Internal Revenue Code:Sec. 401. Qualified pension, profit-sharing, and stock bonus plans
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter D - Deferred Compensation, Etc.
PART I - PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.
Subpart A - General Rule
Statute
Sec. 401. Qualified pension, profit-sharing, and stock bonus plans
(a) Requirements for qualification
A trust created or organized in the United States and forming
part of a stock bonus, pension, or profit-sharing plan of an
employer for the exclusive benefit of his employees or their
beneficiaries shall constitute a qualified trust under this section
-
(1) if contributions are made to the trust by such employer, or
employees, or both, or by another employer who is entitled to
deduct his contributions under section 404(a)(3)(B) (relating to
deduction for contributions to profit-sharing and stock bonus
plans), or by a charitable remainder trust pursuant to a
qualified gratuitous transfer (as defined in section 664(g)(1)),
for the purpose of distributing to such employees or their
beneficiaries the corpus and income of the fund accumulated by
the trust in accordance with such plan;
(2) if under the trust instrument it is impossible, at any time
prior to the satisfaction of all liabilities with respect to
employees and their beneficiaries under the trust, for any part
of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the
exclusive benefit of his employees or their beneficiaries (but
this paragraph shall not be construed, in the case of a
multiemployer plan, to prohibit the return of a contribution
within 6 months after the plan administrator determines that the
contribution was made by a mistake of fact or law (other than a
mistake relating to whether the plan is described in section
401(a) or the trust which is part of such plan is exempt from
taxation under section 501(a), or the return of any withdrawal
liability payment determined to be an overpayment within 6 months
of such determination).; (FOOTNOTE 1)
(FOOTNOTE 1) So in original. Period before semicolon probably
should be a closing parenthesis.
(3) if the plan of which such trust is a part satisfies the
requirements of section 410 (relating to minimum participation
standards); and
(4) if the contributions or benefits provided under the plan do
not discriminate in favor of highly compensated employees (within
the meaning of section 414(q)). For purposes of this paragraph,
there shall be excluded from consideration employees described in
section 410(b)(3)(A) and (C).
(5) Special rules relating to nondiscrimination requirements. -
(A) Salaried or clerical employees. - A classification shall
not be considered discriminatory within the meaning of
paragraph (4) or section 410(b)(2)(A)(i) merely because it is
limited to salaried or clerical employees.
(B) Contributions and benefits may bear uniform relationship
to compensation. - A plan shall not be considered
discriminatory within the meaning of paragraph (4) merely
because the contributions or benefits of, or on behalf of, the
employees under the plan bear a uniform relationship to the
compensation (within the meaning of section 414(s)) of such
employees.
(C) Certain disparity permitted. - A plan shall not be
considered discriminatory within the meaning of paragraph (4)
merely because the contributions or benefits of, or on behalf
of, the employees under the plan favor highly compensated
employees (as defined in section 414(q)) in the manner
permitted under subsection (l).
(D) Integrated defined benefit plan. -
(i) In general. - A defined benefit plan shall not be
considered discriminatory within the meaning of paragraph (4)
merely because the plan provides that the employer-derived
accrued retirement benefit for any participant under the plan
may not exceed the excess (if any) of -
(I) the participant's final pay with the employer, over
(II) the employer-derived retirement benefit created
under Federal law attributable to service by the
participant with the employer.
For purposes of this clause, the employer-derived retirement
benefit created under Federal law shall be treated as
accruing ratably over 35 years.
(ii) Final pay. - For purposes of this subparagraph, the
participant's final pay is the compensation (as defined in
section 414(q)(4)) paid to the participant by the employer
for any year -
(I) which ends during the 5-year period ending with the
year in which the participant separated from service for
the employer, and
(II) for which the participant's total compensation from
the employer was highest.
(E) 2 or more plans treated as single plan. - For purposes of
determining whether 2 or more plans of an employer satisfy the
requirements of paragraph (4) when considered as a single plan
-
(i) Contributions. - If the amount of contributions on
behalf of the employees allowed as a deduction under section
404 for the taxable year with respect to such plans, taken
together, bears a uniform relationship to the compensation
(within the meaning of section 414(s)) of such employees, the
plans shall not be considered discriminatory merely because
the rights of employees to, or derived from, the employer
contributions under the separate plans do not become
nonforfeitable at the same rate.
(ii) Benefits. - If the employees' rights to benefits under
the separate plans do not become nonforfeitable at the same
rate, but the levels of benefits provided by the separate
plans satisfy the requirements of regulations prescribed by
the Secretary to take account of the differences in such
rates, the plans shall not be considered discriminatory
merely because of the difference in such rates.
(F) Social security retirement age. - For purposes of testing
for discrimination under paragraph (4) -
(i) the social security retirement age (as defined in
section 415(b)(8)) shall be treated as a uniform retirement
age, and
(ii) subsidized early retirement benefits and joint and
survivor annuities shall not be treated as being unavailable
to employees on the same terms merely because such benefits
or annuities are based in whole or in part on an employee's
social security retirement age (as so defined).
(G) Governmental plans. - Paragraphs (3) and
(4) shall not apply to a governmental plan (within the meaning
of section 414(d)).
(6) A plan shall be considered as meeting the requirements of
paragraph (3) during the whole of any taxable year of the plan if
on one day in each quarter it satisfied such requirements.
(7) A trust shall not constitute a qualified trust under this
section unless the plan of which such trust is a part satisfies
the requirements of section 411 (relating to minimum vesting
standards).
(8) A trust forming part of a defined benefit plan shall not
constitute a qualified trust under this section unless the plan
provides that forfeitures must not be applied to increase the
benefits any employee would otherwise receive under the plan.
(9) Required distributions. -
(A) In general. - A trust shall not constitute a qualified
trust under this subsection unless the plan provides that the
entire interest of each employee -
(i) will be distributed to such employee not later than the
required beginning date, or
(ii) will be distributed, beginning not later than the
required beginning date, in accordance with regulations, over
the life of such employee or over the lives of such employee
and a designated beneficiary (or over a period not extending
beyond the life expectancy of such employee or the life
expectancy of such employee and a designated beneficiary).
(B) Required distribution where employee dies before entire
interest is distributed. -
(i) Where distributions have begun under subparagraph
(A)(ii). - A trust shall not constitute a qualified trust
under this section unless the plan provides that if -
(I) the distribution of the employee's interest has begun
in accordance with subparagraph (A)(ii), and
(II) the employee dies before his entire interest has
been distributed to him,
the remaining portion of such interest will be distributed at
least as rapidly as under the method of distributions being
used under subparagraph (A)(ii) as of the date of his death.
(ii) 5-year rule for other cases. - A trust shall not
constitute a qualified trust under this section unless the
plan provides that, if an employee dies before the
distribution of the employee's interest has begun in
accordance with subparagraph (A)(ii), the entire interest of
the employee will be distributed within 5 years after the
death of such employee.
(iii) Exception to 5-year rule for certain amounts payable
over life of beneficiary. - If -
(I) any portion of the employee's interest is payable to
(or for the benefit of) a designated beneficiary,
(II) such portion will be distributed (in accordance with
regulations) over the life of such designated beneficiary
(or over a period not extending beyond the life expectancy
of such beneficiary), and
(III) such distributions begin not later than 1 year
after the date of the employee's death or such later date
as the Secretary may by regulations prescribe,
for purposes of clause (ii), the portion referred to in
subclause (I) shall be treated as distributed on the date on
which such distributions begin.
(iv) Special rule for surviving spouse of employee. - If
the designated beneficiary referred to in clause (iii)(I) is
the surviving spouse of the employee -
(I) the date on which the distributions are required to
begin under clause (iii)(III) shall not be earlier than the
date on which the employee would have attained age 70 1/2,
and
(II) if the surviving spouse dies before the
distributions to such spouse begin, this subparagraph shall
be applied as if the surviving spouse were the employee.
(C) Required beginning date. - For purposes of this paragraph
-
(i) In general. - The term ''required beginning date''
means April 1 of the calendar year following the later of -
(I) the calendar year in which the employee attains age
70 1/2, or
(II) the calendar year in which the employee retires.
(ii) Exception. - Subclause (II) of clause (i) shall not
apply -
(I) except as provided in section 409(d), in the case of
an employee who is a 5-percent owner (as defined in section
416) with respect to the plan year ending in the calendar
year in which the employee attains age 70 1/2, or
(II) for purposes of section 408(a)(6) or (b)(3).
(iii) Actuarial adjustment. - In the case of an employee to
whom clause (i)(II) applies who retires in a calendar year
after the calendar year in which the employee attains age 70
1/2, the employee's accrued benefit shall be actuarially
increased to take into account the period after age 70 1/2 in
which the employee was not receiving any benefits under the
plan.
(iv) Exception for governmental and church plans. - Clauses
(ii) and (iii) shall not apply in the case of a governmental
plan or church plan. For purposes of this clause, the term
''church plan'' means a plan maintained by a church for
church employees, and the term ''church'' means any church
(as defined in section 3121(w)(3)(A)) or qualified
church-controlled organization (as defined in section
3121(w)(3)(B)).
(D) Life expectancy. - For purposes of this paragraph, the
life expectancy of an employee and the employee's spouse (other
than in the case of a life annuity) may be redetermined but not
more frequently than annually.
(E) Designated beneficiary. - For purposes of this paragraph,
the term ''designated beneficiary'' means any individual
designated as a beneficiary by the employee.
(F) Treatment of payments to children. - Under regulations
prescribed by the Secretary, for purposes of this paragraph,
any amount paid to a child shall be treated as if it had been
paid to the surviving spouse if such amount will become payable
to the surviving spouse upon such child reaching majority (or
other designated event permitted under regulations).
(G) Treatment of incidental death benefit distributions. -
For purposes of this title, any distribution required under the
incidental death benefit requirements of this subsection shall
be treated as a distribution required under this paragraph.
(10) Other requirements. -
(A) Plans benefiting owner-employees. - In the case of any
plan which provides contributions or benefits for employees
some or all of whom are owner-employees (as defined in
subsection (c)(3)), a trust forming part of such plan shall
constitute a qualified trust under this section only if the
requirements of subsection (d) are also met.
