Limitations on Benefits and Contributions Under Qualified Plans

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 11

[REG-130241-04]

RIN 1545-BD52

Limitations on Benefits and Contributions Under Qualified Plans

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Notice of proposed rulemaking and notice of public hearing.

SUMMARY:

This document contains proposed amendments to the regulations under section 415 of the Internal Revenue Code regarding limitations on benefits and contributions under qualified plans. The proposed amendments would provide comprehensive guidance regarding the limitations of section 415, including updates to the regulations for numerous statutory changes since regulations were last published under section 415. The proposed amendments would also make conforming changes to regulations under sections 401(a)(9), 401(k), 403(b), and 457, and would make other minor corrective changes to regulations under section 457. These regulations will affect administrators of, participants in, and beneficiaries of qualified employer plans and certain other retirement plans. This document also provides notice of a public hearing on these proposed regulations.

DATES:

Written or electronic comments must be received by July 25, 2005. Requests to speak and outlines of topics to be discussed at the public hearing scheduled for August 17, 2005, at 10 a.m., must be received by July 27, 2005.

ADDRESSES:

Send submissions to: CC:PA:LPD:PR (REG-130241-04), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-130241-04), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington DC. Alternatively, taxpayers may submit comments electronically directly to the IRS Internet site at

http://www.irs.gov/regs.

The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Vernon S. Carter at (202) 622-6060 or Linda S. F. Marshall at (202) 622-6090; concerning submissions and the hearing and/or to be placed on the building access list to attend the hearing, Richard A. Hurst at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax Regulations (26 CFR Parts 1 and 11) under section 415 of the Internal Revenue Code (Code) relating to limitations on benefits and contributions under qualified plans. In addition, this document contains conforming amendments to the Income Tax Regulations under sections 401(a)(9), 401(k), 403(b), and 457 of the Code, as well as minor corrective changes to the regulations under section 457.

Section 415 was added to the Internal Revenue Code by the Employee Retirement Income Security Act of 1974 (ERISA), and has been amended many times since. Section 415 provides a series of limits on benefits under qualified defined benefit plans and contributions and other additions under qualified defined contribution plans. See also section 401(a)(16). Pursuant to section 415(a)(2), the limitations of section 415 also apply to section 403(b) annuity contracts and to simplified employee pensions described in section 408(k) (SEPs). In addition, the limitations of section 415 for defined contribution plans apply to contributions allocated to any individual medical account that is part of a pension or annuity plan established pursuant to section 401(h) and to amounts attributable to medical benefits allocated to an account established for a key employee pursuant to section 419A(d)(1).

Section 404(j) provides generally that, in computing the amount of any deduction for contributions under a qualified plan, benefits and annual additions in excess of the applicable limitations under section 415 are not taken into account. In addition, in computing the applicable limits on deductions for contributions to a defined benefit plan, and in computing the full funding limitation, an adjustment under section 415(d)(1) is not taken into account for any year before the year for which that adjustment first takes effect.

The definition of compensation that is used for purposes of section 415 is also used for a number of other purposes under the Internal Revenue Code. Under section 219(b)(3), contributions on behalf of an employee to a plan described in section 501(c)(18) are limited to 25% of compensation as defined in section 415(c)(3). Section 404(a)(12) provides that, for various specified purposes in determining deductible limits under section 404, the term

compensation

includes amounts treated as

participant's compensation

under section 415(c)(3)(C) or (D). Pursuant to section 409(b)(2), for purposes of determining whether employer securities are allocated proportionately to compensation in accordance with the rules of section 409(b)(1), the amount of compensation paid to a participant for any period is the amount of such participant's compensation (within the meaning of section 415(c)(3)) for such period. Under section 414(q)(3), for purposes of determining whether an employee is a highly compensated employee within the meaning of section 414(q), the term

compensation

has the meaning given such term by section 415(c)(3). Section 414(s), which defines the term

compensation

for purposes of certain qualification requirements, generally provides that the term

compensation

has the meaning given such term by section 415(c)(3). Under section 416(c)(2), allocations to participants who are non-key employees under a top-heavy plan that is a defined contribution plan are required to be at least 3% of the participant's compensation (within the meaning of section 415(c)(3)). Pursuant to section 457(e)(5), the term

includible compensation,

which is used in limiting the amount that can be deferred for a participant under an eligible deferred compensation plan as defined in section 457(b), has the same meaning as the term

participant's compensation

under section 415(c)(3).

Comprehensive regulations regarding section 415 were last issued in 1981. See TD 7748, published in the

Federal Register

on January 7, 1981 (46 FR 1687). Since then, changes to section 415 have been made in the Economic Recovery Tax Act of 1981, Public Law 97-34 (95 Stat. 320) (ERTA), the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 (96 Stat. 623) (TEFRA), the Deficit Reduction Act of 1984, Public Law 98-369 (98 Stat. 494) (DEFRA), the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2481) (TRA '86), the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342) (TAMRA), the Uruguay Round Agreements Act of 1994, Public Law 103-465 (108 Stat. 4809) (GATT), the Small Business Job Protection Act of 1996, Public Law 104-188 (110 Stat. 1755) (SBJPA), the Community Renewal Tax Relief Act of 2000, Public Law 106-

554 (114 Stat. 2763), the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 38) (EGTRRA), the Job Creation and Worker Assistance Act of 2002, Public Law 107-147 (116 Stat. 21) (JCWAA), the Pension Funding Equity Act of 2004, Public Law 108-218 (118 Stat. 596) (PFEA), and the Working Families Tax Relief Act of 2004, Public Law 108-311 (118 Stat. 1166).

Although two minor changes to the regulations were made after 1981, most of the statutory changes made since that time are not reflected in the regulations, but in IRS notices, revenue rulings, and other guidance of general applicability, as follows:

• Notice 82-13 (1982-1 C.B. 360) provides guidance on deductible employee contributions (including guidance under section 415) to reflect the addition of provisions relating to deductible employee contributions in ERTA.

• Notice 83-10 (1983-1 C.B. 536) provides guidance on the changes to section 415 made by TEFRA. The TEFRA changes were extensive, and included reductions of the dollar limits on annual benefits under a defined benefit plan and annual additions under a defined contribution plan, changes to the age and form adjustments made in the application of the limits under a defined benefit plan, and rules regarding the deductibility of contributions with respect to benefits that exceed the applicable limitations of section 415.

• Notice 87-21 (1987-1 C.B. 458) provides guidance on the changes to section 415 made by TRA '86. The TRA '86 changes modified the rules for the indexing of the dollar limit on annual additions under a defined contribution plan, the treatment of employee contributions as annual additions, and the rules for age adjustments under defined benefit plans, and added a phase-in of the section 415(b)(1)(A) dollar limitation over 10 years of participation, as well as rules permitting the limitations of section 415 to be incorporated by reference under the terms of a plan.

• Rev. Rul. 95-6 (1995-1 C.B. 80) and Rev. Rul. 2001-62 (2001-2 C.B. 632) (superseding Rev. Rul. 95-6) provide mortality tables to be used to make certain form adjustments to benefits under a defined benefit plan for purposes of applying the limitations of section 415, pursuant to the requirement to use a specified mortality table added by GATT.

• Rev. Rul. 95-29 (1995-1 C.B. 81) and Rev. Rul. 98-1 (1998-1 C.B. 249) (modifying and superseding Rev. Rul. 95-29) provide guidance regarding certain form and age adjustments under a defined benefit plan pursuant to changes made by GATT (as modified under SBJPA), including transition rules relating to those adjustments.

• Notice 99-44 (1999-2 C.B. 326) provides guidance regarding the repeal under SBJPA of the limitation on the combination of a defined benefit plan and a defined contribution plan under former section 415(e).

• Notice 2001-37 (2001-1 C.B. 1340) provides guidance regarding the inclusion of salary reduction amounts for qualified transportation fringe benefits in the definition of compensation for purposes of section 415, as provided under the Community Renewal Tax Relief Act of 2000.

• Rev. Rul. 2001-51 (2001-2 C.B. 427) provides guidance relating to the increases in the limitations of section 415 for both defined benefit and defined contribution plans, which were enacted as part of EGTRRA.

• Notice 2002-2 (2002-1 C.B. 285) provides guidance regarding the treatment of reinvested ESOP dividends under section 415(c), to reflect changes made by SBJPA.

• Rev. Rul. 2002-27 (2002-1 C.B. 925) provides guidance pursuant to which a definition of compensation can be used for purposes of applying the limitations of section 415 even if that definition treats certain specified amounts that may not be available to an employee in cash as subject to section 125 (and therefore included in compensation).

• Rev. Rul. 2002-45 (2002-2 C.B. 116) provides guidance regarding the treatment of certain payments to defined contribution plans to restore losses resulting from actions by a fiduciary for which there is a reasonable risk of liability for breach of a fiduciary duty (including the treatment of those payments under section 415).

• Notice 2004-78 (2004-48 I.R.B. 879) provides guidance regarding the actuarial assumptions that must be used for distributions with annuity starting dates occurring during plan years beginning in 2004 and 2005, to determine whether an amount payable under a defined benefit plan in a form that is subject to the minimum present value requirements of section 417(e)(3) satisfies the requirements of section 415. This guidance reflects changes made in PFEA.

These guidance items are reflected in the proposed regulations with some modifications. In addition, the proposed regulations reflect other statutory changes not previously addressed by guidance, and include some other changes and clarifications to the existing final regulations. Treasury and the IRS believe that a single restatement of the section 415 rules serves the interests of plan sponsors, third-party administrators, plan participants, and plan beneficiaries. To the extent practicable, this preamble identifies and explains substantive changes from the existing final regulations or existing guidance.

Explanation of Provisions

Overview

A. Reflection of Statutory Changes

These proposed regulations reflect the numerous statutory changes to section 415 and related provisions that have been made since 1981. Some of the statutory changes reflected in the proposed regulations are as follows:

• The current statutory limitations under section 415(b)(1)(A) and 415(c)(1) applicable for defined benefit and defined contribution plans, respectively, as most recently amended by EGTRRA.

• Changes to the rules for age adjustments to the applicable limitations under defined benefit plans, under which the dollar limitation is adjusted for commencement before age 62 or after age 65.

• Changes to the rules for benefit adjustments under defined benefit plans. The proposed regulations also specify the parameters under which a benefit payable in a form other than a straight life annuity is adjusted in order to determine the actuarially equivalent annual benefit that is subject to the limitations of section 415(b).

• The phase-in of the dollar limitation under section 415(b)(1)(A) over 10 years of participation, as added by TRA '86.

• The addition of the section 401(a)(17) limitation on compensation that is permitted to be taken into account in determining plan benefits, as added by TRA '86, and the interaction of this requirement with the limitations under section 415.

• Exceptions to the compensation-based limitation under section 415(b)(1)(B) for governmental plans, multiemployer plans, and certain other collectively bargained plans.

• Changes to the aggregation rules under section 415(f) under which multiemployer plans are not aggregated with single-employer plans for purposes of applying the compensation-based limitation of section 415(b)(1)(B) to a single-employer plan.

• The repeal under SBJPA of the section 415(e) limitation on the combination of a defined benefit plan and a defined contribution plan.

• The changes to section 415(c) that were made in conjunction with the repeal under EGTRRA of the exclusion allowance under section 403(b)(2).

• The current rounding and base period rules for annual cost-of-living adjustments pursuant to section 415(d), as most recently amended in EGTRRA and the Working Families Tax Relief Act of 2004.

• Changes to section 415(c) under which certain types of arrangements are no longer subject to the limitations of section 415(c) (

e.g.

, individual retirement accounts other than SEPs) and other types of arrangements have become subject to the limitations of section 415(c) (

e.g.

, certain individual medical accounts).

• The inclusion in compensation (for purposes of section 415) of certain salary reduction amounts not included in gross income.

B. Other Significant Changes

The proposed regulations contain new rules for determining the annual benefit under a defined benefit plan where there has been more than one annuity starting date (

e.g.

, where benefits under a plan are aggregated with benefits under another plan under which distributions previously commenced). These rules would resolve the numerous issues that have arisen in determining the annual benefit under a plan where the application of the section 415(b) limitations must take into account prior distributions as well as currently commencing distributions.

The proposed regulations also provide specific rules regarding when amounts received following severance from employment are considered compensation for purposes of section 415, and when such amounts are permitted to be deferred pursuant to section 401(k), section 403(b), or section 457(b). These rules would resolve issues that have arisen with respect to payments made after the end of employment. The proposed regulations generally provide that amounts received following severance from employment are not considered to be compensation for purposes of section 415, but provide exceptions for certain payments made within 2

1/2

months following severance from employment. These exceptions apply to payments (such as regular compensation, and payments for overtime, commissions, and bonuses) that would have been payable if employment had not terminated, and to payments with respect to leave that would have been available for use if employment had not terminated. This notice of proposed rulemaking includes corresponding changes to the regulations under sections 401(k), 403(b), and 457 that would provide that amounts receivable following severance from employment can only be deferred if those amounts meet these conditions. The rule pursuant to which compensation received after severance from employment is not considered compensation for purposes of section 415 generally does not apply to payments to an individual in qualified military service.

Section 1.415(a)-1: General Rules

Section 1.415(a)-1 of these proposed regulations sets forth general rules relating to limitations under section 415 and provides an overview of the remaining regulations, including cross-references to special rules that apply to section 403(b) annuities, multiemployer plans, and governmental plans. In addition, this section provides rules for a plan's incorporation by reference of the rules of section 415 pursuant to section 1106(h) of TRA '86 (including detailed guidelines regarding incorporation by reference of the annual cost-of-living adjustments to the statutory limits and the application of default rules), rules for plans maintained by more than one employer, and rules that apply in other special situations.

Section 1.415(b)-1: Limitations Applicable to Defined Benefit Plans

Section 1.415(b)-1 of these proposed regulations sets forth rules for applying the limitations on benefits under a defined benefit plan. Under these limitations, the annual benefit must not be greater than the lesser of $160,000 (as adjusted pursuant to section 415(d)) or 100% of the participant's average compensation for the participant's high 3 consecutive years. A retirement benefit payable in a form other than a straight life annuity is adjusted to an actuarially equivalent straight life annuity to determine the annual benefit payable under that form of distribution. In addition, the dollar limitation under section 415(b)(1)(A) is actuarially adjusted for benefit payments that commence before age 62 or after age 65. The proposed regulations clarify that, in addition to applying to benefits payable to participants and beneficiaries, the limitations of section 415(b) apply to accrued benefits and benefits payable from an annuity contract distributed to a participant. Thus, the limitations of section 415(b) apply to a participant's entire accrued benefit, regardless of whether the benefit is vested. Where a participant's accrued benefit is computed pursuant to the fractional rule of section 411(b)(1)(C), the limitations of section 415(b) apply to the accrued benefit as of the end of the limitation year and, for ages prior to normal retirement age, are not required to be applied to the projected annual benefit commencing at normal retirement age from which the accrued benefit is computed. In addition, the proposed regulations provide a number of other updates, clarifications, and other changes to the existing regulations, as described below.

