sum distribu-
                                                                   (or failure to meet such condition), dis-
                                                                                                                             tion option upon termination from em-
                                                                   ability, hardship, marital status, de-
                                                                                                                             ployment for all employees earning
                                                                   fault on a plan loan secured by a par-
                                                                                                                             less than $50,000 and a single sum dis-
                                                                   ticipant’s account balance, or execu-
                                                                                                                             tribution option upon termination
                                                                   tion of a covenant not to compete may
                                                                   be disregarded in determining the                         from employment after the attainment
                                                                   group of employees to whom an op-                         of age 55 for all employees earning
                                                                   tional form of benefit is currently                       $50,000 or more. These distribution op-
                                                                   available.                                                tions are identical in all other respects.
                                                                     (2) Employees taken into account. For                   For purposes of applying section
                                                                   purposes of applying paragraph (a) of                     401(a)(4), such optional forms of benefit
                                                                   this Q&A–2, the tests are to be applied                   may be restructured into two different
                                                                   on the basis of the employer’s non-                       optional forms of benefit: (A) a single
                                                                   excludable employees (whether or not                      sum distribution option upon termi-
                                                                   they are participants in the plan) in                     nation from employment after the at-
                                                                   the same manner as such tests would                       tainment of age 55 for all employees
                                                                   be applied in determining whether the                     (i.e., the common component), and (B)
                                                                   plan providing the optional form of                       a single sum distribution option upon
                                                                   benefit satisfies the tests under section                 termination from employment before
                                                                   410(b).                                                   the attainment of age 55 for all em-
                                                                     (3) Definition of ‘‘plan’’. For purposes                ployees earning less than $50,000. The
                                                                   of applying paragraph (a) of this Q&A–                    availability of each of these restruc-
                                                                   2, the term ‘‘plan’’ has the meaning                      tured optional forms of benefit must
                                                                   that such term has for purposes of de-                    satisfy section 401(a)(4).
                                                                   termining whether the amount of con-                         (c) Commissioner may provide addi-
                                                                   tributions or benefits and whether                        tional tests. The Commissioner may pro-
                                                                   other benefits, rights, and features are                  vide such additional factors, tests, and
                                                                   nondiscriminatory        under     section                safe harbors as are necessary or appro-
                                                                   401(a)(4).                                                priate for purposes of determining
                                                                     (4) Restructuring optional forms of ben-
                                                                                                                             whether the availability of an optional
                                                                   efit—(i) In general. For purposes of ap-
                                                                                                                             form of benefit is discriminatory under
                                                                   plying paragraph (a) of this Q&A–2, the
                                                                                                                             section 401(a)(4). In addition, the Com-
                                                                   availability of two or more optional
                                                                                                                             missioner may provide that additional
                                                                   forms of benefit under a plan may be
                                                                   tested by restructuring such benefits                     eligibility conditions not related di-
                                                                   into two or more restructured optional                    rectly or indirectly to compensation or
                                                                   forms of benefit and testing the avail-                   wealth may be disregarded under para-
                                                                   ability of such restructured optional                     graph (b)(1)(ii)(C) of this Q&A–2 in de-
                                                                   forms of benefit. If two or more op-                      termining the current availability of
                                                                   tional forms of benefit under a plan                      an optional form of benefit. The Com-
                                                                   contain both common and distinct                          missioner may provide such additional
                                                                   components, such optional forms of                        guidance only through the publication
                                                                   benefit may be restructured as a single                   of revenue rulings, notices or other
                                                                   optional form of benefit comprising the                   documents of general applicability.
                                                                   common component, and one or more                            Q–3: May a plan condition the avail-
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                                                                   optional forms of benefit comprising                      ability of an optional form of benefit
                                                                   each distinct component. Components                       on employer discretion?

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                                                                   § 1.401(a)–4                                                            26 CFR Ch. I (4–1–11 Edition)

                                                                      A–3: No. Even if the availability of an                availability of an optional form of ben-
                                                                   optional form of benefit that is condi-                   efit violates section 401(a)(4) is to be
                                                                   tioned on employer discretion satisfies                   made in accordance with Q&A–2 of this
                                                                   the nondiscrimination requirements of                     section. In addition, the availability of
                                                                   section 401(a)(4), the plan providing the                 a particular optional form of benefit
                                                                   optional form of benefit will fail to sat-                may reasonably be expected to violate
                                                                   isfy certain other requirements of sec-                   the nondiscrimination requirements of
                                                                   tion 401(a), including, in applicable cir-                section 401(a)(4) if, under the applicable
                                                                   cumstances, the definitely deter-                         facts and circumstances, there is a sig-
                                                                   minable requirement of section 401(a)                     nificant possibility that the current
                                                                   and the requirements of section                           availability of such optional form of
                                                                   401(a)(25) and section 411(d)(6). See                     benefit will impermissibly favor the
                                                                   § 1.411(d)–4.                                             highly compensated group. This deter-
                                                                      Q–4: Will a plan provision violate sec-                mination must be made on the basis of
                                                                   tion 401(a)(4) merely because it re-                      the seventy percent test of section
                                                                   quires that an employee who termi-                        410(b)(1)(A) or the nondiscriminatory
                                                                   nates from service with the employer                      classification      test     of    section
                                                                   receive a single sum distribution in the                  410(b)(1)(B) as such tests existed prior
                                                                   event that the present value of the em-                   to the effective date of the amend-
                                                                   ployee’s benefit is not more than $3,500,                 ments made to section 410(b) by section
                                                                   as permitted by sections 411(a)(11) and                   1112(a) of TRA ’86. Thus, a condition
                                                                   417(e)?                                                   may not reasonably be expected to dis-
                                                                      A–4: No. A plan will not be treated as                 criminate for purposes of these rules
                                                                   discriminatory under section 401(a)(4)                    merely because it results in a signifi-
                                                                   merely because the plan mandates a                        cant possibility that discrimination
                                                                   single sum distribution when the                          will result because of the amendments
                                                                   present value of an employee’s benefit                    made to section 410(b) by section
                                                                   is not more than $3,500, as permitted by                  1112(a) of TRA ’86. In addition, the
                                                                   sections 411(a)(11) and 417(e). This is an                availability of an optional form of ben-
                                                                   exception to the general principles of                    efit may not reasonably be expected to
                                                                   this section. (No similar provision ex-                   discriminate merely because of an age
                                                                   ists excepting such single sum distribu-                  or service condition that may be dis-
                                                                   tions from the limits on employer dis-                    regarded in determining the current
                                                                   cretion under section 411(d)(6). See                      availability of such optional form of
                                                                   § 1.411(d)–4 Q&A–4.)                                      benefit under paragraph (b)(1)(ii)(A) of
                                                                      Q–5: If the availability of an optional                Q&A–2 of this section. Similarly, the
                                                                   form of benefit discriminates, or may                     availability of an optional form of ben-
                                                                   reasonably be expected to discrimi-                       efit may not reasonably be expected to
                                                                   nate, in favor of the highly com-                         discriminate merely because of an age
                                                                   pensated group, what acceptable alter-                    or service condition that, after per-
                                                                   natives exist for amending the plan                       mitted projection, does not cause such
                                                                   without violating section 411(d)(6)?                      optional form to fail to satisfy the re-
                                                                      A–5: (a) Transitional rules—(1) In gen-                quirement of this paragraph (a)(2).
                                                                   eral. The following rules apply for pur-                    (ii) Examples. The provisions of para-
                                                                   poses of making necessary amendments                      graph (a)(2)(i) of this Q&A–5 can be il-
                                                                   to existing plans (as defined in Q&A–6                    lustrated by the following examples:
                                                                   of this section) under which the avail-                     Example 1. A plan provides that a single
                                                                   ability of an optional form of benefit                    sum distribution option is available only to
                                                                   violates the nondiscrimination require-                   (A) employees earning $50,000 or more in the
                                                                   ments of section 401(a)(4) or may rea-                    final year of employment, (B) employees who
                                                                   sonably be expected to violate such re-                   furnish evidence that they have a net worth
                                                                   quirements. These transitional rules                      above a certain specified amount, and (C)
                                                                   are provided under the authority of                       employees who present a letter from an ac-
                                                                   section 411(d)(6), which allows the                       countant or attorney declaring that it is in
                                                                                                                             the employee’s best interest to receive a sin-
                                                                   elimination of certain optional forms
                                                                                                                             gle sum distribution. Whether the avail-
                                                                   of benefit if permitted by regulations,                   ability of such optional form of benefit dis-
                                                                   and section 7805(b).
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                                                                                                                             criminates depends on whether it meets the
                                                                      (2) Nondiscrimination—(i) In general.                  requirements of Q&A–2 of this § 1.401(a)–4.
                                                                   The determination of whether the                          However, each of the specified conditions

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                                                                   Internal Revenue Service, Treasury                                                           § 1.401(a)–4
                                                                   limiting the availability of the optional form            select one of the alternatives per-
                                                                   of benefit may reasonably be expected to dis-             mitted under paragraph (b) of this
                                                                   criminate in favor of the highly compensated
                                                                                                                             Q&A–5 with respect to each affected op-
                                                                   group in operation because of the likelihood
                                                                   of a significant positive correlation between             tional form of benefit and the plan
                                                                   the ability to meet any of the specified con-             must be operated in accordance with
                                                                   ditions and membership in the highly com-                 this selection. This is an operational
                                                                   pensated group.                                           requirement and does not require a
                                                                     Example 2. A plan limits the availability of            plan amendment prior to the period set
                                                                   a single sum distribution option to employ-
                                                                                                                             forth in paragraph (c)(2) of this Q&A–5.
                                                                   ees employed in one particular division of
                                                                   the employer’s company. All the employees                 There is no special reporting require-
                                                                   of the company are participants in the plan.              ment under the Code or this section
                                                                   During the 1988 plan year, the division em-               with respect to this selection.
                                                                   ploys individuals who represent a non-                      (2) Deferred amendment date. If para-
                                                                   discriminatory classification of that com-                graph (c)(1) of this Q&A–5 is satisfied, a
                                                                   pany’s employees (under section 410(b)(1)(B)
                                                                   prior to the effective date of the amend-
                                                                                                                             plan amendment conforming the plan
                                                                   ments made to section 410(b) by section                   to the particular alternative selected
                                                                   1112(a) of TRA ’86) and is unlikely to cease              under paragraph (b) of this Q&A–5 must
                                                                   employing such a nondiscriminatory classi-                be adopted within the time period per-
                                                                   fication in the future. The availability of a             mitted for amending plans in order to
                                                                   single sum distribution under this plan does              meet the requirements of section 410(b)
                                                                   not result in discrimination during the 1988
                                                                   plan year and may not reasonably be ex-
                                                                                                                             as amended by TRA ’86. Such con-
                                                                   pected to do so.                                          forming amendment must be con-
                                                                                                                             sistent with the sponsor’s selection as
                                                                     (b) Transitional alternatives. If the                   reflected by plan practice during the
                                                                   availability of an optional form of ben-                  period from the effective date to the
                                                                   efit under an existing plan is discrimi-                  date the amendment is adopted. Thus,
                                                                   natory under section 401(a)(4), the plan                  for example, if an existing calendar
                                                                   must be amended either to eliminate
                                                                                                                             year noncollectively bargained defined
                                                                   the optional form of benefit or to make
                                                                                                                             benefit plan has a single sum distribu-
                                                                   the availability of the optional form of
                                                                                                                             tion form subject to a discriminatory
                                                                   benefit nondiscriminatory. For exam-
                                                                                                                             condition, that was available as of Jan-
                                                                   ple, the availability of an optional
                                                                   form of benefit may be made non-                          uary 30, 1986 (subject to such condi-
                                                                   discriminatory by making such benefit                     tion), and such employer makes one or
                                                                   available to sufficient additional em-                    more single sum distributions avail-
                                                                   ployees who are not in the highly com-                    able on or after the first day of the
                                                                   pensated group or by imposing non-                        first plan year commencing on or after
                                                                   discriminatory objective criteria on its                  January 1, 1989, and before the plan
                                                                   availability such that the group of em-                   amendment, then such employer may
                                                                   ployees to whom the benefit is avail-                     not adopt a plan amendment elimi-
                                                                   able is nondiscriminatory. See Q&A–6                      nating the single sum distribution
                                                                   of § 1.411(d)–4 for requirements with re-                 form. Instead, such employer must
                                                                   spect to such objective criteria. If,                     adopt an amendment making the dis-
                                                                   under an exisitng plan, the availability                  tribution form available to a non-
                                                                   of an optional form of benefit may rea-                   discriminatory group of employees
                                                                   sonably be expected to discriminate,                      while retaining the availability of such
                                                                   the plan may be amended in the same                       distribution form with respect to the
                                                                   manner permitted where the avail-                         group of employees to whom the ben-
                                                                   ability of an optional form of benefit is                 efit is already available. Similarly, any
                                                                   discriminatory. See paragraph (d) of                      objective criteria that are adopted as
                                                                   this Q&A–5 for rules limiting the pe-                     part of such amendment must be con-
                                                                   riod during which the availability of                     sistent with the plan practice for the
                                                                   optional forms of benefit may be elimi-                   applicable period prior to the amend-
                                                                   nated or reduced under this paragraph.                    ment. A conforming amendment under
                                                                     (c) Compliance and amendment date                       this paragraph (c)(2) must be made
                                                                   provisions—(1) Operational compliance re-                 with respect to each optional form of
                                                                   quirement. On or before the applicable                    benefit for which such amendment is
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                                                                   effective date for the plan (see Q&A–6                    required and must be retroactive to the
                                                                   of this section), the plan sponsor must                   applicable effective date.

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                                                                   § 1.401(a)–4                                                            26 CFR Ch. I (4–1–11 Edition)

                                                                      (d) Limitation on transitional alter-                  optional form of benefit is discrimina-
                                                                   natives. The transitional alternatives                    tory or may reasonably be expected to
                                                                   permitting the elimination or reduc-                      be discriminatory, and that receive a
                                                                   tion of optional forms of benefit will                    favorable determination letter that
                                                                   not violate section 411(d)(6) during the                  covered such plan provisions with re-
                                                                   period prior to the applicable effective                  spect to an application submitted prior
                                                                   date for the plan (see Q&A–6 of this                      to July 11, 1988, will be treated as exist-
                                                                   section). After the applicable effective                  ing plans with respect to such optional
                                                                   date, any amendment (other than one                       form of benefit for purposes of the
                                                                   described in paragraph (c)(2) of this                     transitional rules of this section. Thus,
                                                                   Q&A–5) that eliminates or reduces an                      such plans are eligible for the compli-
                                                                   optional form of benefit or imposes                       ance and amendment alternatives set
                                                                   new objective criteria restricting the                    forth in the transitional rule in Q&A–5
                                                                   availability of such optional form of                     of this section.
                                                                   benefit will fail to qualify for the ex-                    (c) Existing plans—(1) In general.
                                                                   ception to section 411(d)(6) provided in                  Plans that are both adopted and in ef-
                                                                   this Q&A–5. This is the case without re-                  fect prior to January 30, 1986, are ‘‘ex-
                                                                   gard to whether the availability of the                   isting plans’’. In addition, new plans
                                                                   optional form of benefit is discrimina-                   described in paragraph (b)(2) of this
                                                                   tory or may reasonably be expected to                     Q&A–6 are treated as existing plans
                                                                   be discriminatory.                                        with respect to certain forms of ben-
                                                                      Q–6: For what period are the rules of                  efit. Subject to the limitations in para-
                                                                   this section effective?                                   graph (d) of this Q&A–6, the effective
                                                                      A–6: (a) General effective date—(1) In                 dates set forth in paragraphs (c)(2) and
                                                                   general. Except as otherwise provided                     (c)(3) of this Q&A–6 apply to these ex-
                                                                   in this section, the provisions of this                   isting plans for purposes of this sec-
                                                                   section are effective January 30, 1986,                   tion.
                                                                   and do not apply to plan years begin-                       (2) Existing noncollectively bargained
                                                                   ning on or after January 1, 1994. For                     plans. With respect to existing non-
                                                                   rules applicable to plan years begin-                     collectively bargained plans, this sec-
                                                                   ning on or after January 1, 1994, see                     tion is effective for the first day of the
                                                                   §§ 1.401(a)(4)–1 through 1.401(a)(4)–13.                  first plan year commencing on or after
                                                                      (2) Plans of tax-exempt organizations.                 January 1, 1989.
                                                                   In the case of plans maintained by or-                      (3) Existing collectively bargained
                                                                   ganizations exempt from income tax-                       plans. With respect to existing collec-
                                                                   ation under section 501(a), including                     tively bargained plans, this section is
                                                                   plans subject to section 403(b)(12)(A)(i)                 effective for the later of the first day of
                                                                   (nonelective plans), except as other-                     the first plan year commencing on or
                                                                   wise provided in this section, the provi-                 after January 1, 1989, or the first day of
                                                                   sions of this section are effective Janu-                 the first plan year that the require-
                                                                   ary 30, 1986, and do not apply to plan                    ments of section 410(b) as amended by
                                                                   years beginning on or after January 1,                    TRA ’86 apply to such plan.
                                                                   1996. For rules applicable to plan years                    (d) Delayed effective dates not applica-
                                                                   beginning on or after January 1, 1996,                    ble to new optional forms of benefit or
                                                                   see §§ 1.401(a)(4)–1 through 1.401(a)(4)–13.              conditions—(1) In general. The delayed
                                                                      (b) New plans—(1) In general. Unless                   effective dates in paragraph (c) (2) and
                                                                   otherwise provided in paragraph (b)(2)                    (3) of this Q&A–6 for existing plans are
                                                                   of this Q&A–6, plans that are either                      applicable with respect to an optional
                                                                   adopted or made effective on or after                     form of benefit only if both the op-
                                                                   January 30, 1986, are ‘‘new plans’’. With                 tional form of benefit and any applica-
                                                                   respect to such new plans, this section                   ble condition either causing the avail-
                                                                   is effective January 30, 1986. This effec-                ability of such optional form of benefit
                                                                   tive date is applicable to such plans                     to be discriminatory or making it rea-
                                                                   whether or not they are collectively                      sonable to expect that the availability
                                                                   bargained.                                                of such optional form will be discrimi-
                                                                      (2) Exception with respect to certain                  natory were both adopted and in effect
                                                                   new plans. Plans that are new plans as                    prior to January 30, 1986. If the pre-
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                                                                   defined in paragraph (b)(1) of this Q&A–                  ceding sentence is not satisfied with re-
                                                                   6, under which the availability of an                     spect to an optional form of benefit,