(B) Top-heavy plans. -
(i) In general. - In the case of any top-heavy plan, a
trust forming part of such plan shall constitute a qualified
trust under this section only if the requirements of section
416 are met.
(ii) Plans which may become top-heavy. - Except to the
extent provided in regulations, a trust forming part of a
plan (whether or not a top-heavy plan) shall constitute a
qualified trust under this section only if such plan contains
provisions -
(I) which will take effect if such plan becomes a
top-heavy plan, and
(II) which meet the requirements of section 416.
(iii) Exemption for governmental plans. - This subparagraph
shall not apply to any governmental plan.
(11) Requirement of joint and survivor annuity and
preretirement survivor annuity. -
(A) In general. - In the case of any plan to which this
paragraph applies, except as provided in section 417, a trust
forming part of such plan shall not constitute a qualified
trust under this section unless -
(i) in the case of a vested participant who does not die
before the annuity starting date, the accrued benefit payable
to such participant is provided in the form of a qualified
joint and survivor annuity, and
(ii) in the case of a vested participant who dies before
the annuity starting date and who has a surviving spouse, a
qualified preretirement survivor annuity is provided to the
surviving spouse of such participant.
(B) Plans to which paragraph applies. - This paragraph shall
apply to -
(i) any defined benefit plan,
(ii) any defined contribution plan which is subject to the
funding standards of section 412, and
(iii) any participant under any other defined contribution
plan unless -
(I) such plan provides that the participant's
nonforfeitable accrued benefit (reduced by any security
interest held by the plan by reason of a loan outstanding
to such participant) is payable in full, on the death of
the participant, to the participant's surviving spouse (or,
if there is no surviving spouse or the surviving spouse
consents in the manner required under section 417(a)(2), to
a designated beneficiary),
(II) such participant does not elect a payment of
benefits in the form of a life annuity, and
(III) with respect to such participant, such plan is not
a direct or indirect transferee (in a transfer after
December 31, 1984) of a plan which is described in clause
(i) or (ii) or to which this clause applied with respect to
the participant.
Clause (iii)(III) shall apply only with respect to the
transferred assets (and income therefrom) if the plan
separately accounts for such assets and any income therefrom.
(C) Exception for certain ESOP benefits. -
(i) In general. - In the case of -
(I) a tax credit employee stock ownership plan (as
defined in section 409(a)), or
(II) an employee stock ownership plan (as defined in
section 4975(e)(7)),
subparagraph (A) shall not apply to that portion of the
employee's accrued benefit to which the requirements of
section 409(h) apply.
(ii) Nonforfeitable benefit must be paid in full, etc. - In
the case of any participant, clause (i) shall apply only if
the requirements of subclauses (I), (II), and (III) of
subparagraph (B)(iii) are met with respect to such
participant.
(D) Special rule where participant and spouse married less
than 1 year. - A plan shall not be treated as failing to meet
the requirements of subparagraphs (B)(iii) or (C) merely
because the plan provides that benefits will not be payable to
the surviving spouse of the participant unless the participant
and such spouse had been married throughout the 1-year period
ending on the earlier of the participant's annuity starting
date or the date of the participant's death.
(E) Exception for plans described in section 404(c). - This
paragraph shall not apply to a plan which the Secretary has
determined is a plan described in section 404(c) (or a
continuation thereof) in which participation is substantially
limited to individuals who, before January 1, 1976, ceased
employment covered by the plan.
(F) Cross reference. - For -
(i) provisions under which participants may elect to waive
the requirements of this paragraph, and
(ii) other definitions and special rules for purposes of
this paragraph,
see section 417.
(12) A trust shall not constitute a qualified trust under this
section unless the plan of which such trust is a part provides
that in the case of any merger or consolidation with, or transfer
of assets or liabilities to, any other plan after September 2,
1974, each participant in the plan would (if the plan then
terminated) receive a benefit immediately after the merger,
consolidation, or transfer which is equal to or greater than the
benefit he would have been entitled to receive immediately before
the merger, consolidation, or transfer (if the plan had then
terminated). The preceding sentence does not apply to any
multiemployer plan with respect to any transaction to the extent
that participants either before or after the transaction are
covered under a multiemployer plan to which title IV of the
Employee Retirement Income Security Act of 1974 applies.
(13) Assignment and alienation. -
(A) In general. - A trust shall not constitute a qualified
trust under this section unless the plan of which such trust is
a part provides that benefits provided under the plan may not
be assigned or alienated. For purposes of the preceding
sentence, there shall not be taken into account any voluntary
and revocable assignment of not to exceed 10 percent of any
benefit payment made by any participant who is receiving
benefits under the plan unless the assignment or alienation is
made for purposes of defraying plan administration costs. For
purposes of this paragraph a loan made to a participant or
beneficiary shall not be treated as an assignment or alienation
if such loan is secured by the participant's accrued
nonforfeitable benefit and is exempt from the tax imposed by
section 4975 (relating to tax on prohibited transactions) by
reason of section 4975(d)(1). This paragraph shall take effect
on January 1, 1976 and shall not apply to assignments which
were irrevocable on September 2, 1974.
(B) Special rules for domestic relations orders. -
Subparagraph (A) shall apply to the creation, assignment, or
recognition of a right to any benefit payable with respect to a
participant pursuant to a domestic relations order, except that
subparagraph (A) shall not apply if the order is determined to
be a qualified domestic relations order.
(C) Special rule for certain judgments and settlements. -
Subparagraph (A) shall not apply to any offset of a
participant's benefits provided under a plan against an amount
that the participant is ordered or required to pay to the plan
if -
(i) the order or requirement to pay arises -
(I) under a judgment of conviction for a crime involving
such plan,
(II) under a civil judgment (including a consent order or
decree) entered by a court in an action brought in
connection with a violation (or alleged violation) of part
4 of subtitle B of title I of the Employee Retirement
Income Security Act of 1974, or
(III) pursuant to a settlement agreement between the
Secretary of Labor and the participant, or a settlement
agreement between the Pension Benefit Guaranty Corporation
and the participant, in connection with a violation (or
alleged violation) of part 4 of such subtitle by a
fiduciary or any other person,
(ii) the judgment, order, decree, or settlement agreement
expressly provides for the offset of all or part of the
amount ordered or required to be paid to the plan against the
participant's benefits provided under the plan, and
(iii) in a case in which the survivor annuity requirements
of section 401(a)(11) apply with respect to distributions
from the plan to the participant, if the participant has a
spouse at the time at which the offset is to be made -
(I) either such spouse has consented in writing to such
offset and such consent is witnessed by a notary public or
representative of the plan (or it is established to the
satisfaction of a plan representative that such consent may
not be obtained by reason of circumstances described in
section 417(a)(2)(B)), or an election to waive the right of
the spouse to either a qualified joint and survivor annuity
or a qualified preretirement survivor annuity is in effect
in accordance with the requirements of section 417(a),
(II) such spouse is ordered or required in such judgment,
order, decree, or settlement to pay an amount to the plan
in connection with a violation of part 4 of such subtitle,
or
(III) in such judgment, order, decree, or settlement,
such spouse retains the right to receive the survivor
annuity under a qualified joint and survivor annuity
provided pursuant to section 401(a)(11)(A)(i) and under a
qualified preretirement survivor annuity provided pursuant
to section 401(a)(11)(A)(ii), determined in accordance with
subparagraph (D).
A plan shall not be treated as failing to meet the requirements
of this subsection, subsection (k), section 403(b), or section
409(d) solely by reason of an offset described in this
subparagraph.
(D) Survivor annuity. -
(i) In general. - The survivor annuity described in
subparagraph (C)(iii)(III) shall be determined as if -
(I) the participant terminated employment on the date of
the offset,
(II) there was no offset,
(III) the plan permitted commencement of benefits only on
or after normal retirement age,
(IV) the plan provided only the minimum-required
qualified joint and survivor annuity, and
(V) the amount of the qualified preretirement survivor
annuity under the plan is equal to the amount of the
survivor annuity payable under the minimum-required
qualified joint and survivor annuity.
(ii) Definition. - For purposes of this subparagraph, the
term ''minimum-required qualified joint and survivor
annuity'' means the qualified joint and survivor annuity
which is the actuarial equivalent of the participant's
accrued benefit (within the meaning of section 411(a)(7)) and
under which the survivor annuity is 50 percent of the amount
of the annuity which is payable during the joint lives of the
participant and the spouse.
(14) A trust shall not constitute a qualified trust under this
section unless the plan of which such trust is a part provides
that, unless the participant otherwise elects, the payment of
benefits under the plan to the participant will begin not later
than the 60th day after the latest of the close of the plan year
in which -
(A) the date on which the participant attains the earlier of
age 65 or the normal retirement age specified under the plan,
(B) occurs the 10th anniversary of the year in which the
participant commenced participation in the plan, or
(C) the participant terminates his service with the employer.
In the case of a plan which provides for the payment of an early
retirement benefit, a trust forming a part of such plan shall not
constitute a qualified trust under this section unless a
participant who satisfied the service requirements for such early
retirement benefit, but separated from the service (with any
nonforfeitable right to an accrued benefit) before satisfying the
age requirement for such early retirement benefit, is entitled
upon satisfaction of such age requirement to receive a benefit
not less than the benefit to which he would be entitled at the
normal retirement age, actuarially, reduced under regulations
prescribed by the Secretary.
(15) a (FOOTNOTE 2) trust shall not constitute a qualified
trust under this section unless under the plan of which such
trust is a part -
(FOOTNOTE 2) So in original. Probably should be capitalized.
(A) in the case of a participant or beneficiary who is
receiving benefits under such plan, or
(B) in the case of a participant who is separated from the
service and who has nonforfeitable rights to benefits,
such benefits are not decreased by reason of any increase in the
benefit levels payable under title II of the Social Security Act
or any increase in the wage base under such title II, if such
increase takes place after September 2, 1974, or (if later) the
earlier of the date of first receipt of such benefits or the date
of such separation, as the case may be.
(16) A trust shall not constitute a qualified trust under this
section if the plan of which such trust is a part provides for
benefits or contributions which exceed the limitations of section
415.