A. Actuarial Assumptions Used to Convert Benefit to a Straight Life Annuity

The proposed regulations provide rules under which a retirement benefit payable in any form other than a straight life annuity is converted to the straight life annuity that is actuarially equivalent to that other form to determine the annual benefit (which is used to demonstrate compliance with section 415) with respect to that form of distribution. These rules reflect statutory changes that specify the actuarial assumptions that are to be used for these equivalency calculations (including, for plan years beginning in 2004 and 2005, the use of a 5.5% interest rate for benefits that are subject to the present value rules of section 417(e)(3),

1

as set forth in PFEA), as well as published guidance that has been issued since 1981. In addition to setting forth rules for adjusting forms of benefit other than straight life annuities, the proposed regulations would permit the IRS to issue published guidance setting forth simplified methods for making these adjustments.

1

Section 417(e)(3) provides minimum present value requirements for certain forms of benefit payable from a defined benefit plan under which payments cannot be less than the amount calculated using a specified interest rate and a specified mortality table. For forms of benefit that are subject to the minimum present value rules of section 417(e)(3), the limitations of section 415(b) apply to limit the amount of a distribution even if those limitations result in a lower distribution than would otherwise be required under the rules of section 417(e)(3). See § 1.417(e)-1(d)(1).

Under the proposed regulations, the annual benefit is determined as the greater of the actuarially equivalent straight life annuity determined under the plan's actuarial assumptions or the actuarially equivalent straight life annuity determined under actuarial assumptions specified by statute. This methodology implements the policy reflected in section 415(b)(2)(E), under which the plan's determination that a straight life annuity is actuarially equivalent to a particular optional form of benefit is overridden only when the optional form of benefit is more valuable than the corresponding straight

life annuity when compared using statutorily specified actuarial assumptions.

The rules in the proposed regulations under which a retirement benefit payable in any form other than a straight life annuity is converted to a straight life annuity to determine the annual benefit with respect to that form of distribution generally follow the rules set forth in Rev. Rul. 98-1. However, the calculation of the actuarially equivalent straight life annuity determined using the plan's assumptions for actuarial equivalence has been simplified for a form of benefit that is not subject to the minimum present value rules of section 417(e)(3). Under the simplified calculation, instead of determining the actuarial assumptions used under the plan and applying those assumptions to convert an optional form of benefit to an actuarially equivalent straight life annuity, the regulations use the straight life annuity, if any, that is payable at the same age under the plan. This straight life annuity is then compared to the straight life annuity that is the actuarial equivalent of the optional form of benefit, determined using the standardized assumptions, and the larger of the two straight life annuities is used for purposes of demonstrating compliance with section 415. This simplification has not been extended to forms of benefit that are subject to the minimum present value rules of section 417(e), however, because under the plan those forms of benefit may be determined as the actuarial equivalent of the deferred annuity, rather than as the actuarial equivalent of the immediate straight life annuity.

B. Inclusion of Social Security Supplements in Annual Benefit

The proposed regulations clarify that a social security supplement is included in determining the annual benefit. Under section 415(b)(2)(B), the annual benefit does not include ancillary benefits that are not directly related to retirement benefits. However, because a social security supplement is payable upon retirement as a form of retirement income, it is a retirement benefit. Thus, a social security supplement is included in determining the annual benefit without regard to whether it is an ancillary benefit or a QSUPP within the meaning of § 1.401(a)(4)-12.

C. Determination of High 3 Average Compensation

The proposed regulations would make two changes that would have a significant effect on the determination of a participant's average compensation for the participant's high 3 consecutive years. Consistent with the provisions of section 415(b)(3), the proposed regulations would restrict compensation used for this purpose to compensation earned in periods during which the participant was an active participant in the plan. In addition, the proposed regulations under § 1.415(c)-2 would clarify the interaction of the requirements of section 401(a)(17) and the definition of compensation that must be used for purposes of determining a participant's average compensation for the participant's high 3 consecutive years. Because a plan may not base benefit accruals on compensation in excess of the limitation under section 401(a)(17), a plan's definition of compensation used for purposes of applying the limitations of section 415 is not permitted to reflect compensation in excess of the limitation under section 401(a)(17). Thus, for example, where a participant commences receiving benefits in 2005 at age 75 (so that the adjusted dollar limitation could be as high as $379,783), and the participant had compensation in excess of the applicable section 401(a)(17) limit for 2002, 2003, and 2004, the participant's benefit under the plan is limited by the average compensation for his highest three years as limited by section 401(a)(17) (

i.e.

, $201,667, or the average of $200,000, $200,000, and $205,000).

The proposed regulations set forth rules for computing the limitation of section 415(b)(1)(B) of 100% of the participant's compensation for the period of the participant's high 3 years of service for a participant who is employed with the employer while an active participant for less than 3 consecutive calendar years. For such a participant, the period of a participant's high 3 years of service is the actual number of consecutive years of employment (including fractions of years) while an active participant in the plan. In such a case, the limitation of section 415(b)(1)(B) of 100% of the participant's compensation for the period of the participant's high 3 years of service is computed by averaging the participant's compensation during the participant's longest consecutive period of employment while a plan participant over the actual period of service (including fractions of years, but not less than one year).

D. Treatment of Benefits Paid Partially in the Form of a QJSA

Under section 415(b)(2)(B), the portion of any joint and survivor annuity that constitutes a qualified joint and survivor annuity (QJSA) as defined in section 417(b) is not taken into account in determining the annual benefit for purposes of applying the limitations of section 415(b). The proposed regulations would clarify how this exception from the limitations of section 415 for the survivor annuity portion of a QJSA applies to benefits paid partially in the form of a QJSA and partially in some other form. Under this clarification, the rule excluding the survivor portion of a QJSA from the annual benefit applies to the survivor annuity payments under the portion of a benefit that is paid in the form of a QJSA, even if another portion of the benefit is paid in some other form.

E. Dollar Limitation Applicable to Early or Late Commencement

The determination of the age-adjusted dollar limitation under the proposed regulations reflects the rules enacted in EGTRRA. As provided in Q&A-3 of Rev. Rul. 2001-51, this determination generally follows the same steps and procedures as those used in Rev. Rul. 98-1, except that such determination takes into account the increased defined benefit dollar limitation enacted by EGTRRA and that the adjustments for early or late commencement are no longer based on social security retirement age. Applying rules that are similar to those that are used for determining actuarial equivalence among forms of benefits, the proposed regulations generally use the plan's determinations for actuarial equivalence of early or late retirement benefits, but override those determinations where the use of the specified statutory assumptions results in a lower limit.

The proposed regulations adopt rules for mortality adjustments used in computing the dollar limitation on a participant's annual benefit for distributions commencing before age 62 or after age 65. Under these rules, to the extent that a forfeiture does not occur upon the participant's death, no adjustment is made to reflect the probability of the participant's death during the relevant time period, and to the extent a forfeiture occurs upon the participant's death, an adjustment must be applied to reflect the probability of the participant's death during the relevant time period. These rules generally are consistent with the guidance provided in Notice 83-10.

The proposed regulations would also provide a simplified method for applying this rule. Under this simplified method, a plan is permitted to treat no forfeiture as occurring upon a participant's death if the plan does not charge participants for providing a qualified preretirement survivor annuity, but only if the plan applies this

treatment for adjustments that apply both before age 62 and after age 65.

F. Nonapplication of Adjustment to Dollar Limitation for Early Commencement With Respect to Police Department and Fire Department Employees

Consistent with section 415(b)(2)(G) and (H), the proposed regulations would provide that the early retirement reduction does not apply to certain participants in plans of state and local government units who are employees of a police department or fire department, or former members of the Armed Forces of the United States. This rule applies to any participant in a plan maintained by a state or political subdivision of a state who is credited, for benefit accrual purposes, with at least 15 years of service as either (1) a full-time employee of any police department or fire department of the state or political subdivision that provides police protection, firefighting services, or emergency medical services, or (2) a member of the Armed Forces of the United States. The proposed regulations would clarify that the application of this rule depends on whether the employer is a police department or fire department of the state or political subdivision, rather than on the job classification of the individual participant.

G. Application of $10,000 Exception

Pursuant to section 415(b)(4), the benefits payable with respect to a participant satisfy the limitations of section 415(b) if the retirement benefits payable with respect to such a participant under the plan and all other defined benefit plans of the employer do not exceed $10,000 for the plan year or for any prior plan year, and the employer has not at any time maintained a defined contribution plan in which the participant participated. The proposed regulations would clarify that the section 415(b)(4) alternative $10,000 limitation is applied to actual distributions made during each year. Thus, a distribution for a limitation year that exceeds $10,000 is not within the section 415(b)(4) alternative limitation (and therefore will not be excepted from the otherwise applicable limits of section 415(b)), even if the distribution is a single-sum distribution that is the actuarial equivalent of an accrued benefit with annual payments that are less than $10,000.

H. Exclusion of Annual Benefit Attributable to Mandatory Employee Contributions From Annual Benefit

The proposed regulations would retain the rules under existing final regulations that the annual benefit does not include the annual benefit attributable to mandatory employee contributions. For this purpose, the term “mandatory employee contributions” means amounts contributed to the plan by the employee that are required as a condition of employment, as a condition of participation in the plan, or as a condition of obtaining benefits (or additional benefits) under the plan attributable to employer contributions. See section 411(c)(2)(C). Employee contributions to a defined benefit plan that are not maintained in a separate account as described in section 414(k) constitute mandatory employee contributions (even if section 411 does not apply to the plan) because, depending upon the investment performance of plan assets, employer contributions may be needed to pay a portion of the participant's benefit that is conditioned upon these employee contributions. The rules covering mandatory employee contributions do not extend to voluntary contributions because voluntary employee contributions (plus earnings thereon) are treated as a separate defined contribution plan rather than as part of a defined benefit plan.

The proposed regulations would retain the rule under the existing regulations that the annual benefit attributable to mandatory employee contributions is determined using the factors described in section 411(c)(2)(B) and the regulations thereunder, regardless of whether section 411 applies to the plan. The proposed regulations also would clarify that the following are not treated as employee contributions: (1) Contributions that are picked up by a governmental employer as provided under section 414(h)(2), (2) repayment of any loan made to a participant from the plan, and (3) repayment of any amount that was previously distributed.

I. Exclusion of Annual Benefit Attributable to Rollover Contributions From Annual Benefit

The proposed regulations would clarify that the annual benefit does not include the annual benefit attributable to rollover contributions made to a defined benefit plan (

i.e.

, rollover contributions that are not maintained in a separate account that is treated as a separate defined contribution plan under section 414(k)). In such a case, the annual benefit attributable to rollover contributions is determined by applying the rules of section 411(c) treating the rollover contributions as employee contributions (regardless of whether section 411 applies to the plan). This will occur, for example, if a distribution is rolled over from a defined contribution plan to a defined benefit plan to provide an annuity distribution. Thus, in the case of rollover contributions from a defined contribution plan to a defined benefit plan to provide an annuity distribution, the annual benefit attributable to those rollover contributions for purposes of section 415 is determined by applying the rules of section 411(c), regardless of the assumptions used to compute the annuity distribution under the plan. Accordingly, in such a case, if the plan uses more favorable factors than those specified in section 411(c) to determine the amount of annuity payments arising from a rollover contribution, the annual benefit under the plan would reflect the excess of those annuity payments over the amounts that would be payable using the factors specified in section 411(c)(3).

Rollover contributions to an account that is treated as a separate defined contribution plan under section 414(k) do not give rise to an annual benefit because the separate account is not treated as a defined benefit plan under section 415(b). Furthermore, under the rules relating to defined contribution plans, these rollover contributions to a separate account are excluded from the definition of annual additions to a defined contribution plan.

J. Treatment of Benefits Transferred Among Plans

The proposed regulations would modify the rules of the existing final regulations for determining the amount of transferred benefits that are excluded from the annual benefit under a defined benefit plan in the event of a transfer from another defined benefit plan. These modifications are designed to ensure that transferred benefits are not counted twice by the same employer toward the limitations of section 415(b) and, similarly, to prevent the circumvention of the limitations of section 415(b) through benefit transfers to plans of unrelated employers. Under the proposed regulations, if the transferee plan's benefits are required to be taken into account pursuant to section 415(f) and § 1.415(f)-1 in determining whether the transferor plan satisfies the limitations of section 415(b), then the transferred benefits are included in determining the annual benefit under the transferee plan and are

disregarded in determining the annual benefit under the transferor plan. Accordingly, in such a case, the annual benefit under each plan is determined taking into account the actual benefits provided under that plan after the transfer.

In contrast, if the transferee plan's benefits are not required to be taken into account pursuant to section 415(f) and § 1.415(f)-1 in determining whether the transferor plan satisfies the limitations of section 415(b), then the assets associated with those transferred liabilities (other than surplus assets) are treated by the transferor plan as distributed as a single-sum distribution. This will occur, for example, if the employer sponsoring the transferor plan is a predecessor employer with respect to the participant whose benefits are transferred to the transferee plan, where the transferee plan's benefits are not required to be taken into account pursuant to section 415(f) and § 1.415(f)-1 in determining whether the transferor plan satisfies the limitations of section 415(b). Although such a transfer is treated as a distribution in computing the annual benefit under the transferor plan, no corresponding adjustment to the annual benefit under the transferee plan is made to reflect the fact that some of the benefits provided under the transferee plan are attributable to the transfer. Thus, the actual benefit provided under the transferee plan is used to determine the annual benefit under the transferee plan even though the transferred amount is included as a distribution in determining the annual benefit under the transferor plan. In most such cases, however, a participant whose benefits have been transferred would accrue no additional benefit under the transferor plan that would be required to be tested under the that plan (in combination with the transferred benefits).

K. 10-Year Phase-In of Limitations Based on Years of Participation and Years of Service

The proposed regulations would provide rules for applying the 10-year phase-in of the dollar limitation based on years of participation in the plan, as added by TRA '86, and would modify the rules set forth in final regulations for applying the 10-year phase-in of the compensation limit based on years of service. The proposed regulations follow the guidance set forth in Notice 87-21 for determining years of participation, and apply analogous rules for determining years of service for this purpose.

Section 1.415(b)-2: Multiple Annuity Starting Dates

Section 1.415(b)-2 of the proposed regulations sets forth rules that apply in computing the annual benefit under one or more defined benefit plans in the case of multiple annuity starting dates (

i.e.

, in cases in which a participant has received one or more distributions in limitation years prior to an increase in the accrued benefit occurring during the current limitation year or prior to the annuity starting date for a distribution that commences during the current limitation year). These rules apply, for example, where benefit distributions to a participant have previously commenced under a plan that is aggregated with a plan from which the participant receives current accruals, or where a new distribution election is effective during the current limitation year with respect to a distribution that commenced in a prior limitation year. These rules also apply where benefit payments are increased as a result of plan terms applying a cost-of-living adjustment pursuant to an adjustment of the dollar limit of section 415(b)(1)(A) made pursuant to section 415(d), if the plan does not provide for application of the safe harbor methodology set forth in the proposed regulations for determining the adjusted amount of the benefit.

