[Federal Register Volume 59, Number 122 (Monday, June 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15440]
[[Page Unknown]]
[Federal Register: June 27, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8547]
RIN 1545-AR54
Limitation on Annual Compensation for Qualified Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to the
compensation limit for tax-qualified retirement plans under section
401(a)(17) of the Internal Revenue Code of 1986. These regulations
reflect changes made by the Tax Reform Act of 1986, the Technical and
Miscellaneous Revenue Act of 1988, and the Omnibus Budget
Reconciliation Act of 1993. These regulations provide guidance
necessary to comply with the law and affect sponsors of, and
participants in, tax-qualified retirement plans.
DATES: These regulations are effective January 1, 1994, and apply to
plan years beginning on or after January 1, 1994, except as otherwise
provided in Sec. 1.401(a)(17)-1(d).
FOR FURTHER INFORMATION CONTACT: Marjorie Hoffman at (202) 622-4606
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On September 19, 1991, final regulations under section 401(a)(17)
(TD 8362) were published in the Federal Register (56 FR 47603). On
August 10, 1992, the IRS published in the Federal Register (57 FR
35536) regulations proposing to extend the effective date of the final
regulations under section 401(a)(17) (and related regulations),
generally to plan years beginning on or after January 1, 1994.
On December 30, 1993, proposed regulations under section 401(a)(17)
amending the final regulations were published in the Federal Register
(58 FR 69302). Written comments were received from the public on the
proposed regulations. Because the only request for a public hearing was
withdrawn, no public hearing was held. After considering all of the
written comments received, the proposed regulations are adopted as
modified by this Treasury decision.
Statutory Authority
This document contains amendments to the Income Tax Regulations (26
CFR Part 1) under section 401(a)(17) of the Internal Revenue Code
(Code). These regulations reflect the enactment of section 401(a)(17)
by section 1106 of the Tax Reform Act of 1986 (TRA '86), and subsequent
statutory changes made by section 1011(d)(4) of the Technical and
Miscellaneous Revenue Act of 1988 (TAMRA) and section 13212 of the
Omnibus Budget Reconciliation Act of 1993 (OBRA '93). These regulations
are issued under the authority contained in section 7805 of the Code.
Explanation of Provisions
1. Overview
Section 401(a)(17) of the Code provides an annual compensation
limit for each employee under a qualified plan. This limit applies to a
plan in two ways. First, a plan may not base contributions or benefits
on compensation in excess of the annual limit. Thus, a plan does not
satisfy section 401(a)(17) unless it provides that an employee's
compensation in excess of the annual limit is not used in determining
allocations or accruals for a plan year to which the annual limit
applies. Second, the amount of an employee's annual compensation that
may be taken into account in applying certain specified
nondiscrimination rules under the Code is subject to the annual
compensation limit. Thus, for example, an employee's compensation in
excess of the annual limit is disregarded in determining the accrual
rates for defined benefit plans under those nondiscrimination rules.
The annual compensation limit applies separately to each group of plans
that is treated as a single plan for purposes of the applicable
nondiscrimination requirement.
These final regulations adopt the provisions of the proposed
regulations with only minor modifications, as described below.
2. Changes Made by OBRA '93
a. Lower Limit
Prior to its amendment by OBRA '93, the annual compensation limit
was $200,000 adjusted for cost of living increases ($235,840 for 1993).
Section 401(a)(17) was amended by OBRA '93 to reduce the annual
compensation limit to $150,000 and to modify the manner in which cost
of living adjustments are made to the limit.
b. Annual Adjustment of Compensation Limit
Prior to the effective date of the OBRA '93 changes, the annual
compensation limit was increased annually based on the section 415 cost
of living adjustment. After the effective date of OBRA '93, the annual
compensation limit, as adjusted for changes in the cost of living, is
rounded down to the next lowest multiple of $10,000. Thus, the annual
compensation limit increases only when the cost of living adjustment
would increase the limit by an increment of at least $10,000. These
final regulations retain the rules in the September 1991 regulations
that any increase in the limit is effective for the plan year, or other
12-month period used to determine compensation, commencing in the
calendar year for which the limit is adjusted and that the increase
applies only to compensation for the year of the increase and
subsequent years that are used in determining an employee's benefit.
c. Proration of the Limit
These regulations retain the requirement in the September 1991
regulations that the annual compensation limit must be prorated if
compensation for a period of less than 12 months is used for a plan
year. However, in response to comments on the proposed regulations, the
final regulations clarify that no proration is required merely because
the amount of elective contributions, matching contributions, or
employee contributions that is contributed for each pay period during a
plan year is determined separately using compensation for that pay
period. For example, a section 401(k) plan provides each employee with
the right to elect to defer up to 6 percent of compensation for a plan
year, and then, in accordance with each employee's election for the
plan year, contributions are made monthly using the employee's
compensation for that pay period. Although the compensation for the
plan year that may be taken into account in determining each employee's
elective contributions is subject to the annual compensation limit, the
compensation for each month would not required to be limited to $12,500
(\1/12\ of $150,000) in this situation.
3. Effective Date and Transition Rules
Section 401(a)(17) is generally effective for plan years beginning
on or after January 1, 1989. The changes made by OBRA '93 are generally
effective for plan years beginning on or after January 1, 1994. Special
statutory effective dates are provided for collectively bargained
plans. In addition, OBRA '93 provides a special grandfather rule for
certain eligible participants in governmental plans.
These regulations under section 401(a)(17) are generally effective
at the same time that the reduced limit under OBRA '93 applies to the
plan. However, in the case of plans maintained by tax-exempt
organizations, the regulations are effective for plan years beginning
on or after January 1, 1996.
Minor modifications have been made to the examples in these
regulations to reflect the OBRA '93 statutory change, the change in the
effective date of the regulations from the date in the 1991
regulations, and an employer's choice of complying with the provisions
of these regulations prior to the effective date.
a. Fresh-Start Rules
The regulations retain the rule from the September 1991 regulations
that benefits accrued or allocations made under a plan for plan years
prior to the effective date of section 401(a)(17) are not subject to
the annual compensation limit. The regulations also retain the rule in
the proposed regulations that the benefits accrued or allocations made
under a plan for plan years prior to the effective date of the OBRA '93
changes are not subject to the reduced annual compensation limit.
In order to satisfy the requirements of section 401(a)(17), a
defined benefit plan must ``fresh start'' the benefits of all employees
with accrued benefits that are based on compensation that exceeded the
annual compensation limit. In order to implement the reduced limit
under OBRA '93, a defined benefit plan must again ``fresh start'' the
benefits of all employees with accrued benefits that are based on
compensation that exceeded the OBRA '93 $150,000 compensation limit.
