# Bulletin No. 1998–46

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3Afbce4442b97ae6d5

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

IRB 1998-46

11/12/98 10:45 AM

Page 1

Bulletin No. 1998–46
November 16, 1998

Internal Revenue

bulletin
HIGHLIGHTS
OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX

ADMINISTRATIVE

Rev. Rul. 98–54, page 14.

Notice 98–54, page 25.

LIFO; price indexes; department stores. The September
1998 Bureau of Labor Statistics price indexes are accepted for
use by department stores employing the retail inventory and
last-in, first-out inventory methods for valuing inventories for tax
years ended on, or with reference to, September 30, 1998.

Information reporting; qualified student loan interest.
Taxpayers are informed that the Service and Treasury are
extending the application of Notice 98–7, 1998–3 I.R.B. 54,
to information reporting required under section 6050S of
the Code for 1999. Further, no reporting is required with respect to “mixed use” loans.

T.D. 8787, page 5.
Final and temporary regulations provide ordering rules for
the reduction of basis of property under sections 108 and
1017 of the Code.

Notice 98–55, page 26.

EMPLOYEE PLANS

Qualified offer rule. Public comment is requested on several issues raised by the recently enacted qualified offer rule
regarding the award of reasonable administrative and litigation costs to a taxpayer in connection with an administrative
or court proceeding.

Rev. Rul. 98–53, page 12.

Rev. Proc. 98–55, page 27.

Covered compensation tables; 1999. The covered compensation tables for the 1999 calendar year for determining
contributions to defined benefit plans and permitted disparity are set forth.

Late election relief for S corporations. If an S election or
other related election is filed after the due date for the desired effective date of that election, special procedures permit taxpayers meeting the eligibility requirements outlined in
this revenue procedure to request relief through the service
center instead of applying for a private letter ruling. This revenue procedure extends the special procedure for late S
corporation elections described in Rev. Proc. 97–40 from 6
months to 12 months (but in no event to later than the unextended due date of the tax return for the first year the corporation intended to be an S corporation), provides similar
relief for certain QSub elections, and extends the application
of Rev. Proc. 94–23 to ESBT elections. Rev. Procs. 94–23
and 97–40 amplified and superseded.

Notice 98–52, page 16.
Nondiscriminatory safe harbors; ADP test; ACP test.
This notice provides guidance on the safe harbor methods
contained in sections 401(k)(12) and 401(m)(11) of the
Code for satisfying the nondiscrimination tests contained in
sections 401(k) and 401(m) for plan years beginning after
December 31, 1998.

Notice 98–53, page 24.
Retirement plans; 1999 section 415(d) limitations.
Cost-of-living adjustments effective January 1, 1999, applicable to the dollar limits on benefits under qualified defined
benefit pension plans and to other provisions affecting (1)
certain plans of deferred compensation and (2) “control employees” are set forth.

Finding Lists begin on page 44.

Department of the Treasury
Internal Revenue Service

Rev. Proc. 98–56, page 33.
Section 1374 no-rule. This procedure amplifies the “No
Rule” revenue procedure, Rev. Proc. 98–3, 1998–1 I.R.B.
(Continued on page 4)

IRB 1998-46

11/12/98 10:45 AM

Page 2

The IRS Mission
and by applying the tax law with integrity and fairness to
all.

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.

2

IRB 1998-46

11/12/98 10:45 AM

Page 3

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

3

IRB 1998-46

11/12/98 10:45 AM

Page 4

HIGHLIGHTS
OF THIS ISSUE—Continued
ADMINISTRATIVE—Continued

Announcement 98–100, page 42.
The Service announces that in order to fully consider comments received in response to draft training materials on the
application of section 119 of the Code to the hospitality industry, it will not release final training materials by October
31, 1998. The Service confirms that taxpayers will have
until 30 days after the final materials are issued to indicate
interest in accepting the related settlement initiative, and the
Service responds to a question about the terms of the settlement initiative.

100, to include certain issues arising in the timber, coal, and
domestic iron ore industries under sections 631 and 1374
of the Code.

Announcement 98–99, page 34.
Test of mediation procedure for appeals. Appeals is
conducting an additional two-year test of its mediation procedure. This announcement contains the procedures that
taxpayers may use to request mediation for certain issues
that are in the Appeals administrative process and that are
not docketed in any court.

November 16, 1998

4

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 5

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 108.—Income From
Discharge of Indebtedness
26 CFR 1.108–4: Election to reduce basis of
depreciable property under section 108(b)(5) of the
Internal Revenue Code.

T.D. 8787
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
Basis Reduction Due to
Discharge of Indebtedness
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains final
and temporary regulations that provide ordering rules for the reduction of bases of
property under sections 108 and 1017 of
the Internal Revenue Code of 1986. The
regulations will affect taxpayers that exclude discharge of indebtedness income
from gross income under section 108.
DATES: Effective Date: These regulations are effective,
October 22, 1998.
Applicability Date: These regulations
apply to discharges of indebtedness occurring on or after, October 22, 1998 and
to elections under section 108(b)(5) concerning discharges of indebtedness occurring on or after, October 22, 1998.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations generally, Sharon L. Hall or Christopher F.
Kane of the Office of Assistant Chief
Counsel (Income Tax & Accounting) at
(202) 622-4930; concerning partnership
adjustments under section 1017,
Matthew Lay of the Office of Assistant
Chief Counsel (Passthroughs & Special
Industries) at (202) 622-3050.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this final regulation have been
reviewed and approved by the Office of

1998–46 I.R.B.

Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–1539. Responses to these
collections of information are required to
obtain a benefit.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number.
The estimated annual burden per respondent is 1 hour.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This final regulation contains amendments to the income tax regulations (26
CFR Parts 1 and 301) under sections 108
and 1017 of the Internal Revenue Code of
1986 (Code). The amendments conform
the regulations to amendments to sections
108 and 1017 made by the Bankruptcy
Tax Act of 1980, Public Law 96–589, §§2,
94 (Stat. 3389 (1980)); 1980–2 C.B. 607
(Bankruptcy Tax Act); the Technical Corrections Act of 1982, Public Law 97–448,
§102(h)(1), 96 (Stat. 2365, 2372 (1983));
1983–1 C.B. 451; the Deficit Reduction
Act of 1984, Public Law 98–369, sections
474(r)(5) and 721(b)(2), 98 (Stat. 494,
839, 966 (1984)); 1984–3 C.B. (Vol. 1) 1;
the Tax Reform Act of 1986, Public Law
99–514, sections 104(b)(2), 231(d)(3)(D),
822, and 1171(b)(4), 100 (Stat. 2085,
2105, 2179, 2373, 2513 (1986)); 1986–3
C.B. (Vol. 1) 2; and the Omnibus Budget
Reconciliation Act of 1993, Public Law
103–66, section 13150, 107 (Stat. 312,
446 (1993)); 1993–3 C.B. 1.

5

On January 7, 1997, proposed regulations (REG–208172–91), were published
in the Federal Register (62 F.R. 955).
Written comments were received in response to the notice of proposed rulemaking. One speaker provided testimony at a
public hearing held on May 29, 1997.
After consideration of all the comments, the proposed regulations under
sections 108 and 1017 are adopted, as revised by this Treasury decision.
Explanation of Revisions and Summary
of Comments
1. Basis Reduction Limited to Fair
Market Value
One commentator requested that basis
reduction be limited to fair market value
as provided by §1.1016–7(a) (as removed
by this regulation). The final regulations
do not adopt this recommendation. Section 1017, as enacted by the Bankruptcy
Tax Act, fundamentally changed the rules
relating to basis reduction where discharge of indebtedness income (cancellation of debt (COD) income) is excluded
from gross income. The revised statute,
in section 1017(b)(2), provides only one
limitation on basis reduction for insolvent
and bankrupt taxpayers who do not make
an election under section 108(b)(5).
Under that rule, the basis reduction may
not exceed the excess of the aggregate of
the bases of the property held by the taxpayer immediately after the discharge
over the aggregate of the liabilities of the
taxpayer immediately after the discharge.
The fair market value limitation found in
the regulations removed by this Treasury
decision is not reflected in section 1017.
Accordingly, the IRS and Treasury Department do not believe that a rule limiting basis reduction to fair market value
would be appropriate.
2. Section 108(c)(2)(A) Limitation
Section 1.108–5(a) of the proposed
regulations described the limitation under
section 108(c)(2)(A) and provided that
the amount excluded under section
108(a)(1)(D) (concerning discharges of
qualified real property business indebtedness) could not exceed the excess of the
outstanding principal amount of that indebtedness immediately before the dis-

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 6

charge over the net fair market value of
the qualifying real property (as defined
under §1.1017–1(c)(1)) immediately before the discharge. Two commentators requested that the regulations clarify that
any outstanding accrued and unpaid interest is included in determining the outstanding principal amount of the indebtedness for purposes of this limitation.
Given the purpose of this limitation,
which is to prevent taxpayers from using
the section 108(a)(1)(D) exclusion to the
extent that debt cancellation would create
equity in property (H.R. Rep. 103–111,
103d Cong., 1st Sess., 622–23 (1993)),
the IRS and Treasury Department believe
that it is inappropriate to strictly limit the
exclusion by reference to the amount
stated as principal in the debt instrument.
Accordingly, the final regulations provide
that, for purposes of section 108(c)(2)(A)
and §1.108–6 only, outstanding principal
amount means the principal amount of an
indebtedness and all additional amounts
owed that, immediately before the discharge, are equivalent to principal, in that
interest on such amounts would accrue
and compound in the future. Amounts
that are subject to section 108(e)(2) are
excepted from the definition of principal
amount. In addition, principal amount
must be adjusted to account for unamortized premium and discount consistent
with section 108(e)(3).
3. Allocation of Basis Reduction of
Multiple Properties Within the Same
Class
The proposed regulations incorporated
the limitation described in section
1017(b)(2) which provides that the basis
reduction for bankrupt and insolvent taxpayers may not exceed the excess of the
aggregate of the bases of the property
held by the taxpayer immediately after the
discharge over the aggregate of the liabilities of the taxpayer immediately after the
discharge. A commentator suggested that
this limitation be applied on a class by
class basis, so that when a basis reduction
applied within a single class of properties
described in §1.1017–1(a) exceeds the
amount of basis over the debt secured by
the properties in that class, the basis reduction in excess of that amount should
default to the next class.
The final regulations do not adopt this
comment.