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–11

                                                                   this section is effective with respect to                    (C) In the case of a plan which pro-
                                                                   such optional form of benefit as if the                   vides for the payment of benefits be-
                                                                   plan were a new plan.                                     fore the normal retirement age, begins
                                                                     (2) Exception for certain amendments                    to receive payments under such plan on
                                                                   covered by a favorable determination let-                 or after the date the qualified early re-
                                                                   ter. If a condition causing the avail-                    tirement age (as defined in paragraph
                                                                   ability of an optional form of benefit to                 (b)(4) of this section) is attained, or
                                                                   be discriminatory, or to be reasonably                       (D) Separates from service on or after
                                                                   expected to discriminate, was adopted                     the date the normal retirement age (or
                                                                   or made effective on or after January                     the qualified early retirement age) is
                                                                   30, 1986, and a favorable determination                   attained and after satisfaction of eligi-
                                                                   letter that covered such plan provision                   bility requirements for the payment of
                                                                   is or was received with respect to an                     benefits under the plan (except for any
                                                                   application submitted before July 11,                     plan requirement that there be filed a
                                                                   1988, the effective date of this section                  claim for benefits) and thereafter dies
                                                                   with respect to such provision is the                     before beginning to receive life annuity
                                                                   applicable effective date determined                      benefits;
                                                                                                                                (ii) Any participant may elect, as
                                                                   under the rules with respect to existing
                                                                                                                             provided in paragraph (c)(1) of this sec-
                                                                   plans, as though such provision had
                                                                                                                             tion, not to receive life annuity bene-
                                                                   been adopted and in effect prior to Jan-
                                                                                                                             fits in the form of a qualified joint and
                                                                   uary 30, 1986.
                                                                                                                             survivor annuity; and
                                                                     (e) Transitional rule effective date. The                  (iii) If the plan provides for the pay-
                                                                   transitional rule provided in Q&A–5 of                    ment of benefits before the normal re-
                                                                   this section is effective January 30,                     tirement age, any participant may
                                                                   1986.                                                     elect, as provided in paragraph (c)(2) of
                                                                   [53 FR 26054, July 11, 1988, as amended by                this section, that life annuity benefits
                                                                   T.D. 8360, 56 FR 47536, Sept. 19, 1991; T.D.              be payable as an early survivor annuity
                                                                   8485, 58 FR 46778, Sept. 3, 1993; T.D. 8212, 61           (as defined in paragraph (b)(3) of this
                                                                   FR 14247, Apr. 1, 1996]                                   section) upon his death in the event
                                                                                                                             that he—
                                                                   § 1.401(a)–11 Qualified joint and sur-                       (A) Attains the qualified early retire-
                                                                        vivor annuities.                                     ment age (as defined in paragraph (b)(4)
                                                                     (a) General rule—(1) Required provi-                    of this section), and
                                                                   sions. A trust, to which section 411 (re-                    (B) Dies on or before the day normal
                                                                   lating to minimum vesting standards)                      retirement age is attained while em-
                                                                   applies without regard to section                         ployed by an employer maintaining the
                                                                   411(e)(2), which is a part of a plan pro-                 plan.
                                                                   viding for the payment of benefits in                        (2) Certain cash-outs. A plan will not
                                                                   any form of a life annuity (as defined                    fail to satisfy the requirements of sec-
                                                                   in paragraph (b)(1) of this section),                     tion 401(a)(11) and this section merely
                                                                   shall not constitute a qualified trust                    because it provides that if the present
                                                                   under section 401(a)(11) and this section                 value of the entire nonforfeitable ben-
                                                                   unless such plan provides that:                           efit derived from employer contribu-
                                                                     (i) Unless the election provided in                     tions of a participant at the time of his
                                                                   paragraph (c)(1) of this section has                      separation from service does not ex-
                                                                   been made, life annuity benefits will be                  ceed $1,750 (or such smaller amount as
                                                                   paid in a form having the effect of a                     the plan may specify), such benefit will
                                                                   qualified joint and survivor annuity (as                  be paid to him in a lump sum.
                                                                   defined in paragraph (b)(2) of this sec-                     (3) Illustrations. The provisions of sub-
                                                                                                                             paragraph (1) of this paragraph may be
                                                                   tion) with respect to any participant
                                                                                                                             illustrated by the following examples:
                                                                   who—
                                                                     (A) Begins to receive payments under                      Example 1. The X Corporation Defined Con-
                                                                   such plan on or after the date the nor-                   tribution Plan was established in 1960. As in
                                                                   mal retirement age is attained, or                        effect on January 1, 1974, the plan provided
                                                                                                                             that, upon the participant’s retirement, the
                                                                     (B) Dies (on or after the date the nor-                 participant may elect to receive the balance
                                                                   mal retirement age is attained) while
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                                                                                                                             of his account in the form of (1) a single-sum
                                                                   in active service of the employer main-                   cash payment, (2) a single-sum distribution
                                                                   taining the plan, or                                      consisting of X Corporation stock, (3) five

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                                                                   § 1.401(a)–11                                                           26 CFR Ch. I (4–1–11 Edition)
                                                                   equal annual cash payments, (4) a life annu-              ice at age 66 after completing 48 years of
                                                                   ity, or (5) a combination of options (1)                  service. The plan is required to pay a quali-
                                                                   through (4). The plan also provided that, if a            fied survivor annuity to C’s spouse.
                                                                   participant did not elect another form of dis-
                                                                   tribution, the balance of his account would                 (b) Definitions. As used in this sec-
                                                                   be distributed to him in the form of a single-            tion—(1) Life annuity. (i) The term ‘‘life
                                                                   sum cash payment upon his retirement. As-                 annuity’’ means an annuity that pro-
                                                                   sume that section 401(a)(11) and this section             vides retirement payments and re-
                                                                   became applicable to the plan as of its plan              quires the survival of the participant
                                                                   year beginning January 1, 1976, with respect              or his spouse as one of the conditions
                                                                   to persons who were active participants in                for any payment or possible payment
                                                                   the plan as of such date (see paragraph (f) of
                                                                   this section). If X Corporation Defined Con-              under the annuity. For example, annu-
                                                                   tribution Plan continues to allow the life an-            ities that make payments for 10 years
                                                                   nuity payment option after December 31,                   or until death, whichever occurs first
                                                                   1975, it must be amended to provide that if a             or whichever occurs last, are life annu-
                                                                   participant elects a life annuity option the              ities.
                                                                   life annuity benefit will be paid in a form                 (ii) However, the term ‘‘life annuity’’
                                                                   having the effect of a qualified joint and sur-           does not include an annuity, or that
                                                                   vivor annuity, except to the extent that the
                                                                   participant elects another form of benefit
                                                                                                                             portion of an annuity, that provides
                                                                   payment. However, the plan can continue to                those benefits which, under section
                                                                   provide that, if no election is made, the bal-            411(a)(9), would not be taken into ac-
                                                                   ance will be paid as a single-sum cash pay-               count in the determination of the nor-
                                                                   ment. If the trust is not so amended, it will             mal retirement benefit or early retire-
                                                                   fail to qualify under section 401(a).                     ment benefit. For example, ‘‘social se-
                                                                      Example 2. The Corporation Retirement                  curity supplements’’ described in the
                                                                   Plan provides that plan benefits are payable
                                                                   only in the form of a life annuity and also
                                                                                                                             fourth sentence of section 411(a)(9) are
                                                                   provides that a participant may retire before             not considered to be life annuities for
                                                                   the normal retirement age of 65 and receive               the purposes of this section, whether or
                                                                   a benefit if he has completed 30 years of serv-           not an early retirement benefit is pro-
                                                                   ice. Under this plan, an employee who begins              vided under the plan.
                                                                   employment at the age of 18 will be eligible                (2) Qualified joint and survivor annu-
                                                                   to receive retirement benefits at the age of              ity. The term ‘‘qualified joint and sur-
                                                                   48 if he then has 30 years of service. This plan
                                                                                                                             vivor annuity’’ means an annuity for
                                                                   must allow a participant to elect in the time
                                                                   and manner prescribed in paragraph (c)(2) of              the life of the participant with a sur-
                                                                   this section an early survivor annuity (de-               vivor annuity for the life of his spouse
                                                                   fined in paragraph (b)(3) of this section) to be          which is neither (i) less than one-half
                                                                   payable on the death of the participant if                of, nor (ii) greater than, the amount of
                                                                   death occurs while the participant is in ac-              the annuity payable during the joint
                                                                   tive service for the employer maintaining                 lives of the participant and his spouse.
                                                                   the plan and on or after the date the partici-            For purposes of the preceding sentence,
                                                                   pant reaches the qualified early retirement
                                                                   age of 55 (the later of the date the partici-             amounts       described    in   § 1.401(a)–
                                                                   pant reaches the earliest retirement age (age             11(b)(1)(ii) may be disregarded. A quali-
                                                                   48) or 10 years before normal retirement age              fied joint and survivor annuity must be
                                                                   (age 55)) but before the day after the day the            at least the actuarial equivalent of the
                                                                   participant reaches normal retirement age                 normal form of life annuity or, if great-
                                                                   (age 65).                                                 er, of any optional form of life annuity
                                                                      Example 3. Assume the same facts as in Ex-             offered under the plan. Equivalence
                                                                   ample 2. A, B, and C began employment with
                                                                                                                             may be determined, on the basis of con-
                                                                   Y Corporation when they each attained age
                                                                   18. A retires and begins to receive benefit               sistently applied reasonable actuarial
                                                                   payments at age 48 after completing 30 years              factors, for each participant or for all
                                                                   of service. The plan is not required to pay a             participants or reasonable groupings of
                                                                   qualified joint and survivor annuity to A and             participants, if such determination
                                                                   his spouse at any time. B does not elect an               does not result in discrimination in
                                                                   early survivor annuity at age 55, but retires             favor of employees who are officers,
                                                                   at age 57 after completing 39 years of service.           shareholders, or highly compensated.
                                                                   Unless B makes an election under subpara-
                                                                                                                             An annuity is not a qualified joint and
                                                                   graph (1)(ii) of this paragraph, the plan is re-
                                                                   quired to pay a qualified joint and survivor              survivor annuity if payments to the
                                                                                                                             spouse of a deceased participant are
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                                                                   annuity to B and his spouse. C makes no
                                                                   elections described in subparagraph (1) of                terminated, or reduced, because of such
                                                                   this paragraph, and dies while in active serv-            spouse’s remarriage.

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–11

                                                                      (3) Early survivor annuity. The term                   However, if a plan provides that a
                                                                   ‘‘early survivor annuity’’ means an an-                   qualified joint and survivor annuity is
                                                                   nuity for the life of the participant’s                   the only form of benefit payable under
                                                                   spouse the payments under which must                      the plan with respect to a married par-
                                                                   not be less than the payments which                       ticipant, no election need be provided.
                                                                   would have been made to the spouse                           (B) The election shall be in writing
                                                                   under the joint and survivor annuity if                   and clearly indicate that the partici-
                                                                   the participant had made the election                     pant is electing to receive all or, if per-
                                                                   described in paragraph (c)(2) of this                     mitted by the plan, part of his benefits
                                                                   section immediately prior to his retire-                  under the plan in a form other than
                                                                   ment and if his retirement had oc-                        that of a qualified joint and survivor
                                                                   curred on the day before his death and                    annuity. A plan will not fail to meet
                                                                   within the period during which an elec-                   the requirements of this section merely
                                                                   tion can be made under such paragraph                     because the plan requires the partici-
                                                                   (c)(2). For example, if a participant                     pant to obtain the written approval of
                                                                   would be entitled to a single life annu-                  his spouse in order for the participant
                                                                   ity of $100 per month or a reduced                        to make this election or if the plan
                                                                   amount under a qualified joint and sur-                   provides that such approval is not re-
                                                                   vivor annuity of $80 per month, his                       quired.
                                                                   spouse is entitled to a payment of at                        (ii) Election period. (A) For purposes
                                                                   least $40 per month. However, the pay-                    of the election described in paragraph
                                                                   ments may be reduced to reflect the                       (c)(1)(i) of this section, the plan shall
                                                                   number of months of coverage under                        provide an election period which shall
                                                                   the survivor annuity pursuant to para-                    include a period of at least 90 days fol-
                                                                   graph (e) of this section.                                lowing the furnishing of all of the ap-
                                                                      (4) Qualified early retirement age. The                plicable information required by sub-
                                                                   term ‘‘qualified early retirement age’’                   paragraph (3)(i) of this paragraph and
                                                                   means the latest of—                                      ending prior to commencement of ben-
                                                                      (i) The earliest date, under the plan,                 efits. In no event may the election pe-
                                                                   on which the participant could elect                      riod end earlier than the 90th day be-
                                                                   (without regard to any requirement                        fore the commencement of benefits.
                                                                   that approval of early retirement be                      Thus, for example, the commencement
                                                                   obtained) to receive retirement bene-                     of benefits may be delayed until the
                                                                   fits (other than disability benefits).                    end of such election period because the
                                                                      (ii) The first day of the 120th month                  amount of payments to be made to a
                                                                   beginning      before    the   participant                participant cannot be ascertained be-
                                                                   reaches normal retirement age, or                         fore the end of such period; see
                                                                      (iii) The date on which the partici-                   § 1.401(a)–14(d).
                                                                   pant begins participation.                                If a participant makes a request for ad-
                                                                      (5) Normal retirement age. The term                    ditional information as provided in
                                                                   ‘‘normal retirement age’’ has the                         subparagraph (3)(iii) of this paragraph
                                                                   meaning set forth in section 411(a)(8).                   on or before the last day of the election
                                                                      (6) Annuity starting date. The term                    period, the election period shall be ex-
                                                                   ‘‘annuity starting date’’ means the                       tended to the extent necessary to in-
                                                                   first day of the first period with re-                    clude at least the 90 calendar days im-
                                                                   spect to which an amount is received                      mediately following the day the re-
                                                                   as a life annuity, whether by reason of                   quested additional information is per-
                                                                   retirement or by reason of disability.                    sonally delivered or mailed to the par-
                                                                      (7) Day. The term ‘‘day’’ means a cal-                 ticipant. Notwithstanding the imme-
                                                                   endar day.                                                diately preceding sentence, a plan may
                                                                      (c) Elections—(1) Election not to take                 provide in cases in which the partici-
                                                                   joint and survivor annuity form—(i) In                    pant has been furnished by mail or per-
                                                                   general. (A) A plan shall not be treated                  sonal delivery all of the applicable in-
                                                                   as satisfying the requirements of this                    formation required by subparagraph
                                                                   section unless it provides that each                      (3)(i) of this paragraph, that a request
                                                                   participant may elect, during the elec-                   for such additional information must
                                                                   tion period described in subdivision (ii)                 be made on or before a date which is
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                                                                   of this subparagraph, not to receive a                    not less than 60 days from the date of
                                                                   qualified joint and survivor annuity.                     such mailing or delivery; and if the

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                                                                   § 1.401(a)–11                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   plan does so provide, the election pe-                      (C) A plan is not required to provide
                                                                   riod shall be extended to the extent                      an election under this subparagraph
                                                                   necessary to include at least the 60 cal-                 if—
                                                                   endar days following the day the re-                        (1) The plan provides that an early
                                                                   quested additional information is per-                    survivor annuity is the only form of
                                                                   sonally delivered or mailed to the par-                   benefit payable under the plan with re-
                                                                   ticipant.                                                 spect to a married participant who dies
                                                                      (B) In the case of a participant in a                  while employed by an employer main-
                                                                   plan to which this subparagraph ap-                       taining the plan,
                                                                   plies who separated from service after                      (2) In the case of a defined contribu-
                                                                   section 401(a)(11) and this section be-                   tion plan, the plan provides a survivor
                                                                   came applicable to such plan with re-                     benefit at least equal in value to the
                                                                   spect to such participant, and to whom                    vested portion of the participant’s ac-
                                                                   an election required by this subpara-                     count balance, if the participant dies
                                                                   graph has not been previously made                        while in active service with an em-
                                                                   available (and will not become avail-                     ployer maintaining the plan, or
                                                                   able in normal course), the plan must                       (3) In the case of a defined benefit
                                                                   provide an election to receive the bal-                   plan, the plan provides a survivor ben-
                                                                   ance of his benefits (properly adjusted,                  efit at least equal in value to the
                                                                   if applicable, for payments received,                     present value of the vested portion of
                                                                   prior to the exercise of such election,                   the participant’s normal form of the
                                                                   in the form of a qualified joint and sur-                 accrued benefit payable at normal re-
                                                                                                                             tirement age (determined immediately
                                                                   vivor annuity) in a form other than
                                                                                                                             prior to death), if the participant dies
                                                                   that of a qualified joint and survivor
                                                                                                                             while in active service with an em-
                                                                   annuity. The provisions of paragraph
                                                                                                                             ployer maintaining the plan. Any
                                                                   (c)(1)(ii)(A) shall apply except that in
                                                                                                                             present values must be determined in
                                                                   no event shall the election period end
                                                                                                                             accordance with either the actuarial
                                                                   before the 90th day after the date on
                                                                                                                             assumptions or factors specified in the
                                                                   which notice of the availability of such
                                                                                                                             plan, or a variable standard inde-
                                                                   election and the applicable information
                                                                                                                             pendent of employer discretion for con-
                                                                   required by subparagraph (3)(i) of this
                                                                                                                             verting optional benefits specified in
                                                                   paragraph is given directly to the par-
                                                                                                                             the plan.
                                                                   ticipant. If such notice and informa-                       (ii) Election period. (A) For purposes
                                                                   tion is given by mail, it shall be treat-                 of the election described in paragraph
                                                                   ed as given on the date of mailing. If                    (c)(2)(i) of this section the plan shall
                                                                   such participant has died, such election                  provide an election period which, ex-
                                                                   shall be made available to such partici-                  cept as provided in the following sen-
                                                                   pant’s personal representative.                           tence, shall begin not later than the
                                                                      (2) Election of early survivor annuity—                later of either the 90th day before a
                                                                   (i) In general. (A) A plan described in                   participant attains the qualified early
                                                                   subparagraph (a)(1)(iii) of this section                  retirement age or the date on which his
                                                                   shall not be treated as satisfying the                    participation begins, and shall end on
                                                                   requirements of this section unless it                    the date the participant terminates his
                                                                   provides that each participant may                        employment. If such a plan contains a
                                                                   elect, during the period described in                     provision that any election made under
                                                                   subdivision (ii) of this subparagraph,                    this subparagraph does not become ef-
                                                                   an early survivor annuity as described                    fective or ceases to be effective if the
                                                                   in paragraph (a)(1)(iii) of this section.                 participant dies within a certain period
                                                                   Breaks in service after the participant                   beginning on the date of such election,
                                                                   has attained the qualified early retire-                  the election period prescribed in this
                                                                   ment age neither invalidate a previous                    subdivision (ii) shall begin not later
                                                                   election or revocation nor prevent an                     than the later of (1) a date which is 90
                                                                   election from being made or revoked                       days plus such certain period before
                                                                   during the election period.                               the participant attains the qualified
                                                                      (B) The election shall be in writing                   early retirement age or (2) the date on
                                                                   and clearly indicate that the partici-                    which his participation begins. For ex-
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                                                                   pant is electing the early survivor an-                   ample, if a plan provides that an elec-
                                                                   nuity form.                                               tion made under this subparagraph