As in the proposed regulations, these final regulations provide
guidance on the implementation of these and other multiple fresh starts
and coordinate the regulations with the fresh-start rules of the
section 401(a)(4) regulations. For example, the regulations continue to
cross-reference the section 401(a)(4) regulations for the definition of
an employee's frozen accrued benefit. Thus, an employee's frozen
accrued benefit as of the OBRA '93 effective date includes benefits
accrued as a result of an amendment made within the TRA '86 remedial
amendment period that is recognized under section 401(b) as effective
before the OBRA '93 effective date.
b. Amendments to Comply With Section 401(a)(17)
In conjunction with publishing these regulations under section
401(a)(17), the IRS issued Rev. Proc. 94-13, 1994-3 I.R.B. 18, dated
January 18, 1994. Rev. Proc. 94-13 provides guidance on the remedial
amendment treatment for plans being amended for section 401(a)(17),
including guidance on the conditions under which a plan may be amended
to comply retroactively with section 401(a)(17) even if the amendment
results in a reduction of a benefit protected under section 411(d)(6).
Rev. Proc. 94-13 also provides guidance on the extent to which section
204(h) of the Employee Retirement Income Security Act of 1974 (ERISA)
will not apply to a plan amendment that limits an employee's
compensation taken into account under the plan to the maximum permitted
under section 401(a)(17) of the Code.
Commentators requested that this guidance be incorporated into the
final regulations. The IRS and the Treasury believe these issues are
appropriately addressed in Rev. Proc. 94-13. The guidance under section
411(d)(6) in Rev. Proc. 94-13 is provided pursuant to the specific
delegation of authority in Sec. 1.411(d)-4, Q&A-2(b) to the
Commissioner to provide, through the publication of revenue rulings,
notices, and other documents of general applicability, for the
elimination or reduction of section 411(d)(6) protected benefits to the
extent that the reduction is necessary to permit compliance with the
other requirements of section 401(a). The guidance under section 204(h)
of ERISA is provided pursuant to the delegation of authority to the IRS
under section 101(a) of Reorganization Plan No. 4 of 1978 (1979-1 C.B.
480) to issue regulations, rulings, opinions, variances, and waivers
under section 204 of ERISA.
c. Application of $150,000 Limit to Accruals or Allocations in Plan
Years for Which OBRA '93 is Effective
One commentator suggested that the reduced limit should not apply
to compensation for years beginning before the OBRA '93 effective date
that is used in determining post-effective date benefit accruals. The
regulations, however, continue to provide that benefits accruing, or
allocations made, for plan years beginning on or after the OBRA '93
effective date may not take into account compensation for any year in
excess of the OBRA '93 annual compensation limit applicable to that
year (generally $150,000 for years beginning before the OBRA '93
effective date). Thus, compensation for any plan year before OBRA '93
applies to the plan that is used to determine benefits accruing in plan
years beginning on or after the OBRA '93 effective date is generally
limited to $150,000. In the absence of this rule, post-effective date
accruals under many defined benefit plans would be determined taking
into account compensation in excess of $150,000. For example, this
happens when a defined benefit plan determines annual accruals as a
percentage of each employee's highest average annual compensation for a
specified number of years (including years prior to the effective date
of OBRA '93).
d. Collectively Bargained Plans
TRA '86 and OBRA '93 provide a deferred effective date for
collectively bargained plans. In response to comments, these
regulations clarify that the rules of Sec. 1.410(b)-10(a)(2) apply for
purposes of determining whether a plan is a collectively bargained
plan. Thus, if a plan is a collectively bargained plan (within the
meaning of Sec. 1.410(b)-10(a)(2)(iii)), the deferred effective date
applies in determining the plan allocations or benefit accruals of both
collectively bargained and noncollectively bargained employees.
e. Governmental Plans
These final regulations retain the special effective date for
governmental plans (within the meaning of section 414(d)) in order to
provide governmental employers with adequate time to amend their plans
to comply with section 401(a)(17). Thus, the regulations provide that
these governmental plans will automatically satisfy the requirements of
section 401(a)(17) for plan years beginning before the later of January
1, 1996, or 90 days after the opening of the first legislative session
beginning on or after January 1, 1996, of the governing body with
authority to amend the plan, if that body does not meet continuously.
The final regulations continue to implement the grandfather rule in
OBRA '93 for individuals who first became participants in governmental
plans before the first plan year beginning after December 31, 1995 or,
if earlier, the first plan year for which the plan is amended to comply
with OBRA '93. Under the grandfather rule, the annual compensation
limit will not apply for those individuals to the extent that the limit
would reduce the amount of compensation taken into account under the
plan below the amount that was allowed to be taken into account under
the plan as in effect on July 1, 1993. However, in order for this
grandfather rule to apply to a plan, the plan must be amended,
effective for plan years beginning after December 31, 1995, to
incorporate by reference the annual compensation limits of section
401(a)(17) for those participants who are not grandfathered under OBRA
'93.
f. Good Faith Compliance Prior to the Regulatory Effective Date
For plan years beginning on or after the date that section
401(a)(17) first applies to a plan, but before these regulations apply
to the plan, the plan must be operated in accordance with a reasonable,
good faith interpretation of the requirements of section 401(a)(17).
Whether compliance is reasonable and in good faith will be determined
on the basis of all of the relevant facts and circumstances, including
the extent to which the employer has resolved unclear issues in its
favor. Reasonable, good faith interpretation will be deemed to exist,
however, if a plan is operated in accordance with the 1990 regulations,
the September 1991 regulations, the December 1993 regulations, or these
regulations. However, for any plan with a regulatory effective date
that is later than the OBRA '93 effective date for the plan (e.g., a
plan maintained by a tax-exempt organization), a reasonable, good faith
interpretation must reflect the OBRA '93 amendments to section
401(a)(17).
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these final regulations is Marjorie Hoffman
of the Office of the Associate Chief Counsel (Employee Benefits and
Exempt Organizations), IRS. However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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)(17)-1 is revised to read as follows:
Sec. 1.401(a)(17)-1 Limitation on annual compensation.
(a) Compensation limit requirement--(1) In general. In order to be
a qualified plan, a plan must satisfy section 401(a)(17). Section
401(a)(17) provides an annual compensation limit for each employee
under a qualified plan. This limit applies to a qualified plan in two
ways. First, a plan may not base allocations, in the case of a defined
contribution plan, or benefit accruals, in the case of a defined
benefit plan, on compensation in excess of the annual compensation
limit. Second, the amount of an employee's annual compensation that may
be taken into account in applying certain specified nondiscrimination
rules under the Internal Revenue Code is subject to the annual
compensation limit. These two limitations are set forth in paragraphs
(b) and (c) of this section, respectively. Paragraph (d) of this
section provides the effective dates of section 401(a)(17), the
amendments made by section 13212 of the Omnibus Budget Reconciliation
Act of 1993 (OBRA '93), and this section. Paragraph (e) of this section
provides rules for determining post-effective-date accrued benefits
under the fresh-start rules.
(2) Annual compensation limit for plan years beginning before
January 1, 1994. For purposes of this section, for plan years beginning
prior to the OBRA '93 effective date, annual compensation limit means
$200,000, adjusted as provided by the Commissioner. The amount of the
annual compensation limit is adjusted at the same time and in the same
manner as under section 415(d). The base period for the annual
adjustment is the calendar quarter ending December 31, 1988, and the
first adjustment is effective on January 1, 1990. Any increase in the
annual compensation limit is effective as of January 1 of a calendar
year and applies to any plan year beginning in that calendar year. In
any plan year beginning prior to the OBRA '93 effective date, if
compensation for any plan year beginning prior to the statutory
effective date is used for determining allocations or benefit accruals,
or when applying any nondiscrimination rule, then the annual
compensation limit for the first plan year beginning on or after the
statutory effective date (generally $200,000) must be applied to
compensation for that prior plan year.