(17) Compensation limit. -
(A) In general. - A trust shall not constitute a qualified
trust under this section unless, under the plan of which such
trust is a part, the annual compensation of each employee taken
into account under the plan for any year does not exceed
$200,000.
(B) Cost-of-living adjustment. - The Secretary shall adjust
annually the $200,000 amount in subparagraph (A) for increases
in the cost-of-living at the same time and in the same manner
as adjustments under section 415(d); except that the base
period shall be the calendar quarter beginning July 1, 2001,
and any increase which is not a multiple of $5,000 shall be
rounded to the next lowest multiple of $5,000.
((18) Repealed. Pub. L. 97-248, title II, Sec. 237(b), Sept. 3,
1982, 96 Stat. 511.)
(19) A trust shall not constitute a qualified trust under this
section if under the plan of which such trust is a part any part
of a participant's accrued benefit derived from employer
contributions (whether or not otherwise nonforfeitable), is
forfeitable solely because of withdrawal by such participant of
any amount attributable to the benefit derived from contributions
made by such participant. The preceding sentence shall not apply
to the accrued benefit of any participant unless, at the time of
such withdrawal, such participant has a nonforfeitable right to
at least 50 percent of such accrued benefit (as determined under
section 411). The first sentence of this paragraph shall not
apply to the extent that an accrued benefit is permitted to be
forfeited in accordance with section 411(a)(3)(D)(iii) (relating
to proportional forfeitures of benefits accrued before September
2, 1974, in the event of withdrawal of certain mandatory
contributions).
(20) A trust forming part of a pension plan shall not be
treated as failing to constitute a qualified trust under this
section merely because the pension plan of which such trust is a
part makes 1 or more distributions within 1 taxable year to a
distributee on account of a termination of the plan of which the
trust is a part, or in the case of a profit-sharing or stock
bonus plan, a complete discontinuance of contributions under such
plan. This paragraph shall not apply to a defined benefit plan
unless the employer maintaining such plan files a notice with the
Pension Benefit Guaranty Corporation (at the time and in the
manner prescribed by the Pension Benefit Guaranty Corporation)
notifying the Corporation of such payment or distribution and the
Corporation has approved such payment or distribution or, within
90 days after the date on which such notice was filed, has failed
to disapprove such payment or distribution. For purposes of this
paragraph, rules similar to the rules of section 402(a)(6)(B) (as
in effect before its repeal by section 521 of the Unemployment
Compensation Amendments of 1992) shall apply.
((21) Repealed. Pub. L. 99-514, title XI, Sec. 1171(b)(5), Oct.
22, 1986, 100 Stat. 2513.)
(22) If a defined contribution plan (other than a
profit-sharing plan) -
(A) is established by an employer whose stock is not readily
tradable on an established market, and
(B) after acquiring securities of the employer, more than 10
percent of the total assets of the plan are securities of the
employer,
any trust forming part of such plan shall not constitute a
qualified trust under this section unless the plan meets the
requirements of subsection (e) of section 409. The requirements
of subsection (e) of section 409 shall not apply to any employees
of an employer who are participants in any defined contribution
plan established and maintained by such employer if the stock of
such employer is not readily tradable on an established market
and the trade or business of such employer consists of publishing
on a regular basis a newspaper for general circulation. For
purposes of the preceding sentence, subsections (b), (c), (m),
and (o) of section 414 shall not apply except for determining
whether stock of the employer is not readily tradable on an
established market.
(23) A stock bonus plan shall not be treated as meeting the
requirements of this section unless such plan meets the
requirements of subsections (h) and (o) of section 409, except
that in applying section 409(h) for purposes of this paragraph,
the term ''employer securities'' shall include any securities of
the employer held by the plan.
(24) Any group trust which otherwise meets the requirements of
this section shall not be treated as not meeting such
requirements on account of the participation or inclusion in such
trust of the moneys of any plan or governmental unit described in
section 818(a)(6).
(25) Requirement that actuarial assumptions be specified. - A
defined benefit plan shall not be treated as providing definitely
determinable benefits unless, whenever the amount of any benefit
is to be determined on the basis of actuarial assumptions, such
assumptions are specified in the plan in a way which precludes
employer discretion.
(26) Additional participation requirements. -
(A) In general. - In the case of a trust which is a part of a
defined benefit plan, such trust shall not constitute a
qualified trust under this subsection unless on each day of the
plan year such trust benefits at least the lesser of -
(i) 50 employees of the employer, or
(ii) the greater of -
(I) 40 percent of all employees of the employer, or
(II) 2 employees (or if there is only 1 employee, such
employee).
(B) Treatment of excludable employees. -
(i) In general. - A plan may exclude from consideration
under this paragraph employees described in paragraphs (3)
and (4)(A) of section 410(b).
(ii) Separate application for certain excludable employees.
- If employees described in section 410(b)(4)(B) are covered
under a plan which meets the requirements of subparagraph (A)
separately with respect to such employees, such employees may
be excluded from consideration in determining whether any
plan of the employer meets such requirements if -
(I) the benefits for such employees are provided under
the same plan as benefits for other employees,
(II) the benefits provided to such employees are not
greater than comparable benefits provided to other
employees under the plan, and
(III) no highly compensated employee (within the meaning
of section 414(q)) is included in the group of such
employees for more than 1 year.
(C) Special rule for collective bargaining units. - Except to
the extent provided in regulations, a plan covering only
employees described in section 410(b)(3)(A) may exclude from
consideration any employees who are not included in the unit or
units in which the covered employees are included.
(D) Paragraph not to apply to multiemployer plans. - Except
to the extent provided in regulations, this paragraph shall not
apply to employees in a multiemployer plan (within the meaning
of section 414(f)) who are covered by collective bargaining
agreements.
(E) Special rule for certain dispositions or acquisitions. -
Rules similar to the rules of section 410(b)(6)(C) shall apply
for purposes of this paragraph.
(F) Separate lines of business. - At the election of the
employer and with the consent of the Secretary, this paragraph
may be applied separately with respect to each separate line of
business of the employer. For purposes of this paragraph, the
term ''separate line of business'' has the meaning given such
term by section 414(r) (without regard to paragraph (2)(A) or
(7) thereof).
(G) Exception for plans. - This paragraph shall not apply to
a governmental plan (within the meaning of section 414(d)).
(H) Regulations. - The Secretary may by regulation provide
that any separate benefit structure, any separate trust, or any
other separate arrangement is to be treated as a separate plan
for purposes of applying this paragraph.
(27) Determinations as to profit-sharing plans. -
(A) Contributions need not be based on profits. - The
determination of whether the plan under which any contributions
are made is a profit-sharing plan shall be made without regard
to current or accumulated profits of the employer and without
regard to whether the employer is a tax-exempt organization.
(B) Plan must designate type. - In the case of a plan which
is intended to be a money purchase pension plan or a
profit-sharing plan, a trust forming part of such plan shall
not constitute a qualified trust under this subsection unless
the plan designates such intent at such time and in such manner
as the Secretary may prescribe.
(28) Additional requirements relating to employee stock
ownership plans. -
(A) In general. - In the case of a trust which is part of an
employee stock ownership plan (within the meaning of section
4975(e)(7)) or a plan which meets the requirements of section
409(a), such trust shall not constitute a qualified trust under
this section unless such plan meets the requirements of
subparagraphs (B) and (C).
(B) Diversification of investments. -
(i) In general. - A plan meets the requirements of this
subparagraph if each qualified participant in the plan may
elect within 90 days after the close of each plan year in the
qualified election period to direct the plan as to the
investment of at least 25 percent of the participant's
account in the plan (to the extent such portion exceeds the
amount to which a prior election under this subparagraph
applies). In the case of the election year in which the
participant can make his last election, the preceding
sentence shall be applied by substituting ''50 percent'' for
''25 percent''.
(ii) Method of meeting requirements. - A plan shall be
treated as meeting the requirements of clause (i) if -
(I) the portion of the participant's account covered by
the election under clause (i) is distributed within 90 days
after the period during which the election may be made, or
(II) the plan offers at least 3 investment options (not
inconsistent with regulations prescribed by the Secretary)
to each participant making an election under clause (i) and
within 90 days after the period during which the election
may be made, the plan invests the portion of the
participant's account covered by the election in accordance
with such election.
(iii) Qualified participant. - For purposes of this
subparagraph, the term ''qualified participant'' means any
employee who has completed at least 10 years of participation
under the plan and has attained age 55.
(iv) Qualified election period. - For purposes of this
subparagraph, the term ''qualified election period'' means
the 6-plan-year period beginning with the later of -
(I) the 1st plan year in which the individual first
became a qualified participant, or
(II) the 1st plan year beginning after December 31, 1986.
For purposes of the preceding sentence, an employer may elect
to treat an individual first becoming a qualified participant
in the 1st plan year beginning in 1987 as having become a
participant in the 1st plan year beginning in 1988.
(v) Exception.--This subparagraph shall not
apply to an applicable defined contribution plan
(as defined in paragraph (35)(E)).
(C) Use of independent appraiser. - A plan meets the
requirements of this subparagraph if all valuations of employer
securities which are not readily tradable on an established
securities market with respect to activities carried on by the
plan are by an independent appraiser. For purposes of the
preceding sentence, the term ''independent appraiser'' means
any appraiser meeting requirements similar to the requirements
of the regulations prescribed under section 170(a)(1).
(29) Benefit limitations on plans in at-risk status.--In
the case of a defined benefit plan (other than a multiemployer
plan) to which the requirements of section 412 apply, the trust
of which the plan is a part shall not constitute a qualified
trust under this subsection unless the plan meets the
requirements of section 436.
(30) Limitations on elective deferrals. - In the case of a
trust which is part of a plan under which elective deferrals
(within the meaning of section 402(g)(3)) may be made with
respect to any individual during a calendar year, such trust
shall not constitute a qualified trust under this subsection
unless the plan provides that the amount of such deferrals under
such plan and all other plans, contracts, or arrangements of an
employer maintaining such plan may not exceed the amount of the
limitation in effect under section 402(g)(1)(A) for taxable years
beginning in such calendar year.