In the case of multiple annuity starting dates, the annual benefit that is subject to the limits of section 415(b) and § 1.415(b)-1(a) is equal to the sum of (1) the annual benefit determined with respect to any accrued benefit with respect to which distribution has not yet commenced as of the current determination date, computed pursuant to the rules of § 1.415(b)-1, (2) the annual benefit determined with respect to any distribution with an annuity starting date that occurs within the current limitation year and on or before the current determination date, computed pursuant to the rules of § 1.415(b)-1, (3) the annual benefit determined with respect to the remaining amounts payable under any distribution with an annuity starting date that occurred during a prior limitation year, computed pursuant to the rules of § 1.415(b)-1, and (4) the annual benefit attributable to prior distributions. For this purpose, the current determination date is the last day of period for which an increase in the participant's benefit accrues if an increase in the participant's accrued benefit occurs during the limitation year, and if there is no such increase, the current determination date is the annuity starting date for the distribution that commences during the limitation year. The annual benefit determined using this formula is tested for compliance with section 415(b) as of the current determination date, applying the dollar limitation (which is adjusted under section 415(d) to the current determination date and is also adjusted for the participant's age as of the current determination date) and the compensation limitation applicable as of that date (which is adjusted under section 415(d) to the current determination date but is not adjusted based on the participant's age).

Under the proposed regulations, the annual benefit attributable to prior distributions is determined by adjusting the amounts of prior distributions to an actuarially equivalent straight life annuity commencing at the current determination date. The proposed regulations apply rules that are analogous to the rules for adjusting other benefits to determine the amount of the actuarially equivalent straight life annuity for purposes of determining the annual benefit attributable to prior distributions. Under these rules, the amount and time of prior distributions made to the participant is taken into account, and the prior distributions are adjusted to the actuarially equivalent straight life annuity commencing at the current determination date using interest and mortality assumptions that apply generally for purposes of applying the limitations of section 415(b) to a benefit in a form other than a straight life annuity. For this purpose, the actuarially equivalent straight life annuity commencing at the current determination date must reflect an actuarial increase to the present value of payments to reflect that the participant has survived during the interim period.

The actuarial assumptions used to calculate the annual benefit attributable to a prior distribution are determined as of the current determination date, and are based on the form of the prior distribution. For a prior distribution to which section 417(e)(3) did not apply, the annual benefit attributable to the prior distribution is the greater of the annual amount of a straight life annuity commencing at the current determination date that is the actuarial equivalent of that prior distribution, computed using the actuarial factors specified under the plan that provides for the current distribution or current accrual that are used to determine offsets, if any, for prior distributions, or the annual amount of a straight life annuity commencing at the current determination date that is the actuarial equivalent of that prior distribution, computed using the currently applicable

statutory actuarial factors under section 415(b)(2)(E)(i) and (v). Similarly, for a prior distribution to which section 417(e)(3) applied, the annual benefit attributable to the prior distribution is the greater of the annual amount of a straight life annuity commencing at the current determination date that is the actuarial equivalent of that prior distribution, computed using the actuarial factors specified under the plan that provides for the current distribution or current accrual that are used to determine offsets, if any, for prior distributions, or the annual amount of a straight life annuity commencing at the current determination date that is the actuarial equivalent of that prior distribution, computed using the currently applicable statutory actuarial factors under section 415(b)(2)(E)(ii) and (v).

Apart from determining the actuarial factors applicable to calculating the annual benefit attributable to prior distributions, the form of the prior distribution does not otherwise affect the determination of the annual benefit attributable to prior distributions. Thus, for example, if a participant has received $50,000 per year for the past four years, the determination of the annual benefit attributable to prior distributions will be the same if those distributions are part of a 10-year certain and life annuity or are part of a straight life annuity because both of those distribution forms are subject to the same actuarial factors for determining the annual benefit attributable to prior distributions. In either case, the determination of the annual benefit attributable to prior distributions will be determined by applying the interest and mortality assumptions used under the plan to determine offsets, if any, for prior distributions to determine a straight life annuity that is actuarially equivalent to the four prior payments of $50,000, applying the statutory actuarial assumptions to determine a straight life annuity that is actuarially equivalent to the four prior payments of $50,000, and then taking the greater of the two straight life annuity amounts. Determining the annual benefit attributable to prior distributions on the basis of the amount of distributions made rather than on the form of those distributions (or on the basis of the accrued benefit that underlies those distributions) is designed to simplify the application of the multiple annuity starting date rules.

The proposed regulations provide that a prior distribution is not reflected in the annual benefit attributable to prior distributions to the extent the prior distribution has been repaid to the plan with interest (because the amounts attributable to such a prior distribution are reflected in the annual benefit in other ways). Thus, a prior distribution that has been entirely repaid to the plan (with interest) does not give rise to an annual benefit attributable to prior distributions. Similarly, if a prior distribution was made, and a repayment was subsequently made that was less than the amount of the prior distribution (including reasonable interest), the annual benefit attributable to prior distributions is determined by multiplying the annual benefit attributable to the prior distribution by one minus a fraction, the numerator of which is the amount of the repayment and the denominator of which is the amount of the prior distribution plus reasonable interest.

The proposed regulations provide an additional requirement that applies where a stream of annuity payments is modified by a new distribution election. This additional requirement is also imposed in § 1.401(a)(9)-6, Q&A-13(c)(3). Under this additional requirement, which is intended to limit the extent to which benefits can increase as a result of a change in market interest rates, if a stream of annuity payments is modified by a new distribution election, the payments under the annuity that are paid before the modification plus the modified payments must satisfy the requirements of § 1.415(b)-1 determined as of the original annuity starting date, using the interest rates and mortality table applicable to such date. Following the issuance of the regulations under section 401(a)(9), commentators suggested that the rule should be modified to permit a plan to reflect cost-of-living adjustments under section 415(d) that occur between the original annuity starting date and the date of modification in applying the additional test. These proposed regulations adopt this suggestion, and provide that a plan will not fail to satisfy the additional requirement merely because payments reflect cost-of-living adjustments pursuant to section 415(d) for payments no earlier than the time those adjustments are effective and in amounts no greater than amounts determined under § 1.415(d)-1(a)(5). In addition, the proposed regulations include an amendment to § 1.401(a)(9)-6, Q&A-13(c)(3), to reflect this change.

Section 1.415(c)-1: Limitations Applicable To Defined Contribution Plans

Section 1.415(c)-1 of these proposed regulations sets forth rules that apply to limitations on annual additions under a defined contribution plan. Under these limitations, annual additions must not be greater than the lesser of $40,000 (as adjusted pursuant to section 415(d)) or 100% of the participant's compensation for the limitation year. The term “annual additions” generally means the sum for any year of employer contributions, employee contributions, and forfeitures. In addition to applying to qualified defined contribution plans, the limitations on defined contribution plans apply to section 403(b) annuity contracts, simplified employee pensions described in section 408(k), mandatory employee contributions to qualified defined benefit plans, and contributions to certain medical accounts.

The proposed regulations reflect a number of statutory changes to section 415(c) that were made after the issuance of existing final regulations. Among these changes are the revised limitation amounts under section 415(c), the revised rules applicable to employee stock ownership plans, and the rules applying the limitations of section 415(c) to certain medical benefit plans. The proposed regulations also would make some other changes to existing regulations, as discussed below.

If annual additions under an annuity contract that otherwise satisfies the requirements of section 403(b) exceed the limitations of section 415(c), then the portion of the contract that includes that excess annual addition fails to be a section 403(b) annuity contract (and instead is a contract to which section 403(c) applies), and the remaining portion of the contract is a section 403(b) annuity contract. As under regulations recently proposed under section 403(b) (69 FR 67075, November 16, 2004), the proposed regulations include a provision under which the status of the remaining portion of the contract as a section 403(b) contract is not retained unless, for the year of the excess and each year thereafter, the issuer of the contract maintains separate accounts for each such portion. In addition, consistent with the change to section 403(b)(1) made in JCWAA, the proposed regulations provide that the limitations under section 415(c) apply to any section 403(b) annuity contract, regardless of whether the contract satisfies the requirements of section 414(i) to be a defined contribution plan. Thus, the limitations under section 415(c) apply to a section 403(b) annuity contract even if the limitations of section 415(b) also apply to the contract (

i.e.

, if the contract is a church plan that is covered by the grandfather rule of section 251(e)(5) of TEFRA).

The proposed regulations clarify that the IRS will treat a sale or exchange by the employee or the employer that transfers assets to a plan where the consideration paid by the plan is less than the fair market value of the assets transferred to the plan as giving rise to an annual addition in the amount of the difference between the value of the assets transferred and the consideration.

Consistent with Rev. Rul. 2002-45, the proposed regulations provide that a restorative payment that is allocated to a participant's account does not give rise to an annual addition for any limitation year. For this purpose, restorative payments are payments made to restore losses to a plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under Title I of ERISA, where plan participants who are similarly situated are treated similarly with respect to the payments. Generally, payments to a defined contribution plan are restorative payments only if the payments are made in order to restore some or all of the plan's losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty. The proposed regulations provide that, in addition to payments to a plan made pursuant to Department of Labor order or court-approved settlement to restore losses to a qualified defined contribution plan on account of the breach of fiduciary duty, restorative payments include payments made pursuant to the Department of Labor's Voluntary Fiduciary Correction Program to restore losses to a qualified defined contribution plan on account of the breach of fiduciary duty. However, payments made to a plan to make up for losses due merely to market fluctuations and other payments that are not made on account of a reasonable risk of liability for breach of a fiduciary duty under Title I of ERISA are contributions that give rise to annual additions and are not restorative payments.

The proposed regulations would retain the rule for taxable employers under existing regulations that the deadline for making a contribution to the plan that is credited to a participant's account for a limitation year for purposes of section 415(c). Under this rule, employer contributions are not treated as credited to a participant's account for a particular limitation year unless the contributions are actually made to the plan no later than 30 days after the end of the period described in section 404(a)(6) applicable to the taxable year with or within which the particular limitation year ends. The proposed regulations would modify the corresponding rule for tax-exempt employers. Under the proposed regulations, the deadline for a tax-exempt employer to make a contribution to the plan that is credited to a participant's account for a limitation year for purposes of section 415(c) is the 15th day of the tenth calendar month following the close of the taxable year with or within which the particular limitation year ends. This date corresponds to the due date for Form 5500 (with extensions) in cases in which the taxable year coincides with the plan year, and generally corresponds to the contribution due date for taxable employers who request filing extensions. The deadline for contributions for tax-exempt employers under the proposed regulations would be an extension from the earlier deadline now applicable under existing regulations (

i.e.

, the 15th day of the sixth calendar month following the close of the taxable year with or within which the particular limitation year ends). The extent to which elective contributions constitute plan assets for purposes of the prohibited transaction provisions of section 4975 and Title I of ERISA is determined in accordance with regulations and rulings issued by the Department of Labor. See 29 CFR 2510.3-102.

The proposed regulations clarify the operation of the special increased limitation applicable to church plans under section 415(c)(7). Under this rule, notwithstanding the generally applicable limitations, annual additions for a section 403(b) annuity contract for a year with respect to an individual who is a church employee are treated as not exceeding the limitation of section 415(c) if such annual additions for the year are not in excess of $10,000. However, the total amount of additions with respect to any participant that are permitted to be taken into account for purposes of this rule for all years may not exceed $40,000. In addition, for any individual who is a church employee performing any services for the church outside the United States, additions for a section 403(b) annuity contract for any year are not treated as exceeding the limitations of section 415(c) if those annual additions for the year do not exceed the greater of $3,000 or the employee's includible compensation. The proposed regulations would clarify that the $40,000 cumulative total only applies to excesses over what would have been permitted to be contributed without regard to this special rule, and clarifies the interaction between the generally applicable church employee rule and the rule for church employees performing services outside the United States. In addition, the proposed regulations would clarify that the special rule that applies to services for a church performed abroad applies to the employee's includible compensation only with respect to services for the church outside the United States.

The correction mechanism in current § 1.415-6(b)(6) for handling excess annual additions is not included in the proposed regulations. It is anticipated that this correction mechanism will be included in the Employee Plans Compliance Resolution System (

see

Rev. Proc. 2003-44 (2003-1 C.B. 1051)) in the future.

The proposed regulations generally would retain the rules under existing regulations providing that a contribution to reduce accumulated funding deficiencies or a contribution made pursuant to a funding waiver relates to the limitation year of the initial funding obligation. However, the proposed regulations would provide that any interest paid by the employer with respect to such a contribution that is in excess of a reasonable amount is taken into account as an annual addition for the limitation year when the contribution is made (in contrast to existing regulations, which require interest in excess of a reasonable amount to be taken into account as an annual addition for the limitation year for which the contribution was originally required). Rev. Rul. 78-223 (1978-1 C.B. 125) provides a method for determining contributions required to amortize waived contributions under a defined contribution plan. The application of any of the methods described in Rev. Rul. 78-223 will result in reasonable interest payments for purposes of applying the rules of section 415 (provided that, if a fixed interest rate in excess of 5% is used to amortize waived contributions, the interest rate is reasonable). Thus, for example, the actual yield method (under which the adjusted account balance is increased or decreased periodically at the actual rate of investment return experienced by the plan for such period) can be used for this purpose.

Section 1.415(c)-2: Definition of Compensation

Section 1.415(c)-2 of these proposed regulations defines the term

compensation

, which is defined in section 415(c)(3) and used for purposes of applying the limitations of section 415 as well as for various other purposes specified under the Internal Revenue Code. The proposed regulations reflect a number of statutory changes to section 415(c)(3) that were

made after the issuance of existing final regulations. Among these changes are the inclusion in compensation of certain deemed amounts for disabled participants and nontaxable elective amounts for deferrals under sections 401(k), 403(b), and 457, cafeteria plan elections under section 125, and qualified transportation fringe elections under section 132(f)(4). In addition to these changes, the proposed regulations would make some other changes to existing regulations, as discussed below.

The proposed regulations provide specific guidelines regarding when amounts received following severance from employment are considered compensation for purposes of section 415. The following are types of post-severance payments that are not excluded from compensation because of timing if they are paid within 2

1/2

months following severance from employment: (1) Payments that, absent a severance from employment, would have been paid to the employee while the employee continued in employment with the employer and are regular compensation for services during the employee's regular working hours, compensation for services outside the employee's regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar compensation; and (2) payments for accrued bona fide sick, vacation, or other leave, but only if the employee would have been able to use the leave if employment had continued. Under the proposed regulations, the rule generally excluding payments after severance from employment from compensation does not apply to payments to an individual who does not currently perform services for the employer by reason of qualified military service (as that term is used in section 414(u)(1)) to the extent those payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the employer rather than entering qualified military service. This notice of proposed rulemaking also contain corresponding proposed amendments to the regulations under sections 401(k), 403(b), and 457 that would provide that amounts received following severance from employment can be deferred only if they are considered compensation under the rules of section 415.