November 16, 1998

The overall limitation on basis reduction is determined by reference to the adjusted basis of property and the amount of
money held by the taxpayer over the liabilities of the taxpayer “immediately after
the discharge.” By contrast, under the
basis reduction rules applicable for purposes of section 108(b)(2)(E), the taxpayer must reduce the adjusted basis of
property “held by the taxpayer at the beginning of the taxable year following the
year in which the discharge occurs.” Section 1017(a). Given the difference in the
relevant time for applying the basis limitation and the basis reduction rules, and
the relative complexity of the calculations
necessary to implement the proposal, the
IRS and Treasury Department believe that
the suggested limitation is not workable.
Accordingly, the final regulations continue to apply the limitation based on the
aggregate bases and liabilities of the taxpayer consistent with section 1017(b)(2).
The proposed regulations also provided
that a taxpayer must treat a distributive
share of a partnership’s COD income as
attributable to a discharged indebtedness
secured by the taxpayer’s interest in that
partnership. The rule in the proposed regulations for allocating basis reduction
among multiple properties under section
108(b)(2)(E) contained parenthetical language cross-referencing the partnership
provision for the property classes that included secured real and personal property
used in a trade or business or held for investment. This parenthetical language
was intended to remind taxpayers that
partnership indebtedness is treated as indebtedness secured by the taxpayer’s interest in the partnership.
One commentator stated that the crossreference with respect to secured real
property was confusing since a partnership interest presumably should be treated
as personal property in reducing basis
under section 108(b)(2)(E). This is contrasted with the modified basis reduction
rules under sections 108(b)(5) and 108(c)
which, assuming the appropriate requests
are made and consents are granted, apply
a look-through rule to reduce the inside
basis of depreciable property or depreciable real property held by a partnership.
In order to eliminate this confusion, the
parenthetical language is not included in
the final regulations. However, as under
the proposed regulations, the final regula-

6

tions continue to treat a distributive share
of a partnership’s COD income as attributable to a discharged indebtedness secured by the taxpayer’s partnership interest. Accordingly, the elimination of the
parenthetical language is not intended to
change the substantive results obtained in
allocating a basis reduction among multiple properties.
4. Meaning of “In Connection With” In
Section 108(c)(3)
A commentator requested that the final
regulations provide that the phrase “in
connection with” in section 108(c)(3)
does not require that the proceeds of debt
incurred or assumed before January 1,
1993 be traced to real property used in a
trade or business, but only requires that
the debt be secured by real property used
in a trade or business as of January 1,
1993. The final regulations do not adopt
this comment. Section 108(c)(3)(A) defines qualified real property business indebtedness as indebtedness which “was
incurred or assumed by the taxpayer inconnection with real property used in a
trade or business and is secured by such
real property”. The IRS and Treasury Department do not believe that this sentence
should be interpreted to mean only that
the debt must be secured by real property
used in a trade or business as of January
1, 1993.
5. Basis Reduction With Respect to a
Residence
A commentator requested that when the
basis of a taxpayer’s residence is reduced
under section 1017 and is disposed of in a
transaction subject to section 1034
(which provided for the deferral of gain
on the sale of a personal residence), the
potential recapture income arising under
section 1245 should be carried into the replacement property. This comment is not
adopted in the final regulations. Section
1034 was repealed by the Taxpayer Relief
Act of 1997. New section 121, enacted
by the Taxpayer Relief Act of 1997, exempts certain gain on the sale of a residence, but does not provide that the potential gain will be transferred to a
replacement residence. Therefore, under
the new law, there is no mechanism to
preserve the potential recapture income
with respect to a new residence, and the

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 7

potential recapture income must be recognized on the sale of the residence under
section 1245.
6. Mandatory Request and Consent
The proposed regulations provided that
a partner may treat a partnership interest
as depreciable property under section
108(b)(5) (or as depreciable real property
under section 108(c)) only if the partnership consents to make corresponding adjustments to the basis of the partnership’s
depreciable property (or depreciable real
property). The IRS and Treasury Department generally believe, in this context,
that whether or not a partnership consents
to make the corresponding adjustments to
the basis of its property should be a matter
of agreement between the partner and the
partnership. Therefore, the proposed regulations generally provided that a partner
is free to choose whether or not to request
that a partnership reduce the basis of partnership property and that the partnership
is free to grant or withhold its consent.
The ability to freely choose whether or
not to request or grant consent, however,
provides opportunities to avoid the general ordering rules of the proposed regulations through the use of a partnership.
Therefore, the proposed regulations provided that, in a limited number of situations; (i) a partner is required to request
the partnership’s consent, and (ii) the
partnership is required to grant that consent. Specifically, the proposed regulations provided that a partner is required to
request consent if the partner owns (directly or indirectly) more than 50 percent
of the capital and profits interests of the
partnership, or if the partner receives a
distributive share of COD income from
the partnership. In addition, the partnership is required to grant consent if requests are made by partners owning (directly or indirectly) an aggregate of more
than 50 percent of the capital and profits
interests of the partnership.
One commentator requested revisions
to the mandatory request and consent
rules contained in the proposed regulations. This commentator argued that the
proposed regulations, as written, could
unduly burden certain large partnerships
in situations where the partnership’s refusal to consent was not motivated by tax
avoidance. The commentator requested

1998–46 I.R.B.

that the mandatory consent rule be revised
to require a partnership to consent only if
the partnership receives requests from
five or fewer partners who own, in the aggregate, more than 50 percent of the capital and profits of the partnership.
To ensure that partnerships are not unduly burdened by the mandatory request
and consent rules, the commentator’s proposal has been adopted, in part, in the
final regulations. However, to preserve
the general ordering rules of the regulations, the IRS and Treasury Department
believe that it is appropriate to require a
partnership to consent to reduce the basis
of its depreciable property (or depreciable
real property) where a substantial majority of its partners elect to exclude the
COD income under sections 108(b)(5) or
108(c). Therefore, the final regulations
provide that a partnership must consent to
reduce its partners’ shares of the partnership’s depreciable basis in depreciable
property (or depreciable real property) if
consent is requested by; (i) partners owning (directly or indirectly) an aggregate of
more than 80 percent of the capital and
profits interests of the partnership, or (ii)
five or fewer partners owning (directly or
indirectly) an aggregate of more than 50
percent of the capital and profits interests
of the partnership.
As in the proposed regulations, the
final regulations do not require a partnership to reduce the basis of its depreciable
property (or depreciable real property) in
all situations where the partnership is the
source of the COD income. However,
where a partnership is the source of the
COD income and partners elect to exclude such income, such partners are required to request that the partnership reduce its basis in such property.
Accordingly, if partners meeting the
requirements in (i) or (ii) above elect to
exclude such income, the partnership
must consent to reduce the basis of its depreciable property (or depreciable real
property).
Commentators also requested that the
final regulations clarify that a partnership’s consent is not required for basis adjustments under section 108(b)(2)(E).
The final regulations make it clear that a
partnership’s consent to reduce the basis
of the partnership’s depreciable property
(or depreciable real property) is neither
required nor relevant where a partner re-

7

duces the basis in its partnership interest
under section 108(b)(2)(E).
7. Treatment of the Adjustment to the
Basis of Partnership Property Under
Subchapter K
One commentator requested that the
final regulations address a number of issues concerning the treatment of the partnership’s adjustments to the basis of partnership property under subchapter K. The
final regulations do not address these issues. Instead, the IRS and Treasury Department have addressed these issues in
the proposed regulations recently promulgated under sections 743 and 755.
8. Timing and Reporting
The proposed regulations provided that
a partner requesting a reduction in inside
basis must make the request and receive
consent before the due date (including extensions) for filing the partner’s Federal
income tax return for the taxable year in
which the partner has COD income. The
proposed regulations also provided that a
partnership that consents to a basis reduction must include a consent statement
with its Form 1065, U.S. Partnership Return of Income, and provide a copy of that
statement to the affected partner on or before the date the Form 1065 is filed. One
commentator stated that the final regulations should provide that; (i) partners
should not be required to request consent,
and (ii) neither the partner nor the partnership should be required to attach statements to their returns, until the filing date
of their respective returns for the taxable
year following the year that the partner
excludes COD income.
The IRS and Treasury Department continue to believe that a partner electing
under sections 108(b)(5) or 108(c) must
receive the consent of the partnership before the partner excludes the COD income. Therefore, the final regulations
provide that the partner must request and
receive the consent of the partnership
prior to the due date (including extensions) for filing the partner’s Federal income tax return for the taxable year in
which the partner has COD income. The
final regulations do, however, adopt the
commentator’s suggestion that the partnership is not required to attach a statement to its return until the filing date of its

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 8

Federal income tax return for the taxable
year following the year that ends with or
within the taxable year that the partner excludes the COD income.
The commentator also stated that the
final regulations should provide that when
a partnership recognizes any COD income from qualified real property business indebtedness it should attach a statement to its partners’ Forms K–1 stating
that the COD income is from qualified
real property business indebtedness and
the date the cancellation occurred. The
final regulations do not adopt this proposal. The IRS and Treasury Department
believe that §1.703–1(a)(1) currently requires partnerships to separately state
qualified real property business indebtedness and identify it as such.
The IRS and Treasury Department recognize that a partner might not always
have sufficient information with which to
decide to request a basis reduction until
on, or shortly before, the due date (including extensions) for filing the partner’s
Federal income tax return. Therefore,
comments were requested as to whether
additional rules (such as requiring a partnership to inform partners of COD income prior to the date the Form 1065 is
filed) are necessary to ensure that information is exchanged between the partnership and its partners in a timely fashion.
The final regulations do not require partnerships to inform their partners of COD
income prior to the date the Form 1065 is
filed. Instead, the IRS and Treasury Department believe that any additional administrative burdens imposed on partnerships should be the result of an
understanding between the partners and
the partnership.
9. Methods Used Prior to Issuance of
Final Regulations
A commentator requested that, for cancellation of debt events occurring prior to
the issuance of final regulations, taxpayers be allowed to use any reasonable
method that conforms with existing regulations or the proposed regulations in determining which properties are subject to
the basis adjustments under sections 108
and 1017. This suggestion to provide for
retroactive application of these regulations has not been adopted.

November 16, 1998

Special Analyses
It has been determined that this final
regulation is not a significant regulatory
action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has been determined that a final
regulatory flexibility analysis is required
for the collection of information in this
Treasury decision under 5 U.S.C. 604. A
summary of the analysis is set forth below
under the heading “Summary of Final
Regulatory Flexibility Act Analysis.”
Pursuant to section 7805(f) of the Internal
Revenue Code, this final regulation has
been submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on
small business.
Summary of Final Regulatory Flexibility
Act Analysis
This analysis is required under the Regulatory Flexibility Act (5 U.S.C. chapter
6). In certain circumstances, the final regulations will require a partnership to include a statement with its Form 1065,
U.S. Partnership Return of Income, for
the taxable year following the year that
ends with or within the taxable year the
taxpayer excludes COD income from
gross income, and provide a statement to
the taxpayer on or before the due date of
the requesting partner’s return (including
extensions) for the taxable year in which
the COD income is excluded under section 108(a), stating the amount of the
partner’s share of the reduction in the
partnership’s adjusted bases of depreciable real or personal property (inside
basis). This requirement will ensure that
the partner knows it is entitled to reduce
the adjusted basis of the partnership interest and that the affected partnership
knows it must reduce the partner’s interest in inside basis. The legal basis for this
requirement is contained in sections
1017(b), 6001, and 7805(a).
Though the final regulations might affect any partnership owning depreciable
property, the IRS and Treasury Department believe that partnerships owning depreciable real property are the most likely
to be affected. Approximately 1,560,000
partnership returns were filed for 1993.
Approximately 620,000 of these were for

8

partnerships owning real property. It is
unlikely, however, that many of these
partnerships or partners in these partnerships will have COD income in any given
year, so it is anticipated that only a small
number of these partnerships will be affected by the final regulations in a particular year.
After a partner conveys information
concerning the amount of COD income
excluded from gross income under section 108(a) to the affected partnership, the
partnership must reduce the partner’s interest in inside basis. Accordingly, the
partnership must prepare and maintain
special entries on its books because this
basis reduction will reduce the partner’s
share of the partnership’s depreciation deductions, and ultimate gain or loss on the
sale of the property, in subsequent years.
In many cases, partnership returns are
prepared using computer software that
can prepare and maintain these special entries after the initial year.
The IRS and Treasury Department are
not aware of any federal rules that may
duplicate, overlap, or conflict with the
rule in the final regulation.
As an alternative to the disclosure described above, the IRS and Treasury Department considered, but rejected as too
burdensome, a rule that would have required an affected partnership to disclose
the reductions of adjusted basis on a property-by-property basis. There are no
known alternative rules that are less burdensome to small entities but that accomplish the purpose of the statute.
Drafting Information
The principal authors of these regulations are Sharon L. Hall, Office of Assistant Chief Counsel (Income Tax and Accounting) and Brian Blum, Office of
Assistant Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301 and
602 are amended as follows:

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 9

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.108–4 also issued under 26
U.S.C. 108.
Section 1.108–5 also issued under 26
U.S.C. 108. * * *
Section 1.1017–1 also issued under 26
U.S.C. 1017. * * *
Par. 2. Section 1.108-4 is added to read
as follows.
§1.108–4 Election to reduce basis of
depreciable property under section
108(b)(5) of the Internal Revenue Code .
(a) Description. An election under section 108(b)(5) is available whenever a
taxpayer excludes discharge of indebtedness income (COD income) from gross
income under sections 108(a)(1)(A), (B),
or (C) (concerning title 11 cases, insolvency, and qualified farm indebtedness,
respectively). See sections 108(d)(2) and
(3) for the definitions of title 11 case and
insolvent. See section 108(g)(2) for the
definition of qualified farm indebtedness.
(b) Time and manner. To make an election under section 108(b)(5), a taxpayer
must enter the appropriate information on
Form 982, Reduction of Tax Attributes
Due to Discharge of Indebtedness (and
Section 1082 Basis Adjustment), and attach the form to the timely filed (including
extensions) Federal income tax return for
the taxable year in which the taxpayer has
COD income that is excluded from gross
income under section 108(a). An election
under this section may be revoked only
with the consent of the Commissioner.
(c) Effective date. This section applies
to elections concerning discharges of indebtedness occurring on or after October
22, 1998.
§1.108(c)–1 [Redesignated as §1.108–5]
Par. 3. Section 1.108(c)–1 is redesignated as §1.108–5.
Par. 4. Section 1.108–6 is added to
read as follows:
§1.108–6 Limitations on the exclusion of
income from the discharge of qualified
real property business indebtedness.
(a) Indebtedness in excess of value.
With respect to any qualified real prop-

1998–46 I.R.B.

erty business indebtedness that is discharged, the amount excluded from gross
income under section 108(a)(1)(D) (concerning discharges of qualified real property business indebtedness) shall not exceed the excess, if any, of the outstanding
principal amount of that indebtedness immediately before the discharge over the
net fair market value of the qualifying real
property, as defined in §1.1017–1(c)(1),
immediately before the discharge. For
purposes of this section, net fair market
value means the fair market value of the
qualifying real property (notwithstanding
section 7701(g)), reduced by the outstanding principal amount of any qualified real property business indebtedness
(other than the discharged indebtedness)
that is secured by such property immediately before and after the discharge. Also,
for purposes of section 108(c)(2)(A) and
this section, outstanding principal amount
means the principal amount of indebtedness together with all additional amounts
owed that, immediately before the discharge, are equivalent to principal, in that
interest on such amounts would accrue
and compound in the future, except that
outstanding principal amount shall not include amounts that are subject to section
108(e)(2) and shall be adjusted to account
for unamortized premium and discount
consistent with section 108(e)(3).
(b) Overall limitation. The amount excluded from gross income under section
108(a)(1)(D) shall not exceed the aggregate adjusted bases of all depreciable real
property held by the taxpayer immediately before the discharge (other than depreciable real property acquired in contemplation of the discharge) reduced by
the sum of any—
(1) Depreciation claimed for the taxable year the taxpayer excluded discharge
of indebtedness from gross income under
section 108(a)(1)(D); and
(2) Reductions to the adjusted bases of
depreciable real property required under
section 108(b) or section 108(g) for the
same taxable year.
(c) Effective date. This section applies
to discharges of qualified real property
business indebtedness occurring on or
after, October 22, 1998.
§1.108(a)–1 [Removed]
Par. 5. Section 1.108(a)–1 is removed.

9

§1.108(a)–2 [Removed]
Par. 6. Section 108(a)–2 is removed.
§1.108(b)–1 [Removed]
Par. 7. Section 1.108–(b)-1 is removed.
§1.1016–7 [Removed]
Par. 8. Section 1.1016–7 is removed.
§1.1016–8 [Removed]
Par. 9. Section 1.1016–8 is removed.
Par. 10. Section 1.1017–1 is revised to
read as follows:
§1.1017–1 Basis reductions following a
discharge of indebtedness.
(a) General rule for section 108(b)(2)(E). This paragraph (a) applies to basis
reductions under section 108(b)(2)(E) that
are required by section 108(a)(1)(A) or (B)
because the taxpayer excluded discharge of
indebtedness (COD income) from gross income. A taxpayer must reduce in the following order, to the extent of the excluded
COD income (but not below zero), the adjusted bases of property held on the first
day of the taxable year following the taxable year that the taxpayer excluded COD
income from gross income (in proportion
to adjusted basis)—
(1) Real property used in a trade or
business or held for investment, other
than real property described in section
1221(1), that secured the discharged indebtedness immediately before the discharge;
(2) Personal property used in a trade or
business or held for investment, other
than inventory, accounts receivable, and
notes receivable, that secured the discharged indebtedness immediately before
the discharge;
(3) Remaining property used in a trade
or business or held for investment, other
than inventory, accounts receivable, notes
receivable, and real property described in
section 1221(1);
(4) Inventory, accounts receivable,
notes receivable, and real property described in section 1221(1); and
(5) Property not used in a trade or business nor held for investment.
(b) Operating rules—(1) Prior tax-attribute reduction. The amount of excluded COD income applied to reduce
basis does not include any COD income
applied to reduce tax attributes under sec-

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 10

tions 108(b)(2)(A) through (D) and, if applicable, section 108(b)(5). For example,
if a taxpayer excludes $100 of COD income from gross income under section
108(a) and reduces tax attributes by $40
under sections 108(b)(2)(A) through (D),
the taxpayer is required to reduce the adjusted bases of property by $60 ($100 –
$40) under section 108(b)(2)(E).
(2) Multiple discharged indebtednesses. If a taxpayer has COD income attributable to more than one discharged indebtedness resulting in the reduction of
tax attributes under sections 108(b)(2)(A)
through (D) and, if applicable, section
108(b)(5), paragraph (b)(1) of this section
must be applied by allocating the tax-attribute reductions among the indebtednesses in proportion to the amount of
COD income attributable to each discharged indebtedness. For example, if a
taxpayer excludes $20 of COD income attributable to secured indebtedness A and
excludes $80 of COD income attributable
to unsecured indebtedness B (a total exclusion of $100), and if the taxpayer reduces tax attributes by $40 under sections
108(b)(2)(A) through (D), the taxpayer
must reduce the amount of COD income
attributable to secured indebtedness A to
$12 ($20 – ($20 / $100 ⫻ $40)) and must
reduce the amount of COD income attributable to unsecured indebtedness B to $48
($80 – ($80 / $100 ⫻ $40)).
(3) Limitation on basis reductions
under section 108(b)(2)(E) in bankruptcy
or insolvency. If COD income arises
from a discharge of indebtedness in a title
11 case or while the taxpayer is insolvent,
the amount of any basis reduction under
section 108(b)(2)(E) shall not exceed the
excess of—
(i) The aggregate of the adjusted bases
of property and the amount of money held
by the taxpayer immediately after the discharge; over
(ii) The aggregate of the liabilities of
the taxpayer immediately after the discharge.
(c) Modification of ordering rules for
basis reductions under sections 108(b)(5)
and 108(c)—(1) In general. The ordering
rules prescribed in paragraph (a) of this
section apply, with appropriate modifications, to basis reductions under sections
108(b)(5) and (c). Thus, a taxpayer that
elects to reduce basis under section
108(b)(5) may, to the extent that the elec-

November 16, 1998

tion applies, reduce only the adjusted
basis of property described in paragraphs
(a)(1), (2), and (3) of this section and, if
an election is made under paragraph (f) of
this section, paragraph (a)(4) of this section. Within paragraphs (a)(1),(2), (3) and
(4) of this section, such a taxpayer may reduce only the adjusted bases of depreciable property. A taxpayer that elects to
apply section 108(c) may reduce only the
adjusted basis of property described in
paragraphs (a)(1) and (3) of this section
and, within paragraphs (a)(1) and (3) of
this section, may reduce only the adjusted
bases of depreciable real property. Furthermore, for basis reductions under section 108(c), a taxpayer must reduce the adjusted basis of the qualifying real property
to the extent of the discharged qualified
real property business indebtedness before
reducing the adjusted bases of other depreciable real property. The term qualifying
real property means real property with respect to which the indebtedness is qualified real property business indebtedness
within the meaning of section 108(c)(3).
See paragraphs (f) and (g) of this section
for elections relating to section 1221(1)
property and partnership interests.
(2) Partial basis reductions under section 108(b)(5). If the amount of basis reductions under section 108(b)(5) is less
than the amount of the COD income excluded from gross income under section
108(a), the taxpayer must reduce the balance of its tax attributes, including any remaining adjusted bases of depreciable and
other property, by following the ordering
rules under section 108(b)(2). For example, if a taxpayer excludes $100 of COD
income from gross income under section
108(a) and elects to reduce the adjusted
bases of depreciable property by $10
under section 108(b)(5), the taxpayer
must reduce its remaining tax attributes
by $90, starting with net operating losses
under section 108(b)(2).
(3) Modification of fresh start rule for
prior basis reductions under section
108(b)(5). After reducing the adjusted
bases of depreciable property under section 108(b)(5), a taxpayer must compute
the limitation on basis reductions under
section 1017(b)(2) using the aggregate of
the remaining adjusted bases of property.
For example, if, immediately after the discharge of indebtedness in a title 11 case, a
taxpayer’s adjusted bases of property is

10

$100 and its undischarged indebtedness is
$70, and if the taxpayer elects to reduce
the adjusted bases of depreciable property
by $10 under section 108(b)(5), section
1017(b)(2) limits any further basis reductions under section 108(b)(2)(E) to $20
(($100 – $10) – $70).
(d) Changes in security. If any property
is added or eliminated as security for an
indebtedness during the one-year period
preceding the discharge of that indebtedness, such addition or elimination shall be
disregarded where a principal purpose of
the change is to affect the taxpayer’s basis
reductions under section 1017.
(e) Depreciable property. For purposes
of this section, the term depreciable property means any property of a character
subject to the allowance for depreciation
or amortization, but only if the basis reduction would reduce the amount of depreciation or amortization which otherwise would be allowable for the period
immediately following such reduction.
Thus, for example, a lessor cannot reduce
the basis of leased property where the
lessee’s obligation in respect of the property will restore to the lessor the loss due
to depreciation during the term of the
lease, since the lessor cannot take depreciation in respect of such property.
(f) Election to treat section 1221(1)
real property as depreciable—(1) In general. For basis reductions under section
108(b)(5) and basis reductions relating to
qualified farm indebtedness, a taxpayer
may elect under sections 1017(b)(3)(E)
and (4)(C), respectively, to treat real property described in section 1221(1) as depreciable property. This election is not
available, however, for basis reductions
under section 108(c).
(2) Time and manner. To make an election under section 1017(b)(3)(E) or
(4)(C), a taxpayer must enter the appropriate information on Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness (and Section 1082 Basis Adjustment), and attach the form to a timely
filed (including extensions) Federal income tax return for the taxable year in
which the taxpayer has COD income that
is excluded from gross income under section 108(a). An election under this paragraph (f) may be revoked only with the
consent of the Commissioner.
(g) Partnerships—(1) Partnership
COD income. For purposes of paragraph