(3) Annual compensation limit for plan years beginning on or after
January 1, 1994--(i) In general. For purposes of this section, for plan
years beginning on or after the OBRA '93 effective date, annual
compensation limit means $150,000, adjusted as provided by the
Commissioner. The adjusted dollar amount of the annual compensation
limit is determined by adjusting the $150,000 amount for changes in the
cost of living as provided in paragraph (a)(3)(ii) of this section and
rounding this adjusted dollar amount as provided in paragraph
(a)(3)(iii) of this section. Any increase in the annual compensation
limit is effective as of January 1 of a calendar year and applies to
any plan year beginning in that calendar year. For example, if a plan
has a plan year beginning July 1, 1994, and ending June 30, 1995, the
annual compensation limit in effect on January 1, 1994 ($150,000),
applies to the plan for the entire plan year.
(ii) Cost of living adjustment. The $150,000 amount is adjusted for
changes in the cost of living by the Commissioner at the same time and
in the same manner as under section 415(d). The base period for the
annual adjustment is the calendar quarter ending December 31, 1993.
(iii) Rounding of adjusted compensation limit. After the $150,000,
adjusted in accordance with paragraph (a)(3)(ii) of this section,
exceeds the annual compensation limit for the prior calendar year by
$10,000 or more, the annual compensation limit will be increased by the
amount of such excess, rounded down to the next lowest multiple of
$10,000.
(4) Additional guidance. The Commissioner may, in revenue rulings
and procedures, notices, and other guidance, published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter),
provide any additional guidance that may be necessary or appropriate
concerning the annual limits on compensation under section 401(a)(17).
(b) Plan limit on compensation--(1) General rule. A plan does not
satisfy section 401(a)(17) unless it provides that the compensation
taken into account for any employee in determining plan allocations or
benefit accruals for any plan year is limited to the annual
compensation limit. For purposes of this rule, allocations and benefit
accruals under a plan include all benefits provided under the plan,
including ancillary benefits.
(2) Plan-year-by-plan-year requirement. For purposes of this
paragraph (b), the limit in effect for the current plan year applies
only to the compensation for that year that is taken into account in
determining plan allocations or benefit accruals for the year. The
compensation for any prior plan year taken into account in determining
an employee's allocations or benefit accruals for the current plan year
is subject to the applicable annual compensation limit in effect for
that prior year. Thus, increases in the annual compensation limit apply
only to compensation taken into account for the plan year in which the
increase is effective. In addition, if compensation for any plan year
beginning prior to the OBRA '93 effective date is used for determining
allocations or benefit accruals in a plan year beginning on or after
the OBRA '93 effective date, then the annual compensation limit for
that prior year is the annual compensation limit in effect for the
first plan year beginning on or after the OBRA '93 effective date
(generally $150,000).
(3) Application of limit to a plan year--(i) In general. For
purposes of applying this paragraph (b), the annual compensation limit
is applied to the compensation for the plan year on which allocations
or benefit accruals are based.
(ii) Compensation for the plan year. If a plan determines
compensation used in determining allocations or benefit accruals for a
plan year based on compensation for the plan year, then the annual
compensation limit that applies to the compensation for the plan year
is the limit in effect for the calendar year in which the plan year
begins. Alternatively, if a plan determines compensation used in
determining allocations or benefit accruals for the plan year on the
basis of compensation for a 12-consecutive-month period, or periods,
ending no later than the last day of the plan year, then the annual
compensation limit applies to compensation for each of those periods
based on the annual compensation limit in effect for the respective
calendar year in which each 12-month period begins.
(iii) Compensation for a period of less than 12-months--(A)
Proration required. If compensation for a period of less than 12 months
is used for a plan year, then the otherwise applicable annual
compensation limit is reduced in the same proportion as the reduction
in the 12-month period. For example, if a defined benefit plan provides
that the accrual for each month in a plan year is separately determined
based on the compensation for that month and the plan year accrual is
the sum of the accruals for all months, then the annual compensation
limit for each month is \1/12\th of the annual compensation limit for
the plan year. In addition, if the period for determining compensation
used in calculating an employee's allocation or accrual for a plan year
is a short plan year (i.e., shorter than 12 months), the annual
compensation limit is an amount equal to the otherwise applicable
annual compensation limit multiplied by a fraction, the numerator of
which is the number of months in the short plan year, and the
denominator of which is 12.
(B) No proration required for participation for less than a full
plan year. Notwithstanding paragraph (b)(3)(iii)(A) of this section, a
plan is not treated as using compensation for less than 12 months for a
plan year merely because the plan formula provides that the allocation
or accrual for each employee is based on compensation for the portion
of the plan year during which the employee is a participant in the
plan. In addition, no proration is required merely because an employee
is covered under a plan for less than a full plan year, provided that
allocations or benefit accruals are otherwise determined using
compensation for a period of at least 12 months. Finally,
notwithstanding paragraph (b)(3)(iii)(A) of this section, no proration
is required merely because the amount of elective contributions (within
the meaning of Sec. 1.401(k)-1(g)(3)), matching contributions (within
the meaning of Sec. 1.401(m)-1(f)(12)), or employee contributions
(within the meaning of Sec. 1.401(m)-1(f)(6)) that is contributed for
each pay period during a plan year is determined separately using
compensation for that pay period.
(4) Limits on multiple employer and multiemployer plans. For
purposes of this paragraph (b), in the case of a plan described in
section 413(c) or 414(f) (a plan maintained by more than one employer),
the annual compensation limit applies separately with respect to the
compensation of an employee from each employer maintaining the plan
instead of applying to the employee's total compensation from all
employers maintaining the plan.
(5) Family aggregation. [Reserved]
(6) Examples. The following examples illustrate the rules in this
paragraph (b).
Example 1. Plan X is a defined benefit plan with a calendar year
plan year and bases benefits on the average of an employee's high 3
consecutive years' compensation. The OBRA '93 effective date for
Plan X is January 1, 1994. Employee A's high 3 consecutive years'
compensation prior to the application of the annual compensation
limits is $160,000 (1994), $155,000 (1993), and $135,000 (1992). To
satisfy this paragraph (b), Plan X cannot base plan benefits for
Employee A in 1994 on compensation in excess of $145,000 (the
average of $150,000 (A's 1994 compensation capped by the annual
compensation limit), $150,000 (A's 1993 compensation capped by the
$150,000 annual compensation limit applicable to all years before
1994), and $135,000 (A's 1992 compensation capped by the $150,000
annual compensation limit applicable to all years before 1994)). For
purposes of determining the 1994 accrual, each year (1994, 1993, and
1992), not the average of the 3 years, is subject to the 1994 annual
compensation limit of $150,000.