Section 1.415(d)-1: Cost-of-Living Adjustments

Section 1.415(d)-1 of these proposed regulations sets forth rules that apply to cost-of-living adjustments to the various limitations of section 415 pursuant to section 415(d). Section 415(d) provides for the dollar and compensation limitations on annual benefits and the dollar limitation on annual additions to be adjusted annually for increases in the cost of living based on adjustment procedures similar to the procedures used to adjust social security benefit amounts. These adjustments also apply for other purposes as specified in the Internal Revenue Code. The proposed regulations specify the manner in which these adjustments are determined each year, and reflect statutory changes to the adjustment methodology made after the 1981 regulations were issued. In addition, the proposed regulations make several other changes to existing final regulations, as discussed below.

The proposed regulations would specify the circumstances under which an adjusted limit is permitted to be applied to participants who have previously commenced receiving benefits under a defined benefit plan. Under the proposed regulations, the adjusted dollar limitation is applicable to current employees who are participants in a defined benefit plan and to former employees who have retired or otherwise terminated their service under the plan and have a nonforfeitable right to accrued benefits, regardless of whether they have actually begun to receive such benefits. A plan is permitted to provide that the annual increase applies for a participant who has previously commenced receiving benefits only to the extent that benefits have not been paid. Thus, for example, a plan cannot provide that this annual increase applies to a participant who has previously received the entire plan benefit in a single-sum distribution. However, a plan is permitted to provide for an increase in benefits to a participant who accrues additional benefits under the plan that could have been accrued without regard to the adjustment of the dollar limitation (including benefits that accrue as a result of a plan amendment) on or after the effective date of the adjusted limitation.

The proposed regulations provide for a safe harbor under which the annual benefit will satisfy the limitations of section 415(b) for the current limitation year following an adjustment to benefit payments that is made to reflect the cost-of-living adjustment made pursuant to section 415(d). If such adjustments are made in accordance with this safe harbor, the multiple annuity starting date rules of § 1.415(b)-2 do not apply on account of such adjustments. Under this safe harbor, if a participant has received one or more distributions under an annuity stream that satisfies the requirements of section 415(b) before the adjustment, the plan's benefits will satisfy the limitations of section 415(b) if the amounts payable to the employee for the limitation year and subsequent limitation years are not greater than the amounts that would otherwise be payable under the annuity stream without regard to the adjustment, multiplied by a fraction. The numerator of this fraction is the limitation under section 415(b) (

i.e.

, the lesser of the applicable dollar limitation under section 415(b)(1)(A), as adjusted for age at commencement, and the applicable compensation-based limitation under section 415(b)(1)(B)) in effect for the distribution following the adjustment, and the denominator of this fraction is such limitation under section 415(b) in effect for the distribution immediately before the adjustment.

Section 1.415(f)-1: Combining and Aggregating Plans

Section 1.415(f)-1 of these proposed regulations sets forth rules for combining and aggregating plans pursuant to section 415(f). Under section 415(f) and these proposed regulations, for purposes of applying the limitations of section 415(b) and (c), all defined benefit plans of an employer are treated as one defined benefit plan, and all defined contribution plans of an employer are treated as one defined contribution plan. The controlled group rules of section 414(b) and (c) (as modified by section 415(h)), the affiliated service group rules of section 414(m), and the leased employee rules of section 415(n) apply for purposes of determining whether a plan that is maintained by an entity other than the employer is considered maintained by the employer for purposes of applying the aggregation rules of section 415(f).

The proposed regulations would also make various changes and clarifications to the existing regulations. The proposed regulations would clarify that an employer's plan must be aggregated with all plans maintained by a predecessor employer (

see

section 414(a)), regardless of whether any such plan is assumed by the employer. Pursuant to section 414(a)(1), the proposed regulations would provide that, for purposes of section 415, a former employer is a predecessor employer with respect to a participant in a plan maintained by an employer if the employer maintains a plan under which the participant had accrued a benefit while performing services for the former employer, but only if that benefit is provided under the plan maintained by the employer. In addition, the proposed regulations would provide

pursuant to section 414(a)(2) that, with respect to an employer of a participant, a former entity that antedates the employer is a predecessor employer with respect to the participant if, under the facts and circumstances, the employer constitutes a continuation of all or a portion of the trade or business of the former entity. This will occur, for example, where formation of the employer constitutes a mere formal or technical change in the employment relationship and continuity otherwise exists in the substance and administration of the business operations of the former entity and the employer. See

Lear Eye Clinic, Ltd.

v.

Commissioner

, 106 T.C. 418, 425-429 (1996).

The proposed regulations provide rules for aggregating participation and service for purposes of the 10-year phase-in of the limitations on defined benefit plans. Under these rules, years of participation in all aggregated plans and years of service for employers maintaining all aggregated plans are counted for purposes of applying the 10-year phase-in rules.

The proposed regulations clarify the aggregation rules that apply to section 403(b) annuity contracts, other plans of the employer, and plans of related employers, in light of changes made in EGTRRA. Generally a section 403(b) annuity contract is not aggregated with plans that are maintained by the participant's employer because the section 403(b) annuity contract is deemed maintained by the participant and not the employer for purposes of section 415. However, if a participant on whose behalf a section 403(b) annuity contract is purchased is in control of any employer for a limitation year, the annuity contract for the benefit of the participant is treated as a defined contribution plan maintained by both the controlled employer and the participant for that limitation year and accordingly, the section 403(b) annuity contract is aggregated with all other defined contribution plans maintained by the employer. Accordingly, the employer that contributes to the section 403(b) annuity contract must obtain information from participants regarding employers controlled by those participants and plans maintained by those controlled employers to monitor compliance with applicable limitations to comply with applicable reporting and withholding obligations. In addition to applying the rules under existing final regulations for purposes of determining control for purposes of section 415(f), the proposed regulations would apply the rules under proposed § 1.414(c)-5 (regarding aggregation rules for tax-exempt employers), as published in the

Federal Register

on November 16, 2004 (69 FR 67075).

The proposed regulations also provide that a multiemployer plan, as defined in section 414(f), is not aggregated with other multiemployer plans for purposes of determining any section 415 limitation. In addition, a multiemployer plan will not be aggregated with non-multiemployer plans for purposes of applying the 100% of compensation benefit limit to non-multiemployer plans under section 415(b)(1)(B). In general, under the proposed regulations, benefits of all employers are taken into account in applying the limitations of section 415 to a multiemployer plan. However, a multiemployer plan is permitted to provide that, where a participating employer maintains both a plan which is not a multiemployer plan and a multiemployer plan, only the benefits provided by the employer under the multiemployer plan are aggregated with the benefits under the non-multiemployer plan.

Section 1.415(g)-1: Disqualification of Plans and Trusts

Section 1.415(g)-1 of these proposed regulations sets forth rules regarding disqualification of plans and trusts, including plans and trusts that are aggregated pursuant to § 1.415(f)-1. In large part, proposed § 1.415(g)-1 replicates the rules of § 1.415-9 of the existing final regulations regarding ordering rules for disqualifying plans and trusts that are aggregated for purposes of compliance with section 415. In addition, the proposed regulations provide rules for disqualification where an individual medical account (as described in section 415(l)) and a post-retirement medical benefits account for key employees (as described in section 419A(d)) is combined with a qualified defined contribution plan for purposes of applying section 415(c). If the combined plan exceeds those limitations for a particular limitation year, the qualified defined contribution plan (rather than the medical account) is disqualified for the limitation year.

Section 1.415(j)-1: Limitation Year

Section 1.415(j)-1 of these proposed regulations sets forth rules regarding limitation years that are used as the period for demonstrating compliance with section 415. In addition to setting forth general rules that generally correspond to rules under existing regulations, the proposed regulations provide specific guidelines with respect to overlapping limitation years for aggregated plans. These rules reflect the guidance provided in Rev. Rul. 79-5 (1979-1 C.B. 165). Where defined contribution plans with different limitations years are aggregated, the rules of section 415(c) must be applied with respect to each limitation year of each such plan. For each such limitation year, the requirements of section 415(c) are applied to annual additions that are made for that time period with respect to the participant under all aggregated plans. Similarly, where defined benefit plans with different limitations years are aggregated, the rules of section 415(c) must be applied with respect to each limitation year of each such plan. Thus, for example, the dollar limitation of section 415(b)(1)(A) applicable to the limitation year for each plan must be applied to annual benefits under all aggregated plans to determine whether the plan satisfies the requirements of section 415(b).

Sections 415(m) and 415(n)

These proposed regulations do not contain provisions relating to section 415(m) (regarding treatment of qualified governmental excess benefit arrangements) and section 415(n) (regarding the purchase of permissive service credit from a governmental defined benefit plan). Comments are requested regarding the need for regulations or other guidance on issues arising under these statutory provisions.

Other Changes: Section 457 Regulations

These proposed regulations also include revisions to the regulations under section 457 that are in addition to the revisions to reflect the treatment of compensation paid after severance from employment. The additional revisions do not include any substantive changes, but would merely make clarifications, including corrections in an example illustrating the section 457 catch-up rules and a correction in the rules relating to unforeseeable emergencies to reflect recent revisions in the definition of a dependent (made under the Working Families Tax Relief Act of 2004, which modified the definition of the term

dependent

under section 152).

Proposed Effective Dates

The regulations under section 415 are proposed to apply to limitation years beginning on or after January 1, 2007. Except as described below, until these regulations are issued as final regulations, the existing regulations remain in effect (to the extent not modified by statutory changes). A defined benefit plan that was adopted and effective before May 31, 2005, will be considered to satisfy the limitations of section 415(b) for a participant with

respect to benefits accrued or payable under the plan as of the effective date of final regulations implementing these proposed regulations pursuant to plan provisions adopted and in effect on May 31, 2005, but only if such plan provisions meet the requirements of statutory provisions, regulations, and other published guidance in effect on May 31, 2005. Thus, plans that were in compliance with the rules of section 415 as in effect prior to the finalization of these regulations will not be disqualified based on benefits that arise pursuant to plan provisions that were adopted and in effect on May 31, 2005, and that accrue prior to the effective date of final regulations implementing these proposed regulations, even if those benefits no longer comply with the requirements of section 415 as set forth under those final regulations. However, such a plan will not be permitted to provide for the accrual of additional benefits for a participant on or after the effective date of final regulations implementing these proposed regulations unless such additional benefits, together with the participant's other accrued benefits, comply with those new final regulations.

Reliance on Compensation Timing Rules and Changes to Regulations Under Sections 401(a)(9) and 457

Pending issuance of final regulations, taxpayers may rely on the modifications in these proposed regulations contained in § 1.401(k)-1(e)(8), § 1.415(c)-2(e), and § 1.457-4(d) regarding post-severance compensation payments and other compensation timing rules, § 1.401(a)(9)-6 regarding certain changes in form of payment, and §§ 1.457-5, -6, and -10 providing corrective and clarifying changes. Pursuant to this reliance, taxpayers may apply the proposed amendments described in this paragraph for periods prior to the effective date of final regulations.

Sunset of EGTRRA Changes

The proposed regulations do not provide rules for the application of the EGTRRA sunset provision (section 901 of EGTRRA), under which the provisions of EGTRRA do not apply to taxable, plan, or limitation years beginning after December 31, 2010. Unless the EGTRRA sunset provision is repealed before it becomes effective, additional guidance will be needed to clarify its application.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department specifically request comments on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying.

A public hearing has been scheduled for August 17, 2005 at 10 a.m. in the auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must use the main building entrance on Constitution Avenue. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For more information about having your name placed on the list to attend the hearing, see the

FOR FURTHER INFORMATION CONTACT

section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written (signed original and eight (8) copies) or electronic comments and an outline of the topics to be discussed and the time to be devoted to each topic by July 27, 2005. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal authors of these regulations are Vernon S. Carter and Linda S. F. Marshall, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in the development of these regulations.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 11

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 11 are proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1.

The authority citation for part 1 continues to read, in part, as follows:

Authority:

26 U.S.C. 7805 * * *

Par. 2.

Section 1.401(a)(9)-6, Q&A-13(c)(3) is revised to read as follows:

§ 1.401(a)(9)-6

Required minimum distributions for defined benefit plans and annuity contracts.

A-13. * * *

(c) * * *

(3) In accordance with § 1.415(b)-2(c), after taking into account the modification, the payments under the annuity that are paid before the modification plus the modified payments must satisfy the requirements of § 1.415(b)-1 determined as of the original annuity starting date, using the interest rates and mortality table applicable to such date, except that, for this purpose, payments will not fail to satisfy the requirements of § 1.415(b)-1 determined as of the original annuity starting date merely because the payments are adjusted to reflect cost-of-living adjustments pursuant to section 415(d) that are determined in accordance with § 1.415(d)-1(a)(5); and

Par. 3.

Section 1.401(k)-1 is amended by adding paragraph (e)(8) to read as follows:

§ 1.401(k)-1

Certain cash or deferred arrangements.

(e) * * *

(8)

Section 415 compensation required.

A cash or deferred arrangement satisfies this paragraph (e) only if cash or deferred elections can only be made with respect to amounts that are compensation within the

meaning of section 415(c)(3) and § 1.415(c)-2. Thus, for example, the arrangement is not a qualified cash or deferred arrangement if an eligible employee who is not in qualified military service (as that term is defined in section 414(u)) can make a cash or deferred election with respect to an amount paid after severance from employment, unless the amount is paid within 2

1/2

months following the eligible employee's severance from employment and is described in § 1.415(c)-2(e)(3)(ii).

Par. 4.

Section 1.403(b)-3, as proposed to be revised on November 16, 2004 (69 FR 67086), is further proposed to be amended by adding text to paragraph (b)(4)(ii) to read as follows:

§ 1.403(b)-3

Exclusion for contributions to purchase section 403(b) contracts.

(b) * * *

(4) * * *

(ii)

Exceptions.

The exclusion from gross income provided by section 403(b) applies to contributions made for former employees with respect to compensation described in § 1.415(c)-2(e)(3)(ii) (relating to certain compensation paid within 2

1/2

months following severance from employment), compensation described in § 1.415(c)-2(g)(4) (relating to compensation paid to participants who are permanently and totally disabled), and compensation relating to qualified military service under section 414(u).

§ 1.415-1 thru § 1.415-10

[Removed]

Par. 5.

Sections 1.415-1 through 1.415-10 are removed.

Par. 6.

Section 1.415(a)-1 is added to read as follows:

§ 1.415(a)-1

General rules with respect to limitations on benefits and contributions under qualified plans.

(a)

Trusts.

Under sections 415 and 401(a)(16), a trust that forms part of a pension, profit-sharing, or stock bonus plan will not be qualified under section 401(a) if any of the following conditions exists—

(1) In the case of a defined benefit plan, the annual benefit with respect to any participant for any limitation year exceeds the limitations of section 415(b) and § 1.415(b)-1 (taking into account the rules of § 1.415(b)-2);

(2) In the case of a defined contribution plan, the annual additions credited with respect to any participant for any limitation year exceed the limitations of section 415(c) and § 1.415(c)-1; or

(3) The trust has been disqualified under section 415(g) and § 1.415(g)-1 for any year.