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 11

(a) of this section, a taxpayer must treat a
distributive share of a partnership’s COD
income as attributable to a discharged indebtedness secured by the taxpayer’s interest in that partnership.
(2) Partnership interest treated as depreciable property—(i) In general. For
purposes of making basis reductions, if a
taxpayer makes an election under section
108(b)(5) (or 108(c)), the taxpayer must
treat a partnership interest as depreciable
property (or depreciable real property) to
the extent of the partner’s proportionate
share of the partnership’s basis in depreciable property (or depreciable real property), provided that the partnership consents to a corresponding reduction in the
partnership’s basis (inside basis) in depreciable property (or depreciable real property) with respect to such partner.
(ii) Request by partner and consent of
partnership—(A) In general. Except as
otherwise provided in this paragraph
(g)(2)(ii), a taxpayer may choose whether
or not to request that a partnership reduce
the inside basis of its depreciable property
(or depreciable real property) with respect
to the taxpayer, and the partnership may
grant or withhold such consent, in its sole
discretion. A request by the taxpayer
must be made before the due date (including extensions) for filing the taxpayer’s
Federal income tax return for the taxable
year in which the taxpayer has COD income that is excluded from gross income
under section 108(a).
(B) Request for consent required. A
taxpayer must request a partnership’s consent to reduce inside basis if, at the time
of the discharge, the taxpayer owns (directly or indirectly) a greater than 50 percent interest in the capital and profits of
the partnership, or if reductions to the
basis of the taxpayer’s depreciable property (or depreciable real property) are
being made with respect to the taxpayer’s
distributive share of COD income of the
partnership.
(C) Granting of request required. A
partnership must consent to reduce its
partners’ shares of inside basis with respect to a discharged indebtedness if consent is requested with respect to that indebtedness by partners owning (directly
or indirectly) an aggregate of more than
80 percent of the capital and profits interests of the partnership or five or fewer

1998–46 I.R.B.

partners owning (directly or indirectly) an
aggregate of more than 50 percent of the
capital and profits interests of the partnership. For example, if there is a cancellation of partnership indebtedness that is
secured by real property used in a partnership’s trade or business, and if partners
owning (in the aggregate) 90 percent of
the capital and profits interests of the partnership elect to exclude the COD income
under section 108(c), the partnership must
make the appropriate reductions in those
partners’ shares of inside basis.
(iii) Partnership consent statement—
(A) Partnership requirement. A consenting partnership must include with the
Form 1065, U.S. Partnership Return of
Income, for the taxable year following the
year that ends with or within the taxable
year the taxpayer excludes COD income
from gross income under section 108(a),
and must provide to the taxpayer on or before the due date of the taxpayer’s return
(including extensions) for the taxable year
in which the taxpayer excludes COD income from gross income, a statement
that—
(1) Contains the name, address, and
taxpayer identification number of the
partnership; and
(2) States the amount of the reduction
of the partner’s proportionate interest in
the adjusted bases of the partnership’s depreciable property or depreciable real
property, whichever is applicable.
(B) Taxpayer’s requirement. Statements described in paragraph (g)(2)(iii)(A) of this section must be attached to a
taxpayer’s timely filed (including extensions) Federal income tax return for the
taxable year in which the taxpayer has
COD income that is excluded from gross
income under section 108(a).
(iv) Partner’s share of partnership’s
adjusted basis. [Reserved]
(3) Partnership basis reduction. The
rules of this section (including this paragraph (g)) apply in determining the properties to which the partnership’s basis reductions must be made.
(h) Special allocation rule for cases to
which section 1398 applies. If a bankruptcy estate and a taxpayer to whom section 1398 applies (concerning only individuals under Chapter 7 or 11 of title 11
of the United States Code) hold property
subject to basis reduction under section

11

108(b)(2)(E) or (5) on the first day of the
taxable year following the taxable year of
discharge, the bankruptcy estate must reduce all of the adjusted bases of its property before the taxpayer is required to reduce any adjusted bases of property.
(i) Effective date. This section applies
to discharges of indebtedness occurring
on or after October 22, 1998.
§1.1017–2 [Removed]
Par. 11. Section 1.1017–2 is removed.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 12. The authority citation for part
301 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
§301.9100–13T [Removed]
Par. 13. Section 301.9100–13T is removed.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 14. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 15. Section 602.101(c) is amended
by:
1. Adding the following entries in numerical order to the table:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described

Current OMB
control No.

* * * * *
1.108–4 . . . . . . . . . . . . . . . . . 1545–1539
1.108–5 . . . . . . . . . . . . . . . . . 1545–1421
* * * * *
1.1017–1 . . . . . . . . . . . . . . . .1 545–1539
* * * * *
2. Removing the following entries in
numerical order from the table:
* * * * *

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

CFR part or section
where identified and
described

Page 12

Current OMB
control No.

* * * * *
1.108(a)–1 . . . . . . . . . . . . . . .1545–0046
1.108(a)–2 . . . . . . . . . . . . . . .1545–0046
1.108(c)–1 . . . . . . . . . . . . . . .1545–1421
* * * * *
1.1017–2 . . . . . . . . . . . . . . . .1545–0028
1545–0046
* * * * *
301.9100–13T . . . . . . . . . . . .1545–0046
Michael P. Dolan,
Commissioner of
Internal Revenue.
Approved September 14, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
October 21, 1998, at 8:45 a.m., and published in the
issue of the Federal Register for October 22, 1998,
63 F.R. 56559)

Section 401.—Qualified
Pension, Profit-Sharing, and
Stock Bonus Plans
26 CFR 1.401(l)–1: Permitted disparity with
respect to employer-provided contributions or
benefits.

Covered compensation tables; 1999.
The covered compensation tables for the
1999 calendar year for determining contributions to defined benefit plans and
permitted disparity are set forth.

Rev. Rul. 98–53
This revenue ruling provides tables of
covered compensation under § 401(l)(5)(E) of the Internal Revenue Code (the
“Code”) and the Income Tax Regulations,
thereunder, for the 1999 plan year.
Section 401(l)(5)(E)(i) defines covered
compensation with respect to an employee, as the average of the contribution
and benefit bases in effect under § 230 of
the Social Security Act (the “Act”) for
each year in the 35-year period ending
with the year in which the employee attains social security retirement age.
Section 401(l)(5)(E)(ii) of the Code
states that the determination for any year
preceding the year in which the employee
attains social security retirement age shall
be made by assuming that there is no increase in covered compensation after the
determination year and before the employee attains social security retirement
age.
Section 1.401(l)–1(c)(34) of the regulations defines the taxable wage base as the
contribution and benefit base under § 230
of the Act.
Section 1.401(l)–1(c)(7)(i) defines covered compensation for an employee as the
average (without indexing) of the taxable
wage bases in effect for each calendar

year during the 35-year period ending
with the last day of the calendar year in
which the employee attains (or will attain)
social security retirement age. A 35-year
period is used for all individuals regardless of the year of birth of the individual.
In determining an employee’s covered
compensation for a plan year, the taxable
wage base for all calendar years beginning after the first day of the plan year is
assumed to be the same as the taxable
wage base in effect as of the beginning of
the plan year. An employee’s covered
compensation for a plan year beginning
after the 35-year period applicable under
§ 1.401(l)–1(c)(7)(i) is the employee’s
covered compensation for a plan year during which the 35-year period ends. An
employee’s covered compensation for a
plan year beginning before the 35-year
period applicable under this § 1.401(l)–
1(c)(7)(i) is the taxable wage base in effect as of the beginning of the plan year.
Section 1.401(l)–1(c)(7)(ii) provides
that, for purposes of determining the
amount of an employee’s covered compensation under § 1.401(l)–1(c)(7)(i), a
plan may use tables, provided by the
Commissioner, that are developed by
rounding the actual amounts of covered
compensation for different years of birth.
For purposes of determining covered
compensation for the 1999 year the taxable wage base is $72,600.
The following tables provide covered
compensation for 1999:

1999 Covered Compensation Table
Calendar
Year of
Birth

Calendar Year of
Social Security
Retirement Age

1999 Covered
Compensation

1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919

1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984

$4,488
4,704
5,004
5,316
5,664
6,060
6,480
7,044
7,692
8,460
9,300
10,236
11,232

November 16, 1998

12

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 13

1999 Covered Compensation Table (Continued)
Calendar
Year of
Birth
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966 or later

1998–46 I.R.B.

Calendar Year of
Social Security
Retirement Age

1999 Covered
Compensation

1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033

12,276
13,368
14,520
15,708
16,968
18,312
19,728
21,192
22,716
24,312
25,920
27,576
29,304
31,128
33,060
34,992
36,888
38,772
42,468
44,328
46,176
47,988
49,752
51,456
53,124
54,768
56,364
57,936
59,352
60,684
61,920
63,060
64,116
65,112
66,060
67,752
68,544
69,240
69,852
70,404
70,884
71,316
71,664
71,988
72,264
72,480
72,600

13

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 14

1999 Rounded Covered Compensation Table
Year of Birth

Covered Compensation

1934
1935 – 1936
1937
1938
1939 – 1940
1941
1942 – 1943
1944 – 1945
1946 – 1947
1948 – 1949
1950 – 1952
1953 – 1954
1955 – 1959
1960 – 1964
1965 or later

33,000
36,000
39,000
42,000
45,000
48,000
51,000
54,000
57,000
60,000
63,000
66,000
69,000
72,000
72,600

Drafting Information
The principal author of this revenue ruling is Todd Newman of the Employee
Plans Division. For further information
regarding this revenue ruling, call (202)
622-6076 between 2:30 and 3:30 Eastern
time (not a toll free number) Monday thru
Thursday. Mr. Newman’s number is (202)
622-8458 (also not a toll free number).

Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department
stores. The September 1998 Bureau of

Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, September 30, 1998.

Rev. Rul. 98–54
The following Department Store Inventory Price Indexes for September 1998
were issued by the Bureau of Labor Statistics. The indexes are accepted by the
Internal Revenue Service, under § 1.472–
1(k) of the Income Tax Regulations and
Rev. Proc. 86–46, 1986–2 C.B. 739, for
appropriate application to inventories of
department stores employing the retail inventory and last-in, first-out inventory

methods for tax years ended on, or with
reference to, September 30, 1998.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of departments, (b) three special combinations of
the major groups - soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, except for the following: candy, food,
liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Groups
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . .
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . .
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . .
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . .
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . .
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . .
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . .

November 16, 1998

Sept.
1997

Sept.
1998

Percent Change
from Sept.1997
to Sept. 19981

521.1
646.6
652.0
902.9
623.3
557.8
304.3
544.1
422.2
620.2
603.1

542.3
634.0
664.9
915.1
621.4
569.3
308.7
545.7
419.3
614.9
595.5

4.1
–1.9
2.0
1.4
–0.3
2.1
1.4
0.3
–0.7
–0.9
–1.3

14

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 15

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE (Continued)
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Sept.
1997

Sept.
1998

Percent Change
from Sept.1997
to Sept. 19981

12. Boys’ Clothing and Furnishings
498.7
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1009.5
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
842.0
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . .
904.6
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . .
662.7
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
583.2
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
816.8
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . .
243.4
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . .
74.9
21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . .
108.9
22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . .
131.7
23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . .
108.3

511.6
973.7
754.8
939.8
673.8
602.1
807.8
236.9
71.0
103.2
129.9
107.5

2.6
–3.5
–10.4
3.9
1.7
3.2
–1.1
–2.7
–5.2
–5.2
–1.4
–0.7

Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . .

606.4

605.4

–0.2

Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . .

465.3

458.1

–1.5

Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . .

111.8

107.6

–3.8

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

556.7

551.9

–0.9

Groups

1Absence of a minus sign before percentage change in this column signifies price increase.
2Indexes on a January 1986=100 base.
3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, to-

bacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Stan Michaels of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue ruling, contact Mr.
Michaels on (202) 622-4970 (not a tollfree call).

sired effective date but within 12 months of that
due date, may the taxpayer obtain relief under
§301.9100 of the regulations without applying for a
private letter ruling? See Rev. Proc. 98–55,
page 27.

Section 1362.—Election;
Revocation; Termination
26 CFR 1.1362–4: Inadvertent terminations.