Example 2. Assume the same facts as Example 1, except that
Employee A's high 3 consecutive years' compensation prior to the
application of the limits is $185,000 (1997), $175,000 (1996), and
$165,000 (1995). Assume that the annual compensation limit is first
adjusted to $160,000 for plan years beginning on or after January 1,
1997. Plan X cannot base plan benefits for Employee A in 1997 on
compensation in excess of $153,333 (the average of $160,000 (A's
1997 compensation capped by the 1997 limit), $150,000 (A's 1996
compensation capped by the 1996 limit), and $150,000 (A's 1995
compensation capped by the 1995 limit)).
Example 3. Plan Y is a defined benefit plan that bases benefits
on an employee's high consecutive 36 months of compensation ending
within the plan year. Employee B's high 36 months are the period
September 1995 to August 1998, in which Employee B earned $50,000 in
each month. Assume that the annual compensation limit is first
adjusted to $160,000 for plan years beginning on or after January 1,
1997. The annual compensation limit is $150,000, $150,000, and
$160,000 in 1995, 1996, and 1997, respectively. To satisfy this
paragraph (b), Plan Y cannot base Employee B's plan benefits for the
1998 plan year on compensation in excess of $153,333. This amount is
determined by applying the applicable annual compensation limit to
compensation for each of the three 12-consecutive-month periods. The
September 1995 to August 1996 period is capped by the annual
compensation limit of $150,000 for 1995; the September 1996 to
August 1997 period is capped by the annual compensation limit of
$150,000 for 1996; and the September 1997 to August 1998 period is
capped by the annual compensation limit of $160,000 for 1997. The
average of these capped amounts is the annual compensation limit
applicable in determining benefits for the 1998 year.
Example 4. (a) Employer P is a partnership. Employer P maintains
Plan Z, a profit-sharing plan that provides for an annual allocation
of employer contributions of 15 percent of plan year compensation
for employees other than self-employed individuals, and 13.0435
percent of plan year compensation for self-employed individuals. The
plan year of Plan Z is the calendar year. The OBRA '93 effective
date for Plan Z is January 1, 1994. In order to satisfy section
401(a)(17), as amended by OBRA '93, the plan provides that,
beginning with the 1994 plan year, the plan year compensation used
in determining the allocation of employer contributions for each
employee may not exceed the annual limit in effect for the plan year
under OBRA '93. Plan Z defines compensation for self-employed
individuals (employees within the meaning of section 401(c)(1)) as
the self-employed individual's net profit from self-employment
attributable to Employer P minus the amount of the self-employed
individual's deduction under section 164(f) for one-half of self-
employment taxes. Plan Z defines compensation for all other
employees as wages within the meaning of section 3401(a). Employee C
and Employee D are partners of Employer P and thus are self-employed
individuals. Neither Employee C nor Employee D owns an interest in
any other business or is a common-law employee in any business. For
the 1994 calendar year, Employee C has net profit from self-
employment of $80,000, and Employee D has net profit from self-
employment of $175,000. The deduction for Employee C under section
164(f) for one-half of self-employment taxes is $4,828. The
deduction for Employee D under section 164(f) for one-half of self-
employment taxes is $6,101
(b) The plan year compensation under the plan formula for
Employee C is $75,172 ($80,000 minus $4,828). The allocation of
employer contributions under the plan allocation formula for 1994
for Employee C is $9,805 ($75,172 (Employee C's plan year
compensation for 1994) multiplied by 13.0435%). The plan year
compensation under the plan formula before application of the annual
limit under section 401(a)(17) for Employee D is $168,899 ($175,000
minus $6101). After application of the annual limit, the plan year
compensation for the 1994 plan year for Employee D is $150,000 (the
annual limit for 1994). Therefore, the allocation of employer
contributions under the plan allocation formula for 1994 for
Employee D is $19,565 ($150,000 (Employee D's plan year compensation
after application of the annual limit for 1994) multiplied by
13.0435%).
Example 5. The facts are the same as in Example 4, except that
Plan Z provides that plan year compensation for self-employed
individuals is defined as earned income within the meaning of
section 401(c)(2) attributable to Employer P. In addition, Plan Z
provides for an annual allocation of employer contributions of 15
percent of plan year compensation for all employees in the plan,
including self-employed individuals, such as Employees C and D. The
net profit from self-employment for Employee C and the net profit
from self-employment for Employee D are the same as provided in
Example 4. However, the earned income of Employee C determined in
accordance with section 401(c)(2) is $65,367 ($80,000 minus $4,828
minus $9,805). The earned income of Employee D determined in
accordance with section 401(c)(2) is $146,869 ($175,000 minus $6,101
minus $22,030). Therefore, the allocation of employer contributions
under the plan allocation formula for 1994 for Employee C is $9,805
($65,367 (Employee C's plan year compensation for 1994) multiplied
by 15%). Employee D's earned income for 1994 does not exceed the
1994 annual limit of $150,000. Therefore, the allocation of employer
contributions under the plan allocation formula for 1994 for
Employee D is $22,030 ($146,869 (Employee D's plan year compensation
for 1994) multiplied by 15%).
(c) Limit on compensation for nondiscrimination rules--(1) General
rule. The annual compensation limit applies for purposes of applying
the nondiscrimination rules under sections 401(a)(4), 401(a)(5),
401(l), 401(k)(3), 401(m)(2), 403(b)(12), 404(a)(2) and 410(b)(2). The
annual compensation limit also applies in determining whether an
alternative method of determining compensation impermissibly
discriminates under section 414(s)(3). Thus, for example, the annual
compensation limit applies when determining a self-employed
individual's total earned income that is used to determine the
equivalent alternative compensation amount under Sec. 1.414(s)-1(g)(1).
This paragraph (c) provides rules for applying the annual compensation
limit for these purposes. For purposes of this paragraph (c),
compensation means the compensation used in applying the applicable
nondiscrimination rule.
(2) Plan-year-by-plan-year requirement. For purposes of this
paragraph (c), when applying an applicable nondiscrimination rule for a
plan year, the compensation for each plan year taken into account is
limited to the applicable annual compensation limit in effect for that
year, and an employee's compensation for that plan year in excess of
the limit is disregarded. Thus, if the nondiscrimination provision is
applied on the basis of compensation determined over a period of more
than one year (for example, average annual compensation), the annual
compensation limit in effect for each of the plan years that is taken
into account in determining the average applies to the respective plan
year's compensation. In addition, if compensation for any plan year
beginning prior to the OBRA '93 effective date is used when applying
any nondiscrimination rule in a plan year beginning on or after the
OBRA '93 effective date, then the annual compensation limit for that
prior year is the annual compensation limit for the first plan year
beginning on or after the OBRA '93 effective date (generally $150,000).
(3) Plan-by-plan limit. For purposes of this paragraph (c), the
annual compensation limit applies separately to each plan (or group of
plans treated as a single plan) of an employer for purposes of the
applicable nondiscrimination requirement. For this purpose, the plans
included in the testing group taken into account in determining whether
the average benefit percentage test of Sec. 1.410(b)-5 is satisfied are
generally treated as a single plan.