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–11

                                                                   does not become effective if the partic-                  other than a survivor annuity. If the
                                                                   ipant dies less than 2 years after the                    plan provides that such a spouse may
                                                                   date of such election, the period for                     make such an election, the plan admin-
                                                                   making an election under this subpara-                    istrator must furnish to this spouse,
                                                                   graph must begin not later than the                       within a reasonable amount of time
                                                                   later of (1) 2 years and 90 days before                   after a written request has been made
                                                                   the participant attains the qualified                     by this spouse, a written explanation
                                                                   early retirement age, or (2) the date on                  in non-technical language of the sur-
                                                                   which his participation begins. How-                      vivor annuity and any other form of
                                                                   ever, the election period for an indi-                    payment which may be selected. This
                                                                   vidual who was an active participant                      explanation must state the financial
                                                                   on the date this section became effec-
                                                                                                                             effect (in terms of dollars) of each form
                                                                   tive with regard to the plan need not
                                                                                                                             of payment. A plan need not respond to
                                                                   begin earlier than such effective date.
                                                                     (B) In the case of a participant in a                   more than one such request.
                                                                   plan to which this subparagraph ap-                          (d) Permissible additional plan provi-
                                                                   plies who dies after section 401(a)(11)                   sions—(1) In general. A plan will not fail
                                                                   and this section became applicable to                     to meet the requirements of section
                                                                   such plan with respect to such partici-                   401(a)(11) and this section merely be-
                                                                   pant and to whom an election required                     cause it contains one or more of the
                                                                   by this subparagraph has not been pre-                    provisions described in paragraphs
                                                                   viously made available, the plan must                     (d)(2) through (5) of this section.
                                                                   give the participant’s surviving spouse                      (2) Claim for benefits. A plan may pro-
                                                                   or, if dead, such spouse’s personal rep-                  vide that as a condition precedent to
                                                                   resentative the option of electing an                     the payment of benefits, a participant
                                                                   early survivor annuity. The plan may                      must express in writing to the plan ad-
                                                                   reduce the surviving spouse’s annuity                     ministrator the form in which he pre-
                                                                   to take into account any benefits al-                     fers benefits to be paid and provide all
                                                                   ready received. The period for making                     the information reasonably necessary
                                                                   such election shall not end before the                    for the payment of such benefits. How-
                                                                   90th day after the date on which writ-                    ever, if a participant files a claim for
                                                                   ten notice of the availability of such                    benefits with the plan administrator
                                                                   election and applicable information re-
                                                                                                                             and provides the plan administrator
                                                                   quired by subparagraph (3)(i) of this
                                                                                                                             with all the information necessary for
                                                                   paragraph is given directly to such sur-
                                                                                                                             the payment of benefits but does not
                                                                   viving spouse or personal representa-
                                                                   tive. If such notice and information is                   indicate a preference as to the form for
                                                                   given by mail, if shall be treated as                     the payment of benefits, benefits must
                                                                   given on the date of mailing.                             be paid in the form of a qualified joint
                                                                     (3) Information to be provided by plan.                 and survivor annuity if the participant
                                                                   For rules regarding the information re-                   has attained the qualified early retire-
                                                                   quired to be provided with respect to                     ment age unless such participant has
                                                                   the election to waive a QJSA or a                         made an effective election not to re-
                                                                   QPSA, see § 1.417(a)(3)–1.                                ceive benefits in such form. For rules
                                                                     (4) Election is revocable. A plan to                    relating to provisions in a plan to the
                                                                   which this section applies must provide                   effect that a claim for benefits must be
                                                                   that any election made under this                         filed before the payment of benefits
                                                                   paragraph may be revoked in writing                       will commence, see § 1.401(a)–14.
                                                                   during the specified election period,                        (3) Marriage requirements. A plan may
                                                                   and that after such election has been                     provide that a joint and survivor annu-
                                                                   revoked, another election under this                      ity will be paid only if—
                                                                   paragraph may be made during the                             (i) The participant and his spouse
                                                                   specified election period.                                have been married to each other
                                                                     (5) Election by surviving spouse. A plan                throughout a period (not exceeding one
                                                                   will not fail to meet the requirements
                                                                                                                             year) ending on the annuity starting
                                                                   of section 401(a)(11) and this section
                                                                                                                             date.
                                                                   merely because it provides that the
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                                                                   spouse of a deceased participant may
                                                                   elect to have benefits paid in a form

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                                                                   § 1.401(a)–11                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                      (ii) The spouse of the participant is                  committee knows which form of life
                                                                   not entitled to receive a survivor annu-                  annuity the participant has chosen be-
                                                                   ity (whether or not the election de-                      fore the committee makes its decision,
                                                                   scribed in paragraph (c)(2) of this sec-                  the committee cannot withhold its
                                                                   tion has been made) unless the partici-                   consent for payment of a qualified
                                                                   pant and his spouse have been married                     joint and survivor annuity event
                                                                   to each other throughout a period (not                    though it denies all other life annuity
                                                                   exceeding one year) ending on the date                    options. This subparagraph (5) only ap-
                                                                   of such participant’s death.                              plies before the effective date of the
                                                                      (iii) The same spouse must satisfy                     amendment made to section 411(d)(6)
                                                                   the requirements of subdivisions (i) and                  by section 301 of the Retirement Eq-
                                                                   (ii) of this subparagraph.                                uity Act of 1984. See section 411(d)(6)
                                                                      (iv) The participant must notify the                   and the regulations thereunder for
                                                                   plan administrator (as defined by sec-                    rules limiting employer discretion.
                                                                   tion 414(g)) of his marital status within                   (ii) The provisions of this subpara-
                                                                   any reasonable time period specified in                   graph may be illustrated by the fol-
                                                                   the plan.                                                 lowing example:
                                                                      (4) Effect of participant’s death on an                   Example. In 1980 plan M provides that the
                                                                   election or revocation of an election under               automatic form of benefit is a single sum
                                                                   paragraph (c). A plan may provide that                    distribution. The plan also permits, subject
                                                                   any election described in paragraph (c)                   to approval by the administrative com-
                                                                   of this section or any revocation of any                  mittee, the election of several optional
                                                                   such election does not become effective                   forms of life annuity. On the election form
                                                                                                                             that is reviewed by the administrative com-
                                                                   or ceases to be effective if the partici-                 mittee the participant indicates whether any
                                                                   pant dies within a period, not in excess                  life annuity option is preferred, without indi-
                                                                   of 2 years, beginning on the date of                      cating the particular life annuity chosen.
                                                                   such election or revocation. However, a                   Thus, the committee approves or disapproves
                                                                   plan containing a provision described                     the election without knowledge of whether a
                                                                   in the preceding sentence shall not sat-                  qualified joint and survivor annuity will be
                                                                   isfy the requirements of this section                     elected. The administrative committee ap-
                                                                                                                             proval provision in Plan M does not cause
                                                                   unless it also provides that any such                     the plan to fail to satisfy this section. On the
                                                                   election or any revocation of any such                    other hand, if the form indicates which form
                                                                   election will be given effect in any case                 of life annuity is preferred, committee dis-
                                                                   in which—                                                 approval of any election of the qualified
                                                                      (i) The participant dies from acci-                    joint and survivor annuity would cause the
                                                                   dental causes,                                            plan to fail to satisfy this section.
                                                                      (ii) A failure to give effect to the                     (e) Costs of providing qualified joint
                                                                   election or revocation would deprive                      and survivor annuity form or early sur-
                                                                   the participant’s survivor of a survivor                  vivor annuity form. A plan may take
                                                                   annuity, and                                              into account in any equitable manner
                                                                      (iii) Such election or revocation is                   consistent with generally accepted ac-
                                                                   made before such accident occurred.                       tuarial principles applied on a con-
                                                                      (5) Benefit option approval by third                   sistent basis any increased costs re-
                                                                   party. (i) A plan may provide that an                     sulting from providing qualified joint
                                                                   optional form of benefit elected by a                     and survivor annuity and early sur-
                                                                   participant is subject to the approval                    vivor annuity benefits. A plan may
                                                                   of an administrative committee or                         give a participant the option of paying
                                                                   similar third party. However, the ad-                     premiums only if it provides another
                                                                   ministrative committee cannot deny a                      option under which an out-of-pocket
                                                                   participant any of the benefits required                  expense by the participant is not re-
                                                                   by section 401(a)(11). For example, if a                  quired.
                                                                   plan offers a life annuity option, the                      (f) Application and effective date. Sec-
                                                                   committee may deny the participant a                      tion 401(a)(11) and this section shall
                                                                   qualified joint and survivor annuity                      apply to a plan only with respect to
                                                                   only by denying the participant access                    plan years beginning after December
                                                                   to all life annuity options without                       31, 1975, and shall apply only if—
                                                                   knowledge of whether the participant                        (1) The participant’s annuity starting
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                                                                   wishes to receive a qualified joint and                   date did not fall within a plan year be-
                                                                   survivor annuity. Alternatively, if the                   ginning before January 1, 1976, and

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–12

                                                                     (2) The participant was an active par-                  beginning after December 31, 1984. The
                                                                   ticipant in the plan on or after the first                new survivor annuity rules are pri-
                                                                   day of the first plan year beginning                      marily in sections 401(a)(11) and 417 as
                                                                   after December 31, 1975.                                  revised by REA 1984 and §§ 1.401(a)–20
                                                                     For purposes of this paragraph, the                     and 417(e)–1.
                                                                   term ‘‘active participant’’ means a par-                     (2) Regulations after REA 1984. (i) REA
                                                                   ticipant for whom benefits are being                      and the regulations thereunder to the
                                                                   accrued under the plan on his behalf (in                  extent inconsistent with pre-REA 1984
                                                                   the case of a defined benefit plan), the                  section 401(a)(11) and this section are
                                                                   employer is obligated to contribute to                    controlling for years to which REA 1984
                                                                   or under the plan on his behalf (in the                   applies. See e.g., paragraphs (a)(1) and
                                                                   case of a defined contribution plan                       (2) of this section, relating to required
                                                                   other than a profit-sharing plan), or                     provisions and certain cash-outs, re-
                                                                   the employer either is obligated to                       spectively and (e), relating to costs of
                                                                   contribute to or under the plan on his                    providing annuities, for rules that are
                                                                   behalf or would have been obligated to                    inconsistent with REA 1984 and, there-
                                                                   contribute to or under the plan on his                    fore, are not applicable to REA 1984
                                                                   behalf if any contribution were made                      years.
                                                                   to or under the plan (in the case of a                       (ii) To the extent that the pre-REA
                                                                   profit-sharing plan).                                     1984 law either is the same as or con-
                                                                   If benefits under a plan are provided by                  sistent with REA 1984 and the new reg-
                                                                   the distribution to the participants of                   ulations hereunder, the rules in this
                                                                   individual annuity contracts, the annu-                   section shall continue to apply for
                                                                   ity starting date will be considered for                  years to which REA 1984 applies. (See,
                                                                   purposes of this paragraph to fall with-                  e.g., paragraph (c) (relating to how in-
                                                                   in a plan year beginning before Janu-                     formation is furnished participants and
                                                                   ary 1, 1976, with respect to any such in-                 spouses) and paragraph (b) (defining a
                                                                   dividual contract that was distributed                    life annuity) for some of the rules that
                                                                   to the participant during a plan year                     apply to REA 1984 years.) The rules in
                                                                   beginning before January 1, 1976, if no                   this section shall not apply for such
                                                                   premiums are paid with respect to such                    years to the extent that they are in-
                                                                   contract during a plan year beginning                     consistent with REA 1984 and the regu-
                                                                   after December 31, 1975. In the case of                   lations thereunder.
                                                                   individual annuity contracts that are                        (iii) The Commissioner may provide
                                                                   distributed to participants before Jan-                   additional guidance as to the con-
                                                                   uary 1, 1978, and which contain an op-                    tinuing effect of the various rules in
                                                                   tion to provide a qualified joint and                     this section for years to which REA
                                                                   survivor annuity, the requirements of                     1984 applies.
                                                                   this section will be considered to have                   (Secs. 401(a)(11), 7805 Internal Revenue Code
                                                                   been satisfied if, not later than Janu-                   of 1954, (88 Stat. 935, 68A Stat. 917; (26 U.S.C.
                                                                   ary 1, 1978, holders of individual annu-                  401(a)(11), 7805)))
                                                                   ity contracts who are participants de-
                                                                                                                             [T.D. 7458, 42 FR 1466, Jan. 7, 1977; 42 FR 6367,
                                                                   scribed in the first sentence of this                     Feb. 2, 1977, as amended by T.D. 7510, 42 FR
                                                                   paragraph are given an opportunity to                     53956, Oct. 4, 1977; T.D. 8219, 53 FR 31841, Aug.
                                                                   have such contracts amended, so as to                     22, 1988; 53 FR 48534, Dec. 1, 1988; T.D. 9099, 68
                                                                   provide for a qualified joint and sur-                    FR 70144, Dec. 17, 2003]
                                                                   vivor annuity in the absence of a con-
                                                                   trary election, within a period of not                    § 1.401(a)–12 Mergers and consolida-
                                                                   less than one year from the date such                          tions of plans and transfers of plan
                                                                   opportunity was offered. In no event,                          assets.
                                                                   however, shall the preceding sentence                        A trust will not be qualified under
                                                                   apply with respect to benefits attrib-                    section 401 unless the plan of which the
                                                                   utable to premiums paid after Decem-                      trust is a part provides that in the case
                                                                   ber 31, 1977.                                             of any merger or consolidation with, or
                                                                     (g) Effect of REA 1984—(1) In general.                  transfer of assets or liabilities to, an-
                                                                   The Retirement Equity Act of 1984                         other plan after September 2, 1974, each
                                                                   (REA 1984) significantly changed the                      participant in the plan would receive a
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                                                                   qualified joint and survivor annuity                      minimum benefit if the plan termi-
                                                                   rules generally effective for plan years                  nated immediately after the merger,

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                                                                   § 1.401(a)–13                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   consolidation, or transfer. This benefit                     (ii) Any direct or indirect arrange-
                                                                   must be equal to or greater than the                      ment (whether revocable or irrev-
                                                                   benefit the participant would have                        ocable) whereby a party acquires from
                                                                   been entitled to receive immediately                      a participant or beneficiary a right or
                                                                   before the merger, consolidation, or                      interest enforceable against the plan
                                                                   transfer if the plan in which he was a                    in, or to, all or any part of a plan ben-
                                                                   participant had then terminated. This                     efit payment which is, or may become,
                                                                   section applies to a multiemployer                        payable to the participant or bene-
                                                                   plan only to the extent determined by                     ficiary.
                                                                   the Pension Benefit Guaranty Corpora-                        (2) Specific arrangements not considered
                                                                   tion. For additional rules concerning                     an assignment or alienation. The terms
                                                                   mergers or consolidations of plans and                    ‘‘assignment’’ and ‘‘alienation’’ do not
                                                                   transfers of plan assets, see section                     include, and paragraph (e) of this sec-
                                                                   414(l) and § 1.414(l)–1.                                  tion does not apply to, the following
                                                                   [T.D. 7638, 44 FR 48195, Aug. 17, 1979]                   arrangements:
                                                                                                                                (i) Any arrangement for the recovery
                                                                   § 1.401(a)–13 Assignment or alienation                    of amounts described in section 4045(b)
                                                                         of benefits.                                        of the Employee Retirement Income
                                                                      (a) Scope of the regulations. This sec-                Security Act of 1974, 88 Stat. 1027 (re-
                                                                   tion applies only to plans to which sec-                  lating to the recapture of certain pay-
                                                                   tion 411 applies without regard to sec-                   ments),
                                                                   tion 411(e)(2). Thus, for example, it does                   (ii) Any arrangement for the with-
                                                                   not apply to a governmental plan,                         holding of Federal, State or local tax
                                                                   within the meaning of section 414(d); a                   from plan benefit payments,
                                                                   church plan, within the meaning of sec-                      (iii) Any arrangement for the recov-
                                                                   tion 414(e), for which there has not                      ery by the plan of overpayments of
                                                                   been made the election under section                      benefits previously made to a partici-
                                                                   410(a) to have the participation, vest-                   pant,
                                                                   ing, funding, etc. requirements apply;
                                                                                                                                (iv) Any arrangement for the transfer
                                                                   or a plan which at no time after Sep-
                                                                                                                             of benefit rights from the plan to an-
                                                                   tember 2, 1974, provided for employer
                                                                                                                             other plan, or
                                                                   contributions.
                                                                      (b) No assignment or alienation—(1)                       (v) Any arrangement for the direct
                                                                   General rule. Under section 401(a)(13), a                 deposit of benefit payments to an ac-
                                                                   trust will not be qualified unless the                    count in a bank, savings and loan asso-
                                                                   plan of which the trust is a part pro-                    ciation or credit union, provided such
                                                                   vides that benefits provided under the                    arrangement is not part of an arrange-
                                                                   plan may not be anticipated, assigned                     ment constituting an assignment or
                                                                   (either at law or in equity), alienated                   alienation. Thus, for example, such an
                                                                   or subject to attachment, garnishment,                    arrangement could provide for the di-
                                                                   levy, execution or other legal or equi-                   rect deposit of a participant’s benefit
                                                                   table process.                                            payments to a bank account held by
                                                                      (2) Federal tax levies and judgments. A                the participant and the participant’s
                                                                   plan provision satisfying the require-                    spouse as joint tenants.
                                                                   ments of subparagraph (1) of this para-                      (d) Exceptions to general rule prohib-
                                                                   graph shall not preclude the following:                   iting assignments or alienations—(1) Cer-
                                                                      (i) The enforcement of a Federal tax                   tain voluntary and revocable assignments
                                                                   levy made pursuant to section 6331.                       or alienations. Not withstanding para-
                                                                      (ii) The collection by the United                      graph (b)(1) of this section, a plan may
                                                                   States on a judgment resulting from an                    provide that once a participant or ben-
                                                                   unpaid tax assessment.                                    eficiary begins receiving benefits under
                                                                      (c) Definition of assignment and alien-                the plan, the participant or beneficiary
                                                                   ation—(1) In general. For purposes of                     may assign or alienate the right to fu-
                                                                   this section, the terms ‘‘assignment’’                    ture benefit payments provided that
                                                                   and ‘‘alienation’’ include—                               the provision is limited to assignments
                                                                      (i) Any arrangement providing for                      or alienations which—
                                                                   the payment to the employer of plan                          (i) Are voluntary and revocable;
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                                                                   benefits which otherwise would be due                        (ii) Do not in the aggregate exceed 10
                                                                   the participant under the plan, and                       percent of any benefit payment; and