Section 1361.—S Corporation
Defined
If a taxpayer files a qualified subchapter S subsidiary (QSub) election after the due date for a de-

1998–46 I.R.B.

relief under §1362(f) without applying for a private
letter ruling? See Rev. Proc. 98–55, page 27.

26 CFR 1.1362–6: Elections and consents.
If a taxpayer files an S corporation election after
the statutory due date but within 12 months of that
statutory due date, may the taxpayer obtain relief
under § 1362(b)(5) of the Internal Revenue Code
without applying for a private letter ruling? See
Rev. Proc. 98–55, page 27.

If a qualified subchapter S trust election or an
electing small business trust election is filed after
the required due date but within 24 months of that
due date, may the beneficiary (in the case of a
QSST) or the trustee (in the case of an ESBT) obtain

15

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 16

Part III. Administrative, Procedural, and Miscellaneous
Cash or Deferred Arrangements;
Nondiscrimination
Notice 98–52
I. PURPOSE
This notice provides guidance on the
design-based alternative or “safe harbor”
methods in § 401(k)(12) and § 401(m)(11)
of the Internal Revenue Code for satisfying the § 401(k) and § 401(m) nondiscrimination tests.
Specifically, under this notice:
• A section 401(k) plan generally satisfies
the actual deferral percentage (“ADP”)
test if a prescribed level of safe harbor
matching or nonelective contributions
are made on behalf of all eligible nonhighly compensated employees
(“NHCEs”) and if employees are provided a timely notice describing their
rights and obligations under the plan.
See section V.
• Employee notices for the 1999 plan
year are not required to be provided before March 1, 1999. See the transition
rule in section V.C.2.
• A plan that satisfies the ADP test safe
harbor by providing a basic level of safe
harbor matching contributions automatically satisfies the actual contribution
percentage (“ACP”) test with respect to
matching contributions. Plans that provide additional matching contributions
satisfy the ACP test if matching contributions do not exceed specified limitations. See section VI.
• A special rule allows § 403(b) plans to
take advantage of the ACP test safe harbor. See section VI.C.
• Plan amendments needed to implement
the safe harbor methods generally may
be deferred until the date other SBJPA
plan amendments are required (for calendar year plans, December 31, 1999).
See section XI.
Among other matters, this notice also
addresses the timing of safe harbor contributions (section VII), the interaction of
the safe harbor methods with other qualification rules and testing methods (section
VIII), and how the safe harbor methods
work where an employer maintains multiple CODAs or plans (section IX).

November 16, 1998

II. BACKGROUND
Section 1433(a) of the Small Business
Job Protection Act of 1996 (“SBJPA”),
Pub. L. 104–188, added new §§ 401(k)(12) and 401(m)(11) to the Code, effective
for plan years beginning after December
31, 1998, which provide design-based safe
harbor methods for satisfying the ADP test
contained in § 401(k)(3)(A)(ii) and the
ACP test contained in § 401(m)(2). Section 401(k)(12) provides that a cash or deferred arrangement (“CODA”) is treated
as satisfying the ADP test if the CODA
meets certain contribution and notice requirements. Section 401(m)(11) provides
that a defined contribution plan is treated
as satisfying the ACP test with respect to
matching contributions if the plan meets
the contribution and notice requirements
contained in § 401(k)(12) and, in addition, meets certain limitations on the
amount and rate of matching contributions available under the plan.
Previous guidance on other SBJPA
amendments to §§ 401(k) and 401(m) was
provided in Notice 97–2, 1997–1 C.B.
348, and Notice 98–1, 1998–3 I.R.B. 42.
III. EFFECT ON REGULATIONS
Because of the amendments made to
§§ 401(k) and 401(m) by SBJPA, as well
as by other recent legislation, certain portions of §§ 1.401(k)–1, 1.401(m)–1 and
1.401(m)–2 of the Income Tax Regulations no longer reflect current law. However, these regulations continue to apply
to the extent they are not inconsistent with
the Code, Notices 97–2 and 98–1, this notice, and any subsequent guidance.
IV. DEFINITIONS
A. In General
Except as provided in this section IV,
any term used in this notice that is defined
in Notice 98–1 or the regulations under
§§ 401(k) and 401(m) has the same meaning as in Notice 98–1 or those regulations.
For example, the definition of “plan” in
§ 1.401(k)–1(g)(11) applies for purposes
of this notice.
B. Compensation
Except as provided in section
V.B.1.c.iii, “compensation” for purposes

16

of this notice means compensation as defined in § 1.401(k)–1(g)(2) (which incorporates by reference the definition of compensation in § 414(s) and § 1.414(s)–1);
provided, however, that the rule in the last
sentence of § 1.414(s)–1(d)(2)(iii) (which
generally permits a definition of compensation to exclude all compensation in excess of a specified dollar amount) does not
apply in determining the compensation of
NHCEs. The annual compensation limit
under § 401(a)(17) applies for purposes of
the safe harbor methods.
Thus, a uniform definition of compensation described in this section IV.B must
be used for purposes of the basic matching
formula or an enhanced matching formula
under section V.B.1.a, the nonelective
contribution requirement under section
V.B.2, and the matching contribution limitations under section VI.B. As provided
under § 1.401(k)–1(g)(2), an employer
may limit the period used to determine
compensation for a plan year to that portion of the plan year in which the employee is an eligible employee, provided
that this limit is applied uniformly to all
eligible employees under the plan for the
plan year.
C. Basic Matching Formula
For purposes of this notice, the “basic
matching formula” is the formula described in section V.B.1.a.i.
D. Enhanced Matching Formula
For purposes of this notice, an “enhanced matching formula” is a formula
described section V.B.1.a.ii.
E. Rate of Elective Contributions
For purposes of this notice, an employee’s “rate of elective contributions”
means the ratio of an employee’s elective
contributions under the plan for a plan
year to the employee’s compensation for
that plan year.
F. Rate of Employee Contributions
For purposes of this notice, an employee’s “rate of employee contributions”
means the ratio of an employee’s employee contributions under the plan for a
plan year to the employee’s compensation
for that plan year.

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 17

G. Rate of Matching Contributions
For purposes of the ADP test safe harbor under section V, a “rate of matching
contributions” means the ratio of matching contributions on behalf of an employee under the plan for a plan year to
the employee’s elective contributions for
that plan year. For purposes of the ACP
test safe harbor under section VI, a “rate
of matching contributions” means the
ratio of matching contributions on behalf
of an employee under the plan for a plan
year to the employee’s respective employee contributions or elective contributions for that plan year.
H. Safe Harbor Matching Contributions and Safe Harbor Nonelective
Contributions
For purposes of this notice, safe harbor
matching contributions and safe harbor
nonelective contributions are matching
and nonelective contributions, respectively, that (1) are nonforfeitable within
the meaning of § 1.401(k)–1(c), (2) are
subject to the withdrawal restrictions of
§ 401(k)(2)(B) and § 1.401(k)–1(d), and
(3) are used to satisfy the safe harbor contribution requirement of section V.B. Accordingly, pursuant to § 401(k)(2)(B) and
§ 1.401(k)–1(d), such contributions (and
earnings thereon) must not be distributable
earlier than separation from service, death,
disability, an event described in
§ 401(k)(10), or, in the case of a profitsharing or stock bonus plan, the attainment of age 591⁄2. Pursuant to § 401(k)(2)(B) and § 1.401(k)-1(d)(2)(ii), hardship
is not a distributable event for contributions other than elective contributions.
V. ADP TEST SAFE HARBOR
A. General Rule
A CODA is treated as satisfying the
ADP test under § 401(k)(3)(A)(ii) and
§ 1.401(k)–1(b)(2) for a plan year if, for
the entire plan year, the arrangement satisfies the safe harbor contribution requirement of subsection B of this section V and
the notice requirement of subsection C of
this section V.
B. Safe Harbor Contribution
Requirement
The safe harbor contribution requirement of this section V.B is satisfied for a
plan year if the plan satisfies either (1) the

1998–46 I.R.B.

matching contribution requirement of
paragraph 1 of this section V.B or (2) the
nonelective contribution requirement of
paragraph 2 of this section V.B. Pursuant
to § 401(k)(12)(E)(ii), the safe harbor
contribution requirement of this section
V.B must be satisfied without regard to
§ 401(l).
1. Matching Contribution
Requirement
a. In General
The matching contribution requirement
of this section V.B.1 is satisfied if, under
the terms of the plan, safe harbor matching contributions under either the basic
matching formula or an enhanced matching formula described below are required
to be made on behalf of each NHCE who
is an eligible employee.
i. Basic Matching Formula
The basic matching formula provides
matching contributions on behalf of each
NHCE who is an eligible employee in an
amount equal to (A) 100 percent of the
amount of the employee’s elective contributions that do not exceed 3 percent of the
employee’s compensation and (B) 50 percent of the amount of the employee’s
elective contributions that exceed 3 percent of the employee’s compensation but
that do not exceed 5 percent of the employee’s compensation.
ii. Enhanced Matching Formula
An enhanced matching formula provides matching contributions on behalf of
each NHCE who is an eligible employee
under a formula that, at any rate of elective contributions, provides an aggregate
amount of matching contributions at least
equal to the aggregate amount of matching
contributions that would have been provided under the basic matching formula.
In addition, under an enhanced matching
formula, the rate of matching contributions may not increase as an employee’s
rate of elective contributions increases.
b. Limitation on Matching
Contributions for HCEs
The matching contribution requirement
of this section V.B.1 is not satisfied if, at
any rate of elective contributions, the rate
of matching contributions that would
apply with respect to any highly compen-

17

sated employee (“HCE”) who is an eligible employee is greater than the rate of
matching contributions that would apply
with respect to any NHCE who is an eligible employee and who has the same rate
of elective contributions.
c. Permissible Restrictions on
Elective Contributions by
NHCEs
The matching contribution requirement
of this section V.B.1 is not satisfied if
elective contributions by NHCEs are restricted, unless the restrictions are permitted as described below.
i. Restrictions on Election Periods
A plan sponsor may limit the frequency
and duration of periods in which eligible
employees may make or change cash or
deferred elections under a plan, provided
that, after receipt of the notice described
in subsection C of this section V, an employee has a reasonable opportunity (including a reasonable period) to make or
change a cash or deferred election for the
plan year. For purposes of the preceding
sentence, a 30-day period is deemed to be
a reasonable period.
ii. Restrictions on Amount of
Elective Contributions
A plan sponsor may limit the amount of
elective contributions that may be made
by an eligible employee under a plan, provided that each NHCE who is an eligible
employee is permitted (unless the employee is restricted under paragraph 1.c.iv
of this section V.B) to make elective contributions in an amount that is at least sufficient to receive the maximum amount of
matching contributions available under
the plan for the plan year, and the employee is permitted to elect any lesser
amount of elective contributions.
iii. Restrictions on Types of
Compensation That May be
Deferred
A plan sponsor may limit the types of
compensation that may be deferred by an
eligible employee under a plan, provided
that each NHCE who is an eligible employee is permitted to make elective contributions under a definition of compensation that would be a reasonable definition
of compensation within the meaning of
§ 1.414(s)–1(d)(2). (Thus, the definition