(4) Application of limit to a plan year. The rules provided in
paragraph (b)(3) of this section regarding the application of the limit
to a plan year apply for purposes of this paragraph (c).
(5) Limits on multiple employer and multiemployer plans. The rule
provided in paragraph (b)(4) of this section regarding the application
of the limit to multiple employer and multiemployer plans applies for
purposes of this paragraph (c).
(d) Effective date--(1) Statutory effective date--(i) General rule.
Except as otherwise provided in this paragraph (d), section 401(a)(17)
applies to a plan as of the first plan year beginning on or after
January 1, 1989. For purposes of this section, statutory effective date
generally means the first day of the first plan year that section
401(a)(17) is applicable to a plan. In the case of governmental plans,
statutory effective date means the first day of the first plan year for
which the plan is not deemed to satisfy section 401(a)(17) by reason of
paragraph (d)(4) of this section.
(ii) Exception for collectively bargained plans. In the case of a
plan maintained pursuant to one or more collective bargaining
agreements between employee representatives and one or more employers
ratified before March 1, 1986, section 401(a)(17) applies to
allocations and benefit accruals for plan years beginning on or after
the earlier of--
(A) January 1, 1991; or
(B) The later of January 1, 1989, or the date on which the last of
the collective bargaining agreements terminates (determined without
regard to any extension or renegotiation of any agreement occurring
after February 28, 1986). For purposes of this paragraph (d)(1)(ii),
the rules of Sec. 1.410(b)-10(a)(2) apply for purposes of determining
whether a plan is maintained pursuant to one or more collective
bargaining agreements, and any extension or renegotiation of a
collective bargaining agreement, which extension or renegotiation is
ratified after February 28, 1986, is to be disregarded in determining
the date on which the agreement terminates.
(2) OBRA '93 effective date--(i) In general. For purposes of this
section, OBRA '93 effective date means the first day of the first plan
year beginning on or after January 1, 1994, except as provided in this
paragraph (d)(2).
(ii) Exception for collectively bargained plans--(A) In general. In
the case of a plan maintained pursuant to one or more collective
bargaining agreements between employee representatives and 1 or more
employers ratified before August 10, 1993, OBRA '93 effective date
means the first day of the first plan year beginning on or after the
earlier of--
(1) The latest of--
(i) January 1, 1994;
(ii) The date on which the last of such collective bargaining
agreements terminates (without regard to any extension, amendment, or,
modification of such agreements on or after August 10, 1993); or
(iii) In the case of a plan maintained pursuant to collective
bargaining under the Railway Labor Act, the date of execution of an
extension or replacement of the last of such collective bargaining
agreements in effect on August 10, 1993; or
(2) January 1, 1997.
(B) Determination of whether plan is collectively bargained. For
purposes of this paragraph (d)(2)(ii), the rules of Sec. 1.410(b)-
10(a)(2) apply for purposes of determining whether a plan is maintained
pursuant to one or more collective bargaining agreements, except that
August 10, 1993, is substituted for March 1, 1986, as the date before
which the collective bargaining agreements must be ratified.
(3) Regulatory effective date. This Sec. 1.401(a)(17)-1 applies to
plan years beginning on or after the OBRA '93 effective date. However,
in the case of a plan maintained by an organization that is exempt from
income taxation under section 501(a), including plans subject to
section 403(b)(12)(A)(i) (nonelective plans), this Sec. 1.401(a)(17)-1
applies to plan years beginning on or after January 1, 1996. For plan
years beginning before the effective date of these regulations and on
or after the statutory effective date, a plan must be operated in
accordance with a reasonable, good faith interpretation of section
401(a)(17), taking into account, if applicable, the OBRA '93 reduction
to the annual compensation limit under section 401(a)(17).
(4) Special rules for governmental plans--(i) Deemed satisfaction
by governmental plans. In the case of governmental plans described in
section 414(d), including plans subject to section 403(b)(12)(A)(i)
(nonelective plans), section 401(a)(17) is considered satisfied for
plan years beginning before the later of January 1, 1996, or 90 days
after the opening of the first legislative session beginning on or
after January 1, 1996, of the governing body with authority to amend
the plan, if that body does not meet continuously. For purposes of this
paragraph (d)(4), the term governing body with authority to amend the
plan means the legislature, board, commission, council, or other
governing body with authority to amend the plan.
(ii) Transition rule for governmental plans--(A) In general. In the
case of an eligible participant in a governmental plan (within the
meaning of section 414(d)), the annual compensation limit under this
section shall not apply to the extent that the application of the
limitation would reduce the amount of compensation that is allowed to
be taken into account under the plan below the amount that was allowed
to be taken into account under the plan as in effect on July 1, 1993.
Thus, for example, if a plan as in effect on July 1, 1993, determined
benefits without any reference to a limit on compensation, then the
annual compensation limit in effect under this section will not apply
to any eligible participant in any future year.
(B) Eligible participant. For purposes of this paragraph
(d)(4)(ii), an eligible participant is an individual who first became a
participant in the plan prior to the first day of the first plan year
beginning after the earlier of--
(1) The last day of the plan year by which a plan amendment to
reflect the amendments made by section 13212 of OBRA '93 is both
adopted and effective; or
(2) December 31, 1995.
(C) Plan must be amended to incorporate limits. This paragraph
(d)(4)(ii) shall not apply to any eligible participant in a plan unless
the plan is amended so that the plan incorporates by reference the
annual compensation limit under section 401(a)(17), effective with
respect to noneligible participants for plan years beginning after
December 31, 1995 (or earlier, if the plan amendment so provides).
(5) Benefits earned prior to effective date--(i) In general.
Allocations under a defined contribution plan or benefits accrued under
a defined benefit plan for plan years beginning before the statutory
effective date are not subject to the annual compensation limit.
Allocations under a defined contribution plan or benefits accrued under
a defined benefit plan for plan years beginning on or after the
statutory effective date, but before the OBRA '93 effective date, are
subject to the annual compensation limit under paragraph (a)(2) of this
section. However, these allocations or accruals are not subject to the
OBRA '93 reduction to the annual compensation limit described in
paragraph (a)(3) of this section.
(ii) Allocation for a plan year. The allocations for a plan year
include amounts described in Sec. 1.401(a)(4)-2(c)(ii) or
Sec. 1.401(m)-1(f)(6) plus the earnings, expenses, gains, and losses
attributable to those amounts.
(iii) Benefits accrued for years before the effective date. The
benefits accrued for plan years prior to a specified date by any
employee are the employee's benefits accrued under the plan, determined
as if those benefits had been frozen (as defined in Sec. 1.401(a)(4)-
13(c)(3)(i)) as of the day immediately preceding such specified date.
Thus, for example, benefits accrued for those plan years generally do
not include any benefits accrued under an amendment increasing prior
benefits that is adopted after the date on which the employee's
benefits under the plan must be treated as frozen.