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–13

                                                                     (iii) Are neither for the purpose, nor                    (2) Acknowledgement requirement for
                                                                   have the effect, of defraying plan ad-                    third party arrangements. In accordance
                                                                   ministration costs.                                       with paragraph (e)(1)(ii) of this section,
                                                                   For purposes of this subparagraph, an                     the third party is required to file a
                                                                   attachment, garnishment, levy, execu-                     written acknowledgement with the
                                                                   tion, or other legal or equitable process                 plan administrator. This acknowledge-
                                                                   is not considered a voluntary assign-                     ment must state that the third party
                                                                   ment or alienation.                                       has no enforceable right in, or to, any
                                                                                                                             plan benefit payment or portion there-
                                                                     (2) Benefits assigned or alienated as se-
                                                                                                                             of (except to the extent of payments
                                                                   curity for loans. (i) Notwithstanding
                                                                                                                             actually received pursuant to the
                                                                   paragraph (b)(1) of this section, a plan
                                                                                                                             terms of the arrangement). A blanket
                                                                   may provide for loans from the plan to
                                                                                                                             written acknowledgement for all par-
                                                                   a participant or a beneficiary to be se-
                                                                                                                             ticipants and beneficiaries who are
                                                                   cured (by whatever means) by the par-
                                                                                                                             covered under the arrangement with
                                                                   ticipant’s accrued nonforfeitable ben-
                                                                                                                             the third party is sufficient. The writ-
                                                                   efit provided that the following condi-
                                                                                                                             ten acknowledgement must be filed
                                                                   tions are met.                                            with the plan administrator no later
                                                                     (ii) The plan provision providing for                   than the later of—
                                                                   the loans must be limited to loans from                     (i) August 18, 1978; or
                                                                   the plan. A plan may not provide for                        (ii) 90 days after the arrangement is
                                                                   the use of benefits accrued or to be ac-                  entered into.
                                                                   crued under the plan as security for a                      (f) Effective date. Section 401(a)(13) is
                                                                   loan from a party other than the plan,                    applicable as of January 1, 1976, and
                                                                   regardless of whether these benefits are                  the plan provision required by this sec-
                                                                   nonforfeitable within the meaning of                      tion must be effective as of that date.
                                                                   section 411 and the regulations there-                    However, regardless of when the provi-
                                                                   under.                                                    sion is adopted, it will not affect—
                                                                     (iii) The loan, if made to a partici-                     (1) Attachments, garnishments, lev-
                                                                   pant or beneficiary who is a disquali-                    ies, or other legal or equitable process
                                                                   fied person (within the meaning of sec-                   permitted under the plan that are
                                                                   tion 4975(e)(2)), must be exempt from                     made before January 1, 1976;
                                                                   the tax imposed by section 4975 (relat-                     (2) Assignments permitted under the
                                                                   ing to the tax imposed on prohibited                      plan that are irrevocable on December
                                                                   transactions) by reason of section                        31, 1975, including assignments made
                                                                   4975(d)(1). If the loan is made to a par-                 before January 1, 1976, as security for
                                                                   ticipant or beneficiary who is not a dis-                 loans to a participant or beneficiary
                                                                   qualified person, the loan must be one                    from a party other than the plan; and
                                                                   which would the exempt from the tax                         (3) Renewals or extensions of loans
                                                                   imposed by section 4975 by reason of                      described in subparagraph (2) of this
                                                                   section 4975(d)(1) if the loan were made                  paragraph, if—
                                                                   to a disqualified person.                                   (i) The principal amount of the obli-
                                                                     (e) Special rule for certain arrange-                   gation outstanding on December 31,
                                                                   ments—(1) In general. For purposes of                     1975 (or, if less, the principal amount
                                                                   this section and notwithstanding para-                    outstanding on the date of renewal or
                                                                   graph (c)(1) of this section, an arrange-                 extension), is not increased;
                                                                   ment whereby a participant or bene-                         (ii) The loan, as renewed or extended,
                                                                   ficiary directs the plan to pay all, or                   does not bear a rate of interest in ex-
                                                                   any portion, of a plan benefit payment                    cess of the rate prevailing for similar
                                                                   to a third party (which includes the                      loans at the time of the renewal or ex-
                                                                   participant’s employer) will not con-                     tensions; and
                                                                   stitute an ‘‘assignment or alienation’’                     (iii) With respect to loans that are re-
                                                                   if—                                                       newed or extended to bear a variable
                                                                     (i) It is revocable at any time by the                  interest rate, the formula for deter-
                                                                   participant or beneficiary; and                           mining the applicable rate is con-
                                                                     (ii) The third party files a written ac-                sistent with the formula for formulae
                                                                   knowledgement with the plan adminis-                      prevailing for similar loans at the time
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                                                                   trator pursuant to subparagraph (2) of                    of the renewal or extension. For pur-
                                                                   this paragraph.                                           poses of subparagraphs (2) and (3) of

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                                                                   § 1.401(a)–13                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   this paragraph, a loan from a party                       had provided that H shall be treated as
                                                                   other than the plan made after Decem-                     W’s current spouse only with respect to
                                                                   ber 31, 1975, will be treated as a new                    benefits that accrued prior to the di-
                                                                   loan. This is so even if the lender’s se-                 vorce, then H’s consent would be need-
                                                                   curity interest for the loan arises from                  ed by W to waive the QPSA or QJSA
                                                                   an assignment of the participant’s ac-                    with respect to benefits accrued before
                                                                   crued nonforfeitable benefit made be-                     the divorce. S’s consent would be re-
                                                                   fore that date.                                           quired with respect to the remainder of
                                                                      (g) Special rules for qualified domestic               the benefits.
                                                                   relations orders—(1) Definition. The term                   (2) In the preceding examples, if the
                                                                   ‘‘qualified domestic relations order’’                    QDRO ordered that a portion of W’s
                                                                   (QDRO) has the meaning set forth in                       benefit (either through separate ac-
                                                                   section 414(p). For purposes of the In-                   counts or a percentage of the benefit)
                                                                   ternal Revenue Code, a QDRO also in-                      must be distributed to H rather than
                                                                   cludes any domestic relations order de-                   ordering that H be treated as W’s
                                                                   scribed in section 303(d) of the Retire-                  spouse, the survivor annuity require-
                                                                   ment Equity Act of 1984.                                  ments of sections 401(a)(11) and 417
                                                                      (2) Plan amendments. A plan will not                   would not apply to the part of W’s ben-
                                                                   fail to satisfy the qualification require-                efit awarded H. Instead, the terms of
                                                                   ments of section 401(a) or 403(a) merely                  the QDRO would determine how H’s
                                                                   because it does not include provisions                    portion of W’s accrued benefit is paid.
                                                                   with regard to a QDRO.                                    W is required to obtain S’s consent if W
                                                                      (3) Waiver of distribution requirements.               elects to waive either the QJSA or
                                                                   A plan shall not be treated as failing to                 QPSA with respect to the remaining
                                                                   satisfy the requirements of sections 401                  portion of W’s benefit.
                                                                   (a) and (k) and 409(d) solely because of
                                                                                                                               (C) Amount of the QPSA or QJSA. (1)
                                                                   a payment to an alternate payee pursu-
                                                                                                                             Where, because of a QDRO, more than
                                                                   ant to a QDRO. This is the case even if
                                                                                                                             one individual is to be treated as the
                                                                   the plan provides for payments pursu-
                                                                                                                             surviving spouse, a plan may provide
                                                                   ant to a QDRO to an alternate payee
                                                                                                                             that the total amount to be paid in the
                                                                   prior to the time it may make pay-
                                                                                                                             form of a QPSA or survivor portion of
                                                                   ments to a participant. Thus, for exam-
                                                                                                                             a QJSA may not exceed the amount
                                                                   ple, a pension plan may pay an alter-
                                                                   nate payee even though the participant                    that would be paid if there were only
                                                                   may not receive a distribution because                    one surviving spouse. The QPSA or sur-
                                                                   he continues to be employed by the em-                    vivor portion of the QJSA, as the case
                                                                   ployer.                                                   may be, payable to each surviving
                                                                      (4) Coordination with section 417—(i)                  spouse must be paid as an annuity
                                                                   Former spouse. (A) In general. Under sec-                 based on the life of each such spouse.
                                                                   tion 414(p)(5), a QDRO may provide                          (2) Where the QDRO splits the par-
                                                                   that a former spouse shall be treated as                  ticipant’s accrued benefit between the
                                                                   the current spouse of a participant for                   participant and a former spouse (either
                                                                   all or some purposes under sections                       through separate accounts or percent-
                                                                   401(a)(11) and 417.                                       age of the benefit), the surviving
                                                                      (B) Consent. (1) To the extent a                       spouse of the participant is entitled to
                                                                   former spouse is treated as the current                   a QPSA or QJSA based on the partici-
                                                                   spouse of the participant by reason of a                  pant’s accrued benefit as of the date of
                                                                   QDRO, any current spouse shall not be                     death or the annuity starting date, less
                                                                   treated as the current spouse. For ex-                    the separate account or percentage
                                                                   ample, assume H is divorced from W,                       that is payable to the former spouse.
                                                                   but a QDRO provides that H shall be                       The calculation is made as if the sepa-
                                                                   treated as W’s current spouse with re-                    rate account or percentage had been
                                                                   spect to all of W’s benefits under a                      distributed to the participant prior to
                                                                   plan. H will be treated as the surviving                  the relevant date.
                                                                   spouse under the QPSA and QJSA un-                          (ii) Current spouse. Under section
                                                                   less W obtains H’s consent to waive the                   414(p)(5), even if the applicable election
                                                                   QPSA or QJSA or both. The fact that                       periods (i.e., the first day of the year in
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                                                                   W married S after W’s divorce from H                      which the participant attains age 35
                                                                   is disregarded. If, however, the QDRO                     and 90 days before the annuity starting

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–14

                                                                   date) have not begun, a QDRO may pro-                       (2) The 10th anniversary of the date
                                                                   vide that a current spouse shall not be                   on which the participant commenced
                                                                   treated as the current spouse of the                      participation in the plan,
                                                                   participant for all or some purposes                        (3) The termination of the partici-
                                                                   under sections 401(a)(11) and 417. A                      pant’s service with the employer, or
                                                                   QDRO may provide that the current                           (4) The date specified in an election
                                                                   spouse waives all future rights to a                      made pursuant to paragraph (b) of this
                                                                   QPSA or QJSA.                                             section.
                                                                     (iii) Effects on benefits. (A) A plan is                Notwithstanding the preceding sen-
                                                                   not required to provide additional vest-                  tence, a plan may require that a partic-
                                                                   ing or benefits because of a QDRO.                        ipant file a claim for benefits before
                                                                     (B) If an alternate payee is treated                    payment of benefits will commence.
                                                                   pursuant to a QDRO as having an inter-                      (b) Election of later date—(1) General
                                                                   est in the plan benefit, including a sep-                 rule. A plan may permit a participant
                                                                                                                             to elect that the payment to him of
                                                                   arate account or percentage of the par-
                                                                                                                             any benefit under a plan will com-
                                                                   ticipant’s account, then the QDRO can-
                                                                                                                             mence at a date later than the dates
                                                                   not provide the alternate payee with a
                                                                                                                             specified under paragraphs (a)(1), (2),
                                                                   greater right to designate a beneficiary                  and (3) of this section.
                                                                   for the alternate payee’s benefit                           (2) Manner of election. A plan permit-
                                                                   amount than the participant’s right.                      ting an election under this paragraph
                                                                   The QJSA or QPSA provisions of sec-                       shall require that such election must
                                                                   tion 417 do not apply to the spouse of                    be made by submitting to the plan ad-
                                                                   an alternate payee.                                       ministrator a written statement,
                                                                     (C) If the former spouse who is treat-                  signed by the participant, which de-
                                                                   ed as a current spouse dies prior to the                  scribes the benefit and the date on
                                                                   participant’s annuity starting date,                      which the payment of such benefit
                                                                   then any actual current spouse of the                     shall commence.
                                                                   participant is treated as the current                       (3) Restriction. An election may not be
                                                                   spouse, except as otherwise provided in                   made pursuant to a plan provision per-
                                                                   a QDRO.                                                   mitted by this paragraph if the exer-
                                                                     (iv) Section 415 requirements. Even                     cise of such election will cause benefits
                                                                   though a participant’s benefits are                       payable under the plan with respect to
                                                                   awarded to an alternate payee pursu-                      the participant in the event of his
                                                                   ant to a QDRO, the benefits are bene-                     death to be more than ‘‘incidental’’
                                                                   fits of the participant for purposes of                   within the meaning of paragraph
                                                                   applying the limitations of section 415                   (b)(1)(i) of § 1.401–1.
                                                                   to the participant’s benefits.                              (c) Special early retirement rule—(1)
                                                                                                                             Separation prior to early retirement age.
                                                                   [T.D. 7534, 43 FR 6943, Feb. 17, 1978, as amend-          A trust forming part of a plan which
                                                                   ed by T.D. 8219, 53 FR 31850, Aug. 22, 1988; 53           provides for the payment of an early
                                                                   FR 48534, Dec. 1, 1988]
                                                                                                                             retirement benefit is not qualified
                                                                                                                             under section 401 unless, upon satisfac-
                                                                   § 1.401(a)–14 Commencement of bene-
                                                                        fits under qualified trusts.                         tion of the age requirement for such
                                                                                                                             early retirement benefit, a participant
                                                                     (a)    In   general.   Under    section                 who—
                                                                   401(a)(14), a trust to which section 411                    (i) Satisfied the service requirements
                                                                   applies (without regard to section                        for such early retirement benefit, but
                                                                   411(e)(2) is not qualified under section                    (ii) Separated from service (with any
                                                                   401 unless the plan of which such trust                   nonforfeitable right to an accrued ben-
                                                                   is a part provides that the payment of                    efit) before satisfying such age require-
                                                                   benefits under the plan to the partici-                   ment,
                                                                   pant will begin not later than the 60th                   is entitled to receive not less than the
                                                                   day after the close of the plan year in                   reduced normal retirement benefit de-
                                                                   which the latest of the following events                  scribed in paragraph (c)(2) of this sec-
                                                                   occurs—                                                   tion. A plan may establish reasonable
                                                                     (1) The attainment by the participant                   conditions for payments of early retire-
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                                                                   of age 65, or, if earlier, the normal re-                 ment benefits (including for example, a
                                                                   tirement age specified under the plan,                    requirement that a claim for benefits

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                                                                   § 1.401(a)–15                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   be made) if the conditions are equally                    which section 411 of the Code applies
                                                                   applicable to participants who separate                   without regard to section 411(e)(2).
                                                                   from service when eligible for an early                   (Secs. 401(a)(14), 7805, Internal Revenue Code
                                                                   retirement benefit and participants                       of 1954 (88 Stat. 937, 68A Stat. 917; 26 U.S.C.
                                                                   who separate from service earlier.                        401(a)(14), 7805))
                                                                     (2) Reduced normal retirement benefit.
                                                                                                                             [T.D. 7436, 41 FR 42651, Sept. 28, 1976; 41 FR
                                                                   For purposes of this section, the re-                     44690, Oct. 12, 1976]
                                                                   duced normal retirement benefit is the
                                                                   benefit to which the participant would                    § 1.401(a)–15 Requirement that plan
                                                                   have been entitled under the plan at                            benefits are not decreased on ac-
                                                                   normal retirement age, reduced in ac-                           count of certain Social Security in-
                                                                   cordance with reasonable actuarial as-                          creases.
                                                                   sumptions.                                                   (a)    In   general.    Under     section
                                                                     (3) Separation prior to effective date of               401(a)(15), a trust which is part of a
                                                                   this section. The provisions of this para-                plan to which section 411 applies (with-
                                                                   graph shall not apply in the case of a                    out regard to section 411(e)(2)) is not
                                                                   plan participant who separates from                       qualified under section 401 unless,
                                                                   service before attainment of early re-                    under the plan of which such trust is a
                                                                   tirement age and prior to the effective                   part:
                                                                   date of this section set forth in para-                      (1) Benefit being received by participant
                                                                   graph (e) of this section.                                or beneficiary. A benefit (including a
                                                                     (4) Illustration. The provisions of this                death or disability benefit) being re-
                                                                   paragraph may be illustrated by the                       ceived under the plan by a participant
                                                                   following example:                                        or beneficiary (other than a participant
                                                                     Example. The X Corporation Defined Ben-                 to whom subparagraph (2)(ii) of this
                                                                   efit Plan provides that a normal retirement               paragraph applies, or a beneficiary of
                                                                   benefit will be payable to a participant upon             such a participant) is not decreased by
                                                                   attainment of age 65. The plan also provides              reason of any post-separation social se-
                                                                   that an actuarially reduced retirement ben-               curity benefit increase effective after
                                                                   efit will be payable, upon application, to any            the later of—
                                                                   participant who has completed 10 years of                    (i) September 2, 1974, or
                                                                   service with the X Corporation and attained
                                                                                                                                (ii) The date of first receipt of any re-
                                                                   age 60. When he is 55 years of age and has
                                                                   completed 10 years of service with X Cor-                 tirement benefit, death benefit, or dis-
                                                                   poration, A, a participant in the plan, leaves            ability benefit under the plan by the
                                                                   the service of X Corporation and does not re-             participant or by a beneficiary of the
                                                                   turn. The plan will not be qualified under                participant (whichever receipt occurs
                                                                   section 401 unless, upon attainment of age 60             first).
                                                                   and application for benefits, A is entitled to               (2) Benefit to which participant sepa-
                                                                   receive a reduced normal retirement benefit               rated from service has nonforfeitable
                                                                   described in subparagraph (2) of this para-               right. In the case of a benefit to which
                                                                   graph.
                                                                                                                             a participant has a nonforfeitable right
                                                                     (d) Retroactive payment rule. If the                    under such plan—
                                                                   amount of the payment required to                            (i) If such participant is separated
                                                                   commence on the date determined                           from service and does not subsequently
                                                                   under     this   section    cannot     be                 return to service and resume participa-
                                                                   ascertained by such date, or if it is not                 tion in the plan, such benefit is not de-
                                                                   possible to make such payment on such                     creased by reason of any post-separa-
                                                                   date because the plan administrator                       tion social security benefit increase ef-
                                                                   has been unable to locate the partici-                    fective after the later of September 2,
                                                                   pant after making reasonable efforts to                   1974, or separation from service, or
                                                                   do so, a payment retroactive to such                         (ii) If such participant is separated
                                                                   date may be made no later than 60 days                    from service and subsequently returns
                                                                   after the earliest date on which the                      to service and resumes participation in
                                                                   amount of such payment can be                             the plan, such benefit is not decreased
                                                                   ascertained under the plan or the date                    by reason of any post-separation social
                                                                   on which the participant is located                       security benefit increase effective after
                                                                   (whichever is applicable).                                September 2, 1974, which occurs during
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                                                                     (e) Effective date. This section shall                  separation from service and which
                                                                   apply to a plan for those plan years to                   would decrease such benefit to a level