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 18

is not required to satisfy the nondiscrimination requirement of § 1.414(s)-1(d)(3).)
However, see section IV.B regarding the
definition of compensation for purposes
of the basic matching formula or an enhanced matching formula under paragraph 1.a of this section V.B, the nonelective contribution requirement under
paragraph 2 of this section V.B, and the
matching contribution limitations under
section VI.B.
iv. Restrictions Due to Limitations
under the Code
A plan sponsor may limit the amount of
elective contributions made by an eligible
employee under a plan (A) because of the
limitations under § 402(g) or § 415 or (B)
because, on account of a hardship distribution, an employee’s ability to make elective contributions has been suspended for
12 months in accordance with § 1.401(k)–
1(d)(2)(iv)(B)(4) or limited in accordance
with § 1.401(k)–1(d)(2)(iv)(B)(3).
2. Nonelective Contribution
Requirement
The nonelective contribution requirement of this section V.B.2 is satisfied if,
under the terms of the plan, the employer
is required to make a safe harbor nonelective contribution on behalf of each NHCE
who is an eligible employee equal to at
least 3 percent of the employee’s compensation.
3. Examples
The safe harbor contribution requirement of this section V.B is illustrated by
the following examples:
Example 1
(a) Beginning January 1, 1999, Employer A maintains Plan L covering employees (including HCEs and NHCEs) in
Divisions D and E. Plan L contains a
CODA and provides a required matching
contribution equal to 100 percent of each
eligible employee’s elective contributions
up to 4 percent of compensation. For purposes of the matching contribution formula, compensation is defined as all compensation within the meaning of
§ 415(c)(3) (a definition that satisfies
§ 414(s)). Also, each employee is permitted to make elective contributions from
all compensation within the meaning of

November 16, 1998

§ 415(c)(3) and may change a cash or deferred election at any time. Plan L limits
the amount of an employee’s elective contributions for purposes of § 402(g) and
§ 415, and, in the case of a hardship distribution, suspends an employee’s ability to
make elective contributions for 12 months
in accordance with § 1.401(k)–1(d)(2)(iv)(B)(4) and limits an employee’s elective contributions in accordance with
§ 1.401(k)–1(d)(2)(iv)(B)(3). All contributions under Plan L are nonforfeitable
and are subject to the withdrawal restrictions of § 401(k)(2)(B). Plan L provides
for no other contributions and Employer
A maintains no other plans. Plan L is
maintained on a calendar-year basis and
all contributions for a plan year are made
within 12 months after the end of the plan
year.
(b) Based on these facts, matching
contributions under Plan L are safe harbor
matching contributions because they are
nonforfeitable, are subject to the withdrawal restrictions of § 401(k)(2)(B), and
are used to satisfy the safe harbor contribution requirement of section V.B.
(c) Plan L’s formula is an enhanced
matching formula because each NHCE
who is an eligible employee receives
matching contributions at a rate that, at
any rate of elective contributions, provides an aggregate amount of matching
contributions at least equal to the aggregate amount of matching contributions
that would have been received under the
basic matching formula, and the rate of
matching contributions does not increase
as the rate of an employee’s elective contributions increases.
(d) Plan L satisfies the safe harbor contribution requirement of this section V.B
because safe harbor matching contributions under an enhanced matching formula are required to be made on behalf of
each NHCE who is an eligible employee.
(e) Plan L would satisfy the ADP test
safe harbor if Plan L also satisfied the notice requirement of subsection C of this
section V. (Plan L then would also satisfy
the ACP test safe harbor. See section VI.)
Example 2
(a) The facts are the same as in Example 1, except that instead of providing a
required matching contribution equal to
100 percent of each eligible employee’s
elective contributions up to 4 percent of

18

compensation, Plan L provides a matching contribution equal to 150 percent of
each eligible employee’s elective contributions up to 3 percent of compensation.
(b) Plan L’s formula is an enhanced
matching formula and Plan L satisfies the
safe harbor contribution requirement of
this section V.B.
(c) Plan L would satisfy the ADP test
safe harbor if Plan L also satisfied the notice requirement of subsection C of this
section V. (Plan L then would also satisfy
the ACP test safe harbor. See section VI.)
Example 3
(a) The facts are the same as in Example 1, except that instead of permitting
each employee to make elective contributions from compensation within the
meaning of § 415(c)(3), each employee’s
elective contributions under Plan L are
limited to 15 percent of the employee’s
“basic compensation.” Basic compensation is defined under Plan L as compensation within the meaning of § 415(c)(3),
but excluding overtime pay.
(b) The definition of basic compensation under Plan L is a reasonable definition of compensation within the meaning
of § 1.414(s)–1(d)(2).
(c) Plan L will not fail to satisfy the
safe harbor contribution requirement of
this section V.B merely because Plan L
limits the amount of elective contributions and the types of compensation that
may be deferred by eligible employees,
provided that each NHCE who is an eligible employee may make elective contributions equal to at least 4 percent of the
employee’s compensation under
§ 415(c)(3) (that is, the amount of elective
contributions that is sufficient to receive
the maximum amount of matching contributions available under the plan).
Example 4
(a) The facts are the same as in Example 1, except that Plan L provides that
only employees employed on the last day
of the plan year will receive a safe harbor
matching contribution.
(b) Even if the section 401(m) plan satisfies the minimum coverage requirements of § 410(b)(1) taking into account
this last-day requirement, Plan L would
not satisfy the safe harbor contribution requirement of this section V.B because safe

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 19

harbor matching contributions are not
made on behalf of all NHCEs who are eligible employees and who make elective
contributions.
(c) The result would be the same if, instead of providing safe harbor matching
contributions under an enhanced formula,
Plan L provides for a 3-percent safe harbor nonelective contribution that is restricted to eligible employees under the
CODA who are employed on the last day
of the plan year.
Example 5
(a) The facts are the same as in Example 1, except that instead of providing
safe harbor matching contributions under
the enhanced matching formula to employees in both Divisions D and E, employees in Division E are provided safe
harbor matching contributions under the
basic matching formula, while matching
contributions continue to be provided to
employees in Division D under the enhanced matching formula.
(b)
Even if Plan L satisfies
§ 1.401(a)(4)–4 with respect to each rate
of matching contributions available to employees under the plan, the plan would fail
to satisfy the safe harbor contribution requirement of this section V.B because the
rate of matching contributions with respect to HCEs in Division D at a rate of
elective contributions between 3 and 5
percent would be greater than that with respect to NHCEs in Division E at the same
rate of elective contributions. For example, an HCE in Division D who would
have a 4-percent rate of elective contributions would have a rate of matching contributions of 100 percent while an NHCE
in Division E who would have the same
rate of elective contributions would have a
lower rate of matching contributions.
C. Notice Requirement
The notice requirement of this section
V.C is satisfied if each eligible employee
for the plan year is given written notice of
the employee’s rights and obligations
under the plan and the notice satisfies the
content requirement of paragraph 1 of this
section V.C and the timing requirement of
paragraph 2 of this section V.C.
1. Content Requirement
a. General Rule
The content requirement of this section

1998–46 I.R.B.

V.C.1 is satisfied if the notice (1) is sufficiently accurate and comprehensive to inform the employee of the employee’s
rights and obligations under the plan and
(2) is written in a manner calculated to be
understood by the average employee eligible to participate in the plan. For purposes of the preceding sentence, a notice
is not considered sufficiently accurate and
comprehensive unless the notice accurately describes (i) the safe harbor matching or nonelective contribution formula
used under the plan (including a description of the levels of matching contributions, if any, available under the plan); (ii)
any other contributions under the plan (including the potential for discretionary
matching contributions) and the conditions under which such contributions are
made; (iii) the plan to which safe harbor
contributions will be made (if different
than the plan containing the CODA); (iv)
the type and amount of compensation that
may be deferred under the plan; (v) how
to make cash or deferred elections, including any administrative requirements
that apply to such elections; (vi) the periods available under the plan for making
cash or deferred elections; and (vii) withdrawal and vesting provisions applicable
to contributions under the plan.
b. 1999 Transition Relief for Content Requirement
For a plan adopting the safe harbor provisions for a plan year that begins before
January 1, 2000, a notice will not fail to
satisfy the content requirement for that
plan year merely because the notice does
not include all of the items listed in paragraph 1.a of this section V.C, provided
that the notice satisfies a reasonable good
faith interpretation of the notice requirements under §§ 401(k)(12) and
401(m)(11).
2. Timing Requirement
a. General rule
The timing requirement of this section
V.C.2 is satisfied if the notice is provided
within a reasonable period before the beginning of the plan year (or, in the year an
employee becomes eligible, within a reasonable period before the employee becomes eligible). The determination of
whether a notice satisfies the timing requirement of this section V.C.2 is based

19

on all of the relevant facts and circumstances.
b. Deemed Satisfaction of Timing
Requirement
The timing requirement of this section
V.C.2 is deemed to be satisfied if at least
30 days (and no more than 90 days) before the beginning of each plan year, the
notice is given to each eligible employee
for the plan year. In the case of an employee who does not receive the notice
within the period described in the previous sentence because the employee becomes eligible after the 90th day before
the beginning of the plan year, the timing
requirement is deemed to be satisfied if
the notice is provided no more than 90
days before the employee becomes eligible (and no later than the date the employee becomes eligible). Thus, for example, the preceding sentence would
apply in the case of any employee eligible
for the first plan year under a newly established section 401(k) plan, or would apply
in the case of the first plan year in which
an employee becomes eligible under an
existing section 401(k) plan.
c. 1999 Transition Relief for Timing
Requirement
For a plan year that begins on or before
April 1, 1999, the notice described in this
section V.C satisfies the timing requirement for that plan year (with respect to an
existing section 401(k) plan or a newly
established one) if the notice is given on
or before March 1, 1999. However, in
order to satisfy the ADP or ACP test safe
harbor for the plan year, a plan that is
using the transition relief provided under
this section V.C.2.c still must satisfy the
otherwise applicable requirements of this
Notice 98-52 with respect to the entire
plan year.
VI. ACP TEST SAFE HARBOR
A. General Rule
A defined contribution plan is treated
as satisfying the ACP test under §
401(m)(2) and § 1.401(m)-1(b) with respect to matching contributions for a plan
year if, for the entire plan year, (i) each
NHCE eligible to receive an allocation of
matching contributions under the plan is
also an eligible employee under a CODA
that satisfies the ADP test safe harbor of

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 20

section V and (ii) the plan satisfies the
matching contribution limitations of subsection B of this section VI. See section
VIII.F.1 regarding the continued application of the ACP test to employee contributions.
B. Matching Contribution Limitations
1. Harbor Matching Contributions
Under Basic Matching Formula
A plan satisfies the matching contribution limitations of this section VI.B if (i)
the plan satisfies the matching contribution requirement of section V.B.1 using
the basic matching formula and (ii) no
other matching contributions are provided
under the plan.
2. Safe Harbor Matching Contributions Under an Enhanced Matching Formula
A plan satisfies the matching contribution limitations of this section VI.B if (i)
the plan satisfies the matching contribution requirement of section V.B.1 using an
enhanced matching formula under which
matching contributions are only made
with respect to elective contributions that
do not exceed 6 percent of the employee’s
compensation and (ii) no other matching
contributions are provided under the plan.
3. Other Matching Contributions
In the case of any other plan, the
matching contribution limitations of this
section VI.B are satisfied if, under the
plan, (i) matching contributions are not
made with respect to employee contributions or elective contributions that in the
aggregate exceed 6 percent of the employee’s compensation, (ii) the rate of
matching contributions does not increase
as the rate of employee contributions or
elective contributions increases, and (iii)
at any rate of employee contributions or
elective contributions, the rate of matching contributions that would apply with
respect to any HCE who is an eligible employee is no greater than the rate of
matching contributions that would apply
with respect to an NHCE who is an eligible employee and who has the same rate
of employee contributions or elective
contributions. If a plan provides matching contributions with respect to employee contributions or elective contributions, those employee contributions or