(31) Direct transfer of eligible rollover distributions. -
(A) In general. - A trust shall not constitute a qualified
trust under this section unless the plan of which such trust is
a part provides that if the distributee of any eligible
rollover distribution -
(i) elects to have such distribution paid directly to an
eligible retirement plan, and
(ii) specifies the eligible retirement plan to which such
distribution is to be paid (in such form and at such time as
the plan administrator may prescribe),
such distribution shall be made in the form of a direct
trustee-to-trustee transfer to the eligible retirement plan so
specified.
(B) Certain mandatory distributions. -
(i) In general. - In case of a trust which is part of an
eligible plan, such trust shall not constitute a qualified
trust under this section unless the plan of which such trust
is a part provides that if -
(I) a distribution described in clause (ii) in excess of
$1,000 is made, and
(II) the distributee does not make an election under
subparagraph (A) and does not elect to receive the
distribution directly,
the plan administrator shall make such transfer to an
individual retirement plan of a designated trustee or issuer
and shall notify the distributee in writing (either
separately or as part of the notice under section 402(f))
that the distribution may be transferred to another
individual retirement plan.
(ii) Eligible plan. - For purposes of clause (i), the term
''eligible plan'' means a plan which provides that any
nonforfeitable accrued benefit for which the present value
(as determined under section 411(a)(11)) does not exceed
$5,000 shall be immediately distributed to the participant.
(C) Limitation. - Subparagraphs (A) and (B) shall apply only
to the extent that the eligible rollover distribution would be
includible in gross income if not transferred as provided in
subparagraph (A) (determined without regard to sections 402(c),
403(a)(4), 403(b)(8), and 457(e)(16)). The preceding sentence
shall not apply to such distribution if the plan to which such
distribution is transferred -
(i) is a qualified trust which is part of a plan which
is a defined contribution plan and agrees to separately
account for amounts so
transferred, including separately accounting for the portion
of such distribution which is includible in gross income and
the portion of such distribution which is not so includible,
or
(ii) is an eligible retirement plan described in clause (i)
or (ii) of section 402(c)(8)(B).
(D) Eligible rollover distribution. - For purposes of this
paragraph, the term ''eligible rollover distribution'' has the
meaning given such term by section 402(f)(2)(A).
(E) Eligible retirement plan. - For purposes of this
paragraph, the term ''eligible retirement plan'' has the
meaning given such term by section 402(c)(8)(B), except that a
qualified trust shall be considered an eligible retirement plan
only if it is a defined contribution plan, the terms of which
permit the acceptance of rollover distributions.
(32) Treatment of failure to make certain payments if plan has
liquidity shortfall. -
(A) In general. - A trust forming part of a pension plan to
which section 430(j)(4) applies shall not be treated as failing
to constitute a qualified trust under this section merely
because such plan ceases to make any payment described in
subparagraph (B) during any period that such plan has a
liquidity shortfall (as defined in section 430(j)(4)).
(B) Payments described. - A payment is described in this
subparagraph if such payment is -
(i) any payment, in excess of the monthly amount paid under
a single life annuity (plus any social security supplements
described in the last sentence of section 411(a)(9)), to a
participant or beneficiary whose annuity starting date (as
defined in section 417(f)(2)) occurs during the period
referred to in subparagraph (A),
(ii) any payment for the purchase of an irrevocable
commitment from an insurer to pay benefits, and
(iii) any other payment specified by the Secretary by
regulations.
(C) Period of shortfall. - For purposes of this paragraph, a
plan has a liquidity shortfall during the period that there is
an underpayment of an installment under section 430(j) by
reason of paragraph (5)(A) thereof.
(33) Prohibition on benefit increases while sponsor is in
bankruptcy. -
(A) In general. - A trust which is part of a plan to which
this paragraph applies shall not constitute a qualified trust
under this section if an amendment to such plan is adopted
while the employer is a debtor in a case under title 11, United
States Code, or similar Federal or State law, if such amendment
increases liabilities of the plan by reason of -
(i) any increase in benefits,
(ii) any change in the accrual of benefits, or
(iii) any change in the rate at which benefits become
nonforfeitable under the plan,
with respect to employees of the debtor, and such amendment is
effective prior to the effective date of such employer's plan
of reorganization.
(B) Exceptions. - This paragraph shall not apply to any plan
amendment if -
(i) the plan, were such amendment to take effect, would
have a funding target attainment percentage (as defined in section
430(d)(2))of 100 percent or more,
(ii) the Secretary determines that such amendment is
reasonable and provides for only de minimis increases in the
liabilities of the plan with respect to employees of the
debtor,
(iii) such amendment only repeals an amendment described in
subsection 412(c)(2), or
(iv) such amendment is required as a condition of
qualification under this part.
(C) Plans to which this paragraph applies. - This paragraph
shall apply only to plans (other than multiemployer plans)
covered under section 4021 of the Employee Retirement Income
Security Act of 1974.
(D) Employer. - For purposes of this paragraph, the term
''employer'' means the employer referred to in section 412(b)(2)
(without regard to subparagraph (B) thereof).
(34) Benefits of missing participants on plan termination. - In
the case of a plan covered by title IV of the Employee Retirement
Income Security Act of 1974, a trust forming part of such plan
shall not be treated as failing to constitute a qualified trust
under this section merely because the pension plan of which such
trust is a part, upon its termination, transfers benefits of
missing participants to the Pension Benefit Guaranty Corporation
in accordance with section 4050 of such Act.
Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall apply
only in the case of a plan to which section 411 (relating to
minimum vesting standards) applies without regard to subsection
(e)(2) of such section.
(35) Diversification requirements for certain defined
contribution plans.--
(A) In general.--A trust which is part of an
applicable defined contribution plan shall not be
treated as a qualified trust unless the plan meets the
diversification requirements of subparagraphs (B), (C),
and (D).
(B) Employee contributions and elective deferrals
invested in employer securities.--In the case of the
portion of an applicable individual's account
attributable to employee contributions and elective
deferrals which is invested in employer securities, a
plan meets the requirements of this subparagraph if the
applicable individual may elect to direct the plan to
divest any such securities and to reinvest an equivalent
amount in other investment options meeting the
requirements of subparagraph (D).
(C) Employer contributions invested in employer
securities.--In the case of the portion of the account
attributable to employer contributions other than
elective deferrals which is invested in employer
securities, a plan meets the requirements of this
subparagraph if each applicable individual who--
(i) is a participant who has completed at
least 3 years of service, or
(ii) is a beneficiary of a participant
described in clause (i) or of a deceased
participant,
may elect to direct the plan to divest any such
securities and to reinvest an equivalent amount in other
investment options meeting the requirements of
subparagraph (D).
(D) Investment options.--
(i) In general.--The requirements of this
subparagraph are met if the plan offers not less
than 3 investment options, other than employer
securities, to which an applicable individual may
direct the proceeds from the divestment of
employer securities pursuant to this paragraph,
each of which is diversified and has materially
different risk and return characteristics.
(ii) Treatment of certain restrictions and
conditions.--
(I) Time for making investment
choices.--A plan shall not be treated as
failing to meet the requirements of this
subparagraph merely because the plan
limits the time for divestment and
reinvestment to periodic, reasonable
opportunities occurring no less
frequently than quarterly.
(II) Certain restrictions and
conditions not allowed.--Except as
provided in regulations, a plan shall
not meet the requirements of this
subparagraph if the plan imposes
restrictions or conditions with respect
to the investment of employer securities
which are not imposed on the investment
of other assets of the plan. This
subclause shall not apply to any
restrictions or conditions imposed by
reason of the application of securities
laws.
(E) Applicable defined contribution plan.--For
purposes of this paragraph--
(i) In general.--The term `applicable
defined contribution plan' means any defined
contribution plan which holds any publicly traded
employer securities.
(ii) Exception for certain esops.--Such term
does not include an employee stock ownership plan
if--
(I) there are no contributions to
such plan (or earnings thereunder) which
are held within such plan and are
subject to subsection (k) or (m), and
(II) such plan is a separate plan
for purposes of section 414(l) with
respect to any other defined benefit
plan or defined contribution plan
maintained by the same employer or
employers.
(iii) Exception for one participant plans.--
Such term does not include a one-participant
retirement plan.
(iv) One-participant retirement plan.--For
purposes of clause (iii), the term `one-
participant retirement plan' means a retirement
plan that--
(I) on the first day of the plan
year covered only one individual (or the
individual and the individual's spouse)
and the individual owned 100 percent of
the plan sponsor (whether or not
incorporated), or covered only one or
more partners (or partners and their
spouses) in the plan sponsor,
(II) meets the minimum coverage
requirements of section 410(b) without
being combined with any other plan of
the business that covers the employees
of the business,
(III) does not provide benefits to
anyone except the individual (and the
individual's spouse) or the partners
(and their spouses),
(IV) does not cover a business
that is a member of an affiliated
service group, a controlled group of
corporations, or a group of businesses
under common control, and
(V) does not cover a business that
uses the services of leased employees
(within the meaning of section 414(n)).
For purposes of this clause, the term `partner'
includes a 2-percent shareholder (as defined in
section 1372(b)) of an S corporation.
(F) Certain plans treated as holding publicly
traded employer securities.--
(i) In general.--Except as provided in
regulations or in clause (ii), a plan holding
employer securities which are not publicly traded
employer securities shall be treated as holding
publicly traded employer securities if any
employer corporation, or any member of a
controlled group of corporations which includes
such employer corporation, has issued a class of
stock which is a publicly traded employer
security.
(ii) Exception for certain controlled groups
with publicly traded securities.--Clause (i) shall
not apply to a plan if--
(I) no employer corporation, or
parent corporation of an employer
corporation, has issued any publicly
traded employer security, and
(II) no employer corporation, or
parent corporation of an employer
corporation, has issued any special
class of stock which grants particular
rights to, or bears particular risks
for, the holder or issuer with respect
to any corporation described in clause
(i) which has issued any publicly traded
employer security.
(iii) Definitions.--For purposes of this
subparagraph, the term--
(I) `controlled group of
corporations' has the meaning given such
term by section 1563(a), except that `50
percent' shall be substituted for `80
percent' each place it appears,
(II) `employer corporation' means
a corporation which is an employer
maintaining the plan, and
(III) `parent corporation' has the
meaning given such term by section
424(e).