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–19

                                                                   below the level of benefits to which he                   of the Social Security Act at the same rate
                                                                   would have been entitled had he not re-                   as he received such compensation at the
                                                                   turned to service after his separation.                   time he separated from service, but deter-
                                                                                                                             mined without regard to any post-separation
                                                                     (b) Post-separation social security ben-
                                                                                                                             social security benefit increase, multiplied
                                                                   efit increase. For purposes of this sec-                  by the ratio of the number of years of service
                                                                   tion, the term ‘‘post-separation social                   with the employer to the number of years of
                                                                   security benefit increase’’ means, with                   service the participant would have had if he
                                                                   respect to a participant or a bene-                       had worked for the employer until age 65.
                                                                   ficiary of the participant, an increase                   The plan satisfies the requirements of sec-
                                                                   in a benefit level or wage base under                     tion 401(a)(15), because social security in-
                                                                   title II of the Social Security Act                       creases that occur after a participant’s sepa-
                                                                                                                             ration from service will not reduce the ben-
                                                                   (whether such increase is a result of an
                                                                                                                             efit the participant will receive under the
                                                                   amendment of such title II or is a re-                    plan.
                                                                   sult of the application of the provisions
                                                                   of such title II) occurring after the ear-                  (d) Other Federal or State laws. To the
                                                                   lier of such participant’s separation                     extent applicable, the rules discussed
                                                                   from service or commencement of ben-                      in this section will govern classifica-
                                                                   efits under the plan.                                     tions under a plan supplementing the
                                                                     (c) Illustrations. The provisions of                    benefits provided by other Federal or
                                                                   paragraphs (a) and (b) of this section                    State laws, such as the Railroad Re-
                                                                   may be illustrated by the following ex-                   tirement Act of 1937. See section 206(b)
                                                                   amples:                                                   of the Employee Retirement Income
                                                                                                                             Security Act of 1974 (Public Law 93–406,
                                                                     Example 1. A plan to which section                      88 Stat. 864).
                                                                   401(a)(15) applies provides an annual benefit
                                                                   at the normal retirement age, 65, in the form               (e) Effect on prior law. Nothing in this
                                                                   of a stated benefit formula amount less a                 section shall be construed as amending
                                                                   specified percentage of the primary insur-                or modifying the rules applicable to
                                                                   ance amount payable under title II of the So-             post-separation social security in-
                                                                   cial Security Act. The plan provides no early             creases prior to September 2, 1974. See
                                                                   retirement benefits. In the case of a partici-            paragraph (e) of § 1.401–3.
                                                                   pant who separates from service before age                  (f) Effective date. Section 401(a)(15)
                                                                   65 with a nonforfeitable right to a benefit
                                                                   under the plan, the plan defines the primary
                                                                                                                             and this section shall apply to a plan
                                                                   insurance amount as the amount which the                  only with respect to plan years to
                                                                   participant is entitled to receive under title            which section 411 (relating to minimum
                                                                   II of the Social Security Act at age 65, multi-           vesting standards) is applicable to the
                                                                   plied by the ratio of the number of years of              plan without regard to section 411(e)(2).
                                                                   service with the employer to the number of
                                                                   years of service the participant would have               [T.D. 7434, 41 FR 42650, Sept. 28, 1976]
                                                                   had if he had worked for the employer until
                                                                   age 65. The plan does not satisfy the require-            § 1.401(a)–16 Limitations on benefits
                                                                   ments of section 401(a)(15), because social se-                and contributions under qualified
                                                                   curity increases that occur after a partici-                   plans.
                                                                   pant’s separation from service will reduce                   A trust will not be a qualified trust
                                                                   the benefit the participant will receive under
                                                                                                                             and a plan will not be a qualified plan
                                                                   the plan.
                                                                     Example 2. A plan to which section                      if the plan provides for benefits or con-
                                                                   401(a)(15) applies provides an annual benefit             tributions which exceed the limitations
                                                                   at the normal retirement age, 65, in the form             of section 415. Section 415 and the regu-
                                                                   of a stated benefit formula amount less a                 lations thereunder provide rules con-
                                                                   specified percentage of the primary insur-                cerning these limitations on benefits
                                                                   ance amount payable under title II of the So-             and contributions.
                                                                   cial Security Act. The plan provides no early
                                                                   retirement benefits. In the case of a partici-            [T.D. 7748, 46 FR 1696, Jan. 7, 1981]
                                                                   pant who separates from service before age
                                                                   65 with a nonforfeitable right to a benefit               § 1.401(a)–19 Nonforfeitability in case
                                                                   under the plan, the plan defines the primary                   of certain withdrawals.
                                                                   insurance amount as the amount which the
                                                                                                                               (a) Application of section. Section
                                                                   participant is entitled to receive under title
                                                                   II of the Social Security Act at age 65 based             401(a)(19) and this section apply to a
                                                                                                                             plan to which section 411(a) applies.
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                                                                   upon the assumption that he will continue to
                                                                   receive until reaching age 65 compensation                (See section 411(e) and § 1.411(a)–2 for
                                                                   which would be treated as wages for purposes              applicability of section 411).

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                                                                   § 1.401(a)–20                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                     (b) Prohibited forfeitures—(1) General                  annuity (QJSA) and a qualified pre-
                                                                   rule. A plan to which this section ap-                    retirement survivor annuity (QPSA) to
                                                                   plies is not a qualified plan (and a trust                remain qualified. These survivor annu-
                                                                   forming a part of such plan is not a                      ity requirements are applicable to any
                                                                   qualified trust) if, under such plan, any                 benefit payable under a plan, including
                                                                   part of a participant’s accrued benefit                   a benefit payable to a participant
                                                                   derived from employer contributions is                    under a contract purchased by the plan
                                                                   forfeitable solely because a benefit de-                  and paid by a third party.
                                                                   rived from the participant’s contribu-                       Q–2: Must annuity contracts pur-
                                                                   tions under the plan is voluntarily                       chased and distributed to a participant
                                                                   withdrawn by him after he has become                      or spouse by a plan subject to the sur-
                                                                   a 50 percent vested participant.                          vivor annuity requirements of sections
                                                                     (2) 50 percent vested participant. For                  401(a)(11) and 417 satisfy the require-
                                                                   purposes of subparagraph (1) of this                      ments of those sections?
                                                                   paragraph, a participant is a 50 percent
                                                                                                                                A–2: Yes. Rights and benefits under
                                                                   vested participant when he has a non-
                                                                                                                             section 401(a)(11) or 417 may not be
                                                                   forfeitable right (within the meaning
                                                                                                                             eliminated or reduced because the plan
                                                                   of section 411 and the regulations
                                                                                                                             uses annuity contracts to provide bene-
                                                                   thereunder) to at least 50 percent of his
                                                                   accrued benefit derived from employer                     fits merely because (a) such a contract
                                                                   contributions. Whether or not a partic-                   is held by a participant or spouse in-
                                                                   ipant is 50 percent vested shall be de-                   stead of a plan trustee, or (b) such con-
                                                                   termined by the ratio of the partici-                     tracts are distributed upon plan termi-
                                                                   pant’s total nonforfeitable employer-                     nation. Thus, the requirements of sec-
                                                                   derived accrued benefit under the plan                    tions 401(a)(11) and 417 apply to pay-
                                                                   to his total employer-derived accrued                     ments under the annuity contracts, not
                                                                   benefit under the plan.                                   to the distributions of the contracts.
                                                                     (3) Certain forfeitures. Paragraph (b)(1)                  Q–3: What plans are subject to the
                                                                   of this section does not apply in the                     survivor annuity requirements of sec-
                                                                   case of a forfeiture permitted by sec-                    tion 401(a)(11)?
                                                                   tion 411(a)(3)(D)(iii) and § 1.411(a)–7(d)(3)                A–3: (a) Section 401(a)(11) applies to
                                                                   (relating to forfeitures of certain bene-                 any defined benefit plan and to any de-
                                                                   fits accrued before September 2, 1974).                   fined contribution plan that is subject
                                                                     (c) Supersession. Section 11.401(a)–(19)                to the minimum funding standards of
                                                                   of the Temporary Income Tax Regula-                       section 412. This section also applies to
                                                                   tions under the Employee Retirement                       any participant under any other de-
                                                                   Income Security Act of 1974 is super-                     fined contribution plan unless all of
                                                                   seded by this section.                                    the following conditions are satisfied—
                                                                   (Sec. 411 Internal Revenue Code of 1954 (88                  (1) The plan provides that the partici-
                                                                   Stat. 901; 26 U.S.C. 411))                                pant’s nonforfeitable accrued benefit is
                                                                                                                             payable in full, upon the participant’s
                                                                   [T.D. 7501, 42 FR 42320, Aug. 23, 1977]
                                                                                                                             death, to the participant’s surviving
                                                                   § 1.401(a)–20 Requirements of qualified                   spouse (unless the participant elects,
                                                                        joint and survivor annuity and                       with spousal consent that satisfies the
                                                                        qualified preretirement survivor                     requirements of section 417(a)(2), that
                                                                        annuity.                                             such benefit be provided instead to a
                                                                      Q–1: What are the survivor annuity                     designated beneficiary);
                                                                   requirements added to the Code by the                        (2) The participant does not elect the
                                                                   Retirement Equity Act of 1984 (REA                        payment of benefits in the form of a
                                                                   1984)?                                                    life annuity; and
                                                                      A–1: REA 1984 replaced section                            (3) With respect to the participant,
                                                                   401(a)(11) with a new section 401(a)(11)                  the plan is not a transferee or an offset
                                                                   and added section 417. Plans to which                     plan. (See Q&A 5 of this section.)
                                                                   new section 401(a)(11) applies must                          (b) A defined contribution plan not
                                                                   comply with the requirements of sec-                      subject to the minimum funding stand-
                                                                   tions 401(a)(11) and 417 in order to re-                  ards of section 412 will not be treated
                                                                   main qualified under sections 401(a) or                   as satisfying the requirement of para-
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                                                                   403(a). In general, these plans must pro-                 graph (a)(1) unless both of the fol-
                                                                   vide both a qualified joint and survivor                  lowing conditions are satisfied—

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–20

                                                                     (1) The benefit is available to the sur-                For example, to the extent that section
                                                                   viving spouse within a reasonable time                    205 covers section 403(b) contracts and
                                                                   after the participant’s death. For this                   custodial accounts they are treated as
                                                                   purpose, availability within the 90-day                   section 401(a) plans. Individual retire-
                                                                   period following the date of death is                     ment plans (IRAs), including IRAs to
                                                                   deemed to be reasonable and the rea-                      which contributions are made under
                                                                   sonableness of longer periods shall be                    simplified employee pensions described
                                                                   determined based on the particular                        in section 408(k) and IRAs that are
                                                                   facts and circumstances. A time period                    treated as plans subject to Title I, are
                                                                   longer than 90 days, however, is                          not subject to these requirements.
                                                                   deemed unreasonable if it is less favor-                    Q–4: What rules apply to a partici-
                                                                   able to the surviving spouse than any                     pant who elects a life annuity option
                                                                   time period under the plan that is ap-                    under a defined contribution plan not
                                                                   plicable to other distributions. Thus,                    subject to section 412?
                                                                   for example, the availability of a ben-                     A–4: If a participant elects at any
                                                                   efit to the surviving spouse would be                     time (irrespective of the applicable
                                                                   unreasonable if the distribution was re-                  election period defined in section
                                                                   quired to be made by the close of the                     417(a)(6)) a life annuity option under a
                                                                   plan year including the participant’s                     defined contribution plan not subject
                                                                   death while distributions to employees                    to section 412, the survivor annuity re-
                                                                   who separate from service were re-                        quirements of sections 401(a)(11) and
                                                                   quired to be made within 90 days of                       417 will always thereafter apply to all
                                                                   separation.                                               of the participant’s benefits under such
                                                                     (2) The benefit payable to the sur-                     plan unless there is a separate account-
                                                                   viving spouse is adjusted for gains or                    ing of the account balance subject to
                                                                   losses occurring after the participant’s                  the election. A plan may allow a par-
                                                                   death in accordance with plan rules                       ticipant to elect an annuity option
                                                                   governing the adjustment of account                       prior to the applicable election period
                                                                   balances for other plan distributions.                    described in section 417(a)(6). If a par-
                                                                   Thus, for example, the plan may not                       ticipant elects an annuity option, the
                                                                   provide for distributions of an account                   plan must satisfy the applicable writ-
                                                                   balance to a surviving spouse deter-                      ten explanation, consent, election, and
                                                                   mined as of the last day of the quarter                   withdrawal rules of section 417, includ-
                                                                   in which the participant’s death oc-                      ing waiver of the QJSA within 90 days
                                                                   curred with no adjustments of an ac-                      of the annuity starting date. If a par-
                                                                   count balance for gains or losses after                   ticipant selecting such an option dies,
                                                                   death if the plan provides for such ad-                   the surviving spouse must be able to
                                                                   justments for a participant who sepa-                     receive the QPSA benefit described in
                                                                   rates from service within a quarter.                      section 417(c)(2) which is a life annuity,
                                                                     (c) For purposes of determining the                     the actuarial equivalent of which is not
                                                                   extent to which section 401(a)(11) ap-                    less than 50 percent of the nonforfeit-
                                                                   plies to benefits under an employee                       able account balance (adjusted for
                                                                   stock ownership plan (as defined in sec-                  loans as described in Q&A 24(d) of this
                                                                   tion 4975(e)(7)), the portion of a partici-               section). The remaining account bal-
                                                                   pant’s accrued benefit that is subject                    ance may be paid to a designated non-
                                                                   to section 409(h) is to be treated as                     spouse beneficiary.
                                                                   though such benefit were provided                           Q–5: How do sections 401(a)(11) and
                                                                   under a defined contribution plan not                     417 apply to transferee plans which are
                                                                   subject to section 412.                                   defined contribution plans not subject
                                                                     (d) The requirements set forth in sec-                  to section 412?
                                                                   tion 401(a)(11) apply to other employee                     A–5: (a) Transferee plans. Although
                                                                   benefit plans that are covered by appli-                  the survivor annuity requirements of
                                                                   cable provisions under Title I of the                     sections 401(a)(11) and 417 generally do
                                                                   Employee Retirement Income Security                       not apply to defined contribution plans
                                                                   Act of 1974. For purposes of applying                     not subject to section 412, such plans
                                                                   the     regulations     under     sections                are subject to the survivor annuity re-
                                                                   401(a)(11) and 417, plans subject to                      quirements to the extent that they are
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                                                                   ERISA section 205 are treated as if                       transferee plans with respect to any
                                                                   they were described in section 401(a).                    participant. A defined contribution

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                                                                   § 1.401(a)–20                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   plan is a transferee plan with respect                    charges are allocated on a reasonable
                                                                   to any participant if the plan is a di-                   and consistent basis between the ac-
                                                                   rect or indirect transferee of such par-                  crued benefits subject to the survivor
                                                                   ticipant’s benefits held on or after Jan-                 annuity requirements and other bene-
                                                                   uary 1, 1985, by:                                         fits. If there is an acceptable separate
                                                                     (1) A defined benefit plan,                             accounting between transferred bene-
                                                                     (2) A defined contribution plan sub-                    fits and any other benefits under the
                                                                   ject to section 412 or                                    plan, only the transferred benefits are
                                                                     (3) A defined contribution plan that                    subject to the survivor annuity re-
                                                                   is subject to the survivor annuity re-                    quirements.
                                                                   quirements of sections 401(a)(11) and                       Q–6: Is a frozen or terminated plan
                                                                   417 with respect to that participant.                     required to satisfy the survivor annu-
                                                                   If through a merger, spinoff, or other                    ity requirements of sections 401(a)(11)
                                                                   transaction having the effect of a                        and 417?
                                                                   transfer, benefits subject to the sur-                      A–6: In general, benefits provided
                                                                   vivor annuity requirements of sections                    under a plan that is subject to the sur-
                                                                   401(a)(11) and 417 are held under a plan                  vivor annuity requirements of sections
                                                                   that is not otherwise subject to such                     401(a)(11) and 417 must be provided in
                                                                   requirements, such benefits will be sub-                  accordance with those requirements
                                                                   ject to the survivor annuity require-                     even if the plan is frozen or termi-
                                                                   ments even though they are held under                     nated. However, any plan that has a
                                                                   such plan. Even if a plan satisfies the                   termination date prior to September
                                                                   survivor annuity requirements, other                      17, 1985, and that distributed all re-
                                                                   rules apply to these transactions. See,                   maining assets as soon as administra-
                                                                   e.g., section 411(d)(6) and the regula-                   tively feasible after the termination
                                                                   tions thereunder. A transfer made be-                     date, is not subject to the survivor an-
                                                                   fore January 1, 1985, and any rollover                    nuity requirements. The date of termi-
                                                                   contribution made at any time, are not                    nation is determined under section
                                                                   transactions that subject the trans-                      411(d)(3) and § 1.411(d)–2(c).
                                                                   feree plan to the survivor annuity re-
                                                                                                                               Q–7: If the Pension Benefit Guaranty
                                                                   quirements with respect to a partici-
                                                                                                                             Corporation (PBGC) is administering a
                                                                   pant. If a plan is a transferee plan with
                                                                                                                             plan, are benefits payable in the form
                                                                   respect to a participant, the survivor
                                                                                                                             of a QPSA or QJSA-
                                                                   annuity requirements do not apply
                                                                   with respect to other plan participants                     A–7: Yes, the PBGC will pay benefits
                                                                   solely because of the transfer. Any plan                  in such forms.
                                                                   that would not otherwise be subject to                      Q–8: How do the survivor annuity re-
                                                                   the survivor annuity requirements of                      quirements of sections 401(a)(11) and
                                                                   sections 401(a)(11) and 417 whose bene-                   417 apply to participants?
                                                                   fits are used to offset benefits in a plan                  A–8: (a) If a participant dies before
                                                                   subject to such requirements is subject                   the annuity starting date with vested
                                                                   to the survivor annuity requirements                      benefits attributable to employer or
                                                                   with respect to those participants                        employee contributions (or both), bene-
                                                                   whose benefits are offset. Thus, if a                     fits must be paid to the surviving
                                                                   stock bonus or profit-sharing plan off-                   spouse in the form of a QPSA. If a par-
                                                                   sets benefits under a defined benefit                     ticipant survives until the annuity
                                                                   plan, such a plan is subject to the sur-                  starting date with vested benefits at-
                                                                   vivor annuity requirements.                               tributable to employer or employee
                                                                     (b) Benefits covered. The survivor an-                  contributions (or both), benefits must
                                                                   nuity requirements apply to all ac-                       be provided to the participant in the
                                                                   crued benefits held for a participant                     form of a QJSA.
                                                                   with respect to whom the plan is a                          (b) A participant may waive the
                                                                   transferee plan unless there is an ac-                    QPSA or the QJSA (or both) if the ap-
                                                                   ceptable separate accounting between                      plicable notice, election, and spousal
                                                                   the transferred benefits and all other                    consent requirements of section 417 are
                                                                   benefits under the plan. A separate ac-                   satisfied.
                                                                   counting is not acceptable unless                           (c) Benefits are not required to be
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                                                                   gains, losses, withdrawals, contribu-                     paid in the form of a QPSA or QJSA if
                                                                   tions, forfeitures, and other credits or                  at the time of death or distribution the