(b)

Certain annuities and accounts

—(1)

In general.

Under section 415, an employee annuity plan described in section 403(a), an annuity contract described in section 403(b), or a simplified employee pension described in section 408(k) will not be considered to be described in the otherwise applicable section if any of the following conditions exists—

(i) The annual benefit under a defined benefit plan with respect to any participant for any limitation year exceeds the limitations of section 415(b) and § 1.415(b)-1 (taking into account the rules of § 1.415(b)-2);

(ii) The contributions and other additions credited under a defined contribution plan with respect to any participant for any limitation year exceed the limitations of section 415(c) and § 1.415(c)-1; or

(iii) The employee annuity plan, annuity contract, or simplified employee pension has been disqualified under section 415(g) and § 1.415(g)-1 for any year.

(2)

Special rule for section 403(b) annuity contracts

—(i)

In general.

If the contributions and other additions under an annuity contract that otherwise satisfies the requirements of section 403(b) with respect to any participant for any limitation year exceed the limitations of section 415(c) and § 1.415(c)-1, then the portion of the contract that includes such excess annual addition fails to be a section 403(b) contract (and instead is a contract to which section 403(c) applies), and the remaining portion of the contract is a section 403(b) contract. The status of the remaining portion of the contract as a section 403(b) contract is not retained unless, for the year of the excess and each year thereafter, the issuer of the contract maintains separate accounts for each such portion. See also § 1.403(b)-3(c)(3).

(ii)

Defined benefit plans.

If the annual benefit under an annuity contract that otherwise satisfies the requirements of section 403(b) and that is a defined benefit plan with respect to any participant for any limitation year exceeds the limitations of section 415(b) and § 1.415(b) (taking into account the rules of § 1.415(b)-2), then the portion of the contract that includes such excess annual benefit fails to be a section 403(b) annuity contract (and instead is a contract to which section 403(c) applies), and the remaining portion of the contract is a section 403(b) annuity contract. The status of the remaining portion of the contract as a section 403(b) annuity contract is not retained unless, for the year of the excess and each year thereafter, the issuer of the contract maintains separate accounts for each such portion.

(3)

Section 403(b) annuity contract.

For purposes of section 415 and regulations thereunder, the term

section 403(b) annuity contract

includes arrangements that are treated as annuity contracts for purposes of section 403(b). For example, such term includes custodial accounts described in section 403(b)(7) and retirement income accounts described in section 403(b)(9).

(c)

Regulations

—(1)

In general

. This section provides general rules regarding the application of section 415. For further rules regarding the application of section 415, see—

(i) Section 1.415(b)-1 (for general rules regarding the limit applicable to defined benefit plans);

(ii) Section 1.415(b)-2 (for special rules for defined benefit plans where a participant has multiple annuity starting dates);

(iii) Section 1.415(c)-1 (for general rules regarding the limit applicable to defined contribution plans);

(iv) Section 1.415(c)-2 (for rules regarding the definition of compensation for purposes of section 415);

(v) Section 1.415(d)-1 (for rules regarding cost-of-living adjustments to the various limits of section 415);

(vi) Section 1.415(f)-1 (for rules for aggregating plans for purposes of section 415);

(vii) Section 1.415(g)-1 (for rules regarding disqualification of plans that fail to satisfy the requirements of section 415); and (viii) Section 1.415(j)-1 (for rules regarding limitation years).

(2)

Cross references to additional rules for section 403(b) annuity contracts

. For additional rules relating to section 403(b) annuity contracts, see—

(i) Section 1.415(c)-2(g)(1) and (3) (relating to the definition of compensation for such annuity contracts);

(ii) Section 1.415(f)-1(g) (relating to rules for such annuity contracts for purposes of combining plans);

(iii) Section 1.415(g)-1(b)(3)(iv)(C) (regarding disqualification of section 403(b) annuity contract aggregated with a qualified defined contribution plan if the combined plans exceed the limitations of section 415(c));

(iv) Section 1.415(g)-1(e) (relating to the plan year for such annuity contracts); and

(v) Section 1.415(j)-1(e) (relating to the limitation year for such annuity contracts).

(3)

Cross references to additional rules for governmental plans

. For additional rules relating to governmental plans, see—

(i) Section 1.415(b)-1(a)(6)(i) (providing an exception from the compensation-based limit of section 415(b)(1)(B) for governmental plans);

(ii) Section 1.415(b)-1(a)(7)(ii) (regarding a special limitation for governmental plans making an election during 1990);

(iii) Section 1.415(b)-1(b)(4) (regarding qualified governmental excess benefit arrangements);

(iv) Section 1.415(b)-1(d)(3) and (4) (regarding age adjustments to the dollar limit of section 415(b)(1)(A) in the case of employees of police departments and fire departments and former members of the United States Armed Forces, and in the case of survivor and disability benefits);

(v) Section 1.415(b)-1(g)(3) (regarding adjustments to applicable limitations for years of participation, and adjustments to applicable limitations for years of service for survivor and disability benefits); and

(vi) Section 1.415(c)-1(b)(3)(iii) (regarding amounts not treated as annual additions).

(4)

Cross references to additional rules for multiemployer plans

. For additional rules relating to multiemployer plans, see—

(i) Paragraph (e) of this section (regarding benefits or contributions taken into account where a plan is maintained by more than one employer);

(ii) Section 1.415(b)-1(a)(6)(ii) (providing an exception from the compensation-based limit for multiemployer plans);

(iii) Section 1.415(b)-1(f)(3) (regarding the application of the minimum $10,000 limitation on benefits in the case of a multiemployer plan);

(iv) Section 1.415(f)-1(h) (providing special rules for aggregating multiemployer plans with other plans); and

(v) Section 1.415(g)-1(b)(3)(ii) (regarding plan disqualification rules where a multiemployer plan is aggregated with a plan that is not a multiemployer plan and the combined plans exceed the limitations of section 415).

(d)

Plan provisions

—(1)

In general

. Although no specific plan provision is required under section 415 in order for a plan to establish or maintain its qualification, the plan provisions must preclude the possibility that any accrual, distribution, or annual addition will exceed the limitations of section 415. For example, a plan may include provisions that automatically freeze or reduce the rate of benefit accrual (in the case of a defined benefit plan) or the annual addition (in the case of a defined contribution plan) to a level necessary to prevent the limitations from being exceeded with respect to any participant. For rules relating to this type of plan provision and the definitely determinable benefit requirement for pension plans, see § 1.401(a)-1(b)(1).

(2)

Special rule for profit-sharing and stock bonus plans.

A provision of a profit-sharing or stock bonus plan that automatically freezes or reduces the amount of annual additions to ensure that the limitations of section 415 will not be exceeded must comply with the requirement set forth in § 1.401-1(b)(1)(ii) or (iii) (as applicable) that such plans provide a definite predetermined formula for allocating the contributions made to the plan among the participants. If the operation of a provision that automatically freezes or reduces the amount of annual additions to ensure that the limitations of section 415 are not exceeded does not involve discretionary action on the part of the employer, the definite predetermined allocation formula requirement is not violated by the provision. If the operation of such a provision involves discretionary action on the part of the employer, the definite predetermined allocation formula requirement is violated. For example, if two profit-sharing plans of one employer otherwise provide for aggregate contributions which may exceed the limits of section 415(c), the plan provisions must specify (without involving employer discretion) under which plan contributions and allocations will be reduced to prevent an excess annual addition and how the reduction will occur.

(3)

Incorporation by reference—

(i)

In general

. A plan is permitted to incorporate by reference the limitations of section 415, and will not fail to meet the definitely determinable benefit requirement or the definite predetermined allocation formula requirement, whichever applies to the plan, merely because it incorporates the limits of section 415 by reference.

(ii)

Section 415 can be applied in more than one manner, but a statutory or regulatory default rule exists

. Where a provision of section 415 is permitted to be applied in more than one manner but is to be applied in a specified manner in the absence of contrary plan provisions (

i.e.

, a default rule exists), if a plan incorporates the limitations of section 415 by reference with respect to that provision of section 415 and does not specifically vary from the default rule, then the default rule applies. With respect to a provision of section 415 for which a default rule exists, if the limitations of section 415 are to be applied in a manner other than using the default rule, the plan must specify the manner in which the limitation is to be applied in addition to generally incorporating the limitations of section 415 by reference. For example, if a plan generally incorporates the limitations of section 415 by reference and does not restrict the accrued benefits to which the amendments to section 415(b)(2)(E) made by GATT apply (as permitted by Q&A-12 of Rev. Rul. 98-1 (1998-1 C.B. 249) (see § 601.601(d) of this chapter), which reflects the amendments to section 767 of GATT made by section 1449 of SBJPA), then the amendments to section 415(b)(2)(E) made by GATT apply to all benefits under the plan.

(iii)

Section 415 can be applied in more than one manner with no statutory or regulatory default

. If a limitation of section 415 may be applied in more than one manner, and there is no governing principle pursuant to which that limitation is applied in the absence of contrary plan provisions, then the plan must specify the manner in which the limitation is to be applied in addition to generally incorporating the limitations of section 415 by reference. For example, if an employer maintains two profit-sharing plans, and if any participant participates in more than one such plan, then both plans must specify (in a consistent manner) under which of the employer's two profit-sharing plans annual additions must be reduced if aggregate annual additions would otherwise exceed the limitations of section 415(c)).

(iv)

Former requirements

. A plan cannot incorporate by reference formerly applicable requirements of section 415 that are no longer in force (such as the limits of former section 415(e)).

(v)

Cost-of-living adjustments

—(A)

In general

. A plan is permitted to incorporate by reference the annual adjustments to the limitations of section 415 that are made pursuant to section 415(d). See § 1.415(d)-1 for additional rules relating to cost-of-living adjustments under section 415(d).

(B)

Cost-of-living adjustments not included in accrued benefit until effective

. Notwithstanding that a plan incorporates the increases to the applicable limits under section 415(d) by reference, the accrued benefit of a participant for purposes of section 411 and the annual benefit payable to a participant for purposes of § 1.415(b)-1(a)(1) are not permitted to reflect increases pursuant to the annual increase under section 415(d) of the dollar limitation described in section 415(b)(1)(A) or the compensation limit described in section 415(b)(1)(B) for any

period before the annual increase becomes effective. A plan amendment does not violate the requirements of section 411(d)(6) merely because it eliminates the incorporation by reference of the increases under section 415(d) with respect to increases that have not yet occurred. Pursuant to § 1.415(d)-1(a)(3), the increase in each limit that is adjusted pursuant to section 415(d) is effective as of January 1 of each calendar year, and applies with respect to limitation years ending with or within that calendar year. Thus, where an increase in the dollar limitation under section 415(b)(1)(A) results in an increase to the participant's accrued benefit, the increase to the accrued benefit is permitted to occur as of a date no earlier than January 1 of the calendar year for which the increase in the dollar limitation is effective.

(C)

Application of increase in defined benefit dollar limit to participants who have commenced receiving benefits

. The annual increase under section 415(d) of the dollar limitation described in section 415(b)(1)(A) does not apply in limitation years beginning after the annuity starting date to a participant who has previously commenced receiving benefits unless the plan specifies that this annual increase applies to such a participant. Similarly, the annual increase under section 415(d) of the compensation-based limitation described in section 415(b)(1)(B) does not apply in limitation years beginning after the annuity starting date to a participant who has previously commenced receiving benefits unless the plan specifies that this annual increase applies to such a participant.

(D)

Treatment of cost-of-living adjustments for funding purposes

. In general, the annual increase under section 415(d) of the dollar limitation described in section 415(b)(1)(A) and the compensation limitation described in section 415(b)(1)(B) is treated as a plan amendment for purposes of applying sections 404 and 412, regardless of whether the plan is amended to reflect the increase or the plan reflects the increase automatically through operation of plan provisions. However, where a plan reflects the annual increase under section 415(d) of the dollar limitation described in section 415(b)(1)(A) or the compensation limitation described in section 415(b)(1)(B) automatically through operation of plan provisions, the funding method for the plan is permitted to provide for this annual increase to be treated as an experience loss for purposes of applying sections 404 and 412.

(e)

Rules for plans maintained by more than one employer

. Except as provided in § 1.415(f)-1(h)(2)(i) (regarding aggregation of multiemployer plans with plans other than multiemployer plans), for purposes of applying the limitations of section 415 with respect to a participant in a plan maintained by more than one employer, benefits and contributions attributable to such participant from all of the employers maintaining the plan must be taken into account. Furthermore, in applying the limitations of section 415 with respect to such a participant, the total compensation received by the participant from all of the employers maintaining the plan is permitted to be taken into account under any such plan if the plan so provides.

(f)

Special rules

—(1)

Affiliated employers

. Pursuant to section 414(b) and § 1.414(b)-1, all employees of all corporations that are members of a controlled group of corporations (within the meaning of section 1563(a), as modified by section 1563(f)(5), and determined without regard to section 1563(a)(4) and (e)(3)(C)) are treated as employed by a single employer for purposes of section 415. Similarly, pursuant to section 414(c) and §§ 1.414(c)-1 through 1.414(c)-6, all employees of trades or businesses that are under common control are treated as employed by a single employer. Thus, any defined benefit plan or defined contribution plan maintained by any member of a controlled group of corporations (within the meaning of section 414(b)) or by any trade or business (whether or not incorporated) under common control (within the meaning of section 414(c)) is deemed maintained by all such members or such trades or businesses. Pursuant to section 415(h), for purposes of section 415, sections 414(b) and 414(c) are applied by using the phrase “more than 50 percent” instead of the phrase “at least 80 percent” each place the latter phrase appears in section 1563(a)(1), in § 1.414(c)-2, and in § 1.414(c)-5.

(2)

Affiliated service groups

. Any defined benefit plan or defined contribution plan maintained by any member of an affiliated service group (within the meaning of section 414(m)) is deemed maintained by all members of that affiliated service group.

(3)

Leased employees

—(i)

In general

. Pursuant to section 414(n), except as provided in paragraph (f)(3)(ii) of this section, with respect to any person (referred to as the recipient) for whom a leased employee (within the meaning of section 414(n)(2)) performs services, the leased employee is treated as an employee of the recipient, but contributions or benefits provided by the leasing organization that are attributable to services performed for the recipient are treated as provided under a plan maintained by the recipient.

(ii)

Exception for leased employees covered by safe harbor plans

. Pursuant to section 414(n)(5), the rule of paragraph (f)(3)(i) of this section does not apply to a leased employee with respect to services performed for a recipient if—

(A) The leased employee is covered by a plan that is maintained by the leasing organization and that meets the requirements of section 414(n)(5)(B); and

(B) Leased employees (determined without regard to this paragraph (f)(3)(ii)) do not constitute more than 20% of the recipient's nonhighly compensated workforce.