(e) Determination of post-effective-date accrued benefits--(1) In
general. The plan formula that is used to determine the amount of
allocations or benefit accruals for plan years beginning on or after
the dates described in paragraph (d)(1) or (2) must comply with section
401(a)(17) as in effect on such date. This paragraph (e) provides rules
for applying section 401(a)(17) in the case of section 401(a)(17)
employees who accrue additional benefits under a defined benefit plan
in a plan year beginning on or after the relevant effective date.
Paragraph (e)(2) of this section contains definitions used in applying
these rules. Paragraphs (e)(3) and (e)(4) of this section explain the
application of the fresh-start rules in Sec. 1.401(a)(4)-13 to the
determination of the accrued benefits of section 401(a)(17) employees.
(2) Definitions. For purposes of this paragraph (e), the following
definitions apply:
(i) Section 401(a)(17) employee. An employee is a section
401(a)(17) employee as of a date, on or after the statutory effective
date, if the employee's current accrued benefit as of that date is
based on compensation for a year prior to the statutory effective date
that exceeded the annual compensation limit for the first plan year
beginning on or after the statutory effective date. In addition, an
employee is a section 401(a)(17) employee as of a date, on or after the
OBRA '93 effective date, if the employee's current accrued benefit as
of that date is based on compensation for a year prior to the OBRA '93
effective date that exceeded the annual compensation limit for the
first plan year beginning on or after the OBRA '93 effective date. For
this purpose, a current accrued benefit is not treated as based on
compensation that exceeded the relevant annual compensation limit, if a
plan makes a fresh start using the formula with wear-away described in
Sec. 1.401(a)(4)-13(c)(4)(ii), and the employee's accrued benefit
determined under Sec. 1.401(a)(4)-13(c)(4)(ii)(B), taking into account
the annual compensation limit, exceeds the employee's frozen accrued
benefit (or, if applicable, the employee's adjusted accrued benefit) as
of the fresh-start date.
(ii) Section 401(a)(17) fresh-start date. Section 401(a)(17) fresh-
start date means a fresh-start date as defined in Sec. 1.401(a)(4)-12
not earlier than the last day of the last plan year beginning before
the statutory effective date, and not later than the last day of the
last plan year beginning before the effective date of these
regulations.
(iii) OBRA '93 fresh-start date. OBRA '93 fresh-start date means a
fresh-start date as defined in Sec. 1.401(a)(4)-12 not earlier than the
last day of the last plan year beginning before the OBRA '93 effective
date, and not later than the last day of the last plan year beginning
before the effective date of these regulations.
(iv) Section 401(a)(17) frozen accrued benefit. Section 401(a)(17)
frozen accrued benefit means the accrued benefit for any section
401(a)(17) employee frozen (as defined in Sec. 1.401(a)(4)-13(c)(3)(i))
as of the last day of the last plan year beginning before the statutory
effective date.
(v) OBRA '93 frozen accrued benefit. OBRA '93 frozen accrued
benefit means the accrued benefit for any section 401(a)(17) employee
frozen (as defined in Sec. 1.401(a)(4)-13(c)(3)(i)) as of the OBRA '93
fresh-start date.
(3) Application of fresh-start rules--(i) General rule. In order to
satisfy section 401(a)(17), a defined benefit plan must determine the
accrued benefit of each section 401(a)(17) employee by applying the
fresh-start rules in Sec. 1.401(a)(4)-13(c). The fresh-start rules must
be applied using a section 401(a)(17) fresh-start date and using the
plan benefit formula, after amendment to comply with section 401(a)(17)
and this section, as the formula applicable to benefit accruals in the
current plan year. In addition, the fresh-start rules must be applied
to determine the accrued benefit of each section 401(a)(17) employee
using an OBRA '93 fresh-start date and using the plan benefit formula,
after amendment to comply with the reduction in the section 401(a)(17)
annual compensation limit described in paragraph (a)(3) of this
section, as the formula applicable to benefit accruals in the current
plan year.
(ii) Consistency rules in Sec. 1.401(a)(4)-13(c) and (d)--(A)
General rule. In applying the fresh-start rules of Sec. 1.401(a)(4)-
13(c) and (d), the group of section 401(a)(17) employees is a fresh-
start group. See Sec. 1.401(a)(4)-13(c)(5)(ii)(A). Thus, the
consistency rules of those sections govern, unless otherwise provided.
For example, if the plan is using a fresh-start date applicable to all
employees and is not adjusting frozen accrued benefits under
Sec. 1.401(a)(4)-13(d) for employees who are not section 401(a)(17)
employees, then the frozen accrued benefits for section 401(a)(17)
employees may not be adjusted under Sec. 1.401(a)(4)-13(d) or this
paragraph (e).
(B) Determination of adjusted accrued benefit. If the fresh-start
rules of Sec. 1.401(a)(4)-13(c) and (d) are applied to determine the
benefits of all employees after a fresh-start date, the plan will not
fail to satisfy the consistency requirement of Sec. 1.401(a)(4)-
13(c)(5)(i) merely because the plan makes the adjustment described in
Sec. 1.401(a)(4)-13(d) to the frozen accrued benefits of employees who
are not section 401(a)(17) employees, but does not make the adjustment
to the frozen accrued benefits of section 401(a)(17) employees. In
addition, the plan does not fail to satisfy the consistency requirement
of Sec. 1.401(a)(4)-13(c)(5)(i) merely because the plan makes the
adjustment described in Sec. 1.401(a)(4)-13(d) for section 401(a)(17)
employees on the basis of the compensation formula that was used to
determine the frozen accrued benefit (as required under paragraph
(e)(4)(iii) of this section) but makes the adjustment for employees who
are not section 401(a)(17) employees on the basis of any other method
provided in Sec. 1.401(a)(4)-13(d)(8).
(4) Permitted adjustments to frozen accrued benefit of section
401(a)(17) employees--(i) General rule. Except as otherwise provided in
paragraphs (e)(4)(ii) and (iii) of this section, the rules in
Sec. 1.401(a)(4)-13(c)(3) (permitting certain adjustments to frozen
accrued benefits) apply to section 401(a)(17) frozen accrued benefits
or OBRA '93 frozen accrued benefits.
(ii) Optional forms of benefit. After either the section 401(a)(17)
fresh-start date or the OBRA '93 fresh-start date, a plan may be
amended either to provide a new optional form of benefit or to make an
optional form of benefit available with respect to the section
401(a)(17) frozen accrued benefit or the OBRA '93 frozen accrued
benefit, provided that the optional form of benefit is not subsidized.
Whether an optional form is subsidized may be determined using any
reasonable actuarial assumptions.