(G) Other definitions.--For purposes of this para-
graph--
(i) Applicable individual.--The term
`applicable individual' means--
(I) any participant in the plan,
and
(II) any beneficiary who has an
account under the plan with respect to
which the beneficiary is entitled to
exercise the rights of a participant.
(ii) Elective deferral.--The term `elective
deferral' means an employer contribution described
in section 402(g)(3)(A).
(iii) Employer security.--The term `employer
security' has the meaning given such term by
section 407(d)(1) of the Employee Retirement
Income Security Act of 1974.
(iv) Employee stock ownership plan.--The
term `employee stock ownership plan' has the
meaning given such term by section 4975(e)(7).
(v) Publicly traded employer securities.--
The term `publicly traded employer securities'
means employer securities which are readily
tradable on an established securities market.
(vi) Year of service.--The term `year of
service' has the meaning given such term by
section 411(a)(5).
(H) Transition rule for securities attributable to
employer contributions.--
(i) Rules phased in over 3 years.--
(I) <<NOTE: Applicability.>> In
general.--In the case of the portion of
an account to which subparagraph (C)
applies and which consists of employer
securities acquired in a plan year
beginning before January 1, 2007,
subparagraph (C) shall only apply to the
applicable percentage of such
securities. This subparagraph shall be
applied separately with respect to each
class of securities.
(II) Exception for certain
participants aged 55 or over.--Subclause
(I) shall not apply to an applicable
individual who is a participant who has
attained age 55 and completed at least 3
years of service before the first plan
year beginning after December 31, 2005.
(ii) Applicable percentage.--For purposes of
clause (i), the applicable percentage shall be
determined as follows:
Plan year to wThe applicable............................
subparagraph (percentage is:............................
applies:
1st......................................... 33
2d.......................................... 66
3d and following...........................100.
(36) Distributions during working retirement.--A trust
forming part of a pension plan shall not be treated as failing
to constitute a qualified trust under this section solely
because the plan provides that a distribution may be made from
such trust to an employee who has attained age 62 and who is not
separated from employment at the time of such distribution.
(b) Certain retroactive changes in plan
A stock bonus, pension, profit-sharing, or annuity plan shall be
considered as satisfying the requirements of subsection (a) for the
period beginning with the date on which it was put into effect, or
for the period beginning with the earlier of the date on which
there was adopted or put into effect any amendment which caused the
plan to fail to satisfy such requirements, and ending with the time
prescribed by law for filing the return of the employer for his
taxable year in which such plan or amendment was adopted (including
extensions thereof) or such later time as the Secretary may
designate, if all provisions of the plan which are necessary to
satisfy such requirements are in effect by the end of such period
and have been made effective for all purposes for the whole of such
period.
(c) Definitions and rules relating to self-employed individuals and
owner-employees
For purposes of this section -
(1) Self-employed individual treated as employee
(A) In general
The term ''employee'' includes, for any taxable year, an
individual who is a self-employed individual for such taxable
year.
(B) Self-employed individual
The term ''self-employed individual'' means, with respect to
any taxable year, an individual who has earned income (as
defined in paragraph (2)) for such taxable year. To the extent
provided in regulations prescribed by the Secretary, such term
also includes, for any taxable year -
(i) an individual who would be a self-employed individual
within the meaning of the preceding sentence but for the fact
that the trade or business carried on by such individual did
not have net profits for the taxable year, and
(ii) an individual who has been a self-employed individual
within the meaning of the preceding sentence for any prior
taxable year.
(2) Earned income
(A) In general
The term ''earned income'' means the net earnings from
self-employment (as defined in section 1402(a)), but such net
earnings shall be determined -
(i) only with respect to a trade or business in which
personal services of the taxpayer are a material
income-producing factor,
(ii) without regard to paragraphs (4) and (5) of section
1402(c),
(iii) in the case of any individual who is treated as an
employee under sections (FOOTNOTE 3) 3121(d)(3)(A), (C), or
(D), without regard to paragraph (2) of section 1402(c),
(FOOTNOTE 3) So in original. Probably should be ''section''.
(iv) without regard to items which are not included in
gross income for purposes of this chapter, and the deductions
properly allocable to or chargeable against such items,
(v) with regard to the deductions allowed by section 404 to
the taxpayer, and
(vi) with regard to the deduction allowed to the taxpayer
by section 164(f).
For purposes of this subparagraph, section 1402, as in effect
for a taxable year ending on December 31, 1962, shall be
treated as having been in effect for all taxable years ending
before such date. For purposes of this part only (other than
sections 419 and 419A), this subparagraph shall be applied as
if the term ''trade or business'' for purposes of section 1402
included service described in section 1402(c)(6).
((B) Repealed)
(C) Income from disposition of certain property
For purposes of this section, the term ''earned income''
includes gains (other than any gain which is treated under any
provision of this chapter as gain from the sale or exchange of
a capital asset) and net earnings derived from the sale or
other disposition of, the transfer of any interest in, or the
licensing of the use of property (other than good will) by an
individual whose personal efforts created such property.
(3) Owner-employee
The term ''owner-employee'' means an employee who -
(A) owns the entire interest in an unincorporated trade or
business, or
(B) in the case of a partnership, is a partner who owns more
than 10 percent of either the capital interest or the profits
interest in such partnership.
To the extent provided in regulations prescribed by the
Secretary, such term also means an individual who has been an
owner-employee within the meaning of the preceding sentence.
(4) Employer
An individual who owns the entire interest in an unincorporated
trade or business shall be treated as his own employer. A
partnership shall be treated as the employer of each partner who
is an employee within the meaning of paragraph (1).
(5) Contributions on behalf of owner-employees
The term ''contribution on behalf of an owner-employee''
includes, except as the context otherwise requires, a
contribution under a plan -
(A) by the employer for an owner-employee, and
(B) by an owner-employee as an employee.
(6) Special rule for certain fishermen
For purposes of this subsection, the term ''self-employed
individual'' includes an individual described in section
3121(b)(20) (relating to certain fishermen).
(d) Contribution limit on owner-employees
A trust forming part of a pension or profit-sharing plan which
provides contributions or benefits for employees some or all of
whom are owner-employees shall constitute a qualified trust under
this section only if, in addition to meeting the requirements of
subsection (a), the plan provides that contributions on behalf of
any owner-employee may be made only with respect to the earned
income of such owner-employee which is derived from the trade or
business with respect to which such plan is established.
((e) Repealed. Pub. L. 98-369, div. A, title VII, Sec. 713(d)(3),
July 18, 1984, 98 Stat. 958)
(f) Certain custodial accounts and contracts
For purposes of this title, a custodial account, an annuity
contract, or a contract (other than a life, health or accident,
property, casualty, or liability insurance contract) issued by an
insurance company qualified to do business in a State shall be
treated as a qualified trust under this section if -
(1) the custodial account or contract would, except for the
fact that it is not a trust, constitute a qualified trust under
this section, and
(2) in the case of a custodial account the assets thereof are
held by a bank (as defined in section 408(n)) or another person
who demonstrates, to the satisfaction of the Secretary, that the
manner in which he will hold the assets will be consistent with
the requirements of this section.
For purposes of this title, in the case of a custodial account or
contract treated as a qualified trust under this section by reason
of this subsection, the person holding the assets of such account
or holding such contract shall be treated as the trustee thereof.
(g) Annuity defined
For purposes of this section and sections 402, 403, and 404, the
term ''annuity'' includes a face-amount certificate, as defined in
section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C.,
sec. 80a-2); but does not include any contract or certificate
issued after December 31, 1962, which is transferable, if any
person other than the trustee of a trust described in section
401(a) which is exempt from tax under section 501(a) is the owner
of such contract or certificate.
(h) Medical, etc., benefits for retired employees and their spouses
and dependents
Under regulations prescribed by the Secretary, and subject to the
provisions of section 420, a pension or annuity plan may provide
for the payment of benefits for sickness, accident,
hospitalization, and medical expenses of retired employees, their
spouses and their dependents, but only if -
(1) such benefits are subordinate to the retirement benefits
provided by the plan,
(2) a separate account is established and maintained for such
benefits,
(3) the employer's contributions to such separate account are
reasonable and ascertainable,
(4) it is impossible, at any time prior to the satisfaction of
all liabilities under the plan to provide such benefits, for any
part of the corpus or income of such separate account to be
(within the taxable year or thereafter) used for, or diverted to,
any purpose other than the providing of such benefits,
(5) notwithstanding the provisions of subsection (a)(2), upon
the satisfaction of all liabilities under the plan to provide
such benefits, any amount remaining in such separate account
must, under the terms of the plan, be returned to the employer,
and
(6) in the case of an employee who is a key employee, a
separate account is established and maintained for such benefits
payable to such employee (and his spouse and dependents) and such
benefits (to the extent attributable to plan years beginning
after March 31, 1984, for which the employee is a key employee)
are only payable to such employee (and his spouse and dependents)
from such separate account.
For purposes of paragraph (6), the term ''key employee'' means any
employee, who at any time during the plan year or any preceding
plan year during which contributions were made on behalf of such
employee, is or was a key employee as defined in section 416(i). In
no event shall the requirements of paragraph (1) be treated as met
if the aggregate actual contributions for medical benefits, when
added to actual contributions for life insurance protection under
the plan, exceed 25 percent of the total actual contributions to
the plan (other than contributions to fund past service credits)
after the date on which the account is established.
(i) Certain union-negotiated pension plans
In the case of a trust forming part of a pension plan which has
been determined by the Secretary to constitute a qualified trust
under subsection (a) and to be exempt from taxation under section
501(a) for a period beginning after contributions were first made
to or for such trust, if it is shown to the satisfaction of the
Secretary that -
(1) such trust was created pursuant to a collective bargaining
agreement between employee representatives and one or more
employers,
(2) any disbursements of contributions, made to or for such
trust before the time as of which the Secretary or his delegate
determined that the trust constituted a qualified trust,
substantially complied with the terms of the trust, and the plan
of which the trust is a part, as subsequently qualified, and
(3) before the time as of which the Secretary determined that
the trust constitutes a qualified trust, the contributions to or
for such trust were not used in a manner which would jeopardize
the interests of its beneficiaries,
then such trust shall be considered as having constituted a
qualified trust under subsection (a) and as having been exempt from
taxation under section 501(a) for the period beginning on the date
on which contributions were first made to or for such trust and
ending on the date such trust first constituted (without regard to
this subsection) a qualified trust under subsection (a).