(4)

Permissive service credit under governmental plans

. See section 415(n) for rules regarding the application of the limitations of sections 415(b) and (c) where an employee makes contributions (including a transfer described in section 403(b)(13) or section 457(e)(17)) to a defined benefit governmental plan to purchase permissive service credit under the plan.

(5)

Qualified domestic relations orders

. A benefit provided to an alternate payee (as defined in section 414(p)(8)) of a participant pursuant to a qualified domestic relations order (as defined in section 414(p)(1)(A)) is treated as if it were provided to the participant for purposes of applying the limitations of section 415.

(6)

Effect on other requirements

. Except as provided in § 1.417(e)-1(d)(1), the application of section 415 does not relieve a plan from the obligation to satisfy other applicable qualification requirements. Accordingly, the terms of the plan must provide for the plan to satisfy section 415 as well as all other applicable requirements. For example, if a defined benefit plan has a normal retirement age of 62, and if a participant's benefit remains unchanged between the ages of 62 and 65 because of the application of the section 415(b)(1)(A) dollar limit, the plan satisfies the requirements of section 411 only if the plan either commences distribution of the participant's benefit at normal retirement age (without regard to severance from employment) or provides for a suspension of benefits at normal retirement age that satisfies the requirements of section 411(a)(3)(B) and 29 CFR 2530.203-3. Similarly, if the increase to a participant's benefit under a defined benefit plan in a year after the participant has attained normal

retirement age is less than the actuarial increase to the participant's previously accrued benefit because of the application of the section 415(b)(1)(B) compensation limitation (which is not adjusted for commencement after age 65), the plan satisfies the requirements of section 411 only if the plan either commences distribution of the participant's benefit at normal retirement age (without regard to severance from employment) or provides for a suspension of benefits at normal retirement age that satisfies the requirements of section 411(a)(3)(B) and 29 CFR 2530.203-3.

(g)

Effective date

—(1)

General rule

. Except as otherwise provided, §§ 1.415(a)-1, 1.415(b)-1, 1.415(b)-2, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 apply to limitation years beginning on or after January 1, 2007.

(2)

Option to apply regulations earlier

. A plan that was adopted and in effect before January 1, 2007, is permitted to apply the provisions of §§ 1.415(a)-1, 1.415(b)-1, 1.415(b)-2, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 to limitation years beginning after the date final regulations are published in the

Federal Register

.

(3)

Grandfather rule for preexisting benefits

. A defined benefit plan that was adopted and effective before May 31, 2005, is considered to satisfy the limitations of section 415(b) for a participant with respect to benefits accrued or payable under the plan as of the effective date of final regulations under §§ 1.415(a)-1, 1.415(b)-1, 1.415(b)-2, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 (as provided under paragraph (g)(1) and (2) of this section) pursuant to plan provisions that were adopted and in effect on May 31, 2005, but only if such plan provisions meet the requirements of statutory provisions, regulations, and other published guidance in effect on May 31, 2005.

(4)

Sunset of EGTRRA amendments

. Sections 1.415(a)-1, 1.415(b)-1, 1.415(b)-2, 1.415(c)-1, 1.415(c)-2, 1.415(d)-1, 1.415(f)-1, 1.415(g)-1, and 1.415(j)-1 do not address the application of section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16, 115 Stat. 38 (under which the amendments made by that Act do not apply to limitation years beginning after December 31, 2010).

Par. 7.

Section 1.415(b)-1 is added to read as follows:

§ 1.415(b)-1

Limitations for defined benefit plans.

(a)

General rules

—(1)

Maximum limitations

. Except as otherwise provided under this section, a defined benefit plan fails to satisfy the requirements of section 415(a) for a limitation year if, during the limitation year, either the annual benefit (as defined in paragraph (b)(1)(i) of this section) accrued by a participant or the annual benefit payable to a participant at any time under the plan exceeds the lesser of—

(i) $160,000 (as adjusted pursuant to section 415(d), § 1.415(d)-1(a), and this section); or

(ii) 100% of the participant's average compensation for the period of the participant's high 3 years of service (as adjusted pursuant to section 415(d), § 1.415(d)-1(a), and this section).

(2)

Defined benefit plan

. For purposes of section 415 and regulations thereunder, a defined benefit plan is any plan, contract, or account to which section 415 applies pursuant to § 1.415(a)-1(a) or (b) (or any portion thereof) that is not a defined contribution plan within the meaning of § 1.415(c)-1(a)(2). In addition, a section 403(b) contract that is not described in section 414(i) is treated as a defined benefit plan for purposes of section 415 and regulations thereunder.

(3)

Plan provisions.

As required in § 1.415(a)-1(d)(1), in order to satisfy the limitations on benefits under this section, the plan provisions (including the provisions of any annuity) must preclude the possibility that any annual benefit exceeding these limitations will be accrued, distributed, or otherwise payable in any optional form of benefit (including the normal form of benefit) at any time (from the plan, from an annuity contract that will make distributions to the participant on behalf of the plan, or from an annuity contract that has been distributed under the plan). Thus, for example, a plan will fail to satisfy the limitations of this section if the plan does not contain terms that preclude the possibility that any annual benefit exceeding these limitations will be accrued or payable in any optional form of benefit (including the normal form of benefit) at any time, even though no participant has actually accrued a benefit in excess of these limitations.

(4)

Adjustments to dollar limitation for commencement before age 62 or after age 65.

The age-adjusted section 415(b)(1)(A) dollar limit computed pursuant to paragraph (d) or (e) of this section is used in place of the dollar limitation described in section 415(b)(1)(A) and paragraph (a)(1)(i) of this section in the case of a benefit with an annuity starting date that occurs before the participant attains age 62 or after the participant attains age 65.

(5)

Period of high 3 years of service

—(i)

In general.

For purposes of applying the limitation on benefits described in this section, the period of a participant's high 3 years of service is the period of 3 consecutive calendar years during which the employee was an active participant in the plan and had the greatest aggregate compensation (as defined in § 1.415(c)-2) from the employer. For purposes of this paragraph (a)(5), in determining a participant's high 3 years of service, the plan may use any 12-month period to determine a year of service instead of the calendar year, provided that it is uniformly and consistently applied in a manner that is specified under the terms of the plan. As provided under § 1.415(c)-2(f), because a plan may not base benefit accruals (in the case of a defined benefit plan) on compensation in excess of the limitation under section 401(a)(17), a plan's definition of compensation for a limitation year that is used for purposes of applying the limitations of section 415 is not permitted to reflect compensation for a plan year that is in excess of the limitation under section 401(a)(17) that applies to that plan year.

(ii)

Short periods of service.

For those employees who are employed with the employer while an active participant for less than 3 consecutive calendar years, the period of a participant's high 3 years of service is the actual number of consecutive years of employment (including fractions of years) while an active participant in the plan. In such a case, the limitation of section 415(b)(1)(B) of 100% of the participant's compensation for the period of the participant's high 3 years of service is computed by dividing the participant's compensation during the participant's longest consecutive period of employment while a plan participant by the number of years in that period (including fractions of years, but not less than one year).

(iii)

Examples:

The following examples illustrate the rules of this paragraph (a)(5):

Example 1.

(i) Plan A, which was established on January 1, 2004, covers Participant M, who was hired on January 1, 2000. The limitation year for Plan A is the calendar year. Participant M's compensation (as defined in § 1.415(c)-2) from the employer maintaining the plan is $120,000 for 2000, $120,000 for 2001, $120,000 for 2002, $120,000 for 2003, $100,000 for 2004, $100,000 for 2005, $100,000 for 2006, and $80,000 for 2007. Plan A does not specify a

period other than the calendar year for determining the period of a participant's high 3 years of service while a plan participant.

(ii) As of the end of the 2004 limitation year, the period of M's highest 3 consecutive years of service while a plan participant (or fewer, if applicable) runs from January 1, 2004, through December 31, 2004. As of the end of the 2005 limitation year, the period of M's highest 3 consecutive years of service while a plan participant (or fewer, if applicable) runs from January 1, 2004, through December 31, 2005. As of the end of the 2006 limitation year and the 2007 limitation year, the period of M's highest 3 consecutive years of service while a plan participant (or fewer, if applicable) runs from January 1, 2004, through December 31, 2006. For all of those periods, M's average compensation is $100,000. Thus, the limitation under section 415(b)(1)(B) for 2004 through 2007 is applied using $100,000 as M's average compensation for the period of M's high 3 consecutive years of service while a plan participant (or fewer, if applicable).

Example 2.

(i) Participant P has participated in Plan A, maintained by Employer M, for more than 10 years. P's average compensation for P's high 3 years while a participant in Plan A (determined before the application of section 401(a)(17)) is $220,000. On January 1, 2007, P commences receiving benefits from Plan A at the age of 75, 10 years after attaining P's normal retirement age under Plan A. Distributions to P under Plan A are actuarially adjusted to reflect commencement 10 years after normal retirement age using a 5% interest rate and the applicable mortality table under section 417(e)(3) that applies as of January 1, 2003. The limitation year and the plan year for Plan A are the calendar year.

(ii) Pursuant to § 1.415(c)-2(f) and section 401(a)(17), Plan A is not permitted to provide for a definition of compensation that includes compensation for a plan year that is in excess of the limitation under section 401(a)(17) that applies to that plan year. Accordingly, the limitation under section 415(b)(1)(B) based on P's average compensation for P's high three consecutive years must not reflect compensation for any plan year that is in excess of the limitation under section 401(a)(17) that applies to that plan year. Thus, for example, if the limitation under section 401(a)(17) for plan years beginning in 2004, 2005, and 2006 is $205,000, and if P had compensation in excess of $205,000 in each of those years, then the limitation under section 415(b)(1)(B) based on P's average compensation for P's high three consecutive years is $205,000.

(6)

Exceptions from compensation limit.

The limit under paragraph (a)(1)(ii) of this section (

i.e.

, 100% of the participant's average compensation for his high 3 years of service) does not apply to—

(i) A governmental plan (as defined in section 414(d));

(ii) A multiemployer plan (as defined in section 414(f)); or

(iii) A collectively bargained plan that is described in section 415(b)(7).

(7)

Special rules

—(i)

Total benefits not in excess of $10,000.

See section 415(b)(4) and paragraph (f) of this section for an exception from the limits of section 415(b)(1) and paragraph (a)(1) of this section with respect to retirement benefits that do not exceed $10,000 for the limitation year.

(ii)

Governmental plans electing during 1990.

For a special limitation applicable to certain governmental plans electing the application of this rule during the first plan year beginning after December 31, 1989, see section 415(b)(10).

(b)

Annual benefit

—(1)

In general

—(i)

Definition of annual benefit.

For purposes of this section and § 1.415(b)-2, the term

annual benefit

means a benefit that is payable annually in the form of a straight life annuity. With respect to a benefit payable in a form other than a straight life annuity, the annual benefit is determined as the straight life annuity that is actuarially equivalent to the benefit payable in such other form, determined under the rules of paragraph (c) of this section.

(ii)

Rules for determination of annual benefit.

The annual benefit does not include the annual benefit attributable to either employee contributions or rollover contributions (as described in sections 401(a)(31), 402(c)(1), 403(a)(4), 403(b)(8), and 408(d)(3), and 457(e)(16)), determined pursuant to the rules of paragraph (b)(2) of this section. The treatment of transferred benefits is determined under the rules of paragraph (b)(3) of this section. Paragraph (b)(4) of this section discusses the treatment of qualified governmental excess benefit arrangements.

(iii)

Determination of annual benefit in the case of multiple annuity starting dates.

See § 1.415(b)-2 for rules regarding the determination of the annual benefit from one or more plans in cases in which a participant has received one or more distributions in limitation years prior to an increase in the accrued benefit occurring during the current limitation year or prior to the annuity starting date for a distribution that commences during the current limitation year. The rules of § 1.415(b)-2 apply, for example, to multiple annuity starting dates that result from the commencement of an additional distribution and to multiple annuity starting dates that result from a new distribution election with respect to a distribution that commenced in a prior limitation year. For purposes of § 1.415(b)-2, the determination of whether a new annuity starting date has occurred is made without regard to the rule of § 1.401(a)-20, Q&A-10(d) (under which the commencement of certain distributions may not give rise to a new annuity starting date).

(2)

Determination of annual benefit attributable to employee contributions and rollover contributions

—(i)

In general.

If employee contributions (other than contributions described in paragraph (b)(2)(ii) of this section) or rollover contributions are made to the plan, the annual benefit attributable to these contributions is determined as provided in this paragraph (b)(2).

(ii)

Certain employee contributions disregarded

. For purposes of this paragraph (b)(2), the following are not treated as employee contributions—

(A) Contributions that are picked up by a governmental employer as provided under section 414(h)(2);

(B) Repayment of any loan made to a participant from the plan;

(C) Repayment of a previously distributed amount as described in section 411(a)(7)(B) in accordance with section 411(a)(7)(C); and

(D) Repayment of a withdrawal of employee contributions as provided under section 411(a)(3)(D).

(iii)

Annual benefit attributable to mandatory employee contributions.

In the case of mandatory employee contributions as defined in section 411(c)(2)(C) and § 1.411(c)-1(c)(4) (or contributions that would be mandatory employee contributions if section 411 applied to the plan), the annual benefit attributable to those contributions is determined by applying the factors applicable to mandatory employee contributions as described in section 411(c)(2)(B) and (C) and the regulations thereunder to those contributions to determine the amount of a straight life annuity commencing at the annuity starting date, regardless of whether section 411 applies to that plan. See § 1.415(c)-1(a)(2)(ii)(B) and (b)(3) for rules regarding treatment of mandatory employee contributions to a defined benefit plan as annual additions under a defined contribution plan.

(iv)

Voluntary employee contributions.

If voluntary employee contributions are made to the plan, the portion of the plan to which voluntary employee contributions are made is treated as a defined contribution plan pursuant to section 414(k) and, accordingly, is a defined contribution plan pursuant to § 1.415(c)-1(a)(2)(i). Accordingly, the portion of a plan to which voluntary employee contributions are made is not a defined benefit plan within the meaning of paragraph (a)(2) of this section and is not taken into account in determining the annual benefit under the portion of the plan that is a defined benefit plan.

(v)

Annual benefit attributable to rollover contributions.

The annual benefit attributable to rollover contributions from another qualified plan (for example, a contribution received pursuant to a direct rollover under section 401(a)(31)) is determined in the same manner as the annual benefit attributable to mandatory employee contributions if the plan provides for a benefit derived from the rollover contribution (other than a benefit derived from a separate account to be maintained with respect to the rollover contribution and actual earnings and losses thereon). Thus, in the case of rollover contributions from a defined contribution plan to a defined benefit plan to provide an annuity distribution, the annual benefit attributable to those rollover contributions for purposes of section 415 is determined by applying the rules of section 411(c), regardless of the assumptions used to compute the annuity distribution under the plan. Accordingly, in such a case, if the plan uses more favorable factors than those specified in section 411(c) to determine the amount of annuity payments arising from rollover contributions, the annual benefit under the plan would reflect the excess of those annuity payments over the amounts that would be payable using the factors specified in section 411(c)(3). See § 1.415(c)-1(b)(3)(i) for rules excluding rollover contributions maintained in a separate account that is treated as a defined contribution plan pursuant to section 414(k) from annual additions to a defined contribution plan.