(iii) Adjusting section 401(a)(17) accrued benefits--(A) In
general. If the plan adjusts accrued benefits for employees under the
rules of Sec. 1.401(a)(4)-13(d) as of a fresh-start date, the adjusted
accrued benefit (within the meaning of section Sec. 1.401(a)(4)-13(d))
for each section 401(a)(17) employee must be determined after the
fresh-start date by reference to the plan's compensation formula that
was actually used to determine the frozen accrued benefit as of the
fresh-start date. For this purpose, the plan's compensation formula
incorporates the plan's underlying compensation definition and
compensation averaging period. In making the adjustment, the
denominator of the adjustment fraction described in Sec. 1.401(a)(4)-
13(d)(8)(i) is the employee's compensation as of the fresh-start date
using the plan's compensation formula as of that date and, in the case
of an OBRA '93 fresh-start date, reflecting the annual compensation
limits that applied as of the fresh-start date. The numerator of the
adjustment fraction is the employee's updated compensation (i.e.,
compensation for the current plan year within the meaning of
Sec. 1.401(a)(4)-13(d)(8)), determined after applying the annual
compensation limits to each year's compensation that is used in the
plan's compensation formula as of the fresh-start date. Similarly, in
applying the alternative rule in Sec. 1.401(a)(4)-13(d)(8)(v), the
updated compensation that is substituted must be determined after
applying the annual compensation limits to each year's compensation
that is used in the plan's compensation formula. Thus, no adjustment
will be permitted unless the updated compensation (determined after
applying the annual compensation limit) exceeds the compensation that
was used to determine the employee's frozen accrued benefit.
(B) Multiple fresh starts. If a plan makes more than one fresh
start with respect to a section 401(a)(17) employee, the employee's
frozen accrued benefit as of the latest fresh-start date will either be
determined by applying the current benefit formula to the employee's
total years of service as of that fresh-start date or will consist of
the sum of the employee's frozen accrued benefit (or adjusted accrued
benefit (as defined in Sec. 1.401(a)(4)-13(d)(8)(i))) as of the
previous fresh-start date plus additional frozen accruals since the
previous fresh start. If the frozen accrued benefit consists of such a
sum, in making the adjustments described in paragraph (e)(4)(iii)(A) of
this section, separate adjustments must be made to that previously
frozen accrued benefit (or adjusted accrued benefit) and the additional
frozen accruals to the extent that the frozen accrued benefit and the
additional accruals have been determined using different compensation
formulas or different compensation limits (i.e., the section 401(a)(17)
limit before and after the reduction in limit described in paragraph
(a)(3) of this section). In this case, if the plan is applying the
adjustment fraction of Sec. 1.401(a)(4)-13(d)(8)(i), the denominator of
the separate adjustment fraction for adjusting each portion of the
frozen accrued benefit must reflect the actual compensation formula,
and, if applicable, compensation limit, originally used for determining
that portion. For example, the frozen accrued benefit of a section
401(a)(17) employee as of the OBRA '93 fresh-start date may be based on
the sum of the section 401(a)(17) frozen accrued benefit (determined
without any annual compensation limit) plus benefit accruals in the
years between the statutory effective date and the OBRA '93 effective
date (based on compensation that was subject to the annual compensation
limits for those years). In this example, in adjusting the section
401(a)(17) frozen accrued benefit, the denominator of the adjustment
fraction does not reflect any annual compensation limit. Similarly, in
adjusting the frozen accruals for years between the statutory effective
date and the OBRA '93 effective date, the denominator of the adjustment
fraction reflects the level of the annual compensation limit in effect
for those years.
(5) Examples. The following examples illustrate the rules in this
paragraph (e).
Example 1. (a) Employer X maintains Plan Y, a calendar year
defined benefit plan providing an annual benefit for each year of
service equal to 2 percent of compensation averaged over an
employee's high 3 consecutive calendar years' compensation. Section
401(a)(17) applies to Plan Y in 1989. As of the close of the last
plan year beginning before January 1, 1989 (i.e., the 1988 plan
year), Employee A, with 5 years of service, had accrued a benefit of
$25,000 which equals 10 percent (2 percent multiplied by 5 years of
service) of average compensation of $250,000. Employer X decides to
comply with the provisions of this section for plan years before the
effective date of this section. Employer X decides to make the
amendment effective for plan years beginning on or after January 1,
1989, and uses December 31, 1988 as the section 401(a)(17) fresh-
start date. Plan Y, as amended, provides that, in determining an
employee's benefit, compensation taken into account is limited in
accordance with the provisions of this section to the annual
compensation limit under section 401(a)(17), and that, for section
401(a)(17) employees, the employee's accrued benefit is the greater
of
(i) The employee's benefit under the plan's benefit formula
(after the plan formula is amended to comply with section
401(a)(17)) as applied to the employee's total years of service; and
(ii) The employee's accrued benefit as of December 31, 1988,
determined as though the employee terminated employment on that date
without regard to any plan amendments after that date.
Employer X decides not to amend Plan Y to provide for the
adjustments permitted under Sec. 1.401(a)(4)-13(d) to the accrued
benefit of section 401(a)(17) employees as of December 31, 1988.
(b) Under Plan Y, Employee A's accrued benefit at the end of
1989 is $25,000, which is the greater of Employee A's accrued
benefit as of the last day of the 1988 plan year ($25,000), and
$24,000, which is Employee A's benefit based on the plan's benefit
formula applied to Employee A's total years of service ($200,000
multiplied by (2 percent multiplied by 6 years of service)). The
formula of Plan Y applicable to section 401(a)(17) employees for
calculating their accrued benefits for years after the section
401(a)(17) fresh-start date is the formula in Sec. 1.401(a)-
13(c)(4)(ii) (formula with wear-away). The fresh-start formula is
applied using a benefit formula for the 1989 plan year that
satisfies section 401(a)(17) and this section, and the December 31,
1988 fresh-start date used for the plan is a section 401(a)(17)
fresh-start date within the meaning of paragraph (e)(2)(ii) of this
section. Thus, Plan Y, as amended, satisfies paragraph (e)(3)(i) of
this section for plan years commencing prior to the OBRA '93
effective date.
Example 2. Assume the same facts as in Example 1, except that
the plan formula provides that effective January 1, 1989, for
section 401(a)(17) employees, an employee's benefit will equal the
sum of the employee's accrued benefit as of December 31, 1988
(determined as though the employee terminated employment on that
date and without regard to any amendments after that date), and 2
percent of compensation averaged over an employee's high 3
consecutive years' compensation times years of service taking into
account only years of service after December 31, 1988. Thus, under
Plan Y's formula, Employee A's accrued benefit as of December 31,
1989 is $29,000, which is equal to the sum of $25,000 (Employee A's
accrued benefit as of December 31, 1988) plus $4,000 ($200,000
multiplied by (2 percent multiplied by 1 year of service)). The
formula of Plan Y applicable to section 401(a)(17) employees for
calculating their accrued benefits for years after the section
401(a)(17) fresh-start date is the formula in Sec. 1.401(a)-
13(c)(4)(i) (formula without wear-away). The fresh-start formula is
applied using a benefit formula for the 1989 plan year that
satisfies section 401(a)(17) and this section, and the December 31,
1988 fresh-start date used for the plan is a section 401(a)(17)
fresh-start date within the meaning of paragraph (e)(2)(ii) of this
section. Thus, Plan Y, as amended, satisfies paragraph (e)(3)(i) of
this section for plan years commencing prior to the OBRA '93
effective date.
Example 3. (a) Assume the same facts as in Example 1, except
that the plan formula provides that effective January 1, 1989, an
employee's benefit equals the greater of the plan formulas in
Example 1 and Example 2. The formula of Plan Y applicable to section
401(a)(17) employees for calculating their accrued benefits for
years after the section 401(a)(17) fresh-start date is the formula
in Sec. 1.401(a)-13(c)(4)(iii) (formula with extended wear-away).