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–20

                                                                   participant was vested only in em-                        distributed in the form of a QJSA. A’s
                                                                   ployee contributions and such death                       remaining account balance ($80,000) re-
                                                                   occurred, or distribution commenced,                      mains subject to the QPSA require-
                                                                   before October 22, 1986.                                  ments because the annuity starting
                                                                      (d) Certain mandatory distributions. A                 date has not occurred with respect to
                                                                   distribution may occur without satis-                     the $80,000. (If A survives until the an-
                                                                   fying the spousal consent requirements                    nuity starting date, the $80,000 would
                                                                   of section 417 (a) and (e) if the present                 be subject to the QJSA requirements.)
                                                                   value of the nonforfeitable benefit does                  If A died on the day following the an-
                                                                   not exceed the cash-out limit in effect                   nuity starting date for the withdrawal,
                                                                   under§ 1.411(a)–11(c)(3)(ii). See § 1.417(e)–             A’s spouse would be entitled to a QPSA
                                                                   1.                                                        with a value equal to at least $40,000
                                                                      Q–9: May separate portions of a par-                   with respect to the $80,000 account bal-
                                                                   ticipant’s accrued benefit be subject to                  ance, in addition to any survivor ben-
                                                                   QPSA and QJSA requirements at any                         efit without respect to the $20,000. If
                                                                   particular point in time?                                 the $20,000 payment to A had been the
                                                                      A–9: (a) Dual QPSA and QJSA rights.                    first payment of an annuity purchased
                                                                   One portion of a participant’s benefit                    with the entire $100,000 account bal-
                                                                   may be subject to the QPSA and an-                        ance rather than an in-service distribu-
                                                                   other portion to the QJSA require-                        tion, then the QJSA requirements
                                                                   ments at the same time. For example,                      would apply to the entire account bal-
                                                                   in order for a money purchase pension                     ance at the time of the annuity start-
                                                                   plan to distribute any portion of a mar-                  ing date. In such event, the plan would
                                                                   ried participant’s benefit to the partic-                 have no obligation to provide A’s
                                                                   ipant, the plan must distribute such                      spouse with a QPSA benefit upon A’s
                                                                   portion in the form of a QJSA (unless                     death. Of course, A’s spouse would re-
                                                                   the plan satisfies the applicable con-                    ceive the QJSA benefit (if the QJSA
                                                                   sent requirements of section 417 (a) and                  had not been waived) based on the full
                                                                   (e) with respect to such portion of the                   $100,000.
                                                                   participant’s benefit). This rule applies                   Q–10: What is the relevance of the an-
                                                                   even if the distribution is merely an in-                 nuity starting date with respect to the
                                                                   service distribution attributable to vol-                 survivor benefit requirements?
                                                                   untary employee contributions and re-                       A–10: (a) Relevance. The annuity
                                                                   gardless of whether the participant has                   starting date is relevant to whether
                                                                   attained the normal retirement age                        benefits are payable as either a QJSA
                                                                   under the plan. The QJSA require-                         or QPSA, or other selected optional
                                                                   ments apply to such a distribution be-                    form of benefit. If a participant is alive
                                                                   cause the annuity starting date has oc-                   on the annuity starting date, the bene-
                                                                   curred with respect to this portion of                    fits must be payable as a QJSA. If the
                                                                   the participant’s benefit. In the event                   participant is not alive on the annuity
                                                                   of a participant’s death following the                    starting date, the surviving spouse
                                                                   commencement of a distribution in the                     must receive a QPSA. The annuity
                                                                   form of a QJSA, the remaining pay-                        starting date is also used to determine
                                                                   ments must be made to the surviving                       when a spouse may consent to and a
                                                                   spouse under the QJSA. In addition,                       participant may waive a QJSA. A waiv-
                                                                   the plan must satisfy the QPSA re-                        er is only effective if it is made 90 days
                                                                   quirements with respect to any portion                    before the annuity starting date. Thus,
                                                                   of the participant’s benefits for which                   a deferred annuity cannot be selected
                                                                   the annuity starting date had not yet                     and a QJSA waived until 90 days before
                                                                   occurred.                                                 payments commence under the de-
                                                                      (b) Example. Assume that participant                   ferred annuity. In some cases, the an-
                                                                   A has a $100,000 account balance in a                     nuity starting date will have occurred
                                                                   money purchase pension plan. A makes                      with respect to a portion of the partici-
                                                                   an in-service withdrawal of $20,000 at-                   pant’s accrued benefit and will not
                                                                   tributable to voluntary employee con-                     have occurred with respect to the re-
                                                                   tributions. The QJSA requirements                         maining portion. (See Q&A–9.)
                                                                   apply to A’s withdrawal of the $20,000.                     (b) Annuity starting date—(1) General
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                                                                   Accordingly, unless the QJSA form is                      rule. For purposes of sections 401(a)(11),
                                                                   properly waived such amount must be                       411(a)(11) and 417, the annuity starting

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                                                                   § 1.401(a)–20                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   date is the first day of the first period                 ment age, a participant receives a ben-
                                                                   for which an amount is paid as an an-                     efit that satisfies the accrual and vest-
                                                                   nuity or any other form.                                  ing rules of section 411 without taking
                                                                     (2) Annuity payments. The annuity                       into account the disability benefit pay-
                                                                   starting date is the first date for which                 ments up to that date.
                                                                   an amount is paid, not the actual date
                                                                                                                               Example. (i) Assume that participant A at
                                                                   of payment. Thus, if participant A is to                  age 45 is entitled to a vested accrued benefit
                                                                   receive annuity payments as of the                        of $100 per month commencing at age 65 in
                                                                   first day of the first month after retire-                the form of a joint and survivor annuity
                                                                   ment but does not receive any pay-                        under Plan X. If prior to age 65 A receives a
                                                                   ments until three months later, the an-                   disability benefit under Plan X and the pay-
                                                                   nuity starting date is the first day of                   ment of such benefit does not reduce the
                                                                   the first month. For example, if an an-                   amount of A’s retirement benefit of $100 per
                                                                                                                             month commencing at age 65, any disability
                                                                   nuity is to commence on January 1,
                                                                                                                             benefit payments made to A between ages 45
                                                                   January 1 is the annuity starting date                    and 65 are auxiliary benefits. Thus, A’s annu-
                                                                   even though the payment for January                       ity starting date does not occur until A at-
                                                                   is not actually made until a later date.                  tains age 65. A’s surviving spouse B would be
                                                                   In the case of a deferred annuity, the                    entitled to receive a QPSA if A died before
                                                                   annuity starting date is the date for                     age 65. B would be entitled to receive the
                                                                   which the annuity payments are to                         survivor portion of a QJSA (unless waived) if
                                                                   commence, not the date that the de-                       A died after age 65. The QPSA payable to B
                                                                                                                             upon A’s death prior to age 65 would be com-
                                                                   ferred annuity is elected or the date
                                                                                                                             puted by reference to the QJSA that would
                                                                   the deferred annuity contract is dis-                     have been payable to A and B had A survived
                                                                   tributed.                                                 to age 65.
                                                                     (3) Administrative delay. A payment                       (ii) If in the above example A’s benefit pay-
                                                                   shall not be considered to occur after                    able at age 65 is reduced to $99 per month be-
                                                                   the annuity starting date merely be-                      cause a disability benefit is provided to A
                                                                   cause actual payment is reasonably de-                    prior to age 65, the disability benefit would
                                                                   layed for calculation of the benefit                      not be an auxiliary benefit. The benefit of $99
                                                                   amount if all payments are actually                       per month payable to A at age 65 would not,
                                                                                                                             without taking into account the disability
                                                                   made.                                                     benefit payments to A prior to age 65, satisfy
                                                                     (4) Forfeitures on death. Prior to the                  the minimum vesting and accrual rules of
                                                                   annuity      starting      date,   section                section 411. Accordingly, the first day of the
                                                                   411(a)(3)(A) allows a plan to provide for                 first period for which the disability pay-
                                                                   a forfeiture of a participant’s benefit,                  ments are to be made to A would constitute
                                                                   except in the case of a QPSA or a                         A’s annuity starting date, and any benefit
                                                                   spousal benefit described in section                      paid to A would be required to be paid in the
                                                                   401(a)(11)(B)(iii)(I). Once the annuity                   form of a QJSA (unless waived by A with the
                                                                                                                             consent of B).
                                                                   starting date has occurred, even if ac-
                                                                   tual payment has not yet been made, a                        (d) Other rules—(1) Suspension of bene-
                                                                   plan must pay the benefit in the dis-                     fits. If benefit payments are suspended
                                                                   tribution form elected.                                   after the annuity starting date pursu-
                                                                     (5) Surviving spouses, alternate payees,                ant to a suspension of benefits de-
                                                                   etc. The definition of ‘‘annuity starting                 scribed in section 411(a)(3)(B) after an
                                                                   date’’ for surviving spouses, other                       employee separates from service, the
                                                                   beneficiaries and alternate payees                        recommencement of benefit payments
                                                                   under section 414(p) is the same as it is                 after the suspension is not treated as a
                                                                   for participants.                                         new annuity starting date unless the
                                                                     (c) Disability auxiliary benefit—(1) Gen-               plan provides otherwise. In such case,
                                                                   eral rule. The annuity starting date for                  the plan administrator is not required
                                                                   a disability benefit is the first day of                  to provide new notices nor to obtain
                                                                   the first period for which the benefit                    new waivers for the recommenced dis-
                                                                   becomes payable unless the disability                     tributions if the form of distribution is
                                                                   benefit is an auxiliary benefit. The                      the same as the form that was appro-
                                                                   payment of any auxiliary disability                       priately selected prior to the suspen-
                                                                   benefits is disregarded in determining                    sion. If benefits are suspended for an
                                                                   the annuity starting date. A disability                   employee who continues in service
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                                                                   benefit is an auxiliary benefit if upon                   without a separation and who never re-
                                                                   attainment of early or normal retire-                     ceives payments, the commencement

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–20

                                                                   of payments after the period of suspen-                   whether nonforfeitable before or upon
                                                                   sion is treated as the annuity starting                   death, including the proceeds of insur-
                                                                   date unless the plan provides other-                      ance contracts.
                                                                   wise.                                                       Q–13: Does the rule of section
                                                                     (2) Additional accruals. In the case of                 411(a)(3)(A) which permits forfeitures
                                                                   an annuity starting date that occurs on                   on account of death apply to a QPSA or
                                                                   or after normal retirement age, such                      the spousal benefit described in section
                                                                   date applies to any additional accruals                   401(a)(11)(B)(iii)?
                                                                   after the annuity starting date, unless                     A–13: No. Section 411(a)(3)(A) permits
                                                                   the plan provides otherwise. For exam-                    forfeiture on account of death prior to
                                                                   ple, if a participant who continues to                    the time all the events fixing payment
                                                                   accrue benefits elects to have benefits                   occur. However, this provision does not
                                                                   paid in an optional form at normal re-                    operate to deprive a surviving spouse of
                                                                   tirement age, the additional accruals                     a QPSA or the spousal benefit de-
                                                                   must be paid in the optional form se-                     scribed in section 401(a)(11)(B)(iii).
                                                                   lected unless the plan provides other-                    Therefore, sections 401(a)(11) and 417
                                                                   wise. In the case of an annuity starting                  apply to benefits that were nonforfeit-
                                                                   date that occurs prior to normal retire-                  able immediately prior to death (deter-
                                                                   ment age, such date does not apply to                     mined without regard to section
                                                                   any additional accruals after such                        411(a)(3)(A)). Thus, in the case of the
                                                                   date.                                                     death of a married participant in a de-
                                                                     Q–11: Do the survivor annuity re-                       fined contribution plan not subject to
                                                                   quirements apply to benefits derived                      section 412 which provides that, upon a
                                                                   from both employer and employee con-                      participant’s death, the entire non-
                                                                   tributions?                                               forfeitable accrued benefit is payable
                                                                     A–11: Yes. The survivor annuity ben-                    to the participant’s spouse, the non-
                                                                   efit requirements apply to benefits de-                   forfeitable benefit is determined with-
                                                                   rived from both employer and em-
                                                                                                                             out regard to the provisions of section
                                                                   ployee contributions. Benefits are not
                                                                                                                             411(a)(3)(A).
                                                                   required to be paid in the form of a
                                                                                                                               Q–14: Do sections 411(a)(11), 401(a)(11)
                                                                   QPSA or a QJSA if the participant was
                                                                   vested only in employee contributions                     and 417 apply to accumulated deduct-
                                                                   at the time of death or distribution and                  ible employee contributions, as defined
                                                                   such death or distribution occurred be-                   in section 72(o)(5)(B) (Accumulated
                                                                   fore October 22, 1986. All benefits pro-                  DECs)?
                                                                   vided under a plan, including benefits                      A–14: (a) Employee consent, section 411.
                                                                   attributable to rollover contributions,                   The requirements of section 411(a)(11)
                                                                   are subject to the survivor annuity re-                   apply to Accumulated DECs. Thus, Ac-
                                                                   quirements.                                               cumulated DECs may not be distrib-
                                                                     Q–12: To what benefits do the sur-                      uted without participant consent un-
                                                                   vivor annuity requirements of sections                    less the applicable exemptions apply.
                                                                   401(a)(11) and 417 apply?                                   (b) Survior requirements. Accumulated
                                                                     A–12: (a) Defined benefit plans. Under a                DECs are treated as though held under
                                                                   defined benefit plan, sections 401(a)(11)                 a separate defined contribution plan
                                                                   and 417 apply only to benefits in which                   that is not subject to section 412. Thus,
                                                                   a participant was vested immediately                      section 401(a)(11) applies to Accumu-
                                                                   prior to death. They do not apply to                      lated DECs only as provided in section
                                                                   benefits to which a participant’s bene-                   401(a)(11)(B)(iii).  All    Accumulated
                                                                   ficiary becomes entitled by reason of                     DECs are treated in this manner, in-
                                                                   death or to the proceeds of a life insur-                 cluding Accumulated DECs that are
                                                                   ance contract to the extent such pro-                     the only benefit held under a plan and
                                                                   ceeds exceed the present value of the                     Accumulated DECs that are part of a
                                                                   participant’s nonforfeitable benefits                     defined benefit or a defined contribu-
                                                                   that existed immediately prior to                         tion plan.
                                                                   death.                                                      (c) Effective date. Sections 401(a)(11)
                                                                     (b) Defined contribution plans. Sec-                    and 411(a)(11) shall not apply to dis-
                                                                   tions 401(a)(11) and 417 apply to all non-                tributions of accumulated DECs until
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                                                                   forfeitable benefits which are payable                    the first plan year beginning after De-
                                                                   under a defined contribution plan,                        cember 31, 1988.

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                                                                   § 1.401(a)–20                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                      Q–15: How do the survivor annuity re-                  more actuarially equivalent joint and
                                                                   quirements of sections 401(a)(11) and                     survivor annuities that satisfy the re-
                                                                   417 apply to a defined benefit plan that                  quirements for a QJSA, the plan must
                                                                   includes an accrued benefit based upon                    designate which one is the QJSA and,
                                                                   a contribution to a separate account or                   therefore, the automatic form of ben-
                                                                   mandatory employee contributions?                         efit payment. A plan, however, may
                                                                      A–15: (a) 414(k) plans. In the case of a               allow a participant to elect out of such
                                                                   section 414(k) plan that includes both a                  a QJSA, without spousal consent, in
                                                                   defined benefit plan and a separate ac-                   favor of another actuarially equivalent
                                                                   count, the rules of sections 401(a)(11)                   joint and survivor annuity that satis-
                                                                   and 417 apply separately to the defined                   fies the QJSA conditions. Such an elec-
                                                                   benefit portion and the separate ac-                      tion is not subject to the requirement
                                                                   count portion of the plan. The separate                   that it be made within the 90-day pe-
                                                                   account portion is subject to the sur-                    riod before the annuity starting date.
                                                                   vivor annuity requirements of sections                    For example, if a plan designates a
                                                                   401(a)(11) and 417 and the special QPSA                   joint and 100% survivor annuity as the
                                                                   rules in section 417(c)(2).                               QJSA and also offers an actuarially
                                                                      (b) Employee contributions—(1) Vol-                    equivalent joint and 50% survivor an-
                                                                   untary. In the case of voluntary em-                      nuity that would satisfy the require-
                                                                   ployee contributions to a defined ben-                    ments of a QJSA, the participant may
                                                                   efit plan, the plan must maintain a                       elect the joint and 50% survivor annu-
                                                                   separate account with respect to the                      ity without spousal consent. The par-
                                                                   voluntary      employee      contributions.
                                                                                                                             ticipant, however, does need spousal
                                                                   This separate account is subject to the
                                                                                                                             consent to elect a joint and survivor
                                                                   survivor annuity requirements of sec-
                                                                                                                             annuity that was not actuarially
                                                                   tions 401(a)(11) and 417 and the special
                                                                                                                             equivalent to the automatic QJSA. A
                                                                   QPSA rules in section 417(c)(2).
                                                                                                                             plan does not fail to satisfy the re-
                                                                      (2) Mandatory. In the case of a defined
                                                                                                                             quirements of this Q&A–16 merely be-
                                                                   benefit plan providing for mandatory
                                                                                                                             cause the amount payable under an op-
                                                                   employee contributions, the entire ac-
                                                                                                                             tional form of benefit that is subject to
                                                                   crued benefit is subject to the survivor
                                                                                                                             the minimum present value require-
                                                                   annuity requirements of sections
                                                                                                                             ment of section 417(e)(3) is calculated
                                                                   401(a)(11) and 417 as a defined benefit
                                                                   plan.                                                     using the applicable interest rate (and,
                                                                      (c) Accumulated DECs. See Q&A 14 of                    for periods when required, the applica-
                                                                   this section for the rule applicable to                   ble mortality table) under section
                                                                   accumulated deductible employee con-                      417(e)(3).
                                                                   tributions.                                                  Q–17: When must distributions to a
                                                                      Q–16: Can a plan provide a benefit                     participant under a QJSA commence?
                                                                   form more valuable than the QJSA and                         A–17: (a) QJSA benefits upon earliest re-
                                                                   if a plan offers more than one annuity                    tirement. A plan must permit a partici-
                                                                   option satisfying the requirements of a                   pant to receive a distribution in the
                                                                   QJSA, is spousal consent required                         form of a QJSA when the participant
                                                                   when the participant chooses among                        attains the earliest retirement age
                                                                   the various forms?                                        under the plan. Written consent of the
                                                                      A–16: In the case of an unmarried par-                 participant is required. However, the
                                                                   ticipant, the QJSA may be less valu-                      consent of the participant’s spouse is
                                                                   able than other optional forms of ben-                    not required. Any payment not in the
                                                                   efit payable under the plan. In the case                  form of a QJSA is subject to spousal
                                                                   of a married participant, the QJSA                        consent. For example, if the partici-
                                                                   must be at least as valuable as any                       pant separates from service under a
                                                                   other optional form of benefit payable                    plan that allows for distributions on
                                                                   under the plan at the same time. Thus,                    separation from service or if a plan al-
                                                                   if a plan has two joint and survivor an-                  lows for in-service distributions, the
                                                                   nuities that would satisfy the require-                   participant may receive a QJSA with-
                                                                   ments for a QJSA, but one has a great-                    out spousal consent in such events.
                                                                   er actuarial value than the other, the                    Payments in any other form, including
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                                                                   more valuable joint and survivor annu-                    a single sum, would require waiver of
                                                                   ity is the QJSA. If there are two or                      the QJSA by the participant’s spouse.