(3)

Treatment of transferred benefits

—(i)

In general

—(A)

Transferor plan and transferee plan aggregated.

For the limitation year that includes the date of a transfer between defined benefit plans, if the transferee plan's benefits are required to be taken into account pursuant to section 415(f) and § 1.415(f)-1 in determining whether the transferor plan satisfies the limitations of section 415(b) for that limitation year, then the transferred benefits are included in determining the annual benefit under the transferee plan and are disregarded in determining the annual benefit under the transferor plan. This will occur, for example, if the employer sponsoring the transferor plan and the employer sponsoring the transferee plan are in the same controlled group within the meaning of section 414(b). Similarly, with respect to a transfer between defined benefit plans that occurred in a previous limitation year, if the transferee plan's benefits are required to be taken into account pursuant to section 415(f) and § 1.415(f)-1 in determining whether the transferor plan satisfies the limitations of section 415(b), then the transferred benefits are included in determining the annual benefit under the transferee plan and are disregarded in determining the annual benefit under the transferor plan for the current limitation year. Accordingly, if the transferee plan's benefits are required to be taken into account pursuant to section 415(f) and § 1.415(f)-1 in determining whether the transferor plan satisfies the limitations of section 415(b) for the limitation year with respect to a transfer occurring in the current limitation year or a prior limitation year, no adjustment is made to the benefits actually provided under either plan for purposes of determining the annual benefit under the plans as aggregated.

(B)

Transferor plan and transferee plan not aggregated.

When there has been a transfer of liabilities from one qualified plan to another, the benefits associated with those transferred liabilities are treated by the transferor plan as distributed as a single-sum distribution in an amount determined under paragraph (b)(3)(ii) of this section if the transferee plan's benefits are not required to be taken into account pursuant to section 415(f) and § 1.415(f)-1 in determining whether the transferor plan satisfies the limitations of section 415(b). Although such a transfer is treated as a distribution in computing the annual benefit under the transferor plan, no adjustment is made to reflect the transfer for purposes of determining the annual benefit under the transferee plan. This will occur, for example, if the employer sponsoring the transferor plan is a predecessor employer with respect to the participant whose benefits are transferred to the transferee plan, where the transferee plan's benefits are not required to be taken into account pursuant to section 415(f) and § 1.415(f)-1 in determining whether the transferor plan satisfies the limitations of section 415(b).

(ii)

Amount of deemed distribution on account of transfer of benefits

—(A)

In general.

Where there has been a transfer of liabilities from one qualified defined benefit plan to another, the amount of the single-sum distribution that is deemed distributed from the transferor plan pursuant to paragraph (b)(3)(i)(B) of this section is the amount of the assets transferred (other than surplus assets transferred). Thus, where the fair market value of assets transferred from another defined benefit plan in connection with the transfer of liabilities equals or exceeds the actuarial present value of liabilities transferred, the annual benefit attributable to the liabilities transferred is determined taking into account the entire amount of liabilities transferred as a single-sum distribution.

(B)

Amount of assets transferred.

Where assets are transferred with respect to more than one participant, the assets transferred with respect to each participant (other than surplus assets transferred) are determined as the actuarial present value of the straight life annuity that is actuarially equivalent to the amount the participant would receive if the plan terminated immediately before the transfer (if the plan had then terminated) under the rules of section 414(l) or Subtitle E of Title IV of ERISA, whichever applies to the transferor plan. If neither the rules of section 414(l) nor the rules of Subtitle E of Title IV of ERISA apply to the plan, then the assets transferred with respect to each participant are determined as the actuarial present value of the straight life annuity that is actuarially equivalent to the amount the participant would receive if the plan terminated immediately before the transfer, determined by allocating the assets, to the extent possible, so that employees who are not officers, shareholders, or highly compensated employees receive from the plan at least the same proportion of the present value of their accrued benefits (whether or not nonforfeitable) as employees who are officers, shareholders, or highly compensated employees.

(iii)

Transfer of immediately distributable amount.

Where an immediately distributable amount is transferred from either a defined contribution plan or a defined benefit plan to a defined benefit plan (

see

§ 1.411(d)-4, Q&A-3(c) regarding certain elective transfers of immediately distributable benefits), the annual benefit attributable to the benefits transferred is determined pursuant to the rules of paragraph (b)(2)(v) of this section regarding rollover contributions.

(4)

Treatment of qualified governmental excess benefit arrangements.

Pursuant to section 415(m), in determining whether a governmental plan (as defined in section 414(d)) meets the requirements of this section and § 1.415(b)-2, the annual benefit does not include benefits provided under a qualified governmental excess benefit arrangement, as defined in section 415(m)(3).

(c)

Adjustment to form of benefit for forms other than a straight life annuity

—(1)

In general.

This paragraph (c) provides rules for adjusting a form of benefit other than a straight life annuity to an actuarially equivalent straight life

annuity beginning at the same time for purposes of determining the annual benefit described in paragraph (b) of this section. Examples of benefits that are not in the form of a straight life annuity include an annuity with a post-retirement death benefit and an annuity providing for a guaranteed number of payments. Paragraph (c)(2) of this section describes how to adjust a form of benefit to which section 417(e)(3) does not apply. Paragraph (c)(3) of this section describes how to adjust a form of benefit to which section 417(e)(3) applies. Paragraph (c)(4) of this section describes benefit forms for which no adjustment is required. Paragraph (c)(5) of this section sets forth examples illustrating the application of this paragraph (c). The Commissioner may, in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin set forth simplified methods for adjusting a form of benefit other than a straight life annuity to an actuarially equivalent straight life annuity beginning at the same time for purposes of determining the annual benefit described in paragraph (b) of this section.

See

§ 601.601(d) of this chapter.

(2)

Benefits to which section 417(e)(3) does not apply.

For a benefit to which section 417(e)(3) does not apply, the actuarially equivalent straight life annuity benefit is the greater of—

(i) The annual amount of the straight life annuity (if any) payable to the participant under the plan commencing at the same annuity starting date as the form of benefit payable to the participant; or

(ii) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using a 5% interest assumption and the applicable mortality table described in § 1.417(e)-1(d)(2) for that annuity starting date.

(3)

Benefits to which section 417(e)(3) applies

—(i)

In general.

Except as provided in paragraph (c)(3)(ii) of this section, for a benefit to which section 417(e) applies, the actuarially equivalent straight life annuity benefit is the greater of—

(A) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using the interest rate and mortality table, or tabular factor, specified in the plan for actuarial equivalence; or

(B) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using the applicable interest rate for the distribution under § 1.417(d)-1(d)(3) and the applicable mortality table for the distribution under § 1.417(e)-1(d)(2).

(ii)

Special rule for 2004 and 2005.

For distributions to which section 417(e) applies and which have annuity starting dates beginning in 2004 or 2005, except as provided in section 101(d)(3) of the Pension Funding Equity Act of 2004 (118 Stat. 596), the actuarially equivalent straight life annuity benefit is the greater of—

(A) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using the interest rate and mortality table, or tabular factor, specified in the plan for actuarial equivalence; or

(B) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using a 5.5% interest assumption and the applicable mortality table for the distribution under § 1.417(e)-1(d)(2).

(4)

Certain benefit forms for which no adjustment is required

—(i)

In general.

For purposes of the adjustments described in this paragraph (c), the following benefits are not taken into account—

(A) Survivor benefits payable to a surviving spouse under a qualified joint and survivor annuity (as defined in section 417(b)) to the extent that such benefits would not be payable if the participant's benefit were not paid in the form of a qualified joint and survivor annuity; and

(B) Ancillary benefits that are not directly related to retirement benefits, such as preretirement disability benefits not in excess of the qualified disability benefit, preretirement incidental death benefits (including a qualified preretirement survivor annuity), and post-retirement medical benefits.

(ii)

Rules of application

—(A)

Social security supplements.

Although a social security supplement described in section 411(a)(9) and § 1.411(a)-7(c)(4) may be an ancillary benefit, it is included in determining the annual benefit because it is payable upon retirement and therefore is directly related to retirement income benefits.

(B)

QJSAs combined with other distributions.

If benefits are paid partly in the form of a qualified joint and survivor annuity and partly in some other form (such as a single-sum distribution), the rule of paragraph (c)(4)(i)(A) of this section (under which survivor benefits are not included in determining the annual benefit) applies to the survivor annuity payments under the portion of the benefit that is paid in the form of a QJSA.

(5)

Examples.

The following examples illustrate the provisions of this paragraph (c). For purposes of these examples, except as otherwise stated, actuarial equivalence under the plan is determined using a 5% interest assumption and the mortality table that applies under section 417(e)(3) as of January 1, 2003. It is assumed for purposes of these examples that the interest rate that applies under section 417(e)(3) for relevant time periods is 5.25% and that the mortality table that applies under section 417(e)(3) for relevant time periods is the mortality table that applies under section 417(e)(3) as of January 1, 2003. In addition, it is assumed that all participants discussed in these examples have at least ten years of service with the employer and at least ten years of participation in the plan at issue, and that all payments other than a payment of a single sum are made monthly, on the first day of each calendar month. The examples are as follows:

Example 1.

(i) Plan A provides a single-sum distribution determined as the actuarial present value of the straight life annuity payable at the actual retirement date. Plan A provides that a participant's single sum is determined as the greater of the present value using 5% interest and the applicable mortality table under section 417(e)(3) as of January 1, 2003, and the present value using the applicable interest rate and the applicable mortality table under section 417(e). In accordance with § 1.417(e)-1(d)(1), Plan A also provides that the single sum is not less than the actuarial present value of the accrued benefit payable at normal retirement age, determined using the applicable interest rate and the applicable mortality table. Participant M retires at age 65 with a formula benefit of $152,619 and elects to receive a distribution in the form of a single sum. Under the plan formula, and before the application of section 415 under the plan, the amount of the single sum is $1,800,002 (which is based on the 5% interest rate and applicable mortality table as of January 1, 2003, since that is greater than the amount that would have been determined using the 5.25% interest rate and the applicable mortality table).

(ii) For purposes of this section, the annual benefit is the greater of the annual amount of the actuarially equivalent straight life annuity commencing at the same age (determined using the plan's actuarial factors), and the annual amount of the actuarially equivalent straight life annuity commencing at the same age (determined using the applicable interest rate and applicable mortality table). Based on the factors used in the plan to determine the actuarially equivalent lump sum (in this case,

an interest rate of 5% and the applicable mortality table as of January 1, 2003), $1,800,002 payable as a single sum is actuarially equivalent to an immediate straight life annuity at age 65 of $152,619. Based on the applicable interest rate and the applicable mortality table, $1,800,002 payable as a single sum is actuarially equivalent to an immediate straight life annuity at age 65 of $155,853. With respect to the single-sum distribution, M's annual benefit is equal to the greater of the two resulting amounts ($152,619 and $155,853), or $155,853.

Example 2.

(i) The facts are the same as in

Example 1,

except that Participant M elects to receive his benefit in the form of a 10-year certain and life annuity. Applying the plan's actuarial equivalence factors determined using 5% interest and the applicable mortality table as of January 1, 2003, the benefit payable in this form is $146,100.

(ii) For purposes of this section, the annual benefit is the greater of the annual amount of the plan's straight life annuity commencing at the same age or the annual amount of the actuarially equivalent straight life annuity commencing at the same age, determined using a 5% interest rate and the applicable mortality table. In this case, the straight life annuity payable under the plan commencing at the same age is $152,619. Because the plan's factors for actuarial equivalence in this case are the same standardized actuarial factors required to be applied to determine the actuarially equivalent straight life annuity, the actuarially equivalent straight life annuity using the required standardized factors is also $152,619. With respect to the 10-year certain and life annuity distribution, M's annual benefit is equal to the greater of the two resulting amounts ($152,619 and $152,619), or $152,619.

Example 3.

(i) The facts are the same as in

Example 1.

Participant N retires at age 62 with a formula benefit, after application of the plan's early retirement factors, of $100,000 and a Social Security supplement of $10,000 per year payable until age 65. N chooses to receive the accrued benefit in the form of a straight life annuity. The Plan has no provisions under which the actuarial value of the Social Security supplement can be paid as a level annuity for life.

(ii) Because the plan does not provide for a straight life annuity beginning at age 62, the annual benefit for purposes of this section is the annual amount of the straight life annuity commencing at age 62 that is actuarially equivalent to the distribution stream of $110,000 for three years and $100,000 thereafter, where actuarial equivalence is determined using a 5% interest rate and the applicable mortality table. In this case, the actuarially equivalent straight life annuity is $102,180. Accordingly, with respect to this distribution stream, N's annual benefit is equal to $102,180.

Example 4.

(i) Plan B is a defined benefit plan that provides a benefit equal to 100% of a participant's compensation for the participant's high 3 years of service while a participant, payable as a straight life annuity. For a married participant who does not elect another form of benefit, the benefit is payable in the form of a joint and 100% survivor annuity benefit that is reduced from the straight life annuity and is a QJSA within the meaning of section 417. For purposes of determining the amount of this QJSA, the plan provides that the reduction is only half of the reduction that would normally apply under the actuarial assumptions specified in the plan for determining actuarial equivalence of optional forms. The plan also provides that a married participant can elect to receive the plan benefits as a straight life annuity, or in the form of a single sum distribution that is the actuarial equivalent of the joint and 100% survivor annuity. Participant O elects, with spousal consent, a single-sum distribution.

(ii) The special rule that disregards the value of the survivor portion of a QJSA set forth in paragraph (c)(4)(i) of this section only applies to a benefit that is payable in the form of a qualified joint and survivor annuity. Any other form of benefit must be adjusted to a straight life annuity in accordance with paragraph (c)(1) of this section. Accordingly, because the benefit payable under the plan in the form of a single-sum distribution is the actuarial equivalent of a straight life annuity that is greater than 100% of a participant's compensation for his high 3 years, the limitation of section 415(b)(1)(B) has been exceeded.

Example 5.

(i) Plan C is a defined benefit plan that provides an option to receive the benefit in the form of a joint and 100% survivor annuity with a 10-year certain feature, where the survivor beneficiary is the participant's spouse.

(ii) For a participant at age 65, the annual benefit with respect to the joint and 100% survivor annuity with a 10-year certain feature is determined as the greater of the annual amount of the straight life annuity payable to the participant under the plan at age 65 (if any), or the annual amount of the straight life annuity commencing at age 65 that has the same actuarial present value as the joint and 100% survivor annuity with a 10 year certain feature (but excluding the survivor annuity payments pursuant to paragraph (c)(4)(i)(A) of this section), computing using a 5% interest assumption and the applicable mortality table described in § 1.417(e)-1(d)(2) for that annuity starting date. This latter amount is equal to the product of the annual payments under this optional form of benefit and the factor that provides for actuarial equivalence between a straight life annuity and a 10-year certain and life annuity (with no annuity for the survivor) computed using a 5% interest rate and the applicable mortality table.