((j) Repealed. Pub. L. 97-248, title II, Sec. 238(b), Sept. 3,
1982, 96 Stat. 512)
(k) Cash or deferred arrangements
(1) General rule
A profit-sharing or stock bonus plan, a pre-ERISA money
purchase plan, or a rural cooperative plan shall not be
considered as not satisfying the requirements of subsection (a)
merely because the plan includes a qualified cash or deferred
arrangement.
(2) Qualified cash or deferred arrangement
A qualified cash or deferred arrangement is any arrangement
which is part of a profit-sharing or stock bonus plan, a
pre-ERISA money purchase plan, or a rural cooperative plan which
meets the requirements of subsection (a) -
(A) under which a covered employee may elect to have the
employer make payments as contributions to a trust under the
plan on behalf of the employee, or to the employee directly in
cash;
(B) under which amounts held by the trust which are
attributable to employer contributions made pursuant to the
employee's election -
(i) may not be distributable to participants or other
beneficiaries earlier than -
(I) severance from employment, death, or disability,
(II) an event described in paragraph (10),
(III) in the case of a profit-sharing or stock bonus
plan, the attainment of age 59 1/2,
(IV) in the case of contributions to a profit-sharing or
stock bonus plan to which section 402(e)(3) applies, upon
hardship of the employee, or
(V) in the case of a qualified
reservist distribution (as defined in
section 72(t)(2)(G)(iii)), the date on
which a period referred to in subclause
(III) of such section begins, and
(ii) will not be distributable merely by reason of the
completion of a stated period of participation or the lapse
of a fixed number of years;
(C) which provides that an employee's right to his accrued
benefit derived from employer contributions made to the trust
pursuant to his election is nonforfeitable, and
(D) which does not require, as a condition of participation
in the arrangement, that an employee complete a period of
service with the employer (or employers) maintaining the plan
extending beyond the period permitted under section 410(a)(1)
(determined without regard to subparagraph (B)(i) thereof).
(3) Application of participation and discrimination standards
(A) A cash or deferred arrangement shall not be treated as a
qualified cash or deferred arrangement unless -
(i) those employees eligible to benefit under the
arrangement satisfy the provisions of section 410(b)(1), and
(ii) the actual deferral percentage for eligible highly
compensated employees (as defined in paragraph (5)) for the
plan year bears a relationship to the actual deferral
percentage for all other eligible employees for the preceding
plan year which meets either of the following tests:
(I) The actual deferral percentage for the group of
eligible highly compensated employees is not more than the
actual deferral percentage of all other eligible employees
multiplied by 1.25.
(II) The excess of the actual deferral percentage for the
group of eligible highly compensated employees over that of
all other eligible employees is not more than 2 percentage
points, and the actual deferral percentage for the group of
eligible highly compensated employees is not more than the
actual deferral percentage of all other eligible employees
multiplied by 2.
If 2 or more plans which include cash or deferred arrangements
are considered as 1 plan for purposes of section 401(a)(4) or
410(b), the cash or deferred arrangements included in such
plans shall be treated as 1 arrangement for purposes of this
subparagraph.
If any highly compensated employee is a participant under 2 or
more cash or deferred arrangements of the employer, for
purposes of determining the deferral percentage with respect to
such employee, all such cash or deferred arrangements shall be
treated as 1 cash or deferred arrangement. An arrangement may
apply clause (ii) by using the plan year rather than the
preceding plan year if the employer so elects, except that if
such an election is made, it may not be changed except as
provided by the Secretary.
(B) For purposes of subparagraph (A), the actual deferral
percentage for a specified group of employees for a plan year
shall be the average of the ratios (calculated separately for
each employee in such group) of -
(i) the amount of employer contributions actually paid over
to the trust on behalf of each such employee for such plan
year, to
(ii) the employee's compensation for such plan year.
(C) A cash or deferred arrangement shall be treated as
meeting the requirements of subsection (a)(4) with respect to
contributions if the requirements of subparagraph (A)(ii) are
met.
(D) For purposes of subparagraph (B), the employer
contributions on behalf of any employee -
(i) shall include any employer contributions made pursuant
to the employee's election under paragraph (2), and
(ii) under such rules as the Secretary may prescribe, may,
at the election of the employer, include -
(I) matching contributions (as defined in 401(m)(4)(A))
which meet the requirements of paragraph (2)(B) and (C),
and
(II) qualified nonelective contributions (within the
meaning of section 401(m)(4)(C)).
(E) For purposes of this paragraph, in the case of the first
plan year of any plan (other than a successor plan), the amount
taken into account as the actual deferral percentage of
nonhighly compensated employees for the preceding plan year
shall be -
(i) 3 percent, or
(ii) if the employer makes an election under this
subclause, the actual deferral percentage of nonhighly
compensated employees determined for such first plan year.
(F) Special rule for early participation. - If an employer
elects to apply section 410(b)(4)(B) in determining whether a
cash or deferred arrangement meets the requirements of
subparagraph (A)(i), the employer may, in determining whether
the arrangement meets the requirements of subparagraph (A)(ii),
exclude from consideration all eligible employees (other than
highly compensated employees) who have not met the minimum age
and service requirements of section 410(a)(1)(A).
(G) Governmental plan.--
A governmental plan (within the meaning of section
414(d))(or agency or instrumentality thereof)
shall be treated as meeting the requirements of this paragraph.
(4) Other requirements
(A) Benefits (other than matching contributions) must not be
contingent on election to defer
A cash or deferred arrangement of any employer shall not be
treated as a qualified cash or deferred arrangement if any
other benefit is conditioned (directly or indirectly) on the
employee electing to have the employer make or not make
contributions under the arrangement in lieu of receiving cash.
The preceding sentence shall not apply to any matching
contribution (as defined in section 401(m)) made by reason of
such an election.
(B) Eligibility of State and local governments and tax-exempt
organizations
(i) Tax-exempts eligible
Except as provided in clause (ii), any organization exempt
from tax under this subtitle may include a qualified cash or
deferred arrangement as part of a plan maintained by it.
(ii) Governments ineligible
A cash or deferred arrangement shall not be treated as a
qualified cash or deferred arrangement if it is part of a
plan maintained by a State or local government or political
subdivision thereof, or any agency or instrumentality
thereof. This clause shall not apply to a rural cooperative
plan or to a plan of an employer described in clause (iii).
(iii) Treatment of Indian tribal governments
An employer which is an Indian tribal government (as
defined in section 7701(a)(40)), a subdivision of an Indian
tribal government (determined in accordance with section
7871(d)), an agency or instrumentality of an Indian tribal
government or subdivision thereof, or a corporation chartered
under Federal, State, or tribal law which is owned in whole
or in part by any of the foregoing may include a qualified
cash or deferred arrangement as part of a plan maintained by
the employer.
(C) Coordination with other plans
Except as provided in section 401(m), any employer
contribution made pursuant to an employee's election under a
qualified cash or deferred arrangement shall not be taken into
account for purposes of determining whether any other plan
meets the requirements of section 401(a) or 410(b). This
subparagraph shall not apply for purposes of determining
whether a plan meets the average benefit requirement of section
410(b)(2)(A)(ii).
(5) Highly compensated employee
For purposes of this subsection, the term ''highly compensated
employee'' has the meaning given such term by section 414(q).
(6) Pre-ERISA money purchase plan
For purposes of this subsection, the term ''pre-ERISA money
purchase plan'' means a pension plan -
(A) which is a defined contribution plan (as defined in
section 414(i)),
(B) which was in existence on June 27, 1974, and which, on
such date, included a salary reduction arrangement, and
(C) under which neither the employee contributions nor the
employer contributions may exceed the levels provided for by
the contribution formula in effect under the plan on such date.
(7) Rural cooperative plan
For purposes of this subsection -
(A) In general
The term ''rural cooperative plan'' means any pension plan -
(i) which is a defined contribution plan (as defined in
section 414(i)), and
(ii) which is established and maintained by a rural
cooperative.
(B) Rural cooperative defined
For purposes of subparagraph (A), the term ''rural
cooperative'' means -
(i) any organization which -
(I) is engaged primarily in providing electric service on
a mutual or cooperative basis, or
(II) is engaged primarily in providing electric service
to the public in its area of service and which is exempt
from tax under this subtitle or which is a State or local
government (or an agency or instrumentality thereof), other
than a municipality (or an agency or instrumentality
thereof),
(ii) any organization described in paragraph (4) or (6) of
section 501(c) and at least 80 percent of the members of
which are organizations described in clause (i),
(iii) a cooperative telephone company described in section
501(c)(12),
(iv) any organization which -
(I) is a mutual irrigation or ditch company described in
section 501(c)(12) (without regard to the 85 percent
requirement thereof), or
(II) is a district organized under the laws of a State as
a municipal corporation for the purpose of irrigation,
water conservation, or drainage, and
(v) an organization which is a national association of
organizations described in clause (i), (ii),, (FOOTNOTE 4)
(iii), or (iv).
(FOOTNOTE 4) So in original.
(C) Special rule for certain distributions
A rural cooperative plan which includes a qualified cash or
deferred arrangement shall not be treated as violating the
requirements of section 401(a) or of paragraph (2) merely by
reason of a hardship distribution or a distribution to a
participant after attainment of age 59 1/2. For purposes of
this section, the term ''hardship distribution'' means a
distribution described in paragraph (2)(B)(i)(IV) (without
regard to the limitation of its application to profit-sharing
or stock bonus plans).
(8) Arrangement not disqualified if excess contributions
distributed
(A) In general
A cash or deferred arrangement shall not be treated as
failing to meet the requirements of clause (ii) of paragraph
(3)(A) for any plan year if, before the close of the following
plan year -
(i) the amount of the excess contributions for such plan
year (and any income allocable to such contributions through
the end of such year) is distributed, or
(ii) to the extent provided in regulations, the employee
elects to treat the amount of the excess contributions as an
amount distributed to the employee and then contributed by
the employee to the plan.