The fresh-start formula is applied using a benefit formula for the
1989 plan year that satisfies section 401(a)(17) and this section,
and the December 31, 1988 fresh-start date used for the plan is a
section 401(a)(17) fresh-start date within the meaning of paragraph
(e)(2)(ii) of this section. Thus, Plan Y, as amended, satisfies
paragraph (e)(3)(i) of this section for plan years commencing prior
to the OBRA '93 effective date.
(b) Assume that for each of the years 1991-93 Employee A's
annual compensation under the plan compensation formula,
disregarding the amendment to comply with section 401(a)(17) is
$300,000. The annual compensation limit is adjusted to $222,220,
$228,860, and $235,840 for plan years beginning January 1, 1991,
1992, and 1993, respectively. Because Employer X has decided to
amend Plan Y to comply with the provisions of this section effective
for plan years beginning on or after January 1, 1989, and has used
December 31, 1988 as the section 401(a)(17) fresh-start date, the
compensation that may be taken into account for plan benefits in
1993 cannot exceed $228,973 (the average of $222,220, $228,860, and
$235,840). Therefore, as of December 31, 1993, the benefit
determined under the fresh-start formula with wear-away would be
$45,795 ($228,973 multiplied by (2 percent multiplied by 10 years of
service)). The benefit determined under the fresh-start formula
without wear-away would be $47,897, which is equal to $25,000
(Employee A's section 401(a)(17) frozen accrued benefit) plus
$22,897 ($228,973 multiplied by (2 percent multiplied by 5 years of
service)). Because Employee A's accrued benefit is being determined
using the fresh-start formula with extended wear-away, Employee A's
accrued benefit as of December 31, 1993, is equal to $47,897, the
greater of the two amounts.
Example 4. (a) Assume the same facts as in Example 3, except
that Plan Y satisfies Sec. 1.401(a)(4)-13(d)(3) through (d)(7) and
that the amendment to Plan Y effective for plan years beginning
after December 31, 1988, also provided for adjustments to the
section 401(a)(17) frozen accrued benefit in accordance with
Sec. 1.401(a)(4)-13(d) using the fraction described in
Sec. 1.401(a)(4)-13(d)(8)(i).
(b) As of December 31, 1993, the numerator of Employee A's
compensation fraction is $228,973 (the average of Employee A's
annual compensation for 1991, 1992, and 1993, as limited by the
respective annual limit for each of those years). The denominator of
Employee A's compensation fraction determined in accordance with
paragraph (e)(4)(iii) of this section is $250,000 (the average of
Employee A's high 3 consecutive calendar year compensation as of
December 31, 1988, determined without regard to section 401(a)(17)).
Therefore, Employee A's compensation fraction is $228,973/$250,000.
Because the compensation adjustment fraction is less than 1,
Employee A's section 401(a)(17) frozen accrued benefit is not
adjusted. Therefore, Employee A's accrued benefit as of December 31,
1993, would still be $47,897, which is equal to $25,000 (Employee
A's section 401(a)(17) frozen accrued benefit) plus $22,897
($228,973 multiplied by (2 percent multiplied by 5 years of
service).
Example 5. (a) Assume the same facts as in Example 3, except
that as of January 1, 1994, Plan Y is amended to provide that
benefits will be determined based on compensation of $150,000 (the
limit in effect under section 401(a)(17) for plan years beginning on
or after the OBRA '93 effective date) and that for section
401(a)(17) employees, each employee's accrued benefit will be
determined under Sec. 1.401(a)(4)-13(c)(4)(i) (formula without wear-
away) using December 31, 1993 as the OBRA '93 fresh-start date.
(b) Assume that for each of the years 1996-98 Employee A's
annual compensation under the plan compensation definition,
disregarding the amendment to comply with section 401(a)(17), is
$400,000. Assume that the annual compensation limit is first
adjusted to $160,000 for plan years beginning on or after January 1,
1997, and is not adjusted for the plan year beginning on or after
January 1, 1998. The compensation that may be taken into account for
the 1998 plan year cannot exceed $156,667 (the average of $150,000
for 1996, $160,000 for 1997, and $160,000 for 1998).
(c) Therefore, at the end of December 31, 1998, Employee A's
accrued benefit is $63,564, which is equal to $47,897 (Employee A's
OBRA '93 frozen accrued benefit) plus $15,667 ($156,667 multiplied
by (2 percent multiplied by 5 years of service)).
Example 6. (a) Assume the same facts as in Example 5, except
that, for the fresh-start group (in this case the section 401(a)(17)
employees), the amendments to Plan Y provide for adjustments to the
section 401(a)(17) frozen accrued benefit and the OBRA '93 frozen
accrued benefit in accordance with Sec. 1.401(a)(4)-13(d) using the
fraction described in Sec. 1.401(a)(4)-13(d)(8)(i).
(b) Employee A's frozen accrued benefit as of December 31, 1993,
is adjusted as of December 31, 1998, as follows:
(1) Employee A's frozen accrued benefit as of December 31, 1993,
is the sum of Employee A's section 401(a)(17) frozen accrued benefit
($25,000) and Employee A's frozen accruals for the years 1989-93
($22,897).
(2) The numerator of Employee A's adjustment fraction is
$156,667 (the average of $150,000, $160,000, and $160,000). The
denominator of Employee A's adjustment fraction with respect to
Employee A's section 401(a)(17) frozen accrued benefit is $250,000,
and the denominator of Employee A's adjustment fraction with respect
to the rest of Employee A's frozen accrued benefit is $228,973 (the
average of Employee A's annual compensation for 1991, 1992, and
1993, as limited by the respective annual limit for each of those
years).
(3) Employee A's section 401(a)(17) frozen accrued benefit as
adjusted through December 31, 1998, remains $25,000. The
compensation adjustment fraction determined in accordance with
paragraph (e)(4)(iii) of this section is less than one ($156,667
divided by $250,000).
(4) Employee A's frozen accruals for the years 1989-93, as
adjusted through December 31, 1998, remain $22,897 because the
adjustment fraction is less than one ($156,667 divided by $228,973).
(5) Employee A's adjusted accrued benefit as of December 31,
1998, equals $47,897 (the sum of the $25,000 and $22,897 amounts
from paragraphs (b)(3) and (b)(4), respectively, of this Example).
(c) Employee A's section 401(a)(17) frozen accrued benefit will
not be adjusted for compensation increases until the numerator of
the fraction used to adjust that frozen accrued benefit exceeds the
denominator of $250,000 used in determining those accruals.
Similarly, the portion of Employee A's OBRA '93 frozen accrued
benefit attributable to the frozen accruals for the years 1989-1993
will not be adjusted for compensation increases until the numerator
of the fraction used to adjust those frozen accruals exceeds the
denominator of $228,973 used in determining those accruals.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: June 14, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-15440 Filed 6-23-94; 8:45 am]
BILLING CODE 4830-01-U