Example 6.

(i) Plan D is a defined benefit plan with a normal retirement age of 65. The normal retirement benefit under Plan D (and the only life annuity available under Plan D) is a life annuity with a fixed increase of 2% per year. The increase applies to the benefit provided in the prior year and is thus compounded. The plan provides that the benefit is limited to the lesser of 84% of the participant's average compensation for the participant's high 3 consecutive years of service while a plan participant or 84% of the section 415(b)(1)(A) dollar limit (which is assumed to be $170,000). Participant P's retires at age 65, at which time P's average compensation for P's high 3 consecutive years of service is $165,000. Accordingly, P commences receiving benefits in the form of a life annuity of $138,600 with a fixed increase of 2% per year.

(ii) Because Plan D does not provide for a straight life annuity, P's annual benefit for purposes of section 415(b) is the annual amount of the straight life annuity, commencing at age 65, that is actuarially equivalent to the distribution stream of $138,600 with a fixed increase of 2% per year, where actuarial equivalence is determined using a 5% interest rate and the applicable mortality table. In order to satisfy the requirements of section 415 and this section, this annual benefit must not exceed 100% of average compensation for the participant's high 3 consecutive years, or $165,000. Using a 5% interest rate and the section 417(e)(3) mortality table, the actuarially equivalent straight life annuity is $165,453, which exceeds $165,000. Accordingly, the plan fails to satisfy the compensation-based limitation of section 415(b)(1)(B).

Example 7.

(i) Plan E provides a benefit at age 65 of a straight life annuity equal to the lesser of 90% of the participant's average compensation for the participant's highest 3 consecutive years of service while a plan participant and $148,500. Upon retirement at age 65, the optional forms of benefit available to a participant include payment of a QJSA with annual payments equal to 50% of the annual payments under the straight life annuity, along with a single-sum distribution that is actuarially equivalent (determined as the greater of the single sum calculated using a 5% interest assumption and the section 417(e)(3) mortality table in effect on January 1, 2003, and the single sum calculated using the section 417(e)(3) interest rate and the section 417(e)(3) mortality table) to 50% of the annual payments under the straight life annuity. Participant Q retires at age 65. Q's average compensation for Q's highest 3 consecutive years is $100,000. Q elects to receive a distribution in the optional form of benefit described above, under which the annual payments under the QJSA are $45,000 and the single-sum distribution is equal to $530,734. Q's spouse is 3 years younger than Q.

(ii) Q's annual benefit under Plan E is determined as the sum of the annual benefit attributable to the QJSA portion of the distribution and the annual benefit attributable to the single-sum portion of the distribution.

(iii) Because survivor benefits are not taken into account in determining the annual benefit attributable to the QJSA portion of the distribution, the annual benefit attributable to the QJSA portion of the distribution is determined as if that distribution were a straight life annuity of $45,000 per year commencing at age 65. Thus, no form adjustment is needed to determine the annual benefit attributable to the QJSA portion of the distribution, and the annual benefit attributable to the QJSA portion of the benefit is $45,000.

(iv) The annual benefit attributable to the single sum portion of the distribution is

determined as the greater of the annual amount of the actuarially equivalent straight life annuity commencing at the same age (determined using the plan's actuarial factors), and the annual amount of the actuarially equivalent straight life annuity commencing at the same age (determined using the applicable interest rate and applicable mortality table). With respect to the single-sum distribution, the annual amount of the actuarially equivalent straight life annuity commencing at the same age determined using the plan's actuarial factors is equal to $45,954, and the actuarially equivalent straight life annuity commencing at the same age determined using the applicable interest rate and the applicable mortality table is equal to $45,954. Thus, the annual benefit attributable to the single sum portion of the benefit is $45,954.

(v) Q's annual benefit under the optional form of benefit is equal to the sum of the annual benefit attributable to the QJSA portion of the distribution and the annual benefit attributable to the single sum portion of the distribution, or $90,954. Because Q's average compensation for Q's highest 3 consecutive years is $100,000, the distribution satisfies the compensation limit of section 415(b)(1)(B).

Example 8.

(i) R is a participant in a defined benefit plan maintained by A's employer. Under the terms of the plan, R must make contributions to the plan in a stated amount to accrue benefits derived from employer contributions.

(ii) R's contributions are mandatory employee contributions within the meaning of section 411(c)(2)(C) and, thus, the annual benefit attributable to these contributions does not have to be taken into account for purposes of testing the annual benefit derived from employer contributions against the applicable limitation on benefits. However, these contributions are treated as contributions to a defined contribution plan maintained by R's employer for purposes of section 415(c). See § 1.415(c)-1(a)(2)(ii)(B). Accordingly, with respect to the current limitation year, the limitation on benefits (as described in paragraph (a)(1) of this section) is applicable to the annual benefit attributable to employer contributions to the defined benefit plan, and the limitation on contributions and other additions (as described in § 1.415(c)-1) is applicable to the portion of the plan treated as a defined contribution plan, which consists of R's mandatory contributions. These same limitations would also apply if, instead of providing for mandatory employee contributions, the plan permitted voluntary employee contributions, because the portion of the plan attributable to voluntary employee contributions and earnings thereon is treated as a defined contribution plan maintained by the employer pursuant to section 414(k), and thus is not subject to the limitations of section 415(b).

(d)

Adjustment to section 415(b)(1)(A) dollar limit for commencement before age 62

—(1)

General rule.

For a distribution with an annuity starting date that occurs before the participant attains the age of 62, the age-adjusted section 415(b)(1)(A) dollar limit is determined as the lesser of—

(i) The section 415(b)(1)(A) dollar limit (as adjusted pursuant to section 415(d) and § 1.415(d)-1(a) for the limitation year) multiplied by the ratio of the annual amount of the immediately commencing straight life annuity under the plan (if any) to the annual amount of the straight life annuity under the plan commencing at age 62, if any (with both annual amounts determined without applying the rules of section 415); or

(ii) The annual amount of a straight life annuity commencing at the annuity starting date that has the same actuarial present value as a deferred straight life annuity commencing at age 62, where annual payments under the straight life annuity commencing at age 62 are equal to the dollar limitation of section 415(b)(1)(A), and where the actuarially equivalent straight life annuity is computed using a 5% interest rate and the applicable mortality table under § 1.417(e)-1(d)(2) that is effective for that annuity starting date.

(2)

Mortality adjustments

—(i)

In general.

For purposes of determining the amount described in paragraph (d)(1)(ii) of this section, to the extent that a forfeiture does not occur upon the participant's death, no adjustment is made to reflect the probability of the participant's death between the annuity starting date and the participant's attainment of age 62. To the extent that a forfeiture occurs upon the participant's death, an adjustment must be made to reflect the probability of the participant's death between the annuity starting date and the participant's attainment of age 62.

(ii)

No forfeiture deemed to occur where QPSA payable.

For purposes of paragraphs (d)(2)(i) and (e)(2)(i) of this section, a plan is permitted to treat no forfeiture as occurring upon a participant's death if the plan does not charge participants for providing a qualified preretirement survivor annuity (as defined in section 417(c)) on the participant's death, but only if the plan applies this treatment both for adjustments before age 62 and adjustments after age 65. Thus, in such a case, the plan is permitted to provide that, in computing the adjusted dollar limitation under section 415(b)(1)(A), no adjustment is made to reflect the probability of a participant's death between the annuity starting date and the participant's attainment of age 62 or between the age of 65 and the annuity starting date.

(3)

Exception for certain participants of certain governmental plans.

Pursuant to section 415(b)(2)(G) and (H), no age adjustment is made to the dollar limit for commencement before age 62 for any qualified participant. For this purpose, a qualified participant is a participant in a defined benefit plan that is maintained by a state or local government with respect to whom the service taken into account in determining the amount of the benefit under the defined benefit plan includes at least 15 years of service of the participant—

(i) As a full-time employee of any police department or fire department that is organized and operated by the state or political subdivision maintaining such defined benefit plan to provide police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such state or political subdivision; or

(ii) As a member of the Armed Forces of the United States.

(4)

Exception for survivor and disability benefits under governmental plans.

Pursuant to section 415(b)(2)(I), no age adjustment is made to the dollar limit for commencement before age 62 for a distribution from a governmental plan (as defined in section 414(d)) on account of the participant's becoming disabled by reason of personal injuries or sickness, or as a result of the death of the participant.

(5)

Special rule for commercial airline pilots.

Pursuant to section 415(b)(9), no age adjustment is made to the dollar limit for early commencement after age 60 for a participant if—

(i) The participant is a commercial airline pilot;

(ii) The participant separates from service after attaining age 60; and

(iii) As of the time of the participant's retirement, regulations prescribed by the Federal Aviation Administration require an individual to separate from service as a commercial airline pilot after attaining any age occurring on or after age 60 and before age 62.

(6)

Examples.

The following examples illustrate the application of this paragraph (d). For purposes of these examples, it is assumed that the dollar limitation under section 415(b)(1)(A) for all relevant years is $180,000, that the normal form of benefit under the plan is a straight life annuity payable beginning at age 65, and that all payments other than a payment of a single sum are made monthly, on the first day of each calendar month. The examples are as follows:

Example 1.

(i) Plan A provides that early retirement benefits are determined by reducing the accrued benefit by 4% for each year that the early retirement age is less than age 65. Participant M retires at age 60 after 30 years of service with a benefit (prior to the application of section 415) in the form of a

straight life annuity of $100,000 payable at age 65, and is permitted to elect to commence benefits at any time between M's retirement and M's attainment of age 65. For example, M can elect to commence benefits at age 60 in the amount of $80,000, can wait until age 62 and commence benefits in the amount of $88,000, or can wait until age 65 and commence benefits in the amount of $100,000. Plan A provides a QPSA to all married participants without charge. Plan A provides (consistent with paragraph (d)(2)(ii) of this section) that, for purposes of adjusting the dollar limitation under section 415(b)(1)(A) for commencement before age 62 or after age 65, no forfeiture is treated as occurring upon a participant's death before retirement and, therefore, in computing the adjusted dollar limitation under section 415(b)(1)(A), no adjustment is made to reflect the probability of a participant's death between the annuity starting date and the participant's attainment of age 62 or between the age of 65 and the annuity starting date.

(ii) The age-adjusted section 415(b)(1)(A) dollar limit that applies for commencement of M's benefit at age 60 is the lesser of the section 415(b)(1)(A) dollar limit multiplied by the ratio of the annuity payable at age 60 to the annuity payable at age 62, or the straight life annuity payable at age 60 that is actuarially equivalent, using 5% interest and the applicable mortality table, to the deferred annuity payable at age 62. In this case, the age-adjusted section 415(b)(1)(A) dollar limit at age 60 is $156,229 (the lesser of $163,636 ($180,000* $80,000/$88,000) and $156,229 (the straight life annuity at age 60 that is actuarially equivalent to a deferred annuity of $180,000 commencing at age 62, determined using 5% interest and the applicable mortality table, without a mortality decrement for the period between 60 and 62)).

Example 2.

(i) The facts are the same as in

Example 1,

except the plan provides that, if a participant has 30 or more years of service, no reduction applies for benefits commencing at age 62 and later.

(ii) The age-adjusted section 415(b)(1)(A) dollar limit that applies for commencement of M's benefit at age 60 is the lesser of the section 415(b)(1)(A) dollar limit multiplied by the ratio of the annuity payable at age 60 to the annuity payable at age 62, or the straight life annuity payable at age 60 that is actuarially equivalent, using 5% interest and the applicable mortality table, to the deferred annuity payable at age 62. In this case, because M has 30 years of service and would be eligible for the unreduced early retirement benefit at age 62, the age-adjusted section 415(b)(1)(A) dollar limit at age 60 is $144,000 (the lesser of $144,000 ($180,000* $80,000/$100,000) and $156,229 (the straight life annuity at age 60 that is actuarially equivalent to a deferred annuity of $180,000 commencing at age 62, determined using 5% interest and the applicable mortality table).

Example 3.

(i) Participant O is a full-time civilian employee of the State of X Police Department who performs clerical services. O is a participant in the defined benefit plan that is maintained by the State of X with respect to whom the years of service taken into account in determining the amount of the benefit under the plan includes 15 years of service working for the State of X Police Department.

(ii) For a distribution with an annuity starting date that occurs before O attains the age of 62, there is no age adjustment to the section 415(b)(1)(A) dollar limit.

Example 4.

(i) Participant R is a full-time employee of the Emergency Medical Service Department of County Y (which is not a part of a police or fire department) who performs services as a driver of an ambulance. R is a participant in the defined benefit plan that is maintained by County Y with respect to whom the years of service taken into account in determining the amount of the benefit under the plan includes 15 years of service working for County Y. R does not have service credit for time in Armed Forces of the United States.

(ii) The age adjustments to the limitations of section 415(b)(1)(A) pursuant to section 415(b)(2)(C) and (D) will apply if R commences receiving a distribution at an age to which either of those adjustments applies.

Example 5.

(i) The facts are the same as in

Example 1

except that Participant M chooses to receive benefits in the form of a 10-year certain and life annuity under which payments are 97% of the periodic payments that would be made under the immediately commencing straight life annuity. Annual payments to M are 97% of $80,000, or $77,600. As in

Example 1,

the age-adjusted section 415(b)(1)(A) dollar limit at age 60 is $156,229.

(ii) For purposes of this section, the annual benefit is the greater of the annual amount of the plan's straight life annuity commencing at the same age or the annual amount of the actuarially equivalent straight life annuity commencing at the same age, determined using a 5% interest rate and the applicable mortality table. In this case, the straight life annuity payable under the plan commencing at the same age is $80,000. The annual amount of the actuarially equivalent straight life annuity determined by applying the required standardized factors (

i.e.

, a 5% interest assumption and the applicable mortality under section 417(e)(3)) is $79,416. With respect to the 10-year certain and life annuity commencing at age 62, M's annual benefit is equal to the greater of the two resulting amounts ($80,000 and $79,416), or $80,000.

(e)

Adjustment to section 415(b)(1)(A) dollar limit for commencement after age 65

—(1)

General rule.

For a distribution with an annuity starting date that occurs after the participant attains the age of 65, the age-adjusted section 415(b)(1)(A) dollar limit is determined as the lesser of—

(i) The section 415(b)(1)(A) dollar limit (as adjusted pursuant to section 415(d) and § 1.415(d)-1 for the limitation year) multiplied by the ratio of the annual amount of the immediately commencing straight life annuity under the plan (if any) to the annual amount of the straight life annuity that would be payable under the plan to a hypothetical participant who is 65 years old and has the same accrued benefit (

i.e.

, with no actuarial increases for commencement after age 65) as the participant receiving the distribution (with both annual amounts determined without applying the rules of section 415); or

(ii) The annual amount of a straight life annuity commencing at the annuity start

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