Any distribution of excess contributions (and income) may be
made without regard to any other provision of law.
(B) Excess contributions
For purposes of subparagraph (A), the term ''excess
contributions'' means, with respect to any plan year, the
excess of -
(i) the aggregate amount of employer contributions actually
paid over to the trust on behalf of highly compensated
employees for such plan year, over
(ii) the maximum amount of such contributions permitted
under the limitations of clause (ii) of paragraph (3)(A)
(determined by reducing contributions made on behalf of
highly compensated employees in order of the actual deferral
percentages beginning with the highest of such percentages).
(C) Method of distributing excess contributions
Any distribution of the excess contributions for any plan
year shall be made to highly compensated employees on the basis
of the amount of contributions by, or on behalf of, each of
such employees.
(D) Additional tax under section 72(t) not to apply
No tax shall be imposed under section 72(t) on any amount
required to be distributed under this paragraph.
(E) Treatment of matching contributions forfeited by reason of
excess deferral or contribution or erroneous automatic contribution
For purposes of paragraph (2)(C), a matching contribution
(within the meaning of subsection (m)) shall not be treated as
forfeitable merely because such contribution is forfeitable if
the contribution to which the matching contribution relates is
treated as an excess contribution under subparagraph (B), an
excess deferral under section 402(g)(2)(A), an erroneous
automatic contribution under section 414(w), or an excess
aggregate contribution under section 401(m)(6)(B).
(F) Cross reference
For excise tax on certain excess contributions, see section
4979.
(9) Compensation
For purposes of this subsection, the term ''compensation'' has
the meaning given such term by section 414(s).
(10) Distributions upon termination of plan
(A) In general
An event described in this subparagraph is the termination of
the plan without establishment or maintenance of another
defined contribution plan (other than an employee stock
ownership plan as defined in section 4975(e)(7)).
(B) Distributions must be lump sum distributions
(i) In general
A termination shall not be treated as described in
subparagraph (A) with respect to any employee unless the
employee receives a lump sum distribution by reason of the
termination.
(ii) Lump-sum distribution
For purposes of this subparagraph, the term ''lump-sum
distribution'' has the meaning given such term by section
402(e)(4)(D) (without regard to subclauses (I), (II), (III),
and (IV) of clause (i) thereof). Such term includes a
distribution of an annuity contract from -
(I) a trust which forms a part of a plan described in
section 401(a) and which is exempt from tax under section
501(a), or
(II) an annuity plan described in section 403(a).
(11) Adoption of simple plan to meet nondiscrimination tests
(A) In general
A cash or deferred arrangement maintained by an eligible
employer shall be treated as meeting the requirements of
paragraph (3)(A)(ii) if such arrangement meets -
(i) the contribution requirements of subparagraph (B),
(ii) the exclusive plan requirements of subparagraph (C),
and
(iii) the vesting requirements of section 408(p)(3).
(B) Contribution requirements
(i) In general
The requirements of this subparagraph are met if, under the
arrangement -
(I) an employee may elect to have the employer make
elective contributions for the year on behalf of the
employee to a trust under the plan in an amount which is
expressed as a percentage of compensation of the employee
but which in no event exceeds the amount in effect under
section 408(p)(2)(A)(ii),
(II) the employer is required to make a matching
contribution to the trust for the year in an amount equal
to so much of the amount the employee elects under
subclause (I) as does not exceed 3 percent of compensation
for the year, and
(III) no other contributions may be made other than
contributions described in subclause (I) or (II).
(ii) Employer may elect 2-percent nonelective contribution
An employer shall be treated as meeting the requirements of
clause (i)(II) for any year if, in lieu of the contributions
described in such clause, the employer elects (pursuant to
the terms of the arrangement) to make nonelective
contributions of 2 percent of compensation for each employee
who is eligible to participate in the arrangement and who has
at least $5,000 of compensation from the employer for the
year. If an employer makes an election under this
subparagraph for any year, the employer shall notify
employees of such election within a reasonable period of time
before the 60th day before the beginning of such year.
(iii) Administrative requirements
(I) In general
Rules similar to the rules of subparagraphs (B) and (C)
of section 408(p)(5) shall apply for purposes of this
subparagraph.
(II) Notice of election period
The requirements of this subparagraph shall not be
treated as met with respect to any year unless the employer
notifies each employee eligible to participate, within a
reasonable period of time before the 60th day before the
beginning of such year (and, for the first year the
employee is so eligible, the 60th day before the first day
such employee is so eligible), of the rules similar to the
rules of section 408(p)(5)(C) which apply by reason of
subclause (I).
(C) Exclusive plan requirement
The requirements of this subparagraph are met for any year to
which this paragraph applies if no contributions were made, or
benefits were accrued, for services during such year under any
qualified plan of the employer on behalf of any employee
eligible to participate in the cash or deferred arrangement,
other than contributions described in subparagraph (B).
(D) Definitions and special rule
(i) Definitions
For purposes of this paragraph, any term used in this
paragraph which is also used in section 408(p) shall have the
meaning given such term by such section.
(ii) Coordination with top-heavy rules
A plan meeting the requirements of this paragraph for any
year shall not be treated as a top-heavy plan under section
416 for such year if such plan allows only contributions
required under this paragraph.
(12) Alternative methods of meeting nondiscrimination
requirements
(A) In general
A cash or deferred arrangement shall be treated as meeting
the requirements of paragraph (3)(A)(ii) if such arrangement -
(i) meets the contribution requirements of subparagraph (B)
or (C), and
(ii) meets the notice requirements of subparagraph (D).
(B) Matching contributions
(i) In general
The requirements of this subparagraph are met if, under the
arrangement, the employer makes matching contributions on
behalf of each employee who is not a highly compensated
employee in an amount equal to -
(I) 100 percent of the elective contributions of the
employee to the extent such elective contributions do not
exceed 3 percent of the employee's compensation, and
(II) 50 percent of the elective contributions of the
employee to the extent that such elective contributions
exceed 3 percent but do not exceed 5 percent of the
employee's compensation.
(ii) Rate for highly compensated employees
The requirements of this subparagraph are not met if, under
the arrangement, the rate of matching contribution with
respect to any elective contribution of a highly compensated
employee at any rate of elective contribution is greater than
that with respect to an employee who is not a highly
compensated employee.
(iii) Alternative plan designs
If the rate of any matching contribution with respect to
any rate of elective contribution is not equal to the
percentage required under clause (i), an arrangement shall
not be treated as failing to meet the requirements of clause
(i) if -
(I) the rate of an employer's matching contribution does
not increase as an employee's rate of elective
contributions increase, and
(II) the aggregate amount of matching contributions at
such rate of elective contribution is at least equal to the
aggregate amount of matching contributions which would be
made if matching contributions were made on the basis of
the percentages described in clause (i).
(C) Nonelective contributions
The requirements of this subparagraph are met if, under the
arrangement, the employer is required, without regard to
whether the employee makes an elective contribution or employee
contribution, to make a contribution to a defined contribution
plan on behalf of each employee who is not a highly compensated
employee and who is eligible to participate in the arrangement
in an amount equal to at least 3 percent of the employee's
compensation.
(D) Notice requirement
An arrangement meets the requirements of this paragraph if,
under the arrangement, each employee eligible to participate
is, within a reasonable period before any year, given written
notice of the employee's rights and obligations under the
arrangement which -
(i) is sufficiently accurate and comprehensive to apprise
the employee of such rights and obligations, and
(ii) is written in a manner calculated to be understood by
the average employee eligible to participate.
(E) Other requirements
(i) Withdrawal and vesting restrictions
An arrangement shall not be treated as meeting the
requirements of subparagraph (B) or (C) of this paragraph
unless the requirements of subparagraphs (B) and (C) of
paragraph (2) are met with respect to all employer
contributions (including matching contributions) taken into
account in determining whether the requirements of
subparagraphs (B) and (C) of this paragraph are met.
(ii) Social security and similar contributions not taken into
account
An arrangement shall not be treated as meeting the
requirements of subparagraph (B) or (C) unless such
requirements are met without regard to subsection (l), and,
for purposes of subsection (l), employer contributions under
subparagraph (B) or (C) shall not be taken into account.
(F) Other plans
An arrangement shall be treated as meeting the requirements
under subparagraph (A)(i) if any other plan maintained by the
employer meets such requirements with respect to employees
eligible under the arrangement.
(13) Alternative method for automatic contribution
arrangements to meet nondiscrimination requirements.--
(A) In general.--A qualified automatic
contribution arrangement shall be treated as meeting the
requirements of paragraph (3)(A)(ii).
(B) Qualified automatic contribution
arrangement.--For purposes of this paragraph, the term
`qualified automatic contribution arrangement' means any
cash or deferred arrangement which meets the
requirements of subparagraphs (C) through (E).
(C) Automatic deferral.--
(i) In general.--The requirements of this
subparagraph are met if, under the arrangement,
each employee eligible to participate in the
arrangement is treated as having elected to have
the employer make elective contributions in an
amount equal to a qualified percentage of
compensation.
(ii) Election out.--The election treated as
having been made under clause (i) shall cease to
apply with respect to any employee if such
employee makes an affirmative election--
(I) to not have such contributions
made, or
(II) to make elective
contributions at a level specified in
such affirmative election.
(iii) Qualified percentage.--For purposes of
this subparagraph, the term `qualified percentage'
means, with respect to any employee, any
percentage determined under the arrangement if
such percentage is applied uniformly, does not
exceed 10 percent, and is at least--
(I) 3 percent during the period
ending on the last day of the first plan
year which begins after the date on
which the first elective contribution
described in clause (i) is made with
respect to such employee,
(II) 4 percent during the first
plan year following the plan year
described in subclause (I),
(III) 5 percent during the second
plan year following the plan year
described in subclause (I), and
(IV) 6 percent during any
subsequent plan year.