November 16, 1998

elective contributions may be restricted
only to the extent permitted under section
V.B.1.c.
4. Matching Contributions Generally Must be Required Under
Plan Terms
a. ADP Test Safe Harbor
As provided under section V.B.1.a, a
matching contribution may be taken into
account in determining whether the
matching contribution requirement of the
ADP test safe harbor is satisfied only if
the contribution is required to made under
the terms of a plan. Even though matching contributions made at the employer’s
discretion may not be taken into account
in determining whether the matching contribution requirement of section V.B.1 is
satisfied, a plan that satisfies the safe harbor contribution requirement of section
V.B will not fail to satisfy the ADP test
safe harbor merely because additional
matching contributions are made at the
employer’s discretion.
b. ACP Test Safe Harbor
A plan fails to satisfy the ACP test safe
harbor for a plan year if the plan provides
for matching contributions made at the
employer’s discretion on behalf of any
employee that, in the aggregate, could exceed a dollar amount equal to 4 percent of
the employee’s compensation. This limitation on matching contributions made at
the employer’s discretion does not apply
to plan years beginning before January 1,
2000.
C. Special Rule for Matching Contributions Under a § 403(b) Plan
For purposes of § 403(b)(12)(A)(i), a
§ 403(b) plan is treated as satisfying the
requirements of § 401(m) with respect to
matching contributions if the plan satisfies the safe harbor contribution requirement of section V.B, the notice requirement of section V.C, and the matching
contribution limitations of subsection B
of this section VI. For purposes of applying the requirements of section V and this
section VI, salary reduction contributions
under a § 403(b) plan are treated as elective contributions under a CODA.
D. Examples
The following examples illustrate the

20

requirements of the ACP test safe harbor
described in this section VI:
Example 1
(a) An employer’s only plan, Plan M,
contains a CODA that satisfies the ADP
test safe harbor using safe harbor matching contributions under the basic matching formula. No contributions, other than
elective contributions and contributions
under the basic matching formula, are
made to Plan M.
(b) Because the CODA under Plan M
satisfies the ADP test safe harbor using
the basic matching formula and Plan M
provides for no other matching contributions, Plan M automatically satisfies the
ACP test safe harbor.
Example 2
(a) Beginning January 1, 2000, Employer B maintains Plan N, the only plan
maintained by Employer B. Plan N contains a CODA that satisfies the ADP test
safe harbor using a 3-percent safe harbor
nonelective contribution. Plan N also
provides matching contributions equal to
50 percent of each eligible employee’s
elective contributions up to 6 percent of
compensation. Under Plan N, elective
contributions are limited to 10 percent of
an employee’s compensation and are limited in accordance with § 402(g) and
§ 415. Under Plan N, an employee may
change a cash or deferred election at any
time. Plan N provides a definition of
compensation that satisfies § 414(s) and
that same definition is used for all purposes under Plan N. Matching contributions under Plan N are fully vested after 3
years of service. No other matching contributions are provided for under Plan N.
The plan is maintained on a calendar-year
basis and all contributions for a plan year
are made within 12 months after the end
of the plan year.
(b) Based on these facts, Plan N satisfies the ACP test safe harbor with respect
to matching contributions because each
NHCE eligible to receive an allocation of
matching contributions under Plan N is
also an eligible employee under a CODA
that satisfies the ADP test safe harbor of
section V and because the matching contribution limitations of subsection B of
this section VI are satisfied.

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 21

Example 3
(a) The facts are the same as in Example 2, except that Plan N also provides
matching contributions equal to 50 percent of each eligible employee’s employee contributions up to 6 percent of
compensation.
(b) Plan N does not satisfy the matching contribution limitations of subsection
B of this section VI because matching
contributions can be made with respect to
elective contributions and employee contributions that, in the aggregate, equal 12
percent of compensation (and thus exceed
6 percent of compensation).
Example 4
(a) The facts are the same as in Example 2, except that Plan N also provides
that Employer B, in its discretion, may
make additional matching contributions
up to 50 percent of each eligible employee’s elective contributions that do not
exceed 6 percent of compensation.
(b) Plan N does not fail to satisfy the
ACP test safe harbor on account of discretionary matching contributions, because,
under Plan N, the amount of discretionary
matching contributions cannot exceed 4
percent of an employee’s compensation.
VII. TIMING OF PLAN
CONTRIBUTIONS
A. In General
As provided in subsections B and C of
this section VII, matching and nonelective
contributions under a plan using the safe
harbor methods must be made to the plan
within the same time period that would
apply if these contributions were made to
a plan using the current year testing
method for ADP or ACP testing purposes
(that is, no later than 12 months after the
close of the plan year).
Matching and nonelective contributions also may be made from time to time
during the plan year, instead of at one
time after the close of the plan year. Regardless of the timing of employer contributions, however, the total amount of
matching or nonelective contributions for
the plan year still must satisfy the requirements of sections V and VI, taking into
account the total amount of compensation
for the plan year, in order for a CODA to
satisfy the ADP test safe harbor.

1998–46 I.R.B.

B. Contributions Under the ADP Test
Safe Harbor
A CODA will not satisfy the ADP test
safe harbor for a plan year unless safe harbor matching and nonelective contributions needed to satisfy the safe harbor
contribution requirement of section V.B
are made in accordance with the allocation and timing rules of § 1.401(k)–
1(b)(4).
C. Matching Contributions Under the
ACP Test Safe Harbor
Matching contributions are taken into
account for a plan year under the ACP test
safe harbor of section VI in accordance
with the allocation and timing rules of §
1.401(m)-1(b)(4)(ii)(A).
VIII. INTERACTION WITH OTHER
RULES AND TESTING METHODS
A. In General
A CODA that is treated as satisfying the
ADP test under § 401(k)(3)(A)(ii) and
§ 1.401(k)-1(b)(2) will not be treated as a
qualified CODA unless the arrangement
satisfies the other requirements of
§ 401(k). For example, under § 401(k)(3)(A)(i), the group of eligible employees
under the section 401(k) plan must satisfy
the requirements of § 410(b), under
§ 401(k)(4)(A), benefits (other than matching contributions) must not be contingent
on an election to defer, and elective contributions must satisfy the allocation and timing rules of § 1.401(k)–1(b)(4). A plan that
satisfies the ADP or ACP test safe harbor
must satisfy all other qualification requirements of the Code that are applicable to the
plan, such as the nondiscriminatory availability of benefits, rights, and features
under § 401(a)(4) and the limitations of
§§ 401(a)(17), 401(a)(30) and 415.
B. Use of Safe Harbor Nonelective
Contributions to Satisfy Other
Nondiscrimination Tests
A safe harbor nonelective contribution
used to satisfy the nonelective contribution requirement under section V.B.2 may
also be taken into account for purposes of
determining whether a plan satisfies
§ 401(a)(4). Thus, these contributions are
not subject to the limitations on qualified
nonelective contributions under
§ 1.401(k)–1(b)(5)(ii), but are subject to

21

the rules generally applicable to nonelective employer contributions under §
401(a)(4). See § 1.401(a)(4)–1(b)(2)(ii).
However, pursuant to § 401(k)(12)(E)(ii),
to the extent they are needed to satisfy the
safe harbor contribution requirement of
section V.B, safe harbor nonelective contributions may not be taken into account
under any plan for purposes of § 401(l)
(including the imputation of permitted
disparity under § 1.401(a)(4)–7).
C. Top-Heavy Rules
1. Safe Harbor Nonelective Contributions
Safe harbor nonelective contributions
may be counted under § 416 toward the
minimum contribution requirement for
top-heavy plans. Thus, if a plan allocates
to all eligible employees a 3-percent safe
harbor nonelective contribution, the plan
generally would also satisfy the top-heavy
minimum contribution requirement. See
§ 1.416–1, M-18 for a similar rule applicable to qualified nonelective contributions.
2. Safe Harbor Matching
Contributions
If a plan uses contributions allocated to
employees on the basis of elective contributions or employee contributions to satisfy the top-heavy minimum contribution
requirement under § 416, these contributions are not treated as matching contributions for purposes of §§ 401(k) and
401(m). Therefore, safe harbor matching
contributions may not be counted toward
the minimum contribution requirement
for top-heavy plans under § 416. See
§ 1.416–1, M–19.
D. Qualified Matching Contributions
and Qualified Nonelective Contributions
To the extent they are needed to satisfy
the safe harbor contribution requirement
of section V.B, safe harbor matching and
nonelective contributions may not be used
as qualified matching contributions and
qualified nonelective contributions, respectively, under any plan for any plan
year. For example, if a plan satisfies the
safe harbor contribution requirement
using a safe harbor nonelective contribution by allocating a 7-percent safe harbor
nonelective contribution to all eligible

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 22

employees, contributions in an amount
equal to the first 3 percent of each employee’s compensation may not be used
as a qualified nonelective contribution
under the ACP test. However, safe harbor
nonelective contributions in an amount
equal to the remaining 4 percent of each
employee’s compensation may be used to
satisfy the ACP test (subject to the requirements of § 1.401(m)–1(b)(5)).
E. Testing Methods Under Notice 98–1
For purposes of Notice 98–1, a plan
that uses the safe harbor methods to satisfy the ADP or ACP test for a plan year is
treated as using the current year testing
method for that year and, thus, is subject
to the rules contained in section VII of
Notice 98–1 (relating to changes from
current year to prior year testing).
In addition, in the case of a plan that is
not maintained on a calendar plan year
basis, the anti-abuse provision of section
VIII of Notice 98–1 applies in a similar
manner to changes between the safe harbor methods and the current or prior year
testing method.
F. Continued Application of the ACP
Test to Certain Contributions
1. Employee Contributions
Even if a defined contribution plan satisfies the ACP test safe harbor of section
VI with respect to matching contributions,
the plan still must satisfy the ACP test in
the manner described in paragraph 3 of
this section VIII.F with respect to employee contributions made under the plan.
2. Matching Contributions that Fail to
Satisfy the ACP Test Safe Harbor
If a plan satisfies the ADP test safe harbor of section V.A, but fails to satisfy the
ACP test safe harbor with respect to
matching contributions under the plan,
then the plan must satisfy the ACP test in
the manner described in paragraph 3 of
this section VIII.F.
3. Special Rules for ACP Test
If paragraph 1 or 2 of this section
VIII.F applies, then the plan must satisfy
the ACP test under § 401(m)(2), and
under § 1.401(m)–1(b), as modified by
Notices 97–2 and 98–1, using the current
year testing method. However, in applying the ACP test, an employer may elect

November 16, 1998

to disregard with respect to all eligible
employees (i.e., all HCEs and NHCEs)
(1) all matching contributions, if the ACP
test safe harbor of section VI is satisfied
or (2) matching contributions that do not
exceed 4 percent of each employee’s
compensation, if the matching contribution requirement of section V.B.1 is satisfied. Except as otherwise provided in
section VIII.D, qualified nonelective contributions may be treated as matching
contributions to the extent permitted
under § 1.401(m)–1(b)(5). Finally, in applying the ACP test (i) matching contributions may not be treated as elective contributions under § 401(k)(3)(D) to a CODA
that satisfies the ADP test safe harbor
(and thus excluded from the ACP test
under § 401(m)(3)) and (ii) elective contributions under a CODA that satisfies the
ADP test safe harbor may not be treated
as matching contributions under
§ 401(m)(3).
G. Multiple Use Test
The restrictions on multiple use under
§ 1.401(m)–2 do not apply to a CODA that
satisfies the ADP test safe harbor. In addition, the restrictions on multiple use under
§ 1.401(m)–2 do not apply to a defined
contribution plan that satisfies the ACP test
safe harbor, if the plan does not permit employee contributions. In determining
whether multiple use of the alternative limitation under § 401(k)(3)(A)(ii)(II) or
§ 401(m)(2)(A)(ii) occurs with respect to
another plan of an employer, (1) a CODA
that satisfies the ADP test safe harbor and
(2) a defined contribution plan that satisfies the ACP test safe harbor and does not
permit employee contributions, are disregarded for purposes of § 1.401(m)–2(b).
In the case of a defined contribution plan to
which subsection F.1 or F.2 of this section
VIII applies (that is, a defined contribution
plan that satisfies the ACP test safe harbor
but permits employee contributions, or a
defined contribution plan that fails to satisfy the ACP test safe harbor), the special
rules of subsection F.3 of this section VIII
(relating to ACP testing) also apply for
purposes of § 1.401(m)–2(b) in determining whether the multiple use of the alternative limitation occurs.
H. Early Participation Rules
Sections 401(k)(3)(F) and 401(m)(5)(C), which provide alternative nondis-