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–20

                                                                      (b) Earliest retirement age. (1) This                  day before the participant’s death, and
                                                                   paragraph (b) defines the term ‘‘ear-                     (b) in the case of a participant who dies
                                                                   liest retirement age’’ for purposes of                    on or before the participant’s earliest
                                                                   sections 401(a)(11), 411(a)(11) and 417.                  retirement age under the plan, the par-
                                                                      (2) In the case of a plan that provides                ticipant had separated from service at
                                                                   for voluntary distributions that com-                     the earlier of the actual time of separa-
                                                                   mence upon the participant’s separa-                      tion or death, survived until the ear-
                                                                   tion from service, earliest retirement                    liest retirement age, retired at that
                                                                   age is the earliest age at which a par-                   time with a QJSA, and died on the day
                                                                   ticipant could separate from service                      thereafter. If the participant elects be-
                                                                   and receive a distribution. Death of a                    fore the annuity starting date a form
                                                                   participant is treated as a separation                    of joint and survivor annuity that sat-
                                                                   from service.                                             isfies the requirements for a QJSA and
                                                                      (3) In the case of a plan that provides                dies before the annuity starting date,
                                                                   for in-service distributions, earliest re-                the elected form is treated as the QJSA
                                                                   tirement age is the earliest age at                       and the QPSA must be based on such
                                                                   which such distributions may be made.                     form.
                                                                      (4) In the case of a plan not described                  Q–19: What rules apply in deter-
                                                                   in subparagraph (2) or (3) of this para-                  mining the amount and forfeitability
                                                                   graph, the rule below applies. Earliest                   of a QPSA?
                                                                   retirement age is the early retirement                      A–19: The QPSA is calculated as of
                                                                   age determined under the plan, or if no                   the earliest retirement age if the par-
                                                                   early retirement age, the normal re-
                                                                                                                             ticipant dies before such time, or at
                                                                   tirement age determined under the
                                                                                                                             death if the participant dies after the
                                                                   plan. If the participant dies or sepa-
                                                                                                                             earliest retirement age. The plan must
                                                                   rates from service before such age,
                                                                                                                             make reasonable actuarial adjustments
                                                                   then only the participant’s actual
                                                                                                                             to reflect a payment earlier or later
                                                                   years of service at the time of the par-
                                                                                                                             than the earliest retirement age. A de-
                                                                   ticipant’s separation from service or
                                                                                                                             fined benefit plan may provide that the
                                                                   death are taken into account. Thus, in
                                                                                                                             QPSA is forfeited if the spouse does not
                                                                   the case of a plan under which benefits
                                                                                                                             survive until the date prescribed under
                                                                   are not payable until the attainment of
                                                                                                                             the plan for commencement of the
                                                                   age 65, or upon attainment of age 55
                                                                   and completion of 10 years of service,                    QPSA (i.e., the earliest retirement
                                                                   the earliest retirement age of a partici-                 age). Similarly, if the spouse survives
                                                                   pant who died or separated from serv-                     past the participant’s earliest retire-
                                                                   ice with 8 years of service is when the                   ment age (or other earlier QPSA dis-
                                                                   participant would have attained age 65                    tribution date under the plan) and
                                                                   (if the participant had survived). On                     elects after the death of the partici-
                                                                   the other hand, if a participant died or                  pant to defer the commencement of the
                                                                   separated from service after 10 years of                  QPSA to a later date, a defined benefit
                                                                   service, the earliest retirement age is                   plan may provide for a forfeiture of the
                                                                   when the participant would have at-                       QPSA benefit if the spouse does not
                                                                   tained age 55 (if the participant had                     survive until the deferred commence-
                                                                   survived).                                                ment date. The account balance in a
                                                                      Q–18: What is a qualified preretire-                   defined contribution plan may not be
                                                                   ment survivor annuity (QPSA) in a de-                     forfeited even though the spouse does
                                                                   fined benefit plan?                                       not survive until the time the account
                                                                      A–18: A QPSA is an immediate annu-                     balance is used to purchase the QPSA.
                                                                   ity for the life of the surviving spouse                  See Q&A–17 of this section for the
                                                                   of a participant. Each payment under a                    meaning of earliest retirement age.
                                                                   QPSA under a defined benefit plan is                        Q–20: What preretirement survivor
                                                                   not to be less than the payment that                      annuity benefits must a defined
                                                                   would have been made to the survivor                      contibution plan subject to the sur-
                                                                   under the QJSA payable under the plan                     vivor annuity requirements of sections
                                                                   if (a) in the case of a participant who                   401(a)(11) and 417 provide?
                                                                   dies after attaining the earliest retire-                   A–20: A defined contribution plan
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                                                                   ment age under the plan, the partici-                     that is subject to the survivor annuity
                                                                   pant had retired with a QJSA on the                       requirements of sections 401(a)(11) and

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                                                                   § 1.401(a)–20                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   417 must provide a preretirement sur-                        Q–23: Must a defined benefit plan ob-
                                                                   vivor annuity with a value which is not                   tain the consent of a participant and
                                                                   less than 50 percent of the nonforfeit-                   the participant’s spouse to commence
                                                                   able account balance of the participant                   payments in the form of a QJSA in
                                                                   as of the date of the participant’s                       order to avoid violating section 415 or
                                                                   death. If a contributory defined con-                     411(b)?
                                                                   tribution plan has a forfeiture provi-                       A–23: No. A defined benefit plan may
                                                                   sion permitted by section 411(a)(3)(A),                   commence distributions in the form of
                                                                   not more than a proportional percent                      a QJSA without the consent of the par-
                                                                   of the account balance attributable to                    ticipant and spouse, even if consent
                                                                   contributions that may not be forfeited                   would otherwise be required (see
                                                                   at death (for example, employee and                       § 1.417(e)–1(b)), to the extent necessary
                                                                   section 401(k) contributions) may be                      to avoid a violation of section 415 or
                                                                   used to satisfy the QPSA benefit. Thus,                   411(b). For example, assume a plan has
                                                                   for example, if the QPSA benefit is to                    a normal retirement age of 55. A is a
                                                                   be provided from 50 percent of the ac-                    married participant, age 55, and has ac-
                                                                   count balance, not more than 50 per-                      crued a $75,000 joint and 100 percent
                                                                   cent of the nonforfeitable contribu-                      survivor annuity that satisfies section
                                                                   tions may be used for the QPSA.                           415. If an actuarial increase would be
                                                                      Q–21: May a defined benefit plan                       required under section 411 because of
                                                                   charge the participant for the cost of                    deferred commencement and the in-
                                                                   the QPSA benefit?                                         crease would cause the benefit to ex-
                                                                      A–21: Prior to the later of the time
                                                                                                                             ceed the applicable limit under section
                                                                   the plan allows the participant to
                                                                                                                             415, the plan may commence payment
                                                                   waive the QPSA or provides notice of
                                                                                                                             of a QJSA at age 55 without the par-
                                                                   the ability to waive the QPSA, a de-
                                                                                                                             ticipant’s election or consent and with-
                                                                   fined benefit plan may not charge the
                                                                                                                             out the spouse’s concent.
                                                                   participant for the cost of the QPSA by
                                                                   reducing the participant’s plan benefits                     Q–24: What are the rules under sec-
                                                                   or by any other method. The preceding                     tions 401(a)(11) and 417 applicable to
                                                                   sentence does not apply to any charges                    plan loans?
                                                                   prior to the first plan year beginning                       A–24: (a) Consent rules. (1) A plan does
                                                                   after December 31, 1988. Once the par-                    not satisfy the survivor annuity re-
                                                                   ticipant is given the opportunity to                      quirements of sections 401(a)(11) and
                                                                   waive the QPSA or the notice of the                       417 unless the plan provides that, at
                                                                   QPSA is later, the plan may charge the                    the time the participant’s accrued ben-
                                                                   participant for the cost of the QPSA. A                   efit is used as security for a loan,
                                                                   charge for the QPSA that reasonably                       spousal consent to such use is ob-
                                                                   reflects the cost of providing the QPSA                   tained. Consent is required even if the
                                                                   will not fail to satisfy section 411 even                 accrued benefit is not the primary se-
                                                                   if it reduces the accrued benefit.                        curity for the loan. No spousal consent
                                                                      Q–22: When must distributions to a                     is necessary if, at the time the loan is
                                                                   surviving spouse under a QPSA com-                        secured, no consent would be required
                                                                   mence?                                                    for a distribution under section
                                                                      A–22: (a) In the case of a defined ben-                417(a)(2)(B). Spousal consent is not re-
                                                                   efit plan, the plan must permit the sur-                  quired if the plan or the participant is
                                                                   viving spouse to direct the commence-                     not subject to section 401(a)(11) at the
                                                                   ment of payments under QPSA no later                      time the accrued benefit is used as se-
                                                                   than the month in which the partici-                      curity, or if the total accrued benefit
                                                                   pant would have attained the earliest                     subject to the security is not in excess
                                                                   retirement age. However, a plan may                       of the cash-out limit in effect under
                                                                   permit the commencement of pay-                           § 1.411(a)–11(c)(3)(ii). The spousal con-
                                                                   ments at an earlier date.                                 sent must be obtained no earlier than
                                                                      (b) In the case of a defined contribu-                 the beginning of the 90-day period that
                                                                   tion plan, the plan must permit the                       ends on the date on which the loan is
                                                                   surviving spouse to direct the com-                       to be so secured. The consent is subject
                                                                   mencement of payments under the                           to the requirements of section 417(a)(2).
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                                                                   QPSA within a reasonable time after                       Therefore, the consent must be in writ-
                                                                   the participant’s death.                                  ing, must acknowledge the effect of the

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–20

                                                                   loan and must be witnessed by a plan                      requirements of sections 401(a)(11) and
                                                                   representative or a notary public.                        417 must satisfy those requirements ap-
                                                                     (2) Participant consent is deemed ob-                   plicable to QJSAs with respect to par-
                                                                   tained at the time the participant                        ticipants who are not married. A QJSA
                                                                   agrees to use his accrued benefit as se-                  for a participant who is not married is
                                                                   curity for a loan for purposes of satis-                  an annuity for the life of the partici-
                                                                   fying the requirements for participant                    pant. Thus, an unmarried participant
                                                                   consent     under     sections  401(a)(11),               must be provided the written expla-
                                                                   411(a)(11) and 417.                                       nation described in section 417(a)(3)(A)
                                                                     (b) Change in status. If spousal con-                   and a single life annuity unless another
                                                                   sent is obtained or is not required                       form of benefit is elected by the partic-
                                                                   under paragraph (a) of this Q&A 24 at                     ipant. An unmarried participant is
                                                                   the time the benefits are used as secu-                   deemed to have waived the QPSA re-
                                                                   rity, spousal consent is not required at                  quirements. This deemed waiver is null
                                                                   the time of any setoff of the loan                        and void if the participant later mar-
                                                                   against the accrued benefit resulting                     ries.
                                                                   from a default, even if the participant                     (b) Marital status change—(1) Remar-
                                                                   is married to a different spouse at the                   riage. If a participant is married on the
                                                                   time of the setoff. Similarly, in the                     date of death, payments to a surviving
                                                                   case of a participant who secured a                       spouse under a QPSA or QJSA must
                                                                   loan while unmarried, no consent is re-                   continue even if the surviving spouse
                                                                   quired at the time of a setoff of the                     remarries.
                                                                   loan against the accrued benefit even if                    (2) One-year rule. (i) A plan is not re-
                                                                   the participant is married at the time                    quired to treat a participant as mar-
                                                                   of the setoff.                                            ried unless the participant and the par-
                                                                     (c) Renegotiation. For purposes of ob-                  ticipant’s spouse have been married
                                                                   taining any required spousal consent,                     throughout the one-year period ending
                                                                   any renegotiation, extension, renewal,                    on the earlier of (A) the participant’s
                                                                   or other revision of a loan shall be                      annuity starting date or (B) the date of
                                                                   treated as a new loan made on the date                    the participant’s death. Nevertheless,
                                                                   of the renegotiation, extension, re-                      for purposes of the preceding sentence,
                                                                   newal, or other revision.                                 a participant and the participant’s
                                                                     (d) Effect on benefits. For purposes of                 spouse must be treated as married
                                                                   determining the amount of a QPSA or                       throughout the one-year period ending
                                                                   QJSA, the accrued benefit of a partici-                   on the participant’s annuity starting
                                                                   pant shall be reduced by any security                     date even though they are married to
                                                                   interest held by the plan by reason of a                  each other for less than one year before
                                                                   loan outstanding to the participant at                    the annuity starting date if they re-
                                                                   the time of death or payment, if the se-                  main married to each other for at least
                                                                   curity interest is treated as payment                     one year. See section 417(d)(2). If a plan
                                                                   in satisfaction of the loan under the                     adopts the one-year rule provided in
                                                                   plan. A plan may offset any loan out-                     section 417(d), the plan must treat the
                                                                   standing at the participant’s death                       participant and spouse who are married
                                                                   which is secured by the participant’s                     on the annuity starting date as mar-
                                                                   account balance against the spousal                       ried and must provide benefits which
                                                                   benefit required to be paid under sec-                    are to commence on the annuity start-
                                                                   tion 401(a)(11)(B)(iii).                                  ing date in the form of a QJSA unless
                                                                     (e) Effective date. Loans made prior to                 the participant (with spousal consent)
                                                                   August 19, 1985, are deemed to satisfy                    elects another form of benefit. The
                                                                   the consent requirements of paragraph                     plan is not required to provide the par-
                                                                   (a) of this Q&A 24.                                       ticipant with a new or retroactive elec-
                                                                     Q–25: How do the survivor annuity re-                   tion or the spouse with a new consent
                                                                   quirements of sections 401(a)(11) and                     when the one-year period is satisfied. If
                                                                   417 apply with respect to participants                    the participant and the spouse do not
                                                                   who are not married or to surviving                       remain married for at least one year,
                                                                   spouses and participants who have a                       the plan may treat the participant as
                                                                   change in marital status?                                 having not been married on the annu-
erowe on DSK5CLS3C1PROD with CFR




                                                                     A–25: (a) Unmarried participant rule.                   ity starting date. In such event, the
                                                                   Plans subject to the survivor annuity                     plan may provide that the spouse loses

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                                                                   § 1.401(a)–20                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   any survivor benefit right; further, no                   pant’s account balance. The special ex-
                                                                   retroactive correction of the amount                      ception described in section 417(d)(2)
                                                                   paid the participant is required.                         and Q&A 25 of this section does not
                                                                     (ii) Example. Plan X provides that                      apply.
                                                                   participants who are married on the                          Q–27: Are there circumstances when
                                                                   annuity starting date for less than one                   spousal consent to a participant’s elec-
                                                                   year are treated as unmarried partici-                    tion to waive the QJSA or the QPSA is
                                                                   pants. Plan X provides benefits in the                    not required?
                                                                   form of a QJSA or an optional single                         A–27: Yes. If it is established to the
                                                                   sum distribution. Participant A was                       satisfaction of a plan representative
                                                                   married 6 months prior to the annuity                     that there is no spouse or that the
                                                                   starting date. Plan X must treat A as                     spouse cannot be located, spousal con-
                                                                   married and must commence payments                        sent to waive the QJSA or the QPSA is
                                                                   to A in the form of a QJSA unless an-                     not required. If the spouse is legally
                                                                   other form of benefit is elected by A                     incompetnent to give consent, the
                                                                   with spousal consent. If a QJSA is paid                   spouse’s legal guardian, even if the
                                                                   and A is divorced from his spouse S,                      guardian is the participant, may give
                                                                   within the first year of the marriage, S                  consent. Also, if the participant is le-
                                                                   will no longer have any survivor rights                   gally separated or the participant has
                                                                   under the annuity (unless a QDRO pro-                     been abandoned (within the meaning of
                                                                   vides otherwise). If A continues to be                    local law) and the participant has a
                                                                   married to S, and A dies within the                       court order to such effect, spousal con-
                                                                   one-year period, Plan X may treat A as                    sent is not required unless a QDRO pro-
                                                                   unmarried and forfeit the OJSA benefit                    vides otherwise. Similar rules apply to
                                                                   payable to S.                                             a plan subject to the requirements of
                                                                     (3) Divorce. If a participant divorces                  section 401(a)(11)(B)(iii)(I).
                                                                   his spouse prior to the annuity starting                     Q–28: Does consent contained in an
                                                                   date, any elections made while the par-                   antenuptial agreement or similar con-
                                                                   ticipant was married to his former                        tract entered into prior to marriage
                                                                   spouse remain valid, unless otherwise                     satisfy the consent requirements of
                                                                   provided in a QDRO, or unless the par-                    sections 401(a)(11) and 417?
                                                                   ticipant changes them or is remarried.                       A–28: No. An agreement entered into
                                                                   If a participant dies after the annuity                   prior to marriage does not satisfy the
                                                                   starting date, the spouse to whom the                     applicable consent requirements, even
                                                                   participant was married on the annuity                    if the agreement is executed within the
                                                                   starting date is entitled to the QJSA                     applicable election period.
                                                                   protection under the plan. The spouse                        Q–29: If a participant’s spouse con-
                                                                   is entitled to this protection (unless                    sents under section 417(a)(2)(A) to the
                                                                   waived and consented to by such                           participant’s waiver of a survivor an-
                                                                   spouse) even if the participant and                       nuity form of benefit, is a subsequent
                                                                   spouse are not married on the date of                     spouse of the same participant bound
                                                                   the participant’s death, except as pro-                   by the consent?
                                                                   vided in a QDRO.                                             A–29: No. A consent under section
                                                                     Q–26: In the case of a defined con-                     417(a)(2)(A) by one spouse is binding
                                                                   tribution plan not subject to section                     only with respect to the consenting
                                                                   412, does the requirement that a par-                     spouse. See Q&A–24 of this section for
                                                                   ticipant’s nonforfeitable accrued ben-                    an exception in the case of plan bene-
                                                                   efit be payable in full to a surviving                    fits securing plan loans.
                                                                   spouse apply to a spouse who has been                        Q–30: Does the spousal consent re-
                                                                   married to the participant for less than                  quirement of section 417(a)(2)(A) re-
                                                                   one year?                                                 quire that a spouse’s consent be rev-
                                                                     A–26: A plan may provide that a                         ocable?
                                                                   spouse who has not been married to a                         A–30: No. A plan may preclude a
                                                                   participant throughout the one-year                       spouse from revoking consent once it
                                                                   period ending on the earlier of (a) the                   has been given. Alternatively, a plan
                                                                   participant’s annuity starting date or                    may also permit a spouse to revoke a
                                                                   (b) the date of the participant’s death                   consent after it has been given, and
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                                                                   is not treated as a surviving spouse and                  thereby to render ineffective the par-
                                                                   is not required to receive the partici-                   ticipant’s prior election not to receive