(iv) Automatic deferral for current
employees not required.--Clause (i) may be applied
without taking into account any employee who--
(I) was eligible to participate in
the arrangement (or a predecessor
arrangement) immediately before the date
on which such arrangement becomes a
qualified automatic contribution
arrangement (determined after
application of this clause), and
(II) had an election in effect on
such date either to participate in the
arrangement or to not participate in the
arrangement.
(D) Matching or nonelective contributions.--
(i) In general.--The requirements of this
subparagraph are met if, under the arrangement,
the employer--
(I) makes matching contributions
on behalf of each employee who is not a
highly compensated employee in an amount
equal to the sum of 100 percent of the
elective contributions of the employee
to the extent that such contributions do
not exceed 1 percent of compensation
plus 50 percent of so much of such
compensation as exceeds 1 percent but
does not exceed 6 percent of
compensation, or
(II) is required, without regard
to whether the employee makes an
elective contribution or employee
contribution, to make a contribution to
a defined contribution plan on behalf of
each employee who is not a highly
compensated employee and who is eligible
to participate in the
arrangement in an amount equal to at
least 3 percent of the employee's
compensation.
(ii) Application of rules for matching
contributions.--The rules of clauses (ii) and
(iii) of paragraph (12)(B) shall apply for
purposes of clause (i)(I).
(iii) Withdrawal and vesting restrictions.--
An arrangement shall not be treated as meeting the
requirements of clause (i) unless, with respect to
employer contributions (including matching
contributions) taken into account in determining
whether the requirements of clause (i) are met--
(I) any employee who has completed
at least 2 years of service (within the
meaning of section 411(a)) has a
nonforfeitable right to 100 percent of
the employee's accrued benefit derived
from such employer contributions, and
``(II) the requirements of
subparagraph (B) of paragraph (2) are
met with respect to all such employer
contributions.
(iv) Application of certain other rules.--
The rules of subparagraphs (E)(ii) and (F) of
paragraph (12) shall apply for purposes of
subclauses (I) and (II) of clause (i).
(E) Notice requirements.--
(i) In general.--The requirements of this
subparagraph are met if, within a reasonable
period before each plan year, each employee
eligible to participate in the arrangement for
such year receives written notice of the
employee's rights and obligations under the
arrangement which--
(I) is sufficiently accurate and
comprehensive to apprise the employee of
such rights and obligations, and
(II) is written in a manner
calculated to be understood by the
average employee to whom the arrangement
applies.
(ii) Timing and content requirements.--A
notice shall not be treated as meeting the
requirements of clause (i) with respect to an
employee unless--
(I) the notice explains the
employee's right under the arrangement
to elect not to have elective
contributions made on the employee's
behalf (or to elect to have such
contributions made at a different
percentage),
(II) in the case of an arrangement
under which the employee may elect among
2 or more investment options, the notice
explains how contributions made under
the arrangement will be invested in the
absence of any investment election by
the employee, and
(III) the employee has a
reasonable period of time after receipt
of the notice described in subclauses
(I) and (II) and before the first
elective contribution is made to make
either such election.
(l) Permitted disparity in plan contributions or benefits
(1) In general
The requirements of this subsection are met with respect to a
plan if -
(A) in the case of a defined contribution plan, the
requirements of paragraph (2) are met, and
(B) in the case of a defined benefit plan, the requirements
of paragraph (3) are met.
(2) Defined contribution plan
(A) In general
A defined contribution plan meets the requirements of this
paragraph if the excess contribution percentage does not exceed
the base contribution percentage by more than the lesser of -
(i) the base contribution percentage, or
(ii) the greater of -
(I) 5.7 percentage points, or
(II) the percentage equal to the portion of the rate of
tax under section 3111(a) (in effect as of the beginning of
the year) which is attributable to old-age insurance.
(B) Contribution percentages
For purposes of this paragraph -
(i) Excess contribution percentage
The term ''excess contribution percentage'' means the
percentage of compensation which is contributed by the
employer under the plan with respect to that portion of each
participant's compensation in excess of the integration
level.
(ii) Base contribution percentage
The term ''base contribution percentage'' means the
percentage of compensation contributed by the employer under
the plan with respect to that portion of each participant's
compensation not in excess of the integration level.
(3) Defined benefit plan
A defined benefit plan meets the requirements of this paragraph
if -
(A) Excess plans
(i) In general
In the case of a plan other than an offset plan -
(I) the excess benefit percentage does not exceed the
base benefit percentage by more than the maximum excess
allowance,
(II) any optional form of benefit, preretirement benefit,
actuarial factor, or other benefit or feature provided with
respect to compensation in excess of the integration level
is provided with respect to compensation not in excess of
such level, and
(III) benefits are based on average annual compensation.
(ii) Benefit percentages
For purposes of this subparagraph, the excess and base
benefit percentages shall be computed in the same manner as
the excess and base contribution percentages under paragraph
(2)(B), except that such determination shall be made on the
basis of benefits attributable to employer contributions
rather than contributions.
(B) Offset plans
In the case of an offset plan, the plan provides that -
(i) a participant's accrued benefit attributable to
employer contributions (within the meaning of section
411(c)(1)) may not be reduced (by reason of the offset) by
more than the maximum offset allowance, and
(ii) benefits are based on average annual compensation.
(4) Definitions relating to paragraph (3)
For purposes of paragraph (3) -
(A) Maximum excess allowance
The maximum excess allowance is equal to -
(i) in the case of benefits attributable to any year of
service with the employer taken into account under the plan,
3/4 of a percentage point, and
(ii) in the case of total benefits, 3/4 of a percentage
point, multiplied by the participant's years of service (not
in excess of 35) with the employer taken into account under
the plan.
In no event shall the maximum excess allowance exceed the base
benefit percentage.
(B) Maximum offset allowance
The maximum offset allowance is equal to -
(i) in the case of benefits attributable to any year of
service with the employer taken into account under the plan,
3/4 percent of the participant's final average compensation,
and
(ii) in the case of total benefits, 3/4 percent of the
participant's final average compensation, multiplied by the
participant's years of service (not in excess of 35) with the
employer taken into account under the plan.
In no event shall the maximum offset allowance exceed 50
percent of the benefit which would have accrued without regard
to the offset reduction.
(C) Reductions
(i) In general
The Secretary shall prescribe regulations requiring the
reduction of the 3/4 percentage factor under subparagraph (A)
or (B) -
(I) in the case of a plan other than an offset plan which
has an integration level in excess of covered compensation,
or
(II) with respect to any participant in an offset plan
who has final average compensation in excess of covered
compensation.
(ii) Basis of reductions
Any reductions under clause (i) shall be based on the
percentages of compensation replaced by the employer-derived
portions of primary insurance amounts under the Social
Security Act for participants with compensation in excess of
covered compensation.
(D) Offset plan
The term ''offset plan'' means any plan with respect to which
the benefit attributable to employer contributions for each
participant is reduced by an amount specified in the plan.
(5) Other definitions and special rules
For purposes of this subsection -
(A) Integration level
(i) In general
The term ''integration level'' means the amount of
compensation specified under the plan (by dollar amount or
formula) at or below which the rate at which contributions or
benefits are provided (expressed as a percentage) is less
than such rate above such amount.
(ii) Limitation
The integration level for any year may not exceed the
contribution and benefit base in effect under section 230 of
the Social Security Act for such year.
(iii) Level to apply to all participants
A plan's integration level shall apply with respect to all
participants in the plan.
(iv) Multiple integration levels
Under rules prescribed by the Secretary, a defined benefit
plan may specify multiple integration levels.
(B) Compensation
The term ''compensation'' has the meaning given such term by
section 414(s).
(C) Average annual compensation
The term ''average annual compensation'' means the
participant's highest average annual compensation for -
(i) any period of at least 3 consecutive years, or
(ii) if shorter, the participant's full period of service.
(D) Final average compensation
(i) In general
The term ''final average compensation'' means the
participant's average annual compensation for -
(I) the 3-consecutive year period ending with the current
year, or
(II) if shorter, the participant's full period of
service.
(ii) Limitation
A participant's final average compensation shall be
determined by not taking into account in any year
compensation in excess of the contribution and benefit base
in effect under section 230 of the Social Security Act for
such year.
(E) Covered compensation
(i) In general
The term ''covered compensation'' means, with respect to an
employee, the average of the contribution and benefit bases
in effect under section 230 of the Social Security Act for
each year in the 35-year period ending with the year in which
the employee attains the social security retirement age.
(ii) Computation for any year
For purposes of clause (i), the determination for any year
preceding the year in which the employee attains the social
security retirement age shall be made by assuming that there
is no increase in the bases described in clause (i) after the
determination year and before the employee attains the social
security retirement age.
(iii) Social security retirement age
For purposes of this subparagraph, the term ''social
security retirement age'' has the meaning given such term by
section 415(b)(8).
(F) Regulations
The Secretary shall prescribe such regulations as are
necessary or appropriate to carry out the purposes of this
subsection, including -
(i) in the case of a defined benefit plan which provides
for unreduced benefits commencing before the social security
retirement age (as defined in section 415(b)(8)), rules
providing for the reduction of the maximum excess allowance
and the maximum offset allowance, and
(ii) in the case of an employee covered by 2 or more plans
of the employer which fail to meet the requirements of
subsection (a)(4) (without regard to this subsection), rules
preventing the multiple use of the disparity permitted under
this subsection with respect to any employee.
For purposes of clause (i), unreduced benefits shall not
include benefits for disability (within the meaning of section
223(d) of the Social Security Act).
(6) Special rule for plan maintained by railroads
In determining whether a plan which includes employees of a
railroad employer who are entitled to benefits under the Railroad
Retirement Act of 1974 meets the requirements of this subsection,
rules similar to the rules set forth in this subsection shall
apply. Such rules shall take into account the employer-derived
portion of the employees' tier 2 railroad retirement benefits and
any supplemental annuity under the Railroad Retirement Act of
1974.
(m) Nondiscrimination test for matching contributions and employee
contributions
(1) In general
A defined contribution plan shall be treated as meeting the
requirements of subsection (a)(4) with respect to the amount of
any matching contribution or employee contribution for any plan
year only if the contribution percentage requirement of paragraph
(2) of this subsection is met for such plan year.
(2) Requirements
(A) Contribution percentage requi