22

crimination rules for certain plans that
provide for early participation, do not
apply for purposes of the safe harbor
methods. However, see section IX.B.1
for application of the § 410(b)(4)(B) rule
permitting the separate testing of employees who satisfy age and service conditions
under the plan that are lower than the
greatest age and service conditions permitted under § 410(a).
IX. MULTIPLE CODAS OR
MULTIPLE PLANS
A. Satisfying Safe Harbor Contribution Requirement Under Another
Defined Contribution Plan
1. In General
Safe harbor matching or nonelective
contributions may be made to the plan
that contains the CODA or to another defined contribution plan that satisfies §
401(a) or § 403(a). If safe harbor contributions are made to another defined contribution plan, the safe harbor contribution requirement of section V.B must be
satisfied in the same manner as if the contributions were made to the plan that contains the CODA. Consequently, each employee eligible under the plan containing
the CODA must be eligible under the
same conditions under the other defined
contribution plan.
2. Plan Year Requirement
In order for safe harbor contributions to
be made to another defined contribution
plan, that plan must have the same plan
year as the plan containing the CODA.
However, for plan years of plans containing CODAs beginning before January 1,
2000, contributions used to satisfy the
safe harbor contribution requirement of
section V.B for a CODA also may be
made to another defined contribution plan
that does not have the same plan year as
the plan containing the CODA, provided
that the safe harbor contribution is allocated as of a date within the plan year of
the plan containing the CODA and is
made no later than 12 months after the
close of that plan year.
3. Section 410(b) Aggregation Not
Required
In order for safe harbor contributions to
be made to another defined contribution

1998–46 I.R.B.

IRB 1998-46

11/12/98 10:45 AM

Page 23

plan, it is not necessary that the other plan
be capable of being aggregated with the
plan containing the CODA for purposes
of § 410(b). Therefore, notwithstanding
§§ 1.410(b)–7(c)(2) and 54.4975–11(e), a
contribution to an ESOP may be used to
satisfy the safe harbor contribution requirement of section V.B for a CODA that
is not part of the ESOP.
4. Contributions Used Only Once
Safe harbor matching or nonelective
contributions cannot be used to satisfy the
safe harbor contribution requirement of
section V.B with respect to more than one
plan.
B. Aggregation and Disaggregation
Rules
1. Plans
The rules that apply for purposes of aggregating and disaggregating CODAs and
plans under §§ 401(k) and 401(m) also
apply for purposes of §§ 401(k)(12)
and 401(m)(11), respectively. See
§§ 1.401(k)–1(b)(3) and 1.401(m)–1(b)(3).
Accordingly, all CODAs included in a
plan are treated as a single CODA that
must satisfy the safe harbor contribution
requirement of section V.B and the notice
requirement of section V.C. Moreover,
two plans (within the meaning of
§ 1.410(b)–7(b)) that are treated as a single plan pursuant to the permissive aggregation rules of § 1.410(b)–7(d) are treated
as a single plan for purposes of the safe
harbor methods. Conversely, a plan
(within the meaning of § 414(l)) that includes a CODA covering both collectively bargained employees and noncollectively bargained employees is treated
as two separate plans for purposes of
§ 401(k), and the ADP test safe harbor
need not be satisfied with respect to both
plans in order for one of the plans to take
advantage of the ADP test safe harbor.
Similarly, if, pursuant to § 410(b)(4)(B),
an employer applies § 410(b) separately
to the portion of a plan (within the meaning of § 414(l)) that benefits only employees who satisfy age and service conditions
under the plan that are lower than the
greatest minimum age and service conditions permitted under § 410(a), the plan is
treated as two separate plans for purposes
of § 401(k), and the ADP test safe harbor
need not be satisfied with respect to both

1998–46 I.R.B.

plans in order for one of the plans to take
advantage of the ADP test safe harbor.
2. Highly Compensated Employees
In accordance with §§ 401(k)(3) and
401(m)(2), elective or matching contributions under a plan made on behalf of an
HCE who is eligible to participate in more
than one plan of the same employer providing such contributions must generally
be aggregated and treated as made under
each of the plans, even if one or more of
the plans is intended to satisfy the ADP or
ACP test safe harbor. Thus, for example,
if an HCE is simultaneously an eligible
employee under two plans maintained by
an employer for a plan year, only one of
which one is intended to satisfy the ADP
and ACP tests using the safe harbor methods, and the matching contribution formula of the plan that is not using the safe
harbor methods provides greater matching contributions than the formula under
the plan that is intended to satisfy the
ADP and ACP tests using the safe harbor
methods, the rules in sections V.B.1.b and
VI.B.3 (prohibiting an HCE from receiving a greater rate of matching contributions than an NHCE) could be violated.
These issues could also arise, for example, when an HCE is transferred from a
plan maintained for one group of employees to a plan maintained for another group
of employees.
X. PLAN YEARS OF FEWER THAN
12 MONTHS
A plan will fail to satisfy the ADP test
safe harbor or the ACP test safe harbor for
a plan year unless (i) the plan year is 12
months long or (ii) in the case of the first
plan year of a newly established plan
(other than a successor plan), the plan
year is at least 3 months long (or, any
shorter period in the case of a newly established employer that establishes the
plan as soon as administratively feasible
after the employer comes into existence).
XI. PLAN PROVISIONS RELATING
TO SAFE HARBORS
A. General Rules
1. Plan Must Include Safe Harbor
Provisions
Sections 1.401(k)–1(b)(2)(iii) and
1.401(m)–1(b)(2) require that a plan to

23

which § 401(k) or § 401(m) applies provide that the ADP or ACP test will be met.
Because, effective for plan years beginning after December 31, 1998, a plan may
use the SIMPLE 401(k) plan formula or
safe harbor provisions as alternatives to
the ADP and ACP tests, a plan must specify which of these alternatives it is using.
Generally, a plan sponsor that intends to
use the safe harbor provisions for a plan
year must adopt those provisions before
the first day of that plan year. However,
see section XI.B for the remedial amendment period applicable to plan changes
incorporating the safe harbor provisions.
2. Safe Harbor Contributions Made to
Another Plan
If, pursuant to section IX.A, safe harbor matching or nonelective contributions
will be made to another plan, the name of
the other plan must be specified in the
plan containing the CODA. Moreover, if
safe harbor matching or nonelective contributions will be made to another plan for
a plan year, the other plan must also
adopt, before the first day of that plan
year, provisions specifying that the safe
harbor contributions will be made and
providing for the withdrawal and vesting
restrictions required by § 401(k)(12)(E)(i). However, see section XI.B for the
remedial amendment period applicable to
plan changes incorporating the safe harbor provisions.
3. Disaggregated Plans
If a plan, within the meaning of
§ 414(l), is composed of disaggregated
plans under § 1.410(b)–7(c), the plan provisions must specify which disaggregated
plans are subject to the safe harbor provisions.
B. Remedial Amendment Period
Section 1.401(b)–1T(b)(3) authorizes
the Commissioner to designate a plan provision as a disqualifying provision that either (1) results in the failure of the plan to
satisfy the qualification requirements of
the Code by reason of a change in those
requirements or (2) is integral to a qualification requirement that has been changed.
Section 1.401(b)–1T(c)(3) authorizes the
Commissioner, in the case of a disqualifying provision designated as described in
the preceding sentence, to impose limits

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 24

and provide additional rules regarding the
amendments that may be made with respect to that disqualifying provision.
Pursuant to § 1.401(b)-1T(b)(3) and
(c)(3), a plan provision is hereby designated as a disqualifying provision if the
plan provision is integral to a qualification requirement changed by a provision
of SBJPA that becomes effective on the
first day of the first plan year beginning
after December 31, 1998, provided that
the following conditions are satisfied.
First, the plan provision must be amended
to reflect the change made by SBJPA by
no later than the last day of the first plan
year beginning after December 31, 1998.
(If an employer or plan administrator files
a request for a determination letter on the
qualified status of a plan by the last day of
the first plan year beginning after December 31, 1998, then the date by which the
plan provision must be amended shall be
extended through the 91st day following
the applicable date under § 1.401(b)–
1(e)(3)(i) or (ii).) Second, the plan provision as amended must be effective as of
the first day of the first plan year beginning after December 31, 1998. Thus, if a
plan uses the safe harbor methods for the
plan year beginning in 1999, the plan generally must be amended no later than the
end of that plan year, retroactive to the
first day of that year, to reflect the safe
harbor methods. This remedial amendment period also applies to a plan amendment reflecting the use of the early participation rules under §§ 401(k)(3)(F) and
401(m)(5)(C).
The preceding paragraph does not permit a CODA to be adopted retroactively.
See § 1.401(k)–1(a)(3)(ii).
A plan amendment described in this
section XI.B shall not be treated as violating the requirements of § 411(d)(6)
merely because the plan amendment imposes the withdrawal restrictions required
by § 401(k)(12)(E)(i), provided that those
withdrawal restrictions do not apply with
respect to contributions allocated as of a
date before the first day of the first plan
year beginning after December 31, 1998.
REQUEST FOR COMMENTS
The Service and Treasury invite comments and suggestions concerning the
guidance provided in this notice. Comments are specifically requested as to
whether there are circumstances (in addi-

November 16, 1998

tion to the first plan year of a newly established plan) in which the use of the safe
harbor methods would be appropriately
allowed for a plan year of less than 12
months (e.g., certain corporate merger or
acquisition transactions involving a plan
sponsor maintaining a plan using the safe
harbor methods, if appropriate conditions
are satisfied).
Comments can be addressed to
CC:DOM:CORP:R (Notice 98–52), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, comments
may be hand delivered between the hours
of 8 a.m. and 5 p.m. to CC:DOM:
CORP:R (Notice 98–52), Courier’s Desk,
Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may transmit comments electronically via the IRS Internet
site at: http://www.irs.ustreas.gov/prod/
tax_regs/comments.html.
PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed
and approved by the Office of Management and Budget (OMB) in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 15451624.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.
The collection of information in this
notice is in section V.C, “Notice Requirement,” and section XI, “Plan Provisions
Relating to Safe Harbors.” The collection
of information is required to obtain a benefit. The likely respondents are businesses or other for-profit institutions, and
not-for-profit institutions.
The estimated total annual reporting/
recordkeeping burden is 80,000 hours.
The estimated annual burden per respondent/recordkeeper is 1 hour and 20
minutes. The estimated number of respondents/recordkeepers is 60,000.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

24

Drafting Information
The principal author of this notice is
Roger Kuehnle of the Employee Plans Division. For further information regarding
this notice, please contact the Employee
Plans Division’s taxpayer assistance telephone service at (202) 622-6074/6075
(not toll-free numbers), between the hours
of 1:30 and 3:30 p.m. Eastern Time, Monday through Thursday.

1999 Limitations Adjusted As
Provided in Section 415(d),
Etc.1
Notice 98–53
Section 415 of the Internal Revenue
Code (the Code) provides for dollar limitations on benefits and contributions
under qualified plans. Section 415 also
requires that the Commission

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Afbce4442b97ae6d5. Public record. Not legal advice.