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–20

                                                                   a QPSA or QJSA. A participant must                        retirement benefit, but not the non-
                                                                   always be allowed to change his elec-                     spouse beneficiary, without obtaining
                                                                   tion during the applicable election pe-                   the spouse’s consent.
                                                                   riod. Spousal consent is required in                        (3) Change in form. After the partici-
                                                                   such cases to the extent provided in                      pant’s death, a beneficiary may change
                                                                   Q&A 31, except that spousal consent is                    the optional form of survivor benefit as
                                                                   never required for a QJSA or QPSA.                        permitted by the plan.
                                                                     Q–31: What rules govern a partici-                        (c) General consent. In lieu of satis-
                                                                   pant’s waiver of a QPSA or QJSA under                     fying paragraphs (a) and (b) of this
                                                                   section 417(a)(2)?                                        Q&A 31, a plan may permit a spouse to
                                                                     A–31: (a) Specific beneficiary. Both the                execute a general consent that satisfies
                                                                   participant’s waivers of a QPSA and                       the requirements of this paragraph (c).
                                                                   QJSA and the spouse’s consents there-                     A general consent permits the partici-
                                                                   to must state the specific nonspouse                      pant to waive a QPSA or QJSA, and
                                                                   beneficiary (including any class of                       change the designated beneficary or
                                                                   beneficiaries or any contingent bene-                     the optional form of benefit payment
                                                                   ficiaries) who will receive the benefit.                  without any requirement of further
                                                                   Thus, for example, if spouse B consents                   consent by such spouse. No general
                                                                   to participant A’s election to waive a                    consent is valid unless the general con-
                                                                   QPSA, and to have any benefits pay-                       sent acknowledges that the spouse has
                                                                   able upon A’s death before the annuity                    the right to limit consent to a specific
                                                                   starting date paid to A’s children, A                     beneficiary and a specific optional
                                                                   may not subsequently change bene-                         form of benefit, where applicable, and
                                                                   ficiaries without the consent of B (ex-                   that the spouse voluntarily elects to
                                                                   cept if the change is back to a QPSA).                    relinquish both of such rights. Not-
                                                                   If the designated beneficiary is a trust,                 withstanding the previous sentence, a
                                                                   A’s spouse need only consent to the                       spouse may execute a general consent
                                                                   designation of the trust and need not                     that is limited to certain beneficiaries
                                                                   consent to the designation of trust                       or forms of benefit payment. In such
                                                                   beneficiaries or any changes of trust                     case, paragraphs (a) and (b) of this Q&A
                                                                   beneficiaries.                                            31 shall apply to the extent that the
                                                                     (b) Optional form of benefit—(1) QJSA.                  limited general consent is not applica-
                                                                   Both the participant’s waiver of a                        ble and this paragraph (c) shall apply
                                                                   QJSA (and any required spouse’s con-                      to the extent that the limited general
                                                                   sent thereto) must specify the par-                       consent is applicable. A general con-
                                                                   ticular optional form of benefit. The                     sent, including a limited general con-
                                                                   participant who has waived a QJSA                         sent, is not effective unless it is made
                                                                   with the spouse’s consent in favor of                     during the applicable election period. A
                                                                   another form of benefit may not subse-                    general consent executed prior to Octo-
                                                                   quently change the optional form of                       ber 22, 1986 does not have to satisfy the
                                                                   benefit without obtaining the spouse’s                    specificity requirements of this Q&A
                                                                   consent (except back to a QJSA). Of                       31.
                                                                   course, the participant may change the                      Q–32: What rules govern a partici-
                                                                   form of benefit if the plan so provides                   pant’s waiver of the spousal benefit
                                                                   after the spouse’s death or a divorce                     under section 401(a)(11)(B)?
                                                                   (other than as provided in a QDRO). A                       A–32: (a) Application. In the case of a
                                                                   participant’s waiver of a QJSA (and                       defined contribution plan that is not
                                                                   any required spouse’s consent thereto)                    subject to the survivor annuity re-
                                                                   made prior to the first plan year begin-                  quirements of sections 401(a)(11) and
                                                                   ning after December 31, 1986, is not re-                  417, a participant may waive the spous-
                                                                   quired to specify the optional form of                    al benefit of section 401(a)(11)(B)(iii) if
                                                                   benefit.                                                  the conditions of paragraph (b) are sat-
                                                                     (2) QPSA. A participant’s waiver of a                   isfied. In general, a spousal benefit is
                                                                   QPSA and the spouse’s consent thereto                     the nonforfeitable account balance on
                                                                   are not required to specify the optional                  the participant’s date of death.
                                                                   form of any preretirement benefit.                          (b) Conditions. In general, the same
                                                                   Thus, a participant who waives the                        conditions, other than the age 35 re-
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                                                                   QPSA with spousal consent may subse-                      quirement, that apply to the partici-
                                                                   quently change the form of the pre-                       pant’s waiver of a QPSA and the

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                                                                   § 1.401(a)–20                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   spouse’s consent thereto apply to the                     nonvested participants who are no
                                                                   participant’s waiver of the spousal ben-                  longer employed by such an employer.
                                                                   efit and the spouse’s consent thereto.                      Q–35: When must a plan provide the
                                                                   See Q&A–31. Thus, the participant’s                       written explanation, required by sec-
                                                                   waiver of the spousal benefit must                        tion 417(a)(3)(B), of the QPSA to a par-
                                                                   state the specific nonspouse bene-                        ticipant?
                                                                   ficiary who will receive such benefit.                      A–35: (a) General rule. A plan must
                                                                   The waiver is not required to specify                     provide the written explanation of the
                                                                   the optional form of benefit. The par-                    QPSA to a participant within the ap-
                                                                   ticipant may change the optional form                     plicable period. Except as provided in
                                                                   of benefit, but not the nonspouse bene-                   paragraph (b), the applicable period
                                                                   ficiary, without obtaining the spouse’s                   means, with respect to a participant,
                                                                   consent.                                                  whichever of the following periods ends
                                                                     Q–33: When and in what manner, may                      last:
                                                                   a participant waive a spousal benefit or                    (1) The period beginning with the
                                                                   a QPSA?                                                   first day of the plan year in which the
                                                                     A–33: (a) Plans not subject to section                  participant attains age 32 and ending
                                                                   401(a)(11). A participant in a plan that                  with the close of the plan year pre-
                                                                   is not subject to the survivor annuity                    ceding the plan year in which the par-
                                                                   requirements of section 401(a)(11) (be-                   ticipant attains age 35.
                                                                   cause of subparagraph (B)(iii) thereof)                     (2) A reasonable period ending after
                                                                   may waive the spousal benefit at any                      the individual becomes a participant.
                                                                   time, provided that no such waiver                          (3) A reasonable period ending after
                                                                   shall be effective unless the spouse has                  the QPSA is no longer fully subsidized.
                                                                   consented to the waiver. The spouse                         (4) A reasonable period ending after
                                                                   may consent to a waiver of the spousal                    section 401(a)(11) first applies to the
                                                                   benefit at any time, even prior to the                    participant. Section 401(a)(11) would
                                                                                                                             first apply when a benefit is trans-
                                                                   participant’s attaining age 35. No
                                                                                                                             ferred from a plan not subject to the
                                                                   spousal consent is required for a pay-
                                                                                                                             survivor annuity requirements of sec-
                                                                   ment to the participant or the use of
                                                                                                                             tion 401(a)(11) to a plan subject to such
                                                                   the accrued benefit as security for a
                                                                                                                             section or at the time of an election of
                                                                   plan loan to the participant.
                                                                                                                             an annuity under a defined contribu-
                                                                     (b) Plans subject to section 401(a)(11). A              tion    plan     described    in   section
                                                                   participant in a plan subject to the sur-                 401(a)(11)(B)(iii).
                                                                   vivor annuity requirements of section                       (b) Pre-35 separations. In the case of a
                                                                   401(a)(11) generally may waive the                        participant who separates from service
                                                                   QPSA benefit (with spousal consent)                       before attaining age 35, the applicable
                                                                   only on or after the first day of the                     period means the period beginning one
                                                                   plan year in which the participant at-                    year before the separation from service
                                                                   tains age 35. However, a plan may pro-                    and ending one year after such separa-
                                                                   vide for an earlier waiver (with spousal                  tion. If such a participant returns to
                                                                   consent), provided that a written ex-                     service, the plan must also comply
                                                                   planation of the QPSA is given to the                     with pragraph (a).
                                                                   participant and such waiver becomes                         (c) Reasonable period. For purposes of
                                                                   invalid upon the beginning of the plan                    applying paragraph (a), a reasonable
                                                                   year in which the participant’s 35th                      period ending after the enumerated
                                                                   birthday occurs. If there is no new                       events described in paragraphs (a) (2),
                                                                   waiver after such date, the partici-                      (3) and (4) is the end of the one-year pe-
                                                                   pant’s spouse must receive the QPSA                       riod beginning with the date the appli-
                                                                   benefit upon the participant’s death.                     cable event occurs. The applicable pe-
                                                                     Q–34: Must the written explanations                     riod for such events begins one year
                                                                   required by section 417(a)(3) be pro-                     prior to the occurrence of the enumer-
                                                                   vided to nonvested participants?                          ated events.
                                                                     A–34: Such written explantions must                       (d) Transition rule. In the case of an
                                                                   be provided to nonvested participants                     individual who was a participant in the
                                                                   who are employed by an employer                           plan on August 23, 1984, and, as of that
erowe on DSK5CLS3C1PROD with CFR




                                                                   maintaining the plan. Thus, they are                      date had attained age 34, the plan will
                                                                   not required to be provided to those                      satisfy the requriement of section

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                                                                   Internal Revenue Service, Treasury                                                         § 1.401(a)–20

                                                                   417(a)(3)(B) if it provided the expla-                    efit is not reduced because of the QPSA
                                                                   nation not later than December 31,                        coverage and if no charge to the partic-
                                                                   1985.                                                     ipant under the plan is made for the
                                                                     Q–36: How do plans satisfy the re-                      coverage. Thus, a QPSA is fully sub-
                                                                   quirements of providing participants                      sidized in a defined contribution plan.
                                                                   explanations of QPSAs and QJSAs?                             Q–39: When do the survivor annuity
                                                                     A–36. For rules regarding the expla-                    requirements of sections 401(a)(11) and
                                                                   nation of QPSAs and QJSAs required                        417 apply to plans?
                                                                   under section 417(a)(3), see § 1.417(a)(3)–                  A–39: Sections 401(a)(11) and 417 gen-
                                                                   1. However, the rules of § 1.401(a)–20,                   erally apply to plan years beginning
                                                                   Q&A–36, as it appeared in 26 CFR part                     after December 31, 1984. Sections 302
                                                                   1 revised April 1, 2003, apply to the ex-                 and 303 of REA 1984 provide specific ef-
                                                                   planation of a QJSA under section                         fective dates and transitional rules
                                                                   417(a)(3) for an annuity starting date                    under which the QJSA or QPSA (or
                                                                   prior to February 1, 2006.                                pre-REA 1984 section 401(a)(11)) require-
                                                                     Q–37: What are the consequences of                      ments may be applicable to particular
                                                                   fully subsidizing the cost of either a                    plans or with respect to benefits pro-
                                                                   QJSA or a QPSA in accordance with                         vided to (as amended by REA 1984) par-
                                                                   section 417(a)(5)?                                        ticular participants. In general, the
                                                                     A–37: If a plan fully subsidizes a                      section 401(a)(11) (as amended by REA
                                                                   QJSA or QPSA in accordance with sec-                      1984) survivor annuity requirements do
                                                                   tion 417(a)(5) and does not allow a par-                  not apply with respect to a participant
                                                                   ticipant to waive such QJSA or QPSA                       who does not have at least one hour of
                                                                   or to select a nonspouse beneficiary,                     service or one hour of paid leave under
                                                                   the plan is not required to provide the                   the plan after August 22, 1984.
                                                                   written explanation required by sec-                         Q–40: Are there special effective dates
                                                                   tion 417(a)(3). However, if the plan of-                  for plans maintained pursuant to col-
                                                                   fers an election to waive the benefit or                  lective bargaining agreements?
                                                                   designate a beneficiary, it must satisfy                     A–40: Yes. Section 302(b) of REA 1984
                                                                   the election, consent, and notice re-                     as amended by section 1898(g) of the
                                                                   quirements of section 417(a) (1), (2), and                Tax Reform Act of 1986 provides a spe-
                                                                   (3), with respect to such subsidized                      cial deferred effective date for such
                                                                   QJSA or QPSA, in accordance with sec-                     plans. Whether a plan is described in
                                                                   tion 417(a)(5).                                           section 302(b) of REA 1984 is deter-
                                                                     Q–38: What is a fully subsidized ben-                   mined under the principles applied
                                                                   efit?                                                     under section 1017(c) of the Employee
                                                                     A–38: (a) QJSA—(1) General rule. A                      Retirement Income Security Act of
                                                                   fully subsidized QJSA is one under                        1974. See H.R. Rep. No. 1280, 93d Cong.,
                                                                   which no increase in cost to, or de-                      2d Sess. 266 (1974). In addition, a plan
                                                                   crease in actual amounts received by,                     will not be treated as maintained under
                                                                   the participant may result from the                       a collective bargaining agreement un-
                                                                   participant’s failure to elect another                    less the employee representatives sat-
                                                                   form of benefit.                                          isfy section 7701(a)(46) of the Internal
                                                                     (2) Examples.                                           Revenue Code after March 31, 1984. See
                                                                     Example 1. . If a plan provides a joint and             § 301.7701–17T for other requirements for
                                                                   survivor annuity and a single sum option,                 a plan to be considered to be collec-
                                                                   the plan does not fully subsidize the joint               tively bargained. Nothing in section
                                                                   and survivor annuity, regardless of the actu-             302(b) of REA 1984 denies a participant
                                                                   arial value of the joint and survivor annuity
                                                                                                                             or spouse the rights set forth in sec-
                                                                   because, in the event of the participant’s
                                                                   early death, the participant would have re-               tions 303(c)(2), 303(c)(3), 303(e)(1), and
                                                                   ceived less under the annuity than he would               303(e)(2) of REA 1984.
                                                                   have received under the single sum option.                   Q–41: What is one hour of service or
                                                                     Example 2. . If a plan provides for a life an-          paid leave under the plan for purposes
                                                                   nuity of $100 per month and a joint and 100%              of the transition rules in section 303 of
                                                                   survivor benefit of $99 per month, the plan               REA 1984?
                                                                   does not fully subsidize the joint and sur-                  A–41: One hour of service or paid
                                                                   vivor benefit.
                                                                                                                             leave under the plan is one hour of
erowe on DSK5CLS3C1PROD with CFR




                                                                     (b) QPSA. A QPSA is fully subsidized                    service or paid leave recognized or re-
                                                                   if the amount of the participant’s ben-                   quired to be recognized under the plan

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                                                                   § 1.401(a)–20                                                           26 CFR Ch. I (4–1–11 Edition)

                                                                   for any purpose, e.g., participation,                     which applies only to plans subject to
                                                                   vesting percentage, or benefit accrual                    section 401(a)(11) of the Code (as in ef-
                                                                   purposes. For plans that do not com-                      fect on August 22, 1984), provides that
                                                                   pute hours of service, one hour of serv-                  participants whose annuity starting
                                                                   ice or paid leave means any service or                    date did not occur before August 24,
                                                                   paid leave recognized or required to be                   1984, and who had one hour of service
                                                                   recognized under the plan for any pur-                    on or after September 2, 1974, but not
                                                                   pose.                                                     in a plan year beginning after Decem-
                                                                     Q–42: Must a plan be amended to pro-                    ber 31, 1975, may elect to receive the
                                                                   vide for the QPSA required by section                     benefits required to be provided under
                                                                   303(c)(2) of REA 1984, or for the sur-                    section 401(a)(11) of the Code (as in ef-
                                                                   vivor annuities required by section                       fect on August 22, 1984). Section
                                                                   303(e) of REA 1984?                                       303(e)(2) provides that certain partici-
                                                                     A–42: A plan will not fail to satisfy                   pants who had one hour of service in a
                                                                   the qualification requirements of sec-                    plan year beginning on or after Janu-
                                                                   tion 401(a) or 403(a) merely because it is                ary 1, 1976, but not after August 22,
                                                                   not amended to provide the QPSA re-                       1984, may elect QPSA coverage under
                                                                   quired by section 303(c)(2) or the sur-                   new sections 401(a)(11) and 417 in plans
                                                                   vivor annuities required by section                       subject to these provisions. Section
                                                                   303(e). The plan must, however, satisfy                   303(e)(4)(A) requires plans or plan ad-
                                                                   those requirements in operation.                          ministrators to notify those partici-
                                                                     Q–43: Is a participant’s election, or a                 pants of the provisions of section
                                                                   spouse’s consent to an election, with                     303(e).
                                                                   respect to a QPSA, made before August                       Q–46: When must a plan provide the
                                                                   23, 1984, valid?                                          notice required by section 303(e)(4)(A)
                                                                     A–43: No.                                               of REA 1984?
                                                                     Q–44: Is spousal consent required for                     A–46: The notice required by section
                                                                   certain survivor annuity elections                        303(e)(4)(A) must be provided no later
                                                                   made by the participant after Decem-                      than the earlier of:
                                                                   ber 31, 1984, and before the first plan                     (a) The date the first summary an-
                                                                   year to which new sections 401(a)(11)                     nual report provided after September
                                                                   and 417 apply?                                            17, 1985, is distributed to participants;
                                                                     A–44: Yes. Section 303(c)(3) of REA                     or
                                                                   1984 provides that any election not to
                                                                                                                               (b) September 30, 1985.
                                                                   take a QJSA made after December 31,
                                                                   1984, and before the date sections                        A plan will not fail to satisfy the pre-
                                                                   401(a)(11) and 417 apply to the plan by a                 ceding sentence if the plan provides a
                                                                   participant who has 1 hour of service or                  fully subsidized QPSA with respect to
                                                                   leave under the plan after August 23,                     any participant described in section
                                                                   1984, is not effective unless the spousal                 303(e) who dies on or after July 19, 1985,
                                                                   consent requirements of section 417 are                   and before the notice is received